Case Name: Ohio Farmers Cooperative Milk Assn. v. The Clover Meadow Creamery Co. et al. (Two cases.)
Court: Ohio Court of Appeals
Jurisdiction: Ohio
Decision Date: 1934-12-10
Citations: 50 Ohio App. 261
Docket Number: 
Parties: Ohio Farmers Cooperative Milk Assn. v. The Clover Meadow Creamery Co. et al. (Two cases.)
Judges: Lemert and Montgomery, JJ., concur.
Reporter: Ohio Appellate Reports
Volume: 50
Pages: 261–269

Head Matter:
Ohio Farmers Cooperative Milk Assn. v. The Clover Meadow Creamery Co. et al. (Two cases.)
(Decided December 10, 1934.)
Messrs. Squire, Sanders <& Dempsey, for Ohio Farmers Cooperative Milk Association.
Messrs. Oviatt S Oviatt, for The Clover Meadow Creamery Company.
Mr. Sidney N. Weits and Mr. J. C. Fisher, for James T. Begg, trustee.

Opinion:
Shebick, P. J.
This cause was originally begun in the trial court as a suit in foreclosure and to marshal liens. As a bar to the Ohio Farmers Cooperative Milk Association's right to recover the relief sought, defendant, The Clover Meadow Creamery Company, pleaded a set-off, and this issue alone was submitted to the jury, which returned a verdict and recognized and established the creamery company's rights thereto. From this verdict and the judgment entered thereon the milk association prosecutes error. It also appeals from the decree entered, which determined the equities of the case. The causes were submitted together, and this court will likewise dispose of the issues in one opinion. The principal error or question made concerns the right of the creamery company to its claimed set-off. This raises the question as to whether the milk association's motion for a directed verdict should have been sustained. If it should have been sustained, then the many other errors complained of in the law portion of this case become immaterial, and the judgment or decree of the trial court should have been otherwise.
We shall therefore proceed to consider the creamery company's right to a set-off, and shall refer only to such portion of the voluminous facts as it is imperative for us to refer to in order to set forth our theory of the whole matter and the law controlling herein.
The creamery company claims that the officers of The Ohio Farmers Cooperative Milk Association, the appellant's predecessor, now a bankrupt, who thereafter became the officers and directors of the appellant, did, on February 16, 1931, by virtue of the appellant's ownership of 51% of the voting stock of the creamery company, obtain directorate control of the creamery company, which they held until July 26, 1933; and that they, together with one Smith, who, on April 27, 1931, was appointed as operating receiver of the milk association by the federal court, also became directors of the creamery company on February 16, 1932; and that by means of this appointment and interlocking directorship an understanding or plan of price fixing for the sale of milk sold by the milk association and its receiver to the creamery company was pursued from February 1, 1931, to April 27, 1933, when the receivership of the service company and the sales agency of the milk association was terminated, which overcharged the creamery company in the sum of $90,679 for milk sold to it, and that by this practice it had been defrauded in the sum named and which it claimed as a set-off. It is also stated that Begg as trustee in bankruptcy, appointed January 27, 1933, pursued this same understanding of sale price fixing for milk sold to the creamery company until the end of April, 1933. It also appears that the March, 1931, directorate of creamery company — that is its interlocking majority— fixed the milk sales price for February of 1931. The fact further is disclosed that on May 13, 1933, the trustee sold the certain claims and assets sued upon to the appellant, and that after control of creamery company had been turned back to its minority stockholders on July 26, 1933, this action was begun. The claim is made that the entire matter was a preconceived scheme to defraud and wreck the creamery company at the expense of its minority stockholders.
