Court Opinion

ID: 6905936
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:00:21.059725+00
Date Added: 2024-06-11T16:06:20.816080
License: Public Domain

Denied October 16, 1917.
Petition for Rehearing,
(167 Pac. 1167.)
On petition for rehearing. Petition denied.
Mr. James H. Nichols, Messrs. Smith <& Smith, and Mr. John L. Rand, for the petition.
Mr. Harris Richardson and Mr. Morton D. Clifford, contra.
In Banc.
Mb. Justice McCamant
delivered the opinion of the court.
As requested by plaintiff’s petition for a rehearing, we have read again plaintiff’s briefs. We have also *39reread large portions of the testimony and many of the exhibits. We have re-examined the amended complaint on which the case was tried and have tested it by the rule laid down in Olds v. Cary, 13 Or. 362 (10 Pac. 786), and Oregon & California R. R. Co. v. Jackson County, 38 Or. 589, 597 (64 Pac. 307, 65 Pac. 369). This pleading is fatally defective even under the liberal rule of construction prescribed by these authorities. The case is not one of a defective statement of a good cause of suit, but of a failure, to state a cause of suit. As pointed out in the first opinion, the amended complaint omits a number of essential allegations.
33, 34. It is contended that the Columbia Company is in no position to raise the questions of laches and the statute of limitations. If the suit is to be treated as one brought in the right of the Columbia Company to recover for it moneys abstracted from its treasury, this contention is sound. These defenses can be waived and they are deemed waived unless asserted by the litigant entitled to assert them: Davis v. Davis, 20 Or. 78, 84 (25 Pac. 140); Creason v. Douglas County, post, p. 159 (167 Pac. 796). The parties entitled to assert or waive these defenses, in the case supposed, would be the defendant Backus and the others charged with the frauds relied on.
In his petition for a rehearing plaintiff repudiates the suggestion that this suit is brought in the right of the Columbia Company. He construes his suit as an equitable demand on the corporation for his share of the fund which should have been distributed as a dividend. In this view of the case the Columbia Company is the adverse party and is entitled at its election to insist on its defenses of laches and the statute of limitations.
*4035. The amended complaint wholly fails to state facts showing that plaintiff is entitled to declare his own dividend or to have the court require the corporation so to do. The authority chiefly relied on is Fougeray v. Cord, 50 N. J. Eq. 185 (24 Atl. 499). This was a suit brought by a minority stockholder in the right of a corporation. He showed that its assets consisted wholly of profits in which he was entitled to participate. It clearly appeared that the failure to declare dividends was due to the fraudulent design of the directors to deprive plaintiff of his share of the profits. The purposes for which the corporation was organized had been for the most part subserved and the defendants had transferred its assets fraudulently to a new corporation in whose name they were transacting business. The assets consisted of town lots, bills receivable and liquid securities, all of which were readily divisible. Plaintiff secured personal service on the defendants and the decree provided for a receiver who should divide the assets equally among the stockholders. It affirmatively appeared that there were no creditors and that the corporation no longer required any capital.
In the amended complaint in the instant case it does not appear that the corporate enterprise has been sub-served or abandoned; there are no allegations from which the capital requirements of the company can be inferred and plaintiff does not show that the directors are abusing their discretion in withholding dividends. The rule of law applicable is correctly stated in 4 Thompson on Corporations (2 ed.), Section 4509:
“As a general rule the officers of a corporation are the sole judges of the propriety of declaring dividends, but when directors use their powers illegally, wantonly or oppressively, a court of equity, at the instance of a minority stockholder, will interfere to prevent such ■ *41misconduct. Thus a minority stockholder may compel the declaration of dividends where he clearly shows that the directors are guilty of fraud or bad faith in accumulating a large surplus and refusing to pay dividends.”
The rule is also illustrated by the following cases: Hiscock v. Lacy, 9 Misc. Rep. 578 (30 N. Y. Supp. 860, 872, 873); Boardman v. Lake Shore etc. Ry. Co., 84 N. Y. 157; Morey v. Fish Bros. Wagon Co., 108 Wis. 520, 529 (84 N. W. 862). The first of these eases is valuable as showing the care which should be exercised in this class of litigation. The record showed a conspiracy to prevent the declaration of a dividend by absorbing profits and by concealing the extent of the assets through fraudulent charges on the books. The court carefully investigated the financial condition of the corporation and conservatively determined the fund which plaintiffs were entitled to have distributed in a dividend. By amendment of his pleadings and by further proof plaintiff may bring himself within the operation of these authorities which he cites, but in the present state of the record neither his allegations nor his proofs entitle him to relief in the form of dividends.
