Summary
holding that "[d]irectors may be required to return to the corporate treasury money expended by them to defend suits brought against certain directors individually which did not affect the corporation's rights, where all the stockholders did not consent to such expenditure"
Summary of this case from Werthmann v. DONet, Inc.Opinion
Decided January 7, 1931.
Corporations — Attorney's fees not payable from corporate treasury — Fees for successfully defending individual directors sued for dereliction of duty.
The directors of a corporation who have been sued individually for dereliction of duty resulting in a loss to the corporation, and who have successfully defended such suit, cannot pay out of the corporation treasury the necessary cost of attorney's fees in defending such suit, when no action was taken by the stockholders to authorize such expenditure and where no interest of the corporation was conserved and there was no benefit, either directly or indirectly, to the corporation from the litigation in question.
ERROR: Court of Appeals for Cuyahoga county.
Messrs. Vickery, Duffey Vickery, for plaintiffs in error.
Messrs. Squire, Sanders Dempsey, for defendants in error.
We will refer to the parties as they appeared in the court below. In July, 1927, the plaintiffs, David C. Griesse and others, who were stockholders of the Lang Body Company, a corporation organized under the laws of the state of Delaware and doing business in the state of Ohio brought an action in the court of common pleas of Cuyahoga county against the defendants in error in this case, and others, seeking to recover on behalf of the corporation losses claimed to have been caused by the defendants' alleged malfeasance, nonfeasance, and misfeasance while occupying the position of directors of the corporation. The suit resulted in favor of the defendants, and the case was taken to the Court of Appeals of Cuyahoga county, where the judgment was affirmed. In that case the corporation was made a nominal party defendant, but no affirmative relief was asked against it, and the judgment prayed for was for its benefit. These defendants as directors caused to be paid from the treasury of the Lang Body Company the sum of five thousand dollars as attorneys' fees in representing these defendants and other individual defendants in said litigation. It is admitted by the pleadings that the amount so paid to the attorneys was reasonable compensation for the services rendered up to that date in that action in the defense of the defendant directors and former directors; that the attorneys so paid had no claim against the Lang Body Company for services in said action. The plaintiff stockholders then brought an action in the court of common pleas to recover on behalf of the corporation the sum of five thousand dollars so paid out of the corporation treasury as attorney fees. A motion was made for judgment on the pleadings, which resulted in a judgment in favor of the defendants, and this proceeding in error is to reverse that judgment.
The question presented is one of law. Can the directors of a corporation who have been sued individually for alleged dereliction of duty, resulting in loss to the corporation, and who have successfully defended such suit, pay out of the corporation treasury the necessary cost of attorney fees in defending such suit? Numerous cases have been cited for and against the legal proposition presented. However, no Ohio case has been cited and the question has never been presented to or decided by the courts of Ohio. It is urged that, as directors act as trustees or agents for the corporation, the decisions governing trustees should apply. It is well recognized that where a court of equity has before it a trust fund, together with the trustee and the other parties to the litigation, the court, having jurisdiction of the subject-matter and of the parties and being conversant with all the circumstances surrounding the litigation, has the power to make an allowance to the trustee for reasonable attorney fees which he has incurred in the defense of the trust. But no such facts are presented in this case. In a number of cases cited by counsel in this case attorney fees were not allowed by the courts for the reason that the action or conduct of the directors was wrongful and the fees not expended for the benefit of the trust or corporation. But few, if any, of the cases cited are applicable to the facts presented in this case.
It is elementary that trust property can only be used for trust purposes, and that the property or funds of a corporation can only be used or expended for the advantage of the corporation, or for the purposes stated in its charter. A corporation may sell or dispose of a part or all of its assets by the unanimous vote of all of its stockholders.
The plaintiffs have cited in support of their contention the case of Figge v. Bergenthal, 130 Wis. 594, 109 N.W. 581, 110 N.W. 798, which seems to hold that it is proper for the corporation to pay attorney fees for the defense of an action against the individual directors of the corporation, in a suit instituted against them for fraud, where they have been exonerated. But in that case such payments were authorized by a vote of the stockholders. There is nothing in the instant case that indicates that the stockholders took any action to authorize the expenditure in question.
The Supreme Court of Wisconsin had the question presented to it in the later case of Jesse v. Four Wheel Drive Auto Co., 177 Wis. 627, 189 N.W. 276, and held:
"Although a corporation may, by unanimous action of all of its stockholders, dispose of its property as it pleases so long as it does nothing against public policy, without such unanimous action of the stockholders the corporation is bound by its articles of incorporation, and authority must be found therein for its action, either expressly stated or properly inferred from the general powers conferred.
"Where an action was instituted against the directors of a corporation individually by some of the minority stockholders to cancel a sale of their stock to the directors because of alleged misrepresentations, the corporation cannot provide funds for the defense of the action without the unanimous vote of all of its stockholders; and a unanimous vote at a stockholders' meeting at which not all of the stockholders were represented and the notice for which had not stated that any special business was to be transacted was insufficient to authorize such defense, the articles not authorizing the corporation to engage in litigation between contending factions of its stockholders and such action not being germane to the business of the corporation."
If Figge v. Bergenthal, supra, is authority for defendant's action, it was overruled by the later case of Jesse v. Auto Co.
There is nothing in the pleadings in the instant case to indicate that the stockholders by a unanimous vote, or by any vote at all, authorized the expenditure in question. There is nothing in the pleadings to indicate that the corporation received any benefit either directly or indirectly from the litigation in question. Such being the case, the expenditure of the five thousand dollars was ultra vires and unauthorized.
The same rule has been announced in the case of Godley v. Crandall Godley Co., 168 N.Y.S., 251, where it is said:
"Though representative actions by stockholders are presumptively in favor of, and not in antagonism to, the corporation, and though ordinarily there is no occasion to spend considerable sums of the corporation's money to defend against an action so brought, cases may arise where the interests of the corporation are injuriously threatened by such an action, or by some incidental relief sought therein, and in such case the directors may employ and pay counsel in behalf of the corporation without being charged with wastefulness.
"When such an expenditure is questioned, the directors have the burden of showing that some interest of the corporation was in fact threatened, and that for that reason the expenditure was justified."
In the present case the burden of showing that there was some benefit to the corporation, or that some interest of the corporation was threatened, is upon the directors. There is nothing in the pleadings to indicate that the corporation had any interest whatever or was to be benefited in any manner by the expenditure of the five thousand dollars in question.
The rule here announced has been adopted by the text-writers. Fletcher Encyclopedia Corporations, vol. 11 (1924 Supp.), Section 2512, says:
"Directors may be required to return to the corporate treasury money expended by them to defend suits brought against certain directors individually which did not affect the corporation's rights, where all the stockholders did not consent to such expenditure."
The burden being on the defendant directors to show that the corporation received some benefit from the expenditure of attorney fees, or that some interest of the corporation was conserved, and nothing in that regard being shown, and it also appearing that there was no action taken by the stockholders to authorize the payment, the action of the defendant directors in authorizing the payment out of the corporation treasury was unauthorized and illegal.
The judgment of the lower court in favor of the defendants was erroneous and is reversed. The case is remanded to the court of common pleas to give the defendants in error an opportunity to plead some advantage or benefit to the corporation for the expenditure in question. If no leave to so plead is desired, judgment may be entered in favor of the plaintiffs in error in the sum of five thousand dollars against the defendants in error.
Judgment accordingly.
MIDDLETON, P.J., and MAUCK, J., concur.
MIDDLETON, P.J., MAUCK and BLOSSER, JJ., of the Fourth Appellate District, sitting by designation in the Eighth Appellate District.