Smith v. Gowan, 18 Ohio C.C. (n.s.) 99

Smith v. Gowan

18 Ohio C.C. (n.s.) 99 | Oh. Circ. Ct., Cuyahoga | 1911

MARVIN, J.

Each, of these eases is based on the same state of facts, and each is brought to set aside a transfer of the property of the Cleveland Dredge & Dock Co. to the Great Lakes Dredge & Dock Co. each of which is a corporation, which transfer was made on or about June 30, 1906. The plaintiff in each of these eases was a stockholder in the first named company; the plaintiff, Louis P. Smith, OAvning 48 per cent of the stock, and the plaintiff, Margaret K. Smith, owning 1 per cent of the stock. The balance of the stock was owned, 48 per cent by J. A. Smith, a brother of the plaintiff, Louis P. Smith, and 1 per cent by E. B. D. Smith, Avife of said J. A. Smith, and 2 per cent by James R. Sprankle, now deceased. Indeed, Sprankle was already dead at the time of this transfer and the 2 per cent of the stock which he had owned constituted a part of his estate. The Cleveland Dredge & Dock Co. was the outgroAvth of a partnership which had before its organization existed between the plaintiff, Louis P. Smith, and his brother, James A. Smith. The corporation having been first organized as the L. P. & J. A. Smith Co. and then by reorganization changed to the Cleveland Dredge & Dock Co. the two brothers being equally interested in said partnership. When the corporation was organized, in order to make the number of shareholders sufficient to constitute a board of directors, a share of the stock which was purchased by Louis P. was issued to his wife, Margaret K., and a share of the stock purchased by James A. was issued to his wife, E. B. D., and then two shares were issued to Sprankle, who was a brother-in-law of the Smiths.

It is agreed on the trial that though each of these wives and *576Sprankle were genuine'stockholders, they became such simply to qualify them to act as directors, so that the corporation might be legally organized. The purchase of the stock by Louis P. and James A. Smith was made by the transfer of the property of the partnership formerly existing between them to the corporation. Manifestly the issue of the stock, as it was issued to the two wives and to Sprankle, was that the two brothers should practically control the corporation, each having an equal interest therein. In 1905, or the early part of 1906, the Cleveland Dredge & Dock Co. was in financial straits. Its creditors were consulted and the result finally was that the management of its affairs was put into the hands of a committee; agreed upon between the corporation and the creditors, and spoken of as the creditors’ committee. This committee undertook to tide the company over its embarrassment, believing that its assets were sufficient to pay all its debts, and much more, provided its business could be carried on and its contracts then existing and partly performed could be completed; that this and the business it was likely to get would eventually pay all the debts and leave a good surplus for the stockholders.

On March 26, 1906, a contract was signed transferring the control of the affairs of the Cleveland Dredge & Dock Co., to this committee, and in terms authorizing the committee to sell the assets of the company, if it should deem it best.

The clause of said contract authorizing the sale is in these words:

“To give to said committee, which they hereby do, full authority and discretion with respect to the management of said company and the disposition of the assets of said company by sale, liquidation or otherwise, in such manner and at such price, as they may deem just and proper, at any time during the continuance of this agreement.”

The committee made the transfer of the property to the Great Lakes Dredge & Dock Co., as already stated, on or about June 30, 1906, the Great Lakes Dredge & Dock Co. undertaking to complete various contracts for the kind of work which was carried on by the Cleveland Dredge & Dock Co. and which it had partly performed, and upon which there had been earned a large *577amount of money which had been retained as a percentage until the completion of these contracts. Of course it was of great importance to the Cleveland Dredge & Dock Co. that these contracts should be completed so that this retained percentage could be realized. The transfer however made by the .committee to the Great Lakes Dredge & Dock Co. was not made for money, but there was taken in exchange for these assets stock of the Great Lakes Dredge & Dock Co., which stock was issued to a trustee, who still holds it. ■

The purpose of each of the present actions is to set aside this transfer and for an accounting on the part of the Great Lakes Dredge & Dock Co. and the several members of the creditors’ committee and the trustee. Without stopping to examine the terms of the contract of transfer we hold that the authority given to the committee to sell the assets of the Cleveland Dredge & Dock Co.was not an authority to exchange its assets for any other property, except money or its equivalent. An authority to sell is not an authority to exchange. In support of this, attention is called to Cleveland v. State Bank of Ohio, 16 Ohio St. 236 [88 Am. Dec. 445]. In this case the court construed these words:

‘ ‘ To sell said shares or any part therof at such time or times as to them may seem expedient for not less than their par value and to do whatsoever else may seem necessary to secure and advance the interest of the city in the premises. ’ ’

Commenting on these words the court said that such words did not authorize an exchange of the shares of stock for other property.

