Martin v. Brown , 294 F. 436 ( 1923 )

VAN VALKENBURGH, District Judge.

It appears from the bill that in July, 1893, the J. S. Brown & Brother Mercantile Company was incorporated under the laws of the state of Colorado. This corporation succeeded to the business of J. S. Brown & Brother, wholesale grocers at Denver, Colo., a copartnership conducted by J. Sidney Brown and his brother Junius Elagg Brown. At the time of the incorporation the said John Sidney Brown appears to have been the sole owner of said business and the corporate stock of the corporation which sxicceeded the partnership. John Sidney Brown died on the 15th day of January, 1913, leaving surviving him Adele Overton Brown, his widow, and nine children. The plaintiffs Alice Brown Martin and Irene Brown Black and the defendants J. Sidney Brown and Carroll Teller Brown were children of the said Adele Overton Brown. The defendants Frederick Sidney Brown, William Knight Brown, and Edward Newton Brown, together with one Katherine Brown Johan-son and one Elizabeth Brown Inglis, not parties to this proceeding, were children of the said John Sidney Brown by a former wife.

By his will John Sidney Brown bequeathed his property to his widow and children, and named his widow and the defendants Frederick Sidney Brown and J. Sidney Brown as his executors. In his will he expressed the wish that the stock and notes of the corporation standing in his name should be partitioned among his heirs, upon which they should receive the income respectively from their holdings for a period of five years. On or about the 19th day of July, 1913, the heirs of John Sidney Brown filed in the county court for the city and county of Denver, having probate jurisdiction, their petition, of too great length to be set out in full in this opinion, praying authority to form a corporation with an authorized capital stock of-$1,500,000, to take over the title to all of the said wholesale grocery and jobbing business, including the stock of goods, wares, and merchandise, bills receivable, and accounts receivable relating thereto, then belonging to the said J. S. Brown & Brother Mercantile Company, with the exception of certain accounts receivable'of the value of $150,0Q0, to be determined, selected, and set aside by the executors of said estate, and to be other- , wise, disposed of. This was done for the stated purpose of segregating the said wholesale grocery business and property pertaining thereto from the other business and property of the decedent. As a consideration for the conveyance and delivery of said property to the new corporation, and in exchange therefor, the said J. S. Brown'& Brother Mercantile Company was to receive $400,000 of the par value of the preferred capital stock of said corporation, and $350,000, par value, of the common capital stock of said corporation; said preferred stock and said common stock each amounting to $750,000 of the total capital of $1,500,000. The J. S. Brown & Brother Mercantile Company was also to sell $250,000 of said common capital stock of the corporation to be formed, and also to sell $150,000 of the accounts receivable which had been reserved from the transfer to the new company as herein-above set out; all upon such terms and conditions as the executors, might deem best for the best interests of the estate. For the $250,000 of stock of the said J. S. Brown & Brother Mercantile Company and the $150,0Q0 of accounts receivable, to be sold as last aforesaid, J. S., Brown & Brother Mercantile Company were to receive $100,000 in cash and $150,000 in promissory notes payable in installments over a period of five years; the, same to be secured by the common stock of the new company. It is unnecessary to consider more in detail the other provisions of the petition.

• On the 2d of August, 1913, the prayer of the petitioners was granted by order of the county court. This petition was signed by the plaintiffs in this action. At that time Alice Brown Martin was married and a resident of Seattle, Wash.; the plaintiff Irene Brown Black was unmarried and liying with her mother. It is alleged in the bill that neither of the plaintiffs understood the purport of the transaction, but relied entirely upon the representations, particularly of their elder brothers, defendants herein, who exercised a dominating- influence in the affairs of the family, and upon whose representation that the step taken was for the best interests of all concerned they implicitly relied. It is stated also that the mother, who was at that time living and had been named as president of the J. S. Brown & Brother Mercantile Company, was likewise unversed in business affairs and was under the same dominating influence and control. In the petition filed with the county court the full nature of the contemplated change was not stated. It was evident, of course, that new capital and other parties were to be brought in through the agency of the new corporation, but the names of such parties and the extent of their control was not stated.

