Case Summary: Antonio Esposito v. Riverside Sand Gravel Co. et al.

Factual and Procedural Background

The plaintiff, Antonio Esposito, a minority stockholder holding seventy shares, filed a bill in equity against Riverside Sand Gravel Co. and the majority stockholder, Vassalotti, seeking an accounting by Vassalotti to the corporation for alleged illegal payments and withdrawals. The bill, filed March 9, 1932 and later amended, was referred to a master. The master made material factual findings (the evidence was not reported). A Superior Court judge (Walsh, J.) entered an interlocutory decree overruling the plaintiff's exceptions to the master's report and confirming the report, and a final decree dismissing the bill. The plaintiff appealed both decrees to the Supreme Judicial Court of Massachusetts. The opinion of the court is authored by Lummus, J.

The opinion references an earlier suit by the same plaintiff against the same defendants in which similar allegations were made and in which Esposito had sought the appointment of a receiver and liquidation of the corporation's assets. In that prior suit no receiver was appointed; the final decree ordered Vassalotti to pay the corporation $1,000 and interest because of a loan he made without the plaintiff's consent to a private banker who failed.

Legal Issues Presented

Whether the expenditures made by the corporation to defend the earlier suit (including $175 to regular counsel, $2,200 to special trial counsel, and $1,002 for stenographic services), when caused or arranged by the majority stockholder Vassalotti, were reasonable and properly chargeable to the corporation rather than solely to Vassalotti personally.
Whether the increase in Vassalotti's salary (treasurer and general manager) effected by the directors on March 16, 1932—from prior levels of $1,560 and $1,300 to $5,000—was lawfully fixed in good faith and was not excessive.
Whether the master's factual findings were inconsistent or plainly wrong such that the judge or this court should set them aside.

Arguments of the Parties

Plaintiff's Arguments

The plaintiff contended that Vassalotti should have borne personally the entire expense of defending the earlier suit and should not have caused the corporation to pay for the defense.
The plaintiff objected to the 1932 increase in Vassalotti's salary, asserting it was wrongful.

Defendant's Position

The corporation (through actions of Vassalotti) employed counsel to defend the earlier suit because the corporation itself was attacked in that suit (the bill had prayed for both temporary and permanent receivers and for liquidation of assets), and thus the expenditures were reasonable and necessary for the corporation to incur.
The increase in salary was fixed by the directors in good faith; the management had been honest and capable; given the corporation's success and surplus, the salary was not excessive.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Corey v. Independent Ice Co. 226 Mass. 391	Authority that a corporation may properly incur expenses to defend suits attacking the corporation, subject to reasonableness and necessity.	The court cited this case in support of allowing the corporation's expenditures to defend the earlier suit as proper corporate expenses.
Barnes v. Newcomb, 89 N.Y. 108	Comparable authority on corporate payment of defense costs when the corporation itself is attacked.	Used as supporting precedent for the principle that the corporation could properly pay reasonable expenses of its defense.
Godley v. Crandall Godley Co. 181 App. Div. (N.Y.) 75, affirmed 227 N.Y. 656	Supportive precedent concerning corporate expenditures in defense of suits affecting the corporation.	Relied on as additional authority to uphold the master's finding that the defense expenditures were reasonable corporate charges.
General Mortgage Loan Corp. v. Guaranty Mortgage Securities Corp. 264 Mass. 253, 261	Comparative authority (court noted "Compare") regarding related corporate-law principles.	The court compared the present facts with this prior decision but did not treat it as controlling; it was cited for contextual comparison.

Court's Reasoning and Analysis

The court's analysis rests primarily on the master's fact findings and the limited scope of appellate review where evidence is not reported. The master found (based on evidence not reported) that:

The earlier bill attacked the corporation directly: both temporary and permanent receivers and liquidation of assets were prayed for.
The corporation's regular counsel was not a trial lawyer, so the corporation employed experienced trial counsel to defend the suit.
The corporation expended $175 for regular counsel, $2,200 for special trial counsel, and $1,002 for stenographic services in connection with the earlier suit; Vassalotti personally paid an additional $600 to counsel.
These expenditures were reasonable and necessary under the circumstances.
With respect to salary, the master found the business extensive, management labor onerous, the corporation had been very successful (1920–1928) and had paid out two and one half times its capital as dividends, had made profits each year except for a small loss in 1932, and had a surplus of $102,000 at the end of 1931.
Vassalotti's salary history: $1,560 yearly up to April 1930, then $1,300 thereafter until March 1932, when the directors fixed annual pay at $5,000; the master found the prior pay inadequate, the increase was fixed in good faith, and the amount was not excessive.

Given these findings, the judge was correct to allow the corporation's expenditures to defend the earlier suit as proper corporate expenses. The court emphasized that, because the evidence was not reported, there was no basis for revising the master's findings and that the findings were not inconsistent or plainly wrong. The court applied cited precedents to support the proposition that a corporation may properly pay reasonable and necessary expenses incurred in defending suits that attack the corporation itself. On the salary issue, the court relied on the master's factual findings regarding the corporation's financial condition, the scope of the business, and the good faith of the directors' action to conclude the increase was lawful and not excessive.

Holding and Implications

Interlocutory decree affirmed. Final decree affirmed with costs.

Consequences: The master's findings that the corporation's expenditures to defend the earlier suit were reasonable and necessary and that the March 16, 1932 salary increase for Vassalotti was fixed in good faith and not excessive were upheld. The bill was dismissed, and the appeals from both the interlocutory and final decrees were denied. The opinion does not announce any new legal doctrine beyond applying established principles and precedent to the facts; its practical effect is the affirmation of the master's findings and the dismissal of the plaintiff's claims.

