Townsend v. La Crosse Trailer Corp.

This is an appeal from an order, entered May 6, 1948, requiring the defendant to permit the plaintiff and his agents to inspect and make copies of books, records, and files belonging to the defendant corporation, pursuant to sec. 269.57 (1), Stats. The action was commenced on March 12, 1948.

The defendant-appellant is a Wisconsin corporation engaged in the business of manufacturing heavy-duty industrial trailers and other related products with its principal place of business in the city of La Crosse. The plaintiff-respondent was formerly employed by defendant as its chief engineer.

The action was commenced by service of a summons on March 12, 1948. On March 16, 1948, plaintiff petitioned the circuit court commissioner for La Crosse county for an order granting plaintiff, his attorneys, and agents, the right to inspect and make copies of books, records, and files of the defendant corporation which in the opinion of the plaintiff, his attorneys, and agents, might reflect upon the book value of the common stock of defendant corporation on December 31, 1945. The action was based on a certain contract entered into between La Crosse Trailer Equipment Company (now La Crosse Trailer Corporation), the defendant, Roy C. Townsend, the plaintiff, and the La Crosse Trust Company, dated December 22, 1942, under which contract plaintiff agreed to place one hundred twenty shares of the common stock of defendant corporation owned by him in trust with the La Crosse Trust Company, and which contract further provided that in the event plaintiff should no longer be employed by defendant, the defendant was granted the option of purchasing said shares of stock from the La Crosse Trust Company upon payment to the trust company of a sum equal to one half the book value of said stock computed according to the books of the defendant corporation at the time of termination of employment of plaintiff. On December 31, 1945, when plaintiff had ceased to be employed by the defendant corporation, the defendant corporation, pursuant to contract dated December 22, 1942, tendered to the plaintiff the sum of $24,660 in payment for plaintiff's one hundred twenty shares in the defendant corporation. The defendant submitted to plaintiff and to the La Crosse Trust Company its latest available financial statement prepared by Alexander Grant Company, certified public accountants for the corporation, which statement contained a balance sheet showing the assets, liabilities, and net worth of defendant. The book value of said common stock was thereupon computed by the trust company and plaintiff from the financial statement. Plaintiff then released defendant from all claims arising by reason of his employment by the defendant or the contract of December 22, 1942.

Following a hearing before the court commissioner on the matters set forth in plaintiff's petition, the court commissioner ordered the defendant to permit plaintiff and his auditors to make an inspection of and copies of such books, records, and documents of the defendant corporation as were necessary to determine the book value of the common stock of such corporation as of December 23, 1945, such right of inspection to cover a period not beyond February 1, 1946.

Defendant then petitioned the circuit judge of the sixth judicial circuit for a review of the order of the court commissioner. Following a hearing before the circuit court judge on the matters set forth in defendant's petition, the order of the court commissioner was amended, and defendant was ordered to give to the plaintiff and his auditors, inspection privileges and permission to take copies of the following books, records, and files of the defendant corporation for the period from December 22, 1942, to February 1, 1946:

All books of original entry including,

Pay-roll records
Cash receipts
Cash disbursements
Voucher register
Accounts-receivable ledger
Accounts-payable ledger
Cost-accounting records
Reserve for depreciation records
Purchase journal
General journal
Purchase and expense invoices
Receiving records
Purchase orders
Bills of lading
Sales journal
Sales invoices
General-journal vouchers
Cost-accounting vouchers
Time reports
Job-order tickets

Canceled checks
Bank statements
Pay-roll time tickets and books
Checkbooks
All inventories
Fixed-asset records
Monthly and annual financial statements
Minute books
Stock-certificate books and records
Appraisal books and files

The circuit court further ordered that such inspection by the plaintiff and his auditors should be made at the offices of the defendant corporation at any and all times during the ordinary working day of the defendant corporation, beginning May 17, 1948, and extending for a period not to exceed sixty days thereafter; and that during the period of such examination the custody of such books and records should remain in the defendant corporation and the defendant corporation should have the right to supervise the examination to the extent that no improper use was made of the books and records, and so that none was misplaced, destroyed, or lost.

The defendant appeals from the foregoing order of the circuit judge.

