Hall v. Nieukirk

SULLIVAN, J. This is an appeal from an order of the judge of the fourth judicial district court denying the application of the appellants for the appointment of a receiver for the Charles E. Kelsey Company, Limited, a corporation organized under the laws of the state of Idaho, and doing a general merchandising business in Elmore county. The application was based on the amended complaint in the action. All of the allegations of that complaint were admitted by the respondents, as they did not by answer or otherwise deny any of them at the time said application for a receiver was presented and passed upon by the judge. Among many of the allegations of the complaint we find the following: That Charles E. Kelsey, on or about February 1, 1901, owned and operated a general merchandise store in Mountainhome, said county, and that on or about said day was organized the defendant corporation; that the appellants were inexperienced in the merchandising business and that said Kelsey represented to them that his merchandising house was doing a prosperous business and that the new corporation would make large profits, and guaranteed to the plaintiffs or to the appellants, and to all owners of preferred stock an annual dividend of ten per cent, and to that end he caused the stock of said corpora — 38 — tion to be issued in preferred and common, $25,000 of each. All of the preferred stock he sold to plaintiffs and others, who paid cash therefor; that plaintiffs were led to believe that said preferred stock would receive a ten per cent dividend which would be paid semi-annually, but as a matter of fact said articles of incorporation guaranteed said dividends only out of the profits of the business before the common stock should share in any part thereof; that only three semi-annual dividends had been paid and that no dividends whatever had been paid on said preferred stock since August, 1902; that in fixing the value of the store and general assets of said Kelsey which went to make up the property transferred to said corporation, there was considered and valued a large number and amount of open accounts to said Kelsey, and he guaranteed said accounts should be paid within one year after the incorporation of the said company, and as security for such guaranty it was agreed that $15,000 of the common stock should remain and be the property of the corporation and should not be delivered to said Kelsey or to any other person until all of said open accounts should be paid to said corporation; that thereafter a considerable part of said acconnts were paid, and by proper resolution of the board of directors of said corporation, the president and secretary were directed to issue to said Kelsey $10,-000 worth of the common stock and to retain as the property of the company the remaining $5,000 worth of common stock; that at that time said Kelsey was president of the company, and instead of issuing $10,000 as directed, he caused to be issued $5,000 additional of the said common stock, thus defrauding the plaintiffs out of said common stock; that there is yet due and unpaid a large amount upon said open accounts so guaranteed by Kelsey; that thereafter said Kelsey transferred said $5,000 worth of common stock so fraudulently issued to him to his wife Altha B., who took the same with full knowledge that said stock was fraudulently issued; that on or about the twenty-fourth day of June, 1904, said Kelsey died, and that on or about the ninth day of July, 1904’ the defendant, J. W. Nieukirk, was elected president of the said — 39 — company to succeed the deceased; that he was elected in opposition to the votes of the plaintiffs who were members of the board of directors; that said Nieukirk is a practicing physician and is wholly unacquainted with the mercantile business; that he was a particular friend of the said Kelsey, deceased, and his wife, and was their family physician, and that he always sustained them at the meetings of the stockholders and of the directors of said corporation; that among the duties of the secretary and treasurer is that of preparing every month for the regular monthly meeting of the board of directors a statement in writing showing the present financial condition of the company, the business transacted during the preceding month, the cash taken in and paid out and the amount due and owing to the company; that said Nieukirk has refused to allow the secretary and treasurer to prepare and present to said board the said monthly reports, although the same has often been requested by the board of directors; that on the seventeenth day of November, 1904, the directors, believing that it was for the best interest of the company and stockholders, ordered and directed an inventory of the property of said company to be taken so that they might know how the company stood financially, and for that purpose they employed one "Wilterding, an experienced merchant, whereupon defendant Nieukirk then and there refused to allow him or any person to make an appraisement of the company’s property; that said Nieukirk, Altha B. and Altha R. Kelsey and George C. Nichols have conspired together for the purpose of defrauding said corporation and the plaintiffs herein and other stockholders, and in furtherance of said conspiracy and fraud said Nieukirk has refused to preside over the regular monthly meetings of the board of directors, although personally present; that he failed to entertain motions made for the purpose of adjourning such meetings; that he has left meetings of the board for the purpose of reducing the number so that there would be no quorum present, thereby forcing an adjournment; that at various meetings of said board he has become very offensive, abusive and insulting to the mem — 40 — bers of the board; that he is at enmity with every member of the board, except the two Kelseys and Nichols; that on the seventeenth day of December, 1904, while the board of directors was in session in the company’s store building, they requested their counsel to appear before them, for the purpose of