Cowell v. McMillin

• Decision Date: 28 February 1910
• Docket Number: 1,682.
• Citation: 177 F. 25
• Parties: COWELL v. McMILLIN et al. [1]
• Court: U.S. Court of Appeals — Ninth Circuit

177 F. 25

COWELL v. McMILLIN et al. ^[1]

No. 1,682.

United States Court of Appeals, Ninth Circuit.

February 28, 1910

Ernest V. Cowell, a citizen of California, sued John S. McMillin and the Tacoma & Roche Harbor Lime Company, a corporation doing a large business making and selling lime at Roche Harbor, on the island of San Juan, Wash. The corporation has a capital stock of 1,000 shares of the par value of $100 each.

The bill alleges, in substance, that Henry Cowell owned 275 shares of the capital stock when he died on August 4, 1903 and that Ernest V. Cowell, his son, the complainant herein owns 34 shares; that Helen E. Cowell is executrix of the will of said Henry Cowell deceased; that after the corporation was organized the defendant McMillin owned 180 shares of stock and that the remaining shares of stock were issued to some seven persons whose names are given in the bill; that McMillin was president and manager of the company after its organization, and lived at Roche Harbor; that McMillin's salary was fixed by the first board of trustees at $2,500 per annum, but on January 29, 1889, it was raised to $3,000, and that on January 26, 1891, the board of directors, through the procurement of McMillin, increased his salary to $500 per month; that during the years 1888, 1889, 1890, 1891, and 1892, the company did a very large business and increased its assets, and out of the earnings for said five years paid cash dividends to the amount of 35 per cent. of its capital stock. It is alleged that in the course of its business, the company had erected a mill to manufacture barrels for use in marketing its lime, and built warehouses adjacent to the mill, and that it cost the corporation about 31 cents for each barrel; that during the year 1892 the Waterman-Chapman Barrel Machine Company, of Michigan, sent a representative to the corporation's place of business, and made a proposition to the corporation to install a patent machine for the manufacture of barrel staves in place of the machine then used by the corporation, said barrel machine company to receive compensation for the use of their machine by way of a royalty of 1 1/2 cents upon each barrel manufactured; that McMillin agreed that one of the patent machines could be installed for trial, and in 1892 such patent machine was put in place and used; that McMillin, while manager, ascertained that barrels could be made by the use of the machine at a total cost, including the payment of the royalty, of 21 cents per barrel, and that in January, 1893, after having experimented with the patent machine, he made a proposition to the trustees of the company to lease the stave mill and buildings and machinery connected therewith in the manufacture of barrels from the corporation at $200 per month rental, and to sell barrels to the company at the rate of 30 cents per barrel, and that he fraudulently concealed from the trustees the fact that by using the patent machine barrels could be made at a cost of 21 cents each, and that he falsely represented the facts to the board of trustees in regard to the use of the mill machinery and the cost and expense of making the barrels, and fraudulently represented to the board of trustees the character and value of the patent machine, and that in violation of his duties and trust, he entered into a contract with the barrel machine company in his own name for the use of the machine and the sale of the patent invention within the state of Washington; that McMillin was the only trustee who knew anything about the manufacture and sale of lime or barrels; that the trustees other than McMillin had then entered into an agreement with McMillin by which McMillin was to purchase their shares of stock at stated prices, and that thereupon McMillin fraudulently, through the representations referred to, induced the board of trustees to accept the proposition and to execute a lease in the name of the company to him for the stave mill and machinery used in the operation of the mill for five years from March, 1893, and that McMillin caused the corporation to agree with him to buy barrels at the rate of 30 cents per barrel under an agreement which provided that it might be terminated by McMillin at his option at the end of one year. It is alleged that the value of the property included in the lease was more than $40,000, and that by the terms of the lease, the company was obliged to pay all taxes and insurance and repairs, the cost of which have amounted approximately to the total sum of the rent reserved to the defendant in and by the terms of the lease. It is averred that by the terms of the agreement for the sale of the barrels by McMillin to the company, the company became bound to purchase all barrels required in its lime business upon substantially the following terms: First, the company was to bear all expense of inspecting, measuring, and delivering all material or supplies for the mill to be used in the manufacture therein in the booms or on the wharf, at the mill, and also for the delivery of all cooperage stock; second, to furnish McMillin the free use of the shops and tools and necessary storage for barrels and materials and free wharfage on all supplies; third, to receive from McMillin all staves and heads when manufactured, and to credit him therefor at the rate of 14 cents per set for staves, and 4 cents per pair for heads, payment to be made on the first day of each and every month during the continuance of the lease, and any extension thereof, and to pay the further sum of 12 cents for each barrel when the barrel is complete ready for shipment.

