The opinion of the Court was delivered by
Mr. Justice Cothran.
Action by the plaintiff, J. Mortimer, Jr., in his individual capacity, against D. T. McKeithan Lumber Corporation, Emil Kieswetter, R. L. Gilliam, and John W. Dages. The principal grounds of the plaintiff’s complaint are:
(1) That in the distribution of the capital stock of the D. T. McKeithan Lumber Corporation, organized in 1916 to take over the property of a former corporation known as D. T. McKeithan Lumber Company, the plaintiff was entitled to one-half of the $300,000 common stock issued, and that he received only $47,500 thereof; the par value being $100 per share, that he was entitled to 1,500 shares, when he received only 475 shares; that 2,046 of the 3,000 shares were wrongfully issued to the defendant Emil Kieswetter, and that he should be required to surrender 1,025 of these shares, and that the corporation should be required to issue to the plaintiff 1,025 shares, to make up the difference between the 1,500 shares to which he was entitled and the 475 shares issued to him.
(2) That at the time of the organization of the new company, D. T. McKeithan Lumber Corporation, the plaintiff was employed as general manager, at a salary of $3,000 per annum and the use of a house worth $300 per annum; that he was discharged without cause, and is entitled to his salary for one year, amounting to $3,300.
(3) That the defendants Gilliam and Kieswetter, officers of the corporation, have entered into an unlawful and corrupt agreement, styled a “trust agreement,” with the defendant Dages, as so-called “trustee,” by which the product of the mill business has been turned over to Dages, at grossly inadequate prices, for the purpose of paying the debts of the corporation, including certain obligations to the Ohio National Bank, of which Kieswetter is president, to the great detriment of the plaintiff and other stockholders, and for the corrupt advantage of the defendants,- Gilliam, Kieswetter, and Dages and. the Ohio National Bank.
(4) That the plaintiff has been denied the right of a stockholder to an inspection of the books and records of the corporation; that he has not only been denied all information as to the business, but that the same has been studiously and persistently concealed from him.
(5) That owing to the inexperience, incompetency, concealments, misrepresentations, and fraudulent co-operation of the defendants, officers of the corporation, its affairs have been, and are being, conducted in a careless and uneconomical manner, to the great loss and damage of the stockholders and to the plaintiff in particular.
(6) That the plaintiff is without remedy to obtain any relief by or through the corporation, by reason of the fact that it is in the hands of said defendants and all their acts and doings are hostile to the interests of the plaintiff.
(7) That by reason of the foregoing wrongful acts of the defendants, the plaintiff is entitled for his protection to a full account and discovery of the actings and doings of the defendants and of the affairs of the corporation.
The prayer for relief is:
(1) The appointment of a receiver.
(2) The production of all books and papers ot the corporation for an examination by the plaintiff.
(3) Judgment for the amount of the plaintiff’s salary.
(4) Injunction against disposing of or altering the books and papers of the corporation.
( 5 ) General relief.
The defendants in their answer admit the allegations of the complaint in reference to the incorporation, capital stock, and officers of the corporation, and that the plaintiff has received 475 shares of the capital stock, that he has demanded additional shares, and the demand has been refused. They admit, also, that the plaintiff has been discharged as general manager and that he has been refused permission to examine, and inspect the books and papers of the corporation. They justify, such dismissal and refusal by alleging that the plaintiff wrongfully, willfully, and maliciously, with intent to harass and injure the corporation, to obstruct, hinder, and delay its operations, to impair its credit and disrupt its organization, refused to perform any of the duties assigned to him, circulated false reports among the employees that their dismissal was impending, circulating damaging reports among the creditors affecting the credit of the corporation, and committed other acts calculated to injure the corporation and its stockholders; a denial of all other allegations. The defendants also set up a counterclaim of $5,000 damages for injury done to the corporation by reason of the wrongful acts of the plaintiff as detailed in the answer.
The plaintiff replied to the counterclaim denying the same.
In passing it will be noticed that the complaint improperly unites several causes of action: One in favor of the plaintiff for his additional stock; another in favor of the plaintiff for his arrears of salary; another in the right of the corporation for damages resulting from mismanagement; another in the right of the corporation for a conspiracy in disposing of its assets; another in favor of the plaintiff for an inspection of the records; another in favor of the plaintiff for an accounting; another for the appointment of a receiver.
It will be noticed, also, that in the report of the Master and in the decree, judgments are rendered in favor of the corporation against one or more of the codefendants for large amounts, when the complaint gives no intimation of such demands, and no such causes of action are set up by the defendant corporation in its answer and served upon such codefendants.
No objection having been raised to these manifest . irregularities, no relief on this account can be afforded by this Court.
All the issues of law and fact were referred to Hon. Robert Macfarlan, Judge of Probate, as Acting Master. Various references were held, extending from June, 1919, to September, 1920. The Master filed his report on April 7, 1921, to which the defendants have filed exceptions. On October 13, 1921, Hon. Edward Mclver, upon motion of the plaintiff, unopposed by the defendants, passed an order appointing Woods Darg'an, Esq., receiver of the corporation. The results arrived at by the Master in his report, concisely stated, are as follows:
(1) That the plaintiff is entitled to the judgment against the corporation for $3,200 on account of salary following his unlawful dismissal.
(2) That the plaintiff is entitled to 1,500 shares of the capital stock of the corporation, of which he had received only 475 shares, leaving him short 1,025 shares; that Kieswetter be required to surrender to the corporation 1,025 shares in his custody and control; and that the corporation reissue and deliver the same to the plaintiff.
(3) That the corporation is entitled to judgment against Gilliam, Kieswetter, and Stein, officers and directors in charge of the corporation after the dismissal of the plaintiff, for $86,702.93, on account of depletion of the corporate assets through the consumption of standing timber alone.
