Lenhart v. Lenhart Wagon Co.
| Decision Date | 25 April 1941 |
| Docket Number | No. 32645.,32645. |
| Citation | 210 Minn. 164,298 N.W. 37 |
| Parties | LENHART et al. v. LENHART WAGON CO. et al. |
| Court | Minnesota Supreme Court |
Appeal from District Court, Hennepin County; Frank E. Reed, Judge.
Action by Frank F. Lenhart against the Lenhart Wagon Company with service on Roy F. Lenhart, to recover back salary. A default judgment was taken against the Lenhart Wagon Co. Alfred A. Lenhart as a minority stockholder of the Lenhart Wagon Co., on his own behalf and on behalf of all other stockholders and creditors of the company, filed a motion to set aside the default judgment because of alleged fraud. Frank E. Lenhart having died in the meanwhile, Johanna Lenhart and Roy F. Lenhart, as executors of the last will of Frank E. Lenhart, deceased, were substituted in his place. From an order denying the motion of Alfred A. Lenhart, he and the Lenhart Wagon Company appeal.
Order reversed with directions.
George C. Stiles and F. J. Donahue, both of Minneapolis, for appellants.
Christensen & Johnson and I. K. Lewis, all of Minneapolis, for Johanna Lenhart.
I. K. Lewis, of Minneapolis, for Lenhart Wagon Co.
Lew C. Church, of Minneapolis (Lewis, Grannis & Underhill, of Duluth, of counsel), for Roy F. Lenhart.
This appeal is from an order denying a motion of a minority stockholder, made on behalf of a corporation, to set aside for fraud a default judgment obtained against it by its principal director, stockholder and officer.
On demurrer to the moving papers these facts appear: The Lenhart Wagon Company, a family corporation, in 1930 owed its president, Frank F. Lenhart, director and chief stockholder, $18,000 for back salary. Through the issuance of 180 shares of stock, this indebtedness was compromised. In addition to the father, participating in this settlement were Roy F. Lenhart, a son who was a director-stockholder serving as treasurer, and Alfred A. Lenhart (movant here), another son who was a director-stockholder serving as secretary and vice-president. Thereafter, Alfred left the corporation as a result of misunderstandings with his father. Frank H. Lenhart, another son, was qualified as director and superseded Alfred as secretary, Roy becoming vice-president and treasurer.
In 1936 an action was commenced by the father against the corporation for this back salary with service upon Roy. For want of an answer, a default judgment for $24,350.25 was taken against the corporation, representing salary and interest. Execution followed and the assets of the corporation, real and personal, were sold in partial satisfaction of the judgment, the father buying in at the sale.
The moving papers further aver that the father and Roy, acting in pursuance of a conspiracy to defraud the corporation, fraudulently failed to assert valid defenses to the action, i. e. the previous compromise and the statute of limitations, and further, that they failed to notify anyone else financially or beneficially interested. Continuing with averments that the property had a value far in excess of what it brought on execution, Alfred, on behalf of the corporation, seeks to set aside the default judgment with leave to answer the pretended cause of action of the father. Further averred is the death of Frank F. Lenhart, the father, on September 6, 1939, testate. Alfred was specifically disinherited. All his property was left to his wife and his other sons and daughters. The wife, Johanna, and Roy were named executors. The executors and the corporation, through resolution, unite their efforts to resist the motion of Alfred. It was in connection with the investigation of the father's will in January, 1940, that Alfred was first apprised of the manipulations above related.
The motion was made under the authority conferred by 2 Mason Minn.St. 1927, § 9405; Geisberg v. O'Laughlin, 88 Minn. 431, 93 N.W. 310; Clark v. Marvin, 140 Minn. 285, 167 N.W. 1029. So far as material, § 9405 provides: "Any judgment obtained in a court of record by means of * * * any fraudulent act, practice, or representation of the prevailing party, may be set aside in an action brought for that purpose by the aggrieved party * * * within three years after the discovery by him of such * * * fraud."
In denying the motion the trial court concluded that from facts appearing on the books, the corporation was charged with notice of the fraud "which resulted in the failure to interpose an answer" and all other steps in its consummation. Since the fraud had been discovered more than three years before the motion, the corporation was barred from challenging the judgment.
