Bovay v. H. M. Byllesby & Co.

• Decision Date: 09 October 1941
• Citation: 22 A.2d 138,26 Del.Ch. 69
• Parties: HARRY E. BOVAY and KENYON D. WELLS, Trustees in Bankruptcy of VICKSBURG BRIDGE & TERMINAL COMPANY, a corporation of the State of Delaware, v. H. M. BYLLESBY & COMPANY, a corporation of the State of Delaware, and FEDERAL SECURITIES CORPORATION, a corporation of the State of Illinois
• Court: Court of Chancery of Delaware

22 A.2d 138

26 Del.Ch. 69

HARRY E. BOVAY and KENYON D. WELLS, Trustees in Bankruptcy of VICKSBURG BRIDGE & TERMINAL COMPANY, a corporation of the State of Delaware, v. H. M. BYLLESBY & COMPANY, a corporation of the State of Delaware, and FEDERAL SECURITIES CORPORATION, a corporation of the State of Illinois

Court of Chancery of Delaware, New Castle

October 9, 1941

AMENDED BILL IN EQUITY, filed by the Trustees in Bankruptcy for the Vicksburg Bridge & Terminal Company, a corporation of this State, to recover certain specified large sums of money which they allege that the defendants had illegally and improperly caused that corporation to pay to them, pursuant to contract, or otherwise, at a time when a fiduciary relation existed between the said defendants and that corporation.

The complainants also sought to recover the value of certain shares of stock which had been issued by the Vicksburg Bridge & Terminal Company to one of the defendants, while the same fiduciary relation existed and as a part of some of the same transactions, and for which it was alleged no consideration had been paid.

Both a decree for the payment of money and an accounting were asked for.

Case heard on demurrer to the complainants' amended bill.

The defendants' demurrer alleged:

1. That the complainants, as Trustees in Bankruptcy of the Vicksburg Bridge & Terminal Company, had an adequate remedy at law.

2. That there was no equity in the amended bill.

3. That any possible right of action of the complainants, on behalf of the Vicksburg Bridge & Terminal Company, had been barred by laches.

The material facts will appear in the opinion of the court.

Demurrer to the complainant's amended bill overruled.

Daniel O. Hastings and Caleb R. Layton, 3rd, for complainants.

Aaron Finger, of Richards, Layton & Finger, for defendants.

OPINION

THE CHANCELLOR:

The complainants seek a decree against the defendants for the payment of $ 1,176,765.16, with interest. The amount claimed to be due is made up of numerous items, with interest from various dates, mostly in April and May of 1928. The case grows out of certain alleged transactions between the Vicksburg Bridge & Terminal Company and the defendants at a time when Byllesby & Company is alleged to have occupied the position of a promoter toward the Bridge Company, and to have controlled its actions through nominees on its corporate board. All of these transactions are alleged to have been grossly unfair to the latter corporation, and to the great advantage of the defendants. Most of the material facts were stated with some particularity, in an opinion filed by this court on a demurrer to the original bill. Bovay, et al., v. H. M. Byllesby & Co., et al., 25 Del.Ch. 1, 12 A.2d 178. Some additional facts are, however, alleged in the present bill.

Through the efforts of one Harry E. Bovay, Congress granted to an Arkansas corporation a franchise to erect a bridge across the Mississippi River, at Vicksburg, Mississippi, to a designated point in the State of Louisiana. Bovay was the president of the Arkansas corporation, and owned all of its capital stock. He subsequently interested the defendants in financing the construction of the proposed bridge, and, as the result of a series of agreements and subsequent modifications thereof, the franchise was finally transferred by the Arkansas corporation to the Vicksburg Bridge & Terminal Company of Delaware. By the various agreements and subsequent modifications thereof, Bovay ultimately received one-third of the stock issued by the Delaware corporation and $ 123,666.00 in cash; of which sum $ 23,666.00 was to cover certain promotional expenses. The whole of this sum was paid to Bovay in the first instance either by Byllesby & Company or by Federal Securities Corporation, but later the Bridge & Terminal Company reimbursed Byllesby & Company for the amount so paid.