The bill charges that the purpose of this reorganization was, in effect, to shift the management and control of the business of the J. S. Brown & Brother Mercantile Company from the defendant members of the Brown family, in return for which such defendants made transfers of this portion of the. estate at a sacrifice and for an inadequate consideration, and were themselves to receive certain disproportionate advantages, interests, and returns as compared with their coheirs, and particularly these plaintiffs, and were to enjoy certain emoluments in the way of salaries and otherwise in the management of the residue of the Brown estate, to the disadvantage and to the loss of plaintiffs; that this was known to those of the defendants characterized in the bill as the Metzler party, to wit, Franklin T. Metzler, John O. Spicer, James M. Metzler, and William H. Parry, who participated with the said defend - ants of the Brown family in thus perpetrating what is, in effect, alleged to be a fraud upon the plaintiffs. The defendant Edward Newton Brown is practically exonerated from this charge, because he is alleged to be in a measure irresponsible, and the bill prays relief in his behalf as well as for the plaintiffs. The defendant German-American Trust Company is a mere formal, although necessary, party, because made a trustee with power to hold and vote certain shares of the common stock transferred and delivered to it. The defendant the Shields-Mctzler Grocery Company of Colorado Springs, owned or controlled by the Metzler party, is charged with participation and as having been made an instrumentality in the furtherance of the project. The defendant the J. S. Brown Mercantile Company is the new company organized pursuant to the prayer of the petition filed with the county court, in which the so-called Metzler party, consisting of the individuals above named, and the defendants of the Brown family, with the exception of the defendant Edward Newtoii Brown, are in coi-po-rate control, and to which the business of the old J. S. Brown & Brother Mercantile Company has been transferred, as aforesaid. In the latter company the defendants of the Brown family, together with Franklin T. Metzler, are in control as officers and directors.

At a later period the defendant J. S. Brown Grocery Company, of Pueblo, Colo., was organized, apparently as a branch and subsidiary of the J. S. Brown Mercantile Company: the stock holdings and commercial transactions of the two companies, and indirectly of the J. S. Brown & Brother Mercantile Company, being interlaced and interdependent.

It is charged in the bill that the defendants of the Brown family, in control of the affairs and remaining property of the J. S. Brown & Brother Mercantile Company, have voted to themselves salaries, and have credited themselves with expenses and distributions, largely disproportionate to the services required in view of the transfer of the substantial business of the company to the new corporation, and to the disadvantage of complainants; that in substance the conduct of the business of the affairs of the John Sidney Brown estate, through the transactions to which reference has been made, as alleged in the bill, discloses, and will, upon hearing, more fully disclose, not only waste in management, but a deliberate plan in the nature of a conspiracy to administer the estate to the personal advantage of the defendants and at the expense and loss of these petitioners. The petitioners, therefore, pray an accounting and for such other and further relief as the ultimate facts may justifjL The foregoing is a fair statement of the in-tendment of the bill, omitting unnecessary reference to incidental matters pleaded largely by way of inducement and with the evident purpose of fortifying and justifying the claims of the petitioners.

[ 1 ] The defendants filed motions to strike various paragraphs, clauses, and phrases from the bill. These motions were sustained. This action of the trial court requires no consideration at our hands. It is conceded that the bill contains much repetition, and it is evident that many clauses of the bill were vulnerable to such motions. However, it was conceded at the argument that the bill, as it remained after the motions to strike were, sustained, contained the entire substance of tne charges originally made. In their brief counsel for appellees said:

“As to practically everytMng stricken from the bill, whatever could possibly have been material was sufficiently covered and included in allegations remaining in the bill to have let in all the testimony that might have been admissible under the stricken allegations. In fact, if any causes of action were stated, as to appellees whose motion to strike was sustained, enough remains in the bill to charge them with liability. The rulings, therefore, as to redundant allegations, the substance of which remains in other parts of the bill, could not possibly have prejudiced appellants.”

The motion to strike, therefore, and the parts stricken, need be given no further consideration.

