Darelius v. Commonwealth Mortg. Co.

• Decision Date: 12 May 1922
• Docket Number: No. 22589.,22589.
• Parties: DARELIUS v. COMMONWEALTH MORTGAGE CO.
• Court: Minnesota Supreme Court

152 Minn. 128

188 N.W. 208

DARELIUS

v.COMMONWEALTH MORTGAGE CO.

No. 22589.

Supreme Court of Minnesota.

May 12, 1922.

Appeal from District Court, Hennepin County; Wm. C. Leary, Judge.

Action by A. B. Darelius, as receiver of the Mortgage Security Company of Minnesota, against the Commonwealth Mortgage Company, substituted for J. A. Mansfield. Judgment for plaintiff, and, from an order denying a motion for new trial, defendant appeals. Order affirmed.

Syllabus by the Court

The evidence sustains the finding of the trial court that the issuance of certain notes by plaintiff corporation and the transfer of certain property by plaintiff corporation to defendant corporation, in payment of the notes, were transactions done at the instance of a controlling stockholder in both corporations, without consideration, without authority of plaintiff corporation and in fraud of that corporation, that defendant corporation was chargeable with knowledge of the facts, and that plaintiff corporation is entitled to have the transactions set aside.

Plaintiff may have rescission without return of consideration received, which is wholly worthless. If any part of the consideration is of value, its return may still be required. Tender before suit was unnecessary.

There is no element of estoppel in the case. There is no estoppel as to facts equally known to both parties.

Depreciation of assets to be restored does not necessarily bar rescission, in the absence of laches. Selover, Schultz & Mansfield, of Minneapolis, for appellant.

John N. Berg, of Minneapolis, for respondent.

HALLAM, J.

Plaintiff brought this action to recover certain real and personal property, transferred by officers of the Mortgage Security Company to the Commonwealth Mortgage Company. Plaintiff charges that the transfers were made at the instance of W. H. Schafer and for his personal benefit, without consideration, moving to the Mortgage Security Company, without authority of that corporation, and in fraud of the corporation. The trial court found for the plaintiff on all of these issues and ordered judgment that the property be recovered. Defendant appeals from an order denying a motion for a new trial.

1. The decision is sustained by the evidence. There is evidence of the following facts:

The Mortgage Security Company is a corporation organized to buy, sell, and improve real estate and to buy, sell, and hold stocks, bonds, commercial paper and other choses in action. Prior to August 10, 1918, W. H. Schafer secured a controlling interest, that is, a majority of the voting power of the capital stock.

The Commonwealth Mortgage Company is a corporation organized to buy and sell mortgages and other securities. Prior to August 10, 1918, Schafer secured a similar controlling interest in this corporation. This controlling interest consisted of 8,100 shares of common stock of the par value of $810,000. It was acquired from two men, Loveland and Ludlow, the former then president of the company, for a consideration of about $300,000, and Schafer gave his notes for this amount and gave the stock as security for their payment. The notes and collateral came into the hands of the Commonwealth Company.

On August 10, Schafer ostensibly sold 5,790 shares of this stock to the Mortgage Security Company for $175,000, taking seven notes of the Mortgage Security Company of $25,000 each, payable to bearer for the amount. Loveland was still president of the Commonwealth Mortgage Company, though Schafer took effect. Schafer said Loveland had resigned as president took effect five days later. It had been handed in a few days before it took effect. Schafter said Loveland had resigned before August 10, or at least his resignation was in at that time. Schafer and Loveland together took the 5,790 shares of stock to the Mortgage Security Company and there delivered them to the president of the Mortgage Security Company, and Loveland received the $175,000 in notes of the Mortgage Security Company. A corresponding amount of Schafer's notes held by the Commonwealth Mortgage Company were surrendered. Save as here stated, the Mortgage Security Company received no consideration for the issuance of its notes.

