Brent v. B. E. Brister Sawmill Co.

Reed, J., delivered the opinion of the court. This case is before us upon an appeal from the decrees of the chancery court sustaining the demurrers of appellees, B. E. Brister Sawmill Company, Louis Werner ■Sawmill Company, Citizens’ Savings Bank & Trust Company, and Capital National Bank. The question for our — 886 — consideration is whether a court of equity in this state, at the instance of minority stockholders, can appoint a receiver for- a going and solvent corporation and wind up its' affairs. The following is shown by the original bill and the amendment thereto: The bill is filed by two of the directors and six other stockholders of the B. E. Brister Sawmill Company. At the time of the filing of the bill two of the stockholders were also creditors, but since then the indebtedness due each has been paid, and when the demurrers were heard the complainants were only stockholders and directors. The business, which had been conductéd for some years as a copartnership, was incorporated April 27, 1904. The property of the firm, with the exception of a mercantile business, was thereupon conveyed to the company. The mercantile business was organized into a separate company. The capital stock of the sawmill company was fixed at two hundred thousand dollars, and was divided between the three copartners of the business, as follows: B. E. Brister, eight hundred shares, I. Y. Brister, six hundred shares, and Mrs. Julia Brister, six hundred shares. Mrs. Julia Brister divided a large part of her stock among her children. A portion of the stock was afterwards transferred to F. F. Becker. The stock of I. Y. Brister was transferred by him to his brother, B. E. Brister, after the present suit was brought, and B. E. Brister transferred some of his shares to his wife. Since the organization of the company B. E. Brister has been the president and general manager, and, with his brother and wife, held the majority of the stock, and constituted a majority of the board of directors. It is charged in the bill that at the beginning of the corporation the company’s books showed that it owned property to the value of eight hundred and forty-eight thousand, six hundred and thirty-two dollars and forty-two cents; that the capital stock was two hundred thou — 887 — sand dollars, and that the company owed one hundred and sixty one thousand, seven hundred and forty-six dollars and thirty cents, leaving a surplus of four hundred and eighty-six thousand, eight hundred and eighty-six dollars'and twelve cents; that after six years’ operation there was a shrinkage in the value of the company’s property. of three hundred and twenty-five thousand, three hundred and eight dollars, and fifty-four cents, and an increase in the liabilities of one hundred and forty-six thousand, nine hundred and eighty dollars and forty-seven cents. It is shown that after much effort, and after the filing of the original bill, appellants arranged for an accountant to go over the books of the company for information as to its condition, and that the report of this accnntant showed that on December 31, 1910, the surplus and undivided profits had been reduced to fourteen thousand, five hundred and ninety-seven dollars and seventeen cents; that at the time of the filing of the bill' the property of the company-was incumbered by deeds-of trust amormting to apparently about one hundred and fifty thousand dollars, all past due; of this amount one hundred thousand dollars was in favor of the Louis Werner Sawmill Company, and the remaining secured indebtedness in favor of the Citizens’ Savings Bank & Trust Company and the Capital National Bank. It is charged that the president and general manager of the company failed and refused to give the proper and definite information of the affairs of the company, and that at a meeting of the stockholders the majority voted down the proposition to have the books of the company audited; that the minority stockholders were unable to obtain from the president any information about the land and timber of the company, and that at a meeting their proposition to have the timber cruised so that an intelligent and accurate statement could be made-showing the same was opposed by the president and voted down by the majority; that the minority protested — 888 — against the continuation of the president in office and endeavored, without success to separate the office of pres-. ident and general manager; that the majority promptly re-elected the president and continued his salary at five thousand dollars per year. It is also charged that the mercantile company, in which the minority held no interest, and which was practically owned by the majority, made a large profit out of its business with the sawmill company; that the employees of the sawmill company were paid in non-negotiable checks, which could be used in trade at the store of the mercantile company; that upon an occasion when the mercantile company was temporarily out of business the president of the sawmill company in cashing these checks taken in by other stores demanded a discount of seven and one-half per cent, and that no such discount was ever demanded or collected from the store of the mercantile company; that a large sum would have been realized for the sawmill company by the collection - of this discount from the mercantile company; that bad debts owing by employees of the sawmill company to the mercantile company were charged to the sawmill company; that the clerical force of the sawmill company also kept the books of the mercantile company, and that the mercantile company had a monopoly of the trade of the employees of the sawmill company; that the freight of the mercantile company was transported free over the railroad of the sawmill company, excursions ran