Bridgeport Development Co. v. Tritsch

HEAD, J. Bill in equity by Leo Tritsch, a shareholder of the Bridgeport Development Company, against that company and its officers and directors, and the National Park Bank, for the' appointment of a receiver of the assets of the company, an accounting from other'defendants for assets misappropriated, to enjoin the enforcement of a large judgment obtained by the National Park Bank against the company and for general relief. The appeal is by the defendants from the order of the chancellor affirming the appointment of a receiver made by the register. The Bridgeport Development Company is a body corporate organized, under the general laws of Alabama in October, 1891, to buy and sell real estate ; erect buildings, and sell or rent the same, and to have, enjoy and exercise the powers conferred upon such corporations by Chap. 2, Title 1, Part 2 of the Code of Alabama. The bj^-laws of the company provide that its business shall be to purchase, hold and possess real estate and buildings in the city of Bridgeport, Ala., and to sell at pub277 lie or private sale, lease, mortgage or exchange, improve and restrict the same, to make builders’ loans thereon, and to subscribe and own stock in any other company or enterprise that may be located in the city of Bridgeport, Ala. The authorized capital stock was $300,-000, divided into 3,000 shares of $100 each of which $285,000 was issued, the balance remaining in the treasury. Complainant owns forty shares for which he paid par. The bill avers, that to induce complainant to purchase these shares, the defendant corporation represented to him that it was the owner of a large tract of land in Bridgeport, in fee simple, free from incumbrances, and of great and increasing value, upon which it had made large improvements, and had contracted with the Bridgeport Land & Improvement Company by which the latter was to spend, and was then engaged in spending, $150,000, in improvements on the land, under the direction of the defendant company’s officers. The directors of the company when the bill was filed, elected November 8, 1893, were Frederick Aldhouse, Richard A. Cunningham and J. Van Vech-ten Olcott, resident citizens of New York, and Oscar W. Whitcher and Russell C. Johnson, resident citizens of said city of Bridgeport, Ala. The officers were said Frederick Aldhouse, President; R. A. Cunningham, vice-president, and O. W. Whitcher, Secretary and Treasurer. It is averred that all these directors and officers are parties, to a greater or less extent, in the commission of the various offenses and misconducts in the bill charged, and. that if this action was prosecuted by them, or through them, or by counsel of their selection, they would be practically suing themselves, and the innocent stockholders would be entirely without remedy ; that the company is still under the control of the very directors and persons by whom the very schemes and wrong-doings referred to, and complained of, were committed, and that it would be futile and ineffective to reel uest or demand from them, the commencement of this action, or any action which may be necessary to redress such wrongs, or protect the rights and interests of complainant and the other innocent shareholders, and the property and assets of the company. It is averred that the company is now wholly insolvent; that all of its real estate was suffered to be sold for taxes for the year — 278 — 1892, to-wit, $373.79, on. the 31st day of "July, 1893 ; that the unpaid taxes due September, 8, 1894, upon said real estate, together with the cost of redemption amounts to the sum of $1,434.96; and in addition to this there are unpaid city taxes which on September, 1st, 1894, amounted to $255.10. It is next averred that a judgment has been obtained against the company, for about $180, for office rent in Bridgeport, by the said 0. W. Whitcher, director, secretary and treasurer of the company, under which the company’s property is advertised to be sold on October 1, 1894, That on August 15, 1893, a judgment was recovered by the said National Park Bank of New York against the company, in the court of common pleas for the city and county of New York, for the sum of $14,764.90. The bank brought suit on this judgment against the company, in the city court of Bridgeport, in this State, and, on or about July 12, 1894, obtained judgment therein for $15,844.50 ; that execution issued upon this judgment to the sheriff of Jackson county who advertised thereunder all the real estate and personal oropertv of the company for sale on August 27th, 1894. This sale was postponed until October 1, 1894, and complainant avers that he applied to the attorney of the National Park Bank for a further postponement, which has been refused; and. he avers, that in order to obtain the first postponement the bank was paid $1,000, on or about August 