Marchant v. National Reserve Co. of America

• Decision Date: 12 May 1943
• Docket Number: 6494
• Court: Utah Supreme Court
• Parties: MARCHANT et al. v. NATIONAL RESERVE CO. OF AMERICA, et al

137 P.2d 331

103 Utah 530

MARCHANT et al. v. NATIONAL RESERVE CO. OF AMERICA, et al

No. 6494

Supreme Court of Utah

May 12, 1943

Rehearing denied July 23, 1943.

Appeal from District Court, Third District, Salt Lake County; J Allan Crockett, Judge.

Action by A. G. Marchant and others against National Reserve Company of America and others to recover certain property or the value thereof which defendant Thomas McJilton had acquired at a purchase of the assets of the National Building and Loan Association at a receiver's sale, wherein J. A. Malia, as receiver of National Reserve Company of America was cross-complainant. Judgment for defendant McJilton, and plaintiffs and cross-complainant appeal.

Affirmed.

E. A Walton and R. Leslie Hedrick, of Salt Lake City, for plaintiffs and appellants.

Ingebretsen, Ray, Rawlins & Christensen, Brigham E. Roberts, Wood R. Worsley, and Irvine, Skeen & Thurman, all of Salt Lake City, for defendants and respondents.

Grant Macfarlane, of Salt Lake City, for cross-complainant and appellant.

LARSON, Justice. WOLFE, C. J., and McDONOUGH, and MOFFAT, JJ., and GEORGE A. FAUST, District Judge, concur. PRATT, J., on leave of absence.

OPINION

LARSON, Justice.

This action was brought by plaintiffs as stockholders of defendant, National Reserve Company of America, a corporation, hereinafter called the Reserve Company, against the company itself, J. A. Malia, its receiver, the officers of the company, and Thomas McJilton, as defendants. The receiver, by cross-complaint, and certain officers of the company, by statements into the record at the beginning of the trial became virtually co-plaintiffs. Basically their interest in the action is the same as the parties captioned as plaintiffs. The real situation is that the Reserve Company, as a stockholder in the National Building and Loan Association, a Nevada corporation, hereinafter called the Nevada Company, was suing defendant McJilton, seeking to recover certain property, or the value thereof, which McJilton had acquired in a purchase of the assets of the Nevada Company, at a receiver's sale. Judgment for defendant McJilton; the plaintiffs and cross-complainant, Malia, appeal.

The Reserve Company was organized in July, 1930, as a holding company for the purpose of holding and exercising operative control of several subsidiary building and loan associations, including the Nevada Company; the National Building and Loan Association of Utah, hereinafter called the Utah Company; and the National Building and Loan Association of New Mexico, hereinafter called the New Mexico Company. The common stock of these subsidiaries has been at all times owned or controlled by the Reserve Company. In September, 1933, the Utah State Bank Commissioner took over the Utah Company as insolvent, and in the District Court of Salt Lake County, became its receiver. In April, 1937, D. G. LaRue, Bank Commissioner of Nevada, in the Nevada courts, took over the Nevada Company, as receiver for liquidation, because the company was too small to obtain Federal insurance, and could not operate safely. In July of that year as receiver, he sold some of the assets of the Nevada Company to defendant, McJilton, which sale was confirmed by the Nevada court, and the company's business wound up. In May, 1937, receivership proceedings against the Reserve Company were commenced in the Utah courts, and defendant and cross-complainant, J. A. Malia, was appointed receiver. Liquidation proceedings of the Reserve Company were pending in court at the time of the trial of this action.

After La Rue, Nevada Banking Commissioner, took over the Nevada Company in April, 1937, he filed with the court an inventory of its assets and liabilities (copy of which was received in evidence in this case) and offered all the assets of the company for sale. The bid of defendant McJilton was accepted by the receiver and all the assets of the company, except real estate in New Mexico and cash in the bank were sold to him, subject to approval of the court. The assets of the Nevada Company sold by the receiver to McJilton were appraised by the receiver at $ 25,318.83. The sale price was $ 26,156.94, or $ 838.11 above the receiver's appraisal. Included in these assets were two notes of the Reserve Company for $ 12,061.91, and $ 8000.00, secured by certificates in the Utah Company of a book value of $ 41,562.68, and appraised by the receiver at $ 5,500.00. At 11c appraisal the certificates would value $ 4,571.89; at the 40c value claimed by appellants they would value $ 16,624.80. The two notes totalled $ 20,061.91, plus interest, or a deficit according to the receiver's appraisal of $ 15,490.02, plus interest; and according to the value claimed by plaintiffs, a deficit of $ 3,437.11, plus interest. It is conceded by plaintiffs that the security did not exceed in value the amount of the notes, and no point is raised as to this item.

