Richardson v. Blue Grass Mining Co., 858.

• Decision Date: 17 October 1939
• Docket Number: No. 858.,858.
• Citation: 29 F. Supp. 658
• Parties: RICHARDSON et al. v. BLUE GRASS MINING CO. et al.
• Court: U.S. District Court — Eastern District of Kentucky

29 F. Supp. 658

RICHARDSON et al. v. BLUE GRASS MINING CO. et al.

No. 858.

District Court, E. D. Kentucky, at Lexington.

October 17, 1939.

COPYRIGHT MATERIAL OMITTED

W. E. Faulkner and Wootton & Wooton, all of Hazard, Ky., and J. R. Simmonds, of Johnson City, Tenn., for complainants.

S. S. Willis, of Ashland, Ky., and Craft & Stanfill and J. E. Johnson, Jr., both of Hazard, Ky., for defendants.

FORD, District Judge.

The questions presented for determination make it necessary to review a series of transactions, the first of which took place on November 25, 1929, when the Receiver of the Wakenva Coal Company and Amalgamated Coal Corporation, acting under the orders of the Circuit Court of Perry County, Kentucky, offered for sale at public auction a large acreage of coal lands in Perry County upon which extensive mining operations had been carried on for many years. Included in the sale were numerous buildings and other structures such as miners' houses, tipples and trackage located on the land, also coal cutting machines, mine cars, motors and other equipment in the mines and a stock of merchandise and fixtures in the commissary. The defendant, J. E. Johnson, Sr., became the purchaser for the sum of $14,000, his purchase being subject to confirmation by the Court.

In attendance at the sale were two gentlemen from Tennessee, H. T. McArthur and Ferdinand Powell. They were experienced coal mine operators. After looking over the property, they decided to make an effort to purchase an interest in it for themselves and their associates, W. E. Richardson, Mrs. Margaret Powell and R. W. Lawson. Negotiations were begun with the result that on December 7, 1929, Mr. Johnson sold and assigned one-half interest in his purchase to Mr. McArthur as Trustee for himself and his Tennessee associates. For convenience, we shall refer to Mr. McArthur and his associates, the complainants, as the Tennessee group. They paid Mr. Johnson $1,400, covering one-half of the payment he had made to the Receiver; they agreed to pay one-half the remainder of the purchase price in accordance with the terms of the court sale and to pay Mr. Johnson an additional $4,000 if and when the sale was finally confirmed and title vested in them to one-half of the property. The contract evidencing their various agreements was in writing. It provided, in substance, that in the event one or more corporations should be organized to take over and operate the proposed enterprise one-half the stock in each corporation should be owned by Mr. Johnson and the other half by Mr. McArthur and his associates.

The sale was confirmed by the Perry Circuit Court on December 11, 1929, and possession of the property was then delivered to the purchasers by the Receiver. At about this time, the defendants J. E. Johnson, Jr., and William Pendleton and his brother Arch Pendleton became associated with the defendant J. E. Johnson, Sr., in the undertaking. They will be referred to as the Kentucky group.

On December 16, 1929, representatives of the Tennessee group met with Mr. Johnson and his Kentucky associates in Lexington and definite plans were made for the organization of two corporations. To take over and operate the mines, they incorporated "Blue Grass Mining Company" with a capital stock of $10,000 represented by one hundred shares of par value of $100 each. At the same time, they incorporated "The Pendleton Store" to take over and operate the mine commissary with a capital stock of $5,000 divided into fifty shares of $100 each. The capital stock of both corporations was fully subscribed, representatives of the Tennessee group subscribing for one-half of the stock of each corporation and representatives of the Kentucky group for the other half.

In order to get operations started, it was estimated that $5,000 would be necessary and the Tennessee group paid to Mr. Johnson $2,500 as their share (one-half) of the initial operating capital. Blue Grass Mining Company promptly took over operation of the mines and The Pendleton Store took over the commissary. The mines were put in operation and were ready to ship coal by January 1, 1930. Thereafter the business was carried on diligently. The Kentucky group assumed complete control of both corporations and took active charge of all the business. Mr. J. E. Johnson, Sr., was recognized as in chief authority. Considerable correspondence was carried on with the Tennessee group as the business progressed and operating statements were occasionally mailed to them. Members of the Tennessee group visited the mines and observed the activities from time to time, and on several occasions rendered valuable assistance in solving problems which arose in connection with sales of coal and operations of the mines. The enterprise was so successful that additional contributions by the stockholders were never requested or needed.

