Grismer v. Merger Mines Corporation

• Decision Date: 21 March 1942
• Docket Number: No. 230.,230.
• Citation: 43 F. Supp. 990
• Parties: GRISMER et al. v. MERGER MINES CORPORATION et al.
• Court: U.S. District Court — District of Washington

43 F. Supp. 990

GRISMER et al. v. MERGER MINES CORPORATION et al.

No. 230.

District Court, E. D. Washington, N. D.

March 21, 1942.

Graves, Kizer & Graves, of Spokane, Wash., and H. J. Hull, of Wallace, Idaho, for plaintiffs.

Jas. A. Wayne, of Wallace, Idaho, and Hamblen, Gilbert & Brooke, of Spokane, Wash., for defendants.

SCHWELLENBACH, District Judge.

This is a stockholders' bill in equity to compel the defendant corporation (called Merger hereafter) and its President, the defendant Pearson, to perform a contract between them in a manner equitable to all the stockholders. In order to confine this opinion to reasonable bounds, I am filing simultaneously herewith a detailed opinion as to the facts.

Merger is an Arizona mining development concern which is completely dominated by the defendant Pearson. Its principal place of business, where all its books and records are kept, is in Spokane, Washington. The properties it is developing are in Idaho. It has an authorized capital of 3,900,000 shares of common stock of which approximately 2,963,000, from time to time, have been issued. In 1936, Merger owed money to various persons. It was obligated to deliver stock to numerous persons entitled thereto under the agreement signed at the time of the company's organization. It had no funds and practically no unissued authorized stock. To save the company, the defendants Pearson agreed that they would loan Merger their own stock to meet its needs. This loan was to be repaid with stock as soon as available out of the new issue of 1,000,000 shares to be authorized by an increase in Merger's capital stock. This agreement was evidenced in writing by the corporation minutes and entries in its books of account, all entered under Pearson's direction and control. Acting thereunder during 1936, the defendants Pearson transferred 772,541 shares to the corporate treasury. That stock was community property of the Pearsons. Thence, it was reissued to sundry persons in accordance with the understanding. In September, 1936, the additional 1,000,000 shares were authorized. Merger has not repaid Pearson his loaned stock except as to 63,000 shares which he took on his own responsibility and sold for his own benefit against the advice of his accountant and over the objection of two of his codirectors.

Meanwhile, development work of the company and the payment of its expenses, including Pearson's salary, have been financed by 15 assessments levied against the outstanding shares. Just how much has thus been realized the record does not disclose, but, if the Pearsons had kept their stock and paid the assessments levied against it, such assessments would have amounted to $61,223.82. Of this amount, the Pearsons paid only $1,303.30.

Defendants excuse the failure to carry out the contract by claiming that the new stock could not be delivered to Pearson until each other stockholder had been offered his preemptive right of participation in the issue. Assuming that to be correct, the excuse fails because the defendants let five years go by without making the offer. The other excuse is that the stock could not be delivered to Pearson without registration with the Securities and Exchange Commission. Clearly defendants could not register with S.E.C. without blasting any future hopes of raising funds by the assessment device. This because the company does not own any of the mining claims which it has carried on all of its balance sheets which the directors permitted to be distributed among stockholders as of a value in excess of $1,600,000. All it has is a possessory right under color of title which will require adverse possession actions to perfect. Non-registration, however, did not deter Pearson from selling 63,000 of the new shares on his own account when he needed the money. The testimony did not disclose the amount received by Pearson for this stock. He did, however, testify that the market price for which the Merger stock sold between 1936 and 1942 ranged from 1¢ to 11¢ per share. So, non-registration must be characterized as an explanation rather than an excuse for the failure to perform the contract.

The fact of the stock loan and the failure to repay it was concealed from plaintiffs and other stockholders by refusal to permit them to inspect those corporation records which would have revealed the situation. Merger's directors persisted in this refusal from 1938 through 1940. Only after a hotly contested trip to the State Supreme Court was inspection forced through the use of a writ of mandate. See: State ex rel. Grismer et al. v. Merger Mines Corporation et al., 3 Wash.2d 417, 101 P.2d 308.

