Arn v. Operators Royalty & Producing Co., 816.

CourtUnited States District Courts. 10th Circuit. Northern District of Oklahoma
Writing for the CourtF. E. Riddle and O. G. Rollins, both of Tulsa, Okl., for complainants
Citation13 F. Supp. 769
Decision Date03 March 1936
Docket NumberNo. 816.,816.

F. E. Riddle and O. G. Rollins, both of Tulsa, Okl., for complainants.

Glenn Alcorn, of Tulsa, Okl., W. V. Pryor, of Sapulpa, Okl., and R. W. Raynolds, of Tulsa, Okl., for defendants Dunnett, Cloud, and Disney.

Conner & Winters, of Tulsa, Okl., for First Nat. Bank & Trust Co. of Tulsa, as trustee.

Saul A. Yager, of Tulsa, Okl., and C. C. Madison and Harvey Roney, both of Kansas City, Mo., for Roy S. Randerson and L. B. Randerson.


Ray M. Dunnett purchased two oil and gas royalty interests under lands in Gray county, Tex., for a total consideration of $22,000, which was paid by notes executed by Dunnett and Disney, Wheeler, Alcorn, and Cloud. This group organized the Operators Royalty Company and transferred the two royalty interests to it in consideration of all of its authorized capital stock of 200,000 shares. The stock was issued and divided among the promoters, who in turn transferred a block of it to Stephen B. Nelson as trustee. The promoters, with Nelson, constituted all of the officers and directors of the corporation and ordered the royalty interests to be set up on the corporation's books at a value of $150,000. It is due the promoters to say that between the time Dunnett bought the royalty interests and the time the interests were set up on the corporation's books, there had been some oil and gas development in the vicinity of the royalties.

The organizers of the royalty company had theretofore managed the Operators Oil Company, which was highly successful. Dunnett and his associates mailed to the stockholders of the oil company the letter set out in note 1 The offered stock was oversubscribed. The money received from the sale of the stock was in the form of checks payable to the royalty company, but a large part of the money was used by Dunnett and his associates to pay their notes for the purchase price of the two royalty interests and for other purposes of their own. It is interesting to note that only about two weeks elapsed between the time Dunnett purchased one of these royalties and the time the letter was sent to the stockholders of the Operators Oil Company soliciting their subscriptions for stock in the royalty company. The net result of the transaction was that the promoters owned free of cost the controlling stock of the royalty company and received in cash enough to pay the purchase price of the property owned by the corporation, all organization expenses, and some profit to themselves in addition. On October 5, 1929, another letter soliciting subscriptions was sent to the group receiving the first letter. The letter of October 5th is set out in note 2. Thereafter the capital stock was increased and a 50 per cent. stock dividend declared.

The Operators Royalty Company met financial disaster and plaintiffs, who subscribed to stock, pursuant to the letters of May 2d and October 5, 1929, seek cancellation of the promoters' stock, rescission of their own contract of purchase, judgment in their favor for the moneys paid by plaintiffs in purchasing their stock, the appointment of a receiver, and general relief.

At the time Dunnett transferred his royalty interests to the royalty company, the only persons interested in that company were Dunnett and his associates, who had full knowledge of all the details of the transaction. There were no creditors or innocent stockholders.

In Old Dominion Copper Co. v. Lewisohn, 210 U.S. 206, 28 S.Ct. 634, 636, 52 L.Ed. 1025, promoters formed a corporation that they might sell property to it at a profit and made the sale at a time when they owned all the issued stock. They later caused the corporation to sell other stock to the public. In holding that the corporation could not complain of the transaction, the court said: "At the time of the sale * * * there was no wrong done to anyone," and that the grantors and their syndicate "were on both sides of the bargain, and they might issue to themselves as much stock in their corporation as they liked in exchange for their conveyance of their land." The court also held that a change in stockholders did not increase the corporation's rights, and that if there was a wrong, it was when the innocent public subscribed, but such subscriptions did not confer a right nunc pro tunc upon the corporation. The court said:

"Of course, it is competent for legislators, but not, we think, for judges, except by a quasi legislative declaration, to establish that a corporation shall not be bound by its assent in a transaction of this kind, when the parties contemplate an invitation to the public to come in and join as original subscribers for any portion of the shares."

In Davis v. Las Ovas Co., 227 U.S. 80, 33 S.Ct. 197, 57 L.Ed. 426, a part of the promoters made a secret profit without the knowledge or consent of their associates. The old Dominion Case was held inapplicable and the corporation was permitted to recover.

