Backus v. Finkelstein

• Decision Date: 19 March 1924
• Citation: 23 F.2d 531
• Parties: BACKUS et al. v. FINKELSTEIN et al.
• Court: U.S. District Court — District of Minnesota

23 F.2d 531

BACKUS et al. v. FINKELSTEIN et al.

District Court, D. Minnesota, Fourth Division.

March 19, 1924.

H. E. Fryberger, of Minneapolis, Minn., for plaintiffs.

Doherty, Rumble, Bunn & Butler, of St. Paul, Minn., for defendants.

BOOTH, District Judge.

In the memorandum attached to the order filed in this suit on September 8, 1920, it was held by this court that the suit was a stockholders' suit, brought on behalf of the corporation, the Miles Theater Company, for the recovery of assets diverted from it by wrongful action on the part of the individual defendants. It was also held that the complaint showed a sufficient compliance with equity rule 27 to enable suit to be maintained. That such suits are maintainable, where there has been mismanagement, fraudulent acts, misappropriation of corporate funds or assets, or diversion of funds, is well settled. C. J. vol. 14a, p. 155; Hawes v. Oakland, 104 U. S. 450, 26 L. Ed. 827; McMullen v. Ritchie (C. C.) 64 F. 253; Ranger v. Champion Co. (C. C.) 52 F. 611; Streight v. Junk (C. C. A.) 59 F. 321; Pencille v. Ins. Co., 74 Minn. 67, 76 N. W. 1026, 73 Am. St. Rep. 326; Tasler v. Peerless Co., 144 Minn. 150, 174 N. W. 731.

It was further held by this court that the joinder, as plaintiffs, of the parties who had been at one time stockholders in said company, but who alleged in the bill that they had parted with their stock by reason of wrongful acts and representations by the individual defendants, and further alleged that they now seek to rescind the sales of their stock, and to be restored to their status as stockholders, was proper, and that, if the facts should warrant, relief could be afforded in respect to the cause of action in behalf of the corporation, and also incidental relief to the stockholders seeking restoration of their original status. Price v. Union Land Co. (C. C. A.) 187 F. 886, was cited.

Evidence has been taken, both by deposition and in open court. Upon the trial it was stated by the court and acquiesced in by both parties that the issues involved in the alleged cause of action on behalf of the corporation would first be taken up and, if possible, disposed of, reserving for future consideration the issues in the causes of action in behalf of the plaintiffs who seek restoration of their status as stockholders. In accordance with this understanding, the cause of action in behalf of the corporation has been submitted, and it is that cause of action that I shall consider at the present time.

In the bill of complaint a large number of charges of mismanagement and wrongdoing on the part of the individual defendants are made, among them, the keeping of an inadequate set of books; the keeping of a false set of books; the sending out of false financial statements to the stockholders; the taking of large and exorbitant salaries by the defendants, Finkelstein, Ruben, and Hamm; the charging of excessive prices to the New Garrick Theater in Minneapolis, which was operated by the Miles Theater Company, for moving picture films; the making use of the New Garrick Theater as a feeder for numerous other theaters owned, or controlled and operated, by said individual defendants; the charging up to expenses of the New Garrick Theater amounts paid for moving picture films which were never shown at said theater, but which were shown at other theaters owned or controlled and operated by said individual defendants, without adequate payment for the use thereof; the converting to their own use large sums of money by the individual defendants Ruben and Finkelstein from funds of the Miles Theater Company; the payment of individual debts of defendants Finkelstein and Ruben with funds of the Miles Company; the mortgaging of property belonging to the Miles Company for the benefit of Finkelstein and Ruben.

It will not be necessary to discuss all of these charges in detail at this time. The short facts in the history of the Miles Theater Company, as disclosed by the evidence, are as follows:

It was incorporated under the laws of South Dakota in August, 1911, and was authorized shortly thereafter to do business in the state of Minnesota; the authorized capital stock in the first instance was $250,000, which was shortly increased to $350,000. The par value of the shares was $10. In consideration for the transfer of property to the corporation, Charles H. Miles became the owner of 24,995 shares of the capital stock, and a considerable portion of these shares, as well as of the remaining shares, was sold to various parties, especially in the city of Detroit, Mich. The company operated the theater then known as the Miles Theater in 1912, 1913, and 1914. Dividends amounting to 9 per cent. were paid in 1912, 12 per cent. in 1913, and 3¼ per cent. during the first half of 1914. It may well be doubted, however, from the evidence, whether these dividends were paid wholly from earnings.

