Dodge v. Scripps, 25004.
| Decision Date | 15 November 1934 |
| Docket Number | 25004. |
| Citation | 179 Wash. 308,37 P.2d 896 |
| Parties | DODGE et al. v. SCRIPPS et al. |
| Court | Washington Supreme Court |
Department 2.
Appeal from Superior Court, King County; Robert S. Macfarlane Judge.
Action by E. G. Dodge, special administrator of the estate of Byron Hilton Canfield, deceased, and others against E. W. Scripps trustee, and others. From a judgment dismissing the action plaintiffs appeal.
Affirmed.
Chadwick, Chadwick & Mills, of Seattle, and McAdoo & Neblett, of Los Angeles, Cal., for appellants.
Bayley & Croson, of Seattle, and S. S. Hahn, of Los Angeles, Cal., for respondents.
At the time of his death on March 11, 1932, Byron H. Canfield was the owner of substantial blocks of stock in ten corporations, known as the Scripps-Canfield League, which owned and operated as many newspapers. Five of these papers, Seattle Star, Tacoma Times, Spokane Press, Portland News, and Los Angeles Record, had, for some years prior to 1921, been controlled and operated by James G. Scripps, and had been known as the James G. Scripps newspapers. James G. Scripps died in 1921, leaving to his widow, Josephine Scripps, his interest in the corporations owning these newspapers. He left four minor children, the eldest of whom, E. W. Scripps, was at that time about twelve years of age.
Canfield had for many years been employed by the Scripps newspapers in various responsible capacities, and at the time of the death of James G. Scripps had acquired substantial blocks of stock in the corporations which owned and operated the above-mentioned newspapers. Likewise, Le Roy Sanders, also for many years a trusted employee of the Scripps newspapers, was an owner of a considerable amount of stock in those corporations. The stockholders of Mrs. Scripps, Canfield, and Sanders gave them complete control of the corporations and the newspapers. In fact, the only other stockholders, then or thereafter, were employees or ex-employees of the Scripps or Scripps-Canfield newspapers.
October 22, 1921, Mrs. Scripps, Canfield, and Sanders entered into an agreement whereby Canfield and Sanders gave Mrs. Scripps a preference right to purchase their stock in the various corporations, if ever they desired to sell. Canfield and Sanders gave each to the other a preference right to purchase his stock in case Mrs. Scripps did not exercise her preference right. It was provided that the sale price should be determined by the 'rule of three,' which was a method of valuation originated many years Before by E. W. Scripps, the elder, to determine the value of stock in the corporations owning and operating the original Scripps-McRae chain. Mrs. Scripps bought the Sanders stock in 1928. At about that time, the chain of newspapers became known as the Scripps-Canfield League.
In the meantime, Mrs. Scripps, Canfield, and Sanders had acquired the controlling interest in Telegram-Tribune Publishing Company, operating a newspaper at San Luis Obispo, Cal.; Capitol News Publishing Company, operating a newspaper in Boise, Idaho; Coeur d'Alene Press Company, operating a newspaper at Coeur d'Alene, Idaho; Cache Valley Newspaper Company, operating a newspaper at Prove, Utah; and Herald Corporation, publishing a newspaper at Logan, Utah.
Subsequent to the execution of the contract of October 22, 1921, Canfield became 'chairman of the board' of the various corporations, with practically dictatorial power over the corporations and the newspapers. He exercised such power, however, in accordance with policies agreed to by Mrs. Scripps and Sanders. Executive heads of the various newspapers were usually consulted with respect to problems of the newspapers under their particular direction. But the final word in the management of the corporations and the newspapers was sent out from a 'central office' established by Canfield shortly after he became chairman of the board of the original five companies constituting the James G. Scripps newspapers. This central office was established at Oakland, Cal., where it was maintained until 1930, when it was removed to Seattle.
This central office, although not a legal entity, was, as to the various newspapers and the corporations owning them, as the brain to the nerves of the body. From it emanated all managerial policies of the corporations and editorial policies of the newspapers. Minutes of stockholders' and directors' meetings were there prepared in advance and mailed to the administrative heads of the corporations, with minute directions as to the holding of the meetings, the adoption of resolutions, and the recording of the minutes.
