Irwin v. West End Development Company
| Decision Date | 23 June 1972 |
| Docket Number | Civ. A. No. C-2941. |
| Citation | 342 F. Supp. 687 |
| Parties | Marguerite IRWIN et al., Plaintiffs, v. WEST END DEVELOPMENT COMPANY, a Colorado corporation, et al., Defendants. |
| Court | U.S. District Court — District of Colorado |
COPYRIGHT MATERIAL OMITTED
Shellman, Carney & Edwards, by Dwight K. Shellman, Jr., and William J. Carney, Aspen, Colo., for plaintiffs.
Helmick, Conover & Burkhardt, by Frederic K. Conover, II, and Kenneth L. Keene, Jr., Denver, Colo., for defendants.
The individual plaintiffs, all of whom are citizens of states other than Colorado, and all of whom are retired or soon to be retired Army nurses, are minority stockholders in West End Development Company, a Colorado corporation. They seek to enforce against Roy Vroom, a Colorado citizen, rights to purchase stock in that company worth more than $10,000.00. As stockholders, they bring a derivative action against Roy Vroom as president, director and dominant stockholder of the company to force him to repay a $15,000.00 salary to the company, and they ask other derivative relief to be discussed later. The story unfolds.1
In 1957, Marguerite Irwin and Ada Rock2 came to Aspen on a vacation, and they looked into the possibility of purchasing a small lodge in the area to operate after their retirement from the Army. Defendant Roy Vroom (in partnership with his brother, Jacob Vroom) maintained a real estate office in Aspen, and the two visiting Army nurses chanced into the Vroom real estate office to inquire about the availability of a lodge which they might buy. Vroom touted them into a joint venture with his brother and himself to purchase about 30 acres of undeveloped real estate just outside Aspen. The land was bought from Friedl Pfeiffer for $45,000.00, with $18,000 to be paid at time of purchase and the balance to be paid over a ten year period. One-half of the downpayment was to be put up by Marguerite Irwin, Ada Rock and June M. Lease, and the other half was to be be paid by Vroom Realty and Theodore Gordon, but the total payments to be made by Vroom Realty and Gordon were $18,000.00 each. The interests were to be held:
Irwin, Rock and Lease
collectively 20%
Vroom Realty 40%
Gordon 40%
To come up with $7,500 of their $9,000.00 share of the downpayment, with prior approval of the other investors being obtained, Vroom Realty and Gordon sold a 5% interest to Julia Crowley (nee Graves) and another 5% interest to Lois McCaleb.
A joint venture or syndicate agreement was entered into which provided in material part:
Prior to consummation of the purchase of the land, Vroom Realty assigned 10% of the deal to Ewing R. Taylor, Jr. and his wife, Ann Turlock Taylor, for $10,000.00, and again, notices were sent to the other investors in accordance with the quoted provision of the syndicate agreement. In 1960, Vroom Realty borrowed $8,000.00 from Mr. and Mrs. Taylor and a 10% interest in the syndicate was put up as collateral for the loan. When the loan was not repaid, an outright conveyance of the pledged 10% interest was made to the Taylors.
In 1961, a disagreement arose between the Vrooms and Gordon, and Roy Vroom recommended to the other investors that an informal partition of the property be approved. At that time, Gordon owned a 35% interest in the venture his original 40% less his share of the interest sold to Crowley and McCaleb. By his letter of March 9, 1961, Roy Vroom told the other investors of the dispute and of his recommendations. He said:
All of the investors approved, and 10 and a fraction acres were conveyed to Gordon to terminate his relationship with the venture.
At about this time, the partnership of Roy Vroom and Jacob Vroom came to an end, and in 1962, the Vroom Realty interest in the venture was transferred to Roy Vroom in settlement of the partnership accounts. No notice of this transfer was given to the other investors. This was at about the same time that Roy Vroom's then attorneys were worried about title problems in event of a sale of the real estate owned by the joint venture, and they recommended that the syndicate be incorporated to permit easier conveyance of marketable title. All participants in the venture approved this recommendation, and West End Development Company was incorporated on August 21, 1963, to take over for the joint venture, with stock being issued in accordance with the individuals' percentage ownership of the syndicate. As will be seen before this opinion is concluded, three paragraphs of the Articles of Incorporation are of importance to the resolution of this lawsuit.
The objects and purposes of the corporation are set forth in Article III, Paragraph I:
"To engage in and carry on the business of buying, leasing or otherwise acquiring real estate of every kind and description, to construct and erect, or contract for the construction or erection of buildings and structures in or upon any of said real estate for any uses and purposes; to own, hold, improve, develop, subdivide, maintain, operate, lease, sell or otherwise dispose of all or any of said real estate or any part thereof."
The restrictions on transfer (which Vroom testified in the course of his deposition received in evidence were intended to restate the restrictions contained in the joint venture agreement) appear in Article IV, paragraph 6:
"No shareholder shall sell or transfer any outstanding shares of the capital stock issued by the corporation to such shareholder, excepting to the other shareholders, in the proportion which the number of shares owned by each bears to the total shares outstanding, without the prior consent of the owners of at least two-thirds ( 2/3 ) of the shares entitled to vote at shareholders' meetings, subject, however, to Paragraph 7 of this Article." Emphasis supplied
Article VIII, Paragraph 1 has to do with contracts between the corporation and its officers or directors. It says:
Read literally, Article IV, Paragraph 6 of the Articles having to do with the sale of shares in the corporation is nonsensical. It says that the other shareholders have a right to share in the purchase of a selling stockholder's stock "in the proportion which the number of shares owned by each bears to the total shares outstanding." The impossibility of giving literal application to this provision may be illustrated by assuming a corporation with 100 shares outstanding owned 30 shares by A, 25 shares by B, 20 shares by C, 15 shares by D and 10 shares by E. If A wanted to sell his 30 shares, B would have a right to buy 7.5 shares, C would have a right to 6 shares, D could buy 4.5 shares and E could buy 3 shares—a total of 21 shares, and 9 shares would be left out in space. Obviously, the scrivener who drafted the articles meant to say "in the proportion which the number of shares owned by each bears to the total shares not offered for sale." A court must interpret the articles in a way which will give them a reasonable meaning, and defendant Vroom testified that it was intended in the articles to carry forward the provisions of the syndicate agreement which made provisions for a workable result and for the result necessarily intended by the draftsman of the corporate articles.
With this interruption in our story we return to develop the facts occurring after incorporation of the venture. The Buttermilk ski area was started near the land, and it, coupled with the public's enthusiasm for skiing, caused the value of the land to skyrocket. Vroom, who was well aware of the land's value, made some attempt to buy the nurses' stock for $600 per share in 1965, and for $750 a share in 1967. The nurses had no knowledge of Aspen real estate values because their professional status resulted in duty assignments throughout the world, and they relied on and trusted Vroom to manage the property and to advise them concerning its development or disposition. Vroom freely admitted plaintiffs' trust and reliance on him. Yet, although Vroom had suggested a $600 per share price to the uninformed, far distant nurses in 1965, on September 9 of that same year, he purchased the 30.76 shares owned by the Taylors for $31,536.00—a price per share of $1,025.22. The nurses were not notified of this purchase, and they were given no opportunity to participate therein. Vroom's explanation of his...
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