Dean v. Kellogg

• Decision Date: 19 June 1940
• Docket Number: 26.,Nos. 25,s. 25
• Citation: 292 N.W. 704,294 Mich. 200
• Parties: DEAN et al. v. KELLOGG et al. (two cases).
• Court: Michigan Supreme Court

294 Mich. 200

292 N.W. 704

DEAN et al.

v.KELLOGG et al. (two cases).

Nos. 25, 26.

Supreme Court of Michigan.

June 19, 1940.

Suit by Julia E. Dean and others, as stockholders and creditors of Seedtown Products, Inc., and the Warren-Teed Seed Company, against John L. Kellogg and others for an accounting, retransfer of assets alleged to have been wrongfully misappropriated, an injunction, the appointment of a receiver for Seedtown Products, Inc., and the Warren-Teed Seed Company, and for general relief, and petition for discovery. The trial court granted a motion to dismiss, and the plaintiffs appeal and seek a writ of mandamus to order the trial court to grant the petition for discovery.

Judgment of dismissal affirmed, and writ denied.Appeal from Circuit Court, Calhoun County, in Chancery; Blaine W. Hatch, Judge.

Argued before the Entire Bench.

Frederick McGraw, of Detroit, and Clarence A. Snyder and E. C. Frank Meier, both of Chicago, Ill. (William J. Oldani, of Detroit, Mich., of counsel), for appellants.

Burritt Hamilton, of Battle Creek (Edwin L. Harding, of Battle Creek, of counsel), for appellees.

BUTZEL, Justice.

We are reviewing on one record the dismissal of a stockholders' derivative suit and the denial of a petition for discovery.

Plaintiffs filed a bill of complaint in chancery on behalf of themselves and any other stockholders and creditors of Seedtown Products, Inc., and Warren- Teed Seed Company, who might care to join in and contribute to the expense of the proceedings. The trial court granted a motion to dismiss on the grounds of lack of jurisdiction, laches and multifariousness. We shall summarize the allegations of the lengthy bill. Plaintiffs are the owners of over 130,000 shares in a Nevada corporation now known as the Warren-Teed Seed Company, hereinafter referred to as Warren-Teed. It is joined as a party defendant. Defendant Seedtown Products, Inc., was organized under the laws of Delaware, and shall hereafter be referred to as Seedtown. Defendant Kellogg Company, a Delaware corporation, maintains an office in Battle Creek, Michigan. Battle Creek is also the residence of defendant W. K. Kellogg. Defendant John L. Kellogg is stated in the affidavit of publication to be a resident of Chicago, Illinois; his residence is not stated in the bill of complaint. Defendant John L. Kellogg incorporated the Kellogg Terminal Warehouses, Inc., in Illinois. It maintained an office at the same address as used by Warren-Teed and Seedtown in Chicago.

Shortly after December 1, 1930, after Seedtown had qualified its stock for sale in Illinois, an agreement was made by Warren-Teed and Seedtown whereby the stock of Seedtown was to be exchanged for the assets of Warren-Teed, and each stockholder of Warren-Teed was accorded the right to exchange his stock on a share for share basis for stock of a like class in Seedtown. It is charged that the shares of Seedtown were never issued and delivered to plaintiffs because of the persistent delay of John L. Kellogg.

A large block of Class A stock of Seedtown was exchanged for all the outstanding stock of Kellogg Terminal Warehouses, Inc., not a party to this suit.

Plaintiffs alleged that in 1924 John L. Kellogg began to acquire stock in Warren-Teed, and that by 1928 he had a majority interest therein. It is charged that through ‘all manner of intricacies and schemes known to corporate leger-demain’ John L. Kellogg stripped both Warren-Teed and Seedtown of all their assets. He is alleged to have obtained by fraud in 1931 a default judgment in Illinois against Seedtown in the sum of $220,006.90.

In December, 1931, plaintiffs received a letter addressed to the stockholders of Warren-Teed, signed by John L. Kellogg, president, stating that he had made a net cash outlay of over $1,200,000 during a period of two years, for the purchase of stock in, and advances to, the corporation, and that he had not received in return any amounts for salary, dividends or other remuneration; that he had spared neither time nor money in the effort to make the business a success; that he felt no duty to continue a business that could not be made a commercial success. He requested proxies to vote for dissolution and winding up of the affairs of Warren-Teed at a stockholders' meeting to be held two weeks later. Enclosed therewith was another letter to the stockholders of Seedtown, signed by ‘R. Winter, President,’ stating that there had been little response to the attempted financing of the company through a public stock offering; that Kellogg had primarily met the expenses of the company; that there had been a loss of over $300,000, of which about 90 per cent. was from the seed and grain business, and about 10 per cent. from Kellogg Warehouses, Inc., a wholly owned subsidiary of Seedtown; that the company owed creditors over $110,000 in addition to the default judgment for $220,006.90 held by Kellogg. The letter further advised that Seedtown's current assets were slightly over $41,000; that its patents and processes had proved to be of no commercial value; that the stock of the Kellogg Warehouses, Inc., its wholly owned subsidiary, was of problematical value, for there was a mortgage of $875,000 on its property, and its fixed assets had declined with the current decline in real estate values, and that with current assets of $891,891.62 and current liabilities of $238,681.36, the shares of Kellogg Terminal Warehouses, Inc., had only nominal value. Prompt dissolution and winding up of Seedtown's affairs was recommended.

