This action was brought by the plaintiffs, as stockholders of the Pfaudler Process Fermentation Company, to sot aside and vacate
It is contended that no demand was made by the plaintiffs before this action was brought, that the officers of the company bring a suit to set aside the notes and judgments entered thereon. Assuming, for the sake of the argument, that the rule is that such a demand must be made as a condition precedent to the right of a stockholder to bring and maintain the action, or in lieu thereof that they have exhausted all means within their reach to obtain redress of their grievances, and that under the circumstances of the case the demand would have been of no avail; even then we are of the opinion that the plaintiffs may properly maintain the action. True, it does not appear that any express demand was made that the officers of the company should bring the action. It, however, appears from the evidence that the plaintiff Kelsey had, on several occasions, asked of the defendant Sargent and others, officers of the company, for information in reference to the conditions and transactions of the company, and had been refused such information j that when it was proposed to issue the bonds of the company for the purpose of raising funds to pay and discharge the alleged indebtedness for which these notes were given, he protested against such issue and immediately after hearing that the notes in question had been given, he went to the Traders’ N ational Bank and warned the cashier against discounting the notes, advising him that he should contest the payment thereof. It was alleged in the complaint that the defendants Sargent, Puffer, Markham, the Traders’ National Bank, Matthews and Hawley confederated and conspired together to--defraud the company out of its property, and to defraud the plaintiffs out of their interest therein; that the board of trustees, with the exception of the defendant Pfaudler, was wholly under the control of the defendants Sargent and Puffer; that it was impossible to procure any action of the company for maintaining its rights, or
In the case of Fisher v. Andrews (37 Hun, 176), a similar question was considered by this court, and it was then held that it was necessary that the stockholder should first request the receiver to-prosecute the action; but if it was made to appear that the receiver was in league with the other defendants, or had been guilty with them in misappropriating the funds of the company, that that would be received as a sufficient excuse for not applying to him to prosecute the action.
In the case of Brinckerhoff v. Bostwick (88 N. Y., 52), it was held that in case the receiver of the company was one of the directors chargeable with neglect of duty, the action may be maintained by the stockholders, and that it was not necessary to allege in the complaint, in such an action, a demand upon him and a refusal of the receiver to sue. (See, also, Hawes v. Oakland, 104 U. S., 450.)
As we have shown, the charge of misconduct was against the president, treasurer, secretary and directors of the company, and under such circumstances it would appear that formal demand was not necessary.
The next question which it becomes necessary to determine is, whether or not the notes given to the defendants Sargent and Puffer were fraudulent. At the time of giving the notes the company was managed by five directors, James Sargent, Charles C. Puffer, John M. Pfaudler, William G. Markham and Robert S. Wilson.
At the time that this contract was rescinded it does not appear that any meeting of the stockholders had been called, or that their consent had been obtained to such rescission, or that they had
Again, it appears that the day after the election of the board of directors, in 1883, a meeting was held at which the five directors elected were present. The defendant Sargent was elected president and treasurer. The defendant Puffer was elected secretary. On motion of the defendant Markham a salary of $5,000 per annum was unanimously voted the president, and on motion of Pfaudler a salary of $3,000 per annum was voted Puffer. It further appeared that at this time the company had no income of any amount; that it was just beginning operations, and that it was in want of funds for a working capital. The question is thus sharply presented as to whether or not the directors of a corporation have the power to bind the stockholders to pay such salaries as they by resolution see fit to vote themselves. "We are aware that salaries have in some instances been paid officers in corporations of this character, and that such salaries have been fixed by resolution of the board of directors. We are, however, inclined to question the propriety of so fixing the salaries. In the case under consideration the president, secretary and treasurer are designated from the board of directors. The board of directors are only five in number. If the power of fixing their own compensation is left with the board, it will readily be seen that the stockholder's may be prejudiced; that the directors may arrange with each other and substantially fix their own salaries. There appears to be nothing in the statute, or in the certificate of incorporation under which this corporation was organized, bearing upon the question, and the authorities upon the question appear to be exceedingly meager.
In the case of Coleman v. Second Avenue Railroad Company (38 N. Y., 201), the general rule was stated to the effect that directors, acting as directors and composing a majority of the board, could not make a bargain with themselves binding upon the company.