The value to the stockholders of the properties which Merger is developing rests upon two contingencies: (1) Perfection of title to the mining claims in Merger and (2) discovery of ore in commercial quantities. The properties are in the silver belt in Idaho adjacent to silver-bearing ore of immense value. The vice of the situation lies in the fact that, under present arrangements, Pearson can stand by without expense to himself and force the other stockholders to finance the development work. He can take his stock or leave it depending on its value. The other stockholders carry the burden while he is waiting to cash in on the results. I recognize that Pearson saved the Company in 1936. Consequently, I am anxious not to penalize him. On the other hand, what he did cost him nothing and he profited thereby along with the other stockholders. He was more interested in saving the company then than any one of the others. The stock which he loaned was worthless unless the company was saved. The failure to fully perform the 1936 contract gives Pearson an unconscionable advantage. Equity cannot permit a corporation director to use the power of his office to attain such an end.

Defendants urge the court to decline to exercise its jurisdiction because plaintiffs ask the court to interfere with the management of the internal affairs of a foreign corporation. That plaintiffs do so ask is clear. Tolbert v. Modern Woodmen of America, 83 Wash. 287, 145 P. 183. However, the reach of the Tolbert decision is limited to the application of the rule when the principal place of business of a foreign corporation is located in the state of its domicil. The Washington court has not announced its attitude on the court's duty when the place of business of the foreign corporation is within the territorial limits over which the court has jurisdiction. I say this despite the fact that the Washington Supreme Court did interfere with the internal affairs of this very corporation when it affirmed the writ of mandate in State ex rel. Grismer v. Merger Mines Corporation, supra. This because there the issue was not raised and the question not discussed. Therefore, I am free to search for the answer in the field of general law. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487; MacGregor, Executor, v. State Mutual Life Assurance Co., 62 S.Ct. 607, 86 L.Ed. ___, decided Feb. 16, 1942. Whether the court should exercise this jurisdiction lies within its discretion. Williamson v. Missouri-Kansas Pipe Line Co., 7 Cir., 56 F.2d 503; Rogers v. Guaranty Trust Company, 288 U.S. 123, 53 S.Ct. 295, 303, 77 L.Ed. 652, 89 A.L.R. 720. In the latter case, the standards fixed by the Supreme Court were the "considerations of convenience, efficiency and justice." Thus judged, there is no doubt what the court should do here. To compel these plaintiffs to prosecute this case in Arizona would be inconvenient because of the distance involved, inefficient because of the expense involved, and unjust because probably it would deprive them of any relief.

The rule on which defendants rely is bottomed on the desire to protect against unreasonable harassment those corporations whose business requirements involve activities outside of the states of their domicil. When corporations seeking the advantages of friendly statutes establish their domicils hundreds of miles away from their places of abode, all reason for the rule evaporates. To apply the rule under such circumstances would not only result in injustice but would demonstrate a complete lack of awareness of the realities of the situation.

A few days before the trial and thirty days after the pre-trial hearing, defendants moved to amend their answer by pleading the statute of limitations. This motion was granted subject to the right of the plaintiffs to reply. At the trial, plaintiffs proved without objection the facts concerning the concealment of the status of the stock-loan arrangement by the defendants. During the presentation of plaintiffs' case, plaintiffs' counsel, in response to inquiry by defendants' counsel, stated that such was the purpose of the testimony. Defendants now contend that the statute bars prosecution of this action.

In so far as plaintiffs seek enforcement of the contract for the return of the stock, this is "an action upon a contract in writing, * * *." Rem.Rev.Stat. of Wash. Sec. 157, subd. 2. The contract consists of the corporate minutes and entries made under Pearson's direction and control. Voorhees v. Nabob Silver-Lead Co., 174 Wash. 5, 24 P.2d 114. Under the statute, the action is not barred for six years after the making of the contract. The question as to which statute applies on Pearson's liability to pay the assessments upon the stock before he can receive it is more difficult. The same statute, Rem. Rev.Stat.Wash. 157, subd. 2, provides that the bar of the statute shall not become effective for six years when the claim for recovery is based on a "liability express or implied arising out of a written agreement." The Washington Supreme Court in Caldwell v. Hurley, 41 Wash. 296, 83 P. 318, 320, in holding that the six-year statute applied against the co-surety on a bond, said: "The peculiar feature of our statute is that an implied liability arising out of a written instrument...