Bernheim v. Louisville Property Co.

• Decision Date: 23 May 1919
• Parties: BERNHEIM v. LOUISVILLE PROPERTY CO.
• Court: Kentucky Court of Appeals

214 S.W. 801

185 Ky. 63

BERNHEIM v. LOUISVILLE PROPERTY CO.

Court of Appeals of Kentucky.

May 23, 1919

Rehearing Denied Sept. 24, 1919.

Appeal from Circuit Court, Jefferson County, Chancery Branch, First Division.

Suit by I. W. Bernheim, a minority stockholder, suing in his own right and on behalf of all such stockholders, against the Louisville Property Company, etc. From judgment rendered plaintiff appeals. Reversed and remanded.

Blakey Quin & Lewis, Eli H. Brown, Jr., and M. M. Logan, all of Louisville, and Gustavus Remak, Jr., of Philadelphia, Pa for appellant.

Bruce &amp Bullitt, Benjamin D. Warfield, and H. L. Stone, all of Louisville, for appellee.

Wm. Ayers, of Louisville, for Cairns heirs.

Shackelford Miller, of Louisville, amicus curiæ.

CLARKE J.

By this action in equity the appellant, a minority stockholder suing in his own right and on behalf of all such stockholders, seeks primarily to oust the directors, annul a conveyance to Thos. P. Cairns of a large part of the corporate property, and to wind up the affairs of the Louisville Property Company, a Kentucky corporation alleged to have been managed by its directors solely in the interest and for the benefit of another corporation, the Louisville & Nashville Railroad Company, in disregard of its own welfare and to his hurt, and incidental to this relief recoveries for large amounts are sought upon an accounting for the property company against its directors and against the Louisville & Nashville Railroad Company.

A very large record has resulted from the fact an attempt has been made in both the pleadings and proof to cover in detail practically every corporate act during a period of about 15 years of a corporation owning real estate in several states worth in the aggregate approximately $2,500,000.

Every relief of every kind sought was denied by the chancellor, upon a submission without a reference to the master, and all of these questions of principle and detail are presented and argued upon this appeal, but we cannot attempt to perform the difficult task of rendering an original accounting in any event, so we shall at the very outset limit our consideration as nearly as we can to the pleadings and proof upon the main question involved, viz. whether such mismanagement has been established as authorizes a court of equity to oust the regularly elected directorate, and with the aid of a receiver to wind up the affairs of the corporation; and we shall not attempt to dispose of any but this question, except such of the principal items of detail as cannot be avoided in considering the main issue.

As this is a court of errors and not of original jurisdiction, all questions of accounting upon a final settlement are waived until passed upon by the chancellor, to whom the services of the master are available; as are also all questions not specifically decided.

That the main and all-important question referred to above, which is purely one of fact, may be segregated and considered upon its merits, we shall have to eliminate also much of the argument presented which is upon questions of law alike irrelevant and confusing, but, before doing this, it will be necessary to recite briefly the history of the corporation, the Louisville Property Company.

It was organized in 1898 by the Louisville & Nashville Railroad Company, which owned all of its $50,000 of capital stock, simply as a holding company or depository for the title to real estate that the railroad company believed it would need in the future, or that it was forced to buy to protect its previous investments in or advancements to enterprises of individuals or corporations that were a source of transportation business to it, the title to which was considered inexpedient to be held in the name of the railroad company. It is conceded that for the first 10 years of its existence, though nominally a separate corporation, the property company was not in fact a corporate entity, but was merely "a bookkeeping entry" upon the books of the railroad company, without independent corporate aims or purposes or interests. The full purpose of its existence, such as it had, was to serve the purposes and conveniences of the railroad company, which owned all of its corporate stock and dictated all of its policies. With this period of its existence we are not at all concerned, except as it may explain or account for the subsequent management and control of its affairs by its directors, elected by the Atlantic Coast Line Railroad Company, the owner of the majority of its capital stock, as well as of the Louisville & Nashville Railroad Company, from the officers of the latter company. In March, 1908, the Louisville & Nashville Railroad Company disposed of all of the stock in the property company in the manner hereinafter detailed, and effected a severance of the two companies, thereby ostensibly and in fact emancipating the property company and setting it up in business to serve its own interests, with no duties to perform for or obligations to the parent company, except to repay such sums as it then owed it, and to secure which the Louisville & Nashville Railroad Company retained a mortgage lien upon all of the property of the property company.

What it was that prompted this severance does not concern us, and we therefore put aside entirely the question of the motive of this transaction, but with the method we are momentarily concerned, since thereby the conditions were created out of which arose the property rights and obligations involved in this action.

The railroad company had paid for all of the property acquired by the property company, aggregating some $2,000,000 or more, except the $50,000 the latter company had from the sale of its entire authorized capital stock, and had charged same to the latter upon its books. The severance of the two companies was effected by increasing the capital stock of the property company to $600,000, the railroad company purchasing the $550,000 increase at par, and crediting the property company accounts with that amount, and then distributing the stock in the latter company as stock dividend of 1 per cent. to the stockholders of the railroad company (its capital stock being $60,000,000). It therefore became necessary as a part of this transaction to sever the property company accounts from those of the railroad company, and this was done by opening a set of books for the former company, and therein debiting it with all amounts advanced by the railroad company, and crediting it with the proceeds of property sales and rentals collected. In the summary thus attained the balance sheets showed at first that the property company had a surplus of $102,455.88, estimating the property owned at its cost price, over its indebtedness of $1,948,135.28 to the railroad company, but later in the final balance sheets this surplus was eliminated by increasing the indebtedness to the railroad company by that amount, or to $2,050,591.16, and this change in its book accounts is the first item of which plaintiff complains, but there is no merit in this charge of mismanagement or bad faith upon the part of the directors of the property company, because it is conclusively proven that in the balance sheets showing this surplus the property company received all proper credits, but had not been charged with any interest on advancements, which was clearly chargeable to it upon an equitable and fair adjudgment of accounts, and as this item of interest at the legal rate of 6 per cent. largely exceeded the amount of apparent but not real surplus, there was certainly no wrong upon the part of the directors in agreeing to this correction of the first balance sheets, so as to allow the railroad company partial interest on these advancements; especially is this true as to plaintiff and all the stockholders in the two companies, because their Louisville & Nashville stock was enhanced in value in exactly the same proportion as their property company stock was depreciated, and besides they received the latter simply as a stock dividend upon the former, and they were in no wise hurt, even if the correction on final settlement of accounts between the companies had been fairly open to criticism, as it is not. We therefore eliminate this item from further consideration.

The next and principal act of the directors complained of is a deed to one Thos. P. Cairns, of date October 16, 1911; and as affecting its validity, the question of whether or not the lands thereby conveyed to him were liable at that time to escheat is elaborately argued by counsel on both sides,...