Ashley v. Keith Oil Corporation

• Decision Date: 31 July 1947
• Docket Number: Civil Action No. 5492.
• Citation: 73 F. Supp. 37
• Parties: ASHLEY v. KEITH OIL CORPORATION et al.
• Court: U.S. District Court — District of Massachusetts

73 F. Supp. 37

ASHLEY v. KEITH OIL CORPORATION et al.

Civil Action No. 5492.

District Court, D. Massachusetts.

July 31, 1947.

COPYRIGHT MATERIAL OMITTED

Clifford H. Byrnes, Hale, Sanderson, Byrnes & Morton, and Harold E. Magnuson, all of Boston, Mass., for plaintiff.

Richard C. Reed and Keith, Reed & Wheatley, all of Brockton, Mass., for defendants.

WYZANSKI, District Judge.

A. Introductory.

1. This is a stockholder's derivative suit. Plaintiff, a citizen of Connecticut, sues a Massachusetts corporation and a Massachusetts citizen. Her mother and three of her brothers, Howard, Robert and Richard, all citizens of Massachusetts, intervene as plaintiffs. The original plaintiff invokes the asserted power of this Court under the diversity jurisdiction clause of 36 Stat. 1091, 28 U.S.C.A. § 41(1). She alleges that Warren S. Keith, the individual defendant, in his capacity as president, director and controlling stockholder has mulcted and mismanaged the company of which she holds 20 shares of common sock. In particular, she points to what she regards as the failure of the corporation to pay dividends upon preferred stock and to retire it as stipulated in the articles of association, excessive salaries, unauthorized borrowings, improper transactions in the preferred stock of the company, a 1945 settlement of a stockholders' suit to which she was not a party and the failure to abide by the "spirit" of that settlement. She contends that she has vainly sought relief through the normal corporate channels. So now she asks that the individual defendant be surcharged with his improper expenditures, that certain of his stock transactions with the corporation be set aside, that a receiver be appointed for the corporation and that the individual defendant be enjoined from voting the stock he holds.

2. The case raises important problems of corporate law and difficult questions as to the diversity jurisdiction of this court, the choice of state or federal law as governing the disposition of this case, the propriety of appointing receivers who may be required to operate a corporation for several years and the propriety of enjoining a holder of stock from exercising voting rights as a common and preferred stockholder.

3. Because of the confusion in the management and records of the corporation it is impossible to state with confidence the precise details of every transaction. But clarity will be best promoted by first stating the facts with respect to the general history and present status of the corporation, the salary and loan payments to Warren S. Keith, his transactions in the stock of the company, and the 1945 litigation and settlement. Thereafter, the applicable procedural and substantive principles of law will be considered.

B. History and Present Status of Keith Oil Corporation

4. Keith Oil Corporation is a Massachusetts business corporation. It is engaged in the marketing and transportation of gasoline and oil, as well as in the installation and servicing of equipment that uses oil for heat and fuel.

5. The corporation was organized as a family enterprise in 1917 by the late Warren R. Keith who died in January, 1938. He was the husband of the intervening plaintiff, Mrs. Elizabeth St. John Keith, and the father of the individual defendant, Warren S. Keith, of the original plaintiff, Mrs. Lillian Keith Ashley, and of the intervening plaintiffs, Howard C. Keith, Richard H. Keith and Robert D. Keith.

6. Before his death Warren R. Keith used the corporate funds as though they were his personal funds. He, his wife, his sons and his daughter, the plaintiff here, used various corporate assets (such as gas in the case of Mrs. Ashley) for their personal benefit. While following such unorthodox methods, Warren R. Keith gradually gave the preeminent authority in the corporation to his eldest son, Warren S. Keith, a man more distinguished for his military record in World War I and for his civic reputation than for his training in business, accountancy or law. It was the father's apparent intention that the eldest son should be vested with the authority and privileges that the elder Keith had exercised.

7. As originally organized, Keith Oil Corporation had 1600 authorized and 820 issued shares of common stock each of a par value of $100. Of these the senior Keith retained 421. He gave 319 to his son Warren S. and 20 each to his other four children, Howard C., Richard H., Robert D., and Lillian Keith as she then was. Each of the children has continuously retained his original shares. The 421 shares which belonged to Warren R. Keith he left as a legacy to his widow, who still holds them. Hence, one may say that as a practical matter the holdings of common stock have not shifted from the time that the corporation was organized in 1917 until the present.