(4) That the corporation is entitled to' judgment against Kieswetter and Gilliam for $43,340.25, .on account of the sale by them of 4,820,940 feet of lumber at $15 per thousand, when it was really worth $23.99.
(5) That the corporation is entitled to judgment against Kieswetter and Gilliam for $832.73, on account of charges for incorporation, attorney’s fees, and litigation in connection with the Nu Pro Gum Company.
(6) That the corporation is entitled to judgment against Kieswetter and Gilliam for $18,666.63, on account of excess salary paid to Gilliam up to January 31, 1919.
(7) That the corporation is entitled to judgment against Kieswetter for $1,482.39, on account of payment of that amount out of the funds of the corporation,-to W. R. Lang-don, a certified accountant, for an audit submitted by him at the request and for the personal accomodation of Kieswetter and Poston, which Kieswetter had personally assumed.
(8) That the corporation is entitled to judgment against its codefendants (without naming them) for $2,085.15, on account of a payment of that amount out of the funds of the corporation, to Ernst & Ernst, certified accountants, for an audit submitted by them, at the request of the Ohio National Bank, to which the report was made and the bill rendered.
(9) That the corporation is entitled to judgment against Kieswetter and Gilliam, for $3,906.45, on account of expenses of this litigation paid by them out of the funds of the corporation; they by their conduct being directly responsible for the present litigation.
(10) That the corporation is entitled to judgment against Kieswetter and Gilliam for $2,642.01, on account of the Pace & Pace audit for Mr. Timm, which amounted to $5,284.02, one half of which was paid by the plaintiff and the other half by Kieswetter and Gilliam out of the funds of the corporation, and which by agreement of counsel was to be taxed as costs as might appear equitable.
(11) That the plaintiff is entitled to judgment against the defendants (without naming them) for $2,642.01, on account of the payment made by the plaintiff upon the Pace & Pace audit referred to in the next preceding paragraph, and that Kieswetter and Gilliam be held primarily liable therefor.
(12) That a receiver be appointed with the usual powers.
The matter then came on for trial upon the report and the exceptions of the defendants, before Hon. J. E. Peurifoy, Circuit Judge, at the Fall Term 1921. On January 28, 1922, he filed his decree.
The decree confirms the Master’s report as to the following conclusions (preserving the numbering above) :
(1) Judgment for plaintiff on account of salary, $3,200,
(2) The plaintiff’s right to 1,025 additional shares, making up 1,500.
(7) Judgment for the corporation against Kieswetter for $1,482.39 on account of the Langdon audit.
(9) Judgment for the corporation against Kieswetter and Gilliam for $3,906.45, on account of the expenses of this litigation.
(10) Judgment for the corporation against Kieswetter and Gilliam for $2,642.01, on account of the Pace & Pace audit.
(11) Judgment for the plaintiff against Kieswetter, Gilliam, and the corporation for $2,642.01, on account of the Pace & Pace audit; Kieswetter and Gilliam being primarily liable therefor.
The decree modified the Master’s report as to the following :
(5) Confirmed it as to judgment for the corporation against Gilliam for $832.73, on account of payments in connection with the Nu Pro Gum Company, and reversed it so- far as judgment against Kieswetter is concerned.
(6) Confirmed it as to judgment against Gilliam for $18,666.63, on account of excess salary collected by him, and reversed it so far as judgment against Kieswetter is concerned.
‘ The decree reversed the Master’s report as to the following:
(3) ‘Recommendation, of judgment for the corporation against Kieswetter, Gilliam, and Stein for $86,702.93, on account of depletion of the corporation assets in standing timber.
(4) Recommendation of judgment for the corporation against Kieswetter and Gilliam for $43,340.25, on account of the sale by them of lumber at an inadequate price.
(8) Recommendation of judgment for the corporation against Kieswetter and Gilliam for $2,085.15, on account of the Ernst & Ernst audit.
Prom the decree of Judge Peurifoy both parties appealed.
The plaintiff’s exceptions assign error in the reversal of' the Master’s findings numbered 3 and 4 above, in the modification of the findings numbered 5 and 6, and in admitting the deposition of Kieswetter. They do not cover the reversal of the finding numbered 8.
The defendants’ exceptions, in addition to various matters hereinafter discussed, assign error in confirming the Master’s findings numbered 1, 2, 7, 9, 10, and 11, and in confirming so much of the findings numbered 5 and 6 as recommended judgments in favor of the corporation against Gilliam for $832.73 and $18,666.63, respectively.
In view of the fact that the former corporation, known as D. T. McKeithan Lumber Company, was succeeded by the corporation known as D. T. McKeithan Lumber Corporation, for convenience the former corporation will be referred to as the “old corporation” or “the company,” and the latter, as the “new corporation” or “the corporation.”
The questions arising upon the appeal will be discussed in the following order:
(1) Is the plaintiff entitled to 1,025 additional shares of the new corporation? -
(2) Is the plaintiff entitled to judgment against the corporation for $3,200, on account of salary as general manager?
(3) Is the corporation entitled to judgment against Kieswetter and Gilliam for $86,702.93, on account of depletion of standing timber? - • . • <■
(4) Is the corporation entitled to judgment against Kieswetter and Gilliam for $43,340.25, on account of the sale of .lumber at an inadequate price ?
(5) Is the corporation entitled to judgment against Kieswetter and Gilliam, or against Gilliam, for $832.73, on account of charges for incorporation, attorney’s fees, and litigation expeness, in connection with the Nu Pro Gum Company ?
(6) -Is the corporation entitled to judgment against Kieswetter and Gilliam, or against Gilliam, for $18,666.63, on account of excess salary paid to Gilliam ?
(7) Is the corporation entitled to judgment against Kieswetter for $1,482.39, on account of the Langdon audit?
(8) Is the corporation entitled to judgment against Kieswetter and Gilliam for $3,906.45, on account of costs, expenses, and disbursements in connection with the present litigation ?