over that road for the free transportation of customers of the mercantile company, and that the president and general manager used the ways and means'of the sawmill company to further the interests of his mercantile company, and also for his own private interests. It is also charged that the books of the company wholly failed to disclose the true condition of the business, and failed to provide a record of the timber cut, and to give information from which an estimate can be made of the — 889 — value of the company’s property. It is shown that no dividend has ever been paid the minority stockholders, and that B. E. Brister, president of the company, estimated the stock to be worth thirty-two dollars per share, though in one instance he offered as much as forty dollars per share. It is shown that the sawmill company made a contract with the Louis Werner Sawmill Company, constituting the last-named company as sales agents;' and providing a commission of eight and ten per cent, on the entire product of the mill; that the Louis Werner Sawmill Company has violated its trust in failing "to account for lumber at the prices sold, and has refused to allow an inspection of the books, and appellants have ascertained the failure of the Louis Werner Sawmill Company to account for ten. thousand, two hundred dollars and eighty-, three cents; that this information was from a partial accounting, and that a full accounting should be required; that the commission allowed the Werner Sawmill Company was excessive. It is also charged that information from the president shows the net amount received from the stumpage was an average of ninety-eight cents per thousand, when the value of the stumpage in the timber not manufactured, was from two dollars and fifty cents to four dollars per thousand; that the small sum realized out of the stump-age was by reason of the poor management of the affairs of the company. It is charged in the bill that the management of the company contracted debts in violation of section 924 of the Code of 1906 to the amount of fifty-three thousand dollars in excess of its caiptal stock. It is also charged that the' president and' general manager was slipshod and negligent in keeping the accounts of the company, and .the valuations were .based on mere guesses, and not upon properly made appraisements or original costs; that under the administration of B. E. — 890 — Brister and the majority stockholders the object for which the company was chartered has failed and is impossible of successful execution; that the purpose of the .stockholders in making the investment was to make profit for themselves, and that there has been a failure as to this, and that the operation of the company has been for the benefit of the president and his associates and the .sales agents; that by reason of the gross, negligent incompetency and inattention to business, and in disregard of the rights of the minority, the business has been conducted at' a loss, and the president and his associates have been guilty of a violation of the trust imposed upon them as the managing officers of the company; that- the ■continuation of the business as it has been conducted will result in irreparable injury and loss to appellants, and that it is necessary for their protection that the assets of the company should be placed in the hands of a receiver for safe-keeping, and abide the further decree of the court, and that waste of the property may be stopped; that appellants have made every effort towards reforming the management of the company, and that these efforts have been spurned; that they are in a helpless minority, unable to sell their stock, except to B. E. Brister, for such price as he might name; and that they are powerless to protect themselves by proceeding within the corporation, and are compelled to appeal to a court of ■equity for a redress of their wrongs and the preservation of their property. The bill prayed an accounting from the B. E. Brister 'Sawmill Company and the Louis Werner Sawmill Company, the appointment of a receiver to take charge of and’ preserve the property of the company, and abide the orders of the court, an inventory showing the valuation of the company’s property, and the disposition of the property of the company in- accordance with the law .and equities of the case. We know that in the past the courts have laid down .as a general rule that a court of equity, in the absence — 891 — ■of statutory authority, is without jurisdiction at a suit «of a stockholder to wind up the affairs of a solvent going ■corporation, or to appoint a receiver with that- end in view; and we understand that this rule has been based upon-the reason that a corporation is the creature of the state and its life depends upon the action of the state, or of the stockholders as a whole. We find that in the progress of time and in the development of the jurisprudence of our land this rule has been somewhat changed, and the power of a court of equity has been enlarged for the purpose of more fully protecting the interests of all those owning interests in corporations. In truth, at the-present time a large part of the business of the world is being conducted through corporations. It has been necessary to change materially the general rules originally applied by the courts in construing the obligations and duties of those engaged in business through corporations. The tendency of the times is tó treat corporations as if they were trading copartnerships, with the stockholders as members of the concern. It was stated by Chancellor Walworth that: “Joint stock corporations are mere partnerships, except in form; the directors are the trustees or managing partners, and the stockholders are the cestiás que trust, and have a joint interest in all the property and effects of