Goodwin v. Castleton

• Court: Washington Supreme Court
• Writing for the Court: STEINERT, Justice.
• Citation: Goodwin v. Castleton, 19 Wn.2d 748, 144 P.2d 725 (Wash. 1944)
• Decision Date: 04 January 1944
• Docket Number: 29146.
• Parties: GOODWIN et al. v. CASTLETON et al. (GRAMMER et al., Interveners).

144 P.2d 725

19 Wn.2d 748

GOODWIN et al. v. CASTLETON et al. (GRAMMER et al., Interveners).

No. 29146.

Supreme Court of Washington

January 4, 1944

Rehearing Denied Feb. 21, 1944.

Department 1.

Stockholders' derivative action by C. W. Goodwin and others against W. A Castleton and others, wherein Emma K. Grammer and others were interveners. Defendant J. J. Keenan died after commencement of the action, and his estate was represented by Ralph S Stacy, as administrator with the will annexed. Frank Kern was originally made a defendant, but later joined as plaintiff. From an adverse decree, plaintiffs appeal.

Affirmed.

Appeal from Superior Court, King County; Chester A. batchelor, judge.

E. D Phelan, of Seattle, for appellants.

Holman, Sprague & Allen, James E. Prince, Wright & Wright, Elias A. Wright, Ira D. Orton, Elmer W. Leader, and Hulbert, Helsell & Paul, all of Seattle, for respondents.

STEINERT Justice.

A stockholder of a corporation instituted a derivative action on behalf of the corporate body against certain individuals constituting a partnership and against the former, as well as the present, officers and directors of the corporation. The purpose of the action was to procure a decree of court compelling specific performance of a contract alleged to have been entered into by and between the partnership and the corporation, and, at the same time, setting aside a lease agreement made between the same parties; and, further, to recover for alleged fraud, conspiracy, and unconscionable activities on the part of the respective defendants resulting in the disposition of corporate property. In a second amended complaint, five additional stockholders were joined as plaintiffs in the action.

Three other stockholders appeared in the cause and filed a complaint in intervention, constituting another derivative action, in which the relief sought by them against the defendants was different from that sought by the plaintiffs in their second amended complaint.

The defendants, appearing in several separate groups, filed answers, all of which contained general denials and some of which also contained affirmative defenses, the latter being in turn denied by the plaintiffs.

After issues had been fully joined and the cause set for trial, the respective groups of defendants filed supplemental answers alleging that all of the claims asserted in the second amended complaint and in the complaint in intervention had since been compromised and settled between the corporation and the partnership, through proper corporate action and substantially in accordance with the relief sought by the interveners in the action.

Plaintiffs objected to the filing of the supplemental answers, demurred thereto, and, upon the overruling of their demurrers, filed replies in denial of the affirmative allegations. Over the objections of the plaintiffs, the cause was then set specially for trial upon the issues raised by the supplemental pleadings, to precede trial upon the issues presented by the second amended complaint and the original answers and replies.

Upon a trial of the supplemental issues, the court, sitting without a jury, made findings of fact, established conclusions of law, and entered a decree ratifying and confirming the settlement and at the same time dismissing plaintiffs' action, with prejudice, as to all but one of the defendants. The plaintiffs alone have appealed. A number of the defendants have not appeared upon the appeal and we will therefore refer to them herein simply as defendants and not as respondents.

Stated broadly, the question upon the appeal is whether a derivative action, brought by a minority group of stockholders seeking recovery and relief upon the ground of fraud alleged to have been perpetrated upon the corporation by its officers and directors acting in conjunction with third parties, may be compromised and settled over the objections of the plaintiffs in the action, although the compromise and settlement was confirmed by a majority of the stockholders, omitting the stockholders alleged to have defrauded the corporation, and was approved by the court after a hearing and determination by it that the settlement was free from fraud and domination, that there was adequate consideration for the settlement, and that the best interests of the corporation and of all its stockholders were subserved thereby.

To afford a clear understanding of the situation presented by the case and of the issues involved therein, it will be necessary, as well as informative, to refer at some length to the averments of the principal pleadings found in the record. Some of the facts as alleged in the pleadings are not disputed, and these will be stated first.

