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Gauger v. Hintz

Supreme Court of Wisconsin
Nov 5, 1952
262 Wis. 333 (Wis. 1952)


In Gauger v. Hintz, 262 Wis. 333, 55 N.W.2d 426 (1952), the Supreme Court of Wisconsin laid the foundation for the doctrine of "corporate opportunity.

Summary of this case from Regal-Beloit Corp. v. Drecoll


October 7, 1952 —

November 5, 1952.

APPEALS from a judgment of the circuit court for Milwaukee county: GUSTAVE G. GEHRZ, Circuit judge. Reversed.

Alvin Juedes of Milwaukee, for the plaintiff.

For the defendants there were briefs by Whyte, Hirschboeck Minahan, attorneys, and Victor M. Harding of counsel, and oral argument by Mr. Harding and Mr. Raymond E. Gieringer, all of Milwaukee.

Defendants appeal from the judgment as entered. Plaintiff appeals from that part of the judgment denying the appointment of a receiver for the Milwaukee Machine Products Company to dispose of its assets and wind up its affairs.

This is a stockholder's suit instituted by Frank A. Gauger, a minority stockholder in the Milwaukee Machine Products Company, against the majority stockholders Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, Robert Gieringer, and also against Milmac Corporation, of which the four individual defendants are sole stockholders.

The four defendants, Hintz, Wandel, Mueller, and Gieringer, in 1927, organized and incorporated the Milwaukee Machine Products Company. They were all skilled machinists and toolmakers, and the business of that corporation was operating a machine shop. Each of the four invested $1,250, and each received fifty shares of stock therefor. The plaintiff, Gauger, for many years has been engaged in experimental research and mechanical-development work, and from time to time the Milwaukee Machine Products Company did machine work for him. In 1934, he invested $946 for which he received fifty shares of its capital stock, since which time he has at all times owned twenty per cent of the capital stock. In 1937, each of the stockholders, now numbering five, invested an additional $1,300, for which each received thirteen shares of capital stock. The plaintiff at no time has served as a director or officer of the corporation, but the four defendants have held the corporate offices and have served as the board of directors.

From 1927 to 1940 the Milwaukee Machine Products Company's business was small, and the wages paid to the defendants were modest, if not meager. However, commencing with 1941, largely because of the impetus of war, that company's business expanded very rapidly, and the burdens thus imposed on defendants greatly increased. Sales increased from $89,885.91 in 1940 to $686,371.74 in 1950, and during the same period the corporation's net worth, based upon book value of the outstanding capital stock, increased from $14,132.75 to $122,414.31. At the time the company was organized in 1927, it had but three one-spindle automatic machines. It now has fifteen six-spindle and five four-spindle automatic machines. It makes screw-machine products mainly from bar stock but also some from castings. One of its principal customers is the Delta Manufacturing Company, which manufactures power tools and drill presses. By 1950 the Milwaukee Machine Products Company had developed so as to employ fifty-five employees.

As found by the trial court, the aggregate salaries paid to the four defendants by the corporation for each year from 1940 to 1951, inclusive, is as follows:

1940 ............................ $11,840 1941 ............................. 29,040 1942 ............................. 50,800 1943 ............................. 50,800 1944 ............................. 52,000 1945 ............................. 52,000 1946 ............................. 53,000 1947 ............................. 52,000 1948 ............................. 40,000 1949 ............................. 31,200 1950 ............................. 56,100 1951 14 weeks to Nov. 10, 1951 28,444 While the four defendants acted as officers and directors of the corporation, the amounts paid to them were for personal services rendered outside of their line of duty as officers and directors. Mueller was plant superintendent, Gieringer was in charge of maintenance and supervised the setting up of all machinery, Wandel was foreman of the automatic-machinery department, and Hintz was in charge of sales and the company office. Hintz had direct charge of the books and records of the corporation; he also did estimating on jobs and saw to it that government regulations with respect to priorities and wage and price controls were observed by the corporation.

