Felix Jellenik v. Huron Copper Mining Company

• Citation: 177 U.S. 1,44 L.Ed. 647,20 S.Ct. 559
• Decision Date: 12 March 1900
• Docket Number: No. 100,100
• Parties: FELIX JELLENIK, George Shiras, 3d, C. C. Dickey, Trustee, et al., Appts ., v. HURON COPPER MINING COMPANY, J. C. Watson, et al
• Court: United States Supreme Court

177 U.S. 1

20 S.Ct. 559

44 L.Ed. 647

FELIX JELLENIK, George Shiras, 3d, C. C. Dickey, Trustee, et al., Appts.,

v HURON COPPER MINING COMPANY, J. C. Watson, et al.

No. 100.

Argued and Submitted January 16, 1900.

Decided March 12, 1900.

This is an appeal from a decree of the circuit court of the United States for the western district of Michigan dismissing the bill of the plaintiffs, appellants here, for want of jurisdiction over some of the defendants who were held to be indispensable parties to the suit.

The case made by the bill is as follows: The plaintiffs are stockholders of the Huron Copper Mining Company and citizens of other states than Michigan. The company is a Michigan corporation, the mines operated by it, all its other property, and its principal offices for business being at Houghton, Michigan, with a branch office at Boston, Massachusetts.

During the transactions complained of in the bill, the board of directors of the company, whose members are the other defendants in this suit, were J. C. Watson, D. L. Demmon, Samuel L. Smith, H. J. Stevens, and Johnson Vivian. Watson, Demmon, and Stevens (the last-named having since died) were residents of Boston, Watson being president and Demmon secretary and treasurer of the company. They had charge and control of the branch office in Boston. Smith resided at Detroit, Michigan, but was frequently in Boston. Vivian resided at Houghton, Michigan, and was for many years the general manager of the mining operations and the business of the company at its mining location in Houghton county. Smith and Vivian disclaimed any connection with the alleged fraudulent transactions set forth in the bill, but were put upon their proof by the plaintiffs as to the matters stated therein.

In June, 1890, the board of directors made an assessment upon the capital stock of the company of $5 per share payable on July 7th of that year. Notice of the assessment was given to the stockholders, accompanied by the statement that it would be sufficient to pay off all the indebtedness of the company and leave a cash balance in its treasury of over $30,000 in addition to the unsold copper and other personal property of the company.

It was alleged that upon receiving the amount of the assessment, $200,000, the board of directors, for the purpose of defrauding the plaintiffs and other stockholders, applied a portion of it to the payment of spurious debts of the company, and wasted and misapplied another large portion, diverting it from the treasury of the company and from the purpose for which it was made, and applying it to the personal uses of the directors and officers of the company and their confederates.

On October 25, 1891, the board of directors made another assessment upon the stock of the company of $3 per share, which aggregated $120,000. This assessment was made without the knowledge of the stockholders and at a time when, as appeared from the statement of the board, there were sufficient assets of the company exclusive of its mines and mining property, to pay all its legal debts.

The bill charged that the board of directors ors or their representatives had disposed of the stock held by them before the making of the above assessments, and were the holders of none or at least a very small portion, except as they held stock purchased at a sale to be presently referred to as trustees for the plaintiffs and other stockholders, so that they had but a nominal, if any, interest in the company; that they had so manipulated the assessments as to enable them to speculate in the stock of the company to the detriment of the stockholders; that they had contracted fraudulent debts by means of false and illegal salaries, allowances, and commissions to themselves, by making fraudulent contracts for the company at extravagant prices, and by borrowing large sums of money for the company at usurious interest, in which contracts and usurious loans the directors and their confederates were interested as contracting parties with the company; that while acting as directors and trustees for the stockholders they had betrayed their trust and mismanaged the affairs of the company for their own profit and advantage; and that for many years they had continued the mining of copper at an apparent loss by reason of such fraudulent practices and mismanagement and by false statements concealed the same from the stockholders.

On November 1st, 1891, the plaintiff Jellenik, acting for himself and as attorney for several of the plaintiff stockholders, applied to Watson and Demmon for leave to examine the books of the company for the purpose of determining the true state and condition of its affairs, but the demand was refused; and for that reason Jellenik refused and advised his clients to refuse to pay the $3 assessment.