23, 1894, of which complainant contributed out of his own funds the sum of $250, for the purpose of saving the property of the company. It is averred that the only other assets of the company of which any trace can be found in the books, consists of alleged promissory notes to the amount of about $8,250, which the company received as part payment for lots sold by it, and which the makers refuse to pay because of alleged breaches of contract by the company, and false representations made by the company to induce them to become purchasers. That about September 6, 1894, complainant made a personal examination of the company’s safe in its office in Bridgeport, and said notes were not in the safe, and that said J. Van Vechten Olcott, a director as aforesaid, informed complainant that the notes were being carried around by the president of the company, and were in his personal possession, without any memorandum of any kind — 279 — being left in the office. That there are no other assets of the company, and, as complainant believes, the company was unable to pay its debts as far back as December 9th, 1892. It is averred the company ceased to do business about June, 1892, which fact complainant did not ascertain until about September, 1894; that the company has been, to all practical intents and purposes, abandoned by its officers and directors, and that the last entry in the minute book, is of the minutes of the meeting of the company held on November 15, 1893 ; that shell minutes follow the minutes of an alleged annual meeting held in Bridgeport November 8, 1893 ; that the by-laws require that ten days notice of meetings of stockholders shall be given by the secretary, and the object of a special meeting shall be stated in the notice; that complainant has never received any notice of any of the meetings, except in November, 1893 ; that said Olcott asked him for a proxy of his stock, which he gave, and he has been wholly kept in the dark as to-the actings and doings of the company and its officers and agents, and did not discover the fraudulent conduct, in the bill complained of, until September, 1894. The bill repeals that the company has become hopelessly insolvent and unable to carry on its business, and that it became, and for at least two years last past has been, the duty of the directors, trustees and managers to wind up its affairs and prevent further loss ; but they have failed to take any steps looking bo a winding up thereof, as a part of the wrongful, unlawful and fraudulent scheme and conspiracy to prevent their misdeeds coming to light and to prevent their being called to justice and account for the same ; and to enable the property of the company to be slaughtered and purchased by themselves, or in their interest, to the exclusion of the stockholders. The bill avers that the judgment recovered by the National Park Bank was not for the debt of the company, or for one which the company could have lawfully incurred; that the promissory note for $10,000, on the company’s alleged indorsement of which the recovery was had, was indorsed by the company solely for the accommodation of £he Bridgeport Land & Improvement Company, through certain of defendant company’s officers, never thereunto authorized, and by said Olcott, individually; that although Olcott was also an indorser — 280 — of said note, and although two separate suits were begun on the note simultaneously in the said court of common pleas of New York, the one against the defendant company and the other against the Bridgeport Land & Improvement Company, and judgments entered on the same date in both actions, the said Olcott was not made a party defendant to either of said actions; and complainant avers, on information and belief, that these facts were known to said National Park Bank. The bill charges that the same persons who control the defendant company control the Bridgeport Land & Improvement Company, that the summons and complaint in the action against the defendant company, was served upon said Frederick Aldhouse, president of defendant company in the city of New York ; and in the action against the Bridgeport Land & Improvement Company was served upon J. Van Vechten Olcott,the president of the last named, and a director of the defendant,company; and in both actions judgments were suffered to be entered by default. The complainant avers that the commencement of said action was unknown to him, and was carefully concealed from the stockholders of the defendant company, and no opprotunity was given any of the stockholders to defend the action or to take steps for the appointment of a receiver of the company; all of which, it is averred, was done with the evident fra udulent and unlawful intent to enable certain of the stockholders and officers of the company, by suffering such a default, to escape personal liabilities upon their indorsements