Appellees, defendants below, also filed their several motions to dismiss the bill upon many grounds therein stated; the main ground, and the only one upon which the court acted, as disclosed by its opinion, being that no cause of action was stated against certain of the defendants, to wit, the J. S. Brown Mercantile Company, the J. S. Brown Grocery Company, the Shields-Metzler Grocery Company, Franklin T. Metzler, John O. Spicer, James M. Metzler, and William H. Parry. The motions to dismiss were sustained as to all the above-named defendants except Franklin T. Metzler, and plaintiffs were given 30 days to amend their bill in accordance with equity rule 20, in default of which the bill was to be dismissed. At the expiration of that time, the plaintiffs having elected to stand upon their bill of complaint and declining to plead further, the bill was finally dismissed.

From the foregoing it will be seen that practically the sole question before the court is to determine whether the bill, as it finally stood, stated a cause of action, and whether the defendants, in whose favor, the order of dismissal was made, were proper parties thereto.

[2] In approaching this question yre have recourse to the principle announced by the Supreme Court in Townsend v. Vanderwerker, 160 U. S. 171, 186, 16 Sup. Ct. 258, 263 (40 L. Ed. 383):

“There are doubtless circumstances in the case which indicate at least a difficulty of proof, if not to arouse a suspicion, that perhaps the plaintiff may have overstated his case, but the pleader in a bill in equity is not bound to state either the testimony or facts which militate against his theory, but only to present his case in the light most favorable to his own interests, and ask that, upon such presentation, the court shall decide upon the sufficiency of his bill.”

[ 3 ] We must decide whether the defects in the bill, if any, are fatal and extend to the pleading as a whole. Jack v. Armour & Co. (C. C. A.) 291 Fed. 743.

[4] It is clear that even in the mind of the trial court a cause of action was stated against some of the defendants; that the bill was not fatally defective in its entirety. He says: ,

“In regard to the first group of defendants, with the exception of Franklin T. Metzler, the situation is different. On account of the relationship existing between them, the defendants’ conduct (which would not necessarily be objectionable in the absence of such, relationship) may very properly be deemed fraudulent, if established. They occupied the position, with respect to their two sisters, of executors, older brothers, and confidential advisers; and it is charged knew at the time of the death of their father that they, the plaintiffs, had had no business experience, and had every reason to rely with full confidence upon their judgment and advice.

“The defendant Franklin T. Metzler, although a stranger to the plaintiffs, and occupying no relation of trust toward them, became, according to the bill, after the execution of. Exhibit A, a director of the J. S. Brown & Brother Mercantile Company, and was actively associated with the first group of defendants in the alleged mismanagement of the affairs of the defendant the J. S. Brown & Brother Mercantile Company. The bill, therefore, as to him, will not at the present time be dismissed.”

. It is manifest that the requirement that plaintiffs should amend their bill was made pursuant to that part of the motion to dismiss which was sustained by the court. Under the equity rules motions to dismiss now perform the office of demurrer under the former equity practice. Motions to strike parts of a bill do not, and should not, perform that office.; if sustained, the parts stricken are removed from consideration, without more. In equity they are brought to the attention of no one hut the chancellor, who has passed upon them in considering the motions to strike, and therefore are without further prejudicial effect. It is necessary, therefore, to consider the bill under the motions to dismiss as upon demurrer.

It is conceded by appellees that the parts stricken out constituted, in effect, mere surplusage and unnecessary amplification of the main charge; that all contained therein, so far as it was or might he material, remains in the bill, and therefore that, if a cause of action was originally, stated, it still remains. This is, in effect, the finding of the trial court in refusing to dismiss the bill in the first instance as to several defendants. The chief complaint of appellants is the dismissal as to others of the defendants, and the final order of dismissal as to all defendants because of refusal to amend the bill by leaving out the defendants thus originally dismissed out of court by the trial judge. It is true that the court complained of certain statements of law, argumentative expressions, and allegations of mere business transactions, the wisdom of which “it is not proper for the court to pass upon;” but these are not specified with such particularity as would advise the pleader what amendment should be made in such respects. It does not, therefore, appear that the court dismissed the bill for such general and unexplained faults. It is true that appellees attack the bill as multifarious, and as joining several different grounds for relief, criticized as not affecting all parties to the litgation, and some as not entitled to be considered upon the facts stated; but the trial court did not indulge these attacks, and did not found its ruling thereon. Certainly it did not point out requirements for amendment with sufficient clearness to enable appellants to remedy the alleged defects, even if so inclined. It would seem, therefore, that this court, as a practical matter, is confined to a consideration of whether a cause of action was stated -against those defendants as to whom the motions to dismiss were sustained. As above stated, the trial court itself concedes that there is merit in the bill, and that it states a cause of action against the defendants over whom jurisdiction was retained. The situation is not one where no cause of action is stated.

