Kleinschmidt v. American Mining Co.

• Decision Date: 19 March 1914
• Parties: KLEINSCHMIDT ET AL. v. AMERICAN MINING CO., LTD., ET AL.
• Court: Montana Supreme Court

139 P. 785

49 Mont. 7

KLEINSCHMIDT ET AL. v. AMERICAN MINING CO., LTD., ET AL.

Supreme Court of Montana

March 19, 1914

Appeal from District Court, Lewis and Clark County; J. M. Clements Judge.

Action by Ellen Kleinschmidt and others, minority stockholders brought in behalf of the corporation, American Mining Company, Limited, against R. H. Kleinschmidt and others. From a decree for plaintiffs, defendants appeal. Affirmed.

The plaintiffs, who are minority stockholders of the defendant the American Mining Company, Limited (hereinafter referred to as the company), brought this action to compel defendant R H. Kleinschmidt, one of the directors and acting secretary of the company, to account to it for certain of its moneys which, it is alleged, he had, by the consent of the other defendants, also directors, misappropriated to his own use under the guise of salary as secretary, and for other purposes not authorized by law or the by-laws of the company; to obtain an injunction restraining the defendant directors from auditing or allowing any further claim by this defendant against the company on account of salary, and restraining said defendant from appropriating any of the funds of the company to the payment of any claim for salary; to obtain the appointment of a receiver to take charge of the funds and property of the company and administer the same; to compel the president and secretary to transfer to the plaintiff Ellen Kleinschmidt upon the books of the company certain shares of stock acquired by her by purchase; and to recover the costs of this action, including counsel fees. Plaintiffs also pray for general relief. The circumstances out of which the controversy grew, so far as it is necessary to state them, are the following:

The company was organized under the Compiled Statutes of 1887, for the purpose of conducting the business of mining, its properties being situated in Montana and Idaho. The capital stock consists of 500,000 shares of the par value of $1 each. There were issued to the plaintiffs and the defendants shares to the amounts following: To Ellen Kleinschmidt 230,700; to Albert Klein-Schmidt 250; to R. A. Kleinschmidt 250; to defendant R. H. Kleinschmidt 114,500; to Amelia H. Kleinschmidt 115,500; to Louis Hillebrecht, Maria Kuphal, and Julia M. Mau, each 500 shares--the aggregate issue being 462,700 shares. The company was organized by Albert Kleinschmidt and R. H. Kleinschmidt, brothers, under an agreement that the shares should be held in equal amounts by them and other persons designated by each of them to hold for their respective uses. The shares were issued in consideration of property conveyed to the company by the brothers, and the distribution of them was made as above stated, the plaintiffs holding in the interest of Albert, and the defendants in the interest of R. H. Kleinschmidt. The plaintiffs Ellen and R. A. Kleinschmidt are the wife and son of Albert. The defendant Amelia H. Kleinschmidt is the wife of R. H. Kleinschmidt; Julia M. Mau is her sister. Maria Kuphal is the cousin of R. H. Kleinschmidt, and is a member of his family. The wife of defendant Louis Hillebrecht is closely related by blood to Amelia H. Kleinschmidt, and R. H. Kleinschmidt and Louis Hillebrecht have been associated in business. During the year 1898 dissensions arose between the brothers which gradually grew into extreme hostility, so that they have since rarely spoken to each other or transacted any business with each other. Even when engaged in the transaction of business their intercourse has been characterized by expressions of hate and recrimination. They have rarely agreed in matters pertaining to business of the company. The wife and son of Albert, both as stockholders and directors, when either of them happened to be a director, have always voted in accordance with his views, while the four defendants, other than R. H. Kleinschmidt, have always voted in accordance with his views. Julia M. Mau resides in San Francisco, Cal., and has never attended a stockholders' or directors' meeting, invariably committing her right to vote in either capacity to R. H. Kleinschmidt by proxy. This defendant is of a violent, domineering disposition, and his codefendants have never opposed his wishes. By the distribution and ownership of the shares of stock as above stated, he owns or controls a bare majority thereof. He nevertheless so uses it at all stockholders' meetings as to elect himself a director and to secure the election of two or more of his codefendants (the board of directors consisting of five members) with the purpose of retaining control of the board; and since the year 1898 he has dominated and controlled all the affairs of the company, except in transactions which have required the approval of more than a majority of the stockholders. From the date of the organization of the company until the year 1898, the plaintiff Albert Kleinschmidt had been its president and had performed the duties of secretary. These duties were performed without compensation, none of them being arduous, extensive, or requiring technical skill. At the beginning of that year the defendant R. H. Kleinschmidt had himself elected secretary and treasurer of the company, and has since held these positions. Louis Hillebrecht was then elected president, and held the office up to the time of this action.

