Meier v. Eaton
| Decision Date | 14 March 1923 |
| Docket Number | 5158. |
| Citation | 192 N.W. 721,46 S.D. 286 |
| Parties | MEIER v. EATON et al. |
| Court | South Dakota Supreme Court |
Appeal from Circuit Court, Faulk County; J. H. Bottum, Judge.
Action by S. S. Meier, receiver of the Faulk County Power Company against A. J. Eaton and others. From a judgment against defendants Eaton and another, defendant Eaton appeals. Affirmed.
F. E Snider, of Faulkton, for appellant.
Jacobs & Byrne, of Faulkton, for respondent.
Action by a receiver of a corporation to recover secret profits made by the incorporators, in turning over property to the corporation in exchange for corporate stock, and to recover commissions paid by themselves as directors to themselves as individuals, for selling corporate stock to themselves.
The essential ultimate facts are that defendants, pursuant to a plan to incorporate, bought an electric light plant at Faulkton from one McGraw, paying therefor $10,000 in cash $5,000 in real estate, and $15,000 in promissory notes. They then organized the Faulk County Power Company with a capital stock of $100,000, of which $70,000 was to be preferred stock and $30,000 common stock. They turned over the plant to the corporation on a valuation of $35,000, for which they received common stock for $20,000, and the corporation issued notes for $15,000, which were substituted for the $15,000, individual notes given to McGraw. They then as directors paid to themselves $2,000 of the corporate funds as commissions upon the sale of the $20,000 corporate stock to themselves, thus making a total profit of $7,000 in the transaction, on an investment of $15,000. Soon thereafter and in pursuance of the plan of organization they sold shares of the remaining $10,000 common stock at par to divers individuals, without revealing the secret profits. Defendants Eaton and Fee were served with process. Defendant Coflin was not served. Defendant Eaton answered. From a judgment for $6,800 and interest, entered against defendants Eaton and Fee by the court, pursuant to findings of fact and conclusions of law, the defendant Eaton appeals.
Appellant relies upon the decision in Old Dominion Copper Mining & Smelting Co. v. Lewisohn (C. C.) 136 F. 915; Id., 148 F. 1020, 79 C. C. A. 534; Id., 210 U.S. 206, 28 S.Ct. 634, 52 L.Ed. 1025, where Lewisohn, a promoter, was held not liable to disgorge secret profits under circumstances similar to those at bar, by the federal Circuit Court for the Southern District of New York, by the United States Circuit Court of Appeals for the Second Circuit and by the Supreme Court of the United States.
On the other hand, the respondent relies upon the case of Old Dominion Copper Mining & Smelting Co. v. Bigelow, 188 Mass. 315, 74 N.E. 653, 108 Am. St. Rep. 479; Id., 203 Mass. 159, 89 N.E. 193, 40 L. R. A. (N. S.) 314, which was affirmed by the United States Supreme Court in Bigelow v. Old Dominion Copper Mining & Smelting Co., 225 U.S. 111, 32 S.Ct. 641, 56 L.Ed. 1009. In the latter court, however, the only questions discussed related to estoppel and the full faith and credit clause of the federal Constitution.
Both the Lewisohn Case and the Bigelow Case arose out of the same transactions wherein both were the promoters." The Massachusetts court held that where, as here, the promotion scheme contemplated the sale of the corporate stock to outsiders for the purpose of providing a working capital, the acts of the directors in making secret profits upon the transfer of their property to the corporation in exchange for corporate stock could be inquired into in a suit brought by the corporation, even though the directors owned or controlled all of the corporate stock then issued, and such directors could be compelled to make restitution to the corporation. Besides following what seems to us was the weight of authority at that time that decision has been cited with approval in Alabama Fidelity Mfg. & Bond Co. v. Dubberly, 198 Ala. 545, 73 So. 911; Frame v. Mahoney, 21 Ariz. 282, 187 P. 584; Beal v. Smith, 46 Cal.App. 271, 189 P. 341 (hearing denied by California Supreme Court); Parker v. Boyle, 178 Ind. 560, 99 N.E. 986; American Forging & Socket Co. v. Wiley, 206 Mich. 664, 173 N.W. 515; Brooker v. Wm. H. Thompson Trust Co., 254 Mo. 125, 162 S.W. 187; Arnold v. Searing, 78 N. J. Eq. 146, 78 A. 762 and in Tilden v. Barber (D. C.) 268 F. 587.
On the other hand the federal Supreme Court decision...
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