In 1914 Finkelstein and Ruben, who were then engaged in operating theaters in Minneapolis and St. Paul, arranged with D. L. Bell that he should purchase the controlling interest in the Miles Theater Company on their behalf. Accordingly, in December, 1914, Bell purchased from Miles 17,501 shares of the stock of the company. The arrangement by which Bell should turn the stock over to Finkelstein and Ruben was modified, and the stock continued to be held by Bell until the fall of 1915. Meanwhile, in December, 1914, the old directors of the company resigned, and Bell, Ruben, Finkelstein, McCormick, and J. M. Bell were elected in their places. In November, 1915, D. L. Bell reached a settlement with Ruben and Finkelstein and resigned as director. McCormick resigned at the same time. Thereupon Sarah Blumenthall, an employee of Ruben and Finkelstein, and H. E. Billings, also an employee, were elected directors to fill their places. At the first meeting of the board of directors, after the stockholders' meeting in September, 1916, Ruben was elected president of the company, Finkelstein treasurer, and Sarah Blumenthall secretary. The same officers were continued until September, 1918, when H. J. Charles was elected a director and made secretary of the company, and these three officers have been continued in office from that time.

On September 7, 1920, defendant Hamm was elected a director, and has been continued as such since that time. By September, 1915, Finkelstein and Ruben had acquired 17,591 shares of the stock of the company; by September, 1916, 18,776 shares; by September, 1917, 19,878; by September, 1918, 28,741 shares, 18,773 of which stood in the name of the New Palace Theater Company, which was owned or controlled by Finkelstein and Ruben; by September, 1919, 34,086 shares, 34,080 of which stood in the name of the Twin City Amusement Trust Estate, which is a common-law trust, organized in October, 1918, the sole beneficiaries of which are Finkelstein, Ruben, and Hamm; by September, 1920, 34,230 shares stood in the name of said trust estate; by September, 1921, 34,630, at which figure it has remained.

As has been stated, dividends were paid in 1912, 1913 and the first half of 1914. No further dividends were paid until April, 1920, at which time a dividend of 10 per cent. was paid; in October, 1920, a dividend of 10 per cent. was paid; in January, 1921, a dividend of 10 per cent. was paid; and in September, 1921, a dividend of 20 per cent. was paid. At the time these dividends were paid the stock holdings were such that $173,001 was paid to the Twin City Amusement Trust Estate and $1,974 was paid to other stockholders.

The Books of Account.

The charge is made that a false set of books was kept prior to 1920. To support this charge, evidence was introduced that two books, other than those which were produced upon the trial, had been kept, namely, a perpetual balance book and a private ledger; also testimony which apparently showed that their contents differed materially from the figures shown by the books, papers, and other data produced upon the trial. The keeping of such books was denied on the part of the defendants.

In view of the production of such original books as were claimed by the defendants to have been kept by the Miles Company, together with other records, papers, and data which, taken together, contained such full and complete information that a set of books could be and has in fact been made therefrom, without apparent discrepancies or omissions, and in view of the fallibility of the testimony of witnesses as to the contents of the alleged missing books, I am constrained to the conclusion that the charge of keeping a false set of books has not been sustained by substantial proof.

Inadequacy of the Books Kept.

In my judgment the evidence sustains this charge. The character of the books kept and produced upon the trial, the fact that a great deal of the information usually kept in regular books of account was contained in loose sheets or other memoranda, the fact that the defendants, either for their own private information or for the purpose of this trial, saw fit to have a complete set of books drawn up from the books, papers, loose sheets, and memoranda of the defendant company, are convincing evidence that the books actually kept by the company were in themselves inadequate, and such that the average man, unless he were a bookkeeper, would be unable to obtain either complete or accurate information as to the business of the company. As to the set of books drawn up by Temple, Webb & Co. from the original books and papers of the company, I may say, in passing, that a careful examination of them leads me to the conclusion that they were prepared with great care, and, so far as I have checked them up with the original data, they appear to be accurate and complete, and the same may be said of the compilations made by Temple, Webb & Co. and introduced in evidence as Defendants' Exhibit 20. This is said without intending in any way to disparage the compilations prepared by...