Questions presented by this appeal are (1) was this judgment obtained by a fraudulent act or practice of the prevailing party (2) who was the "aggrieved party" within the statute; (3) when was there a discovery of the fraud; and (4) to what extent does the doctrine of imputed notice apply to these facts?
1. Doubtless there were sufficient averments of fraud to bring the case within the condemnation of the statute. The assertion by the father of a claim, against a prostrate corporation, already satisfied and largely barred by limitations, in pursuance of a conspiracy to defraud adverse interests, was an "act or omission * * * that prevented defendant from acquiring notice of the action, from interposing a defense, and litigating the case on the merits." Clark v. Marvin, 140 Minn. 285, 288, 167 N.W. 1029, 1030; In re Estate of Jordan, 199 Minn. 53, 60, 271 N.W. 104; In re Woodworth's Estate, 207 Minn. 563, 568, 292 N.W. 192, 194.
2. Where a stockholder is asserting a right which, analytically speaking, belongs to a corporation, who then is the "aggrieved party" within § 9405?
Statutory provisions like 2 Mason Minn. St.1927, § 9191(6), that a cause of action for fraud shall accrue with the "discovery by the aggrieved party of the facts constituting the fraud," have furnished the basis for most of the judicial consideration of this problem. In result, the cases are fairly unanimous that statutes requiring a "discovery" will not be so applied or construed as to defeat a derivative suit by the stockholder. The effect of several decisions is to regard the stockholder proceeding on behalf of the corporation as the "aggrieved party" whose knowledge or discovery of the facts is essential. Morgan v. King, 27 Colo. 539, 63 P. 416; Johnson v. United Railways, 243 Mo. 278, 147 S.W. 1077; Mencher v. Richards, 256 App.Div. 280, 9 N.Y.S.2d 990, 996, concurrence of Davis, J.; Bilby v. Morton, 119 Okl. 15, 247 P. 384; Brooks v. Zorn, Tex.Civ.App., 24 S.W.2d 742; Conrads v. Kasch, Tex. Civ.App., 26 S.W.2d 732. Contrariwise, other decisions say that the laches of the particular stockholder bringing suit does not reflect to the disadvantage of other stockholders. Whitten v. Dabney, 171 Cal. 621, 154 P. 312. But even California recognizes that since it is the corporation which has suffered the wrong, the real inquiry in this type of case goes to the chargeability of the corporation with knowledge of the fraud. See Earl v. Lofquist, 135 Cal.App. 373, 376, 27 P.2d 416; Fleishhacker v. Blum, 9 Cir., 109 F.2d 543, 548. The New York statute of limitations contains the word "plaintiff" in a usage similar to "aggrieved party" in § 9191(6). The court in Mencher v. Richards, 256 App.Div. 280, 9 N.Y.S.2d 990, concluded that "plaintiff" in a derivative suit referred to the corporation. Under that view, whether the particular stockholder is barred by laches from asserting a right on behalf of the corporation may well be immaterial. Joy v. Fort Worth Compress Co., 24 Tex.Civ. App. 94, 58 S.W. 173; Goldberg v. Berry, 231 App.Div. 165, 247 N.Y.S. 69.
Those cases which regard the corporation as the "aggrieved party" are consistent with principle and accord with our own views. Since Stewart v. Duncan, 40 Minn. 410, 42 N.W. 89, the rule has been established that only those who have participated in the proceedings so as to become parties can regard themselves as "aggrieved" within § 9405. This rule has been limited to in personam actions. Murray v. Calkins, 191 Minn. 460, 466, 254 N.W. 605; Cf. Murray v. Calkins, 186 Minn. 192, 200, 242 N.W. 706, 709. Here certainly, the corporation, as defendant in the action by the father, was the "aggrieved party" within the statute. Furthermore, the whole theory of this proceeding is that Alfred is proceeding on behalf of the corporation to rectify a wrong done to it. See Fleishhacker v. Blum, 9 Cir., 109 F.2d 543, 548; Cf. Keough v. St. Paul Milk Co., 205 Minn. 96, 123, 285 N.W. 809.
3. It then becomes necessary to consider the circumstances which will charge the corporation with such knowledge of the facts of fraud as will constitute a "discovery" within the statute. Particularly is this necessary to establish because...
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