Court Opinion

ID: 9666922
Source: CourtListenerOpinion
Date Created: 2023-08-24 01:30:18.841469+00
Date Added: 2024-06-11T18:15:33.566869
License: Public Domain

Roberds, P. J.,
dissenting in part.
Liability, or non-liability, of defendants to this bill may logically rest upon the facts and circumstances existing during three separate periods of time — that is, from 1934 to October 16, 1951, during which time Boy Underwood was president of both the Mississippi and the Pennsylvania Corporations; from October 18, 1951, to March 15, 1953, the date of the Eager letter, during which time C. B. Underwood was president of both corporations, and from March 15, 1953, date of the Eager letter, to November 26,1953, on which latter date C. B. Underwood ceased to be an official of both corporations.
The majority opinion has adjudicated that no liability rests upon any defendant during the first period of time. *779I concur in that conclusion. But, the majority opinion has imposed large and heavy personal liability on certain defendants during the second period of time. I disagree with that conclusion. It should be kept clearly in mind that the basis of liability, and the only ground of such personal liability, was the failure of defendants to change the method of doing business — -that is, cancel out the truck leases and use the capital of the Mississippi Corporation, in the purchase and operation of the trucks in the delivery of the output of the plant of the complainant corporation after the death of Roy Underwood. The chancellor held that whether delivery of the output of the plant should be by leased-trucks or owned-trucks involved a question of business judgment, and that no personal liability resulted from the exercise of that judgment in good faith. I concur in that conclusion as it applies to the second period of time. Whether C. R. Underwood and the other officials of complainant corporation were under duty to change the method of delivery of the output of the plant after the death of Roy Underwood depends upon the facts and circumstances existing prior to and at the time C. R. Underwood became president of the complainant corporation. What were those circumstances and facts? As I relate them they are either not in substantial conflict or have been adjudicated by the chancellor on conflicting testimony.
There was no fraud, overreaching or unfairness in the truck lease contracts. They were all open and above board. They were a part of the records of the complainant corporation. The chancellor found these were facts.
The contracts, and, therefore, the method of doing business under them, had not only been agreed to and approved over the years but had been demanded by the Pennsylvania Corporation, owner of all of the stock of the complainant corporation. Roy Underwood was president of the parent corporation from 1933, and of the complainant corporation from 1934, to the date of his *780death. He was a man of strong personality. He was considered somewhat of a genins in the manufacture of glass. He held power of attorney of the stockholders of the complainant corporation to vote all of the stock and to ‘ ‘ represent” the corporation. That power of attorney was renewed from time to time and existed at the time of his death. He had instructed and demanded that the complainant corporation operate through leased trucks. He was opposed to investing in trucks the capital of the Corporation. The chancellor found, and the testimony supports the finding, that Roy Underwood, during the time he was president of the corporation, was the czar of the Knox industrial kingdom. Even witnesses for the complainant said he wielded unlimited power over the operation of both corporations. Roy himself expressed great gratification that not a single decision of his, during the time he ran the corporations, was ever questioned, a remarkable fact indeed considering the vast operations of the Knox industrial empire. And as showing conclusively the esteem and regard in which Roy was held by the officers and stockholders of complainant corporation, these officials, after his death, established a trust of one hundred thousand dollars for the benefit of his widow.
The stockholders of the complainant corporation knew all about the truck leases and the method of doing business under such leases. Copies of the leases were in the files of complainant corporation. Such copies were sent to Roy Underwood under his power of attorney from the stockholders. He had copies of all of them. The record before us discloses -some forty-five letters written by Roy asking for detailed information as to their terms, the duties and obligations imposed by them, and their efficiency and economy of- operation. Full information was given, including a complete record of trips, mileage, rate of pay, and every essential fact involved in them. The leases started in 1946. The first one was to Horton Smith, *781who, strange to say, signed the bill herein but as a witness was frank enough to say the leases were fair and for' the best interest of complainant. The Horton Smith lease was used as a model for the remainder of the leases.