Pursuant to contract, and as a part of the transaction accompanying the assignment of the bridge franchise, the defendants, on the other hand, agreed to purchase for $ 6,299,000.00 in cash, $ 7,000,000.00, principal amount of the bonds and debentures issued by the Delaware corporation and the remaining two-thirds of its stock. Under one of the prior agreements, it had been provided that the stock of the Bridge & Terminal Company should be issued in such manner that Bovay's one-third part would have sixty percent of the voting power; but, by a subsequent agreement, he relinquished that special right, and only one class of stock was issued. The Bridge Corporation also agreed to employ Bovay at a specified salary. In due course, the defendants deposited $ 6,347,666.67, to the credit of the Delaware corporation, in the Continental National Bank & Trust Company of Chicago. Of that sum, $ 6,299,000.00 was the contract price for the bonds, debentures and stock of the corporation, which the defendants had agreed to purchase; the balance represented the accrued interest thereon. Apparently, the stock was regarded as having no real value, and was a part of the consideration in purchasing the bonds and debentures. This would seem to appear from the various contracts attached to the bill.

On April 3rd, 1928, a contract dated March 1st of that year was also entered into between the Bridge Corporation and the Chicago Bank which provided precisely how the fund so deposited should be disbursed. Bovay, though a director of the corporation, was not present at that meeting. The other directors present were all employees of, and are alleged to have been under the control of the defendants, or of one of them. It seems, however, that Federal Securities Corporation was more or less subject to the control of Byllesby & Company, its more active associate, and in fact retired from business in June of 1929.

The bill also alleges that the amount paid by the defendants to the Bridge Corporation represented ninety percent of the face value of the bonds and debentures purchased; that nothing was paid for the stock issued to the defendants, though it had been previously valued by the corporation at $ 5.00 per share; that the sum of $ 123,666.00 paid to Bovay, when he relinquished his right to sixty percent of the voting power of the corporation, should have been paid by the defendants, or by one of them, and not from the funds of the Vicksburg Bridge & Terminal Company of Delaware; and that the various amounts disbursed, under the authority of the disbursement agreement, should not have been paid out of corporate funds.

The various amounts alleged to be due the corporation for moneys illegally and unfairly retained by the defendants and for moneys illegally and unfairly paid to them from corporate funds, and the dates of such payments are:

1. April 12th, 1928--$ 700,000 alleged to be discount on the bonds and debentures of the Vicksburg Bridge & Terminal Company of Delaware, purchased by the defendants from that corporation at ninety percent of their face value.

2. April 12th, 1928--$ 123,666.00, paid by one of the defendants to Bovay to secure control of the Delaware corporation, and which was repaid to Byllesby & Company from the funds of the Bridge & Terminal Company.

3. April 12th, 1928--$ 199,000.00, being the alleged fixed value of 39,800 shares of no par stock of the Bridge & Terminal Company; the certificates for which were issued to the defendants, and which sum represented the value of that stock at $ 5.00 per share.

4. May 1st, 1928--$ 22,644.38, reimbursement of promotion and preorganization expenses incurred by said defendants, and consisting of salaries and expenses paid to Bovay and McCuing under the agreement of June 7th, 1926.

5. May 1st, 1928--$ 1,051.09, for traveling expenses of representatives of the defendants prior to the organization of the Delaware corporation, but in connection with the bridge project.

6. May 1st, 1928--$ 11,543.33, expended by the defendants, prior to the organization of the corporation, for highway and railway traffic reports for their own use and benefit in the investigation of the proposed bridge project, and in subsequently marketing the said securities.

7. May 1st, 1928--$ 27,225.53, paid to defendants to reimburse them for legal opinions on, and approval of, the securities issued by the Bridge Corporation, together with other legal services connected with the marketing thereof.

8. May 1st, 1928--$ 18,301.67, to reimburse the defendants for expenditures made in connection with the project for the possible construction of a bridge at Natchez, Mississippi, and in no way connected with the business of the Vicksburg Bridge & Terminal Company.

9. $ 10,833.16, paid to Byllesby & Company on the representation that the same was due William G. Pohl, secretary-treasurer of the corporation, and an employee of Byllesby & Company, as a salary for his services at the rate of $ 416.66 per month, for the months beginning with March 28th, 1928; such salary was never fixed by corporate authority, and, as a matter of fact, was never received by the said Pohl, but was appropriated by Byllesby & Company to its own use.

10. $ 5,250.00, representing checks drawn for various corporate salaries, for several months, beginning about February or March, 1931, fixed by appropriate corporate action, but which were endorsed by the payees therein, and delivered to Byllesby & Company, and cashed by it. All of these persons were also employees of the defendants, or one of them.

11. $ 7,250.00, representing monthly checks of the corporation, for several months beginning with and subsequent to September 1st, 1932, drawn to the order of Mord M. Bogie, as chairman of the financial adjustment committee, and also an employee of Byllesby & Company, which checks were, however, turned over to...