Court Opinion

ID: 7945689
Source: CourtListenerOpinion
Date Created: 2022-09-08 23:20:06.463303+00
Date Added: 2024-06-11T16:33:54.741477
License: Public Domain

McAlvay, J.
(dissenting). There is no dispute as to facts in this case, and no claim made by any one that the disposition made by the defendants of the stock of complainants in the corporation of which they were officers and directors was lawful or justifiable. Upon this proposition the opinion of Mr. Justice Moore agrees with that of the learned circuit judge who tried the case. There can be no doubt but that both are as to that proposition absolutely correct.
It appears to me the conclusion of Mr. Justice Moore, that it cannot be ascertained what was the actual value of this stock, or that it, in the then condition of the corporation, was of any market value, and therefore complainants are entitled to recover only nominal damages, is not supported by the record, or the principles of law which I think should be applied to this case. The relation between complainants and the officers and directors of this corporation who unlawfully appropriated complainants’ property was a fiduciary relation. They were trustees and bound to care for and protect complainants’ interests, and were strictly accountable to them in case of breach of trust. The manipulation by the defendants, who were active in making the unlawful sale, was not in the inter*413ests of complainants; but their property was appropriated and used by them in such a manner as can leave no possible doubt as to the character of these acts, nor as to the intent of these defendants. Defendants have never denied their conduct or intentions. Upon this record they are confessedly guilty, but interpose the defense that the damages on account of the wrong committed are nominal. I do not agree that the record shows the damages complainants have suffered in this case, for the wrongful appropriation of this property, are merely nominal, and, in considering the case, its cost to complainants, or what they may have considered it worth, should not be considered. It was their property and considered by defendants of sufficient value to acquire its control and possession by the means adopted, and presumably necessary to carry out the scheme which they had devised, and which eventually was successfully consummated by the use of this and other stock of this corporation. The record shows that defendants did profit by this transaction. The books also show the same thing. These are admissions by them, and the stock excuse that this showing was a mere matter of bookkeeping deceives nobody. It would be grossly inequitable to allow them to profit by this unlawful appropriation. They are estopped in law and morals from denying accountability for such value as this property has been and is to them. This is a case where complainants are entitled to follow this property into whatsoever form or situation it may be shown to be, and have it restored to them, or recover its fair value in the condition they find it.
“As between cestui que trust and trustee, and all parties claiming under the trustee, otherwise than by purchase for a valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or altered state, continues to be subject to or affected by the trust.” 28 Am. & Eng. Enc. Law (2d Ed.), p. 1108, note 10, citing Board of Fire & Water Com’rs of Marquette v. Wil*414kinson, 119 Mich. 655 (78 N. W. 893, 44 L. R. A. 493), and other cases.
The special prayers of the bill of complaint, and the general prayer for relief therein contained, are in my opinion sufficient to warrant the relief to which complainants are entitled. The powers of a court of equity are broad, and where, as in this case, the acts done are admitted, and the result has been of the nature and extent herein stated, such court does not hesitate to grant relief to parties appealing for the exercise of its equitable powers. The property of complainants appropriated by defendants was impressed with a trust to be followed in their hands or the hands of others with notice, and its value recovered by complainants in whatsoever form found. The clear conception of the equities of the case have been purposely clouded by defendants, whose argument is that complainants’ interest was worth nothing at the time of appropriation, and consequently a decree for a nominal amount was equitable. It would appear that defendants have overlooked the fact that the decree from which they have not appealed decides that there was an unlawful taking, and therefore under the law which we think applies to the case the increased value, if any can be shown was given to it by the activities of defendants, belongs to complainants. The record does not warrant the conclusion that this taking was simply an oversight in service of a notice of the meeting when the action was taken. On the contrary, the record shows the express intention to cut off such of these stockholders as they desired, and leave them to their legal remedy. This active fraud was followed by acts which clearly indicate the intention that, to aseertain their legal rights and interests in this property, stockholders who had been shut out would have no easy task.
