Leland v. Ford

• Decision Date: 01 February 1929
• Docket Number: No. 33.,33.
• Citation: 245 Mich. 599,223 N.W. 218
• Parties: LELAND et al. v. FORD et al.
• Court: Michigan Supreme Court

245 Mich. 599

223 N.W. 218

LELAND et al.

v.FORD et al.

No. 33.

Supreme Court of Michigan.

Feb. 1, 1929.

Appeal from Circuit Court, Oakland County, in Chancery; Frank L. Covert, Judge.

Suit by Wilfred C. Leland and others against Henry Ford and others. From an order overruling defendant's motion to dismiss the bill, defendants appeal. Bill dismissed, and case remanded, with leave to plaintiffs to apply for permission to file an amended bill.

From the opinion of the trial judge, the following résumé of the facts alleged in the bill is taken:

‘The matter turns largely upon the construction to be placed upon the contract, which is the basis of the action, as set up in the bill of complaint. It is alleged that the Lelands were the promoters of a certain corporation known as the Lincoln Motor Company, organized in 1920 for the manufacture of high-grade automobiles. Class B stock was issued of no par value and paid for in property to the extent of $1,500,000, and class A, preferred stock of the par value of $50, most of which was sold approximately at par. The corporation acquired a modern plant, fully equipped, with a highly skilled body of workmen and a very efficient selling organization. The Lelands had been for many years engaged in the manufacture of such cars and had acquired a high reputation for integrity, business ability and technical skill in designing and manufacturing cars of this type.

‘It is alleged that, because of the aforesaid reputation of the Lelands, many people had invested in class A stock of the corporation and other persons had extended credit to the corporation to a very considerable extent.

‘Later on, because of some financial depression a majority of the stockholders deemed it advisable to affect the reorganization of the business and to that end caused a receiver to be appointed by the federal court for the Eastern district of Michigan. The Lelands and some of the other stockholders were opposed to such reorganization, deeming it unnecessary, and announced that they proposed to procure additional capital and reorganize the company so that the stockholders and creditors of the corporation would be protected against loss. That in order to carry out such a plan, a committee was appointed by the stockholders to protect their interests.

‘It is the further claim of the plaintiffs that the value of the assets of the corporation consisted to a very large extent of the organization of the selling force, the manufacturing personnel, the ability and skill of the Lelands and the fact it was a going concern; that without these intangible assets, the property would be worth comparatively little.

‘The Lelands, in an endeavor to protect the interests of various stockholders and creditors, approached the defendants with a view of interesting them in the purchase of the property, so that an amount might be realized from the sale thereof, sufficient to pay the creditors and stockholders for their investment and thereby prevent loss to any of the interested parties. They represented to the defendants that the value of the assets of the corporation would be greatly enhanced if they, the Lelands, would assist in the reorganization and continue as directors and officers of the new corporation to be organized to take over the assets of the one then in the hands of the receiver, and in pursuance of such representations, agreed to join a new corporation as executives and with their skill and business efficiency and the retention of their selling force and manufacturing personnel, aid in every way to make the newcorporation a success, and that they further would aid in procuring an early sale by the receiver and thus avoid any material lapse in the business, so that the defendants would take it over practically as a going concern.

‘The value of this transaction to the defendants would be the acquiring of a very valuable plant, the benefit of the skill and ability of the Lelands as designers and manufacturers of high-grade automobiles, their manufacturing and sales force, fully organized, all of which would make the property very much more valuable than though it were a defunct organization.

‘They proposed to the defendants that, in consideration of acquiring this valuable property, the defendants should purchase the property at the receiver's sale, paying such price for the tangible assets as was reasonable and fair and that in addition thereto they were to pay all the creditors and refund to class B stockholders the amount invested by them, i. e., $1,500,000, and further to pay to class A stockholders (except such stock as might be in the hands of brokers and held by other persons who had bought the same at $3 or less per share), the full amount of their investment in such stock; that, if such proposition was accepted, the Lelands would make no further effort to interest other capital and would urge the speedy sale of the assets of the corporation.