8. In the 1930's the corporation became financially embarrassed. It filed in this Court a petition for corporate reorganization under the then provisions of § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. The corporation's reorganization was completed by a final decree of this Court dated November 22, 1938.

9. In substance, the reorganization converted the principal former creditors of the corporation into preferred stockholders. The amended articles of association authorized 15,000 shares of $10 par, 5% cumulative prior preferred stock. Only 9,531 shares were issued.

10. Among the principal original holders of this stock, all of whom had been creditors, were—

                Bay Oil Co.               1,487 shares
                Brockton National Bank      500 shares
                Eastern Oil Co.             589 shares
                Goodrich Oil Co.          2,659 shares
                J. C. Keith (a cousin)      635 shares
                Warren S. Keith             149 shares
                Hon. Harry K. Stone       1,958 shares
                

11. The amended articles of association had five important provisions. (a) The preferred stock should be entitled to cumulative dividends of 5% payable out of profits. (b) In 1939 and 1940 75%, and in subsequent years 100%, of the profits left after the payment of the preferred dividend should be used to retire or redeem preferred stock at par, provided that after the retirement at par of 5% of the preferred stock in any one year the corporation should be permitted to purchase at a discount from par other preferred stock offered to the corporation, after notice to and tender by preferred stockholders. (c) All voting power should be originally vested in the common stockholders, but should be transferred to the preferred stockholders whenever and for so long as the company was in default either in the payment of any two semi-annual dividends on preferred stock or in the stipulated retirement of preferred stock. (d) Directors elected by preferred stockholders after a default should have the power to revise officers' salaries. (e) So long as the preferred stock was outstanding, the aggregate salaries of all officers of the corporation should be not more than $12,000 annually.

12. Upon reorganization, Warren S. Keith became the president and treasurer of the corporation; Robert D. Keith, vice-president and Howard C. Keith, assistant treasurer. Those three and Richard H. Keith became directors.

13. The corporation earned net profits every year following its reorganization. In 1939, $4,938.75. In 1940, $3,374.47. In 1941, $4,616.27. In 1942, $4,912.10. In 1943, $3,604.48. In 1944, $7,443.56. In 1945, $286.50. In 1946, $5,361.53. For the 8 years the total profits were $34,537.66.

14. In accordance with the amended articles of association, the corporation declared and paid dividends upon the preferred stock for the two semi-annual periods, (a) September 20, 1938, to March 20, 1939, and (b) March 20, 1939, to September 20, 1939. The latter dividend was actually paid March 31, 1940, Since then no regular dividends have been declared or paid upon the preferred stock. Nonetheless, in the first two months of 1941 the corporation paid an amount equivalent to a preferred stock dividend to three holders of preferred stock: to Crane Co. $17.50; to Eastern Oil Co. $147.25; and to Mrs. Keith $166.25. In 1945 it made a similar payment of $24.

15. The corporation, after notice to preferred stockholders, acquired for the treasury on September 30, 1939, for $5,000 the 500 shares of preferred stock theretofore owned by Brockton National Bank. This was the only redemption which purported to accord precisely with the provisions of the amended articles of association.

16. The corporation appears to have become in default to the preferred stockholders in 1940 for failure to redeem stock on the terms provided in the amended articles of association. But because of the Goodrich Oil Co. transaction referred to in paragraph 35 below the default was ambiguous. At any rate, the corporation had become in default by March 31, 1941 by its failure to pay two semi-annual dividends.

17. Thereafter and continuously until the present time the exclusive voting power has been vested in the preferred stockholders.

18. On April 9, 1942, the preferred stockholders elected as directors two men of their particular choice, Richard Reed and Kenneth Dorn, as well as the then attorney for the company, Walter McDonald, and Warren S. Keith and Richard H. Keith. The board remained the same until February 27, 1945, when Reed (who had entered the armed service in 1943) and Dorn were dropped, the others continuing. Since January 14, 1946, the board has consisted of Warren S. Keith, his wife, Laura B. Keith, and his brother-in-law, Clayton A. Bemis.

19. Since, as before, the vesting of voting power in the preferred stockholders, Warren S. Keith has, with the exception of a short period, continuously served as president and treasurer. In those capacities he has been the managing executive officer.

20. His brother, Howard Keith, ceased to be an officer after he entered the army on November 25, 1940. He was, however, employed for a few months in 1945 as an employee at $75 a month. Another brother...