Holloway v. Osteograf Co., Inc.

• Decision Date: 23 January 1941
• Docket Number: 4 Div. 178.
• Citation: 200 So. 197,240 Ala. 507
• Parties: HOLLOWAY ET AL. v. OSTEOGRAF CO., INC., ET AL.
• Court: Alabama Supreme Court

200 So. 197

240 Ala. 507

HOLLOWAY ET AL. v. OSTEOGRAF CO., INC., ET AL.

4 Div. 178.

Supreme Court of Alabama

January 23, 1941

Appeal from Circuit Court, Pike County; W. L. Parks, Judge.

Bill in equity by J. Lewis Holloway and others against the Osteograf Company, Inc., and others, to compel restoration of capital to corporation, for accounting by directors for negligent dissipation of corporate assets, etc. From a decree sustaining demurrers to the bill, complainants or petitioners appeal.

Affirmed.

Where some of specific grounds of separate demurrers of all defendants were well taken, it was not error for the court to sustain the demurrers.

The bill of complaint in substance alleged that prior to October 1936, Dr. O. N. Edge, H. L. J. Marshall, and Charles E Henderson constituted a partnership called the Osteograf Company which was formed for the purpose of promoting the development and sale of certain types of X-ray machines. On the 6th day of October, 1936, the three parties above named filed an application with the Attorney General, in his capacity under the Alabama Security Law, for permit to sell stock in Alabama to the public, including therein the articles of incorporation of the Osteograf Company, Inc., the incorporators of which were the same three parties. In the application, they represented that said corporation was incorporated at $150,000 of which $45,000 was paid in by said three incorporators, that they had paid for their said capital stock by the transfer to the corporation of the equipment, machinery and assets belonging to themselves as partners doing business as the Osteograf Company. The required bond was furnished by the National Surety Company in the amount of $5,000. The Secretary of the Securities Commission, acting for the Attorney General, pursuant to the duty imposed upon him, made investigation of the alleged assets transferred by the three partners to the new corporation and found that they consisted mainly of experimental or obsolete models or equipment acquired in development of machines known as osteograf machines, and thereupon refused to allow the registration of the securities of the corporation on the ground that said equipment and assets of the partnership had no actual value so far as he could ascertain. Thereupon the said three incorporators offered to pay for their $45,000 worth of stock in cash and rescind the transfer of the assets of the partnership to the corporation. The said secretary agreed that if this were done he would register the stock for sale to the public.

On October 26, 1936, the said three incorporators filed with the Attorney General a new application which showed that the $45,000 cash had been paid in by them to the corporation; a deposit slip for $45,000 to the credit of said Osteograf Company, Inc., was attached to said application. The next day, October 27, 1936, the Attorney General qualified and registered said securities as provided by law.

The said three partners, Henderson, Marshall and Edge constituted the entire board of directors of the corporation from its inception until Henderson's death on January 7, 1937. Said Henderson was also president of the Troy Bank and Trust Company during this entire period until his death, owned 65% of the common stock of the Bank, was active manager and majority stockholder and controlled its financial affairs including loans.

Immediately after the securities were registered, October 28, 1936, the three parties did, by resolution adopted on behalf of the corporation, purchase for the corporation the identical assets owned by them as partners which had been originally transferred to the corporation and said secretary had considered of no practical value for the identical amount of $45,000 which they had paid to the credit of the corporation in the Troy Bank and Trust Company and did pay themselves this entire sum of $45,000, and this act was done without the knowledge or consent of the Attorney General. It is alleged that said Henderson, Edge and Marshall did thereby indirectly that which they were prohibited from doing directly, that is, paying for their $45,000 worth of stock in the corporation by transferring to it the equipment and machinery owned by them as partners and proceeding to sell the stock to the public.

