Watts's Appeal

78 Pa. 370, 1874 Pa. LEXIS 226

• Court: Supreme Court of Pennsylvania
• Decided: October 12, 1874
• Status: Published

Opinion

Mr. Justice Gordon

delivered the opinion of the court, October 12th 1874.

In the absence of a demurrer, we treat as w'aived those objections to the bill which are urged on the ground of multifariousness, both as to the parties and the relief prayed for.

Exceptions of this kind are but technical, and if brought to the notice of the court in a formal manner, and at a proper time, opportunity is furnished to the plaintiff to meet them by amendment. If, however, the defendant does not see proper thus to bring them to the notice of the court, it will be presumed that he elects to proceed with the case on its merits.

Besides this, the court generally has power, by its decree, to meet and obviate any difficulties that may arise from causes of this kind. We therefore proceed, at once, to the investigation of the charges made against the directors of the McKean and Elk Land and Improvement Company, who are the real defendants in this case.

The plaintiffs, shareholders of the stock of this company, charge the directors with a mismanagement of the affairs of this corporation, so obvious and gross, and so wilfully perversive of the charter thereof, as to amount to a fraiud upon their rights and interests. It is for cause of this kind that our intervention as a court of equity is demanded.

That a bill may be maintained against directors personally, under circumstances such as above alleged, is well established by many authorities. Among the most recent we cite the case of Spering’s Appeal, 21 P. F. Smith 24.

Not only may the shareholder thus call the directors to a formal account where he has been fraudulently deprived of money justly belonging to him, but he may also, under proper circumstances, interpose for the protection of the company itself: Gravenstine’s Appeal, 13 Wright 310, Thompson, J.

Having thus disposed of the technicalities encumbering the case, we proceed to examine the specific charges brought by the plaintiffs against the defendants, and upon the truth or falsehood of which this case must be determined.

The directors, defendants, are charged with the commission of the following acts, either wholly without warrant or in excess of the powers vested in them by the charter of incorporation, viz.:—

1. Subscribing for sixteen hundred and twenty-five shares of the Sunhury and Erie Railroad Company’s stock, to be paid for by one hundred thousand dollars in cash, and five thousand acres of land.

2. Executing two mortgages upon the land of the company. One dated February 1st 1863, and the other June 22d 1867; the first to secure the payment of bonds, therein recited, to the amount of two hundred thousand dollars, and the second to secure the payment of like bonds to the amount of two hundred and sixty-seven thousand dollars.

3. Executing, in the year 1865, deeds for a large body of the company’s land, to the New York and Erie and the Erie Mining Companies, and taking in exchange therefor 11,750 shares of their stock.

4. Selling 35,600 acres of the company’s land to the stockholders, including themselves, to be paid for in the manner following, viz., sixty-two per cent, in the stock of the corporation, thirty-six per cent, in the bonds thereof, and but two per cent, in cash.

5. Erecting saw-mills, a hotel and other buildings upon the corporate property.

In this brief of the plaintiffs’ specifications of the misdeeds of the defendants, we have not included one or two of minor import, which we may now notice and dispose of.

It is alleged that Mr. Watts has persistently since November 1859, endeavored to purchase from the directors so much of the lands of said company as he might justly be entitled to, offering to pay for the same in shares of its stock, and that they have as persistently refused to accede to his offers.

It is further alleged that they refused a bid of twenty-five dollars per acre from one Mr. Putman for four thousand acres of said lands.

In the first of these alleged cases, we are not sufficiently informed, from the evidence, to determine whether the directors did well or ill in rejecting these offers.

In the second case, the evidence leaves it very doubtful whether any such offer was made with the bond, fide intent to purchase.

Admit, however, that this offer was made in good faith, and that in both cases the propositions were imprudently rejected ; yet, as they were matters resting wholly in the judgment and discretion of the directors, they are beyond our power of review. Their conduct in the premises may have been unwise, but it was not legally reprehensible.

Without regard to the order of the charges as contained in the bill, we proceed to discuss the items thereof as they present themselves to our mind in apparent legal sequence. First, then, had the directors power to contract debts for the company, and to execute bonds and mortgages to secure the payment thereof ? In the case of the Commonwealth ex rel. Reinboth v. The Councils of Pittsburg, 5 Wright 284, Justice Strong says: “The power to execute and issue bonds, contracts or other certificates of indebtedness, belongs to all corporations, public as well as private, and is inseparable from their existence.” If this be good law, and we think it is, the question as to the power of the directors of the Mc-Kean and Elk Land and Improvement Company, to contract debts and issue the bonds of the corporation therefor, would seem to be settled. The very power to contract necessarily involves the cognate power to create debt; and a corporation, without such power would be a body without life, utterly effete and worthless. If, however, it be objected, that one may have the power to contract debts binding upon his principal, and yet not have the power to bind him by deed, it is answered, these directors have such power under the charter. They have the power to dispose of the whole of the company’s lands, by deed or lease, and as they possess this superior power, the minor one of the mortgaging those lands upon a proper occasion, and for a proper debt, may be inferred : Lancaster v. Dolan, 1 Rawle 231: Gordon v. Preston, 1 Watts 385.