Complainant next alleges that, after making said contract and lease, McMillin, in fraud of the rights of the company, conducted the barrel business in his own name and on his own behalf, and sold barrels to the company, and collected therefor at the rate of 30 cents per barrel until September, 1893, when the mill was destroyed by fire; that thereupon McMillin caused the company to rebuild the mill at an expense of over $40,000, and caused another barrel manufacturing machine to be installed and that after June, 1894, when the new plant was complete, McMillin continued to operate the mill and to sell the barrels to the company at the rate of 30 cents per barrel, although he manufactured them at a cost of not to exceed 21 cents per barrel; that this continued until January 1, 1905, and that McMillin made profits of more than $20,000 per annum by making the barrels up to that time, and that he fraudulently diverted said profits from the company to himself. It is alleged that in 1893 McMillin made an agreement with all the stockholders of the company except Cowell, deceased, and this complainant, to buy all the remaining shares of the capital stock of the company not then owned by him, and that he agreed to pay in installments the purchase price of the said stock and that the stock was thereafter turned over to McMillin, and that he has since then owned and controlled all the shares of the capital stock of the company except the 309 shares owned by complainant and Henry Cowell, and his executrix, and that since the purchase of the stock, McMillin has caused the same to be voted for such persons as he selected, and has refused to elect Henry Cowell as a trustee, but has chosen 'dummy' trustees who, since January, 1893, have obeyed his directions so that really he has had and has control of the corporation; that at a meeting of the trustees in March, 1895, for the purpose of defrauding complainants and other minority stockholders, and for the purpose of enabling McMillin to pay for the stock which he had bought from the other trustees out of the assets and earnings of the company, McMillin caused the trustees to pass a resolution fixing his salary at $12,000 per annum, to take effect from January, 1895, and that since said date he has collected said salary although his services have not been worth more than $3,000 per annum, inasmuch as he has held other positions which required his time, and although he has lived in the city of Seattle and not at the place of business of the defendant company.

It is further alleged that in furtherance of his fraudulent plans in January, 1895, McMillin organized a corporation under the name of the 'Staveless Barrel Company,' with a capital stock of $250,000, consisting of 2,500 shares of the value of $100 each; that this last-named corporation was organized by McMillin and two others, McMullin subscribing for all of the shares except two; that McMillin prepared the articles of incorporation, and charged the company $200 for the service, which sum was used in payment for the two shares of stock subscribed by the two other stockholders, and that for the purpose of making a pretended payment for the shares of stock in the corporation subscribed for by him, McMillin made his note to the company in the sum of $249,800, and that thereafter in order to escape liability as a stockholder and to make a pretended payment of the capital stock, McMillin made a pretended proposition to the corporation to sell to it his lease of the stave mill and other property of this defendant company, and of his contract for the sale of barrels to the defendant company, and of all pretended rights which he had fraudulently acquired from the barrel machine company for the use of the patent machine for the sum of $249,800, and that he agreed to accept in payment therefor the delivery to him of his promissory note, and that he thereupon caused the trustees of the Staveless Barrel Company to accept the proposition and to deliver the note to him and to issue to him the capital stock, and that thereupon he assigned the lease and agreements to the Staveless Barrel Company, and then procured the 'dummy' trustees of this...