Up until November 15, 1941, the compensation of the four defendants had been fixed by informal agreement among themselves. The only record in the minute book of the corporation of any action with respect to fixing salaries appears in the minutes of the special directors' meeting held November 15, 1941, and the entry in such minute book with respect to such action is as follows:

"On a motion by Mr. Hintz, and seconded by Mr. Wandel it was moved that the salary of the officers of the corporation be raised to $15,000 per year each. The motion further stated that the method of payment of this salary shall be as follows: Each officer shall draw each week $100, or any such amount as may be fixed by mutual consent, and shall be permitted to draw such sums as he may require from time to time during the year. The motion further stated that in the event the corporation did not make sufficient profit to warrant these salaries each of the officers shall receive such part of this amount ($15,000) as the corporation shall be able to pay without sustaining a loss for any year of operations. It was further stated that in the event the corporation was unable to pay the full amount in one year that each officer understands and agrees to complete cancellation of the balance due him."

In 1940, according to the evidence, the corporation sustained a net loss of $584.35, and the net profits of the corporation for the succeeding ten years, after payment of all expenses, including the amounts paid to the four defendants, are as follows:

1941 ......................... $ 4,503.00 1942 ........................... 6,284.66 1943 ........................... 7,694.90 1944 ......................... $ 9,173.95 1945 ........................... 5,253.89 1946 .......................... 31,493.83 1947 ........................... 8,928.45 1948 .......................... 16,744.85 1949 ............................. 276.17 1950 .......................... 21,130.66 The dividend distributions made to each stockholder, including the plaintiff, are: 1936 .............................. $ 400 1937 ............................... 1,500 1939 ................................. 122 1940 ................................. 100 1941 ................................. 100 1942 ................................. 100 1943 ................................. 100 1944 ................................. 100 1945 ................................. 100 1946 ................................. 100 ------ Total: $2,722 In 1945, the corporation purchased some machinery from the Smaller War Plants Corporation, paying part of the purchase price down. When the Smaller War Plants Corporation was later dissolved by the government, the remainder of the loan was financed through an RFC loan payable in monthly instalments over a five-year period. The provisions of the loan agreement forbade payment of dividends, and that explains why no dividends were paid by the Milwaukee Machine Products Company in the years 1947-1950, inclusive.

For some time prior to June, 1943, the corporation occupied as lessee a factory building located at 1655 North Water street in the city of Milwaukee. This space proved too small for the expanding business of the corporation, and as early as 1939 or 1940 the defendants began to look for more suitable quarters. Finally, on August 22, 1942, a contract was entered into with the city of Milwaukee to purchase five lots in North View subdivision in the city of Milwaukee for $3,800, and conveyance was thereafter made of the property by the city to the Milwaukee Machine Products Company. Building permits for the erection of a building on such lands were taken out in the name of that corporation, the first one bearing date of December 14, 1942. In 1942, $1,250 was paid to one Hinton, an architect-builder, for services rendered in drafting plans for such new factory building.

It is apparent that the defendants originally contemplated that the Milwaukee Machine Products Company was to own and erect the new factory building. However, the corporation was short of working capital and had no funds available with which to finance the undertaking. The defendants in operating the corporation had always pursued a conservative financial policy of "pay as you go," and the only borrowing by the corporation prior to 1942 was a loan of $1,000 from a bank during the depth of the depression. The defendants, considering the advisability of the corporation borrowing the funds to erect the new building and paying off the indebtedness out of earnings, were confronted with the high federal corporation income taxes and excess-profits taxes, which, in their judgment, made such a plan inadvisable because a large part of the corporation's earnings would be dissipated by such taxes. After considering the matter, the defendants determined that it would be better for the Milwaukee Machine Products Company if they increased their own salaries and paid for the new factory with their own funds, taking title in a separate corporation to be owned by them, and then leasing the factory to the Milwaukee Machine Products Company. This was the plan which was followed.

In September, 1942, the defendants incorporated a holding company under the name of Milmac Corporation, and the lands acquired from the city were later conveyed to it. Milmac also acquired by purchase other adjoining lands. Milmac reimbursed the Milwaukee Machine Products Company for disbursements made by the latter for land, architect fees, and other minor expenditures properly payable by Milmac. The funds for erecting the new building were supplied by the individual defendants from their salaries drawn from the Milwaukee Machine Products Company, the total capital expenditures of Milmac being $69,185.49.