Other material facts will be stated in the opinion. The order from which this appeal was taken was issued pursuant to sec. 269.57 (1), Stats., which reads as follows:

"The court, or a judge thereof, may, upon due notice and cause shown, order either party to give to the other, within a specified time, an inspection of property or inspection and copy or permission to take a copy of any books and documents in his possession or under his control containing evidence relating to the action or special proceeding or may require the deposit of the books or documents with the clerk and may require their production at the trial. If compliance with the order be refused, the court may exclude the paper from being given in evidence or punish the party refusing, or both."

Plaintiff's petition for inspection stated the known facts upon which plaintiff based his cause of action: That when the plaintiff's employment with the defendant was terminated, he was to receive one half the book value for his shares of common stock in the defendant corporation; that the books, records, and facts from which said book value could be computed were entirely within the possession of the defendant corporation; that the plaintiff relied upon, and believed to be true, the representation made by the agents and officers of the defendant corporation, as to book value and accepted the amount tendered; that as a result of either inadvertence, mistake, misrepresentation, or fraud, the petitioner was informed and believed that the alleged book value as represented by the defendant corporation on said date was not in fact the actual and true figure of book value and was in fact substantially lower than the actual book value at said time.

The defendant contends that the plaintiff should be limited to an examination of the financial statement prepared by the company's auditors at or about the time of the termination of the employment, because such financial statement definitely sets the book value of the stock. However, this action is in effect an attack upon that financial statement and an allegation that it did not correctly reflect the actual book value of the stock. The book value is not any arbitrary value that may be entered upon the books of the company but the value as predicated upon the market value of the assets of the company after deducting its liabilities. Steeg v. Leopold Weil Bldg. Imp.Co. (1910), 126 La. 101, 52 So. 232; Southwestern Light P. Co. v. Oklahoma Tax Comm. (1936), 178 Okla. 277,62 P.2d 637.

The plaintiff has the right to go behind the financial statement in order to examine all of the books, records, and files the defendant corporation which might reflect the book value the common stock. Each of the records and files mentioned in the order of the circuit judge is material because it may contain an answer or part of the answer as to the actual net worth. It is also necessary that plaintiff have the records and files for at least one month subsequent to the termination of employment because orders may have been received in December that were not delivered until January, and other transactions may have occurred during the first month of 1946 which refer back to business transacted during the latter part of 1945.

This is an action between a stockholder of a corporation and the corporation to determine the book value of the corporation's stock. The method of determining such value was not provided for by the contract, and plaintiff should have the right to the examination of such books, papers, invoices, etc., as will reflect, either directly or indirectly, upon the value of the stock. The result is to give the plaintiff considerable latitude in his examination. The parties could have avoided this by including in their contract other means of arriving at the book value. We do not consider this a fishing expedition, nor a ransacking of defendant's books, but only necessary to determine the book value as provided for in the contract, and cases cited by defendant are distinguishable.

The case of Northern Wis. Co-op Tobacco Pool v. Oleson (1927), 191 Wis. 586, 211 N.W. 923, was an order to examine secretly all records, without specification as to necessity, and without time limit. This action allowed for the examination of records that could in no way affect the right or interest the party requesting it. It was stated at p. 594:

"It should be clearly kept in mind that this was not an action on the part of the corporation, or of a stockholder of the corporation, affecting the management or conduct of the corporation, and that the defendant was not seeking an examination of the books and records of the association to protect his interests in the corporation. The examination was solely to get information upon which to defend in an action brought to enforce the written contract."

There is no conflict with the case of Worthington P. M.Co. v. Northwestern I. Co. (1922), 176 Wis. 35,186 N.W. 156. The court there sets down the rule that the affidavit must show specifically the materiality of each document sought to be examined. The test is not how wide-reaching the proposed examination is, but the materiality of the items sought to be examined.

The defendant contends further that since no complaint has been served, the plaintiff is not entitled to an inspection of the books, records, and files listed in the order of the circuit court. In this case, the books and records have been within the possession of the defendant corporation at all times. The copy of the contract in plaintiff's possession is not sufficient to enable him to frame his complaint. The object of this proceeding is to enable the plaintiff to plead his alleged causes of action and to define the issues. The plaintiff cannot merely state in a complaint that he received insufficient money for his stock because the book value on the financial statement was represented at a depressed figure. He must allege why it was too low and how that figure was ascertained by the corporation. The dealings between the plaintiff and defendant here are of such a character that the amount sued for cannot be otherwise approximately stated unless a discovery proceeding is had.

By the Court. — Judgment affirmed.