Roy Underwood was present at all of the stockholders’ meetings of the complainant corporation. In addition to that, certain other of the officials of the parent corporation came to Jackson and inspected the Jackson plant. They saw the trucks in operation. They caused an article, accompanied by photographs of themselves and the plant, to be published in a national magazine, which hailed the Knox operations as being models of their kind.
And to show conclusively the Pennsylvania Corporation, owning all of the stock of the complainant corporation, had exclusive control and management of the Mississippi Corporation, it is shown that the Mississippi Corporation paid to the Pennsylvania Corporation two thousand dollars per month for services of the parent corporation in managing and directing the affairs of the complainant corporation.
The truck-lease arrangement was of great benefit to complainant. The chancellor so found and the testimony amply supports the finding. The trucks were able to deliver the manufactured product of complainant to the doors of its customers. They ran day and night. Also, they picked up property on the way back to the plant, for which proper charges of transportation were made for the benefit of the truck lessors, the corporation itself having no power to charge for hauling property of others. This arrangement was taken into consideration in fixing the transportation cost. The chancellor, in his opinion, pointed out one specific instance of the advantage of this truck leasing arrangement. An important ingredient in the manufacture of glass is soda ash. This substance requires special equipment in its transportation. It was being purchased by complainant at Baton Rouge, Louisi*782anq. The owner of a leased truck especially equipped his truck for transportation of soda ash to the plant of complainant, a thing which had never been done before. This truck operated for five years, and during this time saved the complainant $174,831.80. In addition to this, the use of this truck instigated a movement to reduce railroad and common-carrier freight rates from Baton Rouge to Jackson, Mississippi, which reduction was finally made.
But it is said the lessors realized large profits from these leases. Indeed, that is the main ground for liability. Looking only at the figures the profits were large, especially in recent years. However, when examined in the light of the great advantages to the corporation from their operation and when compared with other transportation rates, it will be readily seen why the complainant adopted the leasing arrangement.
I have noted above the great advantages, as found by the chancellor, of the truck-leasing method over other means of transportation. I will not repeat these. But, aside from such advantages in the actual operations, the truck rates were based upon common carrier freight rates. Indeed, the provisions of the leases brought them under-the Interstate Commerce Commission regulations. But there was this difference: The truck rates were based upon full carload lots. Rates for part carload lots are higher than full carload lots. All truck hauls, even consisting of partial loads, took the same rate as full loads. Thus the complainant got the benefit of full load rates on part load hauls, which was indeed an important item. In addition to this, lessors were credited with transportation charges on return hauls, which inured to the benefit of the corporation, which then had no legal right to transport for hire goods of another for its own. benefit. Owners had their money in the purchase price of trucks, .some especially equipped at large cost, and the depreciation on the trucks was very great. However, to show *783conclusively the rates charged on the trucks were not excessive, the proof shows without dispute that in 1933-34, in the depth of the depression, the cost of transportation was 12.6% of the total sales; in 1953, transportation compared to sales costs was 12.69%, and during the past twenty years transportation cost to appellant has averaged 12.69% of the total cost of production, notwithstanding that during that period the cost of transportation has about doubled.
And as bearing upon the cost of transportation, and the effect upon the financial status of complainant corporation, the record discloses a modest financial beginning and an almost unbelievable financial growth. It started with $28,725 cash and secondhand glass machinery of the estimated value of $70,000.00. In other words, its assets amounted to less than one hundred thousand dollars. Its growth was so phenominal that for the first nine months of 1953, under the management of C. B. Underwood and the truck-leasing system, its net sales aggregated $11,580,717.70. The Mississippi Corporation made money constantly. The Pennsylvania Corporation lost money constantly. As a matter of fact the Pennsylvania Corporation, owner of all of the stock of the Mississippi Corporation, simply used the Mississippi Corporation to pump money into the Pennsylvania Corporation, as is shown, for instance, by the practice of having Mississippi remit to Pennsylvania $24,000.00 per year to pay Pennsylvania for so-called supervision of the Mississippi plant. As further proving the feeder method imposed upon complainant corporation I will give a list of the assessments made by the Pennsylvania Corporation against the Mississippi Corporation and paid by Mississippi Corporation in one year :
Air Transportation__________________________$ 8,486.07
Engineering ______________________________________ 27,487.44
Glass container dues________________________ 15,923.17
Knox management__________i________■_________■ 24,000.00
*784Laboratory Expense________________________ 9,142.56
Legal Expense__________________________________ 8,100.00
Glass purchase by parent company- 28,879.73
Again, the Mississippi Corporation paid the parent corporation the following dividends in four years:
For 1948 ____________ .$ 17,734.50
For 1949 ____________ . 54,920.00
For 1950 ____________ . 131,829.25
For 1951 ____________ . 198,734.50
Aggregating .$402,218.25
This is enough to show that the Mississippi Corporation, under its truck-leasing system, was the corporation making the money, and that, contrary to nature, the parent corporation was sucking the life-blood out of its child.