(9) Is the corporation entitled to judgment against Kieswetter and Gilliam for $2,642.01, on account of the Pace & Pace audit?
(10) Is the plaintiff entitled to judgment against Kieswetter and Gilliam, and secondarily against the corporation, for $2,642.01, on account of the Pace & Pace audit?
First. Is the plaintiff entitled to 1,025 additional shares of the new corporation?
The matter is extremely complicated and requires a full statement.
Prior to July 6, 1911, for many years, there was conducted at Lumber, in Darlington County, an extensive sawmill business under various names and managements. The history of these former operations is not relevant or illuminating to the present controversy. On that date, July 6, 1911, a corporation was organized, under the name D. T. Mc-Keithan Lumber Company, which took over the title and operation of the property and business. The capital stock was $200,000, 2000 shares of the par value of $100 each, and was owned as follows:
E. M. Poston, trustee........................................ 1,050 shares
J. Mortimer, Jr................................................. 400 “
R. L. Gilliam..................................................... 200 “
D. T. McKeithan, J. M. Barr, and W. R. Bonsai .................................................................. 350 “
2,000 shares
The 400 shares owned by James Mortimer, Jr., represented a substitution for 400 shares of the Williams & McKeithan Lumber Company, which he had purchased from Barr, Bonsai, and McKeithan, paying them therefor $15,000 cash and giving his note to them for $25,000 with the 400 shares as collateral. The 200 shares owned by R. L. Gilliam represented a substitution for 200 shares of the same company which he had purchased from the same parties, paying them therefor $2,000 cash and giving his note to them for $15,000 with the 200 shares as collateral. The 1,050 shares standing in the name of E. M. Poston, trustee, were subscribed for by the New York Coal Company, of which Poston was president, and for that stock they paid in cash $105,000.
At the time of the organization of the corporation, there was issued $300,000 of bonds, which were turned over to D. T. McKeithan, J. M. Barr, and W. R. Bonsai, which with the 350 shares of stock issued to them, represented the purchase price of the property. These bonds were, secured by a mortgage of certain property of the corporation.
After the company had been operating for a short time, an action was instituted by it in the Federal Court against the bondholders, on account of an alleged shortage in standing timber, under the contract of sale, and for other causes. In that litigation which apparently veered in favor of the bondholders, an injunction was issued by the Court restraining the company for disposing of its product. For this reason, and others, the plant was closed down for more than a year.
Between the date of its organization July 6, 1911, and the early part of 1915, the company had contracted debts to the amount of about $102,000, $78,000 of which was represented by notes to the Ohio National Bank, $9,000 to the City National Bank, and $15,000 to the New York Coal Company, all of Columbus, Ohio, and certain open accounts to other parties, and their statement showed a loss of over $200,000.
During the same period the company had reduced the bonded indebtedness $40,000, had accumulated about 5, 000,000 feet of lumber, valued at $18 per M feet, outstanding accounts and bills receivable amounting to $20,000, and two tracts of land in Lee County, no part of which property was covered by the mortgage which secured the bonds.
Early in 1915, owing to the shutdown, adverse market conditions, and the failure to meet the interest upon its bonds, the bondholders threatened a foreclosure of the mortgage securing the bonds.
In this emergency, the plaintiff Mortimer and the defendant Gilliam, who had practically all of their capital invested in their respective stock holdings, sought to bring about an agreement between the bondholders and the larger unsecured creditors, by which the company could resume operations, pay off its indebtedness, and save the stockholders.
After one or more tentative agreements had fallen through, Mortimer and Gilliam met with the representatives of the three large unsecured creditors, the Ohio National Bank, the City National Bank, and the New York Coal Company, at Columbus, Ohio, in May, 1915. The Ohio National Bank was represented by the defendant Kieswetter, its president; the City National Bank by Copeland, its president; the New York Coal Company by E. M. Poston, its president; and the company by R. L. Gilliam, its president.
On May 26, 1915, an agreement between these several interests was consummated, conditioned upon approval by the bondholders and certain stipulations on their part which will be explained later. There is a controversy whether or not, as a matter of fact, this agreement was actually executed; but I will assume for the moment that it was. It provided:
(1) That the company should sell, to the creditors named, all of the lumber on the yard, approximately 5,000,000 feet; that it should convey to’ them the real estate in Lee County, not covered by the mortgage to the bondholders, reserving standing timber; that it should convert into cash all accounts and bills receivable, and apply the proceeds tO' debts other than obligations to said particular creditors and the bonds, the balance, if any, to go pro rata to said creditors.
(2) That the Ohio National Bank should be the custodian of the money received from the sale of the lumber and real estate and such balance as remained of the accounts and bills receivable referred to in the next preceding paragraph, for distribution pro rata among, the three creditors named, the two banks and the coal company.
(3) That the three creditors named should fully release, discharge, and satisfy the obligations held by them, severally, against the company.
(4) That the New York Coal Company should transfer and assign to the Ohio National Bank, for the purposes of the agreement, 1,044 shares of the capital stock of the company, known as the Poston stock, to be held by it until the stipulations by the bondholders, hereafter referred to, should have been made; that in the event that such stipulations be not made, the Ohio National Bank should return the stock to the New York Coal Company; that in the event that the contract be entered into to the satisfaction of the parties, and the bondholders made such stipulations as were outlined, the Ohio National Bank should transfer said stock to Gilliam and Mortimer, in equal proportions or to such persons as they should nominate.
(5) That the agreement should have no binding effect until the bondholders had consented to same, released all claim upon the property referred to in paragraph 1 above, and agreed to such modification of the existing mortgage as would enable the company to continue operations.
It will be observed that this agreement purported to be one between the company, as party of the first part, and the three large creditors named above, as parties of the second part. Neither Gilliam nor Mortimer was individually a party thereto. It was executed by the McKeithan Lumber Company, the Ohio National Bank, the City National Bank, and the New York Coal Company.