On May 30, 1930, the Kentucky Court of Appeals reversed the order of the lower court and directed that the sale be set aside. Wakenva Coal Co. v. Johnson, 234 Ky. 558, 28 S.W.2d 737. The parties, of course, had anticipated the possibility of this eventuality and had discussed plans to try to lease the property from the Receiver and thereby continue the operation of it until another sale, with the hope that they might again buy it. Under date of June 30th, Mr. Johnson wrote Mr. Powell in reference to the situation, saying: "The only thing that can be done, as I see it, is to make a lease to the Blue Grass Mining Company to take care of it and operate it until it can be sold." The parties concurred in Mr. Johnson's suggestion and on July 7, 1930, with the authority of the Court the Receiver temporarily leased the property to the Blue Grass Mining Company with authority to it to continue operations.

Their efforts to promptly secure a Court order for a second sale and to purchase the property were successful, the purchase price being increased however to $52,000. The Wakenva interest again prosecuted an appeal. Nevertheless all the property remained in the possession of the newly organized corporations and operations were not interrupted by the appeal.

Several months later the Court of Appeal handed down an opinion again reversing the lower court and ordering the sale set aside. Before the mandate was issued a petition for rehearing was filed. While this petition was pending, through the efforts and influence of the Tennessee group, an agreement was reached with the Wakenva interests under which, in consideration of $10,750 paid them by Blue Grass Mining Company, they agreed to withdraw their objections to the sale and dismiss the appeal. As the result of this agreement, the appeal was withdrawn or dismissed, and the order of the Perry Circuit Court confirming the second sale became final.

It appears from the record that between the first and second sales, Blue Grass Mining Company expended $38,800 upon the property in the way of additions and improvements and the Perry Circuit Court allowed it credit on the purchase price for the amount so expended. Notwithstanding these large expenditures on the property and the $10,750 paid to the Wakenva interests in compromise of the suit, in this brief time the company had accumulated such a substantial bank balance that in November 1930 when general conditions throughout the country created uneasiness as to the safety of banks, Mr. Johnson withdrew $10,000 from the bank account of the company and after holding it in his private bank box for a considerable time paid it to the Receiver on the purchase price of the property. In view of the small outlay of initial capital, these expenditures, aggregating more than $50,000, evidence the large earnings of the business from the beginning.

The complainant, W. E. Richardson, succeeded McArthur as Trustee for the Tennessee group and on February 18, 1931, he was induced to sign a contract with J. E. Johnson, Sr., and J. E. Johnson, Jr., providing, in substance and effect, that the interest of the Tennessee group in the capital stock of Blue Grass Mining Company and The Pendleton Store should be thirty percent and that J. E. Johnson, Sr., "and certain other parties of the State of Kentucky" should have seventy percent, with the further provision that the stock was "to be issued immediately". The contract also provided for the formation of a holding corporation with stock to be held by the parties in the same proportion. This corporation was to take over and hold title to the property which had been acquired, leaving operation of the properties to the existing corporations. It was also provided that the Tennessee group were to have a small interest in the Jeda Coal Company and Black Gold Mining Company, corporations promoted by Mr. Johnson. The Tennessee group was released from any obligation to pay the $4,000 referred to in the contract of December 7, 1929, and it was provided that the $3,900 paid into the enterprise by the Tennessee group would be refunded to them and $7,500 refunded to Mr. Johnson. They agreed that in the event of the organization of a separate corporation to handle and promote sales the stock would be owned equally by the parties.

Nothing was done to carry out or consummate this second agreement. The business was continued as theretofore with the Kentucky group in complete control. Finally in June 1935 the Tennessee group, having become dissatisfied with the way things were going, employed an accountant to make an audit of the books and records of the corporations.

The report of the auditor disclosed that entries had been made upon the books of both corporations allotting the entire capital stock of both of them to the Kentucky group to the entire exclusion of the Tennessee group. A sales corporation had been organized, known as Blue Grass Coal Company, with capital stock of $5,000 entered upon the books in the name of J. E. Johnson, Sr., his son Mark Johnson, and W. S. Denham, the sales manager.

It was further...