177 F. 25 | 9th Cir. | 1910
(after stating the facts as above). Stuify of the pleadings already substantially stated, and of the testimony heard, discloses that the main point in this casé relates to the license to use the patent barrel machine with which the defendant corporation made the barrels it used for the shipment of its lime product from Roche Harbor. Addressing themselves to this matter, counsel for complainants earnestly contend that, when the facts are ascertained, it will appear that McMillin, a corporate officer, was guilty of fraud; that he violated his trust by leasing and purchasing the property of the corporation, and by malúng a contract with the corporation for his own personal benefit, and that, as a consequence, the law will'regard him as a constructive trustee liable to an accounting or such other obligations as equity may properly impose. It would extend this opinion to an unnecessary length were we to state and analyze the voluminous testimony in the record, so we will but briefly refer to such parts of the whole evidence as have impressed us as particularly h’elpful in arriving at a correct result.
Going back of the time of the barrel machine matter, we find these things of general interest: McMillin went to Tacoma, Wash., in 1884, and soon thereafter acquired a fourth interest in a lime plant at Roche Harbor, Wash. In addition to this one-fourth interest so purchased, he obtained an option upon the other three-fourths of the properties referred to, such option to expire July 18, 1886. The property consisted of 160 acres of land, containing lime ledges, together with lime kilns and some log buildings. In June, 1886, he went to California for the purpose ol trying to induce a firm, of which complainant’s father was a member, to buy an interest in the property at Roche Harbor. Mr. Cowell was very largely interested in lime manufacture, and had much to do with the control of prices of that product on the Pacific coast. But Mr. Cowell did not take any interest in the property, and McMillin thereafter enlisted several business men in Tacoma —Mr. Masterson,_ Mr. Manning, and Mr. Wallace — who were respectively the president, vice president, and cashier of the Pacific National Bank of Tacoma. Mr. Cowell, however, notwithstanding his refusal to join Mr. McMillin in 1886, acquired much knowledge of. McMillin’s interest in the properties at Roche Harbor, and without disclosure of his plans to McMillin, thereafter bought certain lime lands then under lease to McMillin at Roche Harbor, and soon began the manufacture of lime there under the name of the “San Juan Rime Company,” and in time became a powerful competitor of tire defendant company.
The defendant corporation was organized in 1886, and at once purchased the property rights of two other companies which had been owned or controlled by McMillin defendant and C. P. Masterson. McMillin and his associates owned 686 shares.in the new company, and two years thereafter the elder Cowell bought 309 shares. . Between 1886 and 1892, the new company, now defendant herein, increased its assets, enlarged its plant, and the value of its shares became much greater. It paid dividends amounting to $35,000, between 1888 and 1892, but has paid none since, although its assets have been added to in many ways and its trade has been extended.
McMilliu himself says that he first saw ,tlie barrel machine operated at Detroit, in June, 1892; that Bowering claimed that the machine would he a great economy; that it would manufacture from 3,000 to 1,000 barrels per day, and that the package, when made up, would he practically air-tight, which would prevent air slacking. He says that the proposition to purchase the patent barrel right was discussed by Bowering and members of the board of directors from September, 1890, to March, 1891; that the discussions were informal, hut that the matter was before the hoard of directors several times, and that he frequently urged the hoard to take up the patent, calling their attention to the salient features of the machine, and reminding the directors that the barrels in which the lime was being shipped were costing more than the lime itself, and that the proposition ought not to he passed if there was a probability of the successful development of the machine. The practical utility of the machine was unknown, however; it was ati experiment in Washiugton. He says that he told the hoard that if the machine was not taken up by them, defendant’s competitor Cowell might get it. But the board declined to become interested because of the financial condition of the company, and of the country at large and because of doubts of the success of the patent. McMillin saves that Masterson, one of the directors, at a meeting when the patent question was under discussion, turned to liim and said, “Why, AIc-Millin, if you think it is such a good tiling, why don’t you take it up yourself ?” to which he replied:
“For simply one reason, Mr. Masterson, and one only, * * * simply because I am president of this company, and, if this should prove to be a good tiling, it ought 1o belong 1o the corporation; it ought not to belong to any individual member of it. It is an important feature of the company's business, and Hie institution itself ought to own or operate it. Whatever'is done, it ought to be done by the company, and not by an individual.”