the corporation.” In the case of Fougeray v. Cord, 50 N. J. Eq. 185, 24 Atl. 499, Hinman, C. J., said: “Joint stock companies in modern times are nothing but commercial partnerships which have taken the form of corporations for the greater facility of transacting business.” It is certainly the duty of the officers and directors of a company to conduct its affairs so as to carry out the purposes of its organization to succeed in the business enterprise in hand, to preserve its property, and to recognize and protect the rights and claims of all parties in interest. If they fail in. doing this, it is then their duty to bring the affairs of the company to a con — 892 — elusion. The majority of the directors and stockholders should see that this is' done. Now, if in the face of the failure of' the management to do its duty, and of the failure of the purposes of organization, and of apparent loss to the company and ultimate insolvency, the majority refuses to wind up the affairs of the company, then should not the rights of the minority stockholders be protected by the law? And if so, is not equity the proper court to extend such protection? We fully understand that everything possible should be done by the minority to get a recognition of their rights and preservation of their interests within the corporation; but, when it has been shown that this has been done, then it should not he said they are. without any means of relief, and that they are required in the administration of the law, to stand idly by and see the property in which they are interested wasted and lost and the business enterprise Avrecked. It has been decided that: “If it plainly appears that the object for which the company was formed is impossible, it becomes the duty of the company’s agents to put an end to its operations and wind up its affairs; and should they, though supported by a majority of the stockholders, pursue operations which must eventually be ruinous, or should the enterprise be abandoned as impossible of realization, any shareholder would, upon plain equitable principles, be entitled to the assistance of a court of equity, and decree should be rendered compelling the directors to wind up the company’s business and distribute its assets among those entitled to them.” Ulmer v. Maine Real Estate Co., 93 Me. 324, 45 Atl. 40; Benedict v. Columbus Construction Co., 49 N. J. Eq. 23, 23 Atl. 485. In the case of Hall v. Nieukirk, 12 Idaho, 33, 85 Pac. 485, 118 Am. St. Rep. 188, wdiere it is shown that the man-, ager of a corporation was incompetent, and a conspiracy existed between him and other directors to loot the — 893 — crporation of its profits, and that under his management large debts had accrued against the company, it was decided that on complaint by stockholders a receiver should be appointed, and that the court has jurisdiction to appoint a receiver of the corporation pendente lite. In this case the court made the following quotation from the opinion in the case of Gibbs v. Morgan, 9 Idaho, 100, 72 Pac. 733: “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, especially under different circumstances, and decline to administer justice and enforce rights for which there is no other remedy.” In the case of Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N. W. 218, 17 L. R. A. 412, it is held that the law requires of a manager of a company the utmost good faith in the control and management of the corporation as to the minority. And the court stated that: “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.” In the case of Columbia National Sand Dredging Co. v. Washed Bar Sand Dredging Co. (C. C.), 136 Fed. 710, it is decided that where the majority stockholders of a corporation were also the directors, and are clearly violating the - charter rights of the minority, as by diverting all the earnings of the company to themselves, either directly or indirectly, a court of equity will appoint a receiver at a suit of a minority stockholder, although the company is solvent. The court in this case stated that .a temporary receivership may be created where the corporation is entirely solvent, yet. the corporate officers- by mismanagement or fraud are jeopardizing the property; such acts giving the stockholders and creditors a right to complain and ask for' a receiver. It was decided in the case of Ross v. Ameri — 894 — can Banana Company, 150 Ala. 268, 43 South. 817, that where a private business corporation has failed of the purposes and objects of its creation a single stockholder may maintain a bill in equity for its dissolution and the distribution of its assets among those entitled thereto, and this without reference to the solvency of the corporation. In Fougeray v. Cord, supra, it is stated: “The peculiar province of this court (equity) is not only to right wrongs already committed, but to protect property from future injury and waste by withdrawing it from the reach of danger. In the case- of a willful breach of trust, it not only compels the guilty trustee to restore the trust property, but removes it from the possession and control of the custodian who has proved unworthy. There is nothing in the character of a trading corporation to prevent the application of this remedy.” In the case of Exchange Bank v. Bailey, 29 Okla. 246, 116 Pac. 812, 39 L. R. A. (N. S.) 1032, Hayes, J., delivering the opinion of the court, said: “The officers of the- corporation in the management and control of its assets are the trustees of the stockholders, and are charged with the faithful management of the corporate property for the accomplishment of the purposes for which the corporation is chartered, and where the corporation is insolvent, as the bank is alleged to be in this case, they are also the trustees of the creditors. It would certainly be a