The effort was then made by Gilliam and Mortimer to secure the assent of. the bondholders to that agreement, and to stipulations by them, referred to in the agreement, withr out both of which the agreement would not be effective.
Accordingly, a meeting was held in the office of Willcox & Willcox, attorneys, at Florence, on June 5, 1915, at which were present: Mortimer, Gilliam, Kieswetter, representing the Ohio National Bank, the City National Bank and the New York Coal Company,; and the bondholders Barr, Bonsai, and McKeithan (the latter by George E. Dargan, attorney in fact).
An agreement between these parties was formulated and signed by Mortimer, Gilliam, and the three bondholders— Barr, Bonsai and McKeithan. It did not purport to call for execution by the three creditors, and in fact was not signed by any of them. It is characterized in the Circuit decree as a “tentative agreement” and declared to have been delivered “upoñ what is termed a gentleman’s agreement, that it was not to be binding upon the bondholders, unless the New York Coal Company should surrender its remaining six shares of stock and its claim against the company.” This agreement, known as the June agreement, provided:
(1) That the proceedings in the Federal Court should be dismissed, except that the reformation of the mortgage ordered by the Court, in a certain particular, should be preserved.
(2) That Mortimer and Gilliam should acquire, hold, own, and control all of the capital stock of the company, including the shares (350) owned by the bondholders, which, with the notes of Mortimer and Gilliam held by the bondholders for the balance due on their original stock subscriptions, should be assigned, transferred, and delivered to Mortimer and Gilliam.
(3) That the company should retire all of its debts, including the interest on, but not the principal of, the bonds; the interest due to be paid out of the first moneys derived from the assets.
(4) That all assets of the company, excepted from the mortgage, should be used in retirement of the debts; the bondholders releasing all claim thereto.
(5) That the mortgage given by the company to secure the bondg should be amended in the following particulars:
(a) That the company, in the payment of interest or principal upon the bonds, should be allowed an extension, on account of certain specific casualties.
(b) That the company should pay into the sinking fund $2.50 per M feet for all trees suitable for sawmill purposes, that shall be left on the premises covered by the mortgage after they shall have been cut over.
(c) That the company should pay to the bondholders 75 cents per M feet for all timber cut or dressed at its mill, from timber not covered by the mortgage, to be applied to the bonds.
(d) That the company should submit monthly statements of operations and allow full inspection of their records.
(e) Conditions specified upon which the bondholders might institute proceedings for foreclosure.
(f) That the company should operate its mill to its capacity, the cut in any event to be not less than 800,000 feet per month.
The Florence agreement of June 5, 1915, characterized as a “tentative agreement,” and also subject to the “gentleman’s agreement,” above referred to, evidently contemplated a further agreement, in which the company would enter.
Accordingly, in July, 1915, the same parties who attended the meeting of June 5, 1915, again met at the office of Will-cox & Willcox at Florence. It is assumed that the agreement dated July-, 1915, set forth in the record, was entered into by the parties named: The company, the three bondholders, and the trustee of the mortgage— although the copy contains no signatures at all. That agreement contains the following recitals:
(a) The execution of the preliminary agreement between Mortimer and Gilliam and the bondholders of June 5, 1915, the Florence agreement.
(b) The engagement of Mortimer and Gilliam to procure the execution of a formal contract, containing substantially the covenants in the Florence agreement.
(c) The fact that Mortimer and Gilliam had acquired and owned all of the stock of the company, a part of which had been acquired from the three bondholders.
(d) The assignment of the three bondholders, of the stock owned by them and the notes given to them by Mortimer and Gilliam, to Mortimer and Gilliam.
(e) The consent of the trustee of the mortgage to the terms of the agreement.
(f) The authorization of the agreement by the stockholders of the company, in writing held on Tuly 6, 1915, and by the directors on the same day.
It then proceeded at length and in detail to incorporate provisions practically identical with the provisions of the June agreement, and added the following:
(10) That the mortgage be amended by allowing the company to sell any of the standing timber covered by the mortgage upon payment to the trustee of $2.50 per M feet, upon certain specified conditions.
(11) That the'existing mortgage be continued of full force except as amended by the agreement.
(12) A' repetition of the former mortgage as security for the obligations assumed by -the company, under the agreement.
It thus appears that the agreement of July, 1915, between the company, the bondholders, and the trustees, was practically a confirmation of the agreement of June, 1915, between Mortimer and Gilliam on the one side, and the bondholders on the other.
The vital question, however, is whether either or both of these agreements was a confirmation of the Columbus agreement, through which the plaintiff lays claim to the additional stock.
By a comparison of the agreement of June, 1915, referred to as the Florence agreement, with the, agreement of May, 1915, referred to as the Columbus agreement, it will appear:
(1) That the bondholders did not expressly or impliedly approve the, Columbus agreement.
■ (2) That the bondholders did not agree that the company should sell to the three creditors the 5,000,000 feet of lumber in the yard.
(3) That the bondholders did not agree that the. company should sell to the three creditors the real estate in Tee County not covered by the mortgage.
(4) That the bondholders did not agree that the Ohio National Bank should be the custodian of the proceeds of the sale of the assets referred to.
(5) That the release .by the three creditors of their claims was not considered or referred to.
(6) That the transfer of the 1,044 shares by the New York Coal company was not considered or referred to.
And as has been shown the agreement of July, 1915, is practically a confirmation, and no more, of the Florence agreement of June, 1915; neither of them confirms the Columbus agreement of May, 1915.
On August 16, 1915, another agreement was entered into. This was between the company, the bondholders, and the trust company, trustee of the mortgage. The purpose, and legal effect of it was to amend the mortgage in the particulars referred to in the agreements of Juné, 1915, arid July, 1915; they need not be repeated here.
