Rose Theater, Inc. v. Jones ( 1955 )

Robinson, J.

This is a suit to require the one who organized a corporation to return to the company shares of stock alleged to be of a value in excess of the value of land traded to the corporation for stock; to dissolve the corporation, sell the assets, and distribute the proceeds of the sale among the stockholders.

R. M. Traylor controls the Arkansas Real Estate Company which owned 16% acres on East Roosevelt Road in the city of Little Rock. He wanted to construct a theater on this land, and organized for that purpose a corporation, appellant herein, Rose Theater, Inc. That corporation, owning no assets, issued to the Arkansas Real Estate Company'100,000 shares of common stock in payment of the tract of land above mentioned. The common stock was of no par value; hence the 100,000 shares of stock issued in payment of the land were worth whatever the land was worth.

Traylor was inexperienced in the operation of theaters, and sought advice from appellee Gerald W. Jones, an experienced theater man who was operating several picture shows at the time. Later Jones decided to come into the venture with Traylor under an agreement whereby Jones would be the manager of the theater. Later Jones and William Yan White, another stockholder, brought this action in behalf of themselves and other stockholders.

It is alleged that $65,000 has been spent on the land getting it in shape for a theater, $38,000 for buildings, and $6,000 for theater equipment; that $123,000 would be required to complete the theater and put it in operation and there is evidence to the effect that in fact about $180,000 would be required for that purpose. It is contended that the corporation is without funds and can not raise the necessary money to complete the project; that the part which has been built is depreciating in value and will eventually become worthless; that Traylor through his corporation, Arkansas Real Estate Company, defrauded the Rose Theater by false representations as to ownership of part of the land involved, and by falsely representing that the land had a fair market value of $65,000. After a trial of the issues, the trial court entered a decree ordering the assets of Rose Theater sold.

One of the principal issues is whether Traylor perpetrated a fraud upon Rose Theater in causing the Arkansas Real Estate Company to convey to Rose Theater the land for a price in excess of the true value. The evidence does not justify a conclusion that any fraud was perpetrated in this repect. Assuming that Traylor controls the Arkansas Real Estate Company, we will refer to dealings by that company henceforth as Traylor’s.

At the time Traylor acquired 100,000 shares of no par value common stock of Rose Theater, that corporation owned no assets whatever other than the land that it received for the 100,000 shares of stock. Therefore, regardless of any kind of representations made in connection with the value of the land, the Rose Theater could not have been hurt. It gave nothing for the land except the common stock of no par value; the stock was not worth anything above what the land was worth. So regardless of whether the land was worth $10 or $10,000 an acre, Bose Theater got full value for the stock it gave as the purchase price of the land. Appellees contend that Traylor did not own in fee all of the land transferred to the theater that was to be used for theater purposes, that $6,000 was owed on that which he did own, and that he only had leases on a portion of it. But assuming this to be true, still the common stock issued to Traylor had no value other than what the land was worth which Traylor transferred to the theater, regardless of what that value might be.

After Jones came into the corporation, he complained to Traylor that the preferred stock could not be sold without giving the purchaser an opportunity also to buy some common stock, and since Traylor held all the common stock, sale of the preferred was very difficult. Traylor then transferred back to the corporation 15,000 shares of the common stock, permitting it to be sold elsewhere. The corporation was authorized to issue 1,500 shares of 8% non-participating preferred stock having a par value of $100 per share. Jones has purchased 733 shares of preferred stock for $73,300; this was bought from the corporation, the money paid into the corporation and spent under the supervision of Jones. Jones bought $38,400 worth of common stock and claims that he was overreached by Traylor in the trade on that stock; however, they dealt at arm’s length. Jones says that Traylor represented to him that the land owned by Rose Theater was worth $65,000 and that acting on this representation he bought common stock from Traylor at $.65 a share. Jones is an experienced business man; he had every opportunity to ascertain the value of the land owned by the theater. Later, after Jones had been in active management of the affairs of the corporation for some time, a par value of $1 per share was set on the stock, but this was at Jones’ suggestion.

A great deal more money was spent on the project than was anticipated at first; but this was mostly due to Jones’ management of the affairs of the corporation. In the first place, it cost a good deal more to prepare the land for the theater than was planned. Traylor had nothing to do with estimating this job; it was done by engineers selected by Jones and the contractor, and they underestimated the cost of the project. Jones is to be commended that he did not hold the contractor to a bad bargain, but the mistake should not be charged to Traylor. Two screens were built at a cost of $38,000 when only one screen had been planned originally; this change in plans was due solely to Jones who, while on a trip to Texas, came to the conclusion that two screens would be better. It appears that all of the money which has been spent in connection with the project has been under the management and supervision of Jones.

It is claimed that the corporation is financially embarrassed, and can not raise the money to proceed with the completion of the theater; but there is no showing that any effort has been made to raise the money to complete the job. It appears that about the only thing Traylor has done in connection with this theater is t® organize the corporation and transfer to it 16% acres of land and some leases in consideration of 100,000 shares of the common stock of the corporation. At that time the corporation had no assets except the land. Later Traylor sold some of his stock to Jones, and even if Traylor represented the stock as being worth $.65 a share because the land he had transferred to the theater was worth $65,000, this would not be a false representation giving rise to a cause of action. Traylor was dealing with a man of experience at arm’s length, and the value of the land was a matter of opinion. Witnesses at the trial estimated its value at anywhere from $15,600 to $75,000.

If the decree is allowed to stand, it will mean that all the assets of the theater will be sold to the highest bidder ; the money received will be used first to pay off any third party debts, and from the record there does not appear to be any of that kind of any consequence; next the preferred stockholders will be paid insofar as the money received will go toward the payment of the stock at the par value of $100 per share plus 8% accumulated dividends. In all probability the assets will not bring enough whereby the owners of the common stock will be paid anything.

Appellees also contend that a decree providing for dissolution of a corporation in the circumstances existing here is supported by the case of Warner v. Bonds, 11 Ark. 238, 163 S. W. 788. There it was held that a minority stockholder may maintain an action for fraud and-mismanagement against the governing body of the corporation. This rule is also supported by Red Bud Realty Co. v. South, 96 Ark. 281, 131 S. W. 340. But the facts as they existed in those cases are not present here. In the case at bar, the largest stockholder is the one that has managed the affairs of the corporation and is the principal one who seeks dissolution.

Appellees also cite authority to the- effect that a stockholder may maintain a dissolution suit when the object of the corporation is no longer attainable; but we can not say the evidence here justifies such a conclusion. The corporation owes no debts of any consequence; preferred stockholders are not creditors. 13 Am. Jur. 466. Traylor and those on his side do not own the controlling stock.- The corporation owns over 16 acres in fee and leases on other acres making a total of 23 acres controlled within the city limits of Little Rock; $65,000 has been spent in preparing the land for use as an outdoor theater; $38,000 has been spent in building two large moving picture screens; and $6,000 has been spent on equipment. It appears from all this that the corporation should be able to finance the completion of the theater. At least we do not believe the evidence justifies a holding that the corporation cannot proceed with its business and put an outdoor theater into operation. Perhaps all parties concerned have not proceeded with the caution that prudence would dictate, but be that as it may, there does not appear to have been any fraud, and the object of the corporation does not appear to be unattainable.

Reversed.

Justices McFaddin and Ward dissent.