Detroit Gray Iron & Steel Foundries, Inc. v. Martin

• Decision Date: 01 June 1960
• Docket Number: No. 5,5
• Citation: 106 N.W.2d 793,362 Mich. 205
• Parties: DETROIT GRAY IRON & STEEL FOUNDRIES, INC., a Michigan corporation, Plaintiff and Appellant, v. Hugh MARTIN, Jr., Executor of the Estate of Hugh Martin, deceased, Hugh Martin, Jr., Howard Colby, Bernard P. Costello, The Detroit Bank & Trust Company and Hugh Martin, Jr., Trustees under the Will of Louis W. Schimmel, deceased, Clara Martin and Lois Martin Pioch, Defendants and Appellees, and George R. Gibbs, Fred O'Donnell, and Arthur B. Pfleiderer, Defendants. ,
• Court: Michigan Supreme Court

Page 793

106 N.W.2d 793

362 Mich. 205

DETROIT GRAY IRON & STEEL FOUNDRIES, INC., a Michigan

corporation, Plaintiff and Appellant, v. Hugh MARTIN, Jr., Executor of the Estate of Hugh Martin,

deceased, Hugh Martin, Jr., Howard Colby, Bernard P.

Costello, The Detroit Bank & Trust Company and Hugh Martin,

Jr., Trustees under the Will of Louis W. Schimmel, deceased,

Clara Martin and Lois Martin Pioch, Defendants and Appellees,

and

George R. Gibbs, Fred O'Donnell, and Arthur B. Pfleiderer, Defendants.

No. 5, June Term, 1960.

Supreme Court of Michigan.

Jan. 9, 1961.

Weiner & Grayson, Detroit (Fred R. Walker, Detroit, of counsel), for plaintiff and appellant.

Chris M. Youngjohn, Detroit, for Howard Colby, defendant and appellee.

Arthur F. Barkey, Detroit, for appellee Bernard Costello

Barbier, MacFarlane & Tolleson, Detroit, for Hugh Martin, Jr., Clara Martin, Lois Martin Pioch, The Detroit Bank & Trust Company and Hugh Martin, Jr., Co-Trustees under the will of Louis W. Schimmel, deceased, some of the defendants and appellees.

Before the Entire Bench.

KELLY, Justice.

Plaintiff was engaged in the manufacturing of gray iron castings for the automotive industry, and on February 6, 1929, certain of plaintiff's officers and directors formed the Detroit Alloy Steel Company to manufacture steel castings. The Detroit Alloy Steel Company leased a portion of plaintiff's premises at a monthly rental of $500.

In 1942 plaintiff sought a loan from the Reconstruction Finance Corporation and was informed, as a condition to obtaining the loan, plaintiff would have to acquire the assets of the Detroit Alloy Steel Company. Plaintiff complied by acquiring all of the issued and outstanding shares of capital stock of Detroit Alloy Steel Company on December 31, 1942.

Approximately 16 years later (September, 1958) plaintiff filed its bill of complaint in the circuit court of Wayne county seeking an accounting, cancellation of certain shares of stock, and damages.

Defendants and appellees filed motions to dismiss and, after oral argument, plaintiff, on December 1, 1958, was given the right to file an amended bill of complaint. Plaintiff filed such amended bill of complaint on December 31, 1958, and, also, an amendment to this amended bill was filed on July 2, 1959.

Plaintiff in its final argument and brief abandoned the so-called directors' statute (C.L.1948, § 450.47 [Stat.Ann.1959 Cum.Supp. § 21.47]) and based its action upon common law fraud and conspiracy.

The bill of complaint was dismissed by a decree entered by Hon. Chester P. O'Hara, circuit judge, on October 12, 1959. Claim of appeal was duly filed by plaintiff.

Section 47 of the Michigan general corporation act (C.L.1948, § 450.47 [Stat.Ann.1959 Cum.Supp. § 21.47]) reads

'The directors of every corporation, and each of them, in the management of the business, affairs, and property of the corporation, and in the selection, supervision and control of its committees and of the officers and agents of the corporation, shall give the attention and exercise the vigilance, diligence, care and skill, that prudent men use in like or similar circumstances.

'Action may be brought by the corporation, through or by a director, officer, or shareholder, or a creditor, or receiver or trustee in bankruptcy, or by the attorney general of the state, on behalf of the corporation against 1 or more of the delinquent directors, officers, or agents for the violation of, or failure to perform, the dutires above prescribed or any duties prescribed by this act, whereby the corporation has been or will be injured or damaged, or its property lost, or wasted, or transferred to 1 or more of them, or to enjoin a proposed, or set aside a completed, unlawful transfer of the corporate property to one knowing the purpose thereof. The foregoing shall in no way preclude or affect any action any individual shareholder or creditor or other person may have against any director, officer, or agent for any violation of any duty owed by them or any of them to such shareholder, creditor, or other person. No director or directors shall be held liable for any delinquency under this section after 6 years from the date of such delinquency, or after 2 years from the time when such delinquency is discovered by one complaining thereof, whichever shall sooner occur.'