In December, 1891, the first machine reached Roche Harbor, and in the spring of 1892 was installed by an employe of the manufacturers, who had come out from Michigan. McMillin also says, and he is corroborated in the matter, that this machine was not a success; that it was weak in construction; that its parts bent and broke, and that the agent himself was not satisfied. It seems clear that the machine could not supply defendant’s need for barrels. In September, 1892, fire destroyed the stave mill and the machine that had been set up. McMillin, still hopeful that success wpuld follow experiments with the machine, ordered that a new and stronger one should be built. Eater, such a new one was installed at the company’s plant at Roche Harbor, and in time it proved to be successful and of great value in manufacturing barrels.
We gather from the testimony of Manning, who was one of the directors at the time of the refusal to take up the patent, and who was a witness for complainant, that Bowering submitted his proposition concerning the barrel machine to the board of trustees of the company, and that he (Masterson) and Wallace frequently talked with Mc-Millin about tire machine; that it was a question in their minds whether it would make satisfactory barrels out of the timbers of the state of Washington. He says that, considering the fact that the machine was untried, that it was doubtful whether it would be successful, and, regarding also the financial conditions at about the time the patent was offered, it was concluded that it would not be well for the company to undertake its acquisition. Manning also says that» before the contract was made with McMillin, it was suggested to McMillin that he should take it up individually, as “he seemed to be the only one who was reasonably satisfied that it (the patent) might prove to be something for the benefit of the company.” He also testified that the trustees were familiar with the negotiations between McMillin and Bowering, and that they consented that McMillin should install the machine before it was ordered, and that McMillin was given to understand that it would be satisfactory to the board for him to go ahead and acquire the machine individually if he cared to do so.
Mr. Wallace, who was also one of the directors of the defendant company when the patent was under consideration, says that he talked frequently with McMillin about the barrel machine while Bowering
Mr. Cartwright, who at different times was the bookkeeper and superintendent for the defendant company, says that McMillin was exceedingly anxious that the company should acquire the rights to the machine, although he (Cartwright) had no confidence in it, because he did not believe it would work on the fir of the state of Washington.
Mr. Keene, who was secretary of the company in 1890, testified that he distinctly recalled a meeting of the board when the barrel machine was discussed by the trustees. He says it was offered to the board and the board refused to take it over for the company, for the reason that the trustees thought they could not afford to experiment with it. He testified that McMillin thought the company should have it, and that McMillin looked upon the machine as an experiment, but one worth making. The board, however, declined to become interested.
We cannot find that McMillin concealed from the board of directors of the defendant company any knowledge that he possessed in respect to the probable success of the' machine, or that he misrepresented anything. That he had much more confidence than his associate directors had in the potential success of the patent is evident, but the machine had not been operated, much less had it been proved a success in Washington, when the board refused to go ahead with the experiment. McMillin himself did not then know that it would turn out to be the success that it afterwards proved to be. A circumstance to sustain this is found in the right which was given to McMillin to cancel the contract at the end of a year. Again, the other directors of the company were largely interested, and while to a great extent, they relied on McMillin’s integrity and business abilities in and about the management and policies of the company and its affairs, they acted against his advice in this instance, and did so under the belief that they were guarding the best interests of their company; and, consistent with their past conduct, their attitude in this suit is not only not one of complaint against McMillin’s actions in the premises, but of
The record shows that when the original contracts with McMillin were entered into, McMillin owned 280 shares of stock in the defendant company, Masterson owned 150 shares, Manning 75 shares, T. B. Wallace-100 shares, Hugh Wallace 65 shares, Cartwright 20 shares, Keene 1 share, and complainant 309 shares; furthermore, the evidence is that McMillin did not vote upon the question of entering into the contract or lease, and that when the contract was made he had not contracted fbr the purchase of any of the holdings of other stockholders. The fact that afterwards, in 1894, he bought the stock of other directors is immaterial, unless the facts or circumstances surrounding- such purchase tend in some way to show fraud on McMillin’s part, or conspiracy between the associate directors and McMillin to serve McMillin at the expense of the corporation’s and complainant’s interests when the contract was made.
