McClean v. Bradley, 581
Citation | 282 F. 1011 |
Decision Date | 01 April 1922 |
Docket Number | 581,582. |
Parties | McCLEAN v. BRADLEY et al. GARDINER et al. v. SAME. |
Court | United States District Courts. 6th Circuit. United States District Court of Northern District of Ohio |
[Copyrighted Material Omitted]
Elijah N. Zoline, of New York City, Arthur P. Greeley, of Washington, D.C., E. G. Guthery, of Cleveland, Ohio, and Gilbert H. Baker, of Penn Yan, N.Y., for plaintiff.
Tolles Hogsett, Ginn & Morley, and John F. Wilson, of Cleveland Ohio, for defendant.
PECK District Judge (sitting by designation).
This consolidated action in equity is brought by certain stockholders of a defunct New Jersey corporation, known as the McClean Arms & Ordnance Company, to set aside a sale of its patents made to certain of its former directors, the defendants, and for an accounting for profits therefrom received.
The object of the corporation was the development and exploitation of the inventions of Dr. Samuel N. McClean, one of the plaintiffs, relating to machine guns. Some ten years' time and several hundred thousand dollars were spent in this enterprise, which resulted in failure about January 1, 1910. In its final struggles for success, during the latter half of the year 1909, and after all its assets, including its patents, had been mortgaged to a bank for $48,000, four of the directors, Bradley, Brown, Babcock and Cowles, advanced to it $40,600 by seven several loans, and upon the occasion of making the last loan, December 7, 1909, took a chattel mortgage to themselves, second to that of the bank, on the McClean patents and inventions belonging to the company. The machine gun had been tested by the United States Navy Department in June and November, 1909, and had failed, but a new test had been granted, to be made December 23, 1909, and it was to prepare for this final test that the directors made the loan of December 7th.
Early in January, 1910, a gentleman named Henry W. Rudd, who for years had been trying, unsuccessfully, to exploit the gun in Europe, preparatory to a proposed trip to England for the purpose of exhibiting the gun, had it tested in New York City in the presence of Col. I. N. Lewis, an ordnance expert of the army and inventor, to whom the company had twice previously applied for advice and assistance. The latter disapproved of the gun, and of the water-cooled type of machine guns in general, saying they had had their day. Shortly afterwards Lewis conceived the idea of air cooling by utilizing the blast of the waste gases at the muzzle for suction of air from the breech through an outer casing surrounding the barrel. He proceeded to experiment with this idea on his own account.
On January 12, 1910, the above-named directors, in a circular letter, put the case fairly before the stockholders, disclosing that they had loaned the corporation money, affirming their belief that there was yet value in the property, but giving notice to the stockholders that, unless they came forward with the funds necessary to continue, the assets would be sold to pay the debts. No stockholder responded. On January 17, 1910, a motion to ratify the mortgage to the directors was presented and passed at the annual stockholders' meeting. The secretary reported that without financial assistance the company could not continue, and its property would have to be sold to pay its debts. On January 20th the physical chattels were sold for $15,000, under the aforesaid mortgage to the bank, which amounted to $48,000. In March the leading manufacturers of firearms were addressed by letter, requesting to know if they would be interested in an opportunity to buy the patents. None answered affirmatively.
There being no other assets out of which to satisfy their own claims, on April 27, 1910, the four directors caused notice to be given to all stockholders that the patents covered by 'a chattel mortgage given to secure advancements' would be sold on May 13th, and that full information might be had of the signer, Calfee, who was a director and secretary of the corporation, and had been designated in the chattel mortgage as its attorney to execute any necessary transfers to any purchaser under that instrument. Notice of the sale was also sent to the leading manufacturers of firearms, but was not published in the public prints. About the 1st of May, 1910, Col. I. N. Lewis, under pledge of secrecy as to details, advised Bradley of his invention of the air-cooling device, which was still in the experimental state, and his belief in its success. Bradley thought well of the idea, and, without disclosing its details, so advised his three associates, and they agreed to join with him in paying the cost of the necessary experimental work. Lewis agreed to receive nothing for his services unless he achieved success, but in the event of success an equitable allowance was to be made to him. A McClean gun was furnished him by Rudd for experimental purposes, and a former employee of the company was employed to assist him; also a draftsman.
Pursuant to the notice, on May 13th, Calfee offered the patents at public sale, subject to the prior lien of the bank. They were bid in, on behalf of the four directors aforesaid, by his law partner, Fogg, for a sum which is no longer remembered, but which probably was a nominal amount, there being no other bidder. On the same day the bank held a similar sale of the same patents, pursuant to like notice, under its mortgage. Fogg bid $200, but the patents were not knocked down; the bank's attorney regarding the bid insufficient.
The four directors and Calfee, Lewis, and Rudd organized a new corporation, known as the Automatic Arms Company. On June 27th Lewis made application for letters patent on his air-cooling device. The patent issued October 3, 1911. On August 26, 1910, they caused notice to be sent out, signed by Rudd, who was active in the new promotion, to all of the old stockholders, offering them opportunity to subscribe pro rata for the new stock; stipulating, however, that the amount theretofore advanced for exploitation, aside from company expenditures, approximately $50,000, should be allowed in the new organization, either in cash or stock, and also that subscribers must agree to pay such additional proportionate amount as might be necessary in the judgment of the managers to successfully exploit the business. This letter did not show that the former directors were interested in the new company. None of the stockholders evinced a willingness to subscribe, or even a desire for further details.
On June 2, 1910, an assignment in the name of the McClean Arms & Ordnance Company, by Bradley, president, and Calfee, secretary, was made to the Automatic Arms Company, conveying to it the patents in question. This document was recorded in the Patent Office June 4, 1910. Before August 12, 1910, the four directors settled with the bank, thus securing release of its mortgage on the patents, and upon that date Bradley, Brown, Babcock, and Cowles executed in their own names a further assignment of the patents to the Automatic Arms Company, which was recorded August 16, 1910.
About $5,000 had in the interim been invested by the four directors in Lewis' experiments, and this work, with patents which he had applied for in the meantime, were also turned into the new company. For these assets Bradley, Brown, Babcock, and Cowles received $50,000 at par in the stock of the new company; the defendant Calfee, for his services in the promotion, received $5,000 thereof; and Col. Lewis received $15,000. The sum at which the patents were put into the Automatic Arms Company by the four directors, $50,000, was about the amount of their claims against the old company and their advancements in the interim.
They had been indorsers on the notes held by the bank to the extent of $20,000. The bank held as collateral their stock subscriptions for $12,500, the validity of which they disputed. They settled with the bank for $17,000 and so had acquired by subrogation the bank's lien to the extent of at least $4,500, so that their direct liens on the patents amounted to $45,100 and interest. They were also general creditors of the old corporation to the extent of $3,300, and as such had a claim upon the patents, its only assets. Except for the franchise taxes, and possibly fees due their patent attorney, the bank's claim and their own appear to have been the only debts of the corporation. On January 9, 1911, its franchise was revoked by the state of New Jersey for nonpayment of its corporate excise tax.
The years 1910 and 1911 were spent in experiment and in designing a new gun, which was a radically different arm, although it retained a feature covered by the best claim of the McClean patents, the rearwardly actuated piston and rotating breech block. By June, 1912, four guns had been made. In March, 1913, a contract was made with the Birmingham (Eng.) Small Arms Company to manufacture the gun. The first 50 guns were turned out in the early summer of 1914, after, according to Lewis, the expenditure of a year and a half's labor by 600 men and $1,500,000. Shortly thereafter the Great War began, and the gun was produced in great quantities and became one of the most effective weapons of the conflict.
From their investment in the Automatic Arms Company the four directors received a dividend upon their stock of perhaps 60 or 70 per cent. in 1915, resulting from the sale of the Lewis and McClean patents by the Automatic Arms Company to the Belgian corporation called Arms Automatique Lewis for cash and stock, in all of the value of $125,000. They then sold their stock in the Automatic Arms Company; Brown receiving par in October, 1915, and the others $200 per share about January 1, 1916. Calfee, who got $5,000 of the Automatic Arms Company stock for his services in...
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