After these various agreements had been executed, the affairs and difficulties of the company appeared to be arranged and composed, and Gilliam' and Mortimer proceeded, as president and general manager, with the operation of the plant. Practically all of the 5,000,000 feet of lumber on the yard, referred to in the Columbus agreement of May, 1915, and the accounts and bills receivable, were sold and collected and used in the rehabilitation of the plant and pay ment of interest on the, bonds, a proceeding entirely inconsistent with the May agreement.
In the meantime, the 1,044 shares of stock which had been delivered by Poston to the Ohio National Bank, under the, terms of the May agreement, had been returned by the bank to Poston. On July 10, 1915, more than a month after the Florence agreement of June 5, 1915, Kieswetter, president of the Ohio National Bank, received said shares, as trustee,, from Poston, and issued a receipt therefor as trustee, in which he agreed “to treat with the bondholders, creditors and stockholders of the said company in the settlement of the affairs of said company to the best advantage possible.” Up to this time, certainly, Mortimer and Gilliam had not acquired that stock as provided in the May agreement.
On November 15, 1915, Poston sent to Kieswetter the remaining 6 shares of the 1,050, which he held as trustee, for the New York Coal Company, with a letter, in which he stated that the 1,044 shares theretofore delivered, and the 6 shares then delivered, and the claim of the coal company indorsed in blank, should be held by Kieswetter, as trustee for the coal company, until the claim of the bank had been paid, with certain expenses, and that then the whole 1,050 shares should be returned to Poston.
This demand was communicated to Mortimer and Gilliam, and to the bondholders, at a meeting held in Darlington shortly thereafter. . It indicated a purpose on Poston's part to project himself and the coal company again into the affairs of the, company, an event not at all palatable to the bondholders, and disappointing to the claim of Mortimer and Gilliam to the ownership of this stock. It shattered the last plan which had been adopted for the continued operation of the plant.
Mortimer and Gilliam refused to further operate the plant, if the demand of Poston should be recognized, and the bondholders declared in favor of a foreclosure of the mortgage securing their bonds.
The, foreclosure appears to have been satisfactory to Mortimer and Gilliam, and to have been a step in the proceedings for the reorganization of the company.
A new corporation was organized, under the name of D. T. McKeithan Lumber Corporation, with authorized capital stock of $300,000 preferred and $300,000 common stock.
At that time the capital stock of the old corporation, D. T. McKeithan Lumber Company, $200,000, stood in the names of the following stockholders:
E. M. Poston as trustee............... 1,050 shares
R. L. Gilliam....................... 475 “
J. Mortimer, Jr...................... 475 “
2,000 shares
—the 350 shares which originally belonged to the bondholders having been transferred to Mortimer and Gilliam by them.
The amount of the outstanding bonds was $260,000, $40,-000 having been paid upon them.
The, Circuit Judge held:
“I unhesitatingly find the agreement to have been that all parties should have the same interest in the new corporation as they had in the old. Certainly, under the, circumstances, no other agreement would have been just or equitable.”
This conclusion is supported by the evidence in the case.
Accordingly, out of the $300,000 of common stock, the parties should have received the following:
E. M. Poston as trustee............. 1,575 shares
R. L. Gilliam ..................... 715.5 “
J. Mortimer, Jr..................... 712.5 “
3,000 shares'
—leaving out of view for the moment the question whether or not Mortimer and Gilliam were entitled to the Poston stock. If they were, they would have been entitled to 787.5 shares more, or 1,500 shares each.
Thereafter the mortgage was foreclosed, and the mortgaged property was bought in at the foreclosure sale by Bright Williamson, as agent of the bondholders. Pursuant to instructions from them, he transfrered his bid to Mc-Keithan Lumber Corporation, which had been organized to acquire and operate, the property, in consideration of $260,-000 of the corporation’s bonds, secured by a mortgage of the property, $100,000 of the preferred stock, and $300,-000 of the common stock of the new corporation.
Thereupon Williamson, for the bondholders, delivered the bonds in the sum- of $260,000 to them, and directed that the common stock be issued to the following:
Emil Kieswetter .................... 2,046 shares
R. L. Gilliam....................... 474 “
J. Mortimer, Jr..................... 475 . “
R. L. Gilliam....................... 1 "
Henry Grimble ..................... 1 “
T. C. Cork.......................... 1 “
Ge,o. E. Dargan..................... 1 “
Emil Kieswetter .................... 1 “
3,000 shares
Of the $300,000 of preferred stock, the $100,000 received by Williamson in the trade was turned over by him to the Ohio National Bank, as collateral security to its claim of $78,000; the remaining $200,000 does not appear to have been issued.
The 2,045 shares issued to Kieswetter evidently represented what was supposed to be the proportion of the. new stock to which the old Poston' stock was entitled, but in the -calculation the proportionate interests of Mortimer and Gilliam in the new stock were overlooked; they each should have received 712.5 shares instead of 475, as above shown.
The Master finds that Mortimer is entitled to 1,5.00 shares ■of the capital stock of the, new corporation. The Circuit Judge confirms that finding. I do not concur in that conclusion, and propose to give the reasons therefor.
The 1,050 shares in the old corporation, certainly, at one time, belonged to E. M. Poston, as trustee for the New York Coal Company. If it now belongs to Mortimer and Gilliam, or belonged to them at the time of the reorganization, the manner of their acquisition and of Poston’s disposition should be traced as clearly as the title to a piece of real estate.
Obviously, the, title to them is attempted to be founded upon the May agreement in Columbus. The Circuit Judge holds:
“Mortimer and Gilliam, having secured from the bondholders the contract agreeing to the terms of the May contract, and having secured the modified mortgage required, the contract of -May became operative and binding upon all parties thereto.”
