Martin v. Development Co. of America, 240 F. 42

Martin v. Development Co. of America

240 F. 42 | 9th Cir. | 1917

HUNT, Circuit Judge

(after stating the facts as above). [1] Passing the question of the right of Martin, as trustee, to maintain this suit against the Development Company, we believe that the facts stated do not make the Development Company liable for the debts and defaults of the Copper Company. A holding corporation has a separate corporate existence, and is to be treated as a separate entity, unless facts are averred which show that such separate corporate existence is a mere sham, or has been used as an instrument for concealing the truth, or where the organization and control are shown to be such as that it is but an instrumentality or adjunct of another corporation. Pittsburgh & Buffalo Co. v. Duncan et al.; 232 Fed. 584, 146 C. C. A. 542; In re Watertown Paper Co., 169 Fed. 252, 94 C. C. A. 528.

[2, 3] The Development Company, appellee, back in 1903, had a contract to purchase certain mines described, and caused the Copper Company to be organized. The Development Company acquired the mines, and caused title to be taken in the name of the Copper Company, and caused the development and operation of the mines to be conducted in the name of the Copper Company. Other companies were also organized at the direction of the Development Company, and the capital stock, of these companies was issued to the Copper Company. Later, but back in 1903, the Development Company caused the Copper Company to issue $2,000,000 of bonds, secured by deed of trust upon all of the property of the Copper Company, including the shares of stock in the Smelting and Railroad Companies owned by the Copper Company. All the bonds and all the capital stock of the Copper Company were issued and delivered by the Copper Company to the Development Company, and the Development Company used the bonds and stocks and proceeds of the sale of the bonds and stocks in buying, developing, and operating the mining properties.

It is alleged that the Development Company long since disposed of the bonds and shares of stock of the Copper Company and used the proceeds in development and operation of the mining properties. No facts are alleged which show a concealment in these transactions, and none can be presumed under the showing made. The stockholders who purchased became the owners of the assets of the Copper Company, subject to the debts of the corporation. Legal title of the mining properties was always in the Copper Company, and development and operation were carried on in its name. It incurred debts amounting to over $1,000,000 in its own name, and finally in 1911 was declared a bankrupt. Under such a state of facts the contracts of the Copper Company cannot bind the Development Company, for each corporation was separately organized, and operated under separate, distinct, organization without such interrelationship as would malee the Copper Company but an instrument or adjunct of the Development Company.

The fact that the Development Company exercised a control over the Copper Company, through its stock ownership or identity of directorate, is to be considered, but by itself is not enough to establish a merger, or to make the Copper Company in its contracts the agent *46of the Development Company. In Clere Clothing Company v. Union Trust & Savings Bank, 224 Fed. 363, 140 C. C. A. 49, this court applied the rule that there may be a virtual relationship of principal and agent between two corporations'; but the facts of that case showed a systematic purpose and scheme whereby, from the organization of one corporation down to the time of its bankruptcy, it was acting solely in the capacity of agent of another company, and it was held that in presenting its claim it was deliberately attempting to prove debts against itself, in fraud of legitimate creditors of the bankrupt corporation.

In Linn & Lane Timber Company v. United States, 196 Fed. 593, 116 C. C. A. 267, we find another case'where this court held to the rule that, when proper showing is made, equity will go beyond corporate form to ascertain whether a corporation is being used as a fraud. But again the facts showed that one of the purposes for which the corporation was formed was to conceal fraudulently therein titles to the lands which were the subject of the suit, and to keep the title so concealed until the time when the statute of limitations should bar an anticipated suit by the government to set aside the patents. Here, upon petition of creditors, the Copper Company was duly adjudged a bankrupt. There is no averment that the creditors ever looked to the Development Company as their debtor. Furthermore, it appears that the mining properties were sold under decree in foreclosure of a mortgage, and which never has been and is not heréin assáiled as fraudulent or illegal. The Copper Company was a party to the foreclosure proceedings, which, while instituted before the bankruptcy petition was filed, were not brought to decree until several months after the trustee in bankruptcy was appointed. Martin, Trustee, v. Bankers’ Trust Company, Trustee (Ariz.) 156 Pac. 87. Martin, as trustee, intervened.

The allegation, made upon information and belief, that at the foreclosure sale the property was bought by one Goldschmidt, who was the mere agent of the Development Company, and the prayer that all of the properties be decreed to be part of the assets of tire Copper Company, bankrupt, cannot avail the trustee, if the Development Company is not liable for the debts of the unsecured creditors of the Copper Company; and as we must conclude that there is no such liability the appellant is not entitled to relief.

The judgment is therefore affirmed.