Nicholson v. Kingery

• Decision Date: 18 November 1927
• Docket Number: 1353
• Citation: 261 P. 122,37 Wyo. 299
• Parties: NICHOLSON, ET AL. v. KINGERY, ET AL. [*]
• Court: Wyoming Supreme Court

261 P. 122

37 Wyo. 299

NICHOLSON, ET AL. v. KINGERY, ET AL. ^[*]

No. 1353

Supreme Court of Wyoming

November 18, 1927

APPEAL from District Court, Fremont County; VOLNEY J. TIDBALL Judge.

Action by Oscar W. Nicholson and others, minors, by their next friend, E. H. Luikart, against H. W. Kingery and others. From a judgment for defendants, plaintiffs appeal.

Affirmed.

A. C Allen and O. N. Gibson, for appellants.

Where a corporate officer contracts with his corporation representing both himself and the corporation, it is void at the instance of the corporation without regard to its fairness or good faith. 14a C. J. 112; 4 Fletch. Cyc. 3576-3592; 26 R. C. L. 1325; Munson v. Co., 103 N.Y. 59; Smith v. Co., (Calif.) 78 P. 550. Transactions between a parent corporation and its subsidiary are governed by the same rules as transactions between a corporation and one of its officers. Ala. Co. v. Duberly, (Ala.) 79 So. 911; Sausalito Co. v. Co., (Calif.) 136 P. 57; Munson v. Co., supra; Pearson v. Co., (N. H.) 13 Am. St. Rep. 590; Iron Co. v. Coal Co., (Tenn.) 77 S.W. 774. If there is not a disinterested quorum of directors, without the presence of the interested director, the transaction is voidable. 14a C. J. 92; 4 Fletch. Cyc. 3610; Jones v. Morrison, (Minn.) 16 N.W. 854; U.S. Co. v. Reed, 2 How. Pr. 253; Mobile Co. v. Gass, 142 Ala. 520; Bassett v. Fairchild, (Calif.) 64 P. 1082; Burns v. Co., (Colo.) 130 P. 1037. Directors can bind the company only by collective action, and action by a less number than the disinterested quorum is voidable. 7 R. C. L. 439; 11 Fletch. Cyc. 428. And where a corporate officer acts for himself and the company in the purchase of its property, the sale is presumptively fraudulent. 25 C. J. 1120; Corsicana Bank v. Johnson, 251 U.S. 82; Mors v. Peterson, (Ill.) 104 N.E. 216; Smith v. Ogilvie, (N. Y.) 27 N.E. 807; McKinley v. Lynch, (W. Va.) 51 S.E. 4; Cowee v. Cornell, 75 N.Y. 91; Dawson v. Ins. Co., (Ia.) 157 N.W. 929. The law will presume sufficient damages for the violation of legal rights, even though they be incapable of exact measurement. 17 C. J. 718. The burden is upon a corporate officer who has purchased corporate property to show the transaction to be free from concealment or fraud. 26 C. J. 1120; 10 Fletch. Cyc. 688; Gerry v. Bank, (Mont.) 47 P. 810; Collard v. Hohnstein, (Colo.) 174 P. 597; Geddes v. Co., (Mont.) 197 F. 860; Ross v. Iron Co., 227 F. 337; Bank v. Land, (Mont.) 174 P. 597. The alleged share was a fraudulent preference of officers of an insolvent corporation and is voidable for that reason. 11 Fletch. Cyc. 1416; 14a C. J. 901. The participation of the Worland Bank rendered the share voidable at the option of non-consenting stockholders. 4 Fletch. Cyc. 3633 and cases cited. There was a lack of disinterested quorum. 14a C. J. 92. A corporation cannot be bound by the action, inaction or silence of individual directors, acting separately. 11 Fletch. Cyc. 428. Where fiduciary relation is established courts of equity will scrutinize transactions very closely, 25 C. J. 1120 and cases cited.

H. C. Brome and C. H. Harkins, for respondents.

There is a defect of parties defendant. Mains v. Henkle, 2 Oh. Dec. 530; Shields v. Barrow, 17 How. 129. The sale was made and ratified in a proper and legal manner by a majority of the board of directors of Investors Corporation. Wheeler v. Co., 159 F. 391 (C. C. A. 8th); Cont. Secur. Co. v. Belmont, 206 N.Y. 7. Plaintiffs must show that they have exhausted all available means of redress within the corporation itself. 14 C. J. 943. Stockholders are not permitted to conduct litigation unless they have exhausted all means to obtain, within the corporation itself, the redress of its grievances. Hawes v. Oakland, 104 U.S. 450. The Investors Corporation could not lawfully purchase a majority of the shares of a state bank and conduct it as a subsidiary corporation. Const. Art. X; ch. 326, C. S. 1920. The judgment should be affirmed.

Before BLUME, Chief Justice, POTTER, Justice, and BROWN, District Judge. BLUME, Ch. J., and POTTER, J., concur.

OPINION

BROWN, District Judge.

Defendant, Investors Guaranty Corporation, is a Utah Corporation, authorized to do business in this State, having its principal place of business in this State at Riverton, in Fremont County. It has seven directors, one residing in Utah, one in Omaha, Nebraska, and five at Riverton and Worland in this state. On January 7, 1924, and for a long time prior thereto it owned 183 shares of the capital stock of the Farmers State Bank at Worland, which was more than two thirds of the authorized capital stock of this bank. This 183 shares of stock was carried in the name of the defendant H. W. Kingery who was a director of and the president of both corporations. Defendant W. O. Gray was also a director of each corporation. On or about January 7, 1924, the Investors Guaranty Corporation entered into a contract with Farmers State Bank of Worland, W. H. Kingery, W. O. Gray, J. W. Pulliam, J. W. Pulliam Company, and L. E. Laird, by the terms of which the Investors Guaranty Corporation sold its 183 shares of stock, accepting in payment therefor $ 36,600.00 in notes from the note case of the Farmers State Bank. The purchasers of said stock, Gray, Laird, Pulliam, J.W. Pulliam Company, paying $ 200 per share in cash to said bank for same. On January 7, 1924, the board of directors of the Investors Guaranty Corporation ratified the sale of said stock. There were present at this meeting of the board, Kingery, Gray, Oscar Rohlff and Keating, a bare majority of the board. This was the only time this question came before this board, and we have found no evidence of sale by any one on behalf of the corporation at any other time, so whatever sale of said stock was made, was made at this meeting. Plaintiffs are minority stockholders of the Investors Guaranty Corporation.

As soon as plaintiffs learned of the sale of this stock, they served a notice upon each corporation, upon each member of the board of directors of the Investors Guaranty Corporation and upon each of the alleged purchasers, alleging that the sale was fraudulent and void and demanding that the sale be rescinded or that proceedings be immediately instituted by the Investors Guaranty Corporation for the cancellation of said sale. The Investors Guaranty Corporation failing to bring suit as requested to do, the plaintiffs bring this action alleging that the defendants conspired together for the purpose of defrauding the plaintiffs; that some of the notes accepted in payment of said stock were worthless and all of them greatly less in value than the said stock; that the alleged sale and transfer of said stock was fraudulent and void, and praying for the cancelling and setting aside of said sale and the return of said stock. Defendants answered, admitting the sale, denied the conspiracy, denied that they acted wrongfully or fraudulently, denied that the notes taken in payment for the stock were worthless. Defendants also allege that plaintiffs ought not to maintain its said cause of action for that there is a substantial defect of parties defendant herein, in that D. J. Hundahl, E. Y. Booker, G. R. Kirkpatrick, E. V. Bowen, Ray F. Bower, Earl T. Bower, purchasers of a portion of the 183 shares of stock in controversy in the action have not been made parties defendant or sued in this action. Plaintiffs in their reply deny the new matter in the answer, admit some matters, deny on information and belief the sale of a part of the 183 shares of stock to D. J. Hundahl, E. Y. Booker, G. R. Kirkpatrick, E. V. Bower, Ray F. Bower and Earl T. Bower, or that they have any right to or any interest in said stock, and allege that any right to or interest in said stock was bought with full knowledge of the alleged fraudulent sale.

In the trial of the case below plaintiff failed to show conspiracy or any actual fraud, or that D. J. Hundahl, E. Y. Booker, G. R. Kirkpatrick, E. V. Bower, Ray F. Bower and Earl T. Bower or either of them had any knowledge of any fraud, actual or constructive or any unfair dealings on the part of the purchasers of said stock from the Investors Guaranty Corporation. At the close of plaintiffs' case, defendants moved for judgment in their favor on the ground that plaintiffs had failed to prove the allegations of their petition. This motion was sustained, and judgment entered accordingly.

The case comes to this court on direct appeal.

The plaintiff rely in this court for a reversal of the judgment of the trial court upon the ground of constructive fraud; that because of the fact that Kingery and Gray were directors in both corporations, and Gray was purchasing part of the 183 shares of stock sold and Farmers State Bank of Worland of which Kingery was president was profiting by receiving the cash for the sale of the stock in exchange for notes that were admitted to be "slow," and both Kingery and Gray were necessary to constitute a quorum of the Board of directors of the Investors Guaranty Corporation on January 7, 1924; that the meeting was without a legal quorum and the sale presumptively fraudulent, and should be set aside by a court of equity in a suit by the Investors Guaranty Corporation, or on its failure or refusal to act in a suit by the non-consenting stockholders.

This proposition readily divides itself into two questions: Whether the vote of an interested director can be counted on a matter before the board in which he has an interest adverse to the company, and whether an interested director can be counted in making up a quorum to act on such question.

The directors of a corporation are its agents, and in their dealings with and for the corporation are held to the same strict rule of honesty and fair dealing...