The May agreement in Columbus was one between the company, on the. one side, and the three principal unsecured creditors, on the other. By it, Mortimer and Gilliam proposed to acquire for themselves a transfer of the entire Poston stock of 1,050 shares. The consideration for this transfer was supplied, not by Mortimer and Gilliam, who expended not a dollar, but by certain concessions to be made by the company. In other words, Mortimer and Gilliam, who were president and general manager, respectively, of the company, and as such trustees of the corporation, were attempting to use engagements and concessions by the corporation, to secure personal benefits for themselves. If therefore it should be concluded that the May agreement was confirmed by the bondholders and the. company, in the June and July agreements, Mortimer and Gilliam should be considered trustees for the corporation of the advantages secured by the May agreement. But I' think that it un questionably appears that the May agreement was never confirmed by the bondholders or by the company as contemplated, and that it consequently never went into effect; that the source of Mortimer’s title to the Poston stock is as a “summer dried fountain.”
After the company had been operated by Gilliam and Mortimer from the time of its organization up to about the first of May, 1915, its affairs were in a desperate condition. The books showed a loss during that period of over $200,000. It owed the Ohio National Bank $78,000, the City National Bank $9,000, and the New York Coal Company $15,000, besides an undefined amount of open accounts. It had fallen behind in the payment of interest upon the, $300,000 of bonds, and a foreclosure of the mortgage securing the bonds was threatened.
At that time the company had upon its yard 5,000,000 feet of lumber, valued at $18 per M, $90,000; accounts and bills receivable, $20,000; and two tracts of land in the county of an unstated value. None of this property was covered by the mortgage.
It was then that Mortimer and Gilliam went to the meeting in Columbus, in May, 1915, with the principal creditors, and for the company entered into the agreement which is more fully analyzed above.
The three principal creditors were also in a dilemma. They were confronted with a situation which threatened the loss of their $102,000; for in the event of the threatened foreclosure, they might hope for little, if any, dividend. There was in sight lumber on the yard, accounts and bills' receivable, and the Lee County lands, not covered by the mortgage, which would almost, if not quite, satisfy their demands. The agreement provided that this property should be turned over to the Ohio National Bank as custodian, for .the benefit of the three creditors, and that, in consideration thereof, they would release their claims upon the company^ and in the event that certain modifications of the mortgage should be made, the Poston stock should be transferred to Mortimer and Gilliam. This agreement was not to take effect until approved by the bondholders and the proposed modifications of the mortgage had been consummated.
Mortimer and Gilliam attempted to obtain the consent of the bondholders to the May agreement and the modification of the mortgage. The evidence of their asserted compliance lies in the agreements of June and July, 1915, heretofore analyzed. The pivotal question is whether or not they succeeded.
I think that the following facts show conclusively that they did not succeed:
(1) Not a stick of the 5,000,000 feet of lumber on the yard was delivered to the Ohio National Bank, as contemplated by the May agreement, or authorized to be so delivered by either the June or July agreements. On the contrary, it was retained by the company, under the management of Mortimer and Gilliam, was sold and disposed of in accordance with the agreements subsequent to the May agreement, and in accordance with the terms of the modified mortgage, and the proceeds applied to the rehabilitation of the plant and the payment of interest upon the bonds.
(2) The two tracts of land in Lee County were not conveyed to the Ohio National Bank, as contemplated by the May agreement, or authorized to be so conveyed by either the June or July agreements. On the contrary, they were retained by the company, under the management of Mortimer and Gilliam, until after the mortgage was foreclosed, and were then conveyed to Bright Williamson, and by him to Gilliam, in whose possession they still are.
(3) The agreemnet of June, 1915, provides specifically that the property referred to in the two next preceding paragraphs hereof should be applied to debts of the company, including debts other than those, of the three principal creditors, and interest upon the bonds; in direct contravention of the May agreement that it should be applied to the claims of the three creditors alone, and that the, bondholders should release all claim thereto. ■
(4) The agreement of July 15, 1915, amendatory of the June agreement, provides that the proceeds of the sale of the lumber shall be applied to the payment of other and additioñal interest due to the bondholders, and a charge of $3 per M feet is put upon it to secure such additional interest; in direct contravention of the May agreement, as stated in paragraph 3 hereof.
(5) The modified mortgage, in express terms, provides that a part of the proceeds of the lumber shall be applied to the interest secured by the mortgage; in direct contravention of the May agreement,, as above stated.
The contemporaneous conduct of the parties shows that the agreements of June and July, 1915, were not considered as a compliance with the terms of the May agreement, so as to entitle Mortimer and Gilliam to the Poston stock.
Evidently, after knowledge of the, June, 1915, agreement (which, as I have endeavored to show, was not only inconsistent with, but positively antagonistic to, the terms of the May agreement) reached Poston, the 1,050 shares which he, had left with the Ohio National Bank, to carry out the terms of the May agreement, were reclaimed by him; for we find that on July 10, 1915, Kieswetter received from Poston the 1,044 shares, and issued his receipt therefor, in which he acknowledged that he held them as trustee, not to turn them over to Mortimer and Gilliam, as if the May agreement had been complied with, but “to treat with the bondholders, creditors, and stockholders of the said company, in the settlement of its affairs, to the best advantage possible.” It will be noted, also, that the May agreement provides, in terms, that if there should be a failure to confirm the May agreement, the stock should be returned to Poston. Evidently it was returned for such failure, and a deposit of it made with Kieswetter later, upon terms entirely independent of the May agreement.
On September 24, 1915, Gilliam, who was eqtially interested with Mortimer in the Poston stock, wrote his attorney :
“Mr. Poston, representing the New York Coal Company, has turned his stock over to the Ohio National Bank,' to be held by them until such time as their indebtedness has been taken care of. After that has been done, the stock will be divided betwen Mr. Mortimer and myself.”