There was a third note of the Reserve Company for $ 3,129.93, secured by certificates of the Nevada Company, valued by the receiver at par. The security actually realized the sum of $ 1,589.74 in excess of the note, which McJilton credited on other notes of the Reserve Company. We will refer again to this note later.

There was also a note for $ 12,900.00 signed by E. S. Walker, which note was given without consideration, for inter-office purposes, to account for such sum of money of the company sent to Salt Lake City to be used by Walker in purchasing for the Nevada Company certificates in the Utah Company. When the Nevada Company received the certificates in the Utah Company, the note became a nullity. Two factions, known as the "Diblee" and the "Layton" groups, were seeking control of the Utah Company, in a battle over reorganization. The Diblee group, who controlled the Reserve Company, and through it all the subsidiary companies, apparently operated through the Nevada Company to gain this control. A contract was finally entered into whereby the "Layton" group agreed to sell its holdings in the Utah Company, for an agreed cash price of about 32c on the dollar, and one-half of the receivership dividends, accruing on their block of certificates. The cash was paid, and the contract assigned by the Layton group to one Jenkins, who comes into the story later. Through the activities of Walker and one Rich, there was purchased from the Layton group and others, $ 55,944.19 book value of certificates in the Utah Company for about $ 18,000.00. To raise this money, the Nevada Company furnished the $ 12,900.00 represented in its inter-office practice by the Walker note, and the Reserve Company borrowed and advanced the balance, $ 5,200.00, pledging all the stock purchased to the bank for the $ 5,200.00 loan, which note and security finally came into the hands of Dr. E. A. Tripp, and will hereafter be referred to as the Tripp note. In making the $ 5,200.00 loan the Reserve Company, by resolution of its Board of Directors, disavowed any ownership or interest in the certificates, except as security for the money borrowed and advanced by it. Therefore, when the note held by Dr. Tripp was paid off by or for the Nevada Company, the Reserve Company had no interest in the stock, which was then the property of the Nevada Company. At the sale of the Nevada Company assets to McJilton, the receiver appraised these certificates in the Utah Company at 11c on the dollar, or $ 6,153.84, against which was the Tripp note, amounting, with interest, to $ 5,488.78, which McJilton paid off. According to the receiver's appraisal at the sale these certificates represented an equity in the Nevada Company of $ 665.06.

After the Nevada sale, Jenkins, as assignee of the Layton contract, filed suit in the Utah courts against McJilton, the Utah Company, J. A. Malia, as receiver of the Reserve Company, and Walker, claiming title to one-half of the $ 55,944.19 parcel of shares. McJilton in a cross-complaint, set up title in himself, Malia, with approval of the court in which the Reserve Company receivership proceedings were pending, in behalf of the Reserve Company waived all claims to, and disclaimed any interest in this parcel of stock. The suit was compromised with the approval of the court, giving Jenkins $ 9,300.00 book value shares, and title to the remaining shares was quieted in McJilton. Liquidating the properties and choses in action acquired by him at the Nevada sale in 1937 to time of trial of this action, McJilton realized $ 65,290.29, gross, or $ 28,641.17 over the price he paid. Against this, he claimed reimbursable expenditures in liquidating of $ 36,649.12 or a loss to him of $ 7,809.95.

Plaintiffs instituted this action against McJilton to set aside the Nevada sale for actual and constructive fraud, inadequacy of consideration and unconscionability, and in effect, to recover from McJilton the difference between what he paid for certain of the assets, and what he realized from them. Plaintiffs are not stockholders in the Nevada Company, but are stockholders in the Reserve Company, which was a stockholder in the Nevada Company, and make this suit in equity to enjoin McJilton from enjoying the benefits of his purchase, and to quiet title of the Reserve Company in certain stock in the Utah Company, and proceeds thereof which stock McJilton received at the Nevada sale. Plaintiffs contend that the assets of the Nevada Company were sold at an unconscionably low price, were in effect scuttled by collusion between McJilton, the officers of the company, and LaRue, the receiver, thereby perpetrating a fraud upon the stockholders of the Nevada Company, of which the Reserve Company was one. Plaintiffs are interested as stockholders in the Reserve Company, part of whose assets they claim were lost in the...