Knox v. First Security Bank of Utah

• Citation: 196 F.2d 112
• Decision Date: 29 March 1952
• Docket Number: No. 4380.,4380.
• Parties: KNOX et al. v. FIRST SECURITY BANK OF UTAH et al.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

196 F.2d 112 (1952)

KNOX et al. v. FIRST SECURITY BANK OF UTAH et al.

No. 4380.

United States Court of Appeals Tenth Circuit.

March 29, 1952.

COPYRIGHT MATERIAL OMITTED

Peter W. Billings, Salt Lake City, Utah (Beverly S. Clendenin, Salt Lake City, Utah, on the brief), for appellants.

Charles Welch, Jr., Salt Lake City, Utah (Clair M. Senior and Raymond T. Senior, Salt Lake City, Utah, on the brief), for appellee First Security Bank of Utah, executor of estate of A. C. Milner, deceased.

Paul H. Ray, Salt Lake City, Utah (Albert R. Bowen, Salt Lake City, Utah, on the brief), for appellee Milner Corp.

Before PHILLIPS, Chief Judge, and BRATTON and MURRAH, Circuit Judges.

BRATTON, Circuit Judge.

Resting jurisdiction upon diversity of citizenship and the requisite amount in controversy, De Witt Knox and Frances K. MacEwan instituted in the United States Court for Utah this action against First Security Bank of Utah, as executor of the estate of A. C. Milner, deceased, and Milner Corporation to recover for breach of contract. It was alleged in the complaint that Frank Knox was dead; that plaintiffs were his surviving heirs and the distributees of his estate; that A. C. Milner was dead; that defendant First Security Bank of Utah was the executor of his estate; that in March, 1909, Milner, for value received, executed and delivered a written undertaking to Frank Knox; that as provided in such agreement, the mining property therein referred to was conveyed to the defendant Milner Corporation; that such defendant still owned such property; and that in November, 1924, Milner, then president of the defendant Milner Corporation, made a new agreement and undertaking on behalf of himself and the defendant Milner Corporation to perform the original undertaking. And it was further alleged that on or about December, 1947, the defendant Milner Corporation entered into a long-term lease in which it leased to Columbia Iron Mining Company a portion of such property; that ever since such date, the defendant Milner Corporation had been and then was able to pay the $25,000 referred to in the undertakings of 1909 and 1924 from royalties and other payments under the lease; and that the defendants had failed, neglected, and refused to pay such sum, or any part thereof. Judgment for $25,000, with accrued interest, was prayed against both defendants. A copy of the written undertaking executed by Milner in favor of Frank Knox was attached to the pleading; a copy of the asserted new agreement and undertaking on the part of Milner and the defendant Milner Corporation was also attached; and both were expressly made a part of the pleading. The undertaking from Milner to Frank Knox recited that Stanley B. Milner, during his lifetime, was the owner of interests in certain iron property in Iron and Washington Counties, Utah; that Stanley B. Milner died possessed of such property; that the estate was about to be closed and the assets thereof distributed; and that a corporation would in the immediate future be organized under the laws of Utah to be known as the Milner Corporation, to which such iron property should be deeded. The instrument then provided that Milner, for and in consideration of the sum of one dollar to him in hand paid by Knox, receipt whereof was thereby acknowledged, and for other valuable considerations, did thereby undertake and agree that he would immediately cause a corporation to be organized under the laws of Utah, to be known as the Milner Corporation, and would cause to be conveyed immediately to such corporation the interests of the estate of Stanley B. Milner in and to such iron property; that immediately upon the organization of the corporation, he would cause it to execute to Knox its obligation and agreement to pay him the sum of $25,000 from the first net proceeds or profits derived by the corporation from the sale of the property or the proceeds thereof; that nothing therein should be construed as a covenant requiring the corporation to sell the property or to work it unless and until it should see fit to do so; and that in no event should the corporation be required to pay the $25,000 or any other sum under the instrument, except from the net proceeds or profits derived by the corporation from the sale of its interest in the property or products thereof. The alleged new agreement or undertaking on behalf of Milner and defendant Milner Corporation was in the form of a letter written on the letterhead of the corporation, addressed to plaintiff De Witt Knox, and signed by Milner. At the outset, it acknowledged receipt of a letter from plaintiff De Witt Knox. It stated that "We have a copy of the undertaking with your father relative to $25,000 to be paid from sale, or profits therefrom, of iron property." It detailed difficulties which had been encountered in the development of the property, detailed improvements and facilities which had been provided, stated that in a short time the property would represent an investment of $200,000 to $250,000 and would have a daily output capacity of 2,000 tons, and expressed the hope that in the near future the iron and steel business would expand rapidly to large proportions. It stated that the demonstration already made by Columbia Steel Company indicated that all claims made in respect to the ability to produce a fine grade of coke and pig iron in Utah at reasonably low costs had been borne out. And it then stated "Just how soon we will reach that stage when we will begin to liquidate upon the $25,000 agreement with your father is dependent upon the volume of business we do, and the payment of advances we have made to the operating company. You may rest assured, however, that we are keeping the agreement with your father in mind, and that it will be reached at the proper time." The defendants filed separate motions to dismiss the action on the ground that the complaint failed to state a claim or facts upon which relief could be granted. The motions were sustained; judgment was entered dismissing the action; and plaintiffs appealed. For convenience, continued reference will be made to the parties as plaintiffs and defendants respectively, rather than appellants and appellees.

