OTIS & CO. v. PENNSYLVANIA R. CO., ET AL.

(District Court Case, 1946)

1) OTIS & CO. is a SH in PENNSYLVANIA R. CO.

2) OTIS & CO. sued PENNSYLVANIA R. CO., its directors and officers, its
wholly-owned subsidiary and some of the latter’s directors and officers
contending that:

the individual defendants failed and refused to exercise the ordinary

care and judgment in the sale of the bonds since they kept secret the bond
issue and refused to deal w/ any investment house other than KUHN, LOEB
& CO. That failing to “shop around”, half million dollars was lost and another
half million dollars was lost in failing to put the issue to competitive bidding.

ISSUE: WON the individual defendants are liable for alleged losses
suffered by the PENNSYLVANIA R. CO. arising out of the issuance and sale of
over $28M in bonds by its wholly-owned subsidiary (which guaranteed the
bonds)?

HELD: NO NEGLIGENCE on the part of the officers and directors. The

bond issue was adequately deliberated and planned, properly negotiated and
executed; here was no lack of GF, no motivation of personal gain or profit.

Also, in dealing w/ KUHN, LOEB & CO., defendants were not

contracting w/ another firm in w/c they were interested, nor did the
directories or managerial positions interlock. There is no contention that
fraud existed and fraudulent acts will not be presumed.

Montelibano et al. v. BACOLOD-MURCIA MILLING CO., INC. (1962)

1) Montelibano et al. are sugar planters who had an existing milling

contract w/ BACOLOD-MURCIA MILLING CO., INC. and wherein it was
proposed that they amend their milling contract so that they share
60%(planter) and 40%(miller) and extending their original contract from 30
to 45 years.

2) BACOLOD-MURCIA MILLING CO., INC. adopted a resolution (as a

supplement to the Amended Milling Contract) P(9) of which states that
whatever concessions other millers grant to the said planters will also be
matched by it.
3) 3 millers granted a 62.5% share to the planters.

4) The planters asked the BACOLOD-MURCIA MILLING CO., INC. for

the same share invoking P(9) of the BACOLOD-MURCIA MILLING CO.,
INC. resolution.

5) BACOLOD-MURCIA MILLING CO., INC. DEFENSE:

The stipulations contained in the resolution were made w/o

consideration; therefore the resolution is null and void being in effect a
donation that was ultra vires and beyond the powers of the corporate
directors to adopt.

HELD: The resolution in question was passed in GF by the BOD, it is

valid and binding, and WON it will cause losses or decrease the profits of the
central, the court has no authority to review them.

The BOD of BACOLOD-MURCIA MILLING CO., INC. had authority

to modify the proposed terms of the Amended Milling Contract for the
purpose of making its terms more acceptable to the other contracting
parties.

RATIO:
1) It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and directors of
a C and the court is w/o authority to substitute its judgment of the BOD; the
B is the business manager of the C and so long as it acts in GF its orders are
not reviewable by the courts.

2) It is a question, therefore, in each case of the logical relation of the act

to the corporate purpose expressed in the charter. …. The test to be applied
is whether the act in question is in direct and immediate furtherance of the
C’s business, fairly incident to the express powers and reasonably necessary
to their exercise. If so he C has the power to do it; otherwise not.
Litwin v. Allen et al. (NY, 1940)

1) Minority shareholders of GUARANTY TRUST COMPANY OF NY (BANK)

sued its directors.

2) BANK purchased $3M worth of bonds from ALLEGHANY CORP. wherein

the latter has a right to repurchase the bonds w/n six months.

3) The 6-month period elapsed (April 1931) w/o ALLEGHANY CORP.

exercising the right of repurchase.

4) BANK eventually sold the bonds at a loss of 81% or losing $2.25M.

5) Hence, the Minority shareholders sued the BANK directors.

HELD: I find LB in this transaction because the entire agreement was so

improvident, so risky, so unusual and unnecessary to be contrary to
fundamental conceptions of prudent banking practice.

The effect of the repurchase option is that any benefit of a sharp

rise in the price of the securities is assured the seller and any risk of heavy
loss is inevitably assumed by the BANK.

