Clark v. Am. Coal Co.

• Decision Date: 19 October 1892
• Citation: 86 Iowa 436,53 N.W. 291
• Parties: CLARK v. AMERICAN COAL CO. ET AL.
• Court: Iowa Supreme Court

86 Iowa 436

53 N.W. 291

CLARK

v.AMERICAN COAL CO. ET AL.

Supreme Court of Iowa.

Oct. 19, 1892.

Appeal from district court, Mahaska county; DAVID RYAN, Judge.

The defendant company is a corporation, and this action is to cancel 500 shares of the stock held by defendant McNeil as void, because fraudulently issued, and for an accounting for moneys expended by the corporation. Decree was entered for the defendants, and the plaintiff appealed.C. C. & C. L. Nourse and Seevers & Seevers, for appellant.

Blanchard & Preston, J. F. & W. R. Lacey, and McNett & Tisdale, for appellees.

GRANGER, J.

The defendant company was incorporated about April 23, 1884, with an authorized capital of $200,000, for the purpose of mining and the sale of bituminous coal. The original incorporators were J. K. Graves, H. W. and W. A. McNeil. Prior to the incorporation, E. J. Evans and J. T. James were the owners of certain coal mines and interests in Mahaska county, and J. K. Graves and H. W. McNeil had a contract or option for the purchase thereof. M. R. Wood, whose name appears as defendant, but on whom it is urged that there is no sufficient service, was the fuel agent for the Chicago, Rock Island & Pacific Railway Company, on whose lines of road the coal mines in question were located. Between Graves, the McNeils, and Wood, it was agreed that the defendant corporation should be organized, and should take from Graves and H. W. McNeil an assignment of their purchase or option from Evans and James, and pay therefor $20,000 in the stock of the company. The property conveyed by Evans and James consisted of interests in the Elida Coal Company and the Knoxville Coal Company, the property of the two companies consisting of coal lands and personal property appurtenant to the business of coal mining. The agreement by which Graves and McNeil secured the option specified that Graves and McNeil had organized a corporation “with appropriate powers, and the purchase shall be by the said corporation and in its name.” The payment to Evans and James was to be as follows: The property of the corporation, consisting of that above described, was to be mortgaged to secure $75,000 of negotiable 6 per cent. bonds. Of these bonds $57,000 were to be delivered to Evans and James in payment. By the agreement of sale by Evans and James it is provided: “In case of purchase under this option said Graves and McNeil will purchase $15,000 of said bonds from Evans and James, and will pay cash in hand therefor; said bonds being those last maturing.” It appears that the personal obligation of Graves and McNeil to purchase the $15,000 of bonds was not discharged by them alone, but was assumed by the corporation under a verbal agreement in substance as follows: The corporation was to consist in fact of Graves, Wood, and the two McNeils. Graves and McNeil had made no payments whatever. The $15,000 for the purchase of bonds was raised by Graves and the McNeils, each paying $5,000. The $20,000 of bonds agreed to be delivered to Graves and McNeil was to be shared by the four parties interested, and certificates of stock issued therefor, each party receiving $5,000 thereof, except that the $5,000 for Wood was delivered to and held in trust by H. W. McNeil for him, to be delivered whenever, from the dividends on the stock, after certain other payments, Graves and the McNeils should each be repaid his $5,000 and interest, so that each of the four should stand equal as to expenditures. After such payments it was agreed that Wood should share equally in dividends, including the $15,000 of bonds purchased from Evans and James. These certificates were issued in May, 1884. It will be noticed that, after these certificates were issued, there was remaining of the authorized capital of the corporation $180,000 unrepresented by certificates. In November and December, 1884, the corporation issued what are called “stock dividends” for this balance, one fourth thereof going to each of the four interested, except that the certificates for Wood were delivered to H. W. McNeil in trust, as was done with the former certificate. From the business of the corporation dividends were declared in December, 1884, March, 1885, and January, 1887, in the aggregate $15,239, and paid to Graves, H. W. and W. A. McNeil, to reimburse the amounts paid by them in the purchase of the $15,000 of bonds; and thereafter, as we understand, Wood became, under the agreement, the owner of the stock held in trust for him. The name of Mr. Wood nowhere appears on the books of the corporation as a stockholder or otherwise. At this time J. K. Graves was president, H. W. McNeil was vice president and general manager, and these two, with W. A. McNeil, constituted the board of directors of the corporation, and the entire stockholders, aside from M. R. Wood. The business management for some time devolved on H. W. McNeil, after which it was transferred to W. A. McNeil, who still continues as manager. From the commencement of the business of the corporation there was paid to Graves and the two McNeils each $100 per month, which payments continued until after the $15,000 was repaid, when it was likewise paid to Wood. There was also voted and paid to W. A. McNeil an increase of $166.66 per month, because of his supervision and management of the business of the corporation. In the dividends of the corporation, aggregating thousands of dollars, Mr. Wood always shared equally with the others, to about May 3, 1889, when he assigned his stock to W. A. McNeil. April 26, 1889, the plaintiff obtained from H. W. McNeil 150 shares of stock, and in May thereafter he purchased from the First National Bank of Chicago, Ill., 250 shares of the stock formerly owned by J. K. Graves, and now claims to be the owner of 700 shares of the stock of the corporation.

