Hearst v. Putnam Mining Co.

• Decision Date: 28 July 1904
• Docket Number: 1543
• Citation: 77 P. 753,28 Utah 184
• Court: Utah Supreme Court
• Parties: PHOEBE A. HEARST and JAMES B. HAGGIN, Appellants, v. THE PUTNAM MINING COMPANY, a Corporation, THE QUINCY MINING COMPANY, a Corporation, WILLIAM M. FERRY, HENRIETTA McLAUGHLIN, as Administratrix of the Estate of D. C. McLAUGHLIN, Deceased, W. W. ARMSTRONG, JAMES T. CLASBY, JAMES FARRELL, W. V. RICE, DAVID D. ERWIN, HENRY NEWELL, DAVID KEITH and WALTER SCOTT, Respondents

77 P. 753

28 Utah 184

PHOEBE A. HEARST and JAMES B. HAGGIN, Appellants, v. THE PUTNAM MINING COMPANY, a Corporation, THE QUINCY MINING COMPANY, a Corporation, WILLIAM M. FERRY, HENRIETTA McLAUGHLIN, as Administratrix of the Estate of D. C. McLAUGHLIN, Deceased, W. W. ARMSTRONG, JAMES T. CLASBY, JAMES FARRELL, W. V. RICE, DAVID D. ERWIN, HENRY NEWELL, DAVID KEITH and WALTER SCOTT, Respondents

No. 1543

Supreme Court of Utah

July 28, 1904

Appeal from the Third District Court, Salt Lake County.--Hon. C. W Morse, Judge.

Action in equity to have certain mining transactions declared null and void. From a judgment in favor of the defendants, the plaintiffs appealed.

AFFIRMED.

Messrs Marshall & Royle and C. C. Dey, Esq., for appellants.

Messrs Pierce, Critchlow & Barrette for respondents; Arthur Brown, Esq., H. P. Henderson, Esq., Andrew Howat, Esq., and Ogden Hiles, Esq., of counsel.

BARTCH, J. BASKIN, C. J., and McCARTY, J., concur.

OPINION

STATEMENT OF FACTS.

This is an action in equity resulting from certain mining transactions, whereby the plaintiffs claim they were defrauded.

From the pleadings and the record, it appears, in substance, that the defendant Putnam Mining Company was a corporation organized under the laws of Utah with a capital stock of 100,000 shares, of the par value of $ 10 each. When the transactions, of which complaint is made, occurred, each of the plaintiffs was the owner of 3,293 shares of that stock. The company owned twelve mining claims, with all their "appurtenances, buildings, tunnels, shafts, tools thereon and therein," situate in Summit county, Utah. The defendant William M. Ferry was the vice president and a director of the company, and on about October 16, 1895, the company gave him a lease and bond on said mining property, whereby it was, in substance, agreed that Ferry should, at his own expense, operate and develop the premises for a period of two years from the date of the lease, and should yield and pay to the lessor 20 per cent in value of all pay ores which he would mine and extract under the lease; that the lessee should have the disposal of certain "treasury stock" of the company, to aid him in defraying the expense of developing the mine under his lease; that he should have an option, at any time before the expiration of the lease, to purchase the said premises and property for the sum of $ 300,000, the money to be paid to the lessor; and that the lessee would not assign the lease, or any interest therein, without the consent of the lessor. Thereafter the lease and bond were extended to October 16, 1898, and on May 20, 1898, they were extended to October 16, 1900.

On August 15, 1899, the lessee, having then become financially unable to proceed with the work of developing the property, assigned an undivided two-thirds interest in his lease and bond to Francis Smith and David C. McLaughlin, both of them since deceased, on condition that the Putnam Company would consent to such assignment. The assignees, by the assignment, agreed to prosecute the development work on the property, agreeably to the lease, at their own expense, upon the condition that the assignor would procure a reduction, in the purchase price of the property under the option, from $ 300,000 to $ 50,000. On September 18, 1899, the regular annual meeting of the stockholders of the Putnam Company was held for the election of officers, and such other business pertaining to the business and property of the company as might properly come before it. At that meeting the stockholders present, representing 66,411 shares of the 99,360 shares of the capital stock then issued and outstanding, did, by unanimous vote, adopt and pass a resolution authorizing and instructing the board of directors of the company, by its president and secretary, to execute and deliver to Ferry an instrument in writing changing and modifying the lease and bond in the particulars following:

(1) Extending the time of said lease and bond or option to purchase from October 16, 1900, to October 16, 1903.

