Godfrey v. McConnell

HUNT, District Judge (after stating the facts). The records of the case show that in September, 1901, defendants asked the court for a trial by jury, and the request was denied. This request was not made, however, until after the cause had been referred to a special master, and until after he had filed his report. As the learned judge who then presided over the court did not record his reasons for denying a jury trial to the defendants, his exact views cannot be stated. It is probable that he was of the opinion that the suit was one wherein equity might afford relief if upon the whole record complainant showed himself entitled thereto. However that may be, it is safe to say that so far as defendants are concerned their request for a jury was predicated upon the ground that complainant had a remedy adequate at law; hence that his suit in equity could not be maintained. This question of relief and jurisdiction in the case has forced itself upon my attention as I have progressed in the consideration of the record, and the oítener I have analyzed the kind of relief sought, together with the purposes of the bill, the stronger has become the conviction that the action is to recover a mere judgment for damages upon a past transaction. If the cause of action is of a legal nature, and complainant has a full and ample remedy at law for the wrongs complained of, equity has no jurisdiction. This is elementary. Nor will a mere charge of fraud give equity jurisdiction; nor will averments in regard to conspiracy and violation of trust authorize a court of equity to exercise jurisdiction, if the action is really one arising in tort, for which defendants are liable in damages, where the damages can be just as readily ascertained in an action at law as in equity. To state the doctrine in the language of the Supreme Court in Hipp v. Babbin, 19 How. 271, l5 L. Ed. 633: “Whenever a court of law is competent to take cognizance of a right, and has power to proceed to a judgment which affords a plain, adequate, and complete remedy, without the aid of a court of equity, the plaintiff must proceed at law, because the defendant has a constitutional right to a trial by jury.” And as that same court said in Buzard v. Houston, 119 U. S. 352, 7 Sup. Ct. 252, 30 L. Ed. 451: “In cases of fraud or mistake, as under any other head of chancery jurisdiction, a court of the United States will not sustain a bill in equity to obtain only a decree for tile payment of money by way of damages, when the like amount can be recovered p.t law in an action sounding in tort, or for money had and received.” The hill of this complainant states a case for damages maintainable at law. If the judgments entered against the company under 'which the property of the corporation was sold were procured to be entered by wrongdoing of the defendants, such judgments would be no more binding upon plaintiff at law than in equity; or if the defendants are guilty of the wrongs alleged, and are guilty of a trespass upon the property of the corporation, an action at law is the proper remedy to hold them liable, as plaintiff asks that they should he held, “at least to the extent of the judgments which were wrongfully entered against the company.” That complainant regards his action as one for damages is again made plain by his brief on motion to dismiss as to O. J. McConnell, ad — 798 — ministrator, wherein his counsel characterize the suit as one “to recover, in behalf of the Sunrise Mining Company, or such of its stockholders as should join plaintiff in the prosecution of this suit, damages, or compensation for any injury perpetrated by the defendants in the guise of what is known as the Butte Syndicate.” Complainant’s counsel proceed upon the theory that the suit is equitable; yet, in arguing the question of the survival of the cause of action, which arises in the case, they ask the court to consider the nature and substance of the cause of action, and not the form in which it is presented, and then proceed to speak of it as an action to recover from the defendants the amount of an “unlawful indebtedness which they had fraudulently imposed” upon the property of the Sunrise Mining Company. Counsel further define their own view by the following language from one of their, briefs: “It seems perfectly clear that the cause of action originally arose out of the contract between the syndicate and the corporation, whereby the syndicate acquired possession of the property. Of course, this contract was void and illegal as to the minority stockholders, and the master so declared it to be. But simply because a contract is void presents no reason why the party who receives any benefit from it should not respond' to the other party for Such benefit, or, if one party to such contract succeeds in injuring another party, no reason is presented why such other party might not recover from the one causing the injury compensation therefor. So that, if we consider the action as one brought to compel the Butte Syndicate to account to the complainant or the corporation for damages arising out o'f acts committed under a contract, which has been declared void, the nature and substance of the cause of action is based upon a contract and comes dearly within the provision of section 2731. But again, by the action of the Butte Syndicate, through the conspiracy above