Bates St. Shirt Company v. Waite

Supreme Judicial Court of Maine · 1931 · Corporations

156 A. 293 (Me. 1931)

Updated August 22, 2026

Corporationsdirectorsofficer salariesinterested director transactionsratificationacquiescencestatute of limitationsdirector control

Facts

The defendant directors controlled the corporation from 1917 to 1927 and owned all voting common stock except qualifying shares, except that from 1918 to 1924 Herman A. Fosdick or his estate held 400 common shares. The corporation remained solvent, preferred dividends were paid through July 1927, and no common dividends were paid after 1912 because profits were distributed among the active common-stockholder officers as salaries and allowances. The corporation later sued the former directors, alleging excessive or unauthorized salaries, improper expenses, wrongful insurance-beneficiary substitutions, wrongful purchase of the Fosdick stock by the corporation, and wrongful payment of preferred dividends after the quick-asset covenant was breached. The bill was filed in 1929, and defendants argued that many claims were time-barred.

Issue

Whether former directors were liable in equity to repay the corporation for salaries, expenses, insurance-related transactions, a corporate repurchase of common stock, and preferred dividends allegedly fraudulent or illegal. The court also had to decide whether the statute of limitations barred claims based on acts occurring more than six years before the bill was filed.

Rule

As a general rule, the statute of limitations on corporate claims against directors for malfeasance or nonfeasance runs from the time of the wrong, but it does not begin to run while the defendant directors control the corporation and are charged with bringing suit in the corporation's name against themselves, at least until they relinquish control and a reasonable time has passed for successors to learn the facts. Directors ordinarily may not vote salaries to themselves where their presence is necessary to a quorum, but such irregular action may be ratified by all voting stockholders, and where all voting stock is owned by the directors acting unanimously, formal ratification is unnecessary and acquiescence may be assumed. A court of equity may review officer salaries for reasonableness, but only in extreme cases; interference requires fraud upon the corporation or its stockholders, and the salaries must be clearly excessive, with the burden on the complainant and fraud requiring clear and convincing proof. If directors act in good faith, exercising honest judgment for the corporation's benefit, the court will not revise their business decisions absent fraud, bad faith, or proven corporate damage.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeshore Tool Works, a Maine corporation based in Portland, was controlled from 2012 through 2022 by three directors who owned all voting common shares and allegedly caused the company to pay unauthorized consulting fees to themselves in 2013. In 2023, after a new board took over and spent several months reviewing old records, the corporation sued the former directors. The former directors argue the claim is barred by a six-year statute of limitations because the payments occurred ten years before suit.

How should the court rule on the limitations defense?

Explanation. The majority recognized a general rule that limitations runs from the wrong, but also an exception where the defendant directors control the corporation and are charged with instituting suit against themselves. In that situation, the statute does not begin to run until they relinquish control, and even then successors may have a reasonable time to familiarize themselves with the facts. No showing of insolvency or separate fraudulent concealment is required for this control-based tolling rule.