Shortly after his election as president of the two corporations C. R. Underwood had an audit made of the affairs of the Pennsylvania Corporation. This was the first audit ever made of the affairs of that corporation. It disclosed the corporation to be insolvent. It showed liabilities of over two million dollars in excess of assets. The audit revealed overdrafts aggregating $1,555,070.80 and the corporation was endeavoring to meet this situation by an intricate slight-of-hand arrangement of kiting checks through five banks. It was engaged in a juggling- contest trying to switch from one bank to the other what little available cash it had in order to meet outstanding checks. In that situation C. R. Underwood undertook to borrow money and refinance the corporation. He informed the prospective lender that Knox of Pennsylvania needed to borrow one million dollars. The prospective lender, after examining the audit and informing himself as to the financial condition of the corporation, told Underwood one million dollars would do him no good; that the corporation needed three million dollars. ■On June 24, 1952, as a result of these negotiations, a *785loan of three million dollars was made by The Commercial Credit Company, Inc., of Maryland. It took a deed of trust on all of the property, real and personal, of both the Pennsylvania and Mississippi Corporations and their affiliates, to secure that loan. The terms of the trust deed vested .in the mortgagee large powers as to how the corporate business should be conducted. As proving the dire financial condition of the Pennsylvania Corporation the mortgagor had to pay seven percent interest on this debt, and, as to some “factors”, such as meeting drafts, debtors were obligated to pay nine percent interest. In addition to this, there was a provision in the trust deed which prohibited the mortgagor, under the existing facts, from investing any of the capital of the mortgagor in trucks. It is true that after C. R. Underwood was put out and the new management went in and the new management wanted to adopt the truck-ownership operations that, on request of the mortgagors and under the changed conditions, the mortgagee, to a limited extent, waived the mortgage provision which prohibited investment of corporate capital in trucks. However, that did not alter the fact that the terms of the trust deed, under the existing facts, absolutely forbade the Underwood management investing the capital of the: corporation in trucks.
It is pertinent to add here that at one time under the Roy Underwood regime C. R. Underwood was inclined to favor ownership operation of the trucks. Roy Underwood, representing all the stockholders, forbade such investment and operation. But, after C. R. Underwood learned the true financial condition of the Pennsylvania Corporation, he changed his views and concluded it would be bad judgment to invest the corporate assets in trucks and operate them as owners. The total cost of all the trucks necessary to transport the goods of complainant is not shown, but, from what is disclosed by the record, such total cost would have been in excess of three *786hundred thousand dollars, to say nothing of the cost of operating and keeping them in repair.
These were the conditions facing C. ft. Underwood and his management. Did these conditions demand a cancellation of the truck leases and the purchase and operation of the trucks by the Corporation? Should the law impose disastrous personal money liability for failure to do that? I do not think so. Clearly, as held by the chancellor, the choice of methods of operation of the trucks was a matter of business judgment.
‘ ‘ The fairness of the transaction must be measured not by hindsight but in the light of the circumstances which presented themselves at the time of the transaction. A wisdom developed after an event, and having it and its consequences as a source, is a standard no man should be judged by * * Costello v. Costello, 209 N. Y. 252, 103 N. E. 148.
