Johnson v. Mansfield Hardwood Lumber Company

• Decision Date: 24 January 1958
• Docket Number: Civ. A. No. 5562.
• Citation: 159 F. Supp. 104
• Parties: Hattie A. JOHNSON et al. v. MANSFIELD HARDWOOD LUMBER COMPANY.
• Court: U.S. District Court — Western District of Louisiana

159 F. Supp. 104

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

Civ. A. No. 5562.

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

January 24, 1958.

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.

BEN C. DAWKINS, Jr., Chief Judge.

We find it our hard duty here to pass judgment upon a family schism of the first magnitude, resulting from the purchase of minority stock by a corporation through alleged fraud on the part of its officers and majority stockholders.

The crux of the case is that, had it not been for this suit, the majority— six people who proceeded to sell and liquidate the corporate assets immediately after the minority stock was bought, notwithstanding promises that this would not be done—would have reaped a profit for themselves, before taxes, of more than $3,400,000, at the expense of the minority, and in addition to nearly $6,000,000 rightly to be received by them in the liquidation for their own stock.

All persons involved are educated, cultured, refined. They have enjoyed, and still occupy, positions of prestige in their home communities. Until this tragic controversy arose, they appeared to be fairly congenial, at least on the surface.

Now, regrettably, they are publicly and irreconcilably divided into two warring camps. One group—the former minority stockholders—is convinced that its members are victims of deliberate fraud perpetrated upon them by the majority. For their part, the majority resists and resents, with equal fervor, the charges made against them.

While the suit is one which ought not to have been necessary, and clearly should have been settled, the depth of feeling is such that compromise has not even been discussed. Consequently, this litigation must run its bitter course, for better or for worse.

The issues, as formed by the complaint and answer, are fully detailed in our earlier opinion, D.C., 143 F.Supp. 826, where, after disposing of various defensive motions, we granted a preliminary injunction. Briefly restated, the gist of the controversy is this:

Plaintiffs are Mrs. Hattie Johnson, Mrs. Jeanette Johnson Jennette, Mrs. Mamie Harrel, J. Allen Harrel, Mrs. Elizabeth Harrel Walker, Mrs. Ruth Harrel Mulkey, Mrs. Minette Velvin, Mrs. Alice S. H. Brown and Max Brown, residents of Louisiana and Arkansas. At the times in question, Mrs. Johnson, Mrs. Harrel, Mrs. Velvin and Mrs. Brown were aged widows, largely dependent upon defendant's dividends for their livelihoods. J. Allen Harrel was blind.

On May 1, 1953, plaintiffs owned 1,567 shares of defendant's stock. Defendant's officers, and those whom they allegedly represented or controlled, owned 2,751 shares, being approximately 56 per cent of the 4,836 shares then outstanding. Plaintiffs contend that, in 1952, or early 1953, defendant's officers conceived a fraudulent scheme, acquiesced in or ratified by the others whom they represented, whereby plaintiffs were to be induced to sell their stock to the company for grossly inadequate prices. They allege that, in furtherance of this scheme, they were told by these officers that defendant was about to engage in a long-range reforestation program upon its timberlands; that because of this, and their intention to avoid double taxation by permitting larger salaries and bonuses to be drawn by the officers, there would be little or no dividends paid to the stockholders for the next fifteen or twenty years; and that there were no plans or prospects for liquidation of the company. Plaintiffs further allege they first were offered $300 per share for their stock. After some negotiations, and because they believed and relied upon defendant's representations, as made by its officers, all but two of the plaintiffs sold their stock to the company for $350 per share, and the other two sold theirs for $400 per share.

Plaintiffs contend that, almost immediately after the last stock had been purchased, in November, 1953, defendant began negotiations to sell the corporate assets, culminating in sales effected in the late spring of 1956, and a liquidation whereby the majority group, if undeterred, will realize more than $3,300 per share for their stock. Plaintiffs further contend that, if they had not been fraudulently induced, by the false representations made to them by defendant's officers, to sell their stock to the company, they would have received almost $2,100 per share for it, as against the $350 or $400 per share they actually were paid, being less than one-fifth of the actual liquidated value of the corporate assets. Accordingly, they prayed for an injunction to restrain defendant from distributing to its remaining stockholders the proceeds of the liquidation still remaining in its hands; further asking for a decree rescinding the sales of their stock, recognizing them as its equitable owners, and, thereafter, that an accounting be ordered.

