Fox v. Johnson & Wimsatt

Decision Date09 February 1942
Docket NumberNo. 7677.,7677.
Citation127 F.2d 729,75 US App. DC 211
CourtU.S. Court of Appeals — District of Columbia Circuit

Mr. Howard Boyd, of Washington, D. C., with whom Mr. Nelson T. Hartson and Mr. Edmund L. Jones, both of Washington, D. C., appeared on the brief, for appellant.

Mr. George E. Sullivan and Mr. William E. Leahy, both of Washington, D. C., with whom Mr. Nicholas J. Chiascione, of Washington, D. C., appeared on the brief, for appellee.

Before GRONER, Chief Justice, and MILLER and RUTLEDGE, Associate Justices.

RUTLEDGE, Associate Justice.

The appeal is from a summary judgment which dismissed the plaintiff's complaint. She sought in effect specific performance of an alleged contract. She claimed it bound the defendant corporation to redeem its preferred stock from proceeds received from the sale of real estate. In the alternative she sought to have the company pay her the pro rata share she would have received, if the stock had been redeemed.

The crucial issue is the construction of a resolution of the directors adopted November 8, 1930. Plaintiff claims this converted an option held by the company into a contract binding it to redeem the preferred shares. Defendant says the resolution was merely a declaration of policy having no contractual effect. We think the judgment must be affirmed.

The facts of the controversy are set forth in detail in an opinion of the trial court, rendered when it struck from the files certain affidavits later discussed, Fox v. Johnson & Wimsatt, D.C., 1940, 31 F. Supp. 64. For convenience, we restate the facts here. Although the suit is in form a corporate matter, the company is a family affair. All of its stock is held by the estate and the six surviving children of William A. Wimsatt, including plaintiff, his daughter. All of the children are directors. But the plaintiff is at odds with the others over the conduct of the business.

For more than forty years prior to 1923, William A. Wimsatt conducted a lumber business in the District of Columbia. In 1923 he organized the defendant corporation under the laws of Delaware to take over the business. The authorized capital stock was $3,000,000. This was divided into 20,000 preferred shares and 10,000 common shares. Each share had par value of $100. At incorporation 7,500 preferred shares were issued to Wimsatt. No other preferred shares have been issued. He also received 4,680 common shares.

In November, 1923, Mr. Wimsatt transferred 7,000 preferred shares to his seven children then living. Each received 1,000 shares. He died in February, 1929. By his will he bequeathed the remaining 500 preferred shares and all the common shares (4,680) held by him, in trust to his wife. She died in April, 1929. The trust income was to be divided in equal portions among the seven children then living. Since 1929, therefore, the children have been the virtual owners of all the corporation's outstanding stock. In January, 1930, the seven children were elected directors. All have been re-elected regularly, except that one has died. The vacancy has not been filled.

Plaintiff alleges that prior to 1930 the corporation invested unfortunately in a North Carolina enterprise. Considerable losses resulted. The directors took steps to preserve their inheritance. They inaugurated a policy to sell the real estate not actively used in the lumber business and use the proceeds to redeem issued preferred stock. The policy was declared in a resolution of the board adopted July 12, 1930: "Resolved: That with a view of buying in the preferred stock of this company, a steady and active policy be pursued of liquidating such properties and assets as can most readily be disposed of and conveniently dispensed with. To this end, the officers of the company are directed, individually, to submit at the next regular meeting of the Board, detailed written programs for the carrying out of this resolution. The officers are also directed to confer among themselves and to submit one joint plan incorporating such particulars as all the officers agree upon."

Condemnation proceedings had been instituted in September, 1929, by the District of Columbia to acquire real estate owned by the company in Squares 415 and 439 in the District of Columbia. This property was designated on the books as the Georgia Pine Property. On November 8, 1930, while the condemnation proceedings were pending, the directors unanimously adopted the resolution which is the crux of this suit. It was as follows: "Resolved: That when payment has been received by the Company for Squares 415 and 439, being the property condemned by the District Government, an amount of preferred stock be paid off equal to the net proceeds received from this property".1 (Italics supplied) When the resolution was adopted, the District was expected by all to take over the property. But complications developed later, and in December, 1931, the District discontinued and abandoned the proceedings. Its right to do this was upheld in Johnson & Wimsatt, Inc. v. Reichelderfer, 1933, 62 App.D.C. 237, 66 F.2d 217. The record discloses no further efforts by the District to acquire the property for about seven years. Apparently not merely the proceedings, but the project as well, was abandoned.