Respondent Kougarok Consolidated Placers, Inc., hereinafter referred to as Kougarok, was incorporated September 4, 1935, under the laws of the state of Washington, with an authorized capital stock of 200,000 shares of the par value of one dollar each. December 11, 1937, the articles of incorporation were amended, increasing the capital stock to 400,000 shares of the par value of one dollar each. All of the original stock was issued in payment for certain placer mining claims, leases, and mining rights located on the Kougarok river, about a hundred miles north of Nome, Alaska. Appellants became stockholders of the corporation during the years 1935, 1936, and 1937, and now own approximately 25,000 shares, of which appellant Frank Kern alone holds 15,000 shares.

In February, 1937, and for some time prior thereto, defendants Herbert J. Clough, Sam L. Godfrey, and John A. Kutz were stockholders of the corporation and constituted a majority of its board of directors. During the latter half of 1939, defendant Ivan Merrick was president, or else vice-president, and also a director of the corporation. On December 21, 1940, the date of commencement of this action, the board of directors of the corporation consisted of respondents Gordon T. Shaw, Arthur W. Whalley, J. J. Keenan (who died after the commencement of the action and whose estate is now represented by respondent Ralph S. Stacy), Nick Bez, and Frank Kern (who as such director was originally made a defendant in the action, but who later joined as plaintiff in the second amended complaint and is now one of the appellants).

On March 25, 1942, and April 7, 1942, both of which dates relate particularly to the settlement agreement hereinBefore and hereinafter referred to, the board of directors consisted or respondents Gordon T. Shaw, Nick Bez, N.H. Seil, and W. A. Castleton, together with Elmer W. Leader, an attorney. On April 30, 1942, Castleton and Bez resigned as directors and respondent Clyde W. Brokaw, one of the interveners herein, was elected as director to succeed Castleton. The other vacancy seemingly was never filled.

Respondents W. A. Castleton, J. J. Keenan, and Nick Bez, at all times herein mentioned prior to Keenan's death in 1942, were partners doing business under the firm name of Castleton & Keenan. These partners acquired mining claims in the Kougarok region in about 1937 and, except as their association has been affected by Keenan's death, have been engaged in extensive mining operations in that vicinity ever since. They were impleaded in this action as the principal defendants against whom recovery was sought for the alleged fraudulent activities.

We shall now give a summary of the material allegations of the second amended complaint upon which appellants rely for relief and recovery. It is alleged, first, that some time prior to 1937 one Jerry Sullivan and defendant James Carroll who then owned certain placer mining claims located in the Cape Nome Mining and Recording District, leased these properties to Kougarok; that in February, 1937, defendants Clough, Godfrey, and Kutz, then owning and controlling a majority of Kougarok's capital stock and being officers and directors of the corporation, entered into a fraudulent scheme and conspiracy with respondents Castleton, Keenan, and Bez, composing the partnership of Castleton & Keenan, in pursuance of which conspiracy the officers of the corporation agreed (1) to relinquish, release, or forfeit certain of the mining claims which the corporation held under lease from Sullivan and Carroll, and (2) to sell their majority stockholdings to the partnership; that through such fraudulent scheme the partnership became the pretended owner of the particular mining claims thus relinquished and the owner of the majority stock of the corporation; that in the beginning of 1939 Kougarok owned and was operating a considerable number of mining claims which, with the buildings, supplies, and equipment used in connection therewith, were worth $500,000; that at the same time the partnership owned and was operating other mining claims in the same vicinity which, together with the equipment used in connection therewith, were valued at approximately $245,000, and, besides, was also then operating the claims which had been wrongfully relinquished to the partnership and which had a value of $100,000; that in July, 1939, the partnership made a written offer to sell and convey to Kougarok, for 250,000 shares of its capital stock, all the machinery and real property owned or leased by the partnership; that the directors and stockholders of Kougarok, at a special meeting, called and held for that purpose on September 9, 1939, accepted the offer and, in order to consummate it, thereafter increased its capital stock to 600,000 shares and reduced its capital to $120,000; that despite this solemn agreement, the respondent partners failed and refused to complete the agreement, to the great detriment of the corporation and its stockholders. Upon this set of allegations, appellants prayed...