Franklin v. Havalena Mining Co.

ROSS, J. The appellant complains of the ruling of the court in sustaining demurrers and entering judgment of dis — 206 — missal. The reason given by the court for sustaining demurrers was “that the plaintiff has nowhere in his complaint offered to do equity,” and upon plaintiff’s refusal, after permission was granted by the court, to “insert in his complaint, by amendment, an offer to do equity or an offer, upon the ascertainment upon the trial, to make such equitable restitution to the defendants upon a decree as should be adjudged by the court.” The reasons given by the court for his rulings are relied upon by appellees, in brief and oral argument, as being supported by the law and as demanding the ruling and judgment made. No other objection to the complaint is suggested or argued. We will therefore confine ourselves to the consideration of the one point raised; that is, under the facts of this ease, was it necessary, in order to state a good cause of action, that the plaintiff should have offered in his complaint “to do equity” or “to make such equitable restitution to defendants upon a decree as should be adjudged by the court”? Of course, it goes without saying, if the inclusion of such a declaration by the plaintiff in his complaint was unnecessary to his cause of action, he had a perfect right to refuse and decline to make the amendment, and to elect to stand on his complaint as filed. When a pleading is demurred to, all of the facts well pleaded are admitted as true. Then, in this case, it is admitted that the contract set forth in the complaint as executed by the president, the manager and the secretary of the a-ppellee Havalena Mining Company was executed by such officers without authority of the board of directors or stockholders, and that such contract was disaffirmed, disapproved and disavowed by the board of directors and stockholders at duly called meetings on November 11, 1912,-some nine months before the first payment of $2,000 was due; that J. Wells Smith and his assignors took possession of the mining claims under and by virtue of the contract of August 5, 1912; that J. Wells Smith, as the assignee of said contract, became the sole owner of all the interests conveyed by contract, having purchased the rights of Brown, Culley and Vastine some time prior to January 6, 1913; that J. Wells Smith, at the time of the institution of this suit, had exclusive possession of the mines, and was extracting ores therefrom and applying the same to his own use and, benefit; that the Havalena Mining — 207 — Company in November, 1912, and after the board of directors and stockholders had repudiated the contract of August 5, 1912, instituted suit in the court possessing jurisdiction against Smith, Culley, Brown and Gross to have contract declared null and void, and to restrain defendants in said action from working the mines or extracting or selling ores therefrom, and from withholding the possession of mines from plaintiff corporation; that while such suit was pending defendant Smith purchased or otherwise acquired, the whole interest in said contract, and also for a comparatively small sum of money purchased more than a majority of the issued and outstanding stock of the corporation, and at a stockholders’ meeting January 6, 1913, by his own vote as the holder of a majority of said stock, did cause a resolution to be adopted ratifying the contract of August 5, 1912, and directing the dismissal of said suit, and at said meeting of stockholders likewise did elect a board of directors who were under his control and subservient to his interest, which said board of directors thereafter and on the same day, at the request and direction of Smith, who was one of the directors, did adopt a resolution ordering the dismissal of said suit; and that thereafter the said Smith caused said suit to be dismissed; that $10,000 was grossly inadequate as a bonding price of said mines; that at the time that said contract of August 5, 1912, was made, and since, other responsible parties were willing to take the mining properties on a lease and bond at a price exceeding $100,000 and on more advantageous terms to the corporation and stockholders, of which defendant Smith had knowledge; that said Smith bought the stock of the corporation to secure control and, by means thereof, to obtain said mines at less than one-tenth of their value, and thereby deprive the other stockholders of their rights therein; that the corporation and its directors have been requested to bring suit to right the alleged wrongs; and that they have refused to do so. The first admission, and an important one, is that the defendant Smith and his assignors entered into the possession of the mines under and by virtue of the instrument of August 5, 1912, designated 1 ‘ a lease and bond, ’ ’ and that such instrument was not the act and deed of the corporation, but the act and deed of certain of the corporation officers, without — 208 — authority from the board of directors or the stockholders or' otherwise. Such being the admission, it follows as a legal proposition that the possession acquired by Smith and assignors was without right. Cook on Corporations, sixth edition, section 716, says: “The president of a corporation has no power, by reason of his office alone, to buy, sell or contract for the corporation, nor to control its property, funds or management.” See, also, Thompson on Corporations, second edition, sections 1464, 1470. “The secretary of a corporation has no power, merely as. secretary of the company, to make contracts for it.” Cook on Corporations, sec. 717. A general manager of a corporation has no power merely by virtue of his office to do “anything out of the usual course-of business” of his company. “The general manager does not displace them [directors], and a person dealing with the corporation is bound to take-notice of that fact.’.’ Id., sec. 719. None of the officers who signed the contract of August 5th, nor all of them together, could bind the corporation merely because they were officers. The instrument was not the act. and deed of the corporation. In Little Butte Con. Mines Co. v. Girand, 14 Ariz. 9, 123 Pac. 309, we held that a contract of sale of the corporation’s, mines made by the president and secretary, without authority from the board of directors, was ineffectual. The ■ same-learned author (Cook), at section 712, says: “All contracts of a corporation are to be made by or under the direction of its board of directors. The board of directors may make corporate contracts by a regular vote of the-board; or by authorizing an agent to make them; or by allowing an agent to assume and exercise that power; or by accepting a contract or its benefits after it has been made by an unauthorized agent. And in all cases the board of directors, and not the stockholders, nor the president, secretary,- treasurer or other agent, is the original and supreme power in corporations to make corporate contracts.” The most that could be said for the contract through which Smith claims is that it was capable of being ratified by the corporation, whereupon it would become binding. But it was. — 209 — not ratified; it was repudiated by tbe directors and stockholders, and suit was instituted by the corporation itself against the present defendants and others to have it declared null and void. The defendant Smith and his assignors, upon the showing to this point, were working the mines and extracting the ores, therefrom against the will of the owner, and without any legal right or authority. They had not, nor conld they under the state of facts to this point acquire, any equities in the property or growing out of their unlawful contract as against the-corporation or plaintiff stockholder. The defendant Smith had a perfect right to purchase a-majority of the issued and outstanding stock of the corporation, and to elect a board of directors of his own choice, but. he ought not be permitted to use the power thus acquired to-force from the corporation a contract of sale of all of its property to him for what admittedly is only one-tenth of its value. Neither by such a course of conduct should he be permitted to-initiate rights or acquire equities in the mines as against the-corporation or a nonconsenting minority stockholder. The-ratification of an unauthorized contract of sale for such a. grossly inadequate price when obtained, as in this case, lends nothing to the validity of such a contract when properly challenged in a court of equity by the corporation, or, upon its. refusal, by a stockholder. To sanction such a proceeding would be equivalent to saying that a majority stockholder and director of the corporation could compel a sale of all the assets, of his company to himself at his own price and on his own terms. In Ervin v. Oregon Ry. & Nav. Co., 27 Fed. 625, 631, the court said: “When a number of stockholders combine to constitute-themselves a majority in order to control the corporation as they see fit, they become for all practical purposes the corporation itself, and assume the trust relation occupied by the-corporation toward its stockholders. . . . When several persons have a common interest in property, equity will not allow one to appropriate it exclusively to himself, or to impair its value to the others. Community of interest involves mutuaL obligation. Persons occupying this relation toward each other are under an obligation to make the property or fund productive of tbe most that can be obtained from it for all who210 are interested in it; and those who seek to make a profit out of it at the expense of those whose rights in it are the same as their own are unfaithful to the relation they have assumed, and are guilty at least of constructive fraud. Jackson v. Ludeling, 21 Wall. 616, 622 [22 L. Ed. 492]; Story, Eq., sec. 323. In Backus v. Brooks, 195 Fed. 452, 454, 115 C. C. A. 354, 356, it is said: “Courts of equity have no more valuable function than to protect minority stockholders from the frauds of the majority. When majority stockholders dispose of the property of the corporation which they control in such a manner as to deprive the minority of their just rights in it, there is a breach of trust, and a court of equity is the tribune, and the only tribune, to provide an effective remedy. As said by the circuit court of appeals for the eighth circuit in Jones v. Missouri-Edison Electric Co., 144 Fed. 765, 771, 75 C. C. A. 631, 637: ‘Any sale of the corporate property to themselves, any disposition by them of the corporation or of its property to deprive the minority holders of their just share of it, or to get gain for themselves at the expense of the holders of the minority of the stock, becomes a breach of duty and of trust which invokes plenary relief from a court of chancery. ’ ’ ’ The complaint fails in its rfecitals to disclose a single equity in favor of defendant Smith. True, it set out in full the contract upon which he stands and defends. .The second party, of whom Smith is the assignee, agreed to pay $10,000 for the mines, $2,000 August 5, 1913, $4,000 August 5, 1914, $4,000 August 5, 1915, and agreed to file affidavit of assessment work on or before November 15, 1912, on or before July 1, 1913, and on or before July 1, 1914, and to pay first party 10 per cent of net smelter returns to apply on payments as they became due. If anything has ever been paid on the agreed purchase price by smelter returns or otherwise, to the corporation or plaintiff stockholder, it is not ascertainable from the allegations of the complaint. It is not shown that defendant Smith or his assignors ever performed the inexpensive and mechanical act of filing affidavits of assessment work, as agreed. If nothing has been paid the corporation or plaintiff on the purchase price, and if, as alleged, defendant is working the — 211 — mines and extracting the ores therefrom and converting them to his own use and benefit, what offer of equity can plaintiff make, or what could the corporation make if it were suing? Looking at the matter from another viewpoint, we will assume, although there is nothing in the complaint to justify it, that the defendant has paid the agreed purchase price as it became due to the corporation, and that the corporation now has $2,000 of the purchase price in its treasury; still we are confronted with the proposition that the- defendant Smith is, in fact, the corporation in practically all respects, except in name. He owns a majority of the stock; the board of directors are of his selection and, according to the complaint, do his bidding. If that is true, why should the plaintiff be required, as a condition of maintaining this suit, to repay or offer to repay to defendant Smith the $2,000, for, if he has control of the corporation, he has control of its funds, or why should he be required to tender into court the moneys expended by defendant Smith in working and developing the mines when his complaint shows that defendant is appropriating to his own use the values taken therefrom, or why should he tender the 10 per cent net smelter returns if any have been paid, or the value of the assessment work, if any, has been done? "We do not find it necessary to answer these questions in passing upon the sufficiency of the complaint. The conditions implied by the questions are not to be found in the complaint, and, should they arise upon issue taken, the court will be possessed of ample powers to require the doing of equity. It would be an idle thing to require the plaintiff to insert in his complaint “an offer to do equity,” or to abide the judgment of the court. Those things the court will compel. The plaintiff is asking nothing inequitable. If the things set forth in the complaint are true, and, as here presented, we must so consider them, the possession of defendant Smith is tortious, and everything that he and his assignors have done concerning the mines in the way of working and extracting ores has been against the active opposition of the corporation and plaintiff. To require the plaintiff to tender defendant these expenditures before permitting him to prosecute his suit would be the height of inequity as it would indorse the proposition of forcing the owner of property to repay a trespasser moneys — 212 — expended by him on the property, as a condition precedent to the right of recovery. Judgment is reversed and cause remanded, with directions that defendants’ demurrers be overruled. FEANKLIN, C. J., and CUNNINGHAM, J., concur.