Henderson v. Plymouth Oil Co.

• Decision Date: 22 June 1926
• Docket Number: No. 1426.,1426.
• Citation: 13 F.2d 932
• Parties: HENDERSON v. PLYMOUTH OIL CO. (FARQUHAR, Intervener).
• Court: U.S. District Court — Western District of Pennsylvania

13 F.2d 932 (1926)

HENDERSON v. PLYMOUTH OIL CO. (FARQUHAR, Intervener).

No. 1426.

District Court, W. D. Pennsylvania.

June 22, 1926.

Thorp, Bostwick, Stewart & Reed, of Pittsburgh, Pa., and Owen Roberts, of Philadelphia, Pa., for plaintiff.

John W. Davis, of New York City, and Weller, Wicks & Wallace and Alter, Wright & Barron, all of Pittsburgh, Pa., for defendant.

THOMSON, District Judge.

This case is of much importance, by reason of the amount involved, and calls for a careful consideration of the evidence, and a discriminating application of certain legal and equitable principles of the facts as the court finds them to be.

The bill is filed by William M. Henderson, a citizen of Pennsylvania, against the Plymouth Oil Company, a corporation of the state of Delaware, to compel the company to transfer to him, on its books, 50,000 shares of the common stock, of which plaintiff claims to be the owner by assignment for value from Jerome G. Farquhar, together with all dividends declared and remaining unpaid thereon; the certificates for the stock having been indorsed and delivered to the plaintiff at the time of the assignment, on June 26, 1925.

The plaintiff, averring that he formally tendered the certificates to the company on December 9, 1925, requesting the transfer to him of the stock upon the books, which the company refused, filed this bill for a remedy in the form of a mandatory injunction to compel such transfer. The plaintiff further seeks a judgment against the company for the amount of dividends declared and payable on said stock, which amounted at the time of the trial to $187,500. The bill further avers that this tender was made after December 9, 1925, at which time a certain restraining order, issued by the Chancery Court of Delaware, for New Castle county, prohibiting the company from making transfer on its books or paying any dividends on its stock, was dissolved.

The Plymouth Oil Company, by way of answer, asserts that Farquhar is the record owner and holder of the stock in question, and has given the company notice that he is the true and legal owner of the same, with all dividends declared and unpaid thereon; that the company and its officers had been notified by Farquhar that the transfer set forth in the bill had been effected by duress and fraud, and that no legal assignment resulted from such transfer, and that he would hold the company responsible should it permit a transfer of the stock to the plaintiff. The answer further averred that the company was a mere stakeholder as between the parties, and stood ready to register as owner the claimant whom the court should find entitled thereto, holding the dividends in its treasury ready for payment to such party. The answer also prayed that Farquhar be permitted to intervene as a party defendant.

The court, on petition, permitted Farquhar to intervene as a defendant, and the latter answered the bill, charging that the plaintiff, in concert with others named, in pursuance of a conspiracy, wrongfully obtained the certificates in question by threatening the defendant with arrest and imprisonment upon certain criminal charges, of which he was innocent, and that solely by reason of such coercion, and without other consideration, the defendant Farquhar assigned to plaintiff the certificates described in the bill.

Plaintiff, in reply, denied any coercion, duress, fraud, or deceit in the transaction; averred that, while certain informations were made against Farquhar, they were well founded in fact and in law, the defendant having committed the offenses therein charged against him. The plaintiff further replied that the transfer in question was the free and voluntary act of Farquhar, and was for a good and valuable consideration, the plaintiff and others having been induced to purchase their stock through the false and fraudulent representations of Farquhar that the authorized capital stock of the corporation was 350,000 shares of common stock, whereas in truth the outstanding capital stock of the corporation was 1,050,000 shares; that subsequently the said Farquhar, admitting the falsity of the said representations, promised and agreed to obtain and deliver to the plaintiff and others associated with him enough stock so that two shares should be given to the plaintiff and those associated with him for each share then held by him; that in pursuance of this arrangement and agreement the certificates for the 50,000 shares described in the bill were delivered to the plaintiff, who holds the same for himself and others, the same being delivered for a good and valuable consideration, without duress or fraud, and because of Farquhar's false and fraudulent representations to the plaintiff and others as aforesaid.

