Axford v. The Western Syndicate Investment Co.
| Decision Date | 17 January 1919 |
| Docket Number | 20,907 |
| Citation | 170 N.W. 587,141 Minn. 412 |
| Parties | ALLIN AXFORD AND OTHERS v. THE WESTERN SYNDICATE INVESTMENT COMPANY; THOMAS DUNN AND OTHERS, APPELLANTS |
| Court | Minnesota Supreme Court |
Original Opinion Filed July 1, 1918
Supersedeas bond.
The supreme court has the power to protect a respondent during the pendency of an appeal against inadequate or improvident stay bonds approved and filed in the lower court. In the first instance, the fixing and approval of a stay bond is not for the supreme court. After a case is there upon a cost bond alone, the court retains jurisdiction to proceed until a supersedeas is furnished. In this case it was held fixing the stay bond at $20,000 was not an abuse of discretion. [Reporter.]
January 17, 1919.
Corporation -- issues and transfer of stock -- what law governs.
1. The rights of stockholders in respect to the issue, ownership and transfer of stock in a corporation are governed by the laws of the state under which the corporation was formed, insofar as such laws deal with and affect such rights.
Corporation -- what is fictitious stock under South Dakota Constitution.
2. Under the provisions of article 17, § 8, Constitution of the state of South Dakota, stock issued by a corporation without consideration is fictitious and void.
Corporation -- fictitious entries not evidence of the facts recorded.
3. Sham and fictitious entries in the books of a corporation are not evidence of the existence of the facts stated in such entries.
Corporation -- secret profit of director invalid.
4. A director owes to the corporation and its stockholders the utmost good faith, and he may not enter into an agreement whereby he derives a secret profit at the expense of the corporation.
Corporation -- cancelation of stock -- findings supported by evidence.
5. The cancelation of certain shares of stock in a corporation issued to defendants upon a transfer of void stock held to be justified by the findings of the trial court.
On January 17, 1919, the following opinion was filed:
Action brought by Allin Axford and 16 other named stockholders on behalf of themselves and all others similarly situated, as plaintiffs against the Western Syndicate Investment Company, Thomas Dunn, R. E. Johnson and M. D. Crawford, defendants. Subsequent to the service of the summons and pursuant to an order of the court in the premises, M. C. Smith, E. E. Wagner, C. E. Warner, E. R. Morgans and William B. Roberts appeared and filed answers. E. Klaveness appeared of his own motion and filed a complaint in intervention.
The second amended complaint, upon which the action was tried, is, in form, a complaint in a stockholders' suit for the benefit of the corporation. It is therein alleged that the plaintiffs are bona fide holders of 420 shares of the common stock of the defendant company, issued to them prior to the issuance of the 5,300 shares by this action sought to be canceled; that as the result of a conspiracy between the defendants Dunn, Johnson and Crawford, the said 5,300 shares of stock were issued without consideration to the defendant company and in fraud of all the stockholders and of the said company; that while the certificates were issued in the name of Crawford, they were, in fact, for the use and benefit of the defendant Dunn; that as a result thereof and because of the misconduct of the defendants Dunn and Johnson as its officers and agents, the defendant company is in imminent danger of insolvency; that a receiver should be appointed to take charge of the affairs of the defendant company and that an accounting should be taken with the defendants Dunn and Johnson; that immediately upon learning of the facts set forth in the complaint, plaintiffs demanded from the defendants the cancelation of said shares of stock, and demanded of the defendant company that proper action be brought to obtain the cancelation thereof, which requests were refused.
In their answers the defendants Dunn, Johnson and Crawford, denied the charges of fraud and deception, and alleged that the shares of stock sought to be canceled were issued in lawful exchange for an option for the purchase of 9,000 shares of the capital stock in the Surety Company, and that the defendant company duly ratified said transaction. The answer of Smith and Wagner was a general denial, coupled with an allegation that they purchased the stock held by them in good faith, for an adequate consideration, and without notice of any wrong in connection with the issuance thereof. Warner and Morgans pleaded along the lines of the complaint, and Roberts disclaimed owning any of the Crawford issue. The complaint in intervention was along the lines of the second amended complaint.
