Wilderman v. Wilderman

Brief Fact Summary. Plaintiff, Eleanor M. Wilderman, sued her former husband, Joseph Wilderman, a co-owner of the corporation, “Marble Craft.” Plaintiff claims that the defendant paid himself unreasonable and unauthorized compensation from the corporation. Plaintiff seeks to have the excessive money returned to the corporation, declared as net corporate profits, and re-distributed as dividends.

Synopsis of Rule of Law. A director who pays himself a salary bears the burden of proving that the salary is reasonable. A director is not authorized to receive compensation for more than the amount agreed upon by the board of directors. Nonetheless, that value may be reasonable by looking to a number of factors including (1) whether the Internal Revenue Service has allowed the corporation to deduct the amount of payment alleged to be unreasonable, (2) whether the amount bears a reasonable relation to the success of the corporation, (3) the amount previously received as salary, whether increases in salary are geared to the value of services rendered, and (4) the amount of the challenged salary compared to other salaries paid by the employer.

Facts. Plaintiff owns a one half stock interest in a corporation owned by herself and her former husband. Plaintiff claimed that her husband caused excessive and unauthorized payments to be made in the fiscal years ending March 31, from 1971 to 1973. Plaintiff requests that the court return the excess of the payments back to the corporation’s treasury to be treated as corporate profits and required to be distributed as dividends. Defendant performed most of the work for the business which installed ceramic tile and marble facings in residences and commercial buildings. He worked up to sixty hours or more doing most of the estimating, supervising, and business getting for the corporation. The board of directors authorized the defendant to pay himself a salary of no more than $400 a week. However, in 1971, the defendant paid himself an additional bonus of $71,738.71, a salary of $35,000 in 1972, and a total compensation of $86,893.40 in 1973.

Issue.
Whether a director bears the burden of proving that compensation is reasonable when he pays that compensation to himself.

Whether a director may pay himself compensation when the board has not reached an agreement on the amount that should be paid.

Whether a director is entitled to a compensation that has not been approved by the board if the compensation reflects services that are reasonably related to the success of the corporation.

Held.
Yes. A director must prove his compensation is reasonable when he pays the amount directly to himself.

No. A director is not authorized to pay himself compensation when the board had not agreed to that specific amount because the board is in deadlock.

Yes. The defendant’s work performance alone was vital to the success of the business and he is entitled to a reasonable salary of $45,000. Expert testimony revealed that an executive similarly situated to the defendant would earn a salary of 25,000 to 35,000 a year and the board only approved a salary of not more than $20,800 a year. However, the defendant acquired most of the business for the corporation. He performed most of the necessary estimating and supervising. He alone possessed the skills and expertise to operate the ceramic tile and marble facings business.

Discussion. Directors are required to show that their salary is reasonable when they alone approve the salary for themselves. The board of directors must agree on the amount of compensation paid to an employee. Compensation is not excessive and the court will not declare that the funds be returned to a corporation if the compensation is for services that were crucial to the corporation’s success.