The new factory building was completed in June, 1943, and occupied by the Milwaukee Machine Products Company. Up until January 1, 1951, that company was in possession under a verbal month-to-month lease at a rental of $500 per month. On January 1, 1951, a written lease was entered into between the two corporations, and the rental was then increased to $1,000 per month, an independent appraisal having been made by one Pfeil, connected with the B. M. Weil Company, in November or December, 1950.

Because of the shortage of working capital of the Milwaukee Machine Products Company, which was greatly under-capitalized, Milmac accommodated it by letting unpaid rent accrue, and at the time of the commencement of the action such rent indebtedness to Milmac was between $13,000 and $15,000. Milmac never paid a dividend, but in 1944, 1945, and 1946 it paid a salary to each of the four defendants, who constituted its officers, of $750 per year. Since 1946 no further salaries have been paid.

The present action was begun by the plaintiff Gauger on August 9, 1948. In his complaint he alleged that the action taken at the special directors' meeting on November 15, 1941, with respect to fixing the salaries of the four defendants, was undertaken by the defendants with the fraudulent intent, purpose, and design to defraud and cheat the plaintiff, and to unlawfully divert a large portion of the profits of the corporation, the Milwaukee Machine Products Company, to the unlawful ends and private use and benefit of the four individual defendants; that the said salaries paid the defendants subsequent to January 1, 1941, were "unreasonable and grossly exorbitant and out of all proportion to any consideration" which the corporation might receive for services from said defendants, and "was a gift of the assets of said corporation to said defendants;" that on or about September 8, 1942, the defendants organized the defendant Milmac Corporation and are the sole stockholders and directors thereof; that each of the four individual defendants paid the sum of $10,150 for his shares of capital stock in the Milmac Corporation out of moneys unlawfully paid to and misappropriated by each of the four defendants from assets of the Milwaukee Machine Products Company; and that Milmac Corporation used the moneys received from the individual defendants for their shares of stock in purchasing certain real estate and in constructing the factory building situated thereon, which land and building, since June, 1943, have been occupied by the Milwaukee Machine Products Company, and for which occupancy the Milwaukee Machine Products Company has paid a total of $27,500 rent to Milmac Corporation since June, 1943.

The complaint prays that the defendants be required to account for all moneys unlawfully and unreasonably paid to them out of the assets of the Milwaukee Machine Products Company; that judgment be rendered in favor of the Milwaukee Machine Products Company against the defendants jointly and severally for such amount as the court might ascertain as having been wrongfully or unreasonably paid to the defendants; that a receiver be appointed of the Milwaukee Machine Products Company to "properly distribute the profits" of said corporation among its stockholders; that title to real estate of the Milmac Corporation be established in the Milwaukee Machine Products Company and the Milmac Corporation be forever barred from any right, title, or interest in or to said real estate; that judgment be rendered in favor of the Milwaukee Machine Products Company against the defendants for all rents paid by the Milwaukee Machine Products Company to the Milmac Corporation, less real-estate taxes paid by Milmac Corporation; that judgment be entered canceling any and all rent which the Milmac Corporation claims to be due and unpaid from the Milwaukee Machine Products Company; that plaintiff have such other and further relief against the defendants as may be just and equitable including a provision in the judgment that the expenses of the prosecution of the suit be paid out of the assets of the Milwaukee Machine Products Company, and be repaid to said corporation by the individual defendants.

The action was tried to the court without a jury, and the trial court made findings of fact and conclusions of law, certain of which findings will be discussed in the opinion herein. Judgment was entered on February 27, 1952, which judgment provided as follows:

"1. That the defendant Milmac Corporation and the defendants Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, and Robert Gieringer be, and they hereby are, forever barred and divested from any and all claim, right, title, and interest in and to the lands and premises of the defendant, the Milwaukee Machine Products Company, a Wisconsin corporation, and all machinery and equipment therein, and all buildings and improvements thereon, known as follows, to wit:

"[Description of lots.]

"2. That said defendant Milmac Corporation be, and the same now is, ordered and directed to execute, acknowledge, and deliver, in due manner and form, its deed of conveyance to the defendant the Milwaukee Machine Products Company, free and clear of any clouds, liens, or incumbrances of the lands and premises above described.