The record in this appeal sustains the trial court's carefully prepared opinion, which reads in part as follows:

'Plaintiff's cause of action is based upon an alleged conspiracy entered into by Messrs. Hugh Martin, Louis W. Schimmel, Harry H. Wyatt, Charles Erdman and Matthew Finn about February 6, 1929, and claims that they, as the them directors of plaintiff, caused to be formed another corporation known as Detroit Alloy Steel Co., wherein they were the sole stockholders and directors; and having formed this corporation, they entered into a lease between plaintiff and the new corporation, wherein the latter leased all of the facilities, plant, equipment, etc., of plaintiff for the manufacture of steel castings for the sum of $500 per month. At that time plaintiff was making only gray iron castings. This lease was renewed from time to time until 1942. Plaintiff claims that this amount of money was inadequate consideration for that which was leased and used by the lessee, and that an adequate rental would have been a sum between $15,000 and $25,000 per year or more. No claim is made of any contract with any of these individual directors, but they did control both corporations during this period of time. No misrepresentations are alleged in the bill, and the only basis for this action is the alleged use of these facilities, etc., without paying adequate consideration therefor. * * *

'It is interesting to note that plaintiff alleges in paragraphs 10 through 14 that a merger occurred between this plaintiff and Detroit Alloy Steel Co. as a result of the insistence of the Reconstruction Finance Corporation that a merger be perfected as a condition for a governmental loan. Since the date of that merger in 1942 there has been only one corporation. Plaintiff's claims that these defendants and others conspired in perfecting this merger is not borne out by its own allegations, and under the law of Michigan, as found in Sec. 21.52, M.S.A., where there is a consolidation or merger of corporations, the entire agreement must be submitted to and approved by the shareholders of each corporation involved and two-thirds of the outstanding capital stock must approve the adoption of the agreement. In necessarily follows that the exchange of stock on the basis of one and a quarter shares of plaintiff's capital stock for one share of Detroit Alloy Steel Company's stock was known to all the stockholders and was approved by them, and shortly thereafter, in 1942, this stock was issued. Nobody complained, no action was taken, and nothing was done at all from 1929 until this case was started in September, 1958.

'Of the original alleged conspirators only one is a defendant herein, namely, Hugh Martin. Apparently Howard Colby acted as attorney in the formation of the new corporation, and shortly after the incorporation thereof, he became a stockholder therein. Charles Erdman is not a defendant, and it was stated on the argument that he has made his peace with the plaintiff. Messrs. Schimmel, Wyatt and Finn are dead. Mr. Schimmel died in 1933, Mr. Wyatt died in 1934, and Mr. Finn died in 1932. The estates of all three have been closed for many years, and, of course, no claim was presented against the estate of any of them. Mr. Schimmel created a trust of which Hugh Martin, Jr., and The Detroit Bank and Trust Co. are the present trustees. It is claimed that he received 28,000 shares of the new corporation, which went into this trust, and which were exchanged for 35,000 shares of plaintiff at the time of the merger. Under this trust, Clara Martin has a life interest, and Hugh Martin, Jr., and Lois Martin Pioch are the remaindermen. The only interest of these various defendants arises out of this trust, which came into being at his death in 1933. Neither Hugh Martin, Jr., nor the bank, nor those named in the trust, ever took any part in any of the proceedings complained of except in the active exchange of stock. The defendant Costello happened to be a law partner of Howard Colby, and based upon that fact, plaintiff surmises and guesses that maybe he was a shareholder through the stock holding of his partner, Howard Colby. The allegation is on information and belief only. George Gibbs and Fred O'Donnell were never served, and Arthur Pfleiderer has been dismissed on stipulation.

'Plaintiff definitely alleges in paragraph 4, as amended, that this lease originally and as renewed from time to time was made with Detroit Alloy Steel Co., and that corporation used the leased premises and property. Throughout the bill, as amended, plaintiff refers to these original incorporators as promoters of that company and as stockholders and directors thereof, and also makes constant reference to them and other defendants as directors of plaintiff, refers to the dual capacities occupied by the alleged conspirators, and sets up no facts, but only a couple of conclusions of the pleader which disclose any individual or combined act of these parties which constitute fraud either actual or constructive, except as it pertains to the allegations in connection with, and arising from, what they did as directors of plaintiff. Practically every paragraph makes reference to their actions as directors of plaintiff and/or directors of the new company. * * *

'In view of those assertions of plaintiff as to its position, this court is constrained to hold with the defendants that this bill of complaint does not set forth any cause of action against these defendants. Certainly, they had a perfect right to form another corporation and to operate it. * * * Only their actions as directors of plaintiff are open...