The bill further alleged that a sale of the assets of Seedtown took place, resulting in the purchase by John L. Kellogg, as a judgment creditor, of all the assets. Although notice of dissolution was filed in Delaware, plaintiffs claim that Seedtown was never legally dissolved in a manner binding on plaintiffs or the other stockholders by a two-thirds vote as required by the laws of Delaware, and that the dissolution was brought about by false, fraudulent and illegal returns to the Secretary of State of Delaware, and that for this reason Seedtown is a de facto, if not a de jure, corporation doing business in Michigan.

It is further claimed that John L. Kellogg induced an inventor in the employ of Warren-Teed to become Kellogg's personal employee, and that valuable inventions and processes discovered were appropriated by Kellogg and other corporations controlled by him, in breach of his fiduciary duties to Warren-Teed. It is stated that the patents issued thereon rightfully belonged to the plaintiffs as stockholders of Seedtown. Plaintiffs charge that by some manner or means unknown to plaintiffs, the patents, processes and machinery, etc., were acquired by John L. Kellogg and by him transferred to W. K. Kellogg or the Kellogg Company, and that since June 1, 1932, the Kellogg Company, John L. Kellogg and W. K. Kellogg have been using these assets to their great advantage. These properties are alleged to be worth many millions of dollars and have been the basis for the establishment of an enormous business that has brought very large profits, and that Seedtown and Warren-Teed have been damaged in the amount of $20,000,000. It is charged that the transferees knew of the illegal methods of acquisition of these assets.

Plaintiffs prayed for an accounting, retransfer of the assets wrongfully misappropriated, an injunction, a receiver for Warren-Teed and Seedtown, and general relief. Plaintiffs' petition for discovery was denied without prejudice to a renewal thereof after defendants filed their plea or answer. The trial court granted a motion to dismiss on the grounds that it lacked jurisdiction of essential parties, that the bill was multifarious, and that plaintiffs' inexcusable laches barred equitable relief.

Only W. K. Kellogg and Kellogg Company were personally served with process in the State of Michigan; an order of publication was made as to defendants John L. Kellogg, Warren-Teed Seed Company, and Seedtown Products, Inc. They have not appeared.

The question of jurisdiction over necessary parties to the suit or of the subject of action is controlling. Defendant John L. Kellogg, a resident of Illinois, is asked to account for alleged wrongs to Warren-Teed and Seedtown; he has not been personally served within the State, nor has he submitted to the jurisdiction of this court. We are powerless to render any personal decree against him; our process, personal or constructive, is confined to the limits of this State so far as acquiring personal jurisdiction over nonresidents. Outhwite v. Porter, 13 Mich. 533;McEwan v. Zimmer, 38 Mich. 765, 31 Am.Rep. 332; Booth v. Connecticut Mut. Life Ins. Co., 43 Mich. 299, 5 N.W. 381;Howard v. Coon, 93 Mich. 442, 53 N.W. 513;Stewart v. Eaton, 287 Mich. 466, 477, 283 N.W. 651, 120 A.L.R. 1354;Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565. The dismissal of the bill was correct as to him.

A more difficult problem is presented as to our jurisdiction to adjudicate rights belonging to Warren-Teed and Seedtown. ‘There is no doubt of the power of a court of equity, in case of fraud, abuse of trust, or misappropriation of corporation funds, at the instance of a single stockholder, to grant relief, and compel a restitution.’ Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N.W. 218, 223,17 L.R.A. 412. In the usual stockholders' derivative suit, the stockholders as plaintiffs are permitted to instigate the action in a court of equity to enforce a claim of the corporation. Foss v. Harbottle, 2 Hare's Ch. 461, 67 Eng.Rep. 189; Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827. Any recovery runs in favor of the corporation, for the shareholders do not sue in their own right. Talbot v. Scripps, 31 Mich. 268;Horning v. Louis Peters & Co., 202 Mich. 140, 167 N.W. 874;Curtiss v....