111 F. 639 | U.S. Circuit Court for the District of Southern New York | 1901
This is an action commenced by the complainants, as minority shareholders of the Ecuador Development Company, to set aside as fraudulent a contract made between said company and the Ecuadorian Association, Limited, which was and is the majority shareholder of the said development company. By this contract, substantially, all of the property of the development company was transferred to the Ecuadorian Association. The bill is demurred to on the ground that it fails to state a cause of action and the defendant Mackenzie demurs also on the ground that he is improperly- made a defendant.
The bill alleges as follows: That in the year 1897 a contract was entered into between Archer Harman and the republic of Ecuador whereby Harman and his associates agreed to build and equip a railroad between Guayaquil and Quito, Ecuador. That thereafter the Guayaquil & Quito Railway Company was organized under the laws of New Jersey and took over said contract and entered upon its performance. That in the latter part of 1897 the South American Railway Construction Company was organized for the purpose of building said railway and by agreement with the railway company the said construction company was to receive a large proportion of the bonds and preferred stock of the railway company as a consideration for building the road. That in September, 1899, both said companies were without funds, the construction company was unable to carry out its agreements with the railway company and the concession granted to said company by the republic of Ecuador was in danger of lapsing. That the defendant the Ecuador Development Company was organized in September, 1898, for the purpose of taking over the rights of the construction company, and thereafter the entire property of said company was transferred to the development company, which latter company undertook the construction of said railway.- That the number of directors provided by the charter of the development company was five, three being chosen by the common and two by the preferred stock, the former controlling the management of the company. That in January,. 1899, the said Harman and one Norton conspired together to obtain a controlling interest in the stock of the development company, purchased large amounts of said stock and caused to be elected a board of directors controlled by them and subservient to their interests, Norton being elected president and Harman manager of said company. That the said Harman and Norton thereupon procured the said board of directors fraudulently to allot' to them all of the remaining common stock in the treasury of the
The bill charges that the contract of September 6, 1900, and the 'various contracts which preceded it were and are fraudulent and void as against the shareholders of the Ecuador Developmexit Company axid that they were xnade pursuant to a conspiracy to defraud the minority shareholders and to benefit the said Harman axid Norton. That to this end axid in furtherance of this scheme the property of the development company was squandered and it was induced to assume improvident, reckless, axid unnecessary obligations for the purpose of depressing the value of its stock and giving color to the assertion that it was insolvent in order that its entire property might be transferred to the Ecuadorian Association. That Harman and Norton, through their creatures, absolutely controlled the affairs and dictated the polic3r of the development company, and, pursuant to their scheme to secure all its property for their own use and to defraud the 'minority shareholders, refused to give axiy information regarding the affairs of the said company and kept the .minority in total ignorance of its financial condition until the transfer to the -Ecuadorian Association was accomplished. That no de
The relief demanded-is: First. That a discovery be had. . Second. That the contract of September 6, 19CO, and all previous contracts be set aside as void. Third. That an injunction issue restraining the defendants from transferring said contracts. Fourth. That an accounting be ordered.
The foregoing is a synopsis of the salient features of the bill. The bill is unnecessarily prolix and abounds in needless vituperation. Were the verbosity squeezed out of the bill by passing it through a mental condenser it would, undoubtedly, be a more- symmetrical pleading. However, the bill is now before the court on demurrer and the question, therefore, is not • whether the allegations of the bill could be more concisely stated, but whether the bill states a cause of action; if it does, it matters not what else it states. The bill, condensed to a few paragraphs, alleges as follows: First. The existence of the Ecuador Development Company, a solvent and flourishing corporation, holding a contract from which not less than $6,000,000 will probably be realized. Second. A fraudulent conspiracy on the part of the majority stockholders of the development company to secure for their own benefit and at the expense of the minority stockholders all of the assets and potentialities of the company. Third. The formation of the Ecuadorian Association, Eimited, which is in reality only the corporate name of the majority stockholders, and the transfer to it of all the assets of the development company for an inadequate consideration. Fourth. The various proceedings by which the transfer of the property fr-om all the stockholders to the majority stockholders was accomplished, namely, the packing by the conspirators of the board of directors with their dummies; the partial wrecking of the company to give a semblance of truth to the charge of insolvency; the arbitrary refusal to give any information to the minority stockholders; the absolute control of both corporations by the conspirators through their creatures, and the secret contract and transfer'to the Scotch corporation.