The inquiry, then, is not as to the general authority of these men to contract debts on the credit of the company, and to provide for their payment by issuing of bonds secured by mortgage, but it is rather, had they the power to contract the specific debts complained of? If not, was the contracting thereof so clearly beyond their powers that we must impute to them the commission of a wilful wrong or a carelessness, so obvious to ordinary discretion that it amounts to the same thing ?

There is nothing in the evidence which tends to show that what these directors did in the premises was intended to benefit themselves beyond or above their fellow-shareholders, or to implicate them in any actual fraud. Under such a state of facts, we will not consent to charge them with the results of such ordinary errors of judgment as men of common prudence might fall ‘into, in the conduct of their own business.

The status of directors, and the amount of judgment, care and skill required of them, is so clearly set.forth in the opinion of our brother Sharswood, in Spering’s Appeal, 21 P. F. Smith 11, that we are relieved from the necessity of further investigation or elaboration of these points.

Erom this case we learn that directors are mandatories only, and as such, held to but ordinary skill and diligence, and are not responsible to their fellow corporators for the want of judgment and knowledge. They are personally liable only where they are guilty of fraudulent conduct or of acts clearly ultra vires.

With this light upon the subject it is not difficult for us to determine that the charge of the misappropriation by the directors of the funds of the company, by the erection of saw-mills, a hotel and other buildings, cannot be sustained. Eor it will be observed our inquiry is limited to the question of the power to make such improvements. If they had such power, we, as already intimated, will not sit to determine whether or not they erred in judgment in respect to the character or cost thereof.

Now this corporation had, inter alia, these very general and necessary powers, to wit: “ To aid in the development of the minerals and other materials ” in and upon the lands, and “ to promote the clearing and settlement of the country.”

We know of no other material upon these lands, more abundant or more obviously requiring development, than the timber, which covered them in an almost unbroken forest. Neither can we conceive of anything better calculated to develop this kind of material than saw-mills. So we regard a hotel, of some kind, in so large a territory of wild lands as not only a convenience, adding greatly to the settlement of the country, but a necessity.

Conceding, however, that we have misread the charter, and that the defendants exceeded their power in the erection of the buildings, yet as none of the plaintiffs, or others of the shareholders, objected during the time of their erection, nor until the filing of this bill, some two years after the completion of the last one — the hotel — it would indeed be a very strange kind of equity that would compel the' directors to account for moneys expended in an enterprise in which the plaintiffs, by their silence, if nothing more, acquiesced. Furthermore, it is not alleged that the hotel, the building concerning which the greatest complaint is made, has not accomplished its purpose; that the company did not derive all the advantages which were expected, or that the building is not worth all it cost. As therefore no loss has been wrought, no account can be taken.

With regard to the subscription to the stock of the Sunbury and Erie Railroad Company, we are inclined to think that this act, though perhaps not wholly beyond the powers conferred by the J charter, was at least in excess of that authority. The subscription amounted to one hundred and sixty-two thousand dollars; the stock was worth only about thirty-six dollars in the hundred, hence j there was in effect a donation to the railroad company of about j one hundred thousand dollars, but this amounted to as much as the entire capital stock authorized by the Act of Assembly to be raised for improvement purposes.

Notwithstanding this, the question remains, was this act sol clearly in excess of their authority that the directors were bound \ to know and avoid it ? Because, if while these men were acting honestly, and for what they esteemed the best interests of the company, they were not wilfully perverting their powers, hut only misjudged the same, we cannot consent to compel them to account personally for the moneys thus expended. In order to arrive at a correct conclusion in this matter we must consider all the circumstances by which they were surrounded.

The powers already noticed, to aid in the clearing and settling! of the country, as well as the further power to build not more than; twenty miles of railroad, were conferred upon the company ini order to make the main object of its organization, i. e., the sale of I its lands, at remunerative prices, feasible.

This property lay in a section of the state remote from any large stream, and some forty or fifty miles from the nearest railroad. Even the common roads were few and almost impassable. Under such circumstances these lands were, so far as a present market value was concerned, not worth the taxes annually assessed on them; yet they contained within them valuable minerals and were clothed with forests of excellent timber. But these were use-1 less without the means to transport them to market. When, therefore, the directors of the Sunbury and Erie Railroad proposed, upon a subscription to their stock of one hundred and sixty-two ^ thousand dollars, to adopt a route for their road which would carry it through the heart of the McKean and Elk Land and Improvement Company’s land, it is not surprising that not only the directors but also the stockholders thereof should .have agreed to the proposition. That they had the power to build both common roads and $ railroads, or to aid others to a reasonable extent in so doing, is | beyond doubt. Under such circumstances, their subscription, j though larger than was warranted, looks to me more like a mistake ' in judgment than a wilful perversion of power. But passing this we come to another phase of this case, which we regard as definitive. This subscription, as before observed, was made for the honest purpose of benefiting the company; it was not made in haste, but was some four years in process of consummation. In the meantime it met the approval of the stockholders at their meeting May 16th 1862. There was, therefore, ample notice to all concerned, and ample time for protest and the intervention of the preventive process of the law. Without any precedent authority we might well come to the following conclusions: first, that when an act done by directors is in excess of their authority, yet has | been done with the bon& fide intent of benefiting the corporation which they represent, and a shareholder knowing thereof does not l dissent within a reasonable time, his assent to the act will be presumed, and he will be estopped from gainsaying it.. Eor his silence, Vhen he ought to speak, is such a neglect of duty towards those Who are gratuitously serving his company, that he is entitled to no consideration in a court of justice.