RATIO: Honesty alone does not suffice; the honesty of the directors in
this case is unquestioned. But there must be more than honesty-there must
be diligence, and that means care and prudence, as well. This transaction
was unusual.
Walker v. Man, et al. (NY, 1931)
1) BANK trustee sued the former directors of a bankrupt BANK for
dereliction of duty and mismanagement in the conduct of the bankrupt’s
affairs for non-feasance:

It did not collect the or enforced a $20T loan advanced by the

BANK and secured by a promissory note, even though said loan was
recorded in the BANK’S books. (The loan was not authorized by
any meeting of the BOD)

Since the note was negligently, carelessly or willfully and

fraudulently permitted to remain unprotected, and the result is that
the endorser was released and discharged from any obligation.

HELD: If the Defendant knew that an improvident and unauthorized

loan had been made, and took no steps whatever at salvaging the loan, and
acquiesced in and confirmed the original wrongful act, he would be open to
the charge of negligence and should account for his conduct.

Steinberg v. Velasco (1929)

1) Receiver of the SIBUGUEY TRADING COMPANY, sued the officers
and/or directors of the latter alleging that:

a) (1st CoA) SIBUGUEY TRADING COMPANY’s officers/directors

approved and authorized various unlawful purchases already
made of a large portion of the capital stock of the C from its
various SHs (P3,300 worth of stocks)

At that time, it had accounts receivable of P19,126 and accounts

payable of P13,807.

b) (2nd CoA) Officers/directors approved a resolution for payment

of dividends (P3,000) to the injury and fraud of creditors

2) There is no stipulation or finding of fact as to what was the actual cash

value of C’s account receivable. Neither is there any stipulation that those
accounts or any part of them ever have been or will be collected.

3) The stocks were actually purchased from the 2 former directors of the
C and resigned before the BOD approved the purchase and declared
dividends.
HELD: The Ds did not act in GF or that they were grossly ignorant of
their duties. The authorized capital stock was P20,000 divided into 2,000
shares of the par value of P10 each, of w/c only P10,030 was subscribed and
paid. Deducting the P3,300 paid for the purchase of the stock, there would
be left P7,000 of paid up stock, fro w/c deduct P3,000 paid in dividends,
there would be left only P4,000. In this situation and upon this state of facts,
it is very apparent that the Ds did not act in GF or that they were grossly
ignorant of their duties.

RATIO:

1) Creditors of a corporation have the right to assume that so long as

there are outstanding debts and liabilities, the BOD will not use the assets of
the corporation to purchase its own stock, and it will not declare dividends to
SHs when the corporation is insolvent

Barnes v. Andrews (NY, 1924)

1) Receiver of LIBERTY STARTERS CORP. sued a director (Andrews) of the
C for “misprision of office” alleging that:

The defendant failed to give adequate attention to the affairs of

the C. w/c had been conducted incompetently and w/o regard to the
waste in salaries during the period before production was possible.
(during his incumbency, there were only 2 BOD meeting o w/c he
never attended)

2) C produced starters for Ford Motors. But delays were experienced in

the production of starters.

HELD 2: There is no evidence that the defendant’s neglect caused any

losses to the C and that, if there were, the loss cannot be ascertained.

The plaintiff must show that, had Andrews done his full duty he could
have made the C prosper or at least could have broken its fall. He must
show what sum he could have saved the C. Neither of these has he made
any effort to do so.

RATIO: The defendant is not subject to the burden of proving that the
loss would have happened, whether he had done his duty or not. If he were,
it would come to this: That, if a D were once shown slack in his duties, he
would stand charged prima facie w/ the difference between the corporate
treasury as it was, and as it would be judged by a hypothetical standard of
success. .. No men of sense would take an office, if the law imposed upon
them a guaranty of the general success of their companies as a penalty for
negligence.

Ds are not specialists, like lawyers or doctors. They mush have a good
sense, perhaps they must have acquaintance w/ affairs; but they need not-
perhaps they should not-have any technical talent. They are the general
advisers of the business, and if they faithfully give such liability as they have
to their charge, it would not be lawful to hold them LB.

Bates v. Dresser (US 1920)

1) Receiver of a NATIONAL BANK charged its former president and
directors with the loss of a great part of its assets thru the thefts of an
employee of the BANK while they were in power.

ISSUE: WON the Directors neglected their duty by accepting the

cashier’s statement of liabilities and failing to inspect the depositor’s ledger?

