Munro v. Smith

• Decision Date: 18 June 1919
• Docket Number: 1359.
• Citation: 259 F. 1
• Parties: MUNRO, Trustee, v. SMITH et al.
• Court: U.S. Court of Appeals — First Circuit

259 F. 1

MUNRO, Trustee, v. SMITH et al.

No. 1359.

United States Court of Appeals, First Circuit.

June 18, 1919

Harry M. Holbrook, of Providence, R.I., for appellant.

Richard E. Lyman, of Providence, R.I. (Lyman & McDonnell and Thomas F. I. McDonnell, all of Providence, R.I., on the brief), for appellees.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON Circuit Judge.

This is an appeal from a decree of the District Court for the District of Rhode Island, dismissing with costs a bill brought by Arthur E. Munro, trustee in bankruptcy of the Big Chief Mining Company, adjudicated bankrupt August 24, 1915 in said District Court. The defendants are Fred L. Smith formerly a director and now a stockholder and creditor Charles J. Davol, also a stockholder and creditor-- both citizens of Rhode Island. Mary H. Carroll, executrix under the will of Thomas A. Carroll, was originally named a defendant, but during the trial the bill was, by a consent decree, conditionally dismissed as to her.

Frederick E. Browne, a citizen of California and a mining engineer where he was resident general manager of the bankrupt's mining property as well as statutory agent, was named as a defendant but was not served. He did, however, attend as a witness and testify.

The bill alleges fraud, collusion, and conspiracy on the part of Smith, Davol, Browne, and Carroll, deceased-- in which fraud breach of fiduciary duty plays a large part-- to obtain the bankrupt's property for themselves.

The trial in the District Court went upon the theory that the plaintiff's right of recovery should first be determined, leaving, if the bill should be sustained, the question of the amount of damages and the nature of the relief, for subsequent consideration. As that court found no liability the case was really only partially tried.

The pleadings are long, covering, with their annexes, 90 printed pages. Both the bill and the answers are argumentative. There is little dispute as to basic facts. The defendants' counsel admit performance by the defendants of practically all the substantive acts stated in the bill.

The evidence is also bulky, covering nearly 300 pages besides corporation records not printed. Most of this evidence, however, consists of correspondence between the parties during the period of the transactions in question. The parol evidence adduced before the District Court is of minor significance.

The case must turn upon the admitted facts, the inferences therefrom, and upon the interpretation of written evidence, in considering which, of course, the District Court had no substantial advantage over this court. The usual rule of giving great weight to the conclusions of the trial judge who observed the appearance and the manner of the witnesses is not, therefore, to any substantial degree, applicable in this case. As we are not able to adopt the views of the District Judge, it is necessary to deal in considerable detail with the evidence and necessary inferences therefrom.

The bankrupt is an Arizona corporation, a successor of the California Big Chief Mining Company, a California corporation. The earlier company on May 14, 1910, made a contract with W. Mack Foster and Lee W. Foster, owners of a two-thirds undivided interest in certain mining claims called the Jumbo claims, and with Pat and Lulu McCluskey, owners of the other one-third undivided interest, by which the corporation became entitled to purchase these claims located at Hart, Cal., for $50,000, paying therefor out of the net returns of mining in monthly installments arranged upon a sliding scale, but with a guarantee of certain minimum monthly payments which, from January, 1911, were required to be at least $450 a month. Nonpayment of the monthly installments after 30 days' notice grounded forfeiture of the company's rights under the contract.

The company did not agree to pay this full amount of $50,000, but had the right to abandon, and in case of abandonment, or forfeiture, was entitled to remove the mill, machinery and mining tools used by it on the property described. The bankrupt also owned, or had rights in, certain other claims called the Fairview group and the Oro Belle No. 2; but these claims do not seem to have been regarded as of great importance. The main reliance for financial success was upon the acquisition and development of the Jumbo claims.

In July, 1913, the bankrupt had some 300 stockholders, about 100 of whom are referred to as the chief stockholders. From most of these chief stockholders money had been borrowed on time notes referred to as debenture notes. Into this mining enterprise there appears to have gone about $140,000 in cash. This investment was represented in July, 1913, by outstanding stock of the par value of something over $1,600,000, and by debenture notes of $36,487.83 owing its chief stockholders. Debts to outsiders, not including Browne's salary claim of $886.09, amounted to only about $2,300. Its assets consisted of its mining claims, and a mill and other mining implements on the Jumbo group into which appears to have gone about $27,000. The value of the mining claims was, of course, problematical. They are referred to as a prospect and 'not a poor man's prospect.' The mill had, in 1913, been put in operation; but the results were disappointing; its operation did not produce sufficient profits to pay operating expenses and the accruing payments under the Foster-McCluskey contract. New capital was therefore needed to develop the claims.

The financial status thus outlined remained substantially the same up to the time of the bankruptcy in August, 1915, except that the debenture notes, including apparently some accruing interest, had increased on August 23, 1915, to $57,319.41. Browne's claim for salary was then about $4,000. But within this period of about two years 18 additional payments of $450 each seem to have been made for the Jumbo claims under the Foster-McCluskey contract; so that, theoretically at least, the bankrupt's interest in its mining property had been increased. The company's debts except to its larger stockholders were, during the entire period, almost negligible. Most of the chief stockholders appear to have been resident in Rhode Island and in Massachusetts.

We have, then, the common case of a mine in the West, mainly owned and financed by eastern investors, who were at the same time creditors and stockholders. The enterprise was embryonic; additional capital and successful development thereby was essential to save the investment already made.

The defendant Browne was a mining engineer, and was appointed resident manager in March, 1912. Whether he was the original promoter of these mining enterprises does not clearly appear. The directors of the corporation were all resident in Rhode Island or in Massachusetts. Browne was the only official on or near the company's property. Upon him as the resident manager the bankrupt and its board of directors 3,000 miles away relied and had a right to rely. In May, 1912, Browne was also appointed under a California statute disbursing agent and agent for the acceptance of service, and held these two positions until the adjudication in bankruptcy on August 24, 1915. The defendant Smith had been a director of the enterprise from February, 1910, and remained a director until May, 1914. His resignation was accepted on May 19, 1914, and on that date Carroll was elected, at Smith's request, as his successor. Carroll was a practicing attorney in Providence, and acted as counsel for the company. Counsel for the defendants deny that he was under any general retainer. He was one of two attorneys whose names appear on the letter head of the company, Exhibit 14. He appears to have been, during the period in question, the only counsel generally relied upon by the officers and directors of the company for advice and assistance in the East. It fairly appears that he expected the company to consult him on any questions which could be dealt with by eastern counsel. He was the company's attorney; whether its 'general attorney' is immaterial. Charles J. Davol was a substantial business man in Providence and one of the chief stockholders and creditors of the company. Smith and Carroll were also substantial stockholders and creditors. John M. Welch was one of the directors referred to as 'fiscal agent,' and seems to have been the most active of the directors in raising money for the enterprise.

Smith, Carroll, Davol, and Browne were friends. In the late summer and early fall of 1913, Browne was in Providence and in conference with the officers and directors of the company, including Smith and Carroll, as to its condition and prospects. There is nothing in the record showing just what conversation took place between him and Smith at that time; but after his arrival in Hart, Cal., on October 23, 1913, he wrote Smith that the mill was still running but not on full time, and: 'I will keep you fully advised as the development progresses, having in mind the deal we talked over with Mell Church. I see an opportunity to make a wonderful thing out of this mine: I feel so absolutely sure that we are going to develop a big property that I would be quite willing and anxious to invest my personal funds in it, provided they were of sufficient extent that I could see the proposition through. I can safely assure you that you will not take any chance in financing and buying out the McCluskey-Foster interests.'

From this and from the admissions in the answers and from other correspondence and evidence, it clearly appears that Browne the general manager of the company, while in Providence in 1913, told Smith, one of the directors, that the Foster-McCluskey interests could be bought in at much less than...