Bank of Mill Creek v. Elk Horn Coal Corp.

• Decision Date: 14 February 1950
• Docket Number: No. 10080,10080
• Citation: 57 S.E.2d 736,133 W.Va. 639
• Court: West Virginia Supreme Court
• Parties: BANK OF MILL CREEK, v. ELK HORN COAL CORPORATION et al. ALLERS et al. v. ELK HORN COAL CORPORATION et al.

Page 736

57 S.E.2d 736

133 W.Va. 639

BANK OF MILL CREEK, v. ELK HORN COAL CORPORATION et al.

ALLERS et al. v. ELK HORN COAL CORPORATION et al.

No. 10080.

Supreme Court of Appeals of West Virginia.

Submitted Oct. 4, 1949.

Decided Feb. 14, 1950.

Syllabus by the Court.

1. 'In the absence of special circumstances, a stockholder may sue in behalf of the corporation to avoid an improper transaction consummated at the expense of the corporation before he acquired his stock.' Pollitz v. Gould, 202 N.Y. 11, 94 N.E. 1088, 38 L.R.A.,N.S., 988, Ann.Cas.1912D, 1098.

2. Laches does not commence to run against a party complaining of a wrongful transaction of another until such complaining party has knowledge thereof, or knows facts sufficient to put him on inquiry with respect thereto.

3. 'A charge of laches will not be resolved against allegations of a breach of confidence unless the laches is plainly apparent therefrom.' Pt. 2, Syl., Curl v. Vance, 116 W.Va. 419, 181 S.E. 412.

4. The relationship of attorney-at-law and client is of the highest fiduciary nature, calling for the utmost good faith and diligence on the part of such attorney.

5. A purchase by an attorney-at-law, which acting as such, of property held in trust by his client, or property on which his client has a lien to secure the payment of debts due said client, is voidable on the ground of public policy at the option of the party to whom he stands in such relation, although said attorney may have paid an adequate price for the property, purchased the same in good faith, and gained no advantage whatever.

6. An attorney-at-law, in his own right, cannot make a valid purchase of property, to which his client has the right to resort for the purpose of enforcing the payment of a debt, so as to deprive the client of that right, although such property is purchased at a sale which was neither procured nor controlled by such attorney.

Rummel, Blagg & Stone, Charleston, Robert S. Spilman, Charleston, Kenneth E. Hines, Charleston, for appellants.

Jackson, Kelly, Morrison & Moxley, Charleston, Thomas B. Jackson, Charleston, W. Goodridge Sale, Jr., Charleston, David D. Johnson, Charleston, Crisona Bros., New York City, James J. Crisona, New York City, for appellees.

Brown & Higginbotham, Elkins, John F. Brown, Elkins, H. K. Higginbotham, Elkins, amicus curiae on behalf of Sam G. Polino & Co., a Corporation, a creditor of C. W. Watson Estate and on behalf of other similar creditors of said estate.

Herschel Rose, Jr., Fairmont, Russell B. Goodwin, Russell G. Nesbitt, C. Lee Spillers, Wheeling, amicus curiae on behalf of Ernest Hutton, Admr., c.t.a., of C. W. Watson, deceased.

LOVINS, President.

On this appeal Arthur B. Koontz, in his own right, Arthur B. Koontz, administrator, c. t. a., of the estate of Patrick D. Koontz, George Ward, surviving trustee, Carl W. Clayton, Harry B. Crane, J. H. Wheelwright, C. W. Wheelwright, J. F. Caulfield, Arthur W. Smith, Maude Copeland Haas, Frank Haas, Joyce Davis, R. Kinnaird, Thomas L. Muncaster, F. W. Boyce, William Courtney and Mrs. J. N. Camden, the last two named being executors of the estate of J. N. Camden, and Mrs. Sprigg D. Camden, complain of a decree entered in this suit by the Circuit Court of Ohio County, West Virginia.

Arthur B. Koontz is a stockholder in The Elk Horn Coal Corporation, and is administrator, c. t. a., of Patrick D. Koontz, deceased, who was likewise a stockholder in said corporation. George Ward is the successor and surviving trustee in a certain voting trust, hereinafter mentioned. Carl W. Clayton and the other persons, whose names are set forth above, are stockholders in said corporation, owning an aggregate of 21,723 shares of the stock of the corporation, the classes of which are not disclosed by the record.