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ANTONIO ESPOSITO vs. RIVERSIDE SAND GRAVEL Co. another.

Corporation, Officers and agents.

In a suit in equity by a minority stockholder in a corporation against the corporation and the holder of the majority of the shares to require the individual defendant to account to the corporation for alleged illegal payments and withdrawals of funds from the corporation, a master found upon evidence not reported that the individual defendant had caused the corporation to employ special trial counsel to defend a previous suit brought by the same plaintiff, who therein had made allegations of the same general character against the individual defendant and had sought the appointment of a receiver for the corporation and a liquidation of its assets; that the regular counsel of the corporation was not a trial lawyer; that by final decree in the previous suit no receiver was appointed and the individual defendant was ordered to pay the corporation $1,000 and interest because of a loan of that amount made by him, without the consent of the plaintiff, to a private banker who had failed; that the individual defendant had caused the corporation to pay $175 for services of its regular counsel, $2,200 for the services of the special trial counsel, and $1,002 for stenographic services in connection with the previous suit; and that the individual defendant had paid $600 for services of counsel. The plaintiff contended that the individual defendant personally should have borne the entire expense of the previous suit, but the master found that the expenditures by the corporation were reasonable and necessary. A judge who heard the suit allowed the expenditures as proper for the corporation to make. Held, that the findings were not inconsistent nor plainly wrong and must stand, and that the action by the judge was right. In the later suit above described, the plaintiff also contended that the individual defendant, in 1932, wrongly had caused an increase in his salary as treasurer and general manager of the corporation. The master found that the business of the corporation was extensive and that the individual defendant's labor was onerous; that the corporation had been very successful from 1920 to 1928, had paid out two and one half times its capital as dividends, had made a profit each year except for a small loss in 1932, and at the end of 1931 had a surplus of $102,000; that up to April, 1930, the individual defendant's yearly salary had been $1,560 and thereafter to March, 1932, $1,300; that the increase in 1932 was to $5,000; that he had never been adequately paid before; that the salary was fixed in good faith; and that it was not excessive. Held, that there was no inconsistency in the master's findings and that his conclusions could not be said to be wrong. The master in the later suit above described found that the management of the corporation by the individual defendant had been honest and capable, and a decree dismissing the bill was affirmed on appeal.

LUMMUS, J.

The plaintiff, holding seventy shares of the defendant corporation, brought this bill to compel the defendant Vassalotti, who holds the remainder and majority of the shares, to account to the corporation for alleged illegal payments and withdrawals of funds from the corporation. A master has found that the management of the corporation by Vassalotti has been honest and capable. Exceptions taken by the plaintiff to his report were overruled, the report was confirmed, and the bill was dismissed. The plaintiff appealed from the interlocutory and final decrees.

In an earlier bill against the same defendants, disposed of by final decree, the plaintiff had made similar allegations against Vassalotti and had prayed for the appointment of a receiver for the corporation. No receiver was appointed, and the final decree ordered Vassalotti to pay the corporation $1,000 and interest, because of a loan of that amount made by Vassalotti without the consent of the plaintiff to a private banker who failed.

The defendant Vassalotti caused the corporation to employ counsel to defend against that earlier suit, and to spend $175 for the services of its regular attorney, who was not a trial lawyer, $2,200 for the services of experienced trial counsel, and $1,002 for stenographic service. The master finds that these expenditures were reasonable and necessary. In addition, Vassalotti himself paid $600 to counsel. The plaintiff contends that Vassalotti should have paid everything out of his own pocket. But the master finds that "the corporation was attacked; that both a temporary and a permanent receiver for the corporation was prayed for in the bill; and that there was a prayer for the liquidation of the assets of the corporation." Whether these prayers could legally have been granted or not, the practical danger to the corporation cannot be pronounced so negligible that it could well have ignored the plaintiff's suit as the plaintiff now contends. The corporation was not a mere nominal defendant. There is no inconsistency in the master's findings, and in the absence of the evidence we have no means of revising them. Upon the master's report, the judge was right in allowing these expenditures as proper for the corporation to make. Corey v. Independent Ice Co. 226 Mass. 391. Barnes v. Newcomb, 89 N.Y. 108. Godley v. Crandall Godley Co. 181 App. Div. (N.Y.) 75, affirmed 227 N.Y. 656. Compare General Mortgage Loan Corp. v. Guaranty Mortgage Securities Corp. 264 Mass. 253, 261.

The plaintiff objects to an increase of the salary of Vassalotti as treasurer and general manager of the corporation, made on March 16, 1932, by vote of the directors. The salary had amounted to $1,560 a year up to April, 1930, and $1,300 a year afterwards. The vote of March 16, 1932, made it $5,000. The master finds that Vassalotti had never been adequately paid before, that the salary was fixed in good faith, and that it was not excessive. The corporation had been very successful from 1920 to 1928, and had paid out two and one half times its capital as dividends. Since then the corporation has made a profit each year, except for a small loss in 1932. It had a surplus of $102,000 at the end of 1931. The business was extensive, and the labor great. The evidence is not reported, there is no inconsistency in the master's findings, and we cannot say that he was wrong in his conclusion that the salary was proper and lawfully established. This disposes of all the questions argued.

Interlocutory decree affirmed. Final decree affirmed with costs.

ESPOSITO v. RIVERSIDE SAND GRAVEL CO