An examination into the actual indebtedness of the Lansing & St. Johns Railway Company will, perhaps, be instructive and helpful in solving the difficulties of this case. It was capitalized for $500,000, and bonds of that amount were issued. The construction contract was given *415to John E. Mills and others to construct this road for its entire length for $100,000 cash, to be paid as follows: $35,000 to be paid on the completion of the first 10 miles, $35,000 when second 10 miles were completed; and the balance when a total of 95 miles was completed; also to issue to them 60 per cent, of the total capital stock on demand, at any time after the contract was executed; and, as a further consideration, to bond the road at $95,000 per mile, and deliver the bonds to the contractors. $500,000 bonds of an authorized issue of $1,750,000 were issued, certified by the Detroit Trust Company, trustee, and delivered to John E. Mills. These bonds were secured by a mortgage. No other bonds were then issued. John E. Mills negotiated a loan of $175,000 secured by a pledge of the bonds and the indorsement of Nelson Mills. The contract entered into was never completed by the contractors. John E. Mills became sick. His father, Nelson Mills, paid the $175,000 note given to the Detroit Trust Company. The. bonds pledged as security were then turned over to him.. No statutory foreclosure and sale of the pledged property was had. In 1909 complainants were voted out of office as directors. Later defendants became directors, and, voting this stock which had been issued to them, controlled the organization. In order to make them eligible, some of them had been given a share of stock each. In. 1903 defendant Myron W. Mills became president and James R. Elliott vice president. Then, for a claimed consideration that rights of way between Lansing and St. Johns had been procured and paid for by John E. Mills, the balance of the treasury stock, being all the remaining unissued stock of the corporation, and all subscription stock issued but not paid for, was voted to be issued to Nelson Mills, successor to all the rights of John E. Mills, giving him control or actual possession of 3,980 shares of the 5,000 shares of stock. This was done without any showing in the record of the amount actually involved. The record shows that the Mills stock was all voted at all of the meetings in favor of these different propositions *416above stated. The record does not show that any of the defendants except the interest now represented by Myron W. Mills ever paid any consideration for any of. the stock in this company, or invested any money in any of the transactions involved. Defendants claim that this corporation was at that time indebted as follows: Bonded indebtedness and interest, $571,000; balance unpaid on contract for construction, $60,000; total, $631,000. This is the construction contract which John E. Mills and others undertook to perform, but never completed further than .St. Johns, and we do not find in the record that this balance was a valid subsisting indebtedness, nor do we find that more than $175,000 of indebtedness existed at this time against the bonds, which were held by the Mills interest as security for practically all of the indebtedness.
About this time another corporation, called the "Lansing & Suburban Traction Company,” was organized by these defendants for the purpose of taking over the Lansing & St. Johns Company and the Lansing City Electric Railway Company. This last-named road the Mills Company and defendants Elliott and Moore had acquired for $65,000, which was paid by a note of the Mills Company for that amount. In this transaction also none of the defendants except the Mills interest paid any consideration. The transfer of the Lansing & St. Johns Company was made in consideration of the assumption of its indebtedness by the new corporation, when the Mills interest voted the majority of the stock. The Lansing City Electric Railway Company was transferred for $65,000 and the assumption of $100,000 indebtedness. These transfers occurred in March, 1904. John E. Mills had died in July, 1903. Nelson Mills became ill, and, for the purpose of carrying on these transactions, the Nelson Mills Company was organized, which included all of these individual defendants ; Moore and Elliott holding one share of stock each. The articles of incorporation of the Lansing & Suburban Traction Company were filed March 9, 1904. The incorporators were Nelson Mills, Myron Mills, James *417R. Elliott, and George G. Moore, who were named as directors and officers. Elliott and Moore put no money into the deal. It was capitalized for $1,000,000, of which $10,000 was issued to each of the above named. Nelson Mills died March 15, 1904.