counseling and advising them, whereupon said Nieukirk refused to allow said counsel to enter the building, declaring that he would put him out by force and violence if he attempted to enter; that he refused to abide by their instructions or to carry out their orders; that he manages and operates the business of the said company in the interest of himself and of the said Kelsey’s family to the exclusion of the other stockholders; that he draws from the funds of said company the sum of $150 per month for his said services, which instead of being a benefit are an injury to the company because of his inexperience and misconduct; that he employs the Kelsey family-in said store; that the office help alone consists of four persons at a monthly cost of $500; that in the sales department he employs four persons at a monthly salary of $450; that in the delivery department he employs a man and a boy at a monthly cost of $100; that the work of the office, including the superintending of the buying, can be done by two persons at a cost not to exceed $175 monthly, and that for the five months next preceding the election of said Nieukirk as president, the office force consisted of two .persons for three months at a salary of $150; and for two months at a salary of $185; that the total cost of help for said company should not exceed $550; that the board of directors have often directed that the purchases of the company should be made on a cash basis. Notwithstanding the repeated orders of the board to that effect,, at the close of the year ending January 31, 1904, the said Kelsey, deceased, had so managed the company’s business that it was indebted to wholesale houses and firms in the sum of $16,000, all of which was overdue; that said Kelsey and Nieukirk urged the board of directors to consolidate the indebtedness of the company and place it with one bank or person and that the time for payment thereof — 41 — be extended; that in so doing the finances of the company would be in such condition that all purchases thereafter could be made for cash and all bills discounted, thereby making a great saving to the company. Relying upon such representations the appellants joined with the defendants in an order directing said Kelsey to secure a loan of $16,000; that thereafter said Kelsey became ill and unable to attend to said matter, and that said Nieukirk and others negotiated a loan of $16,000, which loan was secured by mortgage on the company’s property; that said loan was to be paid monthly in payments of $1,000; that four of said monthly payments only had been made; that all other of said monthly payments are now past due and remain unpaid; that said Nieukirk instead of conducting said business upon a cash basis in the purchase of goods, has so managed and conducted the business that said company now owes $11,000 for goods purchased which amount is overdue; that said Nieukirk and Altha B. Kelsey, in furtherance of the conspiracy, transferred to Altha R. Kelsey, daughter of Altha B., without consideration, a number of the shares of the capital stock of said company, and so transferred to the said George Nichols five shares of the capital stock thereof; that said transfers were made for the sole and only purpose of enabling said Kelsey and Nichols to become directors of said company that they might assist Nieukirk and Altha B. Kelsey in said conspiracy; that at the annual meeting of the stockholders on the 16th of January, 1905, the plaintiffs and Altha B. Kelsey were elected directors of said company, but that said Nieukirk, Altha B. and Altha R. Kelsey and Nichols, in furtherance of said conspiracy and after said election and without further ballots being taken, during a recess of said meeting and in pursuance of said conspiracy, did fraudulently and unlawfully remove four of the ballots which had been cast prior to said recess, and in their place substituted other ballots and that said ballots were counted by said defendants on the accumulated plan; that by reason of said fraudulent change of said ballots the defendants, Nieukirk, Kelseys and Nichols were de — 42 — dared elected as directors of said company in fraud of said company and of the rights of plaintiffs. That after said fraudulent election the four persons mentioned elected said Nieukirk president, Altha B. Kelsey vice-president and George C. Nichols, secretary and treasurer of said corporation; that no meeting of the board of directors has been held since the annual meeting of January, 1905; that no monthly statement of the financial condition of the company has been rendered since said annual meeting, and none was made at that time and that said defendants had refused to make such report, in violation of the by-laws of the company. That Nieukirk had taken from said company the sum of $1,800 for one year’s service as president of the company; that said fraudulently elected officers have conspired together to defraud the appellants and other stockholders of any and all profits of said business, and have fraudulently denied the plaintiffs and other stockholders from all knowledge or participation in the conduct of such business; that in furtherance of such conspiracy said defendants have paid to themselves and their favorites salaries way beyond the value of the services rendered by them to the said company, in order to consume the profits and substance of the said company; that while the business of the said company now and for several months last past is less than one-third of the business done by said company before the incompetent management of Nieukirk and the other defendants, they have continued to employ an unnecessary force to conduct the business of said company, and have increased the salaries of the said Kelseys and Nichols, and that the affairs of the company have been so recklessly, fraudulently and incompetently managed that the salary expense thereof ranges from $722 to $959 per month, and that the total expense of conducting the business is from $1,100 to $1,500 per month, and that the average monthly sales do not exceed $5,-000 per month; that to give the impression of doing a large business, credit is indiscriminately extended to people of little or no financial responsibility, and accounts of long standing are left uncollected so that about two-thirds of the total out — 43 — standing bills of said company, aggregating upward of $20,-000 are uncollectible and that said misconduct, mismanagement and extravagance in the affairs of said company are deliberately and intentionally made on the part of said Nieukirk, and in furtherance of a purpose and conspiracy to divert the funds and apply the assets to their own benefit, whereby plaintiffs are defrauded, and the said company is in imminent, danger of becoming insolvent if it is not in fact already so; that said $5,000 of common stock was to become the property of the stockholders in the event Kelsey failed .to collect or pay outstanding accounts, aggregating over $2,-300, and that said stock was fraudulently issued by said Kelsey. and assigned to the defendant Altha B. Kelsey, and that said accounts have not been collected and have been fraudulently charged to the account of said C. R. Kelsey months after his death, and that the same were uncollectible from his estate and that said accounts were so charged for the purpose of consummating the conspiracy to defraud plaintiffs and said stockholders of the $5,000 worth of common stock; that on October 31, 1904, said Altha B. Kelsey owed said company the sum of $758.14 on account, and had the same transferred to the account of O. R. Kelsey, deceased; that said transfer was caused to be made by the said Nieukirk, Kelseys and Nichols with the full knowledge that said C. R. Kelsey was dead and had left no estate, and that said account was utterly worthless as an account against his said estate; that said transfer was made expressly for defrauding plaintiffs and other stockholders out of said sum of $758.14; that said Altha B. Kelsey now disclaims said debt and obligation and refuses to pay the same; that no redress can be obtained .by plaintiffs in an action in the name of the corporation, as its officers and directors are parties to and direct beneficiaries of the fraud practiced upon plaintiffs, and they neglect and refuse to require said Altha B. Kelsey to pay said sum or any part thereof or to require her to assign and transfer to the eompany said $5,000 worth of common stock so fraudulently acquired by her; that prior to the organization of the said cor — 44 — poration as an inducement and protection to the owners and holders of the said preferred stock, it was understood and agreed by and between them and all owners of stock that the holders of preferred stock should have the privilege, power and authority to elect the secretary and treasurer and to fix his salary, and to that end a by-law was adopted as follows: “The office of secretary and the office of treasurer may be held by the same person, both offices to be filled and the salary fixed by a majority vote of the preferred stockholders at the time of the stockholders ’ annual meeting. He or they shall hold the office for one year. In case of a vacancy by resigna-, tion, disqualification or removal, the vacancy .is to be filled in the same manner as the election. ’ ’ That at the annual meeting of the stockholders in January, 1905, Nieukirk, Kelseys and Nichols, representing all the common stock and a very small minority of the preferred stock, against the will and without the authority or consent of the holders of the majority of the preferred stock, in furtherance of said conspiracy and in fraud of plaintiffs, so amended said by-law as to deprive the holders of preferred stock from so selecting the secretary and treasurer and that under such amended by-law and in pursuance of the fraudulent purpose aforesaid, voted for and elected or pretended to elect said Nichols secretary and treasurer, and thereafter employed him as a bookkeeper at a salary of $100 per month; that on account of the unfriendly feeling existing between Nieukirk and the board of directors caused by the mismanagement and misconduct of the said Nieukirk, Kelseys and Nichols, and because of the inexperience of said Nieukirk and his extravagant management in the conduct of the said business, the capital stock of said company is becoming impaired and endangered, and that said corporation is in imminent danger of insolvency and unless protected by order of the court will become entirely valueless; that plaintiff has no plain, speedy and adequate remedy at law. The foregoing is the substance of the allegations of the complaint, none of which are denied by the respondents. That — 45 — being true, we think the allegations amply sufficient to warrant the court in appointing a receiver. The utter incompetency of Nieukirk is shown. A conspiracy is shown to exist between him and other of the directors to loot said corporation of all its profits in the mercantile business and of the profits of the company. Under his management large debts have accrued against the' company and contrary to the order of the board of directors. Salaries of the officers and of the employees have been increased and employees not required by the business retained on the pay-roll. The business of the company has decreased from $15,000 a month to about $5,000. Credit has been indiscriminately given to the amount of about $20,000, much of which is absolutely worthless. Stock that belonged to said company has been fraudulently issued to the Kelsey family. A good account of $758.14 against Altha B. Kelsey has been transferred against a deceased man who left no estate in fraud of the rights of the stockholders. It appears that money was paid for the preferred stock, and a bylaw was adopted giving the stockholders holding the preferred stock the right to elect the secretary and treasurer. This was fraudulently amended by said Nieukirk and his co-conspirators so as to permit the secretary and treasurer to be elected by themselves and against the interests of the stockholders who held the preferred stock, and it is admitted that if said corporation is not already insolvent, that insolvency stares it in the face. Notwithstanding all of those undenied allegations, it is contended by counsel for respondents that sufficient is not alleged to warrant a court of equity in granting a receiver, and that the appellants have a plain, speedy and adequate remedy at law. If the complaint does not contain allegations sufficient to warrant the appointment of a receiver, it would be most difficult to make allegations sufficient for that purpose. Under the provisions of subdivisions 5 and 6 of section 4329 of the Revised Statutes, the appointment of a receiver is authorized where a corporation is insolvent or in imminent danger of insolvency, and also in all other cases where receivers have heretofore been appointed by the usages of — 46 — courts of equity. The allegations are amply sufficient to show that said corporation is grossly mismanaged and is in imminent danger of insolvency. In Gibbs v. Morgan, 9 Idaho, 100, 52 Pac. 733, under section 4329 of the Revised Statutes, this court held that upon proper application a receiver would be appointed for a corporation pendente lite. The court said in that ease: “As far as possible courts of equity should adapt their practice to the existing conditions of the business world and apply their jurisdiction to the changed conditions and cases arising thereunder, and should not too strictly adhere to forms and rules established under different circumstances and decline to administer justice and enforce rights for which there is no other remedy.” The supreme court of Montana in State v. Second Judicial District Court, 15 Mont. 324, 48 Am. St. Rep. 682, 39 Pac. 316, 27 L. R. A. 392, under a statute identical with section 4329, held that the court had jurisdiction to appoint a receiver; and that court, referring to the French Bank Case, 53 Cal. 550, says: “In the California ease an important element in the decision as it appears was that the appointment of a receiver acted as a dissolution of the corporation,” and says further, “the receiver is not to wind up the corporation under his appointment; he is simply to manage the affairs of the same while charges of the most outrageous frauds of the managers and officers are being investigated in the trial of the action.” So in the case at bar the appointment of a receiver does not act as a dissolution of the corporation. The receiver would only manage the affairs of the corporation during the. investigation of the charges of conspiracy, incompetency and fraud. In Smith on Receiverships, section 225, it is stated: “Where upon application of a stockholder it is shown that the directors and officers of the corporation are mismanaging its affairs as for their own personal advantage and gain,” a receiver will be appointed; and ‘ ‘ Where the majority stockholders are clearly violating the chartered rights of the minority and putting their interests in imminent danger,” a receiver — 47 — will be appointed. In section 228 it is said: “"Where, however, the conduct of the officers of a corporation is satisfactorily established as fraudulent, it is not only proper but it is the duty of the court to wrest from such officers the management of the company and place the company in the charge of a receiver. ’ ’ In Gilbert v. Bloch, 51 Ill. 516, it is held that if possession of the defendants is obtained by fraud, or that the income is in danger of loss from neglect, waste or misconduct, a receiver will be appointed upon proper application, and in Re Lewis, 52 Kan. 660, 35 Pac. 287, that the mismanagement, diverting of funds, applying assets to the benefit of officers, are grounds for a receiver. (See Stevens v. South Ogden Land etc. Co., 14 Utah, 232, 47 Pac. 81.) In Ponca Mill Co. v. Mikesell, 55 Neb. 98, 75 N. W. 46, it was held that a receiver would not be appointed merely because of difference of opinion between officers or holders of the majority of the stock as to proper policy of managing the corporate affairs, but that one would be appointed when it was shown that the officers and the holders of. a majority of the stock are fraudulently managing the corporate business, converting the property to their individual use, and abusing their powers to the injury of the other stockholders. Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N. W. 218, 17 L. R. A. 412, was a case something like the one at bar and furnishes an instance of a gross abuse of the trust. It is there held that the law requires of the manager the utmost good faith in the control and management of the corporation as to the minority. The court said: “It is the essence of the trust that it shall be so managed as to produce for each stockholder the best possible returns for his investment. The trustee has so far absorbed all returns.” So in the ease at bar it is shown that Nieukirk and his favorites have not only absorbed all of the returns, but are about to wreck the company. (See Clark & Marshall on Corporations, sec. 556.) In Haywood v. Lincoln Lumber Co., 64 Wis. 639, 26 N. W. 184, the court holds that a receiver may be appointed when — 48 — the affairs of a corporation are being mismanaged and its assets be in danger of being lost to the stockholders. The rights of a majority of the board of directors or a majority of the stockholders to loot and mismanage the business of the corporation is not protected by- our law simply because it is a corporation. Such rights are no more protected to a corporation than they are to a partner of a copartnership. In this age of trusts and corporations, the managers thereof must be held to as strict an accountability for the fair and honest conduct of the business as a partner conducting the business of a partnership. The allegations of the complaint require the appointment of a receiver, and the judge erred in not appointing one. His action in refusing to appoint a receiver is reversed and the cause remanded with directions to appoint one. Costs of this appeal are awarded to appellants. Stockslager, C. J., concurs. Ailshie, J., expresses no opinion.