HELD: Ds NOT LB. Directors should not be held answerable for taking
the cashier’s statement of liabilities to be as correct as the statement of
assets always was. Their confidence seemed warranted by the semi-annual
examinations by the government examiner and they were encouraged in
their belief that all was well y the president, whose responsibility as
executive was in order; interest was large stockholder ad depositor; and
knowledge, from long daily presence in the bank, were greater than theirs.

RATIO: Ds were not bound by virtue of the office gratuitously assumed

by them to call in the passbooks and compare them with the ledger, and
until the event showed the possibility they could hardly have seen that their
failure to look at the ledger opened a way to the fraud.

HELD 2: As to the President, he is LB since he had some warning signs. The

position of the president is different. Practically he was the master of the
situation. He was daily at the bank for hours, he had the deposit ledger in
his hands at times and might have had at any time.

Palting v. SAN JOSE PETROLUEM INC. (1966)

1) SAN JOSE PETROLUEM INC. had a provision in its AOI permitting self-
dealing Ds, in the absence of fraud, to be counted toward a quorum to vote
and are absolved of any LB.

HELD: These provisions are in direct opposition to our corporation law

and corporate practices in this country. The impact of these provisions upon
the traditional fiduciary relationship between the directors and the
stockholders of a C is too obvious to escape notice by those who are called
upon to protect the interest of investors. The Ds and officers of the C can do
anything, short of actual fraud, w/ the affairs of the C even to benefit
themselves directly or other persons or entities in w/c they are interested,
and w/ immunity because of the advance condonation or relief from
responsibility by reason of such acts.

Mead v. McCullough et al. (1911)

1) The plaintiff (Mead will be referred to as the plaintiff in this opinion
unless it is otherwise stated) and the defendants organized the "Philippine
Engineering and Construction Company," the 5 incorporators being the
only stockholders and also the directors of said company, with
general ordinary powers

2) Mead was GM. McCullough was President.

3) The contracts and work undertaken by the company during the

management of Mead were the wrecking contract with the Navy Department
at Cavite for the raising of the Spanish ships sunk by Admiral Dewey.

4) Shortly after the plaintiff left the Philippine Islands for China, the other
directors, the defendants in this case, held a meeting on December 24,
1903, for the purpose of discussing the condition of the company at that
time and determining what course to pursue. They did on that date enter
into the following contract with the defendant McCullough, to wit:

"For value received, this contract and all the rights and interests of the Philippine
Engineering and Construction Company in the same are hereby assigned to E. C.
McCullough of Manila, P. I.
(Sgd.) "E. C. MCCULLOUGH)
"President, Philippine Engineering and Construction Company.
(Sgd.) "F. E. GREEN, Treasurer.
(Sgd.) "THOMAS L. HARTIGAN, Secretary."

The contract referred to in the foregoing document was known as the

wrecking contract with the naval authorities.

ISSUE 1: Did a majority of the stockholders, who were at the same time a
majority of the directors of this corporation, have the power under the law
and its articles of agreement, to sell or transfer to one of its members the
assets of said corporation?

HELD 1: There were only five stockholders in this corporation at any time,
four of whom were the directors who made the sale, and the other the
plaintiff, who was absent in China when the said sale took place. The sale
was, therefore, made by the unanimous consent of four-fifths of all the
stockholders. Under the articles of incorporation, the stockholders and
directors had general ordinary powers. There is nothing in said articles which
expressly prohibits the sale or transfer of the corporate property to one of
the, stockholders of said corporation.

ISSUE 2: May officers or directors of the corporation purchase the

corporate property?

HELD 2: We conclude that the sale or transfer made by the quorum of the
board of directors-a majority of the stockholders-is valid and binding upon
the minority-the plaintiff. This conclusion is not in violation of the articles of
incorporation of the Philippine Engineering and Construction Company.

What were the circumstances under which said sale was made? The
corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the
$10,000 Mexican currency deposited had been confiscated. It had no money.
It was considerably in debt. It was a losing concern and a financial failure. To
continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter
insolvency. The majority of the stockholders or directors sold the
assets of this corporation, thereby relieving themselves and the
plaintiff of all responsibility. This was the only wise and sensible
thing for them to do. They acted in perfectly good faith and for the
best interests of all the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of stockholders to hold a
majority to their investment where a continuation of the business would be
at a loss and where there was no prospect or hope that the enterprise would
be profitable."

