Independence Lead Mines Co. v. Kingsbury

• Decision Date: 23 August 1949
• Docket Number: No. 11959.,11959.
• Citation: 175 F.2d 983
• Parties: INDEPENDENCE LEAD MINES CO. v. KINGSBURY et al.
• Court: U.S. Court of Appeals — Ninth Circuit

175 F.2d 983 (1949)

INDEPENDENCE LEAD MINES CO. v. KINGSBURY et al.

No. 11959.

United States Court of Appeals Ninth Circuit.

February 28, 1949.

Rehearing Denied August 8, 1949.

Dissenting Opinion Amended August 23, 1949.

R. Max Etter and William E. Cullen, both of Spokane, Wash., and Walter H. Hanson, of Wallace, Idaho, for appellant.

H. J. Hull, of Wallace, Idaho, and J. K. Cheadle, of Spokane, Wash., for appellees.

Before DENMAN, Chief Judge, and HEALY and ORR, Circuit Judges.

HEALY, Circuit Judge.

This is an appeal from an order dismissing a petition of appellant, hereafter called Independence, to vacate a judgment. The background of the litigation may be summarized as follows:

Originally the authorized capital stock of Independence consisted of three million shares of common assessable stock and one million shares of preferred. None of the preferred was outstanding. In 1932 the articles were amended by eliminating the authorized preferred stock and creating in lieu thereof one million shares of nonassessable Class A common. Upon the amendment the Class A common was issued to Mines Finance, a corporation wholly owned by two men, Kingsbury and Marquardt, who were respectively president and secretary of Independence. Kingsbury died at an unspecified date. In 1941 Mines Finance assigned two-thirds of the Class A common to Kingsbury's widow and one-third to Marquardt, and Independence issued to those individuals certificates evidencing the shares. In 1942 Marquardt died and his shares were distributed to his widow who thereupon obtained a formal transfer of the stock to herself. Thus on the books of Independence the two widows, who are appellees here, appeared as holders of all the Class A common.

Independence owned and had in its treasury 1,001,000 shares of the stock of Clayton Silver Mines Company. The common stockholders were insistent upon the distribution of the Clayton stock, or the bulk of it, as a dividend. Accordingly the directors of Independence, in August of 1944, adopted a resolution providing that 750,000 of the Clayton shares be distributed to the common stockholders on the basis of one share of Clayton to four shares of Independence. The resolution provided that the Class A common was not to participate in the distribution "for the reason that there is a question as to the validity" of that stock.

Independence commenced actively to distribute the Clayton stock and by June 1946 all but 73,175 shares of the dividend declared had been distributed.¹ Appellees in June of 1945 filed suit against Independence in the court below alleging their ownership of the Class A common, their right to participate in the dividend equally with other stockholders, and the refusal of Independence to recognize their right. They asked that Independence be ordered to distribute to them 250,000 shares of the Clayton stock together with a sum alleged to have been paid to Independence as a dividend thereon. Independence moved to dismiss and its motion was denied in November of 1945. Later, no answer having been filed by Independence and extensions of time given it to answer having expired, appellees moved for a default. Thereupon Independence answered.

The answer denied that the Class A common had been lawfully issued for value received or for any other consideration. It alleged that at the time of the transfer of the stock to Mrs. Kingsbury and to Marquardt the latter was the alter ego of Independence and that the transfer was made without knowledge of its other officers; and further, that at the time of the transfer of the Marquardt stock to his widow the officers of Independence were not aware of the true facts. Finally, the answer denied that the Class A common was issued or outstanding and alleged that if so it was void and of no effect.

Subsequent to the joinder of issue in the suit the parties entered into a stipulation for the entry of judgment to the effect that the claim of the appellees to 250,000 shares of the Clayton stock be rejected and that they have from Independence 170,000 shares thereof, and no more; that appellees surrender to Independence 400,000 shares of their Class A common; that it be adjudged that they are the bona fide owners of the balance, namely 600,000 shares, with rights identical to those of the common stock; and finally that Independence pay to the appellees the sum of $10,050. Judgment to this effect was entered by the court on June 29, 1946.²

The petition for the vacation of this judgment was filed in 1947 after the election by Independence of a new board of directors. Two of its main paragraphs were extensively amended after a motion to dismiss it had been interposed. Appellees' motion was then renewed, and Independence having declined to plead further the court dismissed the amended petition as insufficient. This appeal followed.

