Mason v. Carrothers

• Citation: 106 Me. 392,74 A. 1030
• Parties: MASON et al. v. CARROTHERS et al.
• Decision Date: 28 May 1909
• Court: Supreme Judicial Court of Maine (US)

74 A. 1030

106 Me. 392

MASON et al.

v. CARROTHERS et al.

Supreme Judicial Court of Maine.

May 28, 1909.

(Official.)

Appeal from Supreme Judicial Court, Cumberland County, in Equity.

Action by George W. Mason and others against John P. Carrothers and others. From a decree dismissing the bill on the merits, plaintiffs appeal. Reversed as to defendants James S. Barcus, Willard F. Hallam, John P. Carrothers, and the Marine Safety Appliance Company, and dismissed as to the other defendants, and remanded for further proceedings.

Bill in equity by the plaintiffs, 11 in number, and all of New York City, holders of preferred stock in the Marine Safety Appliance Company, a corporation organized under the laws of Maine and located at Portland, Me., against "John P. Carrothers, of Port Clinton, Ohio, James S. Barcus, of New York City, Willard F. Hallam, of Harpers Ferry. W. Va.," and 16 others, stockholders in said corporation, and against said Marine Safety Appliance Company, alleging, in substance, that certain stock issued to certain prior takers had been illegally and fraudulently issued in exchange for certain letters patent, N and praying for the surrender and cancellation of the stock so alleged to have been illegally and fraudulently issued. Answers were filed by 10 of the defendants, and the usual replications were filed by the plaintiffs.

Argued before WHITEHOUSE, SPEAR CORNISH, and KING, JJ.

Charles E. Gurney and Moses, Morris & Westervelt, for appellants. Verrill, Hale & Booth and John P. Carrothers, for appellees Carrothers, Barcus, Hallam, and others. Ernest E. Noble, for appellee Marine Safety Appliance Company.

CORNISH, J. Bill in equity brought by bona fide purchasers at par of treasury preferred stock in the Marine Safety Appliance Company, against certain prior takers of common stock alleged to have been illegally and fraudulently issued in exchange for letters patent, and against the corporation, praying for the surrender and cancellation of said certificates. The cause was fully heard by a single justice, who, after making exhaustive findings of fact and various rulings in matters of law, made a decree dismissing the bill. The cause is before the law court on plaintiffs' appeal from this decree. The record is voluminous, but, so far as material to the decision, the facts are these:

In May, 1905, Frank W. Irvine and James T. Lihou were the owners of certain letters patent of the United States covering inventions for handling lifeboats, and of application for letters patent in the Dominion of Canada. They met James S. Barcus and Willard F. Hallam, two of the defendants, and after various negotiations a written contract was entered into at Washington, D. C, on July 10, 1905, between Barcus and Hallam on the one part and Irvine and Lihou on the other, whereby Barcus and Hallam agreed to cause a corporation to be organized within four months (subsequently extended six months) for the purpose of manufacturing and selling said lifeboat handler in the United States and Canada, with a capital stock of $1,000,000, $200,000 of which was to be 6 per cent. cumulative preferred stock, and $800,000 common stock. Barcus and Hallam further agreed to cause the corporation to do the following acts: To issue to Irvine and Lihou $100,000 paid up and nonassessable preferred stock at par and $50,000 paid up and nonassessable common stock at par, to enter into a contract to pay Irvine and Lihou a royalty of 10 per cent. on the gross receipts from the sales of the lifeboat handler, and to make an advance payment of $10,000 on royalty account. Barcus and Hallam also agreed to personally pay $2,500 thereof immediately, the balance, $7,500, to be paid by the corporation; Irvine and Lihou assigning to Barcus and Hallam their interest in the royalty contract. Irvine and Lihou agreed to transfer to the corporation, in consideration of the foregoing, all their rights in the patents, on receipt of the stock and the $10,000 advance payment on royalties. In case of failure to have the stock issued and the $10,000 paid, Barcus and Hallam were to forfeit all rights in the premises, including all money advanced by them before the completion of the contract, and all compensation for services already rendered and to be rendered in connection with the enterprise.

It was further stipulated that a copy of this contract, together with an assignment of the patents, should be placed in escrow with a trust company in Washington, to be delivered to Barcus and Hallam upon the payment of the remaining $7,500 on or before November 1, 1905.

On November 13, 1905, Barcus and Hallam caused the Marine Safety Appliance Company to be organized under the laws of. Maine for the purpose and with the capital stock previously agreed upon. There were six incorporators, each subscribing for one share of common stock; one being the attorney of Barcus and Hallam residing in Boston, three being employes in their New York office, and two residents of Maine used as a convenience. The attorney and the two residents of Maine were elected directors at the first meeting, but one of the latter resigned as soon as the organization was completed, and one of the employes was elected in his stead. On November 17, 1905, the attorney director and the employe' director held a meeting at the office of Barcus and Hallam in New York, at which the attorney director and the Maine director also resigned, and two other employes were substituted. This left the entire board of directors employes of Barcus and Hallam.

After this organization was completed, and at this same meeting of November 17, 1905, Barcus and Hallam, representing themselves to be the exclusive owners of these patent rights, offered to sell the same to the corporation in consideration of $100,000 of the full paid and nonassessable preferred stock and $799,400 of the full paid and nonassessable common stock of the corporation at par, being all the common stock except the six shares subscribed for by the dummy incorporators and directors, and of a 10 per cent. royalty agreement and a $10,000 advance royalty payment in cash, the terms of the royalty agreement being similar to those in the July 10th contract between Barcus and Hallam, and Irvine and Lihou. The directors, with what the single justice aptly terms "a grave and eloquent mummery of whereases," accepted the proposal and voted to make the purchase.

Thereupon Barcus and Hallam executed an assignment of all right, title, and interest in the letters patent to the corporation, the royalty contract was executed, and the requisite certificates of preferred and common stock were made out in the names of Barcus and Hallam, but were retained by the treasurer.

On the following day another directors' meeting was held, and Barcus and Hallam, in consideration of the corporation note of $5,000, retransferred and gave back to the corporation $200,000 of the common stock, to be used as a bonus in its sale of the remaining $100,000 of preferred stock. They also split up their certificates, and carved out $50,000 common stock for which certificates were written in the name of Irvine and Lihou, but none of the certificates were delivered before December 12, 1905. On that date Barcus and Hallam on the one part and Irvine and Lihou on the other, or their representatives, met in New York, and reached a settlement of their affairs. Barcus and Hallam delivered to Irvine and Lihou $100,000 of the preferred slock and $50,000 of the common stock, certificates for which had been written November 18th, and assigned to them the royalty contract made between the corporation and Barcus and Hallam on November 17th, and instead of the $10,000 advance royalty payment, Irvine and Lihou accepted part cash and part notes of the corporation. The corporation at the same time delivered to Barcus and Hallam the remaining $549,400 of common stock.

Irvine and Lihou then acknowledged and delivered to Barcus and Hallam, instead of to the corporation, an assignment of their interest in the patents, which on November 17th Barcus and Hallam had conveyed to the corporation, the assignment from Irvine and Lihou bearing date July 10, 1905, though not acknowledged until December 12, 1905. This left $100,000 of the preferred stock in Irvine and Lihou, and $100,000 in the treasury, $50,000 of the common stock in Irvine and Lihou. $549,400 in Barcus and Hallam, $000 in the dummy incorporators, and $200,000 in the treasury to be used as bonus in the sale of the preferred stock. The number of directors was increased on January 8, 1906, from three to nine, and Barcus and Hallam were two of the number, so that with the three employes they still had a majority of the board.

The plaintiffs became stockholders between November 18, 1905, and February 13, 19.10, by the purchase of preferred stock at its par value from the corporation itself, the stock being a part of the $100,000 not issued to Barcus and Hallam, and they received as a bonus two shares of common stock for each share of preferred. The active plaintiffs hold $5,800 of such preferred stock, and ask to represent other holders not appearing as parties plaintiff, making a total of $11,500, being all the preferred stock issued for cash. In June, 1906, Barcus and Hallam assigned to the defendant Carrothers all interest in the stock held by them, in consideration that he would push the business of the company and carry out an agreement previously made with a Cleveland syndicate, so called, which is immaterial here, and he now holds the same, although it has never been transferred to him on the books of the corporation. However, be was familiar with the whole history of the stock issue, and was held by the sitting justice not to be a bona fide purchaser for value, but chargeable with notice of any imperfection in the title to the stock, and of any illegality in its issue, to the same extent that Barcus and Hallam would be; and that finding we approve....