Whatever may be the rule elsewhere, it seems to be well settled in the courts of the United States that the promoters' fiduciary relation to the corporation does not extend to future stockholders, and if the promoters' profit is known to all of the stockholders existing when the profit is made, it may not be recovered by the corporation. This is clear from the Old Dominion and Davis Cases, supra, and from Ball v. Breed, Elliott & Harrison (C.C.A. 2) 294 F. 227; Ball v. Chapman (C.C.A. 7) 1 F.(2d) 895; South Penn Colleries Co. v. Sproul (C.C.A.3) 52 F.(2d) 557.

In so far as the plaintiffs seek to sue for the corporation, their rights are no greater than its rights and their action must fail unless the corporation could have recovered if it were the party plaintiff. Kessler v. Ensley Land Co. (C.C.A.5) 148 F. 1019; Big Creek Gap Coal & Iron Co. v. American Loan & Trust Co. (C.C.A.6) 127 F. 625; Dickerman v. Northern Trust Co., 176 U.S. 181, 20 S.Ct. 311, 44 L.Ed. 423. The plaintiffs are also met by the rule that they cannot attack a transaction occurring before they became stockholders. Equity Rule 27, 28 U.S.C.A. following section 723; Dimpfell v. Ohio & Mississippi R. Co., 110 U.S. 209, 3 S.Ct. 573, 28 L.Ed. 121; Hawes v. Contra Costa Water Co., 104 U.S. 450, 26 L.Ed. 827; Corbus v. Alaska Treadwell Gold M. Co., 187 U.S. 455, 23 S.Ct. 157, 47 L.Ed. 256.

The plaintiffs urged, however, that they are entitled to recover under the principles announced in McCandless v. Furlaud, 296 U.S. 140, 56 S.Ct. 41, 50, 80 L.Ed. ___, decided by the Supreme Court of the United States, November 11, 1935, but I do not construe that case as changing the doctrine of the Old Dominion Copper Company Case in a suit brought by stockholders. In the McCandless Case the action was brought by a receiver representing the creditors of the corporation and the opinion deals with the right of the creditors represented by the receiver to set aside the transactions complained of. This is apparent from the entire opinion and from the statement of the court that "the wrong that is here redressed is the unlawful depletion of the assets whereby the company was made insolvent and the creditors were defrauded of their lawful rights and remedies." Even if a receiver were appointed on the plaintiff's bill, he could not maintain the action here. The distinction is clear that a receiver appointed on a stockholder's bill holds for the corporation, while one appointed on a creditor's bill holds in hostility to the corporation. Park Lane Dresses, Inc., v. Houghton & Dutton Co. (C.C.A.1) 54 F.(2d) 33; Ft. Dearborn Trust & Savings Bank v. Smalley (C.C.A. 8) 298 F. 45.

I therefore hold that the plaintiffs may not, in behalf of the corporation, complain of the transactions by which Dunnett and his associates acquired all of the original stock of the royalty company.

There remains the question as to whether the plaintiffs may in this case rescind their stock purchase and recover individual judgments against Dunnett and associates for the purchase price paid by plaintiffs for their stock in the corporation. The bill is prolix and lacks conciseness, but is sufficiently broad to include such relief and counsel's brief definitely claims it. In the Old Dominion Copper Company Case the court carefully limited the scope of its opinion to the precise question decided, and expressly excluded the question as to whether the innocent subscribers had a personal claim against the promoters. Likewise in McCandless v. Furlaud the question of the right of the creditors to recover damages for deceit was laid to one side. It may be that in a proper action plaintiffs might recover judgment against Dunnett and his associates for false representations and for deceit. But the joinder of a claim for damages to the plaintiffs individually with a claim sought to be prosecuted in behalf of the corporation renders the bill multifarious. The right to sue in behalf of the corporation for wrongs done it is a derivative right in which the corporation is the real plaintiff, but is prevented by the acts of those in control from protecting itself. The right to sue for fraud and deceit practiced upon the plaintiffs in inducing them to purchase their stock is a personal one. The two may not be combined in the same bill. Church v. Citizens' Street Ry. Co. (C.C.Ind.) 78 F. 526; Price v. Union Land Co. (C.C.A.8) 187 F. 886; Monte Rico Min. & Mill. Co. v. Fleming (C.C.A.8) 258 F. 106; Backus v. Brooks (C.C.A.2) 195 F. 452. Compare Jones v. Missouri-Edison Electric Co. (C.C.A.8) 144 F. 765.

The inconsistency of the claims sought to be asserted is apparent. To sue for the corporation, plaintiffs must rely on their status as stockholders. To recover for deceit they wish to rescind their stock purchase, and if that rescission is permitted, they necessarily cease to be stockholders.

In view of this ruling and the fact that...

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