Certainly the language here construed was as comprehensive as the words of the contract now under consideration, giving the creditors ’ committee ‘ ‘ full authority and discretion with respect to the management of said company and the disposition of the assets of said company by sale, liquidation or otherwise, in such manner and at such price as they may deem just and proper. ’ ’

On the part of the defendants, however, it is urged that whatever rights the plaintiffs might have asserted, if they had acted with promptness upon learning that which had been done *578in the matter of this transfer, they are estopped from now asserting. As early as July 13, 1906, the plaintiffs knew of this; in any event, on July 25, 1906, L. P. Smith saw the contract between the committee and the Great Lakes Dredge & Dock Co. and they did nothing until October 1, 1906, when Louis P. Smith made a protest against the action which had been taken, but suits were not brought until May 21, 1907.

In the meantime the Great Lakes Dredge & Dock Co. had taken possession of the assets of the Cleveland Dredge & Dock Co., which consisted of some dredges, scows and other machinery and apparatus for dredging, building docks and the like along the lakes. It had made repairs on the property, had divided it, using it with other property of the same kind which belonged to it originally, and had gone on with the completion of the contracts, which, as alread3r stated, had been partly performed by tile Cleveland Dredge & Dock Co., expending large sums of money in the completion of such work and the making of such repairs, and in short had put itself in a very different position from that in which it was with reference to these assets when it first took possession of them, and had made it impossible to restore the status quo. There seems very little doubt that except for the claim that these plaintiffs are stockholders in a corporation and that whatever they may secure by virtue of these several suits would be for the benefit of the corporation,, they would each be estopped from maintaining an action. In support of this, see the United States Rolling Stock Co. v. Atlantic & G. W. Ry. 34 Ohio St. 450 [32 Am. Rep. 380], and the authorities there cited.

■ But it is urged that estoppel which would be effective as against these plaintiffs, were they suing simply for an infringement of a personal right, can not be asserted to the prejudice of the corporation in which they are stockholders. A complete answer to this seems to be furnished by the fact that though the corporation is a legal entity any benefit which could come to-it would be a benefit simply to its stockholders; that substantially all of its stock was owned by the two Smith Brothers; that James A. Smith and his wife are content with what has been done; that so far as appears no complaint is made by the representa* *579tives of the two shares of Sprankle stock; that there is nobody but these plaintiffs who could be benefited by anything that could come to the corporation, who is not satisfied with the situation as it is in fact practically nobody but the plaintiff,, Louis P. Smith. It would, therefore, seem equitable and just, that what would estop these plaintiffs if each was suing for an individual right should estop them from maintaining these suits. In the case of State v. Standard Oil Co. 49 Ohio St. 137 [30 N. E. 299; 15 L. R. A. 145; 34 Am. St. 541], the first paragraph of .the syllabus reads:

‘ ‘ That a corporation is a legal entity, apart from the natural persons who compose it, is a mere fiction, introduced for convenience in the transaction of its business, and of those Avho do-business with it; but like every other fiction of the law, when, urged to an intent and purpose not within its reason and policy, may be disregarded. ’ ’

Practically each of these suits is brought to vindicate what Louis P. Smith regards as an infringement of his personal right. The amount of stock held by Margaret K. Smith is too insignificant to make the result of this litigation of substantial importance to her, and Louis P. Smith should be treated in this action, notwithstanding there is technically a corporation’s rights sought to be vindicated, as suing for his individual benefit. So treating him, we hold that he is estopped from maintaining the action, and that which estops him estops Margaret K. Smith in her action, and the result is that the petitions are dismissed.

Winch and Henry, JJ., concur.