Second. That when the act complained of is to be followed by a large expenditure of money, the shareholder should not only file his protest within a reasonable time, but should follow up the same by active preventive means. Eor it is obviously against good conscience, that one having the power to prevent it should stand by and see his associates expend money, that may result to his benefit, land afterwards charge them therewith. He may not thus pocket /the gain resulting from his delay or thus wait in order to observe the result of the experiment, and when it fails to produce the ■ result expected, fall back upon his protest as a saving of his legal remedies, giajieglect to act at the proper time bars his right of action as effectually as his neglect to protest.

1 These doctrines are, however, abundantly supported by the authorities quoted by the learned counsel for the defendants; inter alia Great Western Railroad Co. v. Oxford, 3 DeGex, Macn. & G. 341; Clegg v. Edmondson, 8 Id. 787 ; Ashhurst’s Appeal, 10 P. F. Smith 290.

i So far as we are informed, none of the plaintiffs, except Mr. || Watts, so much as interposed an objection to this action of the ¡directors. They are therefore so clearly in default and so obviously I estopped by their neglect, that we may dismiss their claims without further consideration.

it Henry M. Watts, however, did interpose his dissent. He did ¡Iso in his letter to the company dated November 19th 1859. Again, in his letter to John C. Oresson, president of the company, dated 24th day of February 1862, he reiterates the opinion that ■the subscription was ultra vires. It was not, however, until the 19th day of September 1866, that he so much as intimated the possibility of a suit for the purpose of testing the action of the board in making this subscription and executing the mortgage, i Were these expressions of dissent sufficient to relieve hjm from the i ' charge of neglecting the proper assertion of his rights'ímtil through 1 his own laches he had forfeited them ?

From 1859 to 1863, this matter was in abeyance, unconsummated. He was fully informed of every step in the programme. He knew that in 1862, the stockholders' had ratified the action of the directors, by authorizing the execution of the bonds and mortgage in order to raise the money with which to pay the subscription. Yet, during all this time, he contented himself with a mere dissent. A dissent, clear enough, indeed, as to the doubts and legal propositions therein raised, but nothing but a dissent. Under the circumstances, we think he did not do all that was required of him. Had he at the'proper time invoked the restraining power oT"tEe courts, all things would have been properly adjusted, and all improper actions arrested. Instead of this, he refrains from this obvious course of action, until the matter is fully consummated, and until he has derived every possible benefit therefrom. He permits the experiment to proceed to completion, before he attempts to call his fellow corporators to an account. Under such circumstances, we could not have helped him had he commenced his proceedings immediately after the payment of the subscription to the railroad company. But his case is entitled to still less consideration, because he allowed no less than seven years to pass between the consummation of the transaction and' the issuing of his legal process. f

Were we to hold these directors to the duties and responsibilities of trustees, yet six years would bar an action against them for misuse of the corporate property: Ashhurst’s Appeal, supra.

The charge relating to the transfer of lands to the New York and Erie and Erie Mining Companies, and the taking of their stock therefor cannot be sustained. Whilst we are inclined to think that this exchange of land for stock of companies other than their own was unwarranted, yet no harm has been done upon which the plaintiffs can found a bill. If this act of the directors was ultra vires, it is very clear their deed conveyed no title. All persons dealing with them for the lands of the company, were bound to take notice of the extent of their powers, and if the companies named chose to deal with them outside of those powers, they took nothing thereby. It follows, that as the company lost nothing, the directors are liable for nothing. If, however, the act was within their powers, they did what their judgment dictated as best to be done, and we cannot interfere to review a matter of discretion ; a fortiori, when the shareholders interposed no dissent at the time, nor until the bringing of this bill.

With reference to the sales made in 1868, a few words will suffice. Tlj^se sales were ordered by the stockholders themselves. Payment in the bonds of the company was equivalent to payment in cash, and payment in the stock of the company was expressly authorized by the act of incorporation. That the directors should be permitted to purchase, was part of the arrangement and was beneficial to all parties. They were therefore within the rule asserted by Justice Strong in Ashhurst’s Appeal.

The whole affair was conducted openly and fairly; the lands brought good prices ; much better than could have been realized at cash sales, and we cannot see what good could be accomplished by setting them aside.

Thus, upon a careful review of all the points made in this case, and of the facts revealed by the master’s report, and the paper books submitted to us by the parties, we have no hesitation in coming to the conclusion that the decree of the Court of Nisi Prius was correct.

Appeal dismissed at cost of appellant.