Southwestern Portland Cement Co. v. Latta & Happer

I do not concur in the majority opinion in the above case for the following reasons:

Under the pleadings and evidence, the following are the subject-matters made the basis of this action, and they should be determined for or against the plaintiffs in accordance with established rules of law and practice:

It is charged that Courchesne, Martinez, and Leonardt were the original promoters of the corporation, and, as such, made a secret profit upon the lands upon which the El Paso plant is located, in that it was worth not exceeding $50,000 and was turned into or deeded to the corporation for a consideration of $300,000 and the stock of the corporation issued to said promoters for that amount; therefore the stock issued to each in excess of the actual value of the land was issued to them without consideration and should be recalled, and that the corporation should have judgment for all moneys paid to them as dividends thereon.

The admissions of said defendants are that the charge is true, except, they answer, that such claim is barred by the statute of limitations; that a full and fair report of the matter was made to the stockholders and same was approved; and that the lands were in fact worth $300,000.

There is evidence that the stockholders, at the time of the purchase, had a chance to know the facts; but it is denied that they, in fact, knew them, and the subsequent purchasers of stock testify that they knew nothing about the transaction.

It will be noted (in the statement of the majority opinion) that the only question submitted in this respect was, "What was the actual value of the land conveyed?" The questions of secret profits and limitations were not submitted to the jury. Under the pleading and facts, Courchesne, Martinez, and Leonardt were promoters and, as such, they were required by law to act in good faith, one with another and to proposed investors, and such special profits as they reserved to themselves must not have been secret. Hall v. Grayson County National Bank, 36 Tex. Civ. App. 317,81 S.W. 762; Tenison v. Potton, 95 Tex. 284, 67 S.W. 92; Yale Gas Stove Co. v. Wilcox, 64 Conn. 101, 29 A. 303, 25 L.R.A. 92, 42 Am. St. Rep. 159.

If this excess issue of stock to these promoters was secretly manipulated, the corporation, at the suit of these plaintiffs, as stockholders, should recover it back with dividends paid thereon, unless precluded by laches. Limitation begins to run only when the stockholders having full knowledge of the facts delay bringing suit for four years. Fox v. Robbins, 62 S.W. 815.

In my opinion, the judgment in both respects should have been for the plaintiffs under the evidence, but, if not, then the trial court nor this court, where there was a jury, should determine them.

The second question is plaintiffs' charge that the officers and directors are unlawfully dissipating the assets of the corporation with ulterior motives, and the prayer is that an accounting be had to the end that such moneys be returned into the corporation and dividends be declared. As to this, the plaintiffs were entitled to a full hearing. The stockholders are entitled to have access to the books of the corporation, that they may investigate such affairs, and if the directors are refusing to declare dividends, and such refusal amounts to an abuse of their discretion, the court should interfere and compel a distribution. Purdy's Beach on Private Corporations, vol. 2, § 457. This the trial court refused to consider, and plaintiffs, by their ninth assignment, sufficiently raise the question to require a reversal of the case.

The next question raised by the plaintiffs' first assignment, and others, upon which I do not agree with the majority, is the purchase of the Victorville property from Leonardt, president of the corporation, and issuing in payment therefor 750 shares of stock, when in fact the evidence shows that it cost him not more than $34,000, and the jury found its actual value to be $35,000. As to this, the petition charges that the purchase was made with the fraudulent purpose of depreciating the value of the general stock, etc.

Officers and trustees of corporations may sell their property to the corporation where the transaction is fairly and openly entered into for such price as may be agreed upon. Pneumatic Gas Co. v. Berry, 113 U.S. 322,5 S. Ct. 525, 28 L. Ed. 1003; 18 Ann.Cas. 354.

"But courts will restrain the consummation of contracts between directors and the company which show upon their face to be fraudulent or which may be proven to be to the satisfaction of the court and jury, and the fact that a majority of the stockholders have given their consent to the transaction will not deprive the minority stockholders of the right to restrain the fraud by injunction." Purdy's Beach on Private Corporations, vol. 2, § 745.

The public is interested in the question of inflated or watered stocks, of corporations, and it seems to me that the facts here strongly indicate, if they do not conclusively show, such fraud as to require the court to issue the writ prayed for. Again, the question of fraud in this transaction was not submitted to the jury, but must of necessity have been by the court and determined in favor of the plaintiffs, else there is no foundation for the judgment entered. The decree canceled the stock in excess of $35,000, in other words, 400 shares, and now, under the statute, it will be by this court presumed in favor of the judgment that the court determined the issue in favor of the Judgment entered. So if there was fraud (the trial court must have so found) it vitiated all of the stock issued and not only a part of it.