"3. That any and all leases, either oral or in writing, made, executed, or delivered, by said Milmac Corporation as lessor and the Milwaukee Machine Products Company, as lessee, for all or any part of said lands and premises described hereinabove, be, and the same are, canceled, vacated, and set aside and said Milmac Corporation, its officers, directors, and agents, be, and they hereby are, enjoined and restrained from at any time in the future collecting, demanding, or receiving any rents or other payments by virtue thereof.

"4. That said defendant the Milwaukee Machine Products Company have, and recover, from the defendants Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, and Robert Gieringer, the sum of thirty-four thousand one hundred eighteen and 87/100 dollars ($34,118.87) upon the claim or cause of action set forth in finding 38, with interest thereon at the rate of five (5) per cent per annum from September 22, 1948, the date of the commencement of this action, and that said defendant the Milwaukee Machine Products Company is awarded, and will have until full payment of said sum and interest a lien upon the entire corporate stock of said company owned or held by said individual defendants or debtors as aforesaid.

"5. Said defendants Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, and Robert Gieringer be, and they hereby are, enjoined and restrained from collecting, demanding, or receiving from said the Milwaukee Machine Products Company any amount of salary or salaries, as officers or directors of said company for the month of December, 1951, or thereafter, in excess of the sum of $33,465 per year for all of them or the average monthly salary equivalent to one twelfth of said annual sum.

"6. That the defendant the Milwaukee Machine Products Company be, and the same hereby is, ordered and directed to pay the sum of fifteen hundred dollars ($1,500) to plaintiff's attorney, Alvin Juedes, in accordance with finding 56.

"7. The court expressly reserves jurisdiction to modify or amplify said conclusions of law, or the judgment to be entered thereon by appointing a suitable person to be named by the court, after hearing counsel for all parties herein, as receiver to further protect all rights and interests of the plaintiff and of the defendant, the Milwaukee Machine Products Company, by virtue of this judgment herein, and to enforce all provisions thereof, under bond to be fixed and approved by the court.

"(a) That the court expressly reserves jurisdiction to modify, amend, or amplify the conclusions of law or the judgment entered thereon, by ascertaining any and all debits and credits for or against any of the parties to this action, and any and all other accounting to restore them to their equitable position.

"8. That the plaintiff have and recover the sum of one hundred dollars ($100) costs, together with his disbursements in the sum of two hundred twenty-two and 57/100 ($222.57) dollars, amounting in the aggregate to the sum of three hundred twenty-two and 57/100 ($322.57) dollars, in this action, from said individual defendants, Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, and Robert Gieringer.

"[Statements giving names, occupation, and address of defendants Raymond A. Hintz, Fred Wandel, Gottlieb Mueller, and Robert Gieringer, and business and address of defendant Milmac Corporation.]"

Directors are selected by those interested in a corporation to manage the affairs and property of the corporation for its benefit. In corporate management the directors have a wide discretion as long as it is honestly exercised. The meeting by the officers of a corporation of reasonable requirements of business management is recognized as lawful and is to be protected when the efforts are free from corrupt agreements and when there is no action so patently harmful to the corporation as to indicate an abuse of discretion. There is no rule of law which requires a director to act as an employee of the corporation without reasonable compensation for his services in its management. In the absence of evidence tending to show overreaching, fraud, and unreasonableness in the matter of fixing a salary for a particular job, a court ought not substitute its judgment for that of the board of directors and assume to appraise the wisdom of any corporate action. We treated with this point and held, speaking by Mr. Justice WICKHEM, in Steven v. Hale-Haas Corp. (1946), 249 Wis. 205, 221, 23 N.W.2d 620, 23 N.W.2d 768, that "the business of a corporation is committed to its officers and directors, and if their actions are consistent with the exercise of honest discretion, the management of the corporation cannot be assumed by the court." See also Thauer v. Gaebler (1930), 202 Wis. 296, 232 N.W. 561.

The counsel for respondent, with great diligence, has recited cases which have, in accordance with general principles, held that directors of a corporation occupy a fiduciary relationship to it, among which are: In re Taylor Orphan Asylum (1875), 36 Wis. 534; Cook v. Berlin Woolen Mill Co. (1877), 43 Wis. 433, 439; Boyd v. Mutual Fire Asso. (1903), 116 Wis. 155, 181, 90 N.W. 1086, 94 N.W. 171; and Koelbel v. Tecktonius (1938), 228 Wis. 317, 321, 280 N.W. 305. With the doctrine of those cases as applied to the facts involved therein we agree.

Nevertheless, something besides the fact that the individual was a director must be existent to destroy or overcome the accepted doctrine that "the laborer is worthy of his hire." Under such circumstances transactions should be subject to close and searching scrutiny, but if such examination discloses that the compensation arranged for is reasonable and not based on fraud or bad faith, it would be grievous injustice, and not required by legal precedent, for the court to deny the individuals the right to receive or retain compensation reasonably and honestly earned in return for services by which the corporation and necessarily its stockholders were benefited.

In the case at bar, the trial court found, in effect, that a reasonable annual aggregate compensation for the four defendant executives of the Milwaukee Machine Products Company (hereinafter referred to as the "corporation"), for the years 1941-1951, inclusive, was $33,465 per year, and anything paid in excess thereof was excessive and unreasonable. By applying this yardstick, he determined that the defendants had withdrawn in excessive salaries during such period the sum of $132,440, and that $98,321.13 of such sum had been invested by the defendants in the Milmac Corporation (hereinafter referred to as "Milmac"), and the remaining $34,118.87 had been converted by the defendants to their own use. By the judgment, the trial court required the assets of Milmac to be conveyed to the corporation, and required the defendants to pay to the corporation the sum of $34,118.87 representing such balance of the alleged excessive salaries not invested by the defendants in Milmac.

All salaries or wages paid to the four defendants during the eleven-year period from 1941 to 1951, inclusive, were, on the average, well within the $15,000 limit of the resolution appearing in the minutes of the special directors' meeting of November 15, 1941, set forth in the statement of facts preceding this opinion. The minutes do not state that the resolution was carried or voted upon but merely that the defendant Hintz moved its adoption, and that such motion was seconded by the defendant Wandel. The trial court specifically found with respect thereto:

"That no vote was taken upon said motion. It therefore did not carry and remained a nullity and of no force and effect."

The four defendants at that time constituted the board of directors, and all had an interest in the resolution fixing their compensation. See Stoiber v. Miller Brewing Co. (1950), 257 Wis. 13, 42 N.W.2d 144, and annotation entitled, "Corporate Director-Fixing Own Pay," 175 A.L.R. 577.

However, the fact that there was no valid directors' resolution or contract in existence authorizing the increased compensation drawn by these defendants does not mean that they are not entitled to pay for the services rendered by them. Such services were not rendered by them in performing the duties of directors and officers, but rather in the capacity of skilled executives in operating a large and thriving business. The applicable principle of law is well stated by the author of the annotation in 175 A.L.R. 577, 600, as follows:

"The fact that a corporate director participates in a vote or a meeting fixing or increasing compensation for his services not incident to his duties as director does not necessarily mean that he cannot recover for such services. Although the resolution fixing or increasing his salary may be invalid because of his participation in the vote or meeting at which the resolution is passed, if he performs services for the corporation not incident to his duties as director, he will be entitled to a reasonable compensation for the services actually rendered."

In other words, there being no valid contract providing for payment for such services, the defendants are entitled to reasonable compensation therefor on the theory of implied contract. However, the burden of proof in establishing the reasonable value of such services is upon the defendants. 13 Am. Jur., Corporations, p. 985, sec. 1039; 5 Fletcher, Cyc. Corp. (perm. ed.), p. 661, sec. 2181; 7 Minnesota Law Review, 347; O'Leary v. Seemann (1925), 76 Colo. 335, 232 P. 667; Whitewater Tel. Co. v. Cory (1925), 117 Kan. 463, 232 P. 609; Francis v. Brigham-Hopkins Co. (1908), 108 Md. 233, 70 A. 95; Riddle v. Mary A. Riddle Co. (1948), 142 N.J. Eq. 147, 59 A.2d 599.

