Bergold v. Commercial Nat. Underwriters

• Decision Date: 29 March 1945
• Docket Number: Civ. No. 4860.
• Citation: 61 F. Supp. 639
• Parties: BERGOLD v. COMMERCIAL NAT. UNDERWRITERS, Inc., et al.
• Court: U.S. District Court — District of Kansas

61 F. Supp. 639

BERGOLD v. COMMERCIAL NAT. UNDERWRITERS, Inc., et al.

Civ. No. 4860.

District Court, D. Kansas, First Division.

March 29, 1945.

Arthur J. Stanley, Arthur J. Stanley, Jr., J. E. Schroeder, Lee E. Weeks, and Leonard

O. Thomas, all of Kansas City, Kan., for plaintiff.

C. O. French, of Kansas City, Mo., and Melvin E. Buck, of Kansas City, Kan., for defendants Commercial National Underwriters, Inc. and Commercial Bankers Mutual Casualty Co.

HELVERING, District Judge.

This is an action by Mary Bergold, a resident of Kansas, against the Commercial Bankers Mutual Casualty Company, Commercial National Underwriters, Inc., and the Rosedale Bath and Hotel Company, all Missouri corporations, for damages for the wrongful death of plaintiff's husband who died on December 13, 1942, from burns caused by steam used in giving deceased a turkish bath on the premises of the lastnamed corporation in Kansas City, Kansas.

On the 27th day of October, 1943, none of the defendants having appeared, answered or otherwise plead, default was entered and judgment taken against all three. A motion to quash service of process was filed on behalf of the Commercial National Underwriters, Inc. and the Commercial Bankers Mutual Casualty Company on January 31, 1944, and subsequently overruled; but, on motion of plaintiff, the default judgment was vacated and set aside as to these two defendants. They then answered, again attacking the service in the action. The question now before the Court is whether or not these two parties were properly and effectively served with process so as to render them subject to the jurisdiction of this Court. Depositions were submitted and hearings were held on the 19th, 22d, and 24th days of May, 1944, in Kansas City, Kansas, at which further testimony and documentary evidence were introduced.

The service of summons which is now under attack was had upon one J. W. Pierce in Kansas City, Kansas, on September 18, 1943, as manager for each of the defendants. It seems not to be seriously disputed that Pierce was employed, in whatever capacity and for whomsoever he actually served, by a Sam Hudson, whom it is agreed was ostensibly at the time the President of the defendant Rosedale Bath and Hotel Company, although he could not legally have been such under the Missouri law since he owned no stock in the corporation. The problem resolves itself into the question whether Sam Hudson was actually functioning for either or both of the other two defendants and whether, as a consequence, either or both of them were doing business in the State of Kansas so as to render themselves amenable to process here. The capacity of Pierce as a proper agent for receipt of service is also challenged.

From a careful analysis of the evidence, it is obvious that either Sam Hudson acted solely for the Rosedale Bath and Hotel Company and no other or the organization of that company and the Commercial National Underwriters, Inc. by those interested in the Commercial Bankers Mutual Casualty Company, and the subsequent manipulation of these interests, was one of the most cunningly devised and executed schemes to create paper assets for an insurance company and to operate, ultra vires, the business of a third corporation in a foreign state without domestication and with immunity from legal responsibility which this Court has had opportunity to examine.

Whatever kinship may exist between these three corporations springs from the motherhood of the Commercial Bankers Mutual Casualty Company, hereinafter designated C B C. Commercial National Underwriters, Inc., hereinafter referred to as C N U, was admittedly organized as an agency company of C B C, although its authority to act other than in connection with the sale of C B C policies is denied. C B C's control of C N U is not questioned, although C B C was not a stock company and the identity of its owners and the shareholders of C N U is not patent. Both were known as the "Garrett companies", the reference being to a Mr. T. W. Garrett. The maternity, if such existed, of C B C to the Rosedale Bath and Hotel Company, hereinafter called Rosedale, is predicated upon the manner of Rosedale's organization, the issuance and disposition of its bonds and the subsequent efforts of the individuals interested in C B C and C N U to protect that bond issue.