The defenses of want of consideration, invalidity and fraud in the original issuance to Mines Finance of the Class A common, as set up in the answer, are repeated in the petition with much evidentiary detail and in greatly amplified form. The substance of the defenses, however, is concededly identical in the two pleadings. Since fraud in this respect was in issue in the litigation concluded by the judgment it can not be made the basis of an attack on the judgment. Donovan v. Miller, 12 Idaho 600, 88 P. 82, 9 L.R.A.,N.S., 524, 10 Ann.Cas. 444; United States v. Throckmorton, 98 U.S. 61, 68, 25 L.Ed. 93; Toledo Scale Co. v. Computing Scale Co., 261 U.S. 399, 43 S.Ct. 458, 67 L.Ed. 719; 49 Corpus Juris Secundum, Judgments, § 372, pages 738-740. Independence concedes that such is the general rule, but argues in its brief that the principle is not applicable here for the reason that appellees at all times had knowledge of the invalidity of their holdings. Such knowledge, however, is not pleaded, and we need not inquire what might be its effect if it had been pleaded. There is no averment in the petition that appellees knew that fraud had been practiced by their predecessors in the acquisition of the stock; and no facts are set out which would in good conscience preclude them from resorting to the courts for an adjudication of their disputed claim.

The balance and bulk of the petition is devoted to an attempt to show fraud in the procurement of the judgment. On this phase Independence argues that collusion between its president on the one side and appellees on the other prevented it from making its defense. What the court has to determine is whether the contention finds adequate support in the facts alleged in the petition.³

The petition avers that since the death of Marquardt in 1942 Independence had been under the control and domination of one Keane, its acting president; that Keane was currently disqualified to act as an officer because no longer a stockholder; and that the two other directors serving with and appointed by Keane were not stockholders, hence were also disqualified from acting. No stockholders meeting, it is said, had been held for eight years. It is averred that appellees, well knowing these facts, dealt with Keane in the settlement of their suit. From the recitals of the petition as a whole, however, it is plain that Keane and the other directors were at least de facto officers. Cf. Fletcher, Cyc. Corp., Vol. 2, Ch. 11, §§ 372-390. Keane was and for years had been in open and unchallenged possession of the office, discharging its duties under color of authority and with the acquiescence of the generality of stockholders. The latter appear to have recognized his authority to act for the corporation; and there is no allegation that they themselves were unaware of the true nature or infirmities of his tenure. The very dividend from which this litigation stemmed had been declared and was in process of distribution by Keane and his associates acting as officers and directors. The common stockholders had sought the dividend at their hands, recognized their authority to declare it, and claimed and accepted its fruits. We think Independence, speaking here ostensibly for the common stockholders, is in no position to challenge Keane's official status.

Again, it is alleged that Keane was currently engaged in the sale of large blocks of the Clayton stock held by Independence and was corruptly dissipating the proceeds or applying them to his own use. Appellees are alleged on information and belief to have had knowledge of Keane's plundering of the corporation and that they took no steps to oust him for the reason that they could obtain a better settlement of their own claims "by dealing with the so-called president who desired to conceal the true condition of the affairs of the said Company and his own misdeeds in connection with its operations." It is alleged that appellees "claimed to be" such large stockholders of Independence that "they were in virtual control thereof," yet took no action to curb Keane's mismanagement. On this phase it is to be noted that there is no allegation that appellees owned or claimed to own any stock in Independence other than the Class A common, their title to which was being currently denied and contested by Independence. The court is not informed of the means by which, in the circumstances, they could act effectively. Indeed, if the petition be taken at its face value they had in law no standing as stockholders or right to interfere in the corporate affairs. In any event we think they were not obliged to halt their suit until the internal affairs of the corporation were corrected.

The petition, in substance, alleges further that prior to the settlement of the suit Keane had sold 218,000 of the Clayton shares belonging to Independence and had appropriated the proceeds to his own account; that 613,000 Clayton shares had been distributed as dividends to the common stockholders of Independence⁴; and that there was thus left in the treasury a balance of 170,000 Clayton shares. It is alleged that as the...