In so far as the industrial features of the contract need be referred to, it appears that for five years before the contract with McMillin was made, the company had been paying various prices for barrels. Complainant makes deductions of average cost of barrels in the years 1890, 1891, and 1892 only, and then argues that the average cost of barrels was 31% cents. He says, too, that in this average the expense of towage, cartage, and insurance was charged into the cooperage account, and was therefore necessarily included in the cost of the barrels, while under the McMillin agreement, whereby barrels were to cost 30 cents each, the expense of towing, carting and insurance had to be borne by the company, and that because of these matters, in making a comparison between the former cost of the barrels and the cost under the McMillin contract, the expense of towage, cartage, and insurance must either be deducted from the former cost or added to the latter. To an extent, this reasoning is persuasive, but it loses its force when it is applied to the added facts that the company made barrels prior to 1890 at a cost which increased-the average to about 32Jd cents for the period between 1889 and 1893, and when there is ’also included the cost of items of heading up, nails, nailing the barrels, branding, and repairs of all breakage which amounted to several fractions of a cent, and which did not enter into the cost of manufacture, under the older methods, but which under the terms of the 1893 agreement were to be done by McMillin. There is evidence that the item of towage was to be borne by the company for the reason that it was easy for the defendant company to furnish it at an almost nominal cost, because of its having steam tugs in constant use. The company • also used its teams daily, and witnesses say staves could be conveniently delivered at an actual cost of one-third of a cent per barrel. It appeared that insurance amounted to a fraction of a cent per barrel.
We shall not enter upon a detailed analysis of the evidence of the figures. Suffice it to say that after the strictest examination of the accounts, expert witnesses disagreed somewhat in their inferences, but ihe differing conclusions do not vary enough to justify a finding that
We may therefore generally summarize our discussion of the foregoing important features of this case by saying that it is our opinion that McMillin acquired the title to the barrel machine in good faith with the knowledge and consent of the board of directors of the corporation, and after the board knew all that McMillin knew of the merits of the machine and had expressly refused to become interested in it; that there was no concealment from the board of directors on McMillin’s part; that McMillin made the lease of the property and the contract for supplying barrels in good faith, and that the contract ■when entered into was not unreasonable, unfair or illegal.
We would not, to the slightest extent, depart from the salutary rule that directors and other officers of a corporation, occupying a fiduciary relation towards a corporation, are not permitted to assume positions which will bring their private interests into conflict with their duties to act solely in the interests of their corporation; nor would we argue upon the wisdom as well as the morality of the doctrine that where a corporation has made a contract with one of its directors, or a contract wherein one of its directors is personally interested and the interested director has taken part in the making of the contract, the corporation may elect to avoid the agreement so made even though it is in fact free from fraud. But these principles are not those which control in the present case, for here the transaction, when viewed as a whole and in its several parts, between the director and his company, was entirely free from fraud, and the contract was unanimously authorized by a board of disinterested persons, the interested director not voting. Thus, the case is brought within the rule recognized by the Supreme Court of the United States, namely, that where the director has acted with that candor and fairness which equity imposes as the guide for dealing between him and the corporation, and the transaction is open and free from blame, the director is not forbidden from making a contract with the corporation, or from entering upon a transaction in which he is personally interested. Twin Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328. See, also, Marshall on Corporations, § 377; Figge v. Bergenthal, 130 Wis. 591, 109 N. W. 582, 110 N. W. 798; Barr v. Pittsburgh Plate Glass Co., 57 Fed. 86, 6 C. C. A. 260. And an individual stockholder cannot enjoin the execution of a contract iutra vires unless fraud is shown. “So long as the agents of a corporation act honestly within the powers conferred upon them by the charter, they cannot be controlled. The individual shareholders have no authority to dictate to the company’s agents what policy thej- shall pursue or to impair that discretion which was conferred on them by the charter.” Morawetz on Corporations, § 243; Jesup v. I. C. R. R. Co. (C. C.) 43 Fed. 483; Ranger v. Cotton Press
In reaching the conclusions arrived at with respect to the main proposition in the case, we have not overlooked the positions assumed by complainant upon the several other points. We have considered them deliberately, one and all, and will briefly refer to a few on which the learned counsel have dwelt. We may say, too, our examination has been had under the conviction that the transactions involved should be very closely scrutinized, and that it has devolved upon McMillin to show that his conduct was honest, candid, and free from wrong.