The book value put upon these properties combined in this was $1,727,515.92. This is the evidence defendants claim was only a matter of bookkeeping. Whatever they may call it, it was the basis used from which was deducted all bonds and indebtedness, leaving $1,000,000 credit, upon which the entire stock was treated as fully paid, and the majority part of it issued to and held by defendants as such. At this time some of the original stockholders of the Lansing & St. Johns Company, who were identically interested as these complainants, were given, for their 73 shares, 100 shares of the Lansing & Suburban as fully paid and nonassessable. Defendants Mills and Elliott represented that this stock was worth about par. The rights of these original stockholders were explicitly recognized. A bond issue of the new company was negotiated for $750,000 for the purpose of taking up and canceling the outstanding bonds of the two old companies, and for making extensions and additions to the properties. $300,000 of the bonds of the Lansing & St. Johns Company held by Nelson Mills to secure $175,000, which he had paid as before stated, were at this time canceled, leaving but $200,000 of said bonds outstanding as such security. This was done with the consent of the Detroit Trust Company and Mr. Mills. It will be understood that this cancellation wiped out $300,000 of the claimed indebtedness of the Lansing & St. Johns Company, which defendants insist must be considered in this case as part of its indebtedness. This clearly shows that these bonds of this company were merely security for the indebtedness to Mills. A sufficient amount ($175,000) of the Lansing & Suburban bonds were issued to take up the old bonds of the two roads merged and take care of *418extensions, etc. All of these bonds were in fact placed in the hands of the Mills Company, which hypothecated them with the Knickerbocker Trust Company for a loan of $450,000. Later another trust deed was made for $1,000,000 to provide for the retirement of the $750,000. The balance of which ($250,000) was used as collateral to loans.
The next step taken by these defendants was a project to merge the Lansing & Suburban Traction Company with several other properties which they had acquired, or intended to acquire, into a corporation called the “ Michigan United Railways Company.” This corporation was organized with a capital of $5,000,000. It made a trust mortgage for $7,500,000 for the purpose of acquiring and paying for the properties to be merged. Defendant Myron W. Mills was president of this corporation, and defendants Elliott and Moore directors. The Lansing & Suburban Traction Company was sold to the new corporation for $1,000,000 of its common stock. Provision was made in the trust mortgage that, of the bonds to be issued, $1,600,000 should be delivered to the president, Mills, or the vice president, Elliott, for which they were not to be accountable to anybody. This was done, and out of the proceeds the Mills Company was paid in full for all claims of every nature which arose out of the transactions had with the Lansing & St. Johns road, and $240,000 were paid in profits to defendants. A more extended statement of the history of this transaction will be found in Dodge v. Mills, 150 Mich. 394 (113 N. W. 1123).
These facts relative to the Michigan United Railways are material as showing that the claim, as above stated, of the Mills Company, was satisfied. This is in fact the culmination of this chapter in high finance. All the facts herein narrated show that a deliberate plan was conceived and carried out to absolutely ignore the rights of complainants in this property. The record shows a strained effort to inflate the indebtedness of the Lansing & St. Johns Company contrary to the facts. It shows that this. *419property and its prospects were valuable, and so known to be by defendants; that they paid for it about twice as much as for the Lansing City Electric Railway property; that they recieved for it from the Lansing & Suburban par value for all its stock; that they recognized the same rights these complainants are here contending for in others who owned equal stock, and paid them in full in stock, share for share, with an addition, called “a gift,” of 27 shares, making $10,000 to each. The Mills people were simply the bankers of this combination. They were at no time without security which they considered good, and the result shows that their judgment was good. Not only have they been paid in full, but have taken their share of 'the balance of $1,600,000 in profits which have been divided between them, and of the $1,000,000 in stock in the Michigan United Railways, which was distributed to them. As said earlier in this opinion, complainants are entitled to the value this stock acquired in the hands of defendants, which they recognized, and upon which they repeatedly acted, and that was its par value. There is nothing chimerical or speculative about this. It is the application of equitable principles which are fundamental to facts which are not in dispute. Defendants relegated these parties to such rights as the law afforded them, and this court finds that each is entitled to the sum of $7,300, with interest from March 9, 1904.
A decree should be entered in favor of complainants modifying the decree of the circuit court in accordance with this opinion, and with costs of both courts.