Knudsen v. Burdett

• Decision Date: 11 October 1939
• Docket Number: 8215
• Citation: 287 N.W. 673,67 S.D. 20
• Parties: CARL O. KNUDSEN, et al., Respondents, v. W.J. BURDETT, et al., Appellants.
• Court: South Dakota Supreme Court

67 S.D. 20

287 N.W. 673

CARL O. KNUDSEN, et al., Respondents, v. W.J. BURDETT, et al.,

Appellants.

South Dakota Supreme Court

Appeal from Circuit Court, Kingsbury County, SD

Hon. Vern G. Wohlheter, Judge

#8215—Reversed

C.R. Trygstad, George M. Schlosser, Brookings, SD

Attorneys for Appellants.

Louis H. Smith, Sioux Falls, SD

Attorney for Respondents.

Opinion Filed Oct 11, 1939

RUDOLPH, Judge.

The plaintiffs in this action are stockholders in the Sunshine Oil Company, and seek to have set aside the sale of certain assets of that company to the defendants.

The defendants, J.F. Haxton and George P. Reed, are directors of the Sunshine Oil Company, and the trial court found that these two directors and the other defendants conspired to the end that the sale of these corporation assets was made to the defendants at a grossly inadequate and unfair price, and in fraud of the corporation of which the defendants, Haxton and Reed, were directors. It appears from the evidence that neither Haxton nor Reed were present at the meeting of the directors when the sale of these assets, which consisted of stock in another corporation of which Haxton and Reed were also directors, was authorized. However, both of these directors had been present at a directors’ meeting held just a few days before this sale was authorized, and at which meeting the sale of this stock had been discussed. This stock which was sold to the defendants was stock in the Kingsbury County Holding Corporation, which was a company organized for the purpose of leasing and purchasing land with the object of prospecting for and developing any oil or mineral resource thereon. Approximately three months before the sale of this stock, the Kingsbury County Holding Corporation had commenced receiving substantial royalties from oil wells which had been developed on its property and of which fact all of the defendants were advised. The trial court found and no error is predicated thereon or upon the receipt of the evidence upon which the finding is based, that the value of this stock at the time of the sale was “from six to ten dollars per share.” The defendants paid one dollar per share.

We believe the evidence is sufficient to support the court’s finding that the defendants conspired to bring about the sale of this stock in the exact manner in which the sale was consummated. True, the offer to buy this stock was made by the defendant, Burdett, but it was made at a time when he was in Texas with the two defendants, Haxton and Reed, and on the same day as the meeting attended by Haxton and Reed where the sale of this stock was discussed. It also appears that at the time Burdett made the offer to buy this stock he was entirely incapable financially of making the payment required, and this payment was in fact made by all defendants. Within a very few days after the payment was made, the stock was transferred on the books of the company to the defendants substantially in accordance with the payments made by each. In the light of these facts, and other circumstances disclosed by the record which are unnecessary to relate, we believe the trial court was fully justified in disbelieving defendants’ claim that this was a sale by the corporation to Burdett in which the other defendants were not to participate and in which they had no interest. Giving effect to the findings of trial court and the evidence upon which they are based, we must consider this sale by the corporation as a sale in which its two director-defendants were interested and from which they benefitted.

Every sale by a corporation to its officers is not subject to being set aside by the corporation or its stockholders. However, a sale by a corporation to its officer will be set aside by a court of equity if obtained by fraud, or by taking unfair advantage of the corporation. Troy Mining Co. v. White, 42 LRA 549. The rule is stated in 2 Thompson on Corporations, Third Edition, page 792, as follows:

“The fact that, when a director is dealing with the corporation, the latter is represented by other directors or officers, will not permit him to deal unfairly or to defraud the corporation if such transactions are not open, fair, and free from all suspicion of fraud, the corporation or its stockholders may have the contract set aside; and a court in determining whether the transaction was free from fraud will subject it to the most rigid scrutiny.”

There is the further rule, which is without dispute, that is, that the burden is always upon the directors in transactions of the type here involved to show that the transaction was fair, in good faith, open, and above board. Chipola Valley Realty Co. v. Griffin, 94 Fla. 1151, 115 So. 541; Schemmel v. Hill, 91 Ind. App. 373, 169 N.E. 678; Hoyt v. Hampe, 206 Iowa 206, 220 N.W. 45; Witter v. Le Veque, 244 Mich. 83, 221 N.W. 131; Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620; Hine v. Lausterer, 135 Misc. 397, 238 NYS 276; Green River Mfg. Co. v. Bell, 193 NC 367, 137 S.E. 132; Nicholson v. Kingery, 37 Wyo. 299, 261 P. 122. See, also, cases cited in 2 Thompson on Corporations, Third Edition, page 815, note 96.

Applying these well established rules to the facts before us we must hold, first, that it was the duty of these two defendant-directors to disclose to the other directors everything they knew regarding the value of this Kingsbury County Holding Corporation stock; and, second, the burden was upon these defendants to show that such disclosure was made. The defendants have failed to meet this burden. Nowhere in the record does it appear that the directors which authorized this sale were advised of the royalties being received by the Kingsbury County Holding Corporation, or the fact that oil was being produced upon its property. The burden being upon defendants, and they having failed to meet this burden, we must treat the case, so far as the facts are concerned, precisely as though it were established that defendant-directors had failed to make the disclosure. A very similar situation, with the exception that a sale by directors to the corporation was involved instead of a purchase, was before the Idaho court in the case of W.G. Jenkins & Co. v. Standrod, 46 Idaho 614, 269 P. 586, 588. We quote from the opinion in that case:

“As directors of the plaintiff bank, the defendants bore to it a fiduciary relationship, and acted as trustees of the property...