This was more than three months after the June agreement, which Mortimer now contends confirmed the May agreement, and gave him the right to one-half of the stock. Evidently, as shown by his letter, Gilliam had no such conception. A copy of this letter was mailed to Mortimer, who made no protest or claim such as he now sets up.
Prior to this last date, on August 14, 1915, Poston writes to Kieswetter, referring to the verbal agreement under which Kieswetter held the stock, claiming it as his own, and impliedly negativing any idea of responsibility to Mortimer under the May agreement.
On November' 15, 1915, Poston remitted to Kieswetter the remaining 6 shares of the 1,050, with a letter in which he stated:
“We turn these over to you in order that you may hold the same, together with 1,044 shares and our claim of $14,983.53, all delivered to you as our trustee, July 10, 1915, you to hold same in such capacity until you have paid off the bank’s claim and the bills of attorneys, when you are to return all to us”
—a very far cry from an acknowledgment of Mortimer’s interest as claimed under the May agreement.
During this period, after the June agreement,'the bondholders delivered to Mortimer and Gilliam the 350 shares, originally issued to them, and surrendered their notes and collateral stock; and yet no demand appears to have been made upon Kieswetter or Poston 'for the 1,050 shares claimed under the May agreement.
If Kieswetter, who held the Poston stock, had authority to make any agreement, inconsistent with the explicit terms upon which he held it as trustee, which I greatly doubt, the evidence conclusively shows that it was to be delivered to Mortimer and Gilliam only upon payment of the debts of the company.
Mr. P. A. Willcox, Mr. Mortimer’s witness who was present at all the conferences in Florence when Mr. Mortimer contends a different agreement was made, testifies that—
“The agreement as to the delivery to Messrs. Gilliam and Mortimer of the stock held or controlled by Mr. Kieswetter was that it was to be delivered to them when the debts of the company were paid.”
Mr. J. M. Barr, who also attended said conferences and participated in all negotiations leading up to the modification of the mortgage says:
“After the execution of the agreements, which are in evidence and to which I have testified, the Ohio National Bank, through Mr. Kieswetter, agreed to finance the company, provided the, stock was placed in the hands of the bank until the company discharged its obligations; that is, all of this stock.”
Mr. W. R. Bonsai, who was also present at the conferences in Florence, says:
“Arrangements were made with the bank in Columbus, Ohio, to finance the operations of that company. Mr. Kieswetter was president of the bank. I understood that he was to take over the stock, before he would finance the company. This stock was to- be held until the debt of this bank was 'paid off, and then it was to go back to the stockholders.”
Mr. R. L. Gilliam testifies:
“Mr. Kieswetter did agree on behalf of the bank to finance the company, if the company would agree to pay back the entire indebtedness of the bank; and with a pro vision that Mr. Kieswetter, in the interest and protection of the bank, was to hold the controlling interest in the company, until their debt was paid.”
To show how vital to the life of the May agreement the provisions as to the, delivery of the lumber, accounts, bills receivable, and the Lee County property were considered, at the time of that agreement a separate agreement between Mortimer and Gilliam and the three creditors was entered into, wherein Mortimer and Gilliam, as agents of the’custodian bank, agreed to receive and liquidate the assets of the lumber company, and turn over the proceeds to the bank.
And to show the inconsistency between the May agreement and the agreements of June and July, under the latter a part of the proceeds of this property was to be applied to the mortgage debt, and it was shown that $8,895.75 was actually paid to the, Bank of Darlington out of the proceeds of the lumber, and applied to the mortgage debt.
Not a dollar of the debts due the Ohio National Bank, the City National Bank, or the New York Coal Company has been paid, and every dollar of the proceeds of the lumber, accounts, and bills receivable, aggregating in the neighborhood of $100,000, applicable under the May agreement to these debts, has been diverted to the payment of other obligations. How it can be affirmed that the May agreement has been confirmed, either in word or deed, is beyond my comprehension or imagination.
I may say; in addition, that it is a most remarkable, conclusion that the stock of Poston in the old corporation, which, according to the conclusion of the Circuit Judge, gave him the right to participate pro rata in the new stock, can be transferred from him to Mortimer, under the theory that the May agreement has been complied with, in a proceeding to which Poston is not even a party.
The net result of the decree, in the conclusion that Mortimer is now entitled to one-half of the common stock of the new corporation, is astounding: Mortimer, who admittedly has paid in upon his stock subscriptions only $15,000, and has not paid or procured the payment of a single dollar upon the debts referred to in the May agreement, the source of his title, if he has any, becomes owner of stock to the amount of $150,000, ten times what he has paid in; while the New York Coal Company, which paid $102,500 for its stock, in hard cash, and has a claim of $15,000 unpaid, finds .its stock swallowed up by the May agreement and gets nothing upon its claim.
Second. Is the plaintiff entitled to judgment against the corporation for $3,200 on account of salary as general manager?
Prior to the organization of the new corporation, the plaintiff had been general manager of the old corporation, with the very .extensive powers incident to that position. Upon the organization of the new corporation, Gilliam was made president- and charged with the general operation of the business, greatly curtailing the authority which Mortimer had previously exercised. Mortimer became manager and specifically made subject to the commanding authority of Gilliam. He was naturally disconcerted by this demotion, but appears to have accepted the situation. If his disappointment prevented loyal support to- Gilliam’s administration, he, should have declined the appointment.
The Master finds:
“Almost immediately after the new corporation was put into operation, friction arose between Mortimer and Gillitm. Mortimer was in law to blame.”