Plaintiff's complaint is, in brief, that the issue of stock and the payment of salaries and dividends to M. R. Wood are solely in consideration of his relation to the railroad company as fuel agent, “and to interest him in the profits and earnings of said American Coal Company, and to influence his action in making contracts between said railway company and said American Coal Company, and that the same was fraudulent and against public policy.” He also complains of the action of the corporation in voting the salaries or dividends and payments to Mr. Wood, and to some extent to W. A. McNeil, and of voting $100 per month to W. A. McNeil, to be used by him for “special purposes.” Referring to the assignment of the 500 shares by Wood to W. A. McNeil, the plaintiff in his petition says: “ Thirteenth. Plaintiff avers that, by virtue of the exercise of the authority to vote said five hundred shares of the capital stock of said company, the defendant W. A. McNeil has controlled the election of directors, and has elected himself and his brother members of the board of directors, and that two directors is a majority of said board, and that the articles of incorporation vest the management of its affairs in a board of three directors. Fourteenth. Plaintiff further shows that, by virtue of the use of the fraudulent stock at the election of the directors, by the said W. A. McNeil, he has excluded this plaintiff from any voice in the affairs of said company, and has elected a majority of the board wholly under his will and control. That his brother, elected a member of the board as aforesaid, holds only one share of stock in said company, which share was gratuitously transferred to him by the said W. A. McNeil for the sole purpose of making him eligible as a director.” The prayer of the petition is that the 500 shares of stock be canceled, and declared null and void, and that the defendants McNeil and Wood be required to account for the money fraudulently received and expended. Barring the question of public policy, it will be observed that the relief sought is founded on a denial of the right of W. A. McNeil to cast the vote based on the ownership of the 500 shares of stock assigned to him by Wood. If the stock in question is entitled to representation in the business affairs of the corporation, the plaintiff is entitled to no relief in this proceeding, because the legality of the payments and proceedings complained of depend upon the integrity of the stock issued to Wood. Although there is some complaint, particularly in argument, as to the legality of proceedings by the board of directors, in some other particulars, we find nothing to stand as a basis for relief independent of the question of the validity of the stock. The argument of appellant is based upon queries or propositions which it may be well for us to adopt in our consideration of the case.

1. “Was the stock issued for a fraudulent purpose?” As a question of fact, under the evidence, we answer in the negative. What the law, regardless of facts, might impute to such a transaction, in a case where the question of public policy was legitimately involved, may be noticed hereafter. What purpose or motive would and should be imputed to the mere fact that Wood, as fuel agent for the railway company, without its knowledge, agreed to become a member of the corporation from which, as such agent, he was to make purchases of coal, receiving at the same time a compensation for his services as agent, and dividends from the corporation, as a member of it, is not open to question. It would be unhesitatingly declared a fraud. But this is not to say that other evidence may not show that the parties acted without such a purpose. If there was a fraudulent purpose, in fact, it must have been shared in by Wood, Graves, and the McNeils, who were all the parties interested in the corporation; hence the fraud, if intended, was against the railway company. During the time Wood was in fact a member of the corporation, such membership was unknown to the railway company, barring possibly a short time near the close. No fraudulent purpose could have been...