Bovay v. H. M. Byllesby & Co.

Decision Date17 May 1944
Citation27 Del.Ch. 381,38 A.2d 808
PartiesHARRY E. BOVAY and KENYON D. WELLS, Trustees in Bankruptcy of Vicksburg Bridge and Terminal Company, a corporation of the State of Delaware, Complainants Below, Appellants, v. H. M. BYLLESBY & COMPANY, a corporation of the State of Delaware, and FEDERAL SECURITIES CORPORATION, a corporation of the State of Illinois, Defendants Below, Appellees
CourtSupreme Court of Delaware

APPEAL from a decree of the Court of Chancery for New Castle County.

Petition for rehearing denied.

Daniel O. Hastings and Caleb R. Layton, 3d, of the firm of Hastings Stockley & Layton, for appellants.

Aaron Finger of the firm of Richards, Layton & Finger, for appellees.

LAYTON C. J., and RICHARDS, RODNEY, SPEAKMAN, and TERRY, sitting. BOWEN, L. J., was of the same opinion.

OPINION

LAYTON, Chief Justice.

This is an appeal from a decree of the Court of Chancery dismissing an action brought by the complainants, trustees in bankruptcy of Vicksburg Bridge and Terminal Company, a Delaware corporation, in reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, to compel the defendants to account for and refund large sums of money which they unlawfully and fraudulently took from the bankrupt corporation through the agency of its officers and directors who were named and controlled by the defendants.

The averments of the bill of complaint have been recited at length in one or more of the opinions of the court below to which reference will be made later. An outline of the complaint will serve for the purpose of the decision here.

The story of corporate financing and manipulation as told by the bill of complaint is somewhat extraordinary even for the period that ended so abruptly in October, 1929. Briefly it is this: Harry E. Bovay, one of the complaining trustees, conceived the idea of constructing and operating a railway and vehicular traffic toll bridge across the Mississippi River, at Vicksburg, Mississippi, to a point opposite on the Louisiana shore, and, in 1926, he succeeded in procuring the passage of an Act May 3, 1926, 44 Stat. 388, granting the consent of Congress to an Arkansas corporation, wholly owned by him, to construct, maintain and operate such a bridge under certain terms and conditions. This congressional consent is referred to by the parties as the bridge franchise.

Bovay interested the defendants in financing the project. It appears that Federal Securities Corporation is now but a nominal party, and the name, Byllesby & Co., when used, will refer to both defendants or to Byllesby & Co. alone as occasion shall serve. The first agreement between the parties contemplated the formation of a corporation with voting control lodged in Bovay. But, as will appear later, the defendants refused to proceed under this arrangement, and without Bovay's consent, in December, 1927, formed a corporation under the laws of this State with a capitalization of 60,000 shares without par value. This is the corporation now in bankruptcy, and it will be referred to as the bankrupt. The original board of directors selected for organization purposes fixed the value of the shares at $ 5.00 a share. In January, 1928, Bovay caused his Arkansas corporation, by formal instrument of assignment, to transfer the bridge franchise to the bankrupt in consideration of one dollar and other good and valuable considerations; but notwithstanding this formal transfer, the parties proceeded to treat the franchise as, in reality, Bovay's property, and a proper subject of further negotiations.

About this time the defendants declined to proceed with the project with Bovay in voting control of the corporation, and another agreement was made whereby Bovay was to receive 20,000 shares of the capital stock, and the sum of $ 100,000.00 to be paid by the bankrupt, in consideration of his surrender of voting control; and as the matter developed, Bovay received the 20,000 shares, Byllesby & Co. 39,800 shares and Federal Securities 200 shares.

The dates of the several acts and events do not appear to be wholly in proper sequence, but as the complaint relates the occurrences it appears that on February 2, 1928, Bovay made to the bankrupt what was called a "firm proposal", by the terms of which he proposed to cause his Arkansas corporation to assign the bridge franchise, as if owned by it, to the bankrupt, and to cause the defendants to enter into a contract to purchase $ 5,000,000.00 principal amount of the bankrupt's First Mortgage Bonds, $ 2,250,000.00 principal amount of its debentures and two-thirds (40,000 shares) of its total capital stock, for the sum of $ 6,525,000.00, in consideration of the payment to him by the bankrupt of the sum of $ 123,666.00 in cash on or before March 1, 1928, the issuance to him of one-third (20,000 shares) of its total capital stock, and a monthly salary of $ 1000.00 from March 1, 1928, until the opening of the bridge for traffic. The proposal seems to have been immediately accepted by the bankrupt through one Shinners, acting as vice-president; and on the same day, the bankrupt made an agreement in writing with the defendants for the purchase by them of the bankrupt's securities in accordance with the terms of Bovay's proposal. This agreement was executed on behalf of the bankrupt by Bovay, its president, and Pohl, its secretary; on behalf of Federal Securities Corporation, by Clarke, its president, and Wilder, its secretary; and on behalf of Byllesby & Co., by Briggs, its vice-president, and List, its assistant secretary.