noted, complainant’s stock in the Sunrise Mining Company became valueless, and was destroyed. Therefore complainant and other stockholders in like situation might maintain this suit against the personal representatives of any members of the sjmdicate who have died, under section 2733, on the ground that their intestates in their lifetime wasted or destroyed the goods or chattels of the complainant and other minority stockholders. But again, the action survives against the personal representatives of those members of the syndicate who have died, upon the theory of a trespass upon the real estate of the corporation. Considering this suit as an action in behalf of the corporation for the purpose of recovering against the members oC the Butte Syndicate the damages to thp corporation, which resulted from a trespass upon its property by the members of the Butte Syndicate, we submit that such syndicate took possession of the property under a contract which -was unlawful and void. Therefore such possession was unlawful, and any damage which resulted to the company because of such possession or because' of any act committed by the Butte Syndicate to the injury of the property during such possession is a damage arising or resulting from a trespass to the land of the corporation, and survives under the provisions of section 2733, Montana Code.” But regarding it as a suit for damages, as we have seen, equity will not afford the relief asked; nor will equity afford relief upon the ground that it is an action to recover for waste; nor. will equity afford relief upon the last theory advanced by complainant that it is an action in trespass upon the real estate of the corporation. United States v. Bitter Root Company, 200 U. S. 472, 26 Sup. Ct. 318, 50 L. Ed. 550. A judgment for pecuniary damages being the redress cdmplainant is seeking, such a judgment would adjust and settle all rights; but a bill for such relief cannot be maintained on the equitable side of — 799 — the court. Jones v. Mutual Fidelity Company (C. C.) 123 Fed. 506. No discovery, as discovery proper, is sought, as answer under oath is expressly waived; so the bill is not for discovery. Security Savings & Loan Ass’n v. Buchanan, 66 Fed. 799, 14 C. C. A. 97; McFarland v. Bank (C. C.) 132 Fed. 399. No accounting is sought, and clearly there could not be any intricacies which would make an accounting necessary. Had complainant sued at law, he might have procured an order for the inspection of any books or records of the defendant company, or its officers, and secured whatever information therefrom he could in equity. United States v. Bitter Root Company, 200 U. S. 473, 26 Sup. Ct. 318, 50 L. Ed. 550. Nor is injunction sought; nor is the court asked to cancel any instruments, or to declare void the judgments under which the sale of the property was had. To conclude upon this question: Were it not for the ruling of Judge Knowles denying the defendants’ motion for a jury trial, I would dismiss the bill solely upon the ground that no case is presented for relief in equity. But proceeding with the case upon the report of the master, and regarding it as one where equitable relief could be granted upon the pleadings, I am still of the opinion that complainant cannot prevail. To state the testimony in detail would be but to extend this memorandum opinion to unnecessary length, for I should have to incorporate considerable of it as given, on direct and cross examination, and quote it as exactly given by witnesses on both sides. It is enough to say that I have given it my careful and repeated reading. • Moreover, I have considered the evidence given by the defendants who were both directors and members of the syndicate as subject to the need of very close scrutiny, for I believe that the position of all such persons is one -generally to be looked upon with disfavor by the law, and that the burden is upon all who hold such relationships to show implicit integrity and good faith. There are some circumstances besides the relationship of Harper and Sherman to the corporation and to the syndicate, notably the letter of Harper to Sherman, dated June 16, 1897, to the effect that it would be policy to keep anything in the way of a strike as quiet as possible lest McLure’s animosity be awakened, which tend to show a desire on Harper’s and Sherman’s part to withhold full information from McLure, a stockholder. But scrutinizing the whole transaction from beginning to end, the evidence fails to show a conspiracy or fraud in fact on the part of the defendants. It satisfactorily appears that Sherman became the superintendent of the Sunrise Company sometime in 1894, and that thereafter he and McLure, a stockholder in the Sunrise Company, and evidently active in connection with the affairs of the company, became involved in a controversy over a block of the stock of the corporation. The significance of this matter is that it sheds light upon the personal relations existing between Sherman and McLure. There was litigation over various matters connected with the shares referred to between McLure and Sherman, and evidently bad blood existed between them. Sherman became a partner with Frank M. Durfee, and the two of them owned a controlling interest in the Sunrise property. Besides other holdings, the firm of Durfee and Sherman in 1895 bought 127,000 — 800 — shares, to pay for