At this time Harry C. Kemp was president of the Mortgage Security Company. He had been elected after Schafer secured control, and he was the nominal holder of Schafer's stock. Schafer, though not an officer, was directing the affairs of the company. He told Kemp what to do and he did it. He told Kemp to sign the seven notes and he signed them. No other officer of the Mortgage Security Company was consulted. And, as far as the Commonwealth Mortgage Company was concerned, the transaction was at the request of Schafer.

Thereafter and prior to October 17, 1918, Kemp, as president, and A. K. Hofer, as assistant secretary of the Mortgage Security Company conveyed to the Commonwealth Mortgage Company by numerous deeds a large number of pieces of real estate and transferred certain shares of stock, it is claimed, in payment of its notes above mentioned. These transfers the trial court in effect set aside.

These facts stand out: The Mortgage Security Company received nothing of value for the issuance of its $175,000 in notes. It received 5,790 shares of the common stock of the Commonwealth Mortgage Company. But the evidence is undisputed that this stock had no value. There was preferred stock to the amount of $1,000,000, and the assets of the Commonwealth Mortgage Company were worth less than that amount. There was some evidence that the control of the Commonwealth Mortgage Company was worth $300,000, that is, the ‘opportunity of handling the money and the funds of the company’ was considered worth that amount.

Two observations are pertinent here: First, even though this testimony was undisputed the court could not justly find that the opportunity of handling these assets, honestly, was worth anything like $300,000. The stockholders of the company were entitled to the return which the assets might yield, a fact which Mr. Schafer apparently overlooked. The prestige of ownership of the control of a financial institution of badly impaired capital stock may be of some account, but only unfaithful management could yield returns on any such amount as that fixed by this testimony, as the value of the control. Second, the stock transferred to the Mortgage Security Company in fact fell far short of the amount necessary to give control, and any amount less than that, as above stated, had no value.

As to the transfer of the real estate and other assets, the Mortgage Security Company received no further consideration, except a charge on its books to Schafer's account and perhaps a note given by Schafer. Both were worthless. Schafer was insolvent. He had at that time some credit, but very soon thereafter went into bankruptcy with no assets of consequence and large liabilities, how large does not appear, except that there was one claim of $200,000.

There is no evidence of any negotiation between the parties as to these transfers. There is no evidence that any price was fixed. The nearest approach to negotiation is found in the following testimony of Schafer. After stating that he did not discuss these transactions with any of the officers or directors of the Mortgage Security Company save as he told Kemp what to do, he said, referring to Kemp:

‘I think I told him * * * that it was my plan to have the Mortgage Security Company buy half of the stock, the control of the Commonwealth Company, and that later we would make some deal to trade him the real estate that was carried on the books of the Mortgage Security Company for the notes. Some such conversation took place.’

In fact it is hard to find anywhere in any part of these transactions any evidence of real adversary negotiation. Schafer was the only real actor. He testified that he controlled both companies, and that the transaction on both sides was at his request or direction.

Defendant's counsel argue earnestly that Schafer actually paid the Mortgage Security Company approximately $50,000 on account of this real estate, by a charge to Schafer's account on the books of the Mortgage Security Company. The bookkeeping transaction was somewhat bewildering and need not be detailed here, except to say the fact most relied on is that, at the time the real estate transaction was closed, Schafer had a credit on the books of the Mortgage Security Company of $48,346.73. There was then charged to Schafer's account $50,704. Who authorized the charge does not appear. The charge was apparently partly involved in a process of charging off value of assets which the auditor claimed to be inflated or worthless, and was done partly to balance the books when this property disappeared from the assets. There is no evidence that it was made pursuant to any agreement between Schafer and the company. Still defendant contends that the credit to Schafer on the books entitled him to receive the amount thereof from the company, and that the charge against his account, in offset of this credit, was equivalent to the payment to the company of the amount of the credit. As to the ordinary book account, this reasoning would be sound (Hare v. Bailey, 73 Minn. 409, 76 N. W. 213;Pope v. Ramsey County State Bank, 137 Minn. 46, 162 N. W. 1051), but when we consider the nature of the Schafer account we think the position proves untenable.

Schafer's method was to gather together notes and perhaps other paper and then discount them in banks which he controlled. He...