Grady v. Graham

• Decision Date: 07 August 1911
• Citation: 116 P. 1098,64 Wash. 436
• Parties: GRADY v. GRAHAM.
• Court: Washington Supreme Court

116 P. 1098

64 Wash. 436

GRADY v. GRAHAM.

Supreme Court of Washington

August 7, 1911

Department 1. Appeals from Superior Court, King County; Boyd J. Tallman Judge.

Action by Thomas E. Grady, receiver of the Yakima Improvement Company, against A. B. Graham. From a judgment granting plaintiff insufficient relief, both parties appeal. Reversed and remanded for new trial.

Lester E. Kirkpatrick and Peters & Powell, for appellant.

Richard S. Eskridge, Frederick W. Dewart, and Ira Bronson, for respondent.

FULLERTON J.

The Yakima Improvement Company is a corporation organized under the laws of the state of Washington having a capital stock of $1,000,000, divided into 10,000 shares of the par value of $100 each. The corporation was formed by certain persons holding a franchise from the city of North Yakima for installing a gas lighting plant therein, and the stock of the corporation was issued to the incorporators in consideration of the transfer to the corporation of the franchise. The stock appeared on the books of the company as fully paid up. The consecutive order in which certain of the following proceedings took place is not shown very clearly in the record; but it appears that the corporation, being desirous of securing money for the installation of a gas lighting plant in the city of North Yakima, issued its coupon bonds to a considerable face value, probably some $66,000 and sought to secure the same by executing a deed of trust of its franchise and other properties to a corporation, called the 'trustee company'; the deed being conditioned so as to pledge the mortgaged property to the payment of any bonds that should thereafter be sold or applied to the uses of the corporation. The bonds, while negotiable in form contained the following clause: 'There shall be no recourse to the stockholders, trustees or officers of said Yakima Improvement Company for the payment of this bond or any interest thereon.' There proved, however, to be no market for the bonds, and other means had to be resorted to in order to procure the necessary funds to install the lighting plant. In the meantime the corporation had been negotiating with the Acetylene Contracting Company, of Minneapolis, Minn., to install an acetylene gas lighting plant, and had reached an understanding with that company by which the company agreed to install such a plant for a cash consideration of $16,000, the promissory note of the corporation for some $5,300, secured by the corporation's negotiable bonds, and negotiable bonds themselves to the face value of some $17,000. At this stage of the proceedings, A B. Graham, the defendant in the present action, was applied to for the necessary cash advancement. After some negotiations the money was advanced by Graham; he taking therefor an assignment of some 4,900 shares of the stock of the corporation and its negotiable bonds, of the par value of some $20,000. The lighting plant was thereupon installed for the consideration substantially as agreed upon; the work being completed in the early part of the year 1906. The plant, however, did not prove a financial success, and after being in operation for a short time was shut down and practically abandoned by the corporation.

In March, 1907, the Acetylene Contracting Company began an action in the superior court of Yakima county against the Yakima Improvement Company to recover upon the promissory note given it for installing the gas plant, and judgment was entered in its favor on May 29, 1907. At the time of the commencement of the action by the Acetylene Contracting Company, the Trustee Company also brought an action to foreclose the lien created by the trust deed, making parties defendant the Yakima Improvement Company, A. B. Whitson, and the county of Yakima. In its complaint it prayed for the appointment of a receiver of the property of the Yakima Improvement Company, and for an injunction against the other defendants, restraining them from interfering with the property or attempting to sell the same by judicial process or otherwise. Thos. E. Grady was appointed receiver pursuant thereto. Later on the receiver reported that the ordinary assets of the corporation were insufficient to pay its debts, and that there would be a balance of liabilities over assets of approximately $25,000 after all of the property of the corporation had been converted into cash, and petitioned the court for permission to sue the stockholders of the corporation on their unpaid subscriptions to the capital stock of the corporation. No notice was given the stockholders in any manner of the pendency of the petition, but the court nevertheless, on June 29, 1907, made an order authorizing and directing the receiver 'to commence and prosecute such action in such court, in such form as to him shall seem best, against such of the stockholders of the Yakima Improvement Company as to such receiver shall seem most desirable, to recover therefrom on the unpaid stock liability the sum of $25,000, in order to apply the same on the outstanding liabilities of the said Yakima Improvement Company.'

Pursuant to the foregoing order, the receiver brought the present action against Graham to recover $25,000. In his complaint the receiver alleged that the defendant was the owner and holder of shares of stock in the corporation of the face value of $213,200, on which only 5 per cent. had been paid, leaving a balance unpaid thereon of $202,540. The defendant answered, denying liability for any of the indebtedness of the corporation, on the ground that he was not a stockholder therein, but held his stock as collateral security for advancements he had made to the corporation, and as a partial defense denied liability on the bonded indebtedness of the corporation because of the clause of the bond exempting stockholders from liability thereon. He also set up fraud and collusion between certain of the trustees of the Yakima Improvement Company and the corporation installing the lighting plant, by which exorbitant and grossly excessive prices were paid for the lighting plant, thereby greatly increasing the apparent indebtedness of the first corporation. On the trial which was had before the court and a jury, a verdict was returned in favor of the receiver for $10,000, and from the judgment entered thereon both parties appeal.

The receiver contends that the court erred in refusing to enter a judgment for the full amount demanded in the complaint notwithstanding the verdict of the jury was for the lesser sum, arguing that the defendant cannot be heard in this action to question the validity of the order made in the receivership proceedings, either as to the necessity for the order or as to the amount thereof, and since the jury found him liable to answer he must be held for the full amount. But as the defendant is liable as a stockholder, under...