On February 10, 1928, some days after the occurrences above related, Bovay and the defendants made an agreement with respect to the constitution of the board of directors of the bankrupt, as well as an executive committee. It was agreed in writing that the board of directors should consist of nine members. Four members, including Bovay, were named in the writing; the remainder were to be named by the defendants. The executive committee was to consist of Bovay, Shinners, or other nominee of Byllesby & Co., and Wilder, or other nominee of Federal Securities Corporation. But, it seems that on the day before, that is February 9, a special meeting of the board of directors of the bankrupt was held in Chicago, at which meeting, Bovay, Shinners and Clarke were elected directors to take the place of the original directors chosen for the purpose of organizing the bankrupt; and thereupon Briggs and Pohl were also elected directors. Clarke was at the time president of Federal Securities Corporation; Briggs and Pohl were respectively vice-president and assistant treasurer of Byllesby & Co., and Shinners a paid employee. On the following day, Bovay was elected president of the bankrupt, Shinners vice-president, Pohl, secretary-treasurer, and O'Reilly, also an employee of Byllesby & Co., assistant secretary-treasurer.

On April 3, 1928, the defendants caused a meeting of the stockholders of the bankrupt to be held to give an appearance of corporate regularity and authority to the acts of the directors. At this meeting, Shinners, the apparent owner of 200 shares, was the sole stockholder present; and he voted and declared that the corporation should purchase the bridge franchise and to pay therefor such consideration as the officers and directors of the bankrupt should, in their sole discretion, deem advisable; and they also were authorized to dispose of the capital stock and fix the consideration therefor, to borrow money, issue bonds, and to secure them by deed of trust and mortgage on the present and future property of the bankrupt.

According to the minutes of the bankrupt, it appears that a special meeting of the board of directors was held one-half hour later on the same day, at which all of the directors were present, Bovay acting as chairman. Bovay proposed to cause his Arkansas corporation to assign the bridge franchise to the bankrupt, and to cause the defendants to purchase for the sum of $ 6,299,000, the bankrupt's First Mortgage Bonds in the principal amount of $ 5,000,000.00. Debentures in the principal amount of $ 2,000,000.00 (a reduction in amount of $ 250,000.00) and 39,800 shares of the capital stock (200 shares having apparently been sold to Shinners, or put in his name) in consideration of the payment by the bankrupt to him, Bovay, of the sum of $ 123,666.00 in cash, $ 1000.00 monthly from March 1, 1928, until the bridge should be opened for traffic, and the issuance to him of 20,000 shares of the capital stock. This proposal was unanimously accepted, Bovay himself not voting because of his personal interest. Bovay, in fact, was not present at the meeting and had no knowledge of it.

On April 10, 1928, the defendants, or one of them, deposited to the credit of the bankrupt at a Chicago bank, the sum of $ 6,347,666.67, which was entered on the bankrupt's books as follows:

Proceeds of First Mortgage Bonds at 90

4,500,000.00

Proceeds of Debentures at 90 minus

1,799,000.00

Interest on Bonds and Debentures from

March 1, 1928

47,666.67

Proceeds 200 shares of stock

1,000.00

The bankrupt's books show that the defendants, or one of them, retained the following:

Unamortized Debt Discount & Expense

First Mortgage Bonds

500,000

7% Debenture Bonds

201,000

The amount of money deposited to the bankrupt's credit represented the proceeds of the sale of the securities to the defendants plus an accumulation of interest on the bonds and debentures; but prior to the time of the deposit the defendants had already negotiated the sale of the bonds and debentures to others at or above the face value, and ran little or no risk in the venture.

As of April 10, 1928, the cash assets of the bankrupt did not exceed the sum of $ 6,347,666.67. Its liabilities were in excess...

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