Hannigan v. Italo Petroleum Corp. Of America

delivering the opinion of the Court:

Although this Court reversed and remanded the cause to the Court below for a new trial upon the issue whether or not the Board of Directors of Italo ratified the giving of the notes at bar either expressly or impliedly, that Court upon retrial decided the case upon the question of express ratification only. In that connection that trial Judge found as a fact that the purported ratification of the notes by the Board of Directors at a meeting on March 31, 1930, was not based upon a sufficient investigation

Yet another reason was advanced against the validity of the purported ratification of these notes at this Board meeting. The learned trial Judge noted that a majority of Italo’s Directors at the meeting of March 31, 1930 were also members of the Syndicate. Relying on certain language of this Court in its opinion disposing of the first appeal, 1 Terry 534 , 14 A. 2d 401 , he stated “* * * six out of ten members of the Board of Directors present at the meeting at which it is contended the notes with which we are dealing were ratified, being also members of the Syndicate to whose Manager said notes were payable, it was clearly a case of officers dealing with themselves.” Accordingly, he concluded that, because the votes of a majority of the Directors could not be counted no express ratification of the execution of the notes resulted.

Admittedly this Court in 1 Terry 534 , 14 A. 2d 401 , 408. had this to say with respect to circumstances giving rise to the execution of the notes in question: “Public policy demands of directors an undivided loyalty to the corporation to the end that there shall be no conflict between duty and self - interest. Guth v. Loft, Inc. [ 23 Del. Ch. 255 ], 5 A. 2d 503 . The votes of interested directors cannot be counted to make up a majority of the board. 3 Fletcher Corp., § 936 et seq.; Keenan v, Eshleman

We turn now to the question of implied ratification. Despite the fact that this case was remanded for a new trial upon the question not only of express, but also of implied, ratification, the trial Judge seems completely to have overlooked this latter issue.

Whether Italo, by retaining and using the dividend monies due the Syndicate impliedly ratified the unauthorized issuance of the notes in question depends upon whether the dividends were validly declared in the first instance. Whether or not the dividends were validly declared is a question of fact never before passed upon in this proceeding. It is important to observe that the declaration of the three dividends under consideration in our judgment is not subject to suspicion merely because, when declared, a majority of Italo’s Board was composed of Syndicate members who were substantial stockholders of Italo. In the absence of fraud or other unfair dealings a Director should not be disqualified from voting upon the question of a dividend declaration mere

Next Italo has made a purported plea of set-off or recoupment whereby it is charged that the Syndicate owed and still owes $100,000 as a result of the original financing which, if true, would preclude recovery. Italo contends that the original financing contemplated that the Syndicate would advance $3,500,000 representing the agreed on price for some 22 independent oil companies to be purchased for Italo, in return for 6,000,000 shares of Italo stock and, in fact, the Syndicate advanced but $3,400,000 to consummate the deal. Therefore it is contended that, either by way of set-off or recoupment, it is not clear which from the pleadings, the Syndicate is precluded from recovery on these notes. But the closest examination of the pleadings fails to reveal a plea sounding either in set-off or recoupment which conformed to the requirements of the rules of the Superior Court then existing. In this connection Rule 32 of the Old Rules of the Superior Court stated: “Rule 32. A plea of set-off shall, if required, be drawn out; and shall state the matters of set-off with reasonable certainty. In counter claims by way of recoupment, notice thereof shall be filed with the plea, and set forth with like reasonable certainty.” Compare this with Defendant’s purported plea and we see no allegation which, even remotely, touches on the transaction alleged by way of set-off. In fact, the plea deals entirely with that portion of the case involving the compromise of the dispute concerning the excess of liens upon the purchased properties over and above $2,-750,000. The Syndicate conceded that the excess of liens over and

We will now briefly consider the remaining defenses raised by Italo to this action.