Jacob Baum, on the organization of Rosedale, contributed the property at 301 South Mill Street, Kansas City, Kansas, for which he received $22,500 of the Rosedale bonds and $5,000 in cash which was paid by C B C for an equivalent amount of bonds with earliest maturity dates. The total of this consideration, $27,500, had apparently been Baum's asking price on the property, but an appraisal of over $134,000 was obtained and a total of $65,000 in bonds issued. Of this bond issue, C B C received certificates representing $42,500 indebtedness for which it gave $6,000 and a surplus note in the amount of $36,500. One thousand dollars of the cash was paid to Dr. Herman S. Majors, to whom that amount of bonds were purportedly issued and by whom, it is claimed, they were sold to C B C, although Dr. Majors testified that he had never held any of the bonds.

Majors was a Missouri physician who thought he saw financial opportunity in the property and sought assistance in developing it. He considered himself at least one of the organizers of the Rosedale corporation and was named its first president. The $36,500 surplus note, it is claimed, was issued to Majors, although it seems agreed that he could only have held it for the benefit of the Rosedale corporation. Nevertheless, it is also claimed that he assigned it, without authorization of Rosedale's directors or stockholders, either to C B C to secure his own personal agreement to repurchase the bonds it had bought from him or to C N U to secure it in an alleged guarantee of the bonds held by Baum. Since Majors could not even recall the existence of this note or the issuance of any bonds to him, it is probable that all of these transactions took place at the same time as component elements of a single arrangement, and that Majors, whether aware of it or not, was used by someone as a figurehead. It is likewise rather obvious that the bonds obtained by C B C, with the exception of the $5,000 worth which were the first-maturing bonds of the issue, were actually of little value since the other $22,500 worth of bonds which were held by Baum had earlier maturity dates and could have been first foreclosed against a property of a probable value of little more than that amount; but, tout ensemble, they did give the appearance on the books of C B C of $42,500 of assets, and this at the very modest expense to C B C of only $6,000.

It is just as apparent that the bonds and not the shares of corporate stock represented the real ownership and control of the Rosedale company. The company was capitalized for one hundred thousand dollars. Shares in the amount of $60,000 were issued at a par value of $10 each. Six hundred and twenty-eight shares were issued to the Major Clinic, approximately $3,500 of whose money Dr. Majors had used in repairing the property on South Mill Street; no other consideration was paid for these shares. Four qualifying shares each were issued to two parties who were named directors and the rest of the stock, approximately five thousand three hundred and sixty-two shares, was issued to Dr. Majors. These transactions took place in the early part of 1942.

In about September of the same year, when Dr. Majors discovered that he could not profitably operate the bath house enterprise and was ready to "turn the whole thing back and take a loss", he handed over all of his stock intending to turn it "back to the people who had loaned the money, back to the insurance company" and obtained a written release from all liability from "one of Mr. Garrett's companies". This transfer also was made without consideration. Dr. Majors apparently paid nothing for his stock and considered it practically worthless. The other directors paid nothing for their qualifying shares and there is no suggestion that they ever took their ownership seriously enough to attempt to exercise any of the prerogatives of stockholders and no convincing proof that a directors' meeting was ever held. In any event, at the time of the death of plaintiff's husband and at the date of service of process upon Pierce there were no outstanding shares of stock other than the qualifying shares in the hands of two directors and three hundred and twenty-eight shares of that issued to the Major Clinic. Dr. Majors testified that all of the stock held by the clinic was turned back at the time he gave up his own stock but the company records and stock book were apparently not allowed to fully reflect this transfer. No consideration had ever passed for any of the stock except that issued to the clinic and Dr. Majors did not bother to take possession of either his stock or bond certificates. When bonds in double the amount of the probable value of all assets were outstanding and stock shares in the face amount of $60,000 represented a real investment of only about $3,500, the inclination of all interested to ignore the stock as indicia of ownership is easily comprehended.

In the spring or summer of 1943, before the disputed service upon Pierce was made, C. O. French, then president of C B C, proposed a rearrangement of the Rosedale bond and stock issues under which Baum was to cancel $15,500 of his bonds, transfer $5,000 of his remaining bonds to C B C to take the place of an equivalent amount of bonds to be cancelled by C B C, leaving him bonds in the amount of $2,000. For these cancellations and transfers Baum was to receive as consideration all of the capital stock of the Rosedale corporation except that held by the Major Clinic and such shares as might be used to settle open accounts at the rate of $10 per share. This would have left Baum...