Let us refer to the argument that McMillin did not intend to install the first barrel machine at his own expense, but schemed to throw the burden of such charge upon the corporation. The books disclose that while the experiments were being carried on, McMillin’s salary was accumulating in a sum far in excess of any cost of installation, and that although the corporation’s checks were drawn in the first instance to meet expenses, the expense of installation, together with interest, was afterwards charged to McMillin and paid by him. The bookkeeping system was somewhat intricate, and it is true the charge against McMillin was not finally entered until 1894; but there is nothing to warrant the belief that the action of McMillin was wrong or that the entries in the books were false or intended to mislead the company or any of its shareholders, or did mislead them. It is urged that the organization of the Staveless Barrel Company was a colorable transaction, designed and executed by McMillin to shield himself against the alleged inconsistent position he occupied as general manager of the defendant company, in attempting to carry out the contract made with the board. But the Staveless Barrel Company was not organized until December 28, 1894, nearly two years after the contract and lease had been entered into between McMillin and the defendant companjc McMillin’s business affairs were then becoming somewhat extended, and he, and others interested with him, had a right to avail themselves of corporate organization if it was thought best; hence it becomes immaterial to this suit whether he incorporated his barrel-making business or conducted it individually, unless such action as he did take, either by itself, or in connection with other acts or circumstances and facts, bears in some way upon the question of his antecedent conduct in the acquisition of the barrel patent rights and the making of the contract and the lease with the defendant corporation. We can find no such relation, however, and the matter must therefore be disregarded.
It is said that because McMillin’s salary was raised by the directors to $12,000 per annum from January 1, 1895, such action was collusive and fraudulent, 'and was part of a design to enable McMillin to extract illegal gain from the defendant company with which to acquire the stock of his associates on the board. If this contention is sound, it must rest upon the premise that the collusion and fraud involved the members of the board of directors of the defendant company as well as McMillin himself. It is true that, when this salary was voted to McMillin, three of the four individual members of the board of'
The point is made that McMillin was not in financial condition to buy the stock of his associate directors, which he agreed to purchase in 1894. It is beyond successful dispute that the sale by the shareholders to McMillin was in good faith. McMillin paid for the stock he purchased, partly in cash, and for the balance he gave notes. That he was in debt at the time of the purchase is indisputable, but the fact is proven that he had assets and credit other than his salary, and was enabled to make the payments for the stock in ways which were satisfactory to those who sold to him, and to do so without in any manner affecting the questions directly pertinent to this controversy. Granting that he used part of his salary from time to time to help pay his notes as they became due, that fact does not warrant a finding that the directors increased McMillin’s salary in 1895 with the ulterior purpose in mind of giving McMillin means wherewith he could pay his stock purchase notes. In other words, under the evidence, McMillin’s willingness to incur heavy debt to buy the stock does not carry with it an imputation of wrongdoing on his part, or on the part of those, directors who voted to increase his salary.