It is true, I - think, that friction arose between them, caused in the main by Mortimer’s failure to receive the proportion of stock in the new corporation which he claimed, by his disappointment at being reduced to subordination, and by his thwarting the, improper efforts of Gilliam to withhold certain lumber from the royalties due to the bondholders for the sinking fund, which is fully explained in the master’s report, I do not agree with the Master that in all these matters Mortimer was to blame. He was, as I have endeavored to show, entitled to 712.5 shares of the new corporation instead of 475. He was clearly right in opposing Gilliam’s plan to withhold certain lumber from the sinking fund. It was mainly on account of these matters that he was considered troublesome and was discharged. While his demand for one-half of the stock was unjustified, that was a matter that did not affect his duties as manager of operations, and as both parties were wrong in their contentions, that was a matter for legal adjudication and not for discharge. Outside of these matters, I do not find sufficient evidence of his unfitness or failure to discharge his duties as warranted dismissal, and agree with the conclusions of the Master and Circuit Judge as to this item.
Third. Is the corporation entitled to judgment against Kieswetter and Gilliam for $86,702.93, on account of depletion of standing timber?
The Master finds that during the Gilliam administration, there was cut 39,198,986 feet of lumber. He charges this as:
Standing timber, to Kieswetter and Gilliam, at $7.50 per M..... $293,992.39
He credited them with cost of production at $1.96 per M......$ 76,830.01
Amount paid to sinking fund. .. . 97,997.46
Profit charged to them on the books 32,461.99 207,289.46
Balance.................. $ 86,702.93
—which he considers to represent the depletion of corporate assets due to their culpable negligence, in the conduct of operations, and recommends that the corporation have judgment against them in that amount.
The Circuit Judge reverses the Master as to this item, and I concur with him for the reasons stated in the decree.
Fourth. Is the corporation entitled to judgment against Kieswetter and Gilliam for $43,340.25 on account of the sale of lumber at an inadequate price?
The Master finds that when the new corporation absorbed the assets of the old corporation, on March 6, 1916, it took over 4, 820,940 feet of manufactured lumber on the yard at the time. It was charged to the new corporation at $15 per M. The Master finds that it should have been charged at $23.99, a difference of $8.99 per M, amounting to $43,-340.25, for which he recommends that the' corporation have judgment against Kieswetter and Gilliam on account of their negligent waste of the assets of the corporation.
The Circuit Judge reverses the Master as to this item, and I concur with him for the, reasons stated in the decree.
Fifth. Is the corporation entitled to judgment against Kieswetter and Gilliam, or against Gilliam, for $832.73, on account of charges for incorporation, attorney’s fees, and litigation expenses in Connection with the Nu Pro Gum Comp'cmy?
This matter is fully explained in the Master’s report and in the decree, to which resort may be had. The Master held that both Kieswetter and Gilliam were liable for the item and recommended judgment in favor of the corporation against them. The Circuit Judge sustained the Master’s finding and recommendation so far as Gilliam is concerned and reversed him as to Kieswetter. I concur with the Circuit Judge as to this item, for the reasons stated by him in the decree.
Sixth. Is the corporation entitled to judgment against Kieswetter and Gilliam, or against Gilliam, for $18,666.63, on account of excess salary paid to Gilliam?
Shortly after the organization of the new corporation, Kieswetter, Gilliam, and Stein, being in control of the corporate stock, with the exception of the 475 shares issued to Mortimer (in fact, from the time of his discharge Morti mer was denied all participation in the affairs of the company and even an inspection of its records), reduced the number of directors to three, and elected themselves those three, and filled the offices by the election of Gilliam president, Kieswetter secretary and treasurer, and Stein assistnat secretary and treasurer. In October, 1916, at a directors’ meeting held in Columbus, Ohio, they voted to themselves salaries as follows: Kieswetter, $7,200; Stein, $4,800; and Gilliam, an increase from $3,600 to $10,000. Kieswetter and Stein have, not drawn their salaries, but Gilliam has; the excess amounting to $18,666.63.
The Master recommended that the resolution authorizing these salaries be rescinded and that the corporation have judgment against Kieswetter and Gilliam for $18,666.63. The Circuit Judge confirmed the Master’s recommendation as to a rescission of the resolution and so much of it as recommended judgment against Gilliam for said excess, but reversed it so far as judgment against Kieswetter is concerned.
I concur with the Circuit Judge in his conclusions for the reasons stated by him in his decree.
Seventh. Is the corporation entitled to judgment against Kieswetter for $1,482.39, on account of the Langdon audit?
This matter is fully explained in the report of the Master and the Circuit Decree. The Master recommended that the corporation have judgment against Kieswetter for the amount stated, which was confirmed by the Circuit Judge.
I concur in the disposition of this item for the reasons stated in said report and decree.
Eighth. Is the corporation entitled to judgment against Kieswetter and Gilliam for $3,906.45, on account of costs, expenses, and disbursements in connection with the present litigation?
The findings of fact and conclusions of the. Master and Circuit Judge in reference to this item are entirely satisfactory to me, and I concur therein.
Ninth. Is the corporation entitled to judgment against Kieswetter cmd Gilliam for $2,642.01, on account of the Pace & Pace audit?
The findings of fact and conclusions of the Master and Circuit Judge in reference to this item are entirely satisfactory to me, and I concur therein.
Tenth. Is the plaintiff entitled to judgment against Kieswetter and Gilliam, and secondarily against the corporation, for $2,624.01, on account of the Pace & Pace audit?
The findings of fact and conclusions of the Master and Circuit Judge in reference to this item are entirely satisfactory to me, and I concur therein.
Recapitulating my opinion is that the Circuit Court Decree should be affirmed as to all of the items above enumerated except the first: as to it, the decree should be modified to this extent: That Mortimer be adjudged entitled to 712.5 shares of the capital stock of the D. T. McKiethan Lumber Corporation; that of the 2,046 shares standing in the name of Kieswetter, he be required to surrender to the corporation 237.5 shares; and that the corporation issue to Mortimer that amount of stock.
Messrs. Justices Watts and Marion concurring, this opinion becomes the judgment of the Court.
Mr. ChiEE Justice Gary did not participate.