If the complainants are able to prove all that they have alleged it will entitle them to relief within the rule of the following authorities, which are selected from many as approximating most closely the facts in the case at bar: Mason v. Mining Co., 133 U. S. 50, 10 Sup. Ct. 224, 33 L. Ed. 524; Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827; Ervin v. Navigation Co. (C. C.) 20 Fed. 577; Meeker v. Iron Co. (C. C.) 17 Fed. 48; De Neufville v. Railroad Co., 26 C. C. A. 306, 81 Fed. 10. The rule deducible from all these cases is that although a majority may lawfully make a contract with the company such contract will be scrutinized with much greater care than if made with a third party, and unless it appears that it was made honestly and for an adequate consideration a court of equity will interpose to prevent such contract from being used oppressively and in violation of the rights of the minority. It matters not in what form these rights are invaded; it is the business of equity to pene
The theory upon which the courts interfere in such cases is tersely expressed by Sir William M. James, in Menier v. Telegraph Works, 9 Ch. App. 350. He says:
“The minority of the shareholders say in effect that the majority have divided the assets of the company, more or less, between themselves, to the exclusion of the minority. I think it would he a shocking thing if that could he done, because if so, the majority might divide the whole assets of the company, and pass a resolution that everything must he given to them, and that the minority should have nothing to do with it. Assuming the case to he as alleged by the bill, then the majority have put something into their pockets at the expense of the minority. If so, it appears to me that the minority have a right to have their share of the benefits ascertained for them in the best way in which the court can do it, and given to them.”
It is argued for the defendants that if the contract of September 6, 1900, were set out in full it would show ample consideration and would,, in short, demonstrate the falsity of the allegations of the bill regarding it. It is said that until proferí is made of the contract the “court ought not to permit complainants to put defendants or any of them to the trouble, expense and annoyance of filing an answer-herein.” It should be remembered that the cause is before the court on demurrer and bill. The bill must be judged as it is, not as it might be. The action is not founded on the contract of September 6th; it is an action to set that contract asid“ because it was obtained in fraud of complainants’ rights. It is not necessary that the contract should be pleaded in hsec verba. It often happens, in these circumstances, that there is a vast and fatal discrepancy between the pleading and the proof. Documents which are painted black in the pleading often turn out to be white and innocent when finally offered to the court for inspection. And yet the court on demurrer cannot pronounce the bill bad even though it is probable that the papers referred to therein if produced will make it plain that the action cannot be maintained. Adriance, Platt & Co. v. National Harrow Co. (C. C.) 98 Fed. 118. In this case the demurrer to the bill was overruled, but the bill was dismissed on final hearing for the reason that the circulars, which were alleged to be false and malicious, were found when produced to contain nothing but truth. Id. 111 Fed. 637. Assuming the case at bar to be a case where the contract should be pleaded a sufficient excuse for not pleading it is alleged in the bill.
"They are not alleged to be the owners or In possession oí the property, for the return of which the action is brought; and the controversy between the present parties can be completely decided without their presence or intervention and without any decree being entered which can affect then) in any way except indirectly as stockholders of the Ecuadorian Association.”
Surely, no reason can be suggested for failing to sue them which does not apply with infinitely greater force to Mackenzie. The bill contains no allegation implicating him in a conspiracy to defraud or charging him with knowledge of the existence of such a scheme. Any officer of the court receiving a similar commission to appear at a stockholders’ meeting and vote the stock of his principal in favor of a certain specified resolution might accept the service and act as directed with perfect innocence and good faith. No authority has been cited or found by the court where a bill of this character has been maintained against one who was neither a director nor stockholder, but was merely an attorney who did no act, except to vote the stock as he was directed to do by his client.
The demurrer filed by the defendant Mackenzie is allowed, with costs.
The demurrers of the other defendants are overruled, with leave to the defendants to answer the bill within 30 days upon paying the costs of the demurrers.