No action was ever taken by the board of directors concerning the salary of the secretary or treasurer until on or about September 5, 1904. At that time R. H. Kleinschmidt caused to be incorporated in the minutes of the proceedings of the board of directors an entry, in substance, as follows: "R. H. Kleinschmidt, secretary and manager, presented his claim for the amount due him for salary and office expenses from the date of his election, January 5, 1898, to July 5, 1904. He announced that he had theretofore, with the consent of the directors, applied sums aggregating $4,200 upon the amount due him; the item so appropriated being embraced in the statement of receipts and expenditures of the company then submitted. It was thereupon ordered by unanimous vote of the directors, except R. H. Kleinschmidt, who did not vote, that the application of $4,200 to the said claim having been made with the consent and full knowledge of the directors, be approved and the further consideration of the claim be postponed until another meeting. The said Kleinschmidt did not participate in the proceeding touching the statement of receipts and disbursements, nor those relating to his claim." Of the amount so appropriated there had been withdrawn from the bank account of the company on July 3, 1903, $2,100, and on July 6, 1903, $2,100. Thereafter, and for the same purpose, on September 6, 1904, there was withdrawn and appropriated to the same purpose the further sum of $1,400, and on October 26, 1904, the sum of $2,100. On February 4, 1906, the board disposed of the claim for salary by fixing the amount at $300 per month, to date from January 5, 1898, and the withdrawals made on September 6, and October 26, 1904, were approved.

Subsequent to the beginning of the year 1898 the operations of the company had been confined to an effort to close out its business by the sale of its properties and the distribution of the proceeds. From time to time it executed leases and bonds on certain of them. These all provided that such sums as were realized from sales, royalties or otherwise were to be deposited in the American National Bank at Helena, to be paid out by the bank to the stockholders without further action by the board of directors. Under an arrangement made between Albert and R. H. Kleinschmidt, understood by the bank authorities, these funds could not be withdrawn from the bank except upon check signed by both. No sales of any of the claims of the company were affected; but from royalties and forfeited payments, made under bonds for sales and from sales of ore extracted by lessees under forfeited bonds and leases, large sums were realized, and, being paid to the bank, were distributed by it to the stockholders. This arrangement between the brothers was carried out until, for some reason not apparent, unless it is to be accounted for by the growing enmity between them, and R. H. Kleinschmidt and his associates desired exclusive control of the funds of the company, the board of directors authorized a discontinuance of it. The deposits were then made in another bank, subject to withdrawal without the consent of Albert Kleinschmidt. No dividends were thereafter paid to the stockholders, though considerable sums were realized from sales of ore left upon the dumps at the mines by different lessees. All disbursements of moneys have since been made upon the check of R. H. Kleinschmidt alone. The minutes of the meetings of directors and stockholders have been reasonably well kept by R. H. Kleinschmidt, or the attorney employed by him for the company. No books of account, however, have been kept, the only record made of receipts and disbursements being found upon check stubs and in memoranda kept on loose sheets and scraps of paper scattered about this defendant's office.

Since the operations of the company had ceased in 1898 there was no need for the services of a manager; in fact, R. H Kleinschmidt was never elected manager. Such duties as he performed in this capacity he assumed to perform without authority from any one. The duties of secretary were thereafter of little consequence, and did not require this defendant to devote a great deal of time to them, though he did attend to the necessary correspondence. Prior to the bringing of this action, demand was made upon the board of directors to require R. H. Kleinschmidt to repay to the company the moneys appropriated by him to the...