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Valle v. North Jersey Automobile Club

Decided: May 7, 1976.

ELMO G. VALLE, ET AL., PLAINTIFFS-APPELLANTS AND CROSS-RESPONDENTS,
v.
NORTH JERSEY AUTOMOBILE CLUB, ETC. AND FLOYD HUGHES, ET AL., DEFENDANTS-RESPONDENTS AND CROSS-APPELLANTS. WILLIAM RICCARDO, PLAINTIFF-INTERVENOR-APPELLANT AND CROSS-RESPONDENT, V. JAMES T. WHITE, DEFENDANT ON COMPLAINT OF INTERVENOR-RESPONDENT AND CROSS-APPELLANT



Carton, Crahay and Handler. The opinion of the court was delivered by Carton, P.J.A.D. Handler, J.A.D. (dissenting in part and concurring in part).

Carton

The original plaintiff, Valle, brought this action against defendant North Jersey Automobile Club and its directors, asserting various causes of action. The Club is a nonprofit corporation providing automobile service and other benefits to its membership under a franchise from the Automobile Association of America (AAA). The suit was originally commenced as an individual action and then, upon Riccardo's intervention, was certified a class action, Riccardo being named class representative. After the trial was concluded the theory of the action was again changed, the judge viewing the suit as derivative in nature.

Valle's principal claim, and later that of plaintiff-intervenor Riccardo, was that in 1951 the directors had violated their fiduciary obligation to the Club by acquiring an insurance agency (the Auto Club Agency of Hudson County) for their own interest.

The trial judge ruled that the defendant directors, in diverting this business to themselves, committed a breach of trust which wrongfully deprived the Automobile Club of a corporate business opportunity. However, the judge limited the Club's recovery for the breach of trust to the period that intervenor Riccardo was a member of the Club, holding that Valle was barred from bringing the action by equitable doctrines of laches and unclean hands. Valle was a member of the Club since 1951 and had been its accountant since 1950.

Having chosen this approach, the judge held defendant directors liable to the Club for damages from the time Riccardo became a member in 1965 to the time the insurance agency was turned over to the Club in 1971, rather than from the 1951 date of acquisition. As a measure of damages, the judge selected the salaries paid to the individuals in their capacities as officers of the Hudson Agency, less certain accrued value

turned over to the Club, for a total of $87,540. The judge also concluded that the directors who had not participated in the 1951 acquisition should not be held accountable for losses to the Club because they believed in good faith that a ratification meeting held in 1957 relieved them of any duty to urge transfer of the insurance agency to the Club.

Defendant directors primary challenge here is to the correctness of the court's ruling that they committed a breach of trust. On their cross-appeal plaintiffs challenge those rulings of the trial judge which (1) limited the period of the surcharge to a time contemporaneous with plaintiff Riccardo's membership in the Club; (2) found Valle chargeable with laches and unclean hands; (3) denied plaintiffs' request for a further accounting; (4) held that removal of the directors was not warranted; (5) turned back a challenge to certain provisions of the Club's by-laws (while sustaining another such attack); (6) rejected plaintiffs' arguments that monies used to establish pension funds for the directors should be refunded to the Club; (7) provided no award of counsel fees for that part of the action prior to Riccardo's intervention; (8) awarded no costs, and (9) held that the membership was entitled to access to the membership list.*fn1

After reviewing the arguments of all parties, we conclude that, except with respect to its determination limiting the period of surcharge, the trial judge committed no error in his rulings. We express no opinion as to the rulings on the by-laws and membership list issues since subsequent amendments to the by-laws have rendered these questions moot.

In ruling on the question of damages the trial judge denied recovery for the period from 1951, when the breach of trust occurred, to 1965, when Riccardo became a member of the Club, on the basis of its determination that there was no

proper party to complain of the conduct during that period. In so doing the judge also concluded that the situation did not call for making any exception to the contemporaneous ownership-membership requirement in derivative actions on a theory that the conduct complained of constituted a continuing wrong. Before consideration of the propriety of the ruling limiting the period of the surcharge, a brief discussion of the law governing a corporate director's activities and a recitation of the facts surrounding the breach of trust is required.

I

At common law and by current authority in England and the United States, the directors of a private corporation are considered by equity to be in a fiduciary relationship with the corporation and its shareholders. 3 Fletcher, Cyclopedia of Corporations (1975 rev.), § 838 at 142. New Jersey is in accord with this seemingly universal rule. See, e.g., Hill Dredging Corp. v. Risley , 18 N.J. 501 (1955). The same standard applies in cases of nonprofit corporations. See Grace v. Grace Institute , 25 A.D. 2d 277, 268 N.Y.S. 2d 901 (App. Div. 1966); Mile-O-Mo Fishing Club v. Noble , 62 Ill. App. 2d 50, 210 N.E. 2d 12 (App. Ct. 1965); Cuthbert v. McNeil , 103 N.J. Eq. 199 (Ch. 1928).

The corporate opportunity concept is one aspect of the general rule that a fiduciary's loyalties may not be divided. 3 Fletcher, op. cit. , § 861.1 at 208. In Guth v. Loft , 23 Del. Ch. 255, 5 A.2d 503 (Sup. Ct. 1939), the corporate opportunity doctrine was summarized as follows:

[I]f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. And, if, in such circumstances,

the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself, and the law will impress a trust in favor of the corporation upon the property, interests and profits so acquired. * * * [23 Del. Ch. at 272, 5 A.2d at 511]

New Jersey subscribes to this view of corporate opportunity. See, e.g., Solimine v. Hollander , 128 N.J. Eq. 228, 246 (Ch. 1940).

With the above standard in mind we turn to the virtually undisputed facts of this case. Prior to 1930 defendant Carleton Ritter operated his own insurance agency. In 1930 he became executive vice-president and general manager of the Auto Club. The Ritter Agency continued to operate until 1946.

In 1946 Ritter and three Auto Club directors (then called "trustees") formed the Paterson Agency.*fn2 The Paterson Agency, though nominally owned by the individuals, operated in all important respects as a department of the Club.

In 1951 the private ownership of the Paterson Agency led to a dispute among the trustees. One group, consisting of Floyd Hughes, Alexander Patterson, Sr. and Peter Calcia*fn3 felt that the Paterson Agency was a Club asset and, as such, should be owned by the Club and not by the individuals. In a pretrial deposition ...


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