and other liabilities upon said promissory notes. That all the bank books of the company have disappeared, except the stubs in the check-book showing an account between the company and the First National Bank of Bridgeport; that said stubs disclose that large amounts of the funds of the defendant corporation were withdrawn therefrom illegally for champagne,, cigars, and for trips to different parts of the country ; that no trace of any of the check-books, bankbooks or vouchers of the account, alleged to have been kept by the company with the National Park Bank of-New York, can be found in the office of the company at Bridgeport; that the sources of complainant’s information as to the existence of such an account are the statements made to him by said Frederick Aldhouse, presi — 281 — dent of the company. A copy of. the stubs from the check-book of the Bridgeport bank is made an exhibit to the bill, showing large sums paid out for a horse and phaeton, wines, liquors cigars, expenses of entertainments, and travelling expenses, details of which, and other checks drawn can be seen by referring to exhibit No. 8, p. 30 of abstract. That it appears from the minutes of stockholder’s meeting held in New York, at office of said Olcott, on August 18, 1893, three days after the entry of judgment in favor of National Park Bank, that the only business transacted was, “On motion, the secretary was authorized and instructed to execute a bill of sale of the horse, wagon and harness belonging to the company, now at Bridgeport, to secure the payment of the unpaid salary due the assistant secretary.” Said Aldhouse and Olcott on whom said processes were served, in the suits of the National Park Bank, were present at the meeting. That it appears from the books of the company that the money of the company, instead of being used to pay its debts and carry on its business, was loaned to certain of the company’s officers, towit, Cunningham and Aldhouse, to the Bridgeport Lumber Company, in which said Cunningham and Olcott were largely interested, and of which a brother-in-law of said Cunningham was president. Such loans were, as they so appear, December 11, 1891, $2,000, and December 15, $1,000, and April the 6, 1892, $1,500, to the said Lumber Company; and money so appeared to have been loaned the secretary, towit, February 22, 1892, two loans, one of $675, and the other of $603. It is averred that the following named persons subscribed for stock of the defendant company, as follows : Henry Morgenthan, 200 shares ; Charles Weinberg, 40 shares ; Frederick Aldhouse, 40 shares, and B. A. Cunningham, 40 shares ; and that at a directors’ meeting held October 30, 1891, which was one day after the company was chartered, at which there were present, according to the minute book, directors Cunningham, Aldhouse and Morgenthan only, they being personally interested in the subject matter of the resolution, it was resolved that “'Messrs. H. Morgenthan, J. C. Morgenthan, B. A. Cunningham, F. Aldhouse and C. Weinberg were given three months option to either consider their subsciptions — 282 — paid in, as payments in full, or as first payment On the proportionate amount of stock.” “Minutes of the meeting of the directors held at the office of the company at Bridgeport ,present,Messrs. Aldhouse, R. A. Cunningham, J. 0. Morgenthan. Also, the Finance Committee of the L. & I. Co.,Messrs.Olcott,Meyer, H. Morgenthan,Jones and Mes-siter. Moved, seconded and carried, that the balance of the, subscriptions of the stock due from Messrs. Aid-house, Powell and Kilpatrick, be cancelled, and stock issued to these parties to the amount that they paid for. J. 0. Morgenthan, Secretary.” That the minute book shows that at a stockhoders’ meeting on November 8, 1893, a motion was made by Mr. Kilpatrick, who was the general manager of the Bridgeport Land and Improvement Company, from whom the defendant company purchased the lands which formed its main assets, that the directors be empowered to sell, mortgage or otherwise dispose of the property of the company as would seem to be for the best interest of the stockholders ; which motion was adopted. The bill avers that the books show that specified numbers of shares of stock were subscribed for by 0. W. Whitcher and J. W. Hudson, respectively, and much less numbers of shares were issued to. or paid for by them ; that H. H. Longstreet, W. K. Peyton, George Hann and S. H. Chisholm each appear as subscribers for 40 shares, and there is no record of the issue of any stock to them, nor of the receipt of any money from them. On November 24, 1891, J. C. Morgenthan, then secretary of defendant company, wrote Dunn’s Commercial Agency purporting to give a statement of the condition of the company, in which the statement is made that the authorized capital of $300,000, had all been subscribed, and $98,000, paid in; and the