Merger Mines Corporation v. Grismer

• Decision Date: 27 July 1943
• Docket Number: No. 10244.,10244.
• Citation: 137 F.2d 335
• Parties: MERGER MINES CORPORATION et al. v. GRISMER et al.
• Court: U.S. Court of Appeals — Ninth Circuit

137 F.2d 335 (1943)

MERGER MINES CORPORATION et al. v. GRISMER et al.

No. 10244.

Circuit Court of Appeals, Ninth Circuit.

July 27, 1943.

R. W. Nuzum and Wilmot W. Garvin, both of Spokane, Wash., for appellants.

H. J. Hull, of Wallace, Idaho, and Arnold L. Graves and Graves, Kizer & Graves, all of Spokane, Wash., for appellees.

John F. Davis, Sol., Milton V. Freeman, Asst. Sol., and Louis Loss and Arnold R. Ginsburg, Attys., Securities and Exchange Commission, of Philadelphia, Pa., for amicus curiae Securities and Exchange Commission.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

GARRECHT, Circuit Judge.

A bill was filed in the lower court to compel the appellants to make an accounting for the shares lent to the corporation by the Pearsons, and for the assessments thereon. The appellees prayed that the appellant corporation have judgment against the Pearsons for the amount found to be due after such accounting; or in the alternative, that the court decree that the Pearsons have no interest in the shares, which would then be declared the property of the corporation. Declaring that, because of the appellant Morris Pearson's services to the corporation, he was not to be "unduly penalized", the court below entered a decree permitting the Pearsons, under certain conditions, to receive from a new stock issue nearly one-half of the equivalent of the shares that they had lent to the company, provided they pay the assessments thereon; while an equal number of shares would be offered ratably to the other stockholders and the Pearsons would have the right to acquire them only to the extent that the other stockholders failed to avail themselves of the offer. The details of the decree, from which the present appeal has been taken, will be more intelligible after a statement of the facts.

The appellant company was organized in 1929 under the law of Arizona, with its principal office in Spokane, Washington, and with the mining properties to which it claims title located in Idaho. It had an original authorized capital of 2,900,000 shares of common stock and 100,000 shares of non-assessable preferred stock. None of the preferred stock was ever issued. The company constituted a merger of mining development operations, the most important of which were Bear Top Lead Mines and Aetna Mines Corporation.

The title to the properties to which the appellant company lays claim has never been perfected. The corporate records prior to 1935 were fragmentary. The company knew that it owed considerable sums of money to various persons, and that it had varied stock obligations. The amounts of money and stock owed, however, were unknown.

Into this confused setting, the appellant Morris Pearson in 1935 loomed large. He had been one of the original promoters of the company and had by that time acquired more than 800,000 shares of its common stock. In that year he was made its president and general manager. The record leaves no doubt that he became the corporation's dominant figure — directing its affairs, deciding its policies, and controlling its board of directors.

A financial report of the company on October 31, 1935, showed that it was in a precarious financial condition. Virtually all of its authorized stock had been issued. Considerable money was owed to various persons, and there were large stock obligations to the shareholders of the Bear Top and the Aetna. To avoid the possibility of bankruptcy or receivership, it was decided that the corporation would borrow from the appellants Pearson a sufficient number of shares to meet its money and stock obligations. This decision was evidenced in the minutes of three directors' meetings in 1936.

The shares thus lent to the corporation by the Pearsons totaled 772,541. It was intended that they be used to satisfy the company's stock liability to the Bear Top and the Aetna, to satisfy some of the other creditors by issuing some of the stock to them, and to settle with the rest by paying them cash out of the proceeds from the sale of the borrowed stock in the open market.

It was understood that the articles of incorporation would be amended so as to increase the stock authorization by 1,000,000 shares. The minutes of the three board meetings referred to all set forth that the stock would be returned to the Pearsons out of "the new issue of stock." The minutes of two of the meetings specify that the return should be "share for share."

The record is clear that this transaction was neither a gift nor a sale, but a loan. Pearson insisted that it should be only a loan: "I said under one condition would I put up the stock — when the company has increased their capital stock I get my stock back." The parties so regarded it, and the court so found.

After the Pearsons lent their stock to the appellant corporation, from 1936 to 1941 fifteen assessments upon the capital stock were made, to enable the company to carry on its exploration work. Pearson hotly denied at the trial any sinister causal connection between the stock loan and the subsequent assessments. The court found that the testimony did not reveal the exact amount collected by means of assessments; but if the Pearsons had retained the 772,541 shares transferred by them to the corporation and had paid all levied assessments, the amount of such payments would have been $61,223.82. On these assessments, the Pearsons paid only $1,303.30.

On September 12, 1936, the corporation's authorized capital stock was increased by 1,000,000 shares bringing it up to 3,900,000 shares. The court found that these additional shares were at all times "available to return the shares loaned to the corporation by the defendants Morris and Ebba Pearson." This appellants deny, asserting that the officers of the corporation were notified not to issue stock until it had been registered with the Securities and Exchange Commission, and that "under the statute and rules and regulations of the Securities and Exchange Commission, said stock could not be registered." This phase of the case will be discussed hereafter.

At this point, however, it may be noted that on March 26, 1937, Pearson as president and general manager, issued a letter to the company's stockholders, notifying them of an assessment of one per cent per share, as necessary in part for "qualifying and registering" with the Securities and Exchange Commission. The court found that at the time he sent out this letter, Pearson "unquestionably * * * knew that registration with S.E.C. was impossible unless the company was willing to reveal to its stockholders the fact that it had title to practically none of the property upon which the stock had been sold and assessments levied."

Between October 16, 1939, and December 29, 1941, Pearson caused 63,000 shares of account and sold in open market. He did the company's stock to be issued for his this against the advice of his accountant and over the objections of two of the directors. He claims, however, that none of this stock was taken from the capital increase of the treasury stock, but from the stock then owned by the corporation, "largely because of stock sold for failure to pay assessments thereon." Pearson received the proceeds from the sales of this stock, which constitutes the only part of the borrowed 772,541 shares that has ever been returned to him.

In the meanwhile, the appellees and other stockholders of the corporation became interested in the value of their holdings. On July 8, 1938, an informal meeting of the stockholders was held and a committee, including the appellee, was appointed to represent the stockholders. Shortly thereafter a demand was made for inspection of the books.

At this juncture, the case entered a phase in which considerable light was thrown upon the question of the appellants' good faith.

The record is unmistakably clear that, regardless of their attitude regarding the other books of the corporation, the appellants have consistently fought against exhibiting the share register. And it is precisely this register that the court below found to be the most illuminating.

Even in their main brief before this court, the appellants indirectly concede that they have been reluctant to exhibit the share register: "* * * there is no evidence in the case that the facts were concealed from anybody who inquired, the evidence being that the books of the company, except the stock register list, were at all times available to the stockholders of the corporation." (Italics our own)

In their reply brief, however, the appellants seek to make much over the chancellor's candid admission that "As to which side was at fault for the inability of the plaintiffs to see the corporate books, I am unable to determine from the testimony." Had the appellants continued the quotation, they could have shown us how and why any doubt was dispelled:

"Regardless of that, on November 2, 1938, plaintiffs filed with the Superior Court in Spokane, Spokane County, Washington, a petition for a writ of mandate to force defendants to make available for them for inspection * * * the Company books. On that date, an alternative writ was issued by the court returnable November 27, 1938. The defendants served their return to the writ on the last available day but failed to file it until March 28, 1939. In their answer, they alleged their willingness to exhibit all the books except the stock register and alleged that the petition was not filed in good faith. Thereafter, a trial was held, findings of fact and conclusions of law and judgment in favor of the plaintiffs entered and a peremptory writ entered on March 29, 1939. Thereupon, an appeal was taken to the Supreme Court of the State of Washington. The judgment of the trial court was affirmed June 3, 1940. The Supreme Court entered judgment. That case is the State of Washington ex rel. Grismer et al. v. Merger Mines Corporation et al., reported at 3 Wash. 2d 417 101 P.2d 308, 309.

"Thereafter, an accountant was...