Great Western Mining Manufacturing Company v. Harris

This case was begun by bill in equity, filed in the circuit court of the United States for the district of Vermont, in the name of the Great Western Mining & Manufacturing Company, a Kentucky corporation, by L. C. Black, its receiver, against B. D. Harris, a citizen of the state of Vermont. It is averred that the corporation was duly organized under the laws of the state of Kentucky. In substance the bill sets forth: That the Great Western Mining & Manufacturing Company was organized by the Kentucky legislature on January 19, 1856, for the purpose of owning and operating mining property, and selling coal. On or about February 10, 1859, it became the owner of coal properties to the value of about $40,000, situated in Lawrence county, Kentucky. The capital stock of said company was $200,000, divided into 2,000 shares of $100 each. That previous to November 10, 1887, the capital stock of the company was owned as follows: B.D. Harris, the defendant herein, 600 shares, par value..... $60,000 00

G. D. Harris, 600 shares, par value...................... 60,000 00

John Carlisle, 440 shares, par value...................... 44,000 00

George W. Carlisle, 300 shares, par value.................. 30,000 00

James C. Holden, 4 shares, par value......................... 400 00

Loren Hinsdale, 4 shares, par value......................... 400 00

George S. Richardson, 52 shares, par value................... 5,200 00

On November 10, 1887, the stockholders increased the capital stock in the sum of $50,000, the same being distributed among the stockholders as follows: To B. D. Harris, 150 shares, par value..................... $15,000 00

To G. D. Harris, 150 shares, par value...................... 15,000 00

To John Carlisle, 110 shares, par value.................. 11,000 00

To George W. Carlisle, 75 shares, par value................... 7,500 00

To George S. Richardson, 13 shares, par value........... 1,300 00

To James C. Holden, 1 share, par value..................... 100 00

To Loring Hinsdale, 1 share, par value..................... 100 00

[The record she is that this increase was in fact made on January 11, 1888, in pursuance of a meeting authorized to be called at that date in the meeting of November 10, 1887, and certificates issued January 14, 1888.]

On April 22, 1889, a further increase of capital stock was had by adding 1,000 shares of $100 each, which was distributed as follows: To B. D. Harris, 300 shares, par value..................... $30,000 00

To G. D. Harris, 300 shares, par value...................... 30,000 00

To John Carlisle, 220 shares, par value.................. 22,000 00

To George W. Carlisle, 150 shares, par value.......... 15,000 00

To George S. Richardson, 26 shares, par value........... 2,600 00

To James C. Holden, 2 shares, par value..................... 200 00

To Loring Hinsdale, 2 shares, par value..................... 200 00

The complainant avers that at the time the increases of capital stock were made and carried out, the stockholders had formed a plan of issuing bonds and selling the same, and that the issues and distribution of said stock were made for the purpose of defrauding said company, and obtaining, without consideration, the aforesaid shares of capital stock, and for the purpose of selling the same to the company in connection with the said loan, and defrauding the company out of a part thereof. That said issues of capital stock were made by the shareholders and board of directors, of whom the defendant was one, ostensibly in consideration of alleged betterments of said mining property, which betterments, it was pretended, were made and paid for out of the net earnings of the company, which, it was represented, had increased the value of the property belonging to the stockholders. Complainant alleges that no such betterments had been made, and if made they were paid for out of money borrowed upon the credit of the company, for which an indebtedness then existed and still exists. That in fact there had been no net earnings which had been put into betterments by the company, and that the issue of said stock was without consideration, illegal and void, and a breach of duty upon the part of the stockholders and the directors of the corporation to its creditors. That said stock so issued still remains outstanding in the names of the parties to whom it was issued, or their assignees. That on May 13, 1889, the directors of the company, of whom the defendant Harris was one, and who were also stockholders in the company, for the purpose of defrauding said company, and abstracting the assets of the company for their own use and benefit, the corporation then being insolvent, without means to pay its floating indebtedness, which then amounted to $100,000, or more, agreed that they would obtain a loan of $300,000 for said company, said loan to be evidenced by bonds to the number of 300, in the denomination of $1,000 each, to be secured by mortgage upon the property of the company. That the issues of stock had been made upon the consideration that certain betterments had been added to the property, and had been paid for out of the profits of the operation thereof, which profits would otherwise belong to the stockholders, when in truth and fact the said company was largely insolvent, and had a mortgage debt of about $60,000 upon it, and a floating debt of $100,000 or more. In fact, said company had not made any net profits whatever, and said betterments had not been made at all; or, if made, had been paid for out of the earnings of the company, and no consideration than that herein stated was ever paid by the stockholders for the stock issued to them. That it was for the purpose of carrying out the scheme of abstracting from the company money arising from the sale of the bonds, and for that purpose only, that said stock was issued to the defendant Harris and others. That said bonds were sold at a price of 85 cents on the dollar, including a bonus of 50 per cent of the par value of said bonds in the stock of the company; that is, a purchaser of a $1,000 bond was entitled to have with said bond $500 of the capital stock of the company. That in pursuance of the combination aforesaid the said directors and stockholders furnishing said bonus stock were paid for the same from the proceeds of the sale of the bonds. The stock was furnished as follows, in pursuance of the said arrangement: By B. D. Harris, 450 shares, par value..................... $45,000 00