36. Plaintiff asks us to disregard what he calls “the corporate fiction” and cites 2 Cook on Corporations (5 ed.), § 663; First National Bank v. Trebein Co., 59 Ohio St. 316 (52 N. E. 834), and Bennett v. Minott, 28 Or. 339, 347 (39 Pac. 997, 44 Pac. 288). These authorities hold that where a corporation is organized for a fraudulent or unlawful purpose and where the rights of innocent parties are not involved, equity will disregard the corporate fiction. The Ohio and Oregon cases had to do with the organization of corporations by insolvent debtors who transferred assets to the corporations in fraud of their creditors. *42The Ohio court treated the fraudulent conveyances as an assignment for the benefit of creditors as required by an Ohio statute. This court treated the fraudulent conveyance as void at the instance of creditors of the grantor and subjected the property to the payment of the grantor’s debts.
The Columbia Company was organized for a lawful purpose. From July, 1897, to September, 1915, it was engaged in the conduct of a lawful business. Plaintiff participated in its organization and during all those years served it as director and salaried employee. He made reports from year to year on behalf of the corporation to the corporation commissioner. In the ninth paragraph of his amended complaint plaintiff alleges the corporate existence of the Columbia Company; he sues as the owner of seventy-five shares of its capital stock. Plaintiff has received considerable sums of money as dividends on his stock. He is in no position to contend that this corporation is a fiction nor can this court so hold.
37, 38. Plaintiff finds fault with our holding that his attempted service by publication was ineffectual. It was not intended by the former opinion to announce the rule that there can be no service by publication without a prior attachment on which to base it. The seizure or control of the res which will justify such substituted service may be by bill in equity: Hawkins v. Doe, 60 Or. 437, 439, 440 (119 Pac. 754, Ann. Cas. 1914A, 765); State v. First National Bank, 61 Or. 551, 555 (123 Pac. 712, Ann. Cas. 1914B, 153). But all the authorities hold that such service cannot be made unless the court, at the time when the substituted service is invoked, has possession of some property belonging.to the defendant so to be served. If this were a suit to establish and foreclose a lien on the majority stock of the Columbia *43Company and Backus-Brooks Co., the Maine corporation which beneficially owns the majority stock, were a party to the suit, a service by publication could be had on said defendant, and if it failed to appear a decree with reference to the stock could be passed: Jellenik v. Huron Copper Mining Co., 177 U. S. 1 (44 L. Ed. 647, 20 Sup. Ct. Rep. 559, 563). But the mine and the fund of $14,756.83 paid into court were the property of the Columbia Company. Neither at law nor in equity did they belong to the defendants on whom service by publication was undertaken to be had. Such attempted service was ineffectual and nugatory.
39. It is asserted in plaintiff’s petition that when this suit was brought there was no ground for the appointment of a receiver. We have no disposition to force a receivership on these parties unless plaintiff elects to ask for it, but for the sake of clarifying our previous opinion we answer the suggestion of plaintiff. We are cited to a line of authority to the effect that equity has no jurisdiction to dissolve a corporation unless such jurisdiction is conferred by statute and that a receivership which would be equivalent to a dissolution will not be granted. -The receivership suggested in our previous opinion would not dissolve the Columbia Company. It is within the general powers of a court of equity to grant a receivership over a corporation where through such receivership the relief of a minority stockholder can be best worked out: Smith on Receiverships, § 225c, p. 359; 2 Machen on Modern Law of Corporations, § 1161, p. 958; Miner v. Belle Isle Ice Co., 93 Mich. 97, 112 (53 N. W. 218, 17 L. R. A. 412); State v. Second Judicial District Court, 15 Mont. 324, 333-339 (39 Pac. 316, 48 Am. St. Rep. 682, 27 L. R. A. 392). The right is to be exercised sparingly and with great caution, to the end that the innocent be not made to suffer with or *44for the guilty: Columbia Nat. Sand Dredging Co. v. Washed Bar etc. Co., 136 Fed. 710, 712; Bauer v. Haggerty, 42 Wash. 313 (84 Pac. 871); Ponca Mill Co. v. Mikesell, 55 Neb. 98, 101 (75 N. W. 46). But where there are no innocent stockholders or creditors liable to injury from the appointment and where the rights of a minority stockholder victimized by the frauds of the majority can best be secured to him through a receivership, the relief will be granted; Hampton v. Buchanan, 51 Wash. 155, 163 (98 Pac. 374); Fougeray v. Cord, 50 N. J. Eq. 185, 201 (24 Atl. 499). Section 1108; L. O. L., does not divest this jurisdiction inherent in courts of equity; the office of the statute is not to abridge, but to enlarge this jurisdiction.