Into the central office flowed a small percentage of the gross receipts and all of the net receipts of all of the corporations in the chain. Following a precedent long Before set by E. W. Scripps, the elder, Canfield allocated 75 per cent. of the net earnings to dividends and 25 per cent. to treasury reserve. Generally speaking, this reserve was maintained as a margin of safety to cover depletion and obsolescence of equipment and property, for managerial and other expenses incident to the operation of the newspapers. It was carried in one general account in the name of the treasurer, as trustee for each corporation to the extent that each had contributed to it. For accounting purposes, the treasury reserve was allocated to various reserve accounts in anticipation of particular needs. It is unnecessary to describe thes reserve accounts in detail, because we are not here concerned with the expenditure of funds making up the treasury reserve. Generally, we are concerned with investment of surplus funds in the treasury reserve; particularly, we are concerned with loans made to Canfield from such surplus. But, Before going into that, it is necessary to describe a policy with reference to the investment of reserve funds, which originated with the elder Scripps, and which prevailed throughout Canfield's régime.
For many years it had been the Scripps policy to encourage investment by their employees in stocks in the corporations owning and operating newspapers. Surplus funds in the treasury reserve were used to assist employees in the purchase of stock. A loan of an amount sufficient to purchase the stock would be made from the reserve fund to the employee. The employee would sign a note for the amount, and execute an agreement pledging the stock purchased to secure the note. Later on during the Canfield régime, to further facilitate the acquisition of stock by employees, three investment or holding companies were formed: First Coast Investment Company, Second Coast Investment Company, and Scripps-Canfield Company. The only difference in the routine then was that the holding company purchased the stock in the newspaper corporation and issued its own stock to the employee, which he pledged to secure his note. The transaction was financed through the use of treasury reserve funds. The treasurer of the companies (for many years J. W. Curts) was the trustee under the pledge agreements. We shall have occasion to refer to these pledge agreements more particularly later on. It appears from the evidence that, at the time of the trial of this case in 1933, there were some two hundred of such transactions on the books of the central office. Canfield himself had acquired stock in the original five of the James G. Scripps newspapers through loans made to him by James G. Scripps. At the time of the latter's death in 1921 Canfield owed him some $35,000 or $40,000 on account of such loans.
There was another practice with reference to the use of surplus funds, originated by E. W. Scripps, the elder, which was adopted by Canfield and Mrs. Scripps. E. W. Scripps, being for many years the controlling stockholder of his companies, was accustomed to borrow surplus funds for his own purposes. However, he charged his treasurer to see to it that such borrowings should never exceed the amount to which he would be entitled as a stockholder if the surplus were disbursed in dividends. Adopting and following this policy, Canfield's borrowings from the reserve fund, at the time of his death, amounted to $113,530.89. At that time Mrs. Scripps owed the reserve fund $300,000.
The amount owing by Canfield was the accumulation of borrowings extending over a period of eight years or more. At the time of his death, the indebtedness was evidenced by a demand note, dated January 31, 1932. The note was payable to E. W. Scripps (the eldest son of Josephine Scripps, and one of the defendants herein), trustee, who was also treasurer of the Scripps-Canfield corporations, and, as such, custodian of the treasury reserve fund. As security for this indebtedness, E. W. Scripps, as trustee, held all of Canfield's stocks in the corporations comprising the Scripps-Canfield League, except 750 shares in Record Publishing Company. This stock was held in pledge under one of the standard forms of pledge agreements hereinBefore referred to. The salient feature of it, so far as we are here concerned, is that it provided for sale of the pledge stock if there should be a default in the payment of either principal or interest for more than fifteen days.
The 750 shares of Record Publishing Company stock above referred to was held by E. W. Scripps, as trustee, under a similar pledge agreement to secure a note of Canfield's for $39,825.49, payable to Josephine Scripps. This note was dated January 20, 1932, but it represented Canfield's indebtedness to James G. Scripps, hereinBefore referred to. Josephine Scripps also a note a Canfield's for $100,000, dated October 22, 1929. This note was secured by a pledge to E. W. Scripps, as trustee (under a similar agreement), of the same stocks as were held as collateral to secure...
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