which they borrowed money from the Merchants’ & Miners’ National Bank, of Philipsburg, and hypothecated the stock as security. In May, 1896, Durfee and Sherman made an assignment for the benefit of their creditors to Joseph H. Harper, a defendant in the action. Harper was also an individual stockholder in the company, owning 25,000 shares. The Sunrise Company owed about $2,000 at that time, but was not making any considerable monejL They closed down about October, 1896, owing about $5,000. Among the debts of the company when it shut down were certain labor claims, and these claims were bought by Helen C. Harper, who was the wife of the defendant, the said Joseph H. Harper. There were other creditors of the company, but they did not then enforce their claims. Mrs. Harper purchased labor claims to an amount of $2,792.36, the purchase having been advised by Mr. Howell, counsel for Mr. Harp'er, assignee of Durfee and Sherman, with a view to protect the stock under assignment by Durfee and Sherman. Harper, as assignee, in good faith tried to sell the Durfee and Sherman stock, so as to pay the Durfee and Sherman debt to the bank; but the appearance of the mine was such that no purchasers were found. In January, 1897, a stockholders’ meeting of the company was held, and the situation that confronted the corporation was an unhappy one. The mine had been shut down in October, 1896, for lack of ore. The company owed over $5,000, $2,700 of which was for labor claims that had been bought by Mrs. Harper. The majority of the stock was held by defendant Harper, as assignee for Durfee and Sherman, and he had not been able to sell the stock. At this meeting Sherman, who believed in the mines, suggested a plan of getting up a syndicate of men in Butte who would expend money in doing development work on the property, and who might take an option on the Durfee and Sherman stock. Sherman proceeded to carry out his plan, and enlisted Williams, Hamilton, Kenyon, Thompson, and Harper, who have been referred to, in the matter. The several contracts set forth in the statement were made. By one of them the syndicate of Butte persons took an option upon the Durfee and Sherman stock at a price which would liquidate the indebtedness of Durfee and Sherman, if the option was availed of. This option was a private arrangement between the parties fo the agreement. But of the individuals who entered into this option, A. A. McDonald, as president of the Merchants’ & Miners’ Bank, J. H. Harper, M. D. McDonald, and F. W. Sherman, were also trustees of the corporation, and Harper was also assignee of the firm of Durfee and Sherman, and was also an individual stockholder in the company. By the agreement between the corporation and the individuals the privilege of doing certain development work upon the mines of the company was granted. The purpose of this latter agreement was to explore, hoping to open further bodies of ore, and prove the mines of real value. The work to be done by the syndicate was to be done under the supervision of the superintendent of the Sunrise Company, and the money expended by the syndicate was not to become a charge upon the company, unless the members of the syndicate who were interested in the option held upon the Durfee and Sherman stock — 801 — should subsequently purchase the stock under the option. Evidently the directors thought that if, in exploration, the syndicate should open bodies of ore of commercial value, the corporation would be so benefited by 'the exploration that it could afford to pay the costs of the development work done by the syndicate. The third agreement was that wherein Sherman agreed to do the work of exploring for the syndicate. Now, when these three agreements were made, Sherman was still exercising authority as superintendent of the corporation, with the knowledge and approval of the board of directors. It is true that when the mill was closed down, there was but little for him to do; yet there never was a revocation of his authority as superintendent, and it certainly appears that he was the person who was regarded by the trustees of the corporation as the superintendent and the one designated, within the meaning of the contract, to supervise the exploitation. As I have indicated, these contracts and agreements are properly the subject of very close scrutiny. Sherman and Harper particularly put themselves in dual relationships, which demand of them satisfactory explanation, in order that they may be acquitted of any wrongdoing. On the other hand, the court must consider all the circumstances1' of the case. And it is in regarding the whole history of the transaction that I cannot find sufficient evidence of conspiracy. Sherman evidently had confidence in the mine. His'letters indicate, this all through, and if the exploration work had disclosed bodies, of valuable ore, it would have been a very good thing for the company, and the stockholders would have greatly benefited. Sherman’s attitude was one well calculated to put him in a position where his acts might be questioned by either side, for he certainly exercised authority as superintendent of the company, as well as agent of the Butte Syndicate, and he had large personal interest as a stockholder. He went ahead to explore and develop the mines for the syndicate, but at the same time acting under the1 belief that it was within