The background of this suit involves the operation of two corporations. The first corporation was known as Elk Horn Coal Corporation, which was organized in the year 1915, and continued its operation without a great deal of interruption until the year 1931, at which time it was placed in the hands of a receiver in a suit prosecuted in Letcher County, Kentucky. In 1935, having a large funded indebtedness, the amount of which is not clearly shown by the record, and outstanding capital stock, common and preferred, amounting to $18,600,000, the first corporation was placed in bankruptcy in the United States District Court for the Southern District of Ohio, Western Division, and C. W. Watson, who had been receiver in the suit mentioned above, was appointed trustee. In the year 1937 a plan of reorganization, under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, was adopted and approved, from which emerged the present corporation, having the same name as the old one with the addition of the word 'The', which new corporation will be hereinafter referred to as 'Elk Horn.'

Numerous current and funded liabilities existed and the plan contemplated that three classes of capital stock should be issued, being first preferred, second preferred and common.

As a necessary and integral part of such reorganization, Western Pocahontas Corporation, a wholly-owned subsidiary of The Chesapeake and Ohio Railway Company, hereinafter referred to as 'Pocahontas', advanced the sum of $1,500,000 to Elk Horn, and as security for such loan Elk Horn conveyed to Pocahontas approximately 53,000 acres and land, containing approximately 42,000 acres of coal lands, together with all mining plants and equipment thereon. Upon the conveyance being executed, Pocahontas leased the land so conveyed to Elk Horn under an agreement providing for certain payments to be made over a period of twelve years, which payments, at Elk Horn's option, could be applied on an option to repurchase for $1,500,000. Although said payments are treated as rentals and royalties in the agreement between Elk Horn and Pocahontas, the arrangement, in fact, probably amounted to no more than a mortgage made by Elk Horn to secure the loan of $1,500,000. However, we do not pass upon the effect and status of that agreement.

There is no controversy that Watson was the moving spirit in procuring the loan, assisted in a measure by Arthur B. Koontz, one of the appellants. There was a tacit understanding between the officers and agents of Pocahontas and Elk Horn that its management and operation should be controlled by Clarence W. Watson, and, in the event of his death, Arthur B. Koontz would succeed to such control, in order to carry out its understanding with Pocahontas. Implementing such understanding, voting trustees were to be appointed who, for all practical purposes, could control Elk Horn.

Elk Horn agreed to issue and deliver to the voting trustees 120,000 shares of the common stock of Elk Horn, and the trustees agreed to issue to the rightful owners thereof voting trust certificates, which will be hereinafter referred to as 'certificates'. The stock issued under the agreement was to be voted by the trustees, and the holders of said certificates having no right to vote or participate in the management of the corporation, with certain exceptions not material to this inquiry.

The agreement under which the voting trust was set up is lengthy and provided for many and varied contingencies, events and occurrences. It was provided that the voting trust should end on March 1, 1947, unless sooner terminated under the provisions of the agreement by the holders of the voting trust certificates. It is further provided that: 'Any Trustee or any firm of which he may be a member, or any corporation of which he may be a stockholder, director or officer, may contract with the company or he may be or become pecuniarily interested in any matter or transaction to which the Company may be a party, or in which it may be in any way concerned, as fully as though he were not a Trustee.' It would serve no purpose to discuss fully the many provisions of the trust agreement. It suffices to say that the original trustees are now deceased, and that appellant, George Ward, is the sole surviving trustee thereunder.

From the inception of the old corporation, as well as the new one, and up until the time of his death on May 24, 1940, Clarence W. Watson seems to have controlled the policies of both corporations, and at various times seems to have incurred certain debts due Elk Horn.

At a meeting of the board of directors of Elk Horn on June 10, 1937, the board, by resolution, determined Watson's indebtedness to Elk Horn as of March 1, 1937, to be $219,000 and provided that the same should be reduced at the rate of $3,333 per month and that none of said debt should bear interest. The resolution further provided that Watson be employed as president of Elk Horn for three years, commencing March 1, 1937. In consideration of the employment aforesaid, Watson was to receive, in addition to an annual salary of $18,000, and the reduction of his indebtedness above mentioned, forty thousand certificates and options to thereafter purchase a total of sixty thousand additional certificates at ten cents per share. It is admitted that pursuant to said resolution, a contract was entered into between Watson and Elk Horn carrying out the purposes of the resolution.

On the same date the board, by another resolution, authorized the delivery of twenty thousand certificates to Arthur B. Koontz, and the officers of Elk Horn were directed to take the necessary steps to carry out and effectuate the resolution so adopted.

Watson exercised the option to purchase the sixty thousand certificates. In one instance he bought forty thousand certificates, and gave his note for $4,000 in a collateral form, which, in addition to securing the sum of $4,000, also secured all other debts which Watson owed Elk Horn. The purchase of twenty thousand certificates was made by a note of $2,000, which likewise provided that said certificates should be deposited as collateral security for the payment of said...