Complaint is made that McMillin concealed from the minority stockholders all facts which would tend to throw light on the Staveless Barrel Company’s transactions, and upon matters of pecuniary interest to his fellow trustees, and upon the ownership by him of the majority of the stock, and upon the question of his salary. Counsel’s suggestions are partly met by the evidence which shows that in January, 1895, complainant, by his attorney, examined the barrel contract and lease and knew just what they contained. It also appears that in 1903 complainant employed an expert to examine the books of the defendant corporation, and that five months were consumed by the expert in going over the accounts and papers. He made report to the complainant, inasmuch as McMillin’s personal account was credited with the amount of his salary on the books of the corporation, it is impossible to believe that complainant did not know what salary was being paid. It is also a fair inference from Mr. F. V. Cowell’s
McMillin is charged with deception and concealment at a stockholders’ meeting in January, 1895, in withholding information from Mr. '.Cowell and his counsel, who there appeared. It appears, though, that 'at that meeting McMillin presented a full statement, copy of which is •in the record, of the assets -and liabilities of the company, as they existed on January 1, 1895. He and other directors say, too, that he answered many questions propounded orally by counsel and by Mr. Cowell. McMillin admits that he refused information to the Cowells at various times pertaining to questions of cost of manufacture, business of the agencies, contracts with customers and affairs relating to the defendant’s creditors, because he felt that they wished to know such matters in order to use them against the companju His statement that the course he pursued was in pursuance of legal advice sought in .an endeavor to prevent his company from being forced out by the .Cowells is reasonable, and, whether his conduct was legally justifiable .or not, it induces the opinion that it was prompted by no purpose other - than protection of what he believed were the best interests of his cor-. poration.
Suspicion is grounded on the fact that the first barrel contracts between McMillin and defendant company were renewed under the cir.cumstances connected with the renewals. It appears that one of the .renewals or extensions was dated May 7, 1897, and ran to April 1, .1903; another, the last, was dated January 26, 1903, and ran until 1908. Complainant is accurate in saying that a majority of the directors who authorized the renewals only owned 1 share each, when they voted to renew, having previously sold their holdings to McMillin, and that at the time of the renewals, the stock so previously purchased by McMillin had not been transferred on the books or reissued to Mc-Millin. Failure on McMillin’s part to have had the stock reissued to him is a circumstance against McMillin, but if his conduct and the actions of the board in authorizing the renewals were honest, as they were, and within the power of the board to take, as they were, and the contracts were not of disadvantage to the corporation, and they . were not, this complainant was not wronged, and cannot complain ' of McMillin’s failure to have had the stock transferred on the books.
, As to the last renewal in 1903, the board’s action was ratified by the stockholders, all holders of stock having been previously notified of ' the stockholders’ meeting. Here again, no fraud in fact or bad faith .toward the corporation appearing, and the contracts'themselves being ’ of advantage to the company, these minority stockholders have not been wronged and cannot complain. It is insisted, however, that the directors were dummies when they voted for the renewals, because they
The fact that the defendant lime corporation apparently lost money between the years 1892 and 1897, and that the Staveless .Barrel Company made money during that same time, would be significant if the facts or circumstances showed that the relation of one concern to the other was initiated in fraud, or, after being entered upon, became fraudulent in any way. But they do not. The lime company appears to have saved money in the item of barrels by its agreement to buy them at 30 cents; and the evidence of its losses in its lime business during the particular years mentioned shows that general business depression obtained at that time and bore heavily upon most commercial enterprises. The general results of the investment to the stockholders in the defendant lime company for the 16 years between 1888 and 1903 show a profit of $390,000 on the original investment of $100,000, and a profit each and every year except (luring the years of business dullness above mentioned.
Many of the cases cited by complainant’s counsel in their brief upon the law are upon facts showing actual fraud. Among such are Jackson v. Ludeling, 21 Wall. 616, 22 L. Ed. 492; Wheeler v. Abilene Bank Building Co., 159 Fed. 391, 89 C. C. A. 477, 16 L. R. A. (N. S.) 892; Jones v. Missouri Edison Electric Co., 144 Fed. 765, 75 C. C. A. 631; Barker v. Montana Co., 35 Mont. 351, 89 Pac. 66; Miner v. Belle Isle Ice Co., 93 Mich. 112, 53 N. W. 218, 17 L. R. A. 412. The principles of law therein announced do not apply to the facts in the case under consideration.
The action of the Circuit Court in dismissing the bill was right, and the decree is affirmed.