A fiscal agent, Krantz, was appointed according to the requirement of the Attorney General, with the exclusive right to sell the stock of the corporation to the public in an amount not exceeding $82,000; also, pursuant to the requirement of the Attorney General, all such subscriptions to stock so sold were to be held in escrow in the Troy Bank and Trust Company until there had been deposited in escrow the sum of $15,000 at which time that sum would be released to the corporation for use in its business. Krantz then proceeded to sell stock in the corporation to petitioners and other respondents named in the bill in the sum of $15,000. That he represented to them that the stock of the corporation had been duly qualified under the Alabama Securities Act for sale to the public, that Henderson, Marshall and Edge had subscribed for and paid in cash for $45,000 worth of stock, that said Henderson was a former Governor of Alabama, was considered a wealthy and very successful business man, and that he was so convinced of the financial status of the corporation that he had invested his money in cash in the corporation. That the petitioners relied on these representations in purchasing this stock, that they knew nothing whatever about the acts of the three incorporators in diverting the $45,000 until long after purchasing the stock and learned of it only after they had employed attorneys to investigate the affairs of the corporation, in February, 1939. That they were unable to obtain any information as to the condition of the corporation despite frequent inquiries of the officers thereof, were never given notice of any stockholders meetings or any acts of the board of directors of said corporation. That these sales were made in the spring of 1937 after Henderson's death.

Immediately after the death of Henderson, Lane Enzor succeeded him as director in the Osteograf Company, Inc., and also as president of the Troy Bank and Trust Company of which he was already a director and stockholder during the transactions above set forth. It is alleged on advice and belief that in the manner set forth, Henderson, Edge, and Marshall failed to comply with and observe the conditions, regulations, etc., made by the Attorney General in his capacity under the said Securities Act, by doing indirectly that which they had been forbidden to do directly and subsequently, through their fiscal agent, Krantz, selling the stock to the public; that being sole promoters and directors of the Osteograf Company, Inc., they occupied a position of trust demanding of them the utmost circumspection with reference to the interest of the corporation and its other stockholders, that their action in withdrawing the $45,000 in cash from the corporation and paying it to themselves made them trustees de son tort of that sum and rendered them accountable in equity to the corporation and the other stockholders for said amount, that their acts constituted legal fraud upon the corporation and the other stockholders. The Troy Bank and Trust Company was executor of and trustee under the will of Charles E. Henderson, deceased, and as such took control of all funds in the hands of said Henderson at the date of his death, that in such capacity it did receive the sum of $27,000 being part of said $45,000 received by Henderson, that such amount of the trust fund is not a part of the estate of Charles E. Henderson but belonged in equity and good conscience to the said Osteograf Company, Inc. If mistaken in the preceding averment on information and belief, it is averred that the said $27,000 was used by Henderson in paying off the note for $45,000 executed by him, Marshall, and Edge to the Troy Bank and Trust Company and that his estate was thereby enriched to that extent.

It is alleged that Lane Enzor, during this entire period of transactions, from October, 1936, on, was a director in the Troy Bank and Trust Company, until his election as president thereof on the 11th day of February, 1937, had full knowledge of the affairs of the Bank, and was aware in his capacity as director of the entire transaction whereby Henderson, Marshall, and Edge obtained the $45,000. That (paragraph 22) the $45,000 which was paid into the corporation in October, 1936, was obtained by said Henderson, Edge and Marshall by a loan from said Bank in said same amount upon a note executed by the three to the Bank, dated October 26, 1936. That immediately after the stock in the Osteograf Company, Inc., was registered under the Securities Act and after the three parties as directors of the Osteograf Company purchased from themselves as partners the assets of the partnership, the Bank marked the note for $45,000 executed by them, paid, well knowing at the time that the $45,000 with which it was paid was wrongfully diverted from the account of the Osteograf Company, Inc., and well knowing that this represented the entire fund owned by the corporation. That despite this knowledge, the Bank proceeded to release the $15,000 held by it in escrow representing the stock subscription of the other stockholders who purchased stock after registration with the Securities Commission and well knowing at that time that the only cash assets the corporation owned were the said escrow funds of $15,000 representing the petitioners' and other stockholders' money; that thereby the Bank was a party to the diversion of the corporation's assets and therefore responsible for the petitioners' loss.

It is averred...