The record contains no evidence to sustain the learned trial court's finding that any payment of compensation in excess of $33,465 per year in the aggregate for the years 1941 to 1951, inclusive, to the four defendants was unreasonable or excessive. The brief memorandum opinion of the trial court does not disclose what he based such finding upon. We must assume therefore that this is the conclusion of the trial court based upon his independent judgment. A finding as to the value of personal services so based upon the independent judgment of a trial court, be he ever so experienced, cannot stand against the evidence. Will of Gudde (1951), 260 Wis. 79, 49 N.W.2d 906; Birkmire v. Campus Realty Corp. (1928), 223 App. Div. 226, 227 N.Y. Supp. 653.

No evidence whatever was offered in behalf of plaintiff bearing upon the issue of the value of the services rendered to the corporation by the defendants, and the only evidence bearing upon that point is to be found in the testimony of the defendants.

Defendant Hintz testified that the four defendants were very much underpaid for their services from 1930 to 1940, because they were trying to build up the corporation's business to a point where it could pay them a salary commensurate with their work. Hintz further testified that he was at the time of trial working fifty hours per week, but that the defendants during the war period worked as many as seventy-five hours per week. He also stated that during the time the corporation had a RFC loan the Reconstruction Finance Corporation approved salaries of $13,000 per year to each of the defendants, and that the internal revenue bureau in auditing the corporation's federal income-tax returns up through 1947 had not disallowed any of the officers' salaries.

The defendant Wandel testified:

"The reason the salary of each officer is actually the same is because we considered ourselves alike, as far as ability is concerned and so forth. I think we were all worth it."

Defendant Gieringer's testimony bearing on the reasonableness of the salaries paid by the corporation to the defendants is as follows:

"All the officers of Milwaukee Machine Products Company received the same salary. We were not partners, we are a corporation. The salary was not the same because we owned the same number of shares. It was because of the time we put in there and the work. I think we were equal to get that."

The defendant Mueller, president of the corporation, gave no testimony on this issue, and the defendants called no other witnesses to establish the reasonableness of their salaries.

Meager as was this testimony of the defendants on this issue of the worth of their services rendered to the corporation, it is our conclusion that it does meet the burden of proof imposed on them to establish that the compensation received by them was reasonable in view of the complete absence of any evidence to the contrary, and that their effort was put forth in good faith to nurse the corporation and act for its best interest.

There is no evidence in the record to sustain any finding that the individual defendants did any of the acts charged against them in the complaint for the purpose of defrauding the plaintiff, and the findings of the trial court in that respect are against the great weight and clear preponderance of the evidence and cannot stand.

It is considered that there is no evidence to sustain a finding that the individual defendants' salaries were unreasonable or excessive, but that what evidence there is in the record on this point sustains the reasonableness of such salaries. It necessarily follows that the moneys derived from such salaries used by these defendants in acquiring the capital stock of Milmac constituted their own funds, belonged to them, and were not the property of the corporation. Therefore, the actions of the individual defendants with respect to Milmac present these two questions:

(1) Was it improper for the defendants to organize Milmac and have it acquire the lands and construct the new factory building for the use of the corporation, instead of having the corporation do it?

(2) Should the individual defendants be required to account to the corporation for any profits they may have realized out of the operations of Milmac?

Counsel for plaintiff contends that the doctrine of "corporate opportunity" applies to the action of the individual defendants in using Milmac as a vehicle to acquire for themselves the lands and new factory building erected thereon; and that under such doctrine the assets of Milmac should be impressed with a trust in favor of the corporation. This doctrine of "corporate opportunity" is set forth in 3 Fletcher, Cyc. Corp. (perm. ed.), p. 224, sec. 861.1:

"The doctrine of `corporate opportunity' is nothing new to the law. It is but one phase of the cardinal rule of `undivided loyalty' on the part of fiduciaries. In other words, one who occupies a fiduciary relationship to a corporation may not acquire, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence. This corporate right or expectancy, this mandate upon directors to act for the corporation, may arise from various circumstances; such as, for example, the fact that directors had undertaken to negotiate in the field on behalf of the corporation, or that the corporation was in need of the particular business opportunity to the knowledge of the directors, or that the business opportunity was seized and developed at the expense, and with the facilities of the corporation. So, it has been said that a director cannot be allowed to profit personally by acquiring property that he knows the corporation will need or intends to acquire, and that this interest, actual or in expectancy, must have existed while the person involved was a director or officer. . . .

