Johnson v. Mansfield Hardwood Lumber Company, Civ. A. No. 5562.

• Decision Date: 10 August 1956
• Docket Number: Civ. A. No. 5562.
• Citation: 143 F. Supp. 826
• Parties: Hattie A. JOHNSON et al. v. MANSFIELD HARDWOOD LUMBER COMPANY.
• Court: U.S. District Court — Western District of Louisiana

143 F. Supp. 826

Hattie A. JOHNSON et al. v. MANSFIELD HARDWOOD LUMBER COMPANY.

Civ. A. No. 5562.

United States District Court W. D. Louisiana, Shreveport Division.

August 10, 1956.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John M. Madison, Vernon W. Woods, Wilkinson, Lewis, Wilkinson & Madison, Shreveport, La., Ned A. Stewart, Texarkana, Ark., J. W. Patton, Jr., Lewisville, Ark., for plaintiffs.

Sidney M. Cook, Charles D. Egan, Frank M. Cook, Cook, Clark, Egan, Yancey & King, Shreveport, La., for defendant.

BENJAMIN C. DAWKINS, Jr., Chief Judge.

A program of corporate purchase of minority stock, as treasury shares, has reaped a whirlwind of bitterness, resulting in this three-pronged action.

Brought here under the Diversity Statute¹ by eight plaintiffs, and addressed to our equitable powers, the suit is for a preliminary injunction, for rescission of certain stock sales made by plaintiffs to defendant in 1953, and for an accounting.

In their verified complaint, supported by various documents, plaintiffs pitch their claims on charges of deliberate fraud, or, alternatively, upon constructive fraud and unjust enrichment. They allege that, in 1953, defendant, Mansfield Hardwood Lumber Company (sometimes called "Mansfield"), through its President, A. S. Johnson, and its Vice-President, Brown McCullough, fraudulently conceived a scheme through which it induced them to sell their stock in the company to it, on the pretense that no dividends would be paid for the next fifteen to twenty years, that all profits would be reinvested in a reforestation program on its extensive land holdings, and that the corporate assets would not be liquidated and distributed to its shareholders in the foreseeable future.

At that time Mansfield's outstanding capital stock consisted of 4,836 shares, of which plaintiffs owned 1,516 shares, or approximately 33 per cent. It is alleged that the corporate management, together with others dominated by them, owned 2,751 shares, or approximately 56 per cent of the total, giving that group full control of its affairs.

Plaintiffs aver that all of them, except Mrs. Hattie Johnson and Mrs. Jeanette Johnson Jennette, sold their stock to the company for $350 per share, and the latter two, owning 547 and 668 shares, respectively, sold theirs for $400 per share. All plaintiffs contend that in doing so they accepted as true, and relied upon, the representations made to them by Mansfield's officers that no dividends would be paid for many years, and that no liquidation and distribution of the company's assets would be made. Since its stock was closely held, mostly by members of the same two families, was not traded on the open market and, accordingly, had no established market value, they also relied, they say, on the officers' statements as to the intrinsic value of the stock, for which they first were offered $300 per share.

Plaintiffs further say that, in arriving at their estimates of stock value, they placed strong reliance upon defendant's annual Balance Sheets, prepared and distributed to stockholders by the management. Copies of two of these statements are attached to the complaint. Under the heading of "Assets", as of June 30, 1952, one of the larger items was "Timber and Timber Lands", then valued at $969,234.03. The Balance Sheet of June 30, 1953, gave these assets a value of $987,674.84. Actually, but allegedly unknown to them at the time, the true value was almost $9,000,000.

Thus deceived, they turned in their stock for the prices mentioned, and were paid by the company with corporate funds, the last sales having been consummated by Mrs. Johnson and Mrs. Jennette on November 14, 1953.

Plaintiffs next aver that, notwithstanding such representations by Mansfield's officers, both as to stock values and the lack of prospects for liquidation, they began negotiations for sale of the corporate assets within a few months after the stock had been bought. On September 26, 1955, defendant's then officers, directors, and remaining stockholders voted to liquidate completely, selling all, or substantially all, of the assets. To that end, on May 25, 1956, it sold all of its timbered lands, comprising about 93,000 acres, to Robert Gair Company, Inc., for $8,823,000, $5,000,000 being paid in cash, and the balance represented by a mortgage note for $3,823,000, bearing 3 per cent per annum interest, payable in five years. All minerals underlying these lands were reserved to defendant, to be distributed pro rata to its remaining stockholders. A lumber mill owned by defendant, at Winnfield, Louisiana, was sold for $285,000, on September 29, 1955, and another mill at Zwolle, Louisiana, was sold on May 25, 1956, for $75,000. Another asset, the Reader Railroad in Arkansas, was sold for an unascertained amount. No one apparently knows the exact total worth of the minerals reserved for distribution.

