Copper Belle Mining Co. v. Costello

• Decision Date: 27 March 1908
• Docket Number: Civil 1021
• Parties: COPPER BELLE MINING COMPANY, a Corporation, et al., Defendants and Appellants, v. MARTIN COSTELLO, Plaintiff and Appellee
• Court: Arizona Supreme Court

95 P. 94

11 Ariz. 334

COPPER BELLE MINING COMPANY, a Corporation, et al., Defendants and Appellants, v. MARTIN COSTELLO, Plaintiff and Appellee

Civil No. 1021

Supreme Court of Arizona

March 27, 1908

[Copyrighted Material Omitted]

APPEAL from a judgment of the District Court of the Second Judicial District, in and for the County of Cochise. Fletcher M. Doan Judge. Modified and affirmed.

The Copper Belle Mining Company, a West Virginia corporation, was the owner of certain mining claims situated in this territory. In 1899 one John Gleeson was the owner of 8,000 shares of the capital stock of the company, was its general manager and superintendent, on a salary, and had an interest in the net profits of a store of the company on its premises. Gleeson had general charge at the mines, paying the wages of the employees by checks drawn upon the funds deposited in the bank by the company for that purpose. The matte from the mines was shipped to various points by Gleeson, the proceeds therefrom not being collected by him, he retaining no management or control thereof, and the business of the company being transacted in New York. Gleeson had been elected a director, but never met as one of the board of directors, or qualified or acted as such. In January, 1902 certain of the officers of the company came to Arizona for the purpose of effecting an arrangement to get Gleeson out of the company. An arrangement was entered into between Gleeson and these representatives of the company, by which the company agreed to pay Gleeson for his interest in the store, for salary due him, and for his 8,000 shares of stock the sum of $68,100. Gleeson demanded a partial cash payment. Mr. James Peilly, who was the local counsel of the company, agreed to procure from Costello (the appellee) a loan to the company for the amount of the cash payment demanded by Gleeson, provided the company would duly authorize such loan, and would give a mortgage for the amount thereof upon its property. Thereupon the visiting officers of the company returned to New York, a stockholders' meeting was called, and authority was given at such stockholders' meeting to the board of directors, authorizing such board to execute a note of the company to Costello for $15,100 and a mortgage on its property to secure the same, and, further, to execute to Gleeson four promissory notes of the company, for $13,250 each, the same to be secured by a second mortgage on the property. Thereafter, and on the 1st of February, 1902, the board of directors held a meeting, at which the minutes of the meeting of the stockholders were read, and at which the directors authorized the president and secretary to draw up and execute the notes and mortgages referred to. The note for $15,100, and the first mortgage securing the same, were transmitted to Costello, together with a draft, drawn by the company on Costello in favor of Gleeson for the amount of the note, which draft was paid by Costello. The four notes of the company, payable to Gleeson, and the second mortgage securing the same, were delivered to him. These transactions were in February, 1902. Subsequently Costello purchased from Gleeson the four notes, for $13,250 each, and the second mortgage securing the same. The note to Costello for $15,100 was a three year note, and became due on February 4, 1905. The four notes to Gleeson were four, five, six and seven year notes, becoming due February 4, 1906, February 4, 1907, February 4, 1908, and February 4, 1909, respectively. By the terms of the mortgage to Costello, the latter was authorized to have the assessment work required by law done on the mining claims, if he found it necessary for the preservation of the title thereto. For this purpose Costello expended the sum of $802.75. The company paid the interest due on the note to Costello to February 4, 1903, but failed to make any further payment thereon, either of principal or interest, or the amount paid out by Costello for assessment work. The interest due on the notes to Gleeson to February 4, 1903, was also paid; but no further payments were made on such notes. In February, 1903, the corporation was adjudged a bankrupt. Thereafter all the property covered by the mortgages was deeded to a new company, organized under the laws of the territory of Arizona, bearing the same name, to wit, the Copper Belle Mining Company.