The above sets forth the condition of this insolvent corporation when
the defendant McCullough proposed to the majority of stockholders to take
over the assets and assume all responsibility for the payment of the debts
and the completion of the warehouses which had been undertaken.

But as we have said when the sale or transfer under consideration took
place, there were three directors present, and all voted in favor of making
this sale. It was not necessary for the president, McCullough, to vote. There
was a quorum without him: a quorum of the directors, and at the same time
a majority of the stockholders.
 Again, McCullough did not represent the corporation in this
transaction. It was represented by a quorum of the board of directors, who
were at the same time a majority of the stockholders. Ordinarily,
McCullough's duties as president were to preside at the meetings, rule on
questions of order, vote in case of a tie, etc. He could not have voted in this
transaction because there was no tie.

The acts of Hilbert, Green, Hartigan, and McCullough in this

transaction, in view of the relations which they bore to the corporation, are
subject to the most severe scrutiny. They are obliged to establish that they
acted with the utmost candor and fair dealing for the interest of the
corporation, and without taint of selfish motives.

We have subjected their conduct to this test, and, under the evidence,
we believe it has safely emerged from the ordeal.

RATIO:

1) While a corporation remains solvent, we can see no reason why a

director or officer, by the authority of a majority of the stockholders or board
of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely private
corporation remains solvent, its directors are agents or trustees for the
stockholders. They owe no duties or obligations to others.

2) But the moment such a corporation becomes insolvent, its directors

are trustees of all the creditors, whether they are members of the
corporation or not, and must manage its property and assets with strict
regard to their interest; and if they are themselves creditors while the
insolvent corporation is under their management, they will not be permitted
to secure to themselves by purchasing the corporate property or otherwise
any personal advantage over the other creditors. Nevertheless, a director or
officer may in good faith and for an adequate consideration purchase from a
majority of the directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is valid and binding upon the
minority.
GOVERNMENT v. EL HOGAR (1927)
1) (6th CoA) The directors of EL HOGAL FILIPINO, instead of serving
without pay, or receiving nominal pay or a fixed salary, have been receiving
large compensation, varying in amount from time to time, out of the profits
of the respondent.

2) Under section 92 of the by-laws of El Hogar Filipino 5% of the net

profit shown by the annual balance sheet is distributed to the directors in
proportion to their attendance at meetings of the board.

HELD: VALID! In so far as this court is concerned the question here

before us is not one concerning the propriety and wisdom of the measure of
compensation adopted by the respondent but rather the question of the
validity of the measure. Upon this point there can, it seems to us, be no
difference of intelligent opinion. The Corporation Law does not undertake to
prescribe the rate of compensation for, the directors of corporations. The
power to fixed the compensation they shall receive, if any, is left to the
corporation, to be determined in its by-laws (Act No. 1459, sect. 21).

It will be noted that the compensation above indicated as accruing to

the directorate as a whole has been divided among the members actually
present at the different meetings. As a result of this practice, and the liberal
measure of compensation adopted, we find that the attendance of the
membership at the board meetings has been extraordinarily good Thus,
during the years 1920 to 1925, inclusive, when the board was composed of
nine members, the attendance ance has regularly been eight at each
meeting with the exception of two years when the average attendance was
seven. Attention is directed to the fact that the liberal policy adopted by the
association with respect to the compensation of the directors has had highly
beneficial results not only in securing a constant attendance on the part of
the membership, but in obtaining their intelligent attention to the affairs of
the association.

Barreto v. LA PREVISORA FILIPINA ()

1) Former directors of the LA PREVISORA FILIPINA from its
incorporation up to the March 1929, sued the C to recover 1% to each of the
plaintiffs of the profits of said C for the year 1929 (P50T) in accordance with
the amendment in the C’s B-Ls.

HELD: The authority conferred upon C in that section refers only to

providing compensation for the future services of Ds, officers and employees
thereof after the adoption of the B-Ls or other provision in relation thereto,
and cannot in any sense be held to authorize the giving, as in this case, of
continuous compensation to particular Ds after their employment has
terminated for past services rendered gratuitously by them to the C.