G. D. Harris, 450 shares, par value...................... 45,000 00

John Carlisle, 336 shares, par value...................... 33,600 00

George W. Carlisle, 225 shares, par value.................. 22,500 00

George S. Richardson, 39 shares, par value................... 3,900 00

That out of the proceeds of the sale of the bonds the sum of $75,000 was distributed among the parties, as follows: To B. D. Harris the defendant herein.............. $22,500 00 To G. D. Harris.................................... 22,500 00 To John Carlisle................................... 16,800 00 To George S. Richardson............................. 1,950 00 To George W. Carlisle.............................. 11,250 00

That, as a matter of fact, when the stock was contributed the company was insolvent, and could not carry on its business without making the said loan; that said stock was worthless, and was sold to the company at 50 cents on the dollar for the purpose above mentioned, and thereafter said stock was transferred to the purchasers of the bonds. Then follow allegations as to the mismanagement of the company, and the wrongful payment of dividends, and the averment that on or about September 12, 1892, one of the creditors of the company was compelled to make an application to the United States circuit court of Kentucky, wherein a request was made for the appointment of a receiver of the property and franchises of the company for the purpose of realizing its assets, and distributing them among its creditors; that in said proceedings all of the property of the Great Western Mining & Manufacturing Company was sold, and was found to be of the value of $75,666.66, which left a large floating indebtedness of about $90,000, besides a large balance due upon the bonded indebtedness, aggregating about $270,000; that in said proceedings in the United States court for the district of Kentucky, L. P. Black was appointed receiver of the assets of the company, for the purpose of realizing upon the same for the benefit of its creditors, and it is averred that, by special order of the United States court, said receiver had been directed to prosecute this suit, either in his own name or that of the company, as may be proper. The prayer of the bill is for an accounting respecting the matters and things set up in the bill, and that the defendant be required to pay to the complainant the sums which may be found to be due by reason of the matters and things set forth, and for general relief. An answer and replication were filed, and the issues made up were heard upon the pleadings and testimony. The circuit court found the estate of B. D. Harris, he having died pending the suit, liable in the sum of $15,000, being the amount Harris received from the company in exchange for the 300 shares of stock issued to him in April, 1889, and held that the estate was not liable on account of the amounts received by him for stock previously issued to him, and was not liable to account for the amounts taken by other officers, directors, or stockholders of the company. The case in the circuit court is reported in 111 Fed. 38. Upon cross appeals the circuit court of appeals for the second circuit reversed the judgment of the court below upon the ground that the circuit court had no jurisdiction of the action, as the same could not be brought by the receiver in the name of the corporation, and if it could be maintained by the corporation, or in its behalf, no case was made for a recovery, because of the consent of the stockholders to the transactions complained of. 128 Fed. 321. The order appointing the receiver in the circuit court is found in the record, and is as follows:

'The above cause coming on this day to be heard upon the motion of complainant for appointment of a receiver, and having been fully heard and considered, it is ordered by the court that said motion be granted, and that the order hereinbefore entered, appointing L. C. Black as temporary receiver, be continued, and said L. C. Black be and he is hereby appointed receiver of all the property, rights in action, choses in action, and all assets of every description, of the defendant, The Great Western Mining & Manufacturing Co., with all the powers and authority conferred by the order appointing him temporary receiver herein; and that he is to act and continue to act under the orders hereinbefore made, and that he hold and keep the property and assets arising from the funds of said business, or that may come into his hands, subject to such order as may be made from time to time; and it is also ordered that he shall have power to purchase such current supplies as are or may be needed in the proper conduct and operation of the business of said company.'

The application for the order to bring this action sets forth:

'The receiver represents that he has ascertained from the books and records of the Great Western Mining & Manufacturing Company, in his possession, that, in connection with the floating of the loan of $300,000 in the year 1889, upon the property of the Great Western Mining & Manufacturing Company, situate in Lawrence county, Kentucky, certain stockholders and officers of said company combined to obtain for themselves, and did so obtain, proceeds resulting from the sale of said bonds in the sum of $75,000, which money belonged to, and should have been paid into, the treasury of said company.

'Your receiver says that he finds shares of capital stock of the Great Western Mining & Manufacturing Company were issued at the instance of, and through the action of, certain of said stockholders and officers of said company, to the amount of $150,000, which said stock was distributed among said stockholders and officers; that, as your receiver is informed and believes, there was no consideration for the issue and distribution of said stock; that the said stock was sold by said stockholders, so as aforesaid receiving it, to the defendant, The Great Western Mining & Manufacturing Company, and, by means of said sale, moneys to the amount of $75,000 were abstracted from the treasury of said company; that the issue and distribution of said capital stock was, as your receiver believes, a mere device or instrumentality to abstract said moneys from the treasury of said company; that said company, as your receiver believes, has a valid claim against said persons to recover said moneys; that some of said parties are solvent and able to repay said moneys, and proceedings should be taken to recover it for said company and its creditors.

'Your receiver further says that he has discovered from the books of the company that apparently, by reason of the inattention and negligence of the board of directors of the said Great Western Mining & Manufacturing Company, and apparently by reason of the mismanagement and misappropriation of the funds of the company, by certain members of said board, that the said company has been greatly damaged, and its assets depreciated in value in a large amount, the exact sum of which is unknown to your receiver, and that said losses should now be made part of the said company's assets; and that the same is, in the opinion of your receiver, a valid claim against the said board of directors, and that proceedings should be taken to recover the same for the said company and its creditors.

'Wherefore your receiver prays the direction of your honorable court as to his duty in the premises.'

Upon this application the court made the following order:

'This cause coming on to be heard upon the application of L. C. Black, receiver herein, asking for instructions as to his duty in the matters and things set forth in the said application, and wherein said receiver represents to the court that, in certain transactions connected with the floating of a loan of $300,000 upon the property of the Great Western Mining & Manufacturing Company, apparently $75,000 was withdrawn by certain stockholders and officers of the said company, whereas the same should have been paid into the treasury of the said company; and wherein said receiver further represents that apparently certain stock was issued to the stockholders and officers of the said company without consideration, and that apparently, by reason of the inattention and negligence and mismanagement of the board of directors of the said company, and the misappropriation of the funds of the said company, said company has been greatly damaged and its assets depreciated.

'And it appearing to the court that it will be for the advantage of the said company that suit shall be instituted against the stockholders and directors of the same for the recovery of the sums so represented to be lost, it is, therefore, directed that said receiver proceed in his own name as receiver, or in the name of the company, as he may be advised, to recover said sums.'

Mr. Harlan Cleveland for petitioner.

[Argument of Counsel from pages 568-570 intentionally omitted]

Messrs. Brainard Tolles and Julien T. Davies for respondents.

[Argument of Counsel from pages 570-573 intentionally omitted]

Mr. Justice Day delivered the opinion of the court: