Marks v. Merrill Paper Mfg. Co.

• Decision Date: 07 January 1913
• Docket Number: 1,899.
• Citation: 203 F. 16
• Parties: MARKS et al. v. MERRILL PAPER CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

203 F. 16

MARKS et al. v. MERRILL PAPER CO. et al.

No. 1,899.

United States Court of Appeals, Seventh Circuit.

January 7, 1913

Appellants herein termed 'complainants,' minority stockholders in the Merrill Paper Manufacturing Company, herein termed the 'Merrill Company,' filed the present bill on December 6, 1907, against the two corporation defendants, the Merrill Company and the Grandfather Falls Company, and certain individual defendants, majority stockholders of the Merrill Company, and also stockholders of the Grandfather Falls Company, to have the transfer of the property of the Merrill Company to the Grandfather Falls Company of January 15, 1907, declared to be fraudulent and void and set aside, and that said Merrill Company be reinvested with title thereto, that an injunction restraining the Grandfather Falls Company from disposing of said property be granted, and that pending a hearing a receiver be appointed to conserve the property.

From the evidence it appears that the plant was operated by water power; that through some miscalculation this was found to be grossly inadequate (so much so that the plant could not produce a quarter of the pulp required); that it became necessary to purchase the greater part of the needed pulp and that continued operation of the plant would incur heavy loss. At that time the court found that its investment amounted to $444,000. Complainants' counsel assert that there was not to exceed $293,000 invested. This seems to accord with the November, 1905, trial balance, from which however, certain items were omitted. To provide adequate water power, the Merrill Company purchased the power site at Grandfather Falls for $62,500, and paid down $2,500 in February, 1906. Attempts were then made to raise means to pay the balance, which was drawing 6 per cent. interest. The stockholders were appealed to in vain, and this scheme was abandoned. Thereafter, certain of the largest stockholders of the Merrill Company organized the corporation defendant, the Grandfather Falls Company. This was on June 1, 1906, and its object, among others, was the developing of that water power. This company then proposed to the Merrill Company to buy its rights and interest in the Grandfather Falls site, and on June 14, 1906, this offer was accepted by the Merrill Company's stockholders on the following terms, viz., the payment of the $2,500 advanced and the assumption of the debts on said Grandfather Falls site. It was further agreed that the Merrill Company should have water power from said power site at $25 per horse power up to 2,000 or more horse power for three years, whenever the dam was completed,-- which would require at least a year's time. In the meantime, the affairs of the Merrill Company were in a very critical condition. It owed $68,393 of pressing claims, and $33,000 of its bonds were past due. Other bonds aggregating, approximately, $50,000 were up as collateral to loans.

The court found the value of the Merrill Company's property to be $25,000 less than its indebtedness. Its credit was entirely exhausted. In this situation the Grandfather Falls Company made a proposition to purchase all of the Merrill Company's property for the amount of its indebtedness. The officers of both companies were the same, and all the stockholders of the Grandfather Company were stockholders in the Merrill Company. The proposition of the Grandfather Falls Company was accepted without opposition at a duly called meeting of the Merrill Company stockholders on December 15, 1906, at which 1,510 out of 2,000 shares of stock were represented. The deed was delivered January 15, 1907, for an expressed consideration of $186,000. The proposition of the stockholders of the Merrill Company with reference to said sale was set out in the following instrument, viz.:

'We, the undersigned, do each for himself, alone, separately and severally subscribe for and agree to purchase and pay for in cash, at par value, the number of shares of the capital stock of the Merrill Paper Manufacturing Company set opposite our respective names here following. On condition, however, that the owners of not less than 95 per cent. of the present outstanding capital stock of said company each in like manner subscribe for additional stock of said company equal in each instance to not less than 75 per cent. of his present holdings. And in case said condition shall not be complied with within 15 days, then we agree to incorporate and organize a corporation under the laws of Wisconsin, to be known as the Grandfather Falls Company, for the purpose of purchasing the lands and water power facilities at Grandfather Falls heretofore owned in common by Messrs. Anson, S. Heinemann, B. Heinemann, Harmon, O'Day and Daly Estate, and providing boomage facilities, improving navigation, developing water power thereon, and purchasing and holding the stock of the undersigned in Merrill Paper Manufacturing Company and other stock in manufacturing corporations likely to need or use said power, and for such other purposes as may be agreed upon. And upon such incorporation being effected this subscription shall as to each subscriber stand as a subscription and agreement to purchase at par value the same amounts, respectively, of the capital stock of said Grandfather Falls Company, and we each severally agree to pay our respective subscriptions on demand of the proper board of directors.'

Later, the Grandfather Falls Company issued a stock dividend of 133 1/3 per cent. of the holdings of its stockholders based upon the shares in the Merrill Company held by its company. This, the court held, was a matter of form, and not of substance, to enable the stockholders to make a better showing for loaning purposes and otherwise. Complainants did not participate in the foregoing enumerated proceedings, though advised that such propositions were to be acted on. After the suit had been instituted, and at the beginning of the taking of the evidence, defendants offered to let complainants and all minority stockholders in on the deal upon the same terms as those accorded to the majority, plus interest accruing since the time when the majority stockholders had paid in their money. In the meantime, the Grandfather Falls Company had issued and sold its bonds to persons having no knowledge of the complainants' demand. As above stated, this suit was not instituted until about a year after the Merrill Company had sold out.

The complainants attack the bona fides of the sale, charging that the method of doing business by the Merrill Company was not interrupted; that the sole purpose was to deprive the minority stockholders of their rights in case they declined to make further investments in the premises.

The court on the hearing found that the sale was fair, that no advantage was thereby gained by the majority stockholders over the minority stockholders, and that the bill was without equity. Thereupon the court dismissed the bill for want of equity at complainants' costs taxed at $386.35. Included in the items taxed as costs is the allowance of $176.10 in favor of the witness Brazeau, who was brought by defendants from Seattle, and who appeared without subpoena. The mileage was fixed at 5 cents per mile on 3,522 miles, covering the travel of coming and going. From which decree this appeal was prosecuted. For errors, complainants assign the following, viz.:

That the court erred in holding that the majority stockholders and officers of the Merrill Company, being also officers and stockholders of the Grandfather Falls Company, might lawfully transfer the property of the former company in the manner proposed to the latter, to the exclusion of the minority stockholders of the former, if done at a fair sale and without fraud, or undue advantage; that the court erred in holding that the sale in the present case was fair to complainants; and that there was error in the taxation of costs by the court. Further facts are set out in the opinion.

Almon W. Bulkley and C. E. More, both of Chicago, Ill., for appellants.

Edward M. Smart, of Milwaukee, Wis., and R. N. Van Doren, of Merrill, Wis. (B. R. Goggins, of Grand...