Thus the issues of law and fact are joined between the parties. In relation to the organization and holdings of the Plymouth Oil Company, the following facts may be stated:

One Frank T. Pickrell and associates were the owners of certain contracts for oil and gas purposes, embracing 12 sections, aggregating 10,240 acres, in Pecos and Upton counties, Tex., upon which they had drilled one producing oil well. When the first well was completed, they commenced the drilling of two other wells called for in their contracts; but, besides these, they were required to drill at least four additional wells. After expending a very considerable sum of money, Pickrell and his associates, finding themselves unable to proceed with the drilling operations necessary to perfect their leases, interested certain Pittsburgh parties in the enterprise, designated hereafter as promoters, consisting of L. M. Benedum and associates; one Edward C. Stearns being their representative. Pickrell, on the one hand, and Stearns, representing the promoters, on the other, agreed upon terms which were embodied in a contract known as the Pickrell contract, dated October 5, 1923. Under this contract, Pickrell and associates agreed to sell, and Stearns to buy, a three-fourths interest in the aforesaid 12 sections. The three-fourths interest, which Stearns acquired, and the one-fourth interest retained by Pickrell, were to be secured through a corporation to be formed, known as the Big Lake Oil Company. To this corporation Stearns was to transfer all of his rights under the contract, in consideration of three-fourths of its capital stock; one-fourth being held by Pickrell. It was agreed that Stearns should pay for this three-fourths interest $200,000, in cash and notes, and an additional sum sufficient to repay the Pickrell interests the amount theretofore expended in the drilling of the two uncompleted wells, convey one-fourth of the capital stock of the Big Lake Oil Company, complete the two wells then drilled, and drill within the stipulated time, at his own expense and not that of the company, four additional wells. It appears that the estimated sum necessary to make such refund and to drill the four additional wells was $250,000. Stearns thus obligated himself to pay or expend in cash the sum of $450,000.

To effectuate this purpose, two corporations, the Big Lake Oil Company and the Plymouth Oil Company, were formed in October, 1923, under the laws of the state of Delaware. The former had an authorized capital stock of 400,000 shares, of the par value of $10 per share, and the latter a capital stock of 1,200,000 shares, of the par value of $5 per share. The stock of the Plymouth Oil Company consisted of 1,050,000 shares of common stock, and 150,000 shares of preferred. The preferred stock carried a preferred dividend of 7 per cent., and was convertible into common stock, with the right of redemption by the company at any time after January 1, 1926.

Apparently the purpose in incorporating the Plymouth Oil Company was to acquire the shares of the Big Lake Oil Company, which Stearns had purchased from Pickrell, and to assume Stearns' obligations to pay the cash and finance the drilling under the Pickrell contract. In October, 1923, Stearns offered to sell, and the Plymouth Oil Company agreed to buy, all the stock of the Big Lake Oil Company which Stearns held — that is, three-fourths of the company's capital stock — together with the oil and gas properties in Pecos and Upton counties aforesaid, in consideration of the issuance to Stearns of all its capital stock, or a total par value of $5,250,000. This transfer being consummated, the 150,000 shares of preferred stock was transferred back to the corporation for the use of the company; the directors authorizing its sale at $3 per share to raise working capital.

Jerome G. Farquhar, defendant, was one of the promoters, and was treasurer and vice president of the Plymouth Oil Company from its incorporation, and was designated as trustee by the company for the sale of the preferred stock. The Plymouth Oil Company was duly registered to do business in Pennsylvania, with its office and principal place of business in Pittsburgh, where the corporate business is transacted, and where the stock registry books and all books of record are kept. The office of the company is also the office of the treasurer, Jerome G. Farquhar, and of the secretary, W. E. Huston.

Up to this point the facts of the case are clear. We now enter the field of serious conflict. The foundation of the plaintiff's case rests on alleged false representations made by Farquhar to William M. Henderson, the plaintiff, Albert R. Budd, Floyd B. Lockhart, and Wilbur J. Wilson, as to the outstanding capital stock of the Plymouth Oil Company at the time of their several purchases of stock. It is the position of the plaintiff and his associates, Lockhart, Budd, and Wilson, that they were deceived by the representations of Farquhar, who sold them the stock, that the outstanding capital stock was 350,000 shares, whereas in truth the common stock outstanding was 1,050,000 shares, and that, acting under this belief, so induced by Farquhar's misrepresentations, their several...