(2) Reducing the amount to be paid for said property, under said option to purchase, from $ 300,000 to $ 50,000.

(3) Permitting Ferry to make such disposition of the lease and bond, by subletting or otherwise, as, in his discretion, he might deem to be for the best advantage in developing the mining claims.

And thereafter the president and secretary of the Putnam Company executed and delivered to Ferry, under the seal of the corporation, the instrument thus required by the resolution, modifying the lease and bond in the particulars mentioned. The assignees then proceeded, under the lease and bond, to prosecute the work of mining and developing the claims. They sunk a shaft to the depth of 400 feet, and did other mining work at a cost to them of over $ 33,000; and afterwards the lessees, and others associated with them, organized, under the laws of Utah the defendant Quincy Mining Company, with a capital of $ 75,000, and Ferry and his associates assigned the lease and bond to the latter company for shares of its capital stock. On December 6, 1901, the Quincy Company elected to exercise the option, under the lease and bond, to purchase the mining claims and property for $ 50,000, and thereupon paid that sum to the Putnam Company, and received from it a deed to the property, as provided in the lease and bond and the modifications thereof. A part of the sum thus paid to the Putnam Mining Company was used by that company to pay its debts, and out of the entire residue a dividend of forty-eight and one-half cents per share was declared on its capital stock, which was paid to its stockholders; and the plaintiffs received and accepted the dividends on their shares of stock, the same as did the other stockholders of the company.

The plaintiffs allege in their complaint that all these various transactions by which the property of the Putnam Company was leased, and afterwards sold to the Quincy Company, were fraudulent; that Ferry, being the vice president and a director of the company, was seeking his own profit and advantage, to the disadvantage of the corporation, and to the sequestration and dissipation of its property; that the board of directors were in collusion with him and under his control; that the majority of the stockholders were in collusion with him to defraud the minority; that there was no necessity for leasing the property in order to develop it; that it could have been prospected and developed better by the corporation itself; that Ferry had special knowledge of the richness of the ore bodies which were beneath the surface of the claims; that he and his associates, and those in collusion with him, knew of the great value of the property; that the transactions were had and done with the intent to get for themselves property of the Putnam Mining Company which was worth millions of dollars for the grossly inadequate sum of $ 50,000, to the injury of the Putnam Mining Company, and in fraud of the minority stockholders; that plaintiffs did not know of the fraud which had been committed till after it had been done, and until after they had accepted the said dividend out of the $ 50,000 purchase-money; that, the directors of the Putnam Mining Company being in collusion with Ferry and his associates and with the Quincy Mining Company, to ask them to proceed to have these fraudulent things undone would be to ask a vain thing; that, since the sale by the Putnam Company to the Quincy Company of the property in question, the latter company has sold and conveyed it to the Daly-West Mining Company for 30,000 shares of its capital stock; that before the sale to the Daly-West Company the Quincy Company distributed to its stockholders $ 1,200,000 in dividends derived from working said mining claims; that the Quincy Company has on hand in its treasury about $ 200,000 derived in the same way; that the plaintiffs are entitled to and should receive .06586 of all of such money and stocks, as their share of the proceeds which resulted from these alleged fraudulent transactions.

The demands of the plaintiffs are that the lease and bond, and the several instruments of conveyance resulting from the lease and bond, be declared null and void; that an account be taken of all the money and stocks received by the Quincy Mining Company, or due to it, to ascertain the just proportion which should be paid by the defendants to plaintiffs; and that, upon such accounting, judgment be entered in favor of the plaintiffs for the amount due them.

The answer denies the material allegations of the complaint; pleads affirmative matter showing the nature of the transactions of which the plaintiffs complain; and, as a separate affirmative defense, and as a bar to this action, it is averred that heretofore Margaretta V. Rogers, one of the shareholders of the Putnam Mining Company, prosecuted, in the right and for the benefit of the corporation, a suit, in the district court for Summit county, to set aside and annul the said sale and transfer of the same property of the Putnam Company, for the same alleged grounds and the identical dealings and transactions which are alleged and set forth in the complaint herein; that in said action the Putnam Mining Company and the Quincy Mining Company were made parties defendant with Ferry, and as such appeared in that action; that, upon trial thereof in the district court, it was adjudged that neither Mrs. Rogers nor the Putnam Mining Company was entitled to an accounting, nor to any relief on account of the alleged dealings, because the same were in all respects fair and just; that findings and judgment were entered accordingly; and that the same is now a valid and subsisting judgment.

To this special and separate defense the plaintiffs...