bill avers that on January 23, 1892, the same person wrote to the treasurer of the company to inquire,“what success you have had in placing shares of D. Co., stock” — D. Co. meaning the defendant company. This letter is made an exhibit, but appears tobe without date. The bill repeats that $15,000 of the stock remains unsubscribed for; and avers further, that the books of the company do not show the payment, up to November 24, 1891, of $98,000, as stated in the first named letter. It is further averred, that during the months of April and May, 1894, about 150 lots of the — 283 — company were sold to R. A. McFarland and A. 1., I. S. and R. L. Hembree, and J. B. Herron, upon judgment against the Bridgeport L. & I. Go. That upon the books of the company there appear large numbers of entries which have been altered, stricken out, accounts not closed up, the balance sheets not entered in the ledger, and the financial reports have never been sent to the stockholders ; and it is averred that unless relief sought by the bill is granted, the company will continue to be mismanaged, as before set forth, and its resources squandered and misapplied, and its properties sacrificed and wholly lost, and all the rights and interest of the stockholders irretrievably destroyed and annihilated. The complainant afterwards amended his bill, and alleged that the defendant company was projected and organized by the officers and directors of said Bridgeport Land and Improvement Company for the purpose of selling a part of its real estate in Bridgeport, and on November 3, 1891, the defendant company by said Aldhouse, its vice-president, entered into a contract with the improvement Company, through said Olcott, its president, for the purchase of 900 additional lots in Bridgport, 300 lots having been theretofore sold to defendant company, for which the defendant company agreed to pay $225,000, and the selling company undertook to convey said lots to defendant company by proper warranty deed, upon payment of the purchase money as stipulated in a written agreement exhibited with the amended bill, at the time of which agreement, it was well known to said Ol-cott and Aldhouse and the other officers and directors of both said companies,'that said Improvement Company, the vendor, had no title to about 200 of said lots, but that the same were subject to a lien for the purchase money due to the person or persons from whom the said Improvement Company had bought the same, and that that company had no power to convey the same, but they, in disregard of their obligation to the stockholders, subsequently accepted a deed from the Improvement Company and undertook and agreed to pay it the full contract price for said lots. That after the acceptance of said deed, the defendant company issued to said Im-pi-ovement Company paid up stock to the amount of $119,000, in payment for said 200 lots at $250 apiece, and of a balance due for the other lots sold to defendant — 284 — company; and the bill insists that defendant company had no lawful authority to issue stock for said lots, and that said stock so issued is, therefore, wholly unpaid for, and that the owners and holders thereof are now indebted to defendant company for the full par value of said stock. That after the issue of said stock the holders of the purchase money liens on said 200 lots against their vendee, the Improvement Company, enforced their lien in chancery,and all of said 200 lots have been sold,under decrees, for sums insufficient to pay the amounts due thereon by the Improvement Company, so that defendant company had and received nothing whatever of value for the stock it issued in payment for said lots. That some of the officers and directors of the Improvement Company who made the sale of said lots, and received the stock, aforesaid, were the directors and managers of both corporations, and well knew of said infirmity of title. Complainant avers he is informed and believes that of said stock, so issued, said Olcott is the present owner and holder of 640 shares ; M. L. and C. Earnest, 275 shares; Max Weil, 255 shares, and Emma Cohn 40 shares, all being residents of New York, and they are made parties defendant to the bill. That complainant has been informed by said Whitcher and Olcott, directors of defendant company,and by many others that said Cunningham and Plenry Morgenthan were prominently and actively interested in both said companies and their organization and incorporation ; and as a part of the scheme of organizing the defendant company and floating the stock thereof, it was agreed between the Improvement Company and said Cunningham and Henry Mor-genthan, that the Improvement Company would convey to them, Cunningham and Morgenthan, about 150 lots in Bridgeport as compensation .to them as promoters of the defendant corporation ; and it is averred, upon information and belief, that