Brief Fact Summary. Joseph Wilderman (D), president of a family-owned business paid himself large sums without acquiring consent from the company’s only other director, officer and shareholder, his wife, Eleanor (P).
Synopsis of Rule of Law. In the absence of consent from the other executives, an executive may only receive compensation within reasonable expectations of performance of function and duties.
The Wilderman’s business was in installation of ceramic tile and marble facings. Both had knowledge of the craft, but Joseph (D) performed most of the tasks while Eleanor (D) served as administration. The two received salaries at a fixed rate by their agreement and elected not to pay themselves dividends to waive double taxation. Their company became successful, but their marriage started facing hardships. After getting divorced, Joseph (D) increased his own wages. Joseph (D) was authorized in the agreement to receive an annual salary of $20,800, but then he paid himself over $90,000 in salary and bonuses in 1971, accumulated $35,000 in 1972, and was compensated nearly $87,000 in 1973. Eleanor’s (P) wages from 1971 to 1973 was $7,800 annually. During this time, a custodian was appointed to help manage the company, he succeeded in getting a $20,000 dividend declared and divided equally between the two. Eleanor (P) still filed suit because the custodian could not solve the disparity in salaries between the two. Eleanor (P) as both an individual and as a shareholder, seeks a return of excessive amounts Joseph (P) paid to himself, an injunction against any more unauthorized disbursements, and a demand that management continue to be subjected to custodian supervision. Eleanor (P) also sought compulsion to pay dividends, and an adjustment to the corporate pension plan to reflect the excessive amounts that Joseph (P) improperly paid to himself.
Issue. In the absence of consent from the other executives, may an executive receive compensation beyond the reasonable expectations of performance of function and duties?
Held. (Marvel, V. Chan.) No. In the absence of consent from the other executives, an executive may only receive compensation within reasonable expectations of performance of function and duties.Â Joseph’s (D) excessive compensation prior to 1971 may be rescinded. Excessive amounts after that year may be justified by the quantum meruit theory. On the basis of evidence presented, the compensation does not appear reasonable. An expert witness testified that $35,000 maximum annually would have been reasonable. In addition, the Internal Revenue Service allowed the company to deduct only $52,000 of the more than $92,000 Joseph (D) accumulated in 1971. Since Joseph (D) has not produced justification, it is appropriate that any excess over $4500 received in any of the years in question be returned. The corporate pension fund may be modified accordingly, and dividends may be declared on the demands of the directors, or in the event of deadlock, at the custodian’s discretion.
Discussion. Points of Law - for Law School Success
This is so, of course, because of the fiduciary position which directors hold towards their corporation and its stockholders. View Full Point of Law
Corporate executives usually have fixed salaries incorporated into their employment contract whether orally, or written. All persons who render services have a chance at recovery via the theory of quantum meruit. Rarely is it done by a corporate executive who would have to prove that their services were performed for the corporation but in addition to duties already required in the usual scope of their employment.