"If it is the duty of officers in a particular case to enter into a contract, or to purchase or take a transfer of property, on behalf of the corporation, and, in violation of this duty, they enter into the contract or acquire the property personally, they will not be permitted to retain the benefit, but will be held as trustees for the corporation."

This same principle is stated in Blaustein v. Pan American Petroleum Transport Co. (1941), 263 App. Div. 97, 125, 31 N.Y. Supp. 2d 934, as follows:

"One who occupies a fiduciary relationship to a corporation may not acquire, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence."

For further authorities on the doctrine of "corporate opportunity" see notes in 31 California Law Review, 188; 39 Columbia Law Review, 219; and 30 Marquette Law Review, 117.

However, there are certain limitations and exceptions to the rule of "corporate opportunity." 3 Fletcher, Cyc. Corp. (perm. ed.), p. 229, sec. 862, states these limitations as follows:

"A finding of `corporate opportunity' will be denied wherever the fundamental fact of good faith is determined in favor of the director or officer charged with usurping the corporate opportunity, or where the company is unable to avail itself of the opportunity, or where availing itself of the opportunity is not essential to the company's business, or where the accused fiduciary does not exploit the opportunity by the employment of his company's resources, or where by embracing the opportunity personally the director or officer is not brought into direct competition with his company and its business."

In Bump Pump Co. v. Waukesha Foundry Co. (1941), 238 Wis. 643, 300 N.W. 500, this court applied the exception of good faith as one of the grounds in relieving the defendants from the doctrine of "corporate opportunity" which the plaintiffs sought to invoke against them.

The testimony in the instant case establishes that the corporation did not have the liquid funds available for the purpose of erecting a new plant. Its funds were already overtaxed in buying new machines and increasing inventory to meet the tremendously increased volume of production which it was experiencing. The defendants might have borrowed the money, but they were opposed to going in debt. They had weathered the depression largely because they had kept clear of bank loans and mortgages. Besides, they were machinists and craftsmen, not financial experts, and they were suspicious of large debts in any form. In forming a business judgment, those responsible for developing a plan may act on facts existing at the time with reasonable consideration of future prospects. And viewing the matter through defendants' eyes in 1942 the principles of economy which they adhered to were reasonable.

Since the company could not expand its business and at the same time finance the construction of a new plant, the defendants decided that the only sound plan to accomplish the objective was to finance the new plant with money they received in salaries. Plaintiff contends that they should have kept their salaries at the 1940 level and that then the corporation could have financed the new building. He overlooks, of course, the very obvious limitations that would have existed. Federal income and excess-profits taxes would have consumed most of the corporation's net profit. If salaries did not keep pace with rising profits, the corporation's net profit would have been dissipated in taxes and no funds would be available for a building program. The same result would occur if salaries were kept at the 1940 level and any excess paid out in dividends. Before dividends could be paid, taxes would have to be met, and there would be little left for any building fund. From the standpoint of the corporation, therefore, the plaintiff's proposal is without practical advantage. What was saved on salaries would not remain in the corporate treasury for building purposes. But the proposal has the additional defect of suggesting that somehow it was the defendants' duty to work for less than reasonable pay to allow the corporation to carry out a building program. Officers, directors, and employees may forego any part of their reasonable compensation for reasons which they deem satisfactory, but if they do so it is a matter of their own choice, and they are not derelict if they choose otherwise. There is no such duty.

The individual defendants, through Milmac, for nearly eight years charged the low rental of $500 per month. Then in the latter part of 1950 they had an independent appraisal made to determine a fair rental, and such independent appraiser arrived at a fair rental on two bases, one being what similar industrial property was renting for, and the other being a fair return upon replacement cost. On one basis the appraiser arrived at a rental of $1,200 per month, and on the other $1,300 per month. On the basis of this appraisal a new lease was entered into, effective January 1, 1951, for a rental of $1,000 per month.