In the case of Ogden v. Murray (39 N. Y., 202), it was held that trustees and persons standing in similar fiduciary relations shall not be permitted to exercise their powers and manage or appropriate
In the case of the Maux Ferry Gravel Road Company v. Branegan (40 Ind., 361), it was held that if there is no provision made in the law under which a corporation is organized, or in its by-laws by which compensation is to be made to the directors for services, compensation cannot be recovered, and in the absence of such provision the making of an allowance by the board of directors to themselves and the issuing of an order or bond as a compensation for services was invalid.
In the case of Holder v. The La Fayette, Bloomington and Mississippi Railroad Company (71 Ill., 106), it was held that where a director of a company is appointed treasurer and no provision at the time is made for his compensation, he will have no right to claim pay for the same, and a subsequent allowance of a claim in his favor will not entitle him to receive it; that the directors in respect to the corporate funds are trustees and have no right to use or appropriate the funds of their cestui que trusts to themselves.
In the case of Jackson v. The New York Central Railroad Company (2 Thomp. & Cook, 653), it was held that a director of a railroad company is not entitled to compensation for his legitimate and ordinary duties as director, but is for his personal services beyond the ordinary range of his official duties upon an actual employment by the company.
Pierce on Railroads (page 31) says that “ the directors are presumed to perform the duties of their trust gratuitously; they are not entitled to compensation even for services outside of the ordinary duties of their offices unless it is expressly stipulated before the services are rendered; but an express contract by the board to pay a fixed or reasonable sum is binding. Some authorities require a vote or resolution as evidence of the agreement, while others do not regard such formal action as essential where there is an actual employment. A subsequent vote of the board to pay a director for his services, where there was no previous agreement, is not binding. The expectation of a director, that he was to receive compensation,
There are other authorities which appear to assume that the board of directors have the right to vote salaries, but in none to which our attention has been called does it appear that the question of their power so to do was raised or discussed. "Without stopping to determine the question as to whether or not the board of directors have the power, by resolution, to vote salaries to one or more of their own body, we are clearly of the opinion that such salaries so voted are not binding upon the company, when the director in whose favor the salary is voted is present participating in the proceeding.
In the case under consideration the five directors were present. The motion was carried unanimously. • The inference to be drawn from the proceeding is that they all participated. We are consequently of the opinion that, under the circumstances of this case, the salaries voted ought not to be upheld.’ The amount of these salaries, together with the $5,000 embraced in the $6,252.12 note, entered into and formed a part consideration of the notes sought to be set aside. The referee has not in terms found that there was a fraudulent conspiracy on the part of the directors to swell the indebtedness of the company in favor of its officers, so that the corporate franchises might be sold out for their benefit; but he has found facts which, if true, would be sufficient to establish the existence of such fraudulent conspiracy. This is sufficient. (Whittlesey v. Delaney, 73 N. Y., 511.)
The facts found by the referee appear to be sustained by the evidence. "We have not discovered any exception taken upon the trial which necessitates a reversal of the judgment. The judgment entered in this action, among other things, provides that “ any party may apply upon the foot of this judgment for a reference to ascertain and report what-damages, if any, the said company, or any of its stockholders, parties to this action, have sustained by reason of the action of any of the defendants, trustees of such company; and if desired by said defendants, what amount was due
The issues joined in this action were referred to the referee to-hear, try and determine. The plaintiffs have failed to prove that they have sustained any damages beyond the relief given in the judgment. The referee consequently was not authorized to find or award damages. This is the only issue raised by the pleadings, which the referee was called upon to try, that remains undeterm ined. If the plaintiffs claimed that they were entitled to damages the evidence should have been produced before the referee. Failing in that they should not recover.
The judgment should be modified by striking out so much of the judgment as is above quoted, and as so modified the judgment should be affirmed, with costs of this appeal to the respondents.
Judgment modified by striking out the following: “ Any party may apply upon the foot of this judgment for a reference to ascertain and report what damages, if any, the said company or any of its stockholders, parties to this action, have sustained by reason of the action of any of the defendants, trustees of such company, and if desired by said defendants, what amount was due to them, or either of them, from said company on the 5th day of December, 1883, to the end that such further judgment may be entered as shall be just.” And as so modified the judgment is affirmed, with costs of this appeal to the respondents.