40. Plaintiff’s petition presses upon us with much earnestness the contention that we are in error in the construction placed on the contract by which plaintiff acquired his interest in the mine and his stock in the Columbia Company. The contract in question was executed January 7, 1897, prior to the incorporation of the Columbia Company and at a time when only a small part of the purchase price of the mine had been paid. The dispute on this branch of the case has to do with plaintiff’s contention that E. W. Backus Lumber Company was obligated to pay to the vendors the balance of the purchase price and that the defendants were guilty of a misappropriation of the funds of the Columbia Company in using $60,000 of them with interest in the payment of the balance of this purchase price. The agreement is as follows:
‘ ‘ Memorandum of agreement made and entered into by and between the E. W. Backus Lumber Company ■party of the first part and Frank S. Baillie party of the second part both of Minneapolis Hennepin County, Minnesota to wit:
*45“Now whereas the said first party is the owner of the property known as the ‘Columbia Mine’ as is shown by a certain lease and deed in escrow, made and executed on the seventeenth of August 1896 a copy of which is on file in the office of the register of deeds of Baker County Oregon made by Henry Cable Irwin Cable and Marion Cable vendors all of Baker County Oregon and R. C. Leavitt of Minneapolis Hennepin County Minnesota purchaser in behalf of the said E. W. Backus Lumber Company of which he is its Vice President. All of the above property named in the above deed and lease and all other property acquired since that date by Prank S. Baillie or any other persons now belongs to this property and is all jointly known hereafter for the sake of convenience as the ‘ Columbia Mine.’
“And whereas it is agreed that the said Baillie shall enter at once into the employ of the said first party hereto as active manager of the ‘Columbia Mine’ and to so remain as long as such employment is mutually satisfactory and for such services he shall receive a salary of $100 per month and all his expenses while in service together with his railroad fare and travellingexpenses including four or six trips to Minneapolis from the Mine per annum if he should find it necessary or convenient and for the two and one half months services already rendered the sum of $115 per month and expenses. And as a further consideration should his services prove mutually satisfactory it is hereby agreed that said Baillie shall have the privilege of purchasing a five per cent interest in the equity now owned by said first party in said ‘Columbia Mine’ at the agreed price of $5,000 on the following terms to wit: the sum of $1,000 in cash the receipt of which is hereby acknowledged and the remaining sum of $4,000 shall bear interest at the rate of 8% per annum and shall be paid at the convenience of said Baillie but within a period of five years from this date, provided however that no dividend or profits from said ‘ Columbia Mine ’ shall be paid to said Baillie until said five per cent interest shall have been paid in full either out of his share of profits or otherwise. It is further agreed that should this *46property be incorporated and the stock of same issued the said Baillie shall have the privilege of having his stock issued and giving a note for balance of his purchase price and attaching to same the stock to be allotted to him amounting to five per cent as collateral for the payment of said note and it is also further agreed that should the said Baillie sever his active connection with this company within five years from date either on account of a dissatisfaction or for any other reason then in that case the said first party in consideration of one dollar in hand paid receipt of which is hereby acknowledged shall have the privilege of purchasing back the aforesaid five per cent interest whether the same had been fully paid for or not for the sum actually paid by the said Baillie for the same together with 8% interest from the dates of the payments made by him.