‘The defendants, after a careful investigation of the proposition and going over the books of the corporation, accepted the offer, and thereupon the parties waited upon the federal judge and informed him of the proposed sale and made no further efforts to interest additional capital. That subsequently the sale was held, the defendants buying the property for $8,000,000. The new corporation was then formed, in pursuance of the agreement, the Lelands participating in the new organization, becoming directors and officers of the same and conducting business as theretofore. The defendants, in addition to paying the purchase price, also reimbursed the creditors and some of the stockholders.’

The bill is filed by the Lelands, with whom are joined probably 2,000 other stockholders of the Lincoln Motor Company, for whom it is alleged the Lelands acted, and for whom they were agents and trustees. The defendants filed a motion to dismiss the bill. Briefly stated and without elaboration of detail, the grounds of the motion were that the agreement as set up in the bill was invalid and unenforceable (1) because against public policy in that it was made for the advantage and benefit of the Lelands especially and of a part only of the stockholders and excluded other stockholders from its benefits; (2) that it was within the statute of frauds in that defendants' promise, if made, was one to answer for the debt, default or misdoings of another (section 11981, C. L. 1915); and (3) that it was a contract to stifle bidding at a judicial sale. The trial judge overruled the motion to dismiss, and the case is before us on this appeal from his order in so doing.

Argued before the Entire Bench.

Sharpe, Wiest, and Clark, JJ., dissenting. Clifford B. Longley and Wallace R. Middleton, both of Detroit (Louis J. Colombo, of Detroit, of counsel), for appellants.

Kenneth M. Stevens and Wm. Henry Gallagher, both of Detroit, for appellees.

FELLOWS, J. (after stating the facts as above).

1. To my mind the serious question presented on this record is involved in the first ground urged. The bill alleges in substance that the Fords agreed that the Lelands should be the managers of the new corporation and should be elected to its board of directors. It also alleges that the agreement, which was an oral one, contemplated a settlement with the Lelands and stockholders other than brokers, others who had bought stock at $3 per share or less, and other than those who purchased stock after the appointment of the receiver. It was not alleged in the bill that there were stockholders of these classes, and for this reason the trial judge declined to consider this question. I think the question of the validity of the contract which is sought to be enforced is before us and should be decided. The contract upon its face excluded certain classes of stockholders, who for want of a better name we will style minority stockholders, if there were no such stockholders, there was no necessity for considering them in the agreement, and if there were none of such classes, plaintiff should have so stated in their bill. If the agreement by the Fords to vote for the Lelands for directors and managers of the corporation was invalid, and the agreement contemplating the exclusion of minority stockholders was a fraud upon them and rendered the contract invalid, and defendants may be heard in a court of equity to assert such invalidity, it should be so held upon this appeal. I shall consider the points separately.

(a) The bill alleges that the Lelands were president and vice president, respectively, of the old corporation, and that they were to have the management and control of the new company and were to have important and probably lucrative positions in it. It alleges that, after it was organized, they were given such positions, but were later relieved of them. Of this they complain, and it is patent that they construe the contract to require their contrinued employment, and their continued election to their respective offices.

In West v. Camden, 135 U. S. 507, 10 S. Ct. 838, 34 L. Ed. 254, it was held (quoting from the syllabus): ‘An agreement by a director of a corporation to keep another person permanently in place as an officer of the corporation, is void as against public policy, even though there was not to be any direct private gain to the promisor.’ This case was followed and exhaustively quoted from in Scripps v. Sweeney, 160 Mich. 148, 125 N. W. 72. In Wilbur v. Stoepel, 82 Mich. 344, 46 N. W. 724,21 Am. St. Rep. 568, the same rule was recognized, and it was held that the contract was not a severable one, and the invalid provision permeated the whole of it, and rendered it unenforceable. There is no allegation in the bill that it was agreed that the reorganized corporation was to be a close corporation. It had to have more than two stockholders. Act 84, P. A. 1921, § 1. It is alleged that, as organized, the defendants Ford own all its stock, but that one share is in the name of defendant Craig for...