As noted, the preliminary injunction was granted, and our action in that respect was affirmed by the appellate Court, 5 Cir., 242 F.2d 45. The injunction was mandatory in form, requiring that defendant transfer to a bank, as Court-designated trustee, its remaining assets, totaling approximately $1,300,000 in cash, plus certain other properties. This was done and the funds have been invested by the trustee in short-term Government securities earning more than 3% per annum interest. The trustee now holds these funds and properties, secured by a pledge of Government bonds, subject to further orders of the Court upon final decision of the case.

In its answer, defendant has denied generally and specifically that it or its officers were guilty of the fraudulent conduct attributed to them by plaintiffs. It also has asserted various special defenses which will be particularized as we proceed.

After a full trial on the merits, lasting more than a week; having heard all of the parties and their witnesses; having considered the lengthy briefs (totaling approximately 300 pages), and the authorities cited; having studied the transcript of testimony and exhibits (some 1255 pages); having heard the oral arguments of respective counsel, lasting nearly three hours; and having reached our findings of fact and conclusions of law, we now set them down for the record. They represent to us the only result which justly could come from the evidence before us.

While there are some facts not in dispute, there are many more which are hotly controverted, especially as to what was said or not said, done or not done, known or not known, with regard to the purchase of plaintiffs' stock. In stating the facts we have found, our statements are based upon what we believe to be the truth, notwithstanding some testimony to the contrary. We also have drawn inferences, which we believe to be reasonable and correct, from the facts and circumstances in evidence.

We begin with the founding of the company, and proceed chronologically down to date, covering the important points as they developed.

The business that became Mansfield Hardwood Lumber Company was organized shortly after the turn of this century. It first was operated in South Arkansas, later moving its headquarters to Mansfield, Louisiana, thence to Shreveport. In 1940, it was chartered as a Delaware corporation, but by then its principal office, and most of its properties, were located in Louisiana.

Its founders were A. S. Johnson and N. D. Harrel. Johnson was married three times, first to Alice Farrow, their only child being H. Ben Johnson. After his first wife's death, A. S. Johnson married Mattie Harrel, sister of N. D. Harrel, but no children were born to this union. When Mrs. Mattie Harrel Johnson died, A. S. Johnson married Mrs. Hattie A. Johnson, and of this marriage was born but one child, Jeanette Johnson, who later married Charles L. Jennette. A. S. (Bud) Johnson and his sister, Mrs. Margaret Johnson Long, wife of T. W. M. (Tom) Long, were the only children of the marriage of H. Ben Johnson and Mrs. Eleanor Ewing Johnson, all three of whom survived him at his death in 1948.

The first A. S. Johnson served as president of the business from its beginning until his death in 1929, when his stock in the defendant company was inherited by his son, H. Ben Johnson, his daughter, Jeanette, and his widow, Hattie, the latter two receiving 668 and 547 shares, respectively. When H. Ben Johnson died, the stock he then owned (1,296 shares) was inherited by his children, Bud and Margaret, and his widow, Eleanor, he previously having given them 1,119 shares, making a total of 2,415 shares.

N. D. Harrel was the husband of Mrs. Mamie Harrel, they being the parents of Tracy Harrel, J. Allen Harrel, Frank Harrel, Mrs. Elizabeth Harrel Walker and Mrs. Ruth Harrel Mulkey. Upon N. D. Harrel's death, his widow and children inherited from him a fairly substantial block of defendant's stock, some of which had been acquired by defendant before 1953. Mrs. Mamie Harrel died in 1956, after this suit was filed, her estate now being represented by Cora Harrel, administratrix. On January 1, 1953, she and her children, except Tracy Harrel, owned a total of 256 shares, her part being 131 shares. Mrs. Minette Velvin owned 51 shares, Mrs. Alice S. H. (D. K.) Brown, 10, and Max Brown, 65. Mrs. Velvin also died after the suit was filed, on April 23, 1957. Her estate is represented here by Drew Velvin, executor.

Upon the death of A. S. Johnson in 1929, he was succeeded as president of the company by his son, H. Ben Johnson. When the latter died in 1948, his son, Bud Johnson, was elected as his successor. The first vice-president, before and after H. Ben Johnson's death, was Brown McCullough, husband of Rosalind Kalmbach. He is the nephew of ...