Mansfield Hardwood Lumber Company v. Johnson

• Decision Date: 20 February 1959
• Docket Number: No. 17299.,17299.
• Citation: 263 F.2d 748
• Parties: MANSFIELD HARDWOOD LUMBER COMPANY, Appellant, v. Hattie A. JOHNSON et al., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

263 F.2d 748 (1959)

MANSFIELD HARDWOOD LUMBER COMPANY, Appellant, v. Hattie A. JOHNSON et al., Appellee.

No. 17299.

United States Court of Appeals Fifth Circuit.

February 20, 1959.

COPYRIGHT MATERIAL OMITTED

Benjamin C. King, Charles D. Egan, Sidney M. Cook, Frank M. Cook, Shreveport, La., for appellant.

John M. Madison, Vernon W. Woods, Shreveport, La., J. W. Patton, Jr., Lewisville, Ark., Ned A. Stewart, Texarkana, Ark., for appellee.

Before RIVES, TUTTLE, and BROWN, Circuit Judges.

RIVES, Circuit Judge.

This appeal is from a final decree ordering a rescission of sales of corporate stock made in 1953, granting plaintiffs a pro rata portion of assets realized by a liquidation of defendant corporation, ordering an accounting by defendant, and making permanent a temporary injunction, already issued.

The opinion and order granting the temporary injunction were reported at D.C., 143 F.Supp. 826. This order was affirmed at 5 Cir., 242 F.2d 45. This case was reported on the merits at 159 F.Supp. 104 in a twenty-seven page opinion where District Judge Benjamin C. Dawkins, Jr., preludes:

"The crux of the case is that, had it not been for this suit, the majority — six people who proceeded to sell and liquidate the corporate assets immediately after the minority stock was bought, notwithstanding promises that this would not be done — would have reaped a profit for themselves, before taxes, of more than $3,400,000, at the expense of the minority, and in addition to nearly $6,000,000 rightly to be received by them in the liquidation for their own stock.

"All persons involved are educated, cultured, refined. They have enjoyed, and still occupy, positions of prestige in their home communities. Until this tragic controversy arose, they appeared to be fairly congenial, at least on the surface.

"Now, regrettably, they are publicly and irreconcilably divided into two warring camps. One group — the former minority stockholders — is convinced that its members are victims of deliberate fraud perpetrated upon them by the majority. For their part, the majority resists and resents, with equal fervor, the charges made against them.

"While the suit is one which ought not to have been necessary, and clearly should have been settled, the depth of feeling is such that compromise has not even been discussed. Consequently, this litigation must run its bitter course, for better or for worse.

* * * * * *

"After a full trial on the merits, lasting more than a week; having heard all of the parties and their witnesses; having considered the lengthy briefs (totaling approximately 300 pages), and the authorities cited; having studied the transcript of testimony and exhibits (some 1255 pages); having heard the oral arguments of respective counsel, lasting nearly three hours; and having reached our findings of fact and conclusions of law, we now set them down for the record. They represent to us the only result which justly could come from the evidence before us.

"While there are some facts not in dispute, there are many more which are hotly controverted, especially as to what was said or not said, done or not done, known or not known, with regard to the purchase of plaintiffs\' stock. In stating the facts we have found, our statements are based upon what we believe to be the truth, notwithstanding some testimony to the contrary. We also have drawn inferences, which we believe to be reasonable and correct, from the facts and circumstances in evidence." 159 F.Supp. at pages 106, 107-108.

This case concerns the purchase of minority shares from the plaintiffs as treasury stock by the defendant-corporation and a subsequent liquidation of the corporation, the transaction alleged (1) to have been fraudulent upon the interest of the plaintiffs, or (2) to have unjustly enriched the defendant, or (3) to have had no "serious" consideration under Art. 2464, L.S.A.-Civil Code.¹

The gist of the complaint is in paragraph 28 thereof, which states:

"28. Plaintiffs aver that A. S. Johnson and Brown McCullough (acting in their capacities as President and Vice President, respectively, of Defendant, and who actually dominated the business policies of the Company and without securing the prior approval of the directors or stockholders of Defendant) conceived a fraudulent scheme acquiesced in by those stockholders whom they controlled and constituting a majority of the outstanding stock, whereby they conspired to cause Mansfield Hardwood Lumber Company to buy as treasury stock all the stock of the remaining stockholders for an inadequate price and then to cause the company to sell its assets and distribute the proceeds upon liquidation at a tremendous profit to the conspiring group. The plan or artifice of the scheme was to cause Mansfield Hardwood Lumber Company to falsely notify the minority stockholders that dividend payments would be virtually discontinued for a period of the next 15 to 20 years, this to be the consequence of the company\'s entering upon a long range plan of extensive reforestation and improvement of its assets. The company was to negotiate for and purchase the stock at a price approximating its value as reflected by the books of the company, which value the conspirators knew to be grossly understated. The company was to falsely deny any intention of disposing of its assets and liquidating. Plaintiffs aver that the representations made to each of them in the purchase of their stock were in furtherance of this fraudulent scheme."