I am of the opinion that this purchase is in line with that passed upon in the case of Gamble v. Queens County Water Co., 52 Hun, 166, 5 N.Y.S. 124; Id., 123 N.Y. 91, 25 N.E. 201, 9 L.R.A. 527, where it was held "that to issue $50,000 of stock and $60,000 bonds to raise money for the purchase from one of its trustees of property worth $65,000, the corporation stock at the time being at par, was sufficient evidence of fraud to authorize an injunction restraining the corporation from carrying out the resolution," and the court held that it was immaterial that a majority of the stockholders consented to the arrangement. To the same effect is Fogg v. Blair, 139 U.S. 118, 11 S. Ct. 476, 35 L. Ed. 104. See, also, Lockney State Bank v. Martin, 191 S.W. 796.

But if we would not be justified in holding that the transaction is fraudulent as a matter of law, surely the case must either be reversed and remanded for a new trial upon the assignments raising the question, or else here rendered for the plaintiffs. My view is that the assignments are sufficient to call for a reversal only upon this question, because the evidence is such that it ought not to be determined by this court and is such as that, upon another trial, the jury might find for either party.

The defendants' eleventh and twelfth assignments complain of the judgment in favor of plaintiffs and against Martinez and Leonardt for back salary. The majority opinion sustains the judgment for the corporation upon the ground that "the evidence is insufficient to show that there was an implied contract to pay salaries to them for the year 1914." The plaintiffs seek to recover this money back from the defendants; therefore have the burden of proving that there were no services rendered, or, if services were rendered, that they were of no value, or, if valuable services were rendered, they must prove that there was neither express nor implied contract to pay for them. The question here is: Was there any affirmative evidence of the necessary fact or facts indicated next above to support the judgment? After a most careful reading of the statement of facts, I fail to find such evidence; therefore conclude that the judgment for this amount should not be sustained.

Both parties have appealed from the judgment entered by the trial court in this case, and I think both have pointed out reversible error. I am not unmindful of the fact that the Supreme Court, by rule 62a (149 S.W. x), has given us permission, if they have not commanded us, to determine whether a case shall be reversed upon errors of law in the course of the trial and, though it may have so done, charged the appellate courts not to reverse, if upon consideration of the merits of the case we shall have determined that no improper judgment has been rendered; but I am of the opinion that this rule should rarely, if ever, be invoked in support of appellate court opinions, because to determine the merits of the case here is to usurp the functions of the trial judge and jury, and I am of this opinion, notwithstanding the fact that the Legislature has by article 1984, R.S., in cases submitted upon special issues, as this one was, charged us to presume that, when an issue is not submitted and not requested, the trial court found in favor of Its judgment, if there be evidence to support such findings, for both of the rules above quoted operate to divest the trial court of functions which are peculiarly and properly theirs in the administration of our laws. Upon the trial of this case, five special issues were submitted, and not one of them requested a finding upon the merits of any issue made by the pleadings and evidence. Take, for instance, the issue of recovery of back salary, of which defendants complain upon this appeal, the only question submitted concerning it is: "Did the board of directors give Leonardt and Martinez back salary?" Not controverted, but admitted in the pleadings. So, I think, considering the record as a whole, together with the assignments of the parties, some of which are good, the cause should be reversed and remanded for a new trial upon all the issues raised by the pleadings, with an opinion so framed as to fully advise the counsel and the court of the rules of law applicable thereto, for, in my opinion, it has not so been tried. I therefore enter my dissent.

When the above dissent was penned, I thought, from the length of the majority opinion, that it exhausted all there was to say in its favor, but since there has been born into it page 1125, which asserts that, this being a foreign corporation, the laws of West Virginia govern in the issuance of its capital stock, and that, "in the absence of fraud, the value of the property purchased is conclusive," and further asserts that "the minority opinion presumes that there was fraud in the transaction," and further calls attention to the fact that the findings of the trial court do not show that he found that there was fraud in the sale by the president of the corporation of the Victorville plant, I feel constrained to add the following:

In my opinion, the principles of law invoked above are not peculiar to any particular state, but are of universal application. The above opinion simply means, if it needs explanation, that the question in these transactions — the sale by the promoters of the El Paso lands and the sale to the corporation of the Victorville plant — is: Was there fraud? Conceding that the trial court did not find fraud in his findings of fact, to enter the judgment canceling the 400 shares of stock issued for the Victorville plant, he must necessarily have found that fraud actually existed. This being so, to make a separate finding of facts which finds to the contrary, or fails to find in line with the judgment, for which finding of facts there is no express or implied statutory authority, where the case is tried by jury, should in no sense authorize this court to determine the question, especially in view of the fact, as I view the record, that there is evidence of fraud, and in view of the further fact that the question has not been submitted to the jury. I do not think the above dissent is susceptible of the construction that it presumes fraud. It was not so intended. But I simply intend to say that from the whole of the record, as attacked by the assignments of error, this case should be tried again and the questions determined by the trial court and not by the appellate court.

I therefore dissent to the things asserted on page 1125 of the majority opinion.