the scope of his authority, as superintendent of the company, he expended certain money in behalf of the corporation in putting the mill and roads in proper condition to operate the mine. About August 10, 1897, the mill was started, being fed by ore which was disclosed by the development work paid for by the Butte Syndicate. The directors of the corporation say that it -was understood that the mill was to be started, and that Sherman was to look after the work. But after 10 days of operation a loss was shown, and the ore in the mine appeared to be growing less valuable. So the whole thing was again shut down, and again the situation was bad. Sherman went to Butte. There was no money in the treasury, and Sherman notified the creditors that they need not defer action any longer. Helen C. Harper then brought an attachment suit upon the labor claims which she had purchased the year before. Four other creditors —the Montana Harware Company, a creditor to the extent of $799.63, Baker & Harper, creditors to the extent of $560.75, May Sterrett, for $223.50, and Marie Wood, .for $666—brought actions, and attached the property of the company on August 19, 1897. Eaborers — 802 — also filed liens amounting to about $4,866 for labor done for the company in July and August, 1897. The receiver of the Merchants’ & Miners’ National Bank intervened in these suits, and alleged that all' of the causes of action were fraudulent and collusive. About that time Mr. Frank A. Smith interested himself in the matter and sought an Option- from Mr. Harper and other owners of Sunrise stock upon an arrangement generally similar to that which had been .given to the Butte Syndicate. The assignee of Durfee and Sherman said that the attachment suits pending should be disposed of, and the charges of fraud determined before any option could be given. Thereupon Smith so arranged matters that the receiver and the Sunrise Company withdrew their appearances in the suits, and permitted the attaching creditors to take judgments for their respective claims, and, in turn, the attaching creditors agreed to give the corporation a six-months’ stay of execution. As the law gave to the company the right to redeem within a year, the effect of the extension of six months was to give the corporation 18 months wherein it might secure funds to redeem and prevent the loss of its property. The adjustment of these suits was made after full knowledge of the whole situation on the part of the directors of the company, and the receiver of the bank, and their attorneys. A meeting of the directors of the corporation was held in November, 1897, at Drummond. Necessary resolutions were passed by the board approving of the arrangements referred to, stipulations were signed, the answers of the Sunrise Company were withdrawn, judgments were taken without opposition by the attaching plaintiffs, and a stay of execution for six months given. The directors then passed a resolution recognizing the validity of the labor claims against the Sunrise Company. The object of this was to enable the claimants to sell their claims more easily. Smith, heretofore referred to, after the settlement of the suits, made a contract with the company, by which he was to make certain ore tests, but he never carried out his contract. There was a stockholders’ meeting in January, 1898, at which F. D. Brown, who was the agent of McLure, just heretofore referred to, was elected a director. F. I. Holland, Vincent Smith, a son of F. A. Smith referred to, F. M. Durfee, D. M. Durfee, A. A. McDonald and J. H. Harper were elected directors. Complainant had notice of this meeting, but did not attend. It satisfactorily appears that Mr. McDure’s friends on the board and Mr. Sherman’s were equal in number, which gave to Mr. Smith, who held a neutral attitude, apparently, the balance of power. Nothing was done during the stay of execution which had been granted, and at the end of that period execution was issued in favor of the judgment creditor Mrs. Harper, holding a judgment conceded tp be valid, and on July 2, 1898, the property was sold at public auction, and bid in by William Thompson, who had beeii a party to’ one of the contracts already referred to, Thompson representing the judgment creditors Helen C. Harper, Baker & Harper May Sterrett, administratrix, Montana Hardware Company, and Marie Wood. Thompson’s bid was about $12,000. It appears that on the day of the sale, and subsequent thereto, Thompson conferred with F. M. Durfee, the president of the corporation, and also with one of the — 803 — directors, urging them to hold a meeting with a view of negotiating i loan upon the properties of the corporation, to the end that there night be a redemption from the execution sale which had just theretofore taken place. His attitude appears to have been entirely frank and fair. Nothing, however, was done by tlie directors. Thereafter, in the fall of 1898, Harper, as assignee of Durfee and Sherman, sold :he Durfee-Sherman holdings at public auction. The stock was bought by A. A. McDonald for the Merchants’ & Miners’ National Bank, and afterwards turned over to the Thompson Investment Company. There was litigation in the state courts growing out of this sale, jut the Thompson Investment Company prevailed in this litigation by decisions of the Supreme Court of the state, reported Durfee v. Harper, 22 