With issues joined as indicated, a trial lasting for a number of weeks was had. Two days were consumed by the arguments, and the findings of fact bearing upon the issuance and disposal of the 5,300 shares of stock sought to be canceled are in detail. The sufficiency of the testimony to sustain the findings is not raised by the assignments of error.
From the facts so determined, the trial court found as conclusions:
(1) That the 5,300 shares of stock issued to Crawford were without consideration and constituted a fictitious increase of stock, and were therefore void under the Constitution and laws of the state of South Dakota.
(2) That none of the parties to this action acquired any right, title or interest in or to any such stock by virtue of any of the certificates issued to Crawford.
(3) That plaintiffs are entitled to an interlocutory judgment, adjudging and decreeing the cancelation of the following stock certificates so issued on account thereof, to-wit:
E. R. Morgans
Oct. 1, 1915
14 shares
C. E. Warner
Oct. 1, 27, 1915
10 shares
Thomas Dunn
Feb. 12, 1916
81 shares
M. D. Crawford
May 25, 1916
125 shares
E. Klaveness
May 25, 1916
675 shares
E. Klaveness
June 22, 1916
25 shares
E. Klaveness
Sept. 25, 1916
400 shares
E. E. Wagner &
M. C. Smith
Sept. 25, 1916
2085 shares
Wm. B. Roberts
Oct. 6, 1916
200 shares
(4) That each of said defendants and the intervener surrender into court each of such certificates for cancelation.
(5) Authorizing the receiver, to be hereafter appointed, to bring proper actions for the cancelation of all other certificates representing any of such stock so issued to Crawford.
(6) Directing an accounting to be taken with the defendants Dunn and Johnson.
(7) Continuing such receivership until the further order of the court in the premises.
(8) Dismissing the cross complaint of Smith and Wagner and the complaint of intervention, insofar as the same set forth any claim in or to any stock under or by virtue of any certificate so issued to Crawford.
(9) That plaintiffs recover from the defendants Dunn, Johnson, Crawford, Wagner and Smith, the costs and disbursements of this action.
The Surety Fund Life Company was incorporated in 1898, under the laws of the state of Minnesota, for the transaction of life and endowment insurance upon the assessment plan. In 1910, Leslie C. Lane, E. J. Miller and W. P. Hobart were respectively president, secretary and treasurer thereof. In December of that year, the organization was changed to that of a stock company, with an authorized capital of $100,000, divided into 10,000 shares. The trustees, Lane, Miller and Hobart, each immediately subscribed for 3,000 shares and Crawford for 100 shares thereof. It was necessary for Miller and Hobart to make a loan for the amount of their subscription in order to pay for the same. The three figured on a profit of $50,000 each, and accordingly fixed upon $249,000 as the selling price thereof. They agreed to stand together in the disposal of the same, one was not to sell unless the others could. They could not obtain the stock until such time as Miller and Hobart might borrow $66,000, their amount of the subscription price. Crawford had subscribed for 100 shares and understood the entire transaction. He had a verbal agreement with Lane, Miller and Hobart, that he could retain all that might be received for the 9,000 shares, in excess of $249,000, and they were to pay him $1,000 each as a commission in case he procured a purchaser. Crawford was in touch with Dunn, and reported all prospective buyers to the Surety Company office.
With this situation before them, Dunn conceived the idea of incorporating a holding company and of obtaining, in its name, the handling of the Surety Company and other like concerns. Accordingly, on June 26, 1913, he caused the defendant Western Syndicate Investment Company to be incorporated under the laws of the state of South Dakota, with an authorized capital of $500,000, divided into 10,000 shares of common and 10,000 shares of preferred, nonvoting stock. The sole incorporators were R. E. Johnson, J. E. Mather and C. J. Hedwall, each holding one share of stock. The principal place of business was designated as Sioux Falls, South Dakota, but an office was maintained at Minneapolis, where the books and records were kept. Johnson was a director and the secretary of the company from the time of its organization, and in custody of the books and records.
An option in form had been prepared, purporting to bind Lane Miller and Hobart to sell to the defendant Dunn the 9,000 shares of stock upon the payment of $249,000, as therein specified. On July 2, 1913, Dunn, Crawford and the three incorporators appeared at the office of the Surety Company and sought to induce Lane, Miller and Hobart to execute such contract. They...
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