Banking Trust Co.
Realty Co.

Not overruled or negatively treated on appealinfoCoverage
Court of Appeals of OhioMay 19, 1930
37 Ohio App. 566 (Ohio Ct. App. 1930)
37 Ohio App. 566175 N.E. 36

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Decided May 19, 1930.

Corporations — Leases to firm controlled by directors, invalid — Directors occupy fiduciary relation toward stockholders — Directors to act in interest of and protect stockholders — Dissenting shareholders — Rights restored after demand for cash value withdrawn — Section 8623-72, General Code.

1. Leases demising space in building of corporation and made by its directors, all of whom are interested in the leases as lessees, held invalid.

2. Directors of corporation occupy fiduciary relation toward stockholders.

3. Directors of corporation as trustees of stockholders must act in interest of stockholders and protect their rights in good faith.

4. Where demand of dissenting stockholder for cash value of stock after voting against proposed sale of corporation's property was withdrawn with consent of corporation, rights of shareholder were restored and enforceable by proper action (Section 8623-72, General Code).

APPEAL: Court of Appeals for Erie county.

Messrs. King, Ramsey Flynn, for plaintiff.

Messrs. Young Young, for defendants.

This cause comes into this court on appeal from the court of common pleas of Erie county. A motion to dismiss the appeal was filed but during the argument of the cause counsel agreed that the cause should be determined upon appeal, and we have therefore not passed upon the motion to dismiss the appeal.

The evidence discloses that the Tenants Realty Company was organized in 1922 for the purpose of buying, selling, renting, leasing, and dealing in real estate. The real purpose in organizing the company was to acquire the Kingsbury building in Sandusky for the protection of four tenants, Bauman Bros., Ehrhardt Brown, William Seitz Sons, and Alex Textor, who occupied the four storerooms on Columbus avenue. The property was acquired for a consideration of $95,000, soon after the formation of the company. There were at the time several offices in the building occupied by various tenants, and rents were collected therefrom. In addition, the four tenants referred to paid as monthly rental such amount as would yield a return of six per cent. on the outstanding capital stock, but no leases were executed to them until April, 1928. At that time there appeared to be a good chance of selling the property at a considerable advance in price. On April 27, 1928, the directors, Charles Bauman, Jacob Bauman, Fred Ehrhardt, William F. Seitz, and Herbert Textor held a meeting. After the date of organization of the company Fred Ehrhardt had succeeded to the business of Ehrhardt Brown, and the firm of William Seitz Sons, composed of William F. Seitz and Frank J. Seitz, had been dissolved by the death of the latter. Herbert Textor, the son of Alex Textor, deceased, represented the Textor interests. At this meeting a resolution was passed authorizing the execution of leases to the four tenants (1) Bauman Bros., composed of Charles H. Bauman and Jacob H. Bauman, (2) Fred Ehrhardt, who succeeded Ehrhardt Brown, (3) William F. Seitz, and (4) Eleanor S. Textor and Herbert Textor, doing business as Alex Textor Store. Each of these leases was for a term of five years with an option of renewal for another five years, and at a rental of $2,178 per year, with the exception that the one to Bauman Bros. was at a rental of $2,613 per year. The rental in each instance was substantially the same in amount as that previously paid. On August 4, 1928, the board of directors, at a special meeting, accepted the offer of David Haber, representing the S.S. Kresge Company, to buy the building for the sum of $200,000. At the time of this meeting, the board of directors was composed of the same persons as at the previous meeting on April 27, 1928. On August 6, 1928, a stockholders' meeting was called for the purpose of ratifying the sale to David Haber. At that time the stockholders were as follows: William F. Seitz, 58 shares; Charles H. Bauman, 56 shares; Jacob H. Bauman, 51 shares; Herbert Textor, 30 shares; John Bauman, 35 shares; Wilford Seitz, 15 shares; Fred Ehrhardt, 29 shares; Eleanor Textor, 80 shares; estate of Frank J. Seitz, 121 shares.

Frank J. Seitz having died previous to the making of the leases, the Commercial Banking Trust Company, the plaintiff, had qualified as executor of the last will and testament of the decedent. At this stockholders' meeting a resolution was presented and passed by a vote of all the stock except the 121 shares of the Frank J. Seitz estate, ratifying the sale of the property for $200,000. The resolution also provided that the owners of three of the four leases should receive payment for surrender of their rights under their leases as follows: Bauman Bros., $27,500; Fred W. Ehrhardt, $16,500; William F. Seitz, $6,000.

The Textors received no consideration, but it is disclosed that the purchaser consented to allow them to retain the lease previously executed to them. The Commercial Banking Trust Company, executor of the Frank J. Seitz estate, was willing to have the sale made, but was opposed to the payments of the sums for the leaseholds, and brings this action to restrain the distribution of these sums to the three tenants.

All the directors at the meeting which passed the resolution authorizing the execution of the leases were interested parties, and there were lacking two contracting parties necessary to the execution of a valid contract. In re Liquidation of State Exchange Bank of Stryker, 26 Ohio App. 142, 159 N.E. 839. The directors occupied a fiduciary relation toward the stockholders, and, when we consider that the leases in question were executed at a time when it was anticipated that the property would be sold for a considerable sum in excess of the amount paid for it, and that the directors caused to be executed to themselves leases which would yield six per cent. to the stockholders on the price paid by the Tenants Realty Company when it purchased the building, and that within four months thereafter it was sold for more than twice the amount originally paid for it, and that the obvious purpose in executing the leases was so that large amounts might be obtained as bonuses when leases were surrendered on the sale of the property, we are of opinion that the leases are invalid and that the plaintiff is entitled to have the full amount of $200,000, received as the purchase price of the building, distributed as assets of the corporation. The directors of a corporation, as trustees of the stockholders, are bound to act in the interest of such stockholders and protect their rights in good faith.

It is claimed, however, by the defendants, that the plaintiff has waived its rights. Under the provisions of Section 8623-72, General Code, a dissenting shareholder who shall vote against a proposal for the sale of the company's property may object thereto within twenty days, and demand in writing payment of the fair cash value of his shares, and the corporation is required, within thirty days after receipt of such demand, unless it is withdrawn with the consent of the corporation, to pay to such shareholder upon surrender of his certificates or shares the fair cash value thereof as of the date before such vote was taken. In the instant case such demand was made, but was withdrawn with the consent of the corporation. In our judgment, after such withdrawal, the rights of the shareholder are restored, and he may enforce such rights by proper action. To hold that the plaintiff could not maintain its action because of the demand made would be to hold that, after withdrawal of the demand, with the consent of the corporation, the owner of the stock did not have the rights of a shareholder. This court is of the opinion that such a conclusion is not warranted, and that, when the corporation consented to the withdrawal, the rights of the shareholder were fully restored and such shareholder is entitled to have the assets of the corporation distributed according to law and equity.

A decree will therefore be entered in behalf of the plaintiff, granting it relief as a shareholder, as prayed for.

Decree for plaintiff.

LLOYD and RICHARDS, JJ., concur.