“In consideration of all the above it is also agreed by the parties hereto that the said Baillie shall give to first party the benefit of his entire time and ability during the time of his connection with the ‘Columbia Mine.’ ”
The words in italics, “equity now owned by said first party in,” were not in the first draft of the agreement. They were interlined therein by the defendant Backus. When the first draft was so amended, it was copied by plaintiff in his own handwriting and signed as above. Some six months later, on July 30, 1897, the Columbia Company was incorporated and the Leavitt option or lease was assigned to it in payment for the stock subscribed. Cable Brothers, the vendors, were induced to give a deed to the Columbia Company and this corporation executed to them on August 5, 1897, a mortgage in the sum of $60,000 covering the mine. This mortgage was subsequently paid with Columbia Company funds.
The evidence shows that plaintiff was familiar with these transactions at all times and that he made no *47objection to them until shortly before the bringing of this suit in 1915. If the contract had been signed in the form in which it was originally drawn, plaintiff’s contention would probably be sound. There might possibly be some doubt as to the construction of the agreement in that event because the ownership of the E. W. Backus Lumber Company is referred to the contract with Cable Brothers and that contract shows the ownership to be the equitable title of a vendee in a contract of sale, which is, of course, subject to the payment of the remainder of the purchase price. But the contract as finally signed is free from ambiguity. Plaintiff’s agreement was to pay $5,000 for a five per cent interest in the equity in the property owned January 7, 1897, by the E. W. Backus Lumber Company. Such was the practical construction given the contract by the parties. The circumstances to which plaintiff directs our attention show that a hard bargain was driven with plaintiff, but they are not effectual to modify the plain meaning of the contract actually executed.
41. It is contended that the entries in the books with reference to the accounts of the Midland Mining and Milling Company and the Northern Mining and Trading Company misled plaintiff and that therefore he should not be held to have acquiesced in these diversions of funds. The contention is that the entries charged plaintiff only with notice of loans, while the fact was that investments were made with the funds of the Columbia Company. As regards the Midland Company, the contention cannot be upheld. The account on the books of the Columbia Company recites the purchase of stock from different parties and the levy of assessments on this stock. The correspondence to which plaintiff was a party discusses the wisdom of patenting two of the mining claims and there was an *48effort to sell the property in which plaintiff participated. The expense of plaintiff on a side trip to Denver for the purpose of selling this property was paid by the Columbia Company. Plaintiff must have known for nearly fifteen years of this investment and the record shows no protest on his part until 1915 immediately prior to the bringing of this suit.
The record is less clear in the case of the Northern Mining and Trading Company. The bookkeeping is equivocal, but most of the entries would suggest to a reasonable man that money of the Columbia Company had been loaned to the Northern Company. Plaintiff shows that the notes held by the Columbia Company were executed without authority from the Northern Company and represented ho debt owing by it. There is evidence, however, that plaintiff understood that the Columbia Company was interested in the Nome properties of the Northern Company in some other sense than as a creditor. Several witnesses for the defendants testify explicitly to notice brought home to plaintiff and they are corroborated by letters written by plaintiff in which he speaks of these Nome mines as “our properties.” Plaintiff wholly fails to show that the notes of the Northern Company would have more value than its stock. The evidence makes out a clear case of acquiescence by plaintiff for fifteen years in the diversion of these funds either by way of loan or investment and we think that plaintiff can have no relief on this score.
Charles A. Perrin, a witness for the defendants, testifies that he remitted to the defendant Backus from the operation of these Nome properties $5,000 in 1912, $4,000 in 1913 and $3,000 in 1915. The evidence indicates that only a small part of these sums has been accounted for by the defendant Backus, but the obligation *49to account was due primarily to the Northern Mining and Trading Company. We do not see how relief can be granted plaintiff in this suit on this ground, but the decree in this suit will not stand in the way of suitable relief in a new proceeding.
The Columbia Company has filed a petition for rehearing which asks a modification of the previous opinion on the subject of costs. Our conclusions on this subject are predicated on the assumption that plaintiff will amend and in case he fails to do so in such time as may be allowed by the lower court, the Columbia Company may apply to this court for a recall of the mandate and its modification in the matter of costs.
Both Petitions for Rehearing are Denied.