Mont. 354, 56 Pac. 582, Id., 22 Mont. 373, 56 Pac. 589. In June, 1899, James A. Murray, representing C. D. McLure, purchased the aertificate of sale which William Thompson had secured the preceding year upon the properties of the Sunrise Company, together with all the holdings of the Thompson Investment Company, amounting to something over 304,000 shares, and a sheriff’s deed upon the certificate of sale was issued to an attorney in the employ of Mr. McLure. On June 28, 1899, after McLure had conipleted the purchase 'of the stock from Thompson, and while he w'as possessed of the sheriff’s certificate of sale, a meeting- of the board of directors was called. This meeting was attended by Vincent Smith, who was a son of F. A. Smith heretofore referred to, E. I. Holland, an employe of a mining company it Philipsburg, in which Mr. McLure was largely interested, F. D. Brown, an agent and attorney in fact for Mr. McLure, and F. M. Durfee, whose sympathies were against Harper and Sherman. The minutes of this meeting of the directors show that a committee was appointed with authority to borrow for the company the sum of $30,000, for one year, for the purpose of redeeming the property, paying off :he judgments and liens, discharging liabilities, costs, expenses, and whatever balance there might be was to be held for the purpose of resuming the conduct of the business of the corporation. Some efforts to obtain a loan of $30,000 were made, but they were by no means liligent, and it would look as if the directors had but little confilence irf the value of the mines, or were indifferent in the matter, or as f those to whom they applied for a loan had no great faith in their ralue. The company did not need a loan of $30,000 at that time. Had application been made for a loan in a sum merely sufficient to ■edeem, not more than $20,000 would have been required. The defendants sought, throughoitt their testimony, to show that Hr. McLure was really the party behind the plaintiff in this action, md that it was not brought in good faith by the plaintiff, but as a part pf a plan to thwart the defendants in every way that he could. And .here is evidence tending to show that Mr. McLure, through his busiíess associates, did instigate the plaintiff to begin this suit, and that it s a culmination of tlie frequent wrangles among the directors and nanagers of the Sunrise Company. Still, I do not attach importance .o this, because complainant undoubtedly had a legal right to sue; but it loes have some bearing in weighing the testimony of the plaintiff — 804 — himself, and in sifting the whole evidence, with a view of arriving at the merits of the controversy from an equitable standpoint. 1 am considering the case, too, always mindful of the, allegations of fraud and Gonspiracjr, and, as before indicated, I think the position taken by Sherman and Harper, who. acted as trustees of the 'company, and for their own personal interests as' well, was one that ought not to have been assumed, and which a stockholder might justly have complained of at a proper time by appropriate proceedings; still, considering all the circumstances known to all the directors, the contracts were really efforts by way of a desperate chance to prove the property valuable, and I do not believe that the purpose of the parties^ was to cheat or defraud anyone, or that the debts contracted in the name of the company were fraudulent. The sum actually expended by the syndicate for exploration- work never became a charge against the corporation, and no purchase of the stock that was in escrow was had by the syndicate. Complainant earnestly contends, however, that because Sherman, acting as manager or superintendent of the corporation, incurred certain expenditures in behalf of the company at the time he was also doing-the development work for the syndicate, his acts, in so doing, were a fraud upon the company, and the judgments of certain creditors were fraudulent. I do not think so, considering all the evidence in the case. There was no good faith lacking, and, as far as the evidence shows, Sherman believed that under the agreement the syndicate was to do the exploration work, but that the company was to put the mill in condition to work any ores which might be taken out by the syndicate. It was under this belief that Sherman commenced to repair roads and tramways, and to build ore chutes for the corporation. This understanding of the contract itself was not erroneous, for the syndicate could not take the ore mined. Stress is laid, too, upon that feature of the contract which put upon the corporation the costs of the work performed by the syndicate, if ore should be found. While this may have been an unnecessarily severe expense to contemplate putting upon the corporation, it does not justify an inference of fraud on the part of the contracting parties; for, if valuable ore had been discovered, the company could have afforded to stand the outlay that had been made, and looked upon the venture as very profitable, and made without real risk to itself. But the hopes of the directors and others were not well founded. No good ore- was found. The company could not pay its debts. No one appears to have been willing to loan it money to save itself, and, although advertised to be sold at public auction to satisfy a judgment, no one had enough confidence in the mines to