On February 9, 1892, the assessment of $3 not having been paid, a sale of the stock was made by order of the directors at the office of the company in Boston. The sale took place in the private office of the defendant Demmon, the secretary and treasurer of the company. No one was present but the plaintiff Edwards and three other persons, besides the officers and directors of the company and their clerks. The directors or their clerks did all the bidding on the stock, except the bids made for twenty shares, ten of which were purchased for each of the plaintiffs Dickey and Kennedy, trustees. One of the clerks in the office of the company bid in 2,725 shares, and Watson, the president of the company, took 38,315 shares. The total number of shares sold was 41,060, or 1,060 more than the company possessed, its capital stock being 40,000 shares.

Notwithstanding the assessment of $5 and the second assessment of $3, which were made upon notice to the plaintiffs and other stockholders that they would not only be ample to pay all the indebtedness of the company, but would leave its property free and clear, with a large balance in the treasury, and notwithstanding the defendants Watson and Demmon, in making the sale of the stock under the $3 assessment, required Dickey and Kennedy, trustees, and other stockholders not in conspiracy with the defendants, to pay the full amount of the assessment on such sale, Watson and Demmon, the bill charged, either fraudulently sold the stock upon that sale to themselves individually or to their fellow conspirators for a mere pittance, without realizing the assessment thereon, or they realized the money and squandered it and allowed the indebtedness of the company to be put in judgment in Houghton county, Michigan, with the fraudulent intent through and by that means to buy in and absorb the property and render valueless the stock of the plaintiffs.

In carrying out this scheme, it was alleged that the directors permitted judgments to be taken against the company for $180,230.08, of which amount $106,251.84 was a judgment by the defendant Demmon to himself, growing out of illegal transactions with himself as a director and officer. All the judgments were obtained on the same day, December 30, 1891, by consent between the attorneys appearing for the company and those for the judgment creditors, Demmon's judgment having been fraudulently procured by using his power and influence to prevent any investigation as to the honesty and legality of his claim.

All of the judgments, except the one procured by Demmon, were assigned to J. B. Sturgis, trustee, of Houghton, Michigan, and on May 7, 1892, the mining property of the company was sold under the judgments so assigned to Sturgis and a certificate of sale given him by the sheriff of Houghton county. On August 21, 1893, the sheriff of that county, in pursuance of the certificate of sale, executed a sheriff's deed of the property to Sturgis. This deed was duly recorded August 24th, 1893, and so far as the records showed, no transfer of title to the property had since been made by Sturgis.

It was alleged that the purpose of making the fraudulent assessment and pretended sale of stock was to exclude the plaintiffs and other stockholders from any right of inquiry into the affairs of the company; that the purpose of the directors and officers in causing the property of the company to be seized and sold by legal process for spurious and fraudulent debts was to extinguish the title of the corporation and of its stockholders to the mining property and to vest the same in the directors and their confederates; and that the pretended sale of stock was made in defiance of the protest of the plaintiffs and other stockholders of the company and upon notice given to the directors, at the time and place of the sale of the stock, of the fraudulent character of the assessment and of the proposed sale, like notice being given to all purchasers before the making of the sale.

It was stated in the bill that on September 15th, 1892, the plaintiffs filed in the court below a bill similar to the one herein A plea and demurrer were interposed by Watson, and upon a hearing had thereon by consent, the court held that the bill was defective in its jurisdictional allegations and declined to proceed further until one was filed having proper allegations and giving it jurisdiction to act.

The present bill contained this paragraph:

'Your orators allege that the shares of stock in the said defendant company are personal property, and its location is where the company is incorporated and nowhere else, and that the locus in quo of the stock of the defendant company has been since its incorporation at Houghton county, Michigan, that being its principal office for business and place of incorporation, and this bill is filed to remove any encumbrances, lien, or cloud upon the title of your orators in said personal property thus located caused by the fraudulent acts of the defendants, as herein alleged, and for such other and further relief as the nature of the case shall require.'

The plaintiffs also averred that they filed their bill in their own...