In July, 1905, subsequent to the maturity of the $15,100 note, but prior to the maturity of the other notes, Costello brought this action against the Copper Belle Mining Company of West Virginia and the Copper Belle Mining Company of Arizona for the foreclosure of the mortgages. The complaint was divided into two causes of action: First, on the $15,100 note and the $802.75 assessment expenditures; the second, on the four notes, for $13,250 each, which Gleeson had assigned to Costello. The plaintiff prayed judgment for the amount of the principal and interest due on the $15,100 note, and for "the present value of the four promissory notes mentioned in the second cause of action of the plaintiff's complaint," and for a sale of the mortgaged premises. A petition in intervention was filed by certain stockholders, alleging the acts of the corporation with respect to the execution of the notes and mortgage to be ultra vires. A demurrer to this intervening petition was sustained by the court. Upon application of the defendant companies, Gleeson was made a party defendant to the suit. The defendant companies in their answer demurred to the complaint generally, and specially to the second cause of action, on the ground that none of the notes sued on in the second cause of action were due at the time the complaint was filed. They answered on the merits, denying the allegations of the complaint, averring that the assessment work done was unnecessary; that the notes set up in plaintiff's second cause of action were not due; that Gleeson was a director, superintendent and general manager, and occupied a fiduciary and trust relation toward the corporation and its stockholders; that Gleeson made false representations to the stockholders and officers of the corporation respecting the value of the mines, the freedom of the company from debts, and the profits of the store business; that he induced the execution of the agreement between the company and himself for the purchase of his stock and interest in the company by means of false representations as to the extent of the company's revenues and income, and its freedom from debts. They further alleged the invalidity of the notes and mortgage for want of consideration, for want of authority on the part of the officers of the company to execute them, and alleged that the acts of the corporation in that behalf were ultra vires. They alleged that at the time of the execution of the notes and mortgages the company was insolvent; that it owed debts in excess of $40,000, which had been incurred by Gleeson in his capacity as director, superintendent and general manager, which fact Gleeson and Costello knew, but which fact Gleeson concealed from the company, its officers, agents and stockholders; that at the time of the execution of the notes the company had no net profits in its business. They set up suits brought by creditors against the company in July, 1902, a petition in bankruptcy of July 29, 1902, and the subsequent adjudication of the company as a bankrupt, the amount of debts proved, a sale and assignment to the Arizona company of the claims of the creditors, the indebtedness of Gleeson to the West Virginia Company, the invalidity of the stockholders' meeting (by reason of the failure to give proper notice thereof) at which the notes and mortgages were authorized, the nonassent of certain stockholders thereto, and prayed for an accounting between the company and Gleeson, the appointment of a referee for that purpose, a credit as an offset of any amount found to be due from Gleeson to the company, that Costello and Gleeson be required to deliver up the notes and mortgages for cancellation, and that they be perpetually enjoined from enforcing payment of the notes. The trial court rendered judgment for Costello for the amount of the $15,100 note, principal and interest, for the amount expended by him for the assessment work, and for the interest due on the four notes to Gleeson covered by the second mortgage, and ordered a foreclosure to satisfy the same. From this judgment the two corporations have appealed.

Frank H. Hereford, and Francis M. Hartman, for Appellants.

The mortgage sued on in the second cause of action did not provide for any default for nonpayment of interest. The notes and mortgage give the debtor the option of having the interest added to the principal, and there was no right of action on the notes and mortgage until after the principal became due, and therefore the demurrer should have been sustained. Van Loo v. Van Aken, 104 Cal. 269, 37 P 925.

This was a transaction where a corporation purchased its own stock from one of its directors and stockholders, and gave notes and mortgages upon all its property in payment thereof. It will not be disputed that Judge Reilly (Mr. Costello's attorney) knew what the transaction was, and notice to the attorney is notice to the client. May v. Le Claire, 11 Wall. 217, 20 L.Ed. 50; Rogers v. Palmer, 102 U.S. 263, 26 L.Ed. 164; City of Denver v. Sherrett, 88 F. 234, 31 C.C.A. 499; Railroad Co. v. Smith, 21 Wall. 255, 22 L.Ed. 513; Astor v. Wells, 4 Wheat 466, 4 L.Ed. 616; Johnston v. Laflin, 103 U.S. 803, 26 L.Ed. 532. A purchaser of a note of a corporation, payable to an officer of the corporation, is not a bona fide purchaser. Stough v. Ponca Mill Co., 54 Neb. 500, 74 N.W. 868; Cook on Corporations, 5th ed., par. 293, p. 640. The charter of the company...