In March, 1931, the corporation borrowed $37,500 from the National Metropolitan Bank. It used this money to redeem 375 preferred shares. This was pursuant to a resolution of the board that five per cent of the preferred stock be redeemed in lieu of a one per cent dividend previously declared on the stock. There was a second pro rata redemption of 375 preferred shares, pursuant to resolutions of November 18, 1935, and April 25, 1936.2 To meet the cost of the second redemption and also refund the previous loan of $37,500, the company borrowed $64,500 from the National Metropolitan Bank. As security a deed of trust on Squares 415 and 439 was given.

In her amended complaint and affidavits, plaintiff alleged the first redemption was in partial compliance with what she regards as the obligation of the November 8th resolution. But she said the second redemption had no connection with this resolution because those of 1935 and 1936 called for redemption out of earnings without reference to the policy of liquidation.3

In August, 1938, nearly seven years after the condemnation proceedings were abandoned, the corporation sold the Georgia Pine Property to the District of Columbia for $192,000. On July 30, 1938, when the sale was imminent, disagreement developed in the board over the proposed use of the proceeds. It then passed the following resolution, with the concurrence of all directors except plaintiff: "Resolved: Following, and in consequence of, question raised by one of the members of the Board as to the proper interpretation and effect of the resolution adopted by the Board November 8, 1930, that (1) it had no relation to net proceeds that might be derived otherwise than through the then pending condemnation proceedings, which were later abandoned, (2) it constituted merely an authorization by the Board to the proper officers of the corporation, as to the application of the funds from said condemnation proceedings if and when received, (3) such authorization was subject to any later action that the Board might take, and (4) this Board hereby directs the officers of the corporation not to apply any funds of the corporation, from whatever source derived, toward the redemption or retirement of any preferred stock, unless and until this Board so provides in a resolution hereafter adopted."

The sale was completed and the proceeds were used to pay off the National Metropolitan Bank notes and deed of trust and the dividend notes previously issued to the shareholders.4 Plaintiff claims these payments were improper and the corporation was bound by the November 8th resolution to apply the net proceeds of this sale directly to further redemption of preferred stock.

Shortly after the sale plaintiff tendered her preferred shares to the corporation and demanded redemption of her pro rata portion. The tender was rejected. In making it she claimed the November 8th resolution was an exercise of the corporation's option to redeem, and thereby a contract for redemption arose between it and the shareholders, which was specifically enforceable.

The Delaware statute (Del.Rev.Code 1935, § 2059; (c. 65, § 27) provides that a corporation may redeem all or any part of its preferred shares, if subject to redemption, at such time or times, at such price or prices, and otherwise as shall be stated in its certificate of incorporation. Defendant's certificate states that "the preferred stock shall be subject to redemption at $100 per share at any time after five years from the date of the issue thereof, at such time and place and in such manner as the Board of Directors shall determine." This is the only attribute of the preferred stock shown in the record.

The procedural history of the case is as follows. Plaintiff's original complaint, filed in January, 1939, was dismissed, with leave to amend, for failure to state a cause of action. The stated ground for dismissal was that the November 8th resolution was a mere declaration of policy, having no contractual force. The complaint was in the form of a shareholder's derivative suit for recovery of funds wrongfully paid out. It named as defendants the corporation and the directors other than plaintiff. The amended complaint, filed in June, 1939, was against the corporation only. It stated substantially the same facts as grounds for recovery. But the theory of the cause of action was a contractual right to have redemption made, alleged to have been formulated in the resolution of November 8th. The corporation filed an answer and a motion for summary judgment. The grounds for the motion were that the amended complaint set forth the same cause of action as did the...

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