Plaintiffs calculate that defendant's assets will realize, or be worth, approximately $10,000,000, from which each share of the remaining stock will receive about $3,000, as contrasted to the $350 and $400 per share they received. If they had not sold their shares, in reliance on defendant's representations, they now would be entitled to receive more than $2,000 per share. Thus, they say, defendant obtained stock worth approximately $3,300,000 for $609,200, or about 18 per cent of the true value.

As stated, plaintiffs claim that all this resulted, to their serious detriment, from a fraudulent scheme on the part of defendant's officers, Johnson and McCullough. In the alternative, in the event it is determined that no deliberate fraud was practiced, plaintiffs contend that in their sale and defendant's acquisition of the stock they and defendant neither understood the true value of the rights being sold and acquired, and because of this mutual error of fact the sales were invalid.

In the further alternative, plaintiffs contend that in acquiring their stock defendant used cash and credit which equitably belonged to them and that, accordingly, no consideration was paid for the stock, or such consideration as was paid was not serious, and the sales were invalid.

In the still further alternative, plaintiffs urge that the price paid by defendant was so utterly out of proportion to the true value of the stock as to render the consideration vile, and to permit those who stood in a fiduciary relationship to plaintiffs to enrich themselves unjustly at plaintiffs' expense, and, therefore, that the sales were invalid.

Plaintiffs pray for a decree rescinding the sales of their stock to defendant, recognizing them as its equitable owners, requiring defendant to account to them for their share of the liquidation proceeds, and to deliver to them their proper part of the mineral rights reserved for distribution. They further allege that defendant is about to distribute a large amount of cash on hand, and to be received, to the remaining shareholders, and proposes to transfer to them title to undivided interests in the minerals, which would make it possible for third persons to acquire indefeasible interests therein, all to plaintiffs' irreparable injury. Accordingly, they have asked for, and were granted, a temporary restraining order, renewed each ten days since the suit was filed on June 22, 1956, to hold matters in status quo until determination of the suit on its merits. They further pray for a preliminary injunction for the same purpose.

Defendant has filed a motion to dismiss, encompassing several points of defense, and a verified answer with supporting documents, which vigorously denies the alleged fraud and asserts additionally a number of affirmative defenses. While admitting generally that plaintiffs are former stockholders, who sold their stock to it for the amounts mentioned, partly at the behest of Johnson and McCullough, defendant contends that all statements made by them, in the negotiations leading up to the sales, were completely honest and factually correct. It further contends, with particular respect to the stock purchased from Mrs. Johnson and Mrs. Jennette, that they were thoroughly familiar with the company's affairs; that they initiated the negotiations and in effect importuned defendant to buy their stock, which constituted about 80 per cent of the total purchased, being all but 281 shares out of 1,516 which were bought; that defendant did not have sufficient cash or liquid assets on hand to pay the entire purchase price ($494,000); hence, it paid them $121,500 in cash, giving its notes for the balance, due serially each six months, secured by a mortgage on 11,845 acres of its property; that it paid the notes as they matured, and on May 25, 1956, it called the remainder of the unpaid notes, as was its privilege under the mortgage, paying the full balance of principal and interest, plus a 2 per cent charge for the privilege of calling the notes prior to their maturities. Defendant also alleges that, in addition to the payments already mentioned, it caused to be paid to Mrs. Johnson and Mrs. Jennette a sum equal to a 2 per cent dividend upon their stock, which payment was made some time subsequent to the consummation of the stock sale. Accordingly, defendant contends that by their actions they have ratified, confirmed and made valid their sale of stock to it, and now are estopped to bring this action to rescind it.

It further contends that it did not "immediately" begin to look for a sale of its timbered lands, after it had purchased plaintiffs' stock, but admits that in about the month of April, 1954, it began to negotiate with International Paper Company for that purpose. It further admits that on September 29, 1955, it agreed to sell those lands to the Gair Company, reserving all mineral rights, for $8,823,000.

While admitting that it was a closely held corporation, it denies that there was no market price for its stock; and it denies that plaintiffs had no accurate knowledge...