Kimball v. Bangs, 51.

• Decision Date: 14 June 1948
• Docket Number: No. 51.,51.
• Citation: 321 Mich. 394,32 N.W.2d 831
• Parties: KIMBALL et al. v. BANGS et al.
• Court: Michigan Supreme Court

321 Mich. 394

32 N.W.2d 831

KIMBALL et al.

v.BANGS et al.

No. 51.

Supreme Court of Michigan.

June 14, 1948.

Suit by Dean G. Kimball and another, stockholders in Mt. Forest Fur Farms of America, Inc., a Delaware corporation, on behalf of themselves and other stockholders, against Mt. Forest Fur Farm, a Michigan corporation, Milton S. Bangs and others for an accounting on part of individual defendants and for appointment of a receiver for each of the two corporations, distribution of assets of boty corporations and for other relief, wherein John R. Westenbarger, Detroit Trust Company and others intervened as plaintiffs and Harley C. Waitman and others intervened as defendants. A cross bill in nature of a derivative suit by stockholders on behalf of the Michigan corporation was filed by Harley C. Waitman and others against John R. Westenbarger, Detroit Trust Company and others. From decree entered, Milton S. Bangs and others, original individual defendants, and Harley C. Waitman and others, intervening defendants and cross plaintiffs, appeal, and John R. Westenbarger, Detroit Trust Company and others, intervening plaintiffs and cross defendants, cross appeal.

Decree affirmed in accordance with opinion.Appeal from Circuit Court, Wayne County in Chancery; Guy A. Miller, judge.

Before the Entire Bench.

Fischer, Brown, Sprague, Franklin & Ford, of Detroit (David G. Barnett, of Detroit, of counsel), for appellants Waitman and others.

Harold R. Smith, of Detroit (John P. Neudorfer, of Detroit, of counsel), for Detroit Trust Co. and John R. Westenbarger, appellees and cross-appellants.

Ray B. Johnston and Walter M. Nelson, both of Detroit, for Mt. Forest Fur Farm, a Michigan Corporation, Donald Campbell, Milton S. Bangs, and Lenna BangsCorbett, defendants, appellees, and cross-appellants.

REID, Justice.

The bill of complaint was filed in 1930 by two stockholders in Mt. Forest Fur Farms of America, Inc., a Delaware corporation, on behalf of themselves and other stockholders of that corporation, said corporation being hereinafter referred to as the Delaware corporation. One of the defendants named in the bill is Mt. Forest Fur Farm, a Michigan corporation, and such defendant will hereinafter be referred to as the Michigan corporation. Three individual defendants named in the bill, Milton S. Bangs, his former wife, Lenna B. Bangs (now Corbett), and Donald Compbell, are hereinafter spoken of as Bangs et al. Bangs et al. were the directors and officers of each of the two corporations. The Delaware corporation was formed by Bangs et al. as a partial rearrangement of the business of the Michigan corporation. The bill alleged that the formation of the Delaware corporation and the transfer to the Delaware corporation of the assets of the Michigan corporation was a fraudulent scheme on the part of the management of the Michigan corporation. The amended bill prayed for an accounting on the part of Bangs et al. and for the appointment of a receiver for each of the two corporations, distribution of the assets of both corporations, and for other relief. On August 21, 1931, Harry J. Merritt was appointed receiver of the Delaware corporation with the consent of that corporation.

Upon the formation fo the Delaware corporation, the Michigan corporation transferred its property to the Delaware corporation and in return received certain shares of stock in the Delaware corporation, said to represent about 48 per cent. of the voting stock in the Delaware corporation. This block of stock in the Delaware corporation constituted practically the entire assets of the Michigan corporation and is hereinafter referred to as the stock in question. Cross defendant John R. Westenbarger (together with those to whom he has made assignments of interests or part interests, hereinafter referred to as the Westenbarger interests) claims the stock in question by reason of a sale made by M. S. Bangs, allegedly as general manager of the Michigan corporation, on June 6, 1934, to Westenbarger.

Individuals who later on were sold stock or assignments designated as ‘units of interest’ in stock of the Michigan corporation intervened and a group of such interveners who actively participated in the hearing in the court below, disputing the validity of the sale to Westenbarger, are hereinafter referred to as Waitman et al. The issue to be determined is joined between the Westenbarger interests on one side and Waitman et al. on the other side.