confession of extreme weakness in the power of a court of equity, which is presumed to afford a remedy where no adequate remedy at law can be had, to hold that plaintiff in this case, under the facts, can be afforded no relief in equity.” a Mr. Thompson, in his work on Corporations (2 Ed.), section 4622, in discussing stockholders’ right to.a receiver to prevent the wrecking of a corporation, says: “A stockholder has an unquestioned right to the appointment of a receiver where the facts disclose a scheme on the part of the directors or majority stockholders to — 895 — wreck the corporation and dissipate its assets. Said one of the courts, after noting the hesitancy of courts to interfere in the management of corporations: ‘It may be further said that this court, has never denied power in a chancellor to prevent a scheme of -irreparable injury and wrong, merely because the movers in that scheme speak and act in a corporate capacity rather than in an individual capacity.’ That solvent corporations are wrecked for purely selfish and illegal purposes, that minority interests are ‘frozen out,’ that business immortality has run amuck under the assumption that courts are powerless, is too true. But the assumption is wrong. Judicial hesitancy does not mean judicial atrophy or paralysis. The board of directors of a corporation are but trustees of an estate for all the stockholders, and' may not only be amenable to the law, personally, for a breach of trust, but their corporate power under color of office to effectuate a contemplated wrong may be taken from them when, by fraud, conspiracy, or covinous conduct, or extreme mismanagement, the rights of minority stockholders are put in imminent peril and the underlying, original, corporate entente oordiale is unfairly destroyed. It would be a sad commentary on the law if, when-the trustee of a corporate estate is making an improper-disposition of it, or has shown improper partiality toward one of its conflicting parties, or has put the estate in a fix where it is liable and likely to be either wasted or destroyed, or mercilessly taken from all and given to a part, a court could not reach out its arm and preserve- and administer the estate. We have never so declared the law. ’ ’ In the note to the case of Secord v. Wheeler Gold Mining Co., 17 Ann. Cas. 917, the rule stated under the subject of “misconduct threatened or causing serious loss”' is as follows: “Where it appears that the directors or other officers of a corporation are putting in jeopardy the rights of stockholders or creditors by grossly mis — 896 — managing the business, or by misapplying the property or funds of the corporation, a receiver will generally be appointed.” It is settled in this state, where there is an absence of a statute on the subject, that a court of equity, at the instance of a creditor, has the jurisdiction to appoint a receiver because of fraudulent mismanagement of the directors of a corporation. Benjamin v. Staples, 93 Miss. 507, 47 South. 425. We see no sufficient reason why it should not also be settled that a court of equity in this state, when it shall appear that by gross mismanagement of the affairs and misapplication of the property or funds of a corporation by the directors, or other officers in control, the right's of the stockholders, as well as the creditors, are being put in jeopardy, or when it shall be necessary to protect the interests of such stockholders or creditors and preserve the assets of the business injuriously affected by such mismanagement or of fraud in the management, may appoint a receiver to take charge of the business of the corporation, and in proper cases,, under the orders of the court and in the progress of the receivership, wind up such business. Therefore, in the present case we decide that the chancery court has the jurisdiction to appoint a receiver at the instance of the minority stockholders, to take charge of the business of the corporation, and if it is shown to the court to be necessary, to wind up such business. The bill, with the amendment thereto, is sufficient to require answers of the appellees. We do not see that interests of the Louis Werner Sawmill Company, the Citizens ’ Savings Bank & Trust Company, and the Capital National Bank as creditors holding liens will be prejudiced by placing the business of the Brister Sawmill Company in the hands of a receivei. The bill avers that appellants are not seeking to defeat these parties “in realizing upon any legitimate security they may hold, or in the collection of any legitimate debt — 897 — they may claim against the corporation.” Appellants state that their sole purpose in filing the hill is to preserve the property of the corporation, which they allege is being dissipated, to the end that all creditors will be paid and the stockholders be protected. It will be noted that appellants pray for an accounting and discovery from the Louis Werner Sawmill Company. In the general prayer appellants ask that upon a final adjudication of the interests of all parties concerned, the funds in the possession of the receiver may “be disbursed in accordance with the law and the equity of the cases.” The chancery court has full power to make all necessary decrees to fully protect the rights of the lien creditors. The matter of the appointment of a receiver pendente lite, as well as a receiver generally, is committed to the sound discretion of the court. The necessity for such an appointment should be clear, and the court in making it should move with due care, and a full consideration of the interests of all parties concerned. The court erred in sustaining the several demurrers. Reversed and remanded, and sixty days' given appellees from the filing of the mandate in the chancery court in which to answer. Reversed and remamded.