We further note from the record that Mr. Oviatt of counsel for the creamery company was a director of the creamery company and that after February 16, 1931, he was one of two of the directors of creamery company who represented the minority stockholders of that company. We also learn from the minutes of the directors' meeting of the creamery company, under date of May 25, 1932, that he objected to the price fix ing charge made against his company for milk sold to it by the receiver of the appellant. His proposed legislation thereat and his statements in open court indicate his knowledge and that of his minority associate of the wrong then being done his company and its minority stockholders. It further appears that this was not the first overcharge of which his company complained against the bankrupt; for we note that Mr. Oviatt represented his company in the latter part of 1931 in an arbitration of a like prior claim. It must therefore be considered as established that the creamery company's minority directors and stockholders had a continuing knowledge of the practice and overcharge which is now the basis of their present claim to right of set-off. The fact is of interest that the arbitration award, which in part took the form of notes in an approximate sum of $45,000, issued by the creamery company to the bankrupt and placed in judgment by the trustee Begg, and sold and assigned by him as trustee to the appellant with reservations, is one of the claims of the appellant sued upon in this suit.
Mr. Oviatt, as counsel for his company, says that at no time was the creamery company — or rather the minority stockholders — able to prove their elaim or any portion thereof as a claim against the bankrupt's estate within the time designated for proving the same, and that it has by the present claimed right to set-off asserted its demand at the earliest available opportunity. The appellant, however, among its other defenses, maintains that the creamery company knowingly permitted the price fixing practice, which it now says was fraudulent, to go on, and that the knowing acquiescence and the company's acts and conduct with respect thereto, now estop it from the assertion of the right to set-off.
Assuming, as the creamery company now contends, that the interlocking directors and the receiver were guilty of an actual fraud against it, that is to despoil and wreck it by overcharging, and by vexatious suits, and by final forced sale and dissolution of the company, we perceive that a vicious plan of ultimate destruction was being carried forward. And if this was the true state of affairs the minority stockholders might have had the aid of a court of equity. 6 Thompson on Corporations (3rd Ed.), 399, Section 4518, recites the well recognized rule that :
"The minority stockholder may always have the aid of courts of equity in cases where he sufficiently establishes fraud on the part of the officers or directors. ' '
Section 4522 of the same authority states a further rule, wherein it is said, that:
"A minority stockholder may waive his right to question the acts of the officers or majority stockholders. He. may do this on the principle of estoppel by participation, consent or acquiescence. . He may likewise lose these rights by laches. Where the act of the majority is an act that will be valid if ratified by all the stockholders, a stockholder may estop himself to raise the question of the lack of power by delay, with knowledge, for such a time as would be equivalent to a ratification."
Numerous cases are therein cited which fully support this rule.
If the claimed fraudulent practices were being pursued by the interlocking directorate; and the federal receiver as such, or as a director, was participating therein, all of which was known to the minority directors and stockholders of the creamery company, then we perceive no good and adequate reason why they should not at once have proceeded in a court of equity to stop the fraud and looting of which they now complain. Surely no court of chancery, federal or state, would have turned a deaf ear to such a charge and proof of actual fraud.
It was the duty of the minority to then protect the creamery company's interest. They could have made demand upon the majority directorate of the creamery company to seek the removal of the receiver, and this failing, then the minority on behalf of and for the benefit of the creamery company could have made such request of the federal court. If all was true of the receiver, as the creamery company now says, surely no court would have permitted its officer to continue in office or to further perpetrate the fraud proved.
It is said by the creamery company that because of the antagonistic majority of its board of directors the company could not have proved its claim in the bankruptcy court within the time prescribed. No effort was made towards that end. We see no reason why the procedure indicated in the next preceding paragraph was not resorted to and its then present claim approved or disallowed. Had it been approved the creamery company would have received its pro rata distribution out of the assets of the bankrupt, but purposely failing in that it now seeks by its set-off to procure allowance in full of its claimed demand from the trustee's assignee. The minority directors and stockholders of the creamery company, by their failure to act and seeming acquiescence, led the appellant to believe that no set-off existed as against the bankrupt claims assigned to it. In good conscience it should not now be permitted to assert such.