in pursuance of this agreement the said Improvement Company, on January 23, 1892, executed and delivered to said parties, a deed conveying to them 150 lots ; which deed is made to them as trustees, but no trust is declared in it, or any other recorded instrument which complainant or his counsel has been able to discover after thorough search of the records of Jackson county, wherein the lots lie. That the deed is recorded in J ackson county and the bill insists that, by — 285 — law, the. title to said 150 lots is bold by the grantees in trust for the defendant company, and said Henry Morgentlian is made a party defendant to the bill, and it is prayed that he and said Cunningham be decreed to convey the said lots to defendant company. It is further averred that said promissory note for $10,000,-on which said National Park Bank obtained judgment against defendant company, as aforesaid, was given for money borrowed from said bank to purchase or pay for the furniture in a hotel in Bridgeport which was owned by said Improvement Company ; and defendant company never had any interest therein; yet some of the officers and directors of the defendant company, being also officers and directors of the Improvement Company, or largely 'interested therein, made and delivered said note of defendant company to said bank, upon which said bank, well knowing it was given for moneys advanced and paid to said Improvement Company, sued defendant company thereon, and by collusion with the other defendants, obtained said judgment, under which it is now' threatening to sell the entire property of the defendant company. Complainant further avers that, by the books of the defendant company, on November 19, 1892, a check was drawn by the defendant company on the Madison Square Bank, of New York, in which it had funds to the order of Lochman, Morgentlian & Gold-smidt for the sum of $1,818.10, for which complainant could find no voucher in the office of defendant company, and has been unable to learn from any of the officers of the company why said sum was given or paid to said firm. The bill also shows that a check for $500. was drawn by the treasurer in favor of said Aldhouse, on said Madison Square Bank, April 4, 1893, but no voucher therefor is on file in the office, nor does it anywhere appear for what said payment was made; and that on September 12, 1892, a check for $400, on the said Bridgeport bank, was drawn by one of the officers payable to George Messiter, then a stockholder in the company, and since November 9, 1892, a director and secretary thereof, and also at all said times a director and officer of said Improvement Company, which complainant is informed and believes was given to said Messiter to pay for some entertainment given by said Improvement Company ; and on December 1.9, 1892, another check on the same — 286 — bank for $225 was given to said Messiter; and on April 26, 1893, still another for $100, for all which money there are no vouchers or receipts in the office; that much of the money on deposit in First National Bank of Bridgeport, has been from time to time drawn out by the officers of the defendant corporation, on checks payable to bearer, and there are no vouchers or receipts in the office explaining for what purpose said moneys are drawn or used, nor has complainant been able to get any information in reference thereto from any of the officers ; that in the checks drawn on the Madison Square Bank by the treasurer five different colors of check were used, all of which books were missing, and of return checks or vouchers eight were missing, the stubs of which showed they aggregated $47,489.63, and among the return vouchers was a slip as follows : ‘ ‘$15,036.54, March 16, 1893. Charge R. A. Cunningham, Treas. for return of (3) vouchers with account current rendered October 28th, 1892 yet there are no vouchers or receipts in the office showing how these sums had been applied. We have thus condensed the phraseology of the bill, and set forth the several grievances complained of as causes for the appointment of a receiver, in order that they may appear as concisely as practicable, and their bearing upon the question of the appointment of a receiver made plain. It will be remembered that this appeal involves nothing but the question of the propriety of the appointment of a receiver. ' The complainant must, therefore, show by his bill not only some equitable ground of relief, but that a receivership is necessary in furtherance of that relief. Although the bill may contain equity, yet if the relief sought may be as well obtained without disturbing the possession of the property involved, it is most clear a receiver will not be allowed. Again, in Roman v. Woolfolk, 98 Ala. 219, we stated some principles which govern the appointment of receivers. We need not repeat what we there said, except to say, that a minority