The intricate facts are set out fully in the opinion below at 159 F.Supp. 104, 106-117, and it would be redundant for us to reiterate them here. However, for the purpose of this opinion, we must attempt a brief summary.

The sole defendant is a corporation formed in 1901 by two men, the predecessors of the parties in interest here. The corporation engaged in the business of growing timber and sawmilling and by 1955 had acquired extensive holdings — some 93,000 acres of timberlands, two sawmills, several lumber companies, and a small railroad. Out of the 4,836 shares of stock outstanding in 1953 (par value of $100 per share), the defendant's three officers and their immediate families owned some 2,751 shares. These three officers — A. S. (Bud) Johnson, Brown McCullough, and T. W. M. Long — and their families will be referred to as the majority stockholders. The remaining shares were spread out among the plaintiffs and others, the two largest holders being plaintiffs, Mrs. Hattie A. Johnson and Mrs. Jeanette Johnson Jennette. The corporation began purchasing the minority shares in the Spring of 1953 for $350 per share and made its last purchase from Mrs. Johnson and Mrs. Jennette in the Fall of 1953 for $400 per share. The defendant purchased a total of 1,567 shares. There was some evidence that the fair market value of the stock, considering all elements, was about $320 per share.

As early as 1952, the officers of the corporation considered the possibility of liquidating the corporation but testified that this possibility was dismissed because of the large tax consequences. In the Spring of 1954, some negotiations for a liquidation sale were resumed in earnest; and, after receiving word that Sections 331(a)(1) and 337(a) of the 1954 Internal Revenue Code, 26 U.S.C.A. §§ 331(a) (1), 337(a) would become effective on August 16, 1954, which would abolish the double capital gains tax in liquidation, that is on both the corporation and the stockholders, the officers actively solicited a sale to several purchasers. In July 1955, Robert Gair Company, Inc. had agreed to purchase all the assets of defendant, excepting certain mineral rights, for $9,531,630.34. This agreement was approved by defendant's remaining stockholders on September 26, 1955, and the sale to Gair was consummated on May 25, 1956.

As the district court found, had the plaintiffs and other minority sellers not sold their stock, it would have been worth about $2,068 per share on liquidation or over five times the amount received. The majority stockholders thus profited by some $3,458,007 from the treasury purchases.

There are two outstanding facets in this case: (1) the shortness of the time interval between the purchase of the minority shares as treasury stock and the subsequent liquidation of the corporation, and (2) the great difference between the amount paid per share for the repurchased stock ($350 to $400) and its worth on liquidation ($2,068).

Thirty-four specifications of error are assigned by appellant. Some merit consideration and some are purely frivolous. In discussing only those which we think dispositive of the case, we again refer for a more complete statement of the facts to the opinion below.

Great emphasis is placed on the failure to join as indispensable parties the officers as wrongdoers, the liquidators, the stockholders after adoption of liquidation, the court trustee (a local bank) holding the remaining liquidated assets not yet disbursed, and the stockholders as owners of the assets held by the trustee. To join any of these would, of course, defeat diversity jurisdiction. On the prior appeal, from the granting of the temporary injunction, Chief Judge Hutcheson stated for this Court at 242 F.2d 45, 47:

"* * * and agreeing with the district judge that the case should not have been dismissed for want of indispensable parties,4 * * *.

"4. Hudson v. Newell, 5 Cir., 172 F.2d 848, at page 850, Id., 5 Cir., 174 F.2d 546; Mackintosh v. Marks, 5 Cir., 225 F.2d 211. Cf. Christian v. Texas Gas Co., D.C., 14 F.R.D. 80, 81."

Without deciding whether this prior adjudication of jurisdiction is the law of the case,² we note that, under the circumstances of this case, if the plaintiffs have stated a claim against the defendant corporation upon which relief can be granted, the failure to join the corporate officers and others as party-defendants is not fatal, for

"The power of a court of equity so to mold its decree as to do complete

...