Knapp v. S. Jarvis Adams Co.

• Decision Date: 13 February 1905
• Docket Number: 1,362.
• Citation: 135 F. 1008
• Parties: KNAPP v. S. JARVIS ADAMS CO.
• Court: U.S. Court of Appeals — Sixth Circuit

135 F. 1008

KNAPP v. S. JARVIS ADAMS CO.

No. 1,362.

United States Court of Appeals, Sixth Circuit.

February 13, 1905

Bargar & Bargar and Pomerene & Pomerene, for appellant.

Henderson & Livesay, for appellee.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

SEVERENS Circuit Judge.

This case was brought here on a former occasion on an appeal by the S. Jarvis Adams Company from a decree dismissing its bill of complaint upon demurrer. The decree of the court below was reversed, with directions to permit the filing of an answer and for further proceedings. 121 F. 34, 58 C.C.A. 1.

Upon the entry of the decree in the Circuit Court, pursuant to our mandate, the defendant in that court, who is the appellant here, filed his answer. The answer admits the making of the contracts shown by Exhibits A and B, denies some other allegations of the bill, and sets up certain special matters of defense, which will presently be stated. These exhibits, A and B, were attached to the bill when the latter was filed. The substance of the case as stated by the bill (and of the exhibits which were part thereof) is given, with our opinion in the volume of reports and at the page of the foregoing citation, to which, in order to save needless repetition, we here refer.

The complainant filed a replication to the answer, proofs were taken, and the case brought to hearing. Judge Thompson, who presided in the Circuit Court, being of opinion that the case as presented by the proofs was controlled by our decision on the former appeal, directed a decree for the complainant.

Counsel for the appellant state the issues for decision by this court, as they understand them, to be as follows:

'First whether the complainants come into a court of equity with clean hands; second, whether there are in fact any secret processes or trade secrets to be protected; third, whether the contracts upon which the original complaints are founded are such contracts in restraint of trade as are valid, and (a) are founded upon a legal consideration; (b) afford but a reasonable protection to complainants; (c) require but a reasonable restriction of Knapp and Bossert; (d) are merely ancillary to the main purpose of a lawful contract.'

The second of these questions may be dismissed. The decree is silent upon that subject, the complainant having apparently waived any relief in respect to its trade secrets or secret processes. The ground of controversy on that branch of the case is therefore removed.

The special matter of the first 'issue' above stated is based upon certain evidence brought out upon the examination of witnesses and not upon any averments of the answer. The imputation that the complainant does not come with clean hands rests upon this basis: that it is shown that when McKnight, Fownes, and the Speers, the parties of the first part in the contract Exhibit A, proceeded to organize the S. Jarvis Adams Company, they first bought out the plant of S. Jarvis Adams & Co. and its good will for $390,000, and after the company was incorporated they sold this property to it for $600,000, and took the company's entire capital stock, which was of the same amount, in payment, the company agreeing further to repay them $125,000, the down payment to S. Jarvis Adams on the purchase from him, and assume the payment of the remaining $265,000 to S. Jarvis Adams & Co., which had not yet been paid. It is thereupon said by counsel for appellant that the stock was all 'pure water,' which is not very wide of the mark, but not quite true. It represented the promoter's profits. The business of the company, however, was prosperous, and the profits of the first year amounted to $150,000.

But whatever faults in launching the corporation may have been, they cannot be made the subject of inquiry and of remedy in the present suit. The state might interpose to correct them or annul the charter if the incorporation was fraudulent, or, perhaps, the stockholders, if any were defrauded, or creditors, might, in some circumstances, have a remedy in a direct proceeding for that purpose; so that, if we could bring ourselves to believe that the defendant did not know all these facts while he was associated with the company and a prospective stockholder, the matter would be foreign to the present controversy. The maxim of equity to which the defendant refers contemplates some fraud or misconduct on the part of complainant in regard to the transaction which is the subject of controversy, and not to matters not involved in it. It may further be observed that the defendant has never, on that account or any other, sought to rescind the agreement by which his controversy with the company was settled and which is the basis of the present suit. He got the $6,480.95, and keeps it.

It is manifest that the controversy between the appellant and the company was settled upon the faith of his agreement that he would not engage in competition with the company's manufacture and sale of the specialities enumerated in the contract. By reference to the original contract (Exhibit A), which was the basis of the controversy, it is seen that if he left the company to go into a competing business he was to receive only what had been credited to him upon his stock, which was nothing; whereas, if he left without that intention, he would receive the book value of his stock, less the sum due upon it, which would include the undivided profits. No dividend had ever been declared, and no credit on the purchase of his stock was due him. The power to declare dividends rests with the directors of a corporation, and a large discretion is given them whether to retain its surplus profits as part of the working capital or divide it out to the stockholders. To be sure, an abuse of that discretion which works a fraud upon the stockholders may be relieved against by a court of equity.

In 1 Mor.on Corp. 447, it is said:

'Profits earned by a corporation may be divided among its shareholders; but it is not a violation of the charter if they are allowed to accumulate and remain invested in the company's business. The managing agents of a corporation are impliedly invested with a discretionary power with regard to the time and manner of distributing its profits. They may apply profits in payment of floating or funded debts or in development of the company's business, and so long as they do not abuse their discretionary powers or violate the company's charter the courts cannot interfere.'

And in Thompson's Article on Corporations, 10 Cyc. 548, the law is thus stated:

'In general, except where, under the governing statute or instrument, the directors are overruled by the shareholders, the propriety or expediency of declaring and paying dividends rests in their sound discretion, and the courts will not interfere to compel them to declare and pay a dividend unless they are guilty of bad faith, or of a willful abuse of this discretion, or, what is substantially the same thing, unless in refusing so to do they have acted unreasonably, capriciously, or fraudulently.'

The stockholder has not title to the surplus earnings of the company until his share is segregated by the board of directors. The law upon this subject is well and clearly stated in Wheeler v. Northwestern Sleigh Co. (C.C.) 39 F. 347.

But here there is no proof of fraud in withholding dividends. The business of the company was growing and rapidly extending. It is quite possible that it was wise policy to retain the profits for use in the business. There was nothing in the original contract which entitled the stock set apart for Knapp to any special privilege not belonging to other stock or that he was to be credited with undivided profits or dividends not declared, except that in one alternative upon his going out he would get an interest in the undivided profits in receiving the book value of the stock. And this confessedly he did get in the settlement. He says he gave this stipulation in the settlement upon advice and his own belief that it was not binding. But he knew that the other party relied upon it, and he is entitled to no relief against it by reason of any legal or equitable consideration due to himself. He must make defense, if at all, upon the ground that his stipulation was injurious to the public, and that the court will not help the other part...