It is considered that the foregoing facts establish that the defendants acted in entire good faith with respect to incorporating Milmac and in having that corporation acquire the new factory property.

The last point to be considered is whether the defendants are accountable to the corporation for any profits that Milmac may have realized out of the rentals charged the corporation. In order for the plaintiff to prevail as to this point, it would have to appear that the leasing arrangement between Milmac and the corporation was invalid on the ground that the individual defendants controlled the boards of directors and officers of both corporations, thereby enabling these defendants to make a profit at the expense of the corporation. The rule as to such showing is stated in 19 C.J.S., Corporations, p. 166, sec. 789:

"The mere fact that some, a majority, or all of the directors or contracting officers of two corporations are common to both, does not render a contract between such corporations void; it is merely voidable for fraud or unfairness, and the burden is on those seeking to sustain the transaction to prove absence of fraud or unfairness."

This court, in Roberts v. Saukville Canning Co. (1947), 250 Wis. 112, 122, 26 N.W.2d 145, succinctly stated the same principle as follows:

"Contracts between corporations having identical officers are not void, but are voidable if either corporation has been imposed upon."

In State ex rel. Shinners v. Grossman (1933), 213 Wis. 135, 138, 250 N.W. 832, the court summed up the rule as follows:

"It has always been the law that corporations, even though having identical officers or boards of directors, may deal with each other, and that contracts made between them are not void by reason of the simple circumstance of identical officers or boards of directors. The most that has been said of such contracts is that they will be vigorously scrutinized by the courts for the purpose of ascertaining whether either of the corporations to the transaction has been imposed upon, and, if such imposition appears, to permit and enforce the rescission of such contract on the part of the suffering corporation. Such contracts are voidable and not void. Bergenthal v. Boynton A. L. Co. 179 Wis. 42, 190 N.W. 901; Trustees Onalaska Camp v. Onalaska M. W. H. Asso. 179 Wis. 486, 192 N.W. 33; 14A Corp. Jur., p. 125, sec. 9; 2 Thompson, Corporations, sec. 1241 et seq."

The testimony in the instant case discloses that, far from imposing upon the corporation, the leasing arrangements with Milmac were in its (the corporation's) interest and very beneficial. Even the plaintiff in his testimony stated that he could not tell whether the rent paid was excessive and had "no feeling about that one way or the other." The defendants have amply proved that the dealings between the two corporations were not tainted by fraud or unfairness. In this stockholder's suit, plaintiff stands in the shoes of the Milwaukee Machine Products Company, and, the leasing arrangements being valid, there is no basis for that corporation to recover any of the rentals paid Milmac, and any profits which the individual defendants may have realized from said rentals is immaterial. It is unnecessary to treat with other matters sought to be raised on this appeal.

By the Court. — Judgment reversed and cause remanded with directions to dismiss the complaint.

Summaries of

Gauger v. Hintz

Supreme Court of Wisconsin
Nov 5, 1952
262 Wis. 333 (Wis. 1952)

In Gauger v. Hintz, 262 Wis. 333, 55 N.W.2d 426 (1952), the Supreme Court of Wisconsin laid the foundation for the doctrine of "corporate opportunity.

Summary of this case from Regal-Beloit Corp. v. Drecoll

In Gauger v. Hintz, 262 Wis. 333, 55 N.W.2d 426 (1952), the Supreme Court of Wisconsin laid the foundation for the doctrine of "corporate opportunity.

Summary of this case from Havlicek/Fleisher Enterprises, Inc. v. Bridgeman

In Gauger, the court noted that a corporate opportunity did not exist because the corporation "could not expand its business and at the same time finance the construction of a new plant" due to federal corporate income and excess-profit taxes.

Summary of this case from Racine v. Weisflog
Case details for

Gauger v. Hintz

Case Details

Full title:GAUGER, Plaintiff, vs. HINTZ and others, Defendants. [Two appeals

Court:Supreme Court of Wisconsin

Date published: Nov 5, 1952


262 Wis. 333 (Wis. 1952)
55 N.W.2d 426

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