The lower court properly determined that although the issue would have been more appropriately triable in a separate plenary suit, still the question not having been seasonably raised or suggested until the hearing had progressed to great length at great cost to the parties, the court should proceed to a final determination. The propriety of such ruling is not drawn in question or stated as a question involved. The cross bill of Waitman et al. is a derivative suit by stockholders on behalf of the Michigan corporation.

The most important question for our determination in this case is concerning the validity of the sale of the block of stock in question by defendant M. S. Bangs to cross defendant Westenbarger. Waitman et al. claim the sale to have been without the authorization of the Michigan corporation, its directors or stockholders, and claim that such transfer was fraudulent as to the Michigan corporation, its stockholders and creditors, and null and void.

The trial court found Westenbarger not a bona fide purchaser and determined that Waitman et al. as purchasers of units of interest are entitled to priority over the Westenbarger interests, each purchaser of units being entitled for each unit to 1/900 of the 111,558 shares of stock of Vermilion Bay Land Company (which is the name of the Delaware corporation since its reorganization under § 77B of the Federal Bankruptcy Act, 11 U.S.C.A. § 207, which stock is now held by the present receiver, Hugh Francis, and that the Detroit Trust Company, trustee, assignee of Westenbarger interests, is entitled to the remaining 6507/7200 of the total of the 111,558 shares of the Vermilion Bay Land Company, and that the parties in such proportion should receive the benefits of dividends when declared or distribution of assets when made; further, that the 111,558 shares of Vermilion Bay Land Company (substituted by court order for the stock in question) when issued shall be surrendered for transfer and issuance of voting trust certificates in denominations convenient for making such distribution. The decree further provided that Bangs et al., the owners of stock, were so much indebted to the Michigan corporation that they should not hereafter be accorded the position of stockholders, practically extinguishing their stock although not expressly so reciting. Waitman et al. and Bangs et al. appealed; Westenbarger interests cross appealed.

This being a chancery proceeding, we hear the case de novo.

In 1925 Mr. and Mrs. Bangs were operating a ‘sort of partnership’ for the production of muskrat furs. Soon afterward defendant Donald Campbell became associated with them. On or about July 13, 1926, Milton S. Bangs and Lenna B. Bangs, his wife, together with Donald Campbell and Jerry E. M. Coulson, formed and promoted the Michigan corporation. The corporation had capital stock of the amount of $12,000 represented as fully paid in, divided into 1,200 shares of the par value of $10 each. Of these shares, 270 were issued to Campbell, 30 shares to Bangs, 600 shares to Mrs. Bangs and 300 shares to Coulson. The principal avowed purpose of the Michigan corporation was the breeding of muskrats in captivity.

There appears in the minutes of the Michigan corporation a recital that Bangs purchased the 300 shares from Coulson and that adjustments should be made in the Bangs account with the corporation, evidently on account of the corporation's having advanced $4,250 for Bangs to pay Coulson for his stock. Notwithstanding such recital on the minutes of the corporation,it is clearly established by the testimony that the stock of Coulson became treasury stock and that the total outstanding shares from that time on were 900 shares. The lower court so found and we affirm that finding.

From its inception the business of the Michigan corporation and later the business of the Delaware corporation was carried on under the control of Bangs, until the appointment of a receiver respectively for each of the corporations.

The only asset of the Michigan corporation at the time of the incorporation was 40 acres of land at Mt. Forest in Bay county, Michigan, which was considered to be worth not more than $500, so that the corporation was grossly overcapitalized in its beginning. Very large sums of money came into the possession of the corporation through the sale of so-called muskrat contracts. The nature of such contracts is set forth in detail in Morlock v. Mount Forest Fur Farms, 269 Mich. 549, 257 N.W. 880.

The trial court in the case at bar found: ‘The $662,000.00, or thereabouts, which was raised from the sale of rat contracts was received from buyers of those contracts in the time between January 15, 1926 and March 28, 1928. After March 28, 1928, no more contracts were sold. From these considerations, the obvious conclusion is that the sale of rat contracts was a fraud upon the public, was so intended from the start, was based upon misrepresentations of facts known to be false, and without the slightest regard to whether they were true or false, and was continued long after the slightest shred of possibility had vanished that there could be any such thing under the plan of operations as the successful breeding of these animals in captivity.’

Campbell testified, ‘We [evidently referring to the Michigan corporation] took in, as far as I can remember, one million one hundred thirty-four thousand from the public.

‘Q. From the sale of contracts? A. That was everything. That I understand is the total cash we...