First, it is argued that there is a want of consideration for the $9,476.13 note because Fred Shingle, Syndicate Manager, was not a stockholder of record on the dates of the first and second dividend declarations. The defense that, when the first two dividends were declared the stock was in the name of Myers, Trustee, and not Fred Shingle, Syndicate Manager, is completely lacking in persuasion. The agreements contemplated an issuance of the stock to Myers, Trustee, and thence to Shingle, Brown & Co., Escrow Agent, which was to transfer the stock ratably to the Syndicate as the latter from time to time made payment of what it claims to have been its full obligation of $3,-400,000. To say that the Syndicate, which had made available vast sums to Italo, was foreclosed from receiving dividends on stock to which it was clearly entitled under the financing agreements simply because, for technical reasons not appearing, the shares had not been formally transferred to the name of the Syndicate, is an argument calling for a complete sacrifice of substance for form. Salt Dome Oil Corp. v. Schenck, 28 Del. Ch. 433 , 158 A. L. R. 975 , does not sustain Defendant’s argument. That case originated under the merger statute, Section 59, Rev. Code 1935, § 2091. It held that as between the record and beneficial holder,

Next it is said that Plaintiff is disqualified to maintain this action because he had only a naked legal title to the notes without any beneficial interest therein. But it seems clearly that this contention was fully considered and found untenable by this Court in an earlier decision, 14 A. 2d 401 , 404 — 405. This ground of defense is not acceptable.

Finally, it is contended that no recovery can be had because the assignment by Fred Shingle, Syndicate Manager, to Hannigan, is champertous. This ground of defense was also considered and passed on by this Court in an earlier opinion appearing in 14 A. 2d 401 , 408. What we said was this: “It was necessary for the defendant to prove that Hannigan was either a party to the champertous agreement of Byers, or that he was the agent of Byers and acting for him. The proof utterly failed. The court’s ruling in this respect was correct.” No additional evidence has been offered which changes the result above stated. This defense is without merit.

Let the judgment of the lower Court be reversed and the cause remanded for new trial upon the sole ground of the validity of the declaration of the first, second and third dividends which formed the basis for the notes at bar. If the dividends were validly declared then there should be judgment for Hannigan- — if not, then judgment for Italo.

Superficially it would seem inequitable for the corporation to be allowed to defend here on the ground that the notes were lacking in consideration because the dividends were illegally declared. Even assuming the illegality of the dividend declaration, the funds representing the Syndicate’s share of the dividends were retained by the corporation and used for corporate purposes. Why, it may be asked, should the corporation and those of its stockholders who have received their share of the dividends long since, be permitted to assert this defense against those stockholders who have never received their dividends and where the right of no creditor seems to be concerned ?

On the other hand, this is an action at law, not equity. It is sought to recover upon certain notes. The defense of failure of

We have examined a number of cases cited by Appellants for the proposition that the corporation should be estopped from interposing the defense of lack of consideration in the giving of these notes. Concededly they support the argument that a corporation may not set up as a defense the invalidity of a dividend declaration in a suit by a stockholder for his share of the dividends where all the other stockholders have been paid. Thiry v. Banner Window Glass Co., 81 W. Va. 39 , 93 S. E. 958 , L. R. A. 1918B, 1048; Ball v. Pepper Cotton Press Co., 141 Mo. App. 26 , 121 S. W. 798 ; Stoddard v. Shetucket Foundry Co., 34 Conn. 452 ; Southwestern A. & I. T. Ry. Co. v. Martin, 57 Ark. 355 , 21 S. W. 465 . The reasoning to be gathered from these decisions is that to allow discrimination in the payment of dividends would serve to promote fraud. We concur in this general proposition but it is to be observed that the cited cases differ factually from this in that the dividends were apparently not declared in violation of positive statute and the plaintiffs seeking to recover the dividends were not parties to the alleged invalid dividend declaration.

Section 35 of the General Corporation Law of this State, Rev. Code 1935, § 2067, in effect makes it unlawful for corporate directors to declare dividends in violation of Section 34, and under certain expressed conditions imposes financial liability on those directors who wilfully or negligently participate in an illegal dividend declaration. Even assuming that the conditions under which financial liability might be imposed against directors under the statute are not here present, yet Section 35 declares the policy against the creation of dividends except as pro

If, upon retrial, it is determined that these dividends which formed the consideration for the notes in suit were validly declared, then, as we stated in the main opinion, the Plaintiff should recover, but not otherwise.

In conclusion, we wish to emphasize the fact that we have decided nothing more than the legal issues presented by the facts of this case. We were not called upon to consider the various ramifications of the civil liability of corporate directors for participating in a dividend declaration in violation of Section 35 of the General Corporation Law nor the rights of an innocent stockholder to recover his dividend, when all other stockholders have been paid theirs, in the face of the defense that the dividend was illegally declared. All we have decided is that, under these facts the corporation is not estopped from asserting the defense of lack of consideration in the notes sued on.