It is of further importance to remember that the creamery company by assertion of its set-off disregards the tort feature of its case in one respect, in that it connects up the three periods of overcharging upon the theory of an implied contract existing between the officers of the interlocking directorates with the receiver's connivance and the trustees' continuance thereof. It is recognized that receivers and trustees are not bound to accept a contract disadvantageous to the bankrupt estate. It is therefore apparent that they must determine if a contract be advantageous or not, and, if so, the appointing court may order its continuance. It is therefore of further significance that the creamery company minority made no move or effort to bring the attention of the court to the facts which might or should have advised the court that this particular implied contract was fraudulent.
Hill v. Gould, 129 Mo., 106, 30 S. W., 181, is authority for holding that contracts made by directors of one corporation with another corporation, in which they are largely interested, or in which they or their corporation own a majority of the stock, are neither void nor constructively fraudulent; but that courts will grant relief to minority stockholders if there is actual fraud. If the implied contract in this matter was fraudulent, that fact should have been presented to the court.
The Act of Congress, dated March 3, 1887, as amended August 13, 1888 (25 Stat. at L., 436, Chap. 866, Section 3), now known as Judicial Code Section 66 (36 Stat. at L., 1104, Chap. 231, Section 66; Title 28, Section 125, U. S. Code), provides:
"Every receiver or manager of any property appointed by any court of the United States may be sued in respect of any act or transaction of his in carrying on the business connected with such property, without the previous leave of the court in which such receiver or manager was appointed; but such suit shall be subject to the general equity jurisdiction of the court in which such manager or receiver was appointed so far as the same may be necessary to the ends of justice. ' '
The note appearing in 29 A. L. R., 1467, considers this statute, and digests many adjudications which distinctly hold that under Judicial Code Section 66 the right exists to sue a federal receiver in a state court without leave. And turning to I Collier on Bankruptcy (13th Ed.), 79, Section 2G, it is said:
"The Judicial Code [Section 66] provides in sub stance that a receiver appointed in a Federal court may be sued without leave of the court 'in respect to any act or transaction of his in carrying on the business connected with' the property in his charge. It has been held that this provision applies to receivers appointed in bankruptcy proceedings as well as other Federal receivers."
See, also, In Re Kalb & Berger Mfg. Co., 165 F., 895.
And we find it further stated in 23 Ruling Case Law, 128, Section 136, citing Grant v. Buckner, 172 U. S., 232, 19 S. Ct., 163, 43 L. Ed., 430, as authority, that:
"A counterclaim or set-off comes within the spirit of the act which permits the receiver of a federal court to be sued without leave, and gives a defendant sued by such a receiver, in a state court, the right to plead a set-off against him in that court."
And further commenting on the facts appearing we find that when the trustee caused the creamery company notes, which were given in January, 1932, to be placed in judgment, and which were assigned to the appellant and alleged by it as one of its causes of action herein, the creamery company minority made no effort to open up this judgment and be let in to defend with its set-off.
It is the conclusion of this court that the creamery company, by reason of its passive participation and seeming acquiescence, and by reason of its minority failing to act when it should have acted, and by its knowledge at all times seemingly possessed, has been guilty of laches, and by reason of its delay, which is equivalent to ratification, is now estopped to assert its claimed set-off. The court should have sustained the plaintiff's repeated motions for a directed verdict. Therefore the judgment entered, from which error is prosecuted in case No. 13990, is reversed and final judgment is entered for the plaintiff in error.
It is the decree of this court in case No. 13971 that the appellant is entitled to the relief prayed for in its third and fourth causes of action, subject to the reservation of trustee Begg in the judgment sued upon, which is set up in the third cause of action. The mortgage sued upon in the second cause of action is ordered cancelled. A decree may be drawn accordingly.
Decree accordingly.
Judgment reversed.
Lemert and Montgomery, JJ., concur.
Judges Sherick, Lemert and Montgomery, of the Fifth Appellate District, sitting by designation in the Eighth Appellate District.