‘ ‘ Corporations must be allowed to function under majority control, as do most institutions in this country, so long as the majority does no actual wrong to the minority or others. Courts are not to be called on to operate or control them except in cases where such interference is essential to justice; and in interfering with what majority has done in such a case as this, real caution must be taken not to work a wrong in striving towards the right ® * " Landstreet, et al v. Meyer, et al, 201 Miss. 826, 29 So. 2d 653. The foregoing rule was quoted and approved in Hudson v. Belzoni Equipment Co., 211 Miss. 178, 51 So. 2d 223.
The stockholders of complainant corporation knew all about the terms of the truck leases and those who were parties to them and their relations to the corporation and to each other. They affirmed and ratified them. The chancellor found “That the stockholders of complainant corporation had knowledge of the truck leases throughout the period of time complained of; that complainant continued to operate the trucks under the leases in ques*787tion after defendants-, C. R. Underwood, E. F. Underwood and J. H. Underwood were discharged as officers and directors of said complainant corporation and that by such nse and by failing to make complaint in due course it has in effect affirmed, acquiesced in and ratified said leases.”
It is a great injustice, in my humble opinion, to impose crushing personal liability on C. R. Underwood and those operating the complainant corporation with him because they did not cancel out these truck leases and invest several hundred thousand dollars of the capital of the corporation in the purchase and operation of trucks under the foregoing conditions. In the first place, as found by the chancellor, it involved only a question of business judgment, which this Court will not attempt to regulate, and in the second place, imposition of personal liability presupposes the system would have been changed had the question of change or no-change been brought before the stockholders of complainant corporation. There is no certainty whatever the change would have been made had the question been presented to the stockholders.
Again, in considering the question of fairness, right, and justice, it should be remembered that the new management, after C. R. Underwood severed his connection with the corporation, renewed and continued at least one of the leases in question.
Once again, looking to the right and justice of the situation, it should be kept in mind that only a part of the cost of transportation was incurred by operating leased trucks. This was the percentage: 33% of the corporate output was shipped in leased trucks; 41% was paid to customers who came for their goods; 17% was shipped in trucks owned by the corporation; 6% was shipped by rail and 3% by motor freight.
The complainant corporation did not lose a dime by the truck-leasing operations. It is not shown that it could have had its goods transported and delivered one *788cent cheaper by any other method. Indeed, as above stated, the freight outlay under this method was cheaper than any other available method. Instead of showing a loss it has shown a profit under this system. The burden was upon it, as complainant, to show loss or damage. It has not done so. On the other hand enforcement of these personal decrees will result in this Corporation having transported and delivered a large part of its output for many years without a penny’s cost to itself.
Now, as to liability after March 15, 1953, the date of the Pat Eager letter. In this letter Mr. Eager, a very able lawyer, called attention to the quasifiduciary relationship existing between corporations and their officers and stockholders. He quoted these rules at length as announced in recognized authorities. He then suggested that he thought these leased-truck contracts should be submitted to the directors and stockholders of the two corporations. This, to me, presents a different situation from that existing before this letter was received by Mr. C. R. Underwood. To that time he and his co-managers of the complainant corporation had a right to rely upon the contracts, which, as shown, had been authorized, confirmed and ratified. After receipt of the Eager letter, however, C. R. Underwood was put upon notice that new lease-truck contracts should be presented to the officers and stockholders of the two corporations. After receipt of this letter two lease contracts were executed by C. R. Underwood as lessor to the complainant corporation as lessee. At that time C. R. Underwood well knew the contents of the Eager letter. He did not submit his contracts to the directors and stockholders of either corporation. I think that was a breach of duty under these circumstances, and he might well be held liable for the rentals under these two contracts.
Arrington, J., joins in this dissent.
*789ON SUGGESTION OF ERROR
Per Curiam:
 Of the numerous questions argued in the several suggestions of error the most forceful one is based on the premise that the Court held in its original decision that the lease contracts were valid until Roy Underwood died. This premise is not correctly assumed. The majority of the Court did not consider, and did not hold, the leases valid prior to the death of Roy Underwood. It was held that under the peculiar circumstances of the case the appellant was estopped to assert their invalidity.
In our opinion none of the questions presented justify any change in our decision.
Suggestions of error overruled.
McGehee, C. J., and Hall, Kyle, Holmes, Ethridge, and Gillespie, JJ., concur. Boherds, Lee and Arrington, JJ., dissent.