Mumford v. Ecuador Development Co.

• Decision Date: 25 November 1901
• Citation: 111 F. 639
• Parties: MUMFORD et al. v. ECUADOR DEVELOPMENT CO. et al.
• Court: U.S. District Court — Southern District of New York

111 F. 639

MUMFORD et al. v. ECUADOR DEVELOPMENT CO. et al.

United States Circuit Court, S.D. New York.

November 25, 1901

Justus P. Sheffield, for complainants.

Lawrence E. Sexton, for defendants Ecuadorian Ass'n, Limited, and W. Lyon Mackenzie.

Benoni Lockwood, Jr., for defendant Ecuador Development Co.

COXE District Judge.

This is an action commenced by the complainants, as minority shareholders of the Ecuador Development Company, to set aside as fraudulent a contract made between said company and the Ecuadorian Association, Limited, which was and is the majority shareholder of the said development company. By this contract, substantially, all of the property of the development company was transferred to the Ecuadorian Association. The bill is demurred to on the ground that it fails to state a cause of action and the defendant Mackenzie demurs also on the ground that he is improperly made a defendant.

The bill alleges as follows: That in the year 1897 a contract was entered into between Archer Harman and the republic of Ecuador whereby Harman and his associates agreed to build and equip a railroad between Guayaquil and Quito, Ecuador. That thereafter the Guayaquil & Quito Railway Company was organized under the laws of New Jersey and took over said contract and entered upon its performance. That in the latter part of 1897 the South American Railway Construction Company was organized for the purpose of building said railway and by agreement with the railway company the said construction company was to receive a large proportion of the bonds and preferred stock of the railway company as a consideration for building the road. That in September, 1899, both said companies were without funds, the construction company was unable to carry out its agreements with the railway company and the concession granted to said company by the republic of Ecuador was in danger of lapsing. That the defendant the Ecuador Development Company was organized in September, 1898 for the purpose of taking over the rights of the construction company, and thereafter the entire property of said company was transferred to the development company, which latter company undertook the construction of said railway. That the number of directors provided by the charter of the development company was five, three being chosen by the common and two by the preferred stock, the former controlling the management of the company. That in January, 1899, the said Harman and one Norton conspired together to obtain a controlling interest in the stock of the development company purchased large amounts of said stock and caused to be elected a board of directors controlled by them and subservient to their interests, Norton being elected president and Harman manager of said company. That the said Harman and Norton thereupon procured the said board of directors fraudulently to allot to them all of the remaining common stock in the treasury of the said company, amounting to 200 shares of the par value of $20,000, which, with their previous purchases, gave them a majority interest and absolute control of said company. That the Ecuadorian Association is an English corporation and was organized in March, 1899, for the purpose of acquiring from Harman and Norton 500 shares of the stock of the development company and a large amount of bonds of the railway company which they claimed to own, which said stock and bonds were actually transferred to the said association. That Harmon and Norton, notwithstanding the said transfer, continued to own a controlling interest in the common stock of the development company and they agreed to sell to the association $250,000 of the bonds of the railway company at par for which the association was to issue to them L50,000 par value of the shares of the association. That the complainant was a director of the development company in January, 1900, and while he was acting in that capacity a contract was proposed giving certain valuable rights, privileges and mining interests belonging to the development company to the association for an inadequate consideration. That the complainant opposed this contract and procured a postponement of its consideration, but before it was again examined by the board of directors he was removed from office. That after his removal Harman and Norton, having control of the board of directors of the development company, procured a large number of other contracts to be entered into which transferred various rights and privileges to the said association without adequate consideration and in fraud of the rights of the stockholders of the development company. That in pursuance of a fraudulent design to transfer all of the valuable assets of the development company without adequate consideration and in fraud of the rights of the minority stockholders the said Harman and Norton, in the summer of 1900, transferred to the association their majority holdings of the common stock of the development company and the preferred stock held by them and took in exchange therefor stock of the association to an amount many times the par value of the stock so transferred. That in this manner the association has become the owner of 80 per cent. of the capital stock of the development company. That Harman and Norton were and are directors of the association and of the development company, the said Norton resigning as president of the latter and causing a confidential agent of his to be elected in his place. That after the removal of the complainant from the board neither Norton nor any of the officers of the development company who were under his control, allowed the minority stockholders any information regarding the assets of the development company, though frequently requested so to do. That Harman and Norton, holding a majority of stock in the development company, prevented the annual meeting, which should have been held in June, from being held until September 15, 1900. That at an adjourned meeting held on that day the defendant Mackenzie appeared as proxy for the Ecuadorian Association and in its name voted a majority of the stock of the development company. That at said meeting no statement of the business, assets or finances of the development company was made, but its president presented, as part of his report, a contract, bearing date September 6, 1900, between said company and the Ecuadorian Association, which was executed by the said Mackenzie on behalf of the latter corporation. The contract was voluminous, reciting a large number of previous contracts between the said parties, and, in general, purported to transfer to the said association all the property of the said development company of every name and nature. That the only consideration for this transfer was the assumption of certain obligations of the development company and an agreement to pay the said company, when the said railway should be completed, one-tenth of the net profits which should appear to have accrued from the completion of the contract with the government of Ecuador. That the contract was adopted Mackenzie casting the vote of the association in its favor, the minority stockholders, including representatives of the complainants, voting against it and strenuously opposing its ratification. That pursuant to the terms of this contract all the property of the said company, including $17,000 cash, was turned over to the said Ecuadorian Association. That at the date of said meeting-- September 15, 1900-- the development company was entirely solvent, owing...