give more than $12,000 for the whole property. I think it but fair to say that in the light of the several failures to discover ore of sufficient value to justify operation and of the failure to realize larger prices upon the Durfee and Sherman holdings very few had any substantial faith in the property. Complainant, in his bill, expressly avers that the judgments obtained by Helen C. Harper, Baker & Harper, Marie Wood, Sanders & Sanders, and May Sterrett, amounting to the sum of $6,888.63, were valid against.the Sunrise Company at the time of the sale of the property — 805 — under the execution. But his contention is that by means of the other judgments and liens,, which it is alleged that defendants procured to be filed against the company with a view to defrauding it, the amount necessary to redeem the property from the sale under the execution was increased in a sum so large that the company could not borrow the money wherewith to redeem its property. But even assuming that the judgments other than those conceded to be valid ought never to have been taken against the corporation, it is indisputable that the persons in whose favor the judgments had been rendered, and who had performed the services or furnished the materials, did so upon the strength of the representations made in good faith by Sherman, assuming to act for the corporation, and held out by the directors as superintendent. No argument can be successfully made that in the services themselves, or in the value of the material furnished, there was anything wrong as between the creditors and the corporation; hence the corporation was not in a position to' dispute these claims. The sale, which was alone under execution issued by Mrs. Harper, in her judgment against the corporation, was perfectly valid. At that time, too—about June 28, 1899—the directory was not in the control of persons alleged to be involved in wrongs against this complainant. Vincent Smith, E. I. Holland, F. D. Brown, and F. M. Durfee were four directors, only one of whom—F. M. Durfee—is a defendant here. Clearly, Thompson, the purchaser at the execution sale, was anxious that the property should be redeemed, for he took immediate steps to confer with the president and other officers of the corporation upon the subject. There was ample time for the directors or stockholders to have instituted proper proceedings to prevent the sale or transfer of the property, or to have annulled any judgments which might have been obtained by fraud; but no seasonable action of any kind was taken. The case, therefore, must stand without satisfactory proof of fraud in fact or of conspiracy by the defendants to wrong the Sunrise Company or its stockholders, and with the elimination of fraud in fact, what is left for a court of equity to consider? Even granting the directors exceeded their legal powers in making the contract with the syndicate, yet equity will not grant a mere money judgment to stockholders against directors to recover damages for moneys, for the payment of which their corporation is liable, and where a sale under a valid judgment has been had, and where no actual fraud underlies the transaction. The case is very unusual in its facts, and while the courts should never depart from the principle that directors, as agents, are forbidden to exercise their powers for their own personal ends against the interests of their companies, yet the features and facts disclosed herein relieve the transaction complained of of a, fraudulent character. The petition to send the case back to the master was denied once by Judge Knowles, and I shall abide by his ruling. There is evidence to support each of the master’s findings of fact. The exceptions to the master’s findings of fact are overruled. In his conclusions of law, the master found that the-contracts for the purchase of the stock, and between the directors of the corporation and the Butte Syndicate, were — 806 — void as against the corporation and all stockholders not parties thereto, and by another finding the master concluded that the complainant, and parties in whose behalf he sued, are not entitled to recover damages against the defendants or any of them. Under my view of the case, conclusion No. 6, that complainant cannot recover damages in this action is accurate. Whether the several contracts were void as against the Sunrise Company and the stockholders thereof, or were simply voidable, becomes immaterial. I am satisfied, however, no one of them was void. Mutual Benefit Life Insurance Co. v. Winne, 20 Mont. 20, 49 Pac. 446. The contract between the corporation and the members of the Butte Syndicate, and that between the members of the syndicate and Sherman were, at most, voidable; but the individual contract for the option was always valid as against complainant. 'But the complainant is not seeking to have any contracts declared void, and no steps ever have been taken with such end in view. Conclusion No. 8 of the master is therefore, immaterial to the present case, and will be disregarded. Finally, believing that the judgments were valid, and that the complainant has not established that defendants conspired to wrong or defraud the corporation or its stockholders, it follows that the findings and conclusions of the master, as modified by striking out conclusion No. 3, should be adopted, and the bill dismissed. So ordered.