The first contention urged by plaintiffs is that the complaint stated a cause of action against the defendant Milner Corporation, and that the court erred in dismissing the action as against that defendant. It is argued in support of the contention that the original undertaking entered into in 1909 was a promoters contract; that it was accepted and adopted by the defendant Milner Corporation; and that therefore such defendant is liable. It is well settled law in Utah that promoters or those contemplating the organization of a corporation do not have power to enter into a contract with binding effect upon the corporation after it is organized. They lack that power, either as agents or otherwise. But promoters or those contemplating the formation of a corporation may make a contract in furtherance of the corporation and for its benefit; and if the corporation after it comes into existence accepts or adopts the contract, it thereupon becomes the contract of the corporation and may be enforced against it. Wall v. Niagara Mining & Smelting Co., 20 Utah 474, 59 P. 399; Tanner v. Sinaloa Land & Fruit Co., 43 Utah 14, 134 P. 586; Murry v. Monter, 90 Utah 105, 60 P.2d 960; Kahn v. Perry Zolezzi, Inc., Utah, 226 P.2d 118.

Under the law of Utah, a contract made by and with promoters which is entended to inure to the benefit of a corporation about to be organized is to be regarded as an open offer which the corporation may after its formation accept or adopt, as it chooses. And if it does in the exercise of its own judgment accept or adopt the contract and retain the benefits of it, it cannot reject liability under it. Wall v. Niagara Mining & Smelting Co., supra. In the absence of acceptance or adoption of a contract of that kind, the corporation is not liable even though it may have been entered into with the understanding that the corporation would be bound. Tanner v. Sinaloa Land & Fruit Co., supra. But it is not necessary that acceptance or adoption of a contract of that kind be by express action of the corporation entered in the minutes of the directors, or that it be effectuated in any other like formal manner. It may be inferred from acts, conduct, and acquiescence. Wall v. Niagara Mining & Smelting Co., supra.

The original undertaking was an agreement in the nature of a promoters contract. And from what has been said it is manifest that defendant Milner Corporation is not bound by it to make payment of the $25,000 unless it was accepted or adopted in an effective manner. Assuming for the moment that Milner, in his capacity as president of the corporation, was clothed with authority to act for it in accepting and adopting the undertaking, there can be little doubt that the letter written in 1924 constituted an effective acceptance and adoption. The letter referred at the beginning to the undertaking to pay $25,000 from the sale of the property or from profits derived from its operation. It stated in clear terms that the time when liquidation of the obligation would begin was dependent upon the volume of business done and the payment of advances made to an operating company. And it further stated without condition or qualification that the agreement was being kept in mind and would be reached at the proper time. Plainly, the last statement was intended to mean that the obligation would be reached for payment at the proper time. The letter constituted recognition of the original undertaking as an obligation on the part of the corporation to pay the amount specified in the contract at the proper time. And in the circumstances, that recognition amounted to an effective acceptance and adoption of the undertaking.

It was not alleged in the complaint that the directors of the corporation by formal...