It is alleged in the bill that the defendants in whose favor the order of dismissal was originally made were all parties with the remaining defendants in the various transactions, exchange of properties, and reorganization,- of which complaint is made. They received interests and benefits flowing therefrom. It satisfactorily appears from the allegations that what was done was done as part of a plan of which all the parties must necessarily have had knowledge and understanding. Furthermore this express allegation is found:

“And the plaintiffs expressly charge the defendants Franklin T. Metzler, John O. Spicer, James H. Metzler, William H. Parry, and the Shields-Metzler Grocery Company were participants in the fraud by which the business and property of the J. S. Brown & Brother Mercantile Company was transferred and turned over to the J. S. Brown Mercantile Company as herein stated, and that the said last-named defendants and all of them should likewise be held to account to the J. S. Brown & Brother Mercantile Company for all loss and damage which the last named company suffered by reason of such fraud, disposition, and transfer; and the plaintiffs further allege that the J. S. Brown Mercantile Company was organized for the express purpose of being a beneficiary of the fraud so perpetrated.”

The trial court expressly finds that the defendant Franklin T. Metz-ler sustained such a relationship to the transaction that he must be retained as a defendant in the case, but the allegations of the bill involve equally the other Metzler defendants named.

But, even though the allegations did not point convincingly to the active participation of such dismissed parties in an unlawful attempt to gain undue advantage over the complainants, nevertheless the interests of all parties defendants, in the properties involved and in the complex transactions affecting those properties in their various changed forms and relations, are so interlaced and interwoven that a disentanglement and readjustment in accordance with the prayer of the bill would be impossible, without affecting the property rights and holdings of each. Even though some of the parties could not be personally .charged with affirmative fraud, nevertheless the fact that they are alleged to be recipients and holders of stock and other property rights in the allied companies, would make them proper, if not necessary, parties to any readjustment and marshaling of the assets involved. They should therefore be retained in the case for this reason if for no other.

It may be freely conceded that this bill is unduly prolix, and contains much repetition and duplication of statement. This vice makes it confusing and embarrassing to a chancellor, and this type of pleading is condemned. The order of the court, however, does not have the effect of dismissing the bill upon that ground, and the spirit of equity requires, in the absence of substantial violation specifically pointed out, that where a bill states, even imperfectly, a cause of action which is recognized by the court in its findings, a complainant should not be foreclosed of the opportunity to establish such right to relief as his bill may justify, even though that be less than the full measure prayed.

This bill sounds primarily and in the last ■ analysis in a charge of fraud and overreaching on the part of the older brothers of complainants, in which the other defendants not so related have contributed and participated in some degree. It is charged that certain of the defendants made knowingly and pjirposely an unwise and improvident disposition of the father’s estate, with the intent and purpose of gaining personal benefits to the disadvantage of the complainants; that this was a breach of trust and confidence, the consent to which was brought about, if not by active misrepresentation, then by tacit deceit practiced and accomplished through, the relationship of trust and confidence existing; that since the original transfer of a large part of the assets of the original company for an inadequate consideration, the family defendants, at least, have enjoyed special benefits and pecuniary gain, to the disadvantage, or at the expense, of the complainants, to such extent and in such manner as to amount to a breach of <he trust and confidence existing between them. It is unnecessary to do moré than generalize upon the intendment of the bill. It may very well be that the charges made cannot and will not be substantiated; that it may develop, upon hearing, that complainants are estopped from being accorded the relief in whole or in part to which they lay claim; but this court cannot anticipate such a result, particularly when the trial court upon the face of its ruling concedes that a case is stated against some of the defendants, when such finding is sustained by the allegations of the bill, and when it appears that all of the defendants are at least proper, if not necessary, parties to a determination of the full extent of the relief which may flow from the cause of action stated.

It follows from what has been said that the order of dismissal should be set aside, and the cause reinstated as to all the defendants named. The case is remanded for hearing upon the merits.

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