of stockholders will not be permitted to displace corporate authority and control, by substituting therefor the policy, management and control of the courts, except in plain cases of such fraud or maladministration as works manifest oppression or wrong to them, and, we will add, when the displacement of corporate control plainly appears to neces — 287 — sary to prevent further mischief ; and, further, that before calling upon the court to take into its hands the administration of the corporate affairs, it must be made clearly to appear not only that such oppression or wrong to them depends, but tiiat every reasonable effort has been made to secure redress and prevention of further mischief within the company itself. We say every reasonable effort. If it clearly appears that application to the governing body would be a futile and fruitless performance, and it is impracticable to obtain action by the stockholders, then effort, on that, line, will not be required.—Etowah Mining Co. v. Wills Valley M. & M. Co., 106 Ala. 492. The complainant has sued without making any such effort, upon the theory that his case comes within the exception stated. Let us see if the position can be sustained. The directors elected in October, 1891, were Myers, Gunter, Cunningham, Mor-genthan and Aldhouse. They continued in office until November 8, 1893, when Aldhouse, Cunningham, Olcott, Whitcher and Johnson were elected and constituted the board of directors, and they were in office when the bill was iiled. Thus we see, that of those who served from October 28, 1891, to November 8, 1893, only Aldhouse and Cunningham were continued in office after November 8, 1893, and up to the time the bill was filed. Upon examination of the allegations of the bill, all of which we have herein substantially set forth, it will be seen that not a grievance is charged which did not occur long prior to the election of the present board of directors, and at a time, as we have seen, when only two of the five members of the present board were in office, except the following, if when properly analyzed it can be called a grievance, viz. : That the company is insolvent and unable to «carry on its business, and that it became, and, for at least two years last past, has been the duty of its directors, trustees and managers to wind up its affairs and prevent further loss ; but they have failed to take any steps looking to a winding up thereof, as a [art of the wrongful, unlawful and fraudulent scheme and conspiracy to prevent their misdeeds coming to light and to prevent their being called to justice and account for the same, and to enable the property of the company to be slaughtered and purchased by themselves, or their interest, to the exclusion of the stockholders. — 288 — In the first place, we are aware of no authority upon the part of the directors, to dissolve the corporation and wind up (by which we understand, to put an end to) its affairs. The statute provides by whom and by what procedure that may be done. — Code, §§ 1683 at seq. The directors and officers have no such authority. In the next place, if it can be said there are any allegations, upon which a court can act, of such a wrongful, unlawful and fraudulent scheme and conspiracy on the part of either of the directors who are said to have been thus derelict in the matter of winding up the affairs, there are -certainly no such allegations affecting a majority of the board. The averment made early in the bill that all the directors and officers are parties, to a. greater or less extent, in the commission of the various offenses, wrongs and misconducts in the bill charged, is too vague and indefinite to carry with it any significance whatever. Thus ic appears too plain for reasonable controversy, that there is no just cause shown, taking every matter averred in the bill to be true, for assuming that the board of-directors, as now constituted, is not open to the just and reasonable appeals of stockholders to redress any wrongs which may have been done to the company. The complainant, therefore, had no right to intervene and bring this suit without first having made an unsuccessful appeal to the board. So, let the equities of the company, as disclosed by the bill, be what they may, when the complainant; under these circumstances, makes the suit his own, there is no equity in his bill. The chancellor erred in refusing to set aside the appointment of the receiver, and his order in that behalf is reversed, and a decree-here rendered vacating the appointment and ordering the receiver to restore to the company its property in his hands, as such receiver. If an accounting by the receiver be necessary, it is referred to the chancery court to make such orders and take such proceedings as may be necessary in the premises. The cause will be remanded to the chancery court. Reversed, rendered and remanded.