Parsons v. Tacoma Smelting & Refining Co.

• Decision Date: 12 July 1901
• Court: Washington Supreme Court
• Parties: PARSONS et al. v. TACOMA SMELTING & REFINING CO. et al.

65 P. 765

25 Wash. 492

PARSONS et al. v. TACOMA SMELTING & REFINING CO. et al.

Supreme Court of Washington

July 12, 1901

Appeal from superior court, Pierce county; Thomas Carroll, Judge.

Action by Galusha Parsons and others against the Tacoma Smelting &amp Refining Company, a corporation, and others. From a judgment in favor of defendants, plaintiffs appeal. Reversed.

Parsons Parsons & Parsons, for appellants.

J. M Ashton, W. O. Chapman, and W. L. Sachse, for respondents.

REAVIS, C.J.

Appellant Parsons, original plaintiff, brings suit as a stockholder of the Tacoma Smelting & Refining Company against the corporation and the trustees thereof and the Tacoma Smelting Company, a corporation. The other appellants intervened likewise as stockholders, and united with the plaintiff. Appellants, as minority stockholders of the Tacoma Smelting & Refining Company, pray the cancellation of a lease executed by the Tacoma Smelting & Refining Company to the Tacoma Smelting Company. Their complaints allege substantially that the meeting of trustees who resolved upon the execution of the lease did not have a legal quorum of the board present to adopt the resolution; that a majority of the stock of the Tacoma Smelting & Refining Company had, in fact, been transferred to the Tacoma Smelting Company, and was controlled in the interest of the latter company; that at the stockholders' meeting where the trustees were authorized to execute the lease the majority of the stock was controlled by the Tacoma Smelting Company, and voted by a trustee of that company, who was also trustee of the Tacoma Smelting Company; that by the execution of the lease the Tacoma Smelting & Refining Company ceased to perform the functions for which it was organized. After issue joined by the respondents, a trial was had, and a decree followed, dismissing the action. No special findings of fact were made by the superior court. Upon an examination of the facts admitted in the pleadings and shown by the testimony at the trial, so far as deemed material to state, it appears that the Tacoma Milling & Smelting Company was organized under the laws of this state in Pierce county, in 1887, with a nominal capital of $1,000,000. Before commencing business, however, in March, 1890, it amended its articles of incorporation, and changed its name to the Tacoma Smelting & Refining Company, and made a board of seven trustees. Under the latter name it opened stock subscription books, and the whole amount of the capital stock, $1,000,000, was subscribed. There was, however, an agreement made among the subscribers that the stock should be paid for at 50 per cent. of its par value. Theretofore a smelting plant had been erected about seven miles from the city of Tacoma by other parties, and the plant was sold to the corporation for the sum of $375,000, and paid for in capital stock at 50 per cent. of its par value. Respondents Brown and Oakes were respectively elected trustees and president and vice president, and Rust was employed as manager at a salary of $8,000 per year. He was also secretary and a trustee during all the times mentioned thereafter. A Mr. Clark was assistant at a salary of $3,600 per annum, and Mr. Daly at a salary of $2,400. In December, 1898, four of the trustees of the Tacoma Smelting & Refining Company--Brown, Oakes, Rust, and Anderson--met, and resolved that it was for the best interests of the corporation to lease all its plant and properties for the period of 10 years for the annual rental of $5,000, and the payment of taxes, and advancing funds to take up the indebtedness of the company, which was about $50,000. The proposal to make a lease had come through Mr. Rust from a Mr. Perkins, of San Francisco, and, in substance, it was that Mr. Perkins would form an incorporation which should lease all the property of the Tacoma Smelting & Refining Company, and pay the rental as mentioned, if he (Perkins) or the new company could have an option for 18 months to purchase three-fourths of the capital stock of the Tacoma Smelting & Refining Company at $25 per share. This proposition was submitted by the board of trustees to the stockholders of the corporation at a meeting called in December, 1898, at which was represented a majority of the capital stock. At such meeting of the stockholders the proposal to execute the lease submitted by the trustees was approved by a majority of all the stockholders, and thereafter the trustees executed the lease in question. The lease was executed on the 6th of December, 1898, and included all the properties, smelting plant, buildings, machinery, and all property of every description, whether real, personal, or mixed, belonging to the Tacoma Smelting & Refining Company, and also included a provision for purchasing all ore and finished products and supplies then on hand, at its market value, to be thereafter inventoried and appraised, and for which $30,000 was afterwards paid in settlement of the lessor's liabilities. The lessee also covenanted that within six months it would expend at least $30,000 in making improvements and betterments on the smelting plant; that it would pay $5,000 per annum rental, together with taxes, insure the property, and at the end of the term return the property in as good condition, wear and tear excepted, as when received. The resolution of the meeting of the stockholders of the Tacoma Smelting & Refining Company recites as reasons for the execution of the lease that the corporation was without sufficient capital to conduct its business at a profit, or in such a manner as to pay its operating and incidental expenses without drawing upon its capital, and that it was compelled to liquidate its affairs unless capital could be raised; that it had made diligent efforts to raise such capital, without success, until recently, when, through the manager, Mr. Rust, it had been able to arrange so that the business of the company could be continued, and the plant and property of the company preserved and maintained in good order and condition, upon the terms mentioned in the lease. The original plaintiff, who was the owner of 150 shares of capital stock, appeared at such meeting, and protested against the execution of the lease on the ground that the company could not make such lease against the objection of a minority of its stockholders, and that such lease was against the best interests of the company and that of its stockholders; and a similar protest was made to the board of trustees before the execution of the lease. Prior to the execution of the lease the properties were under the management and in the possession of Mr. Rust and his assistants, under the direction of the trustees. The same managers remained, and are now in possession under the new company. It appears that prior to the execution of the lease the proposal of the new corporation to hold in option on three-fourths of the stock in the old corporation was superseded by the purchase of a majority of the stock in the old corporation at $15 per share, and the day after the execution of the lease the stock so purchased was entered upon the books of the new corporation, the Tacoma Smelting Company, as owned by the corporation. A large portion of this stock represented by Mr. Rust as trustee was voted at the stockholders' meeting of the old corporation when the trustees were authorized to execute the lease. Mr. Rust was the only witness who testified. He detailed the history of the old corporation. About 1892-93 it sustained considerable losses because of falling valves in silver and lead. What the aggregate losses were is not stated with precision, but the company had borrowed about $50,000, for which it was liable, and it had no funds on hand. It appears that the operating expenses and salaries during the time had been paid.

1. At the trustees' meeting there were present four of the board of seven,--Anderson, Oakes, Brown, and Rust,--of whom Rust was a promoter and trustee of the new corporation, and controlling a majority of the stock in the old company. Section 4257, 1 Ballinger's Ann. Codes & St., declares 'A majority of the whole number of trustees shall form a board for the transaction of business and every decision of a majority of the persons duly assembled as a board shall be valid as a corporate act.' It is maintained by counsel for respondents that the statute makes every act of a majority of a quorum, when assembled, valid, and that the statute is merely confirmatory of the existing rule at common law. This view of the validity of such action seems to omit a consideration of the trust held by the director. Each occupies a fiduciary relation to the corporation and to each stockholder. He must faithfully perform his trust. The ordinary obligation attending trust relations attaches to the trustee of a corporation. The policy of the law forbids a trustee to assume a double function where there are adverse interests considered. 1 Wat. Corp. p. 612, observes that they cannot, as agents or trustees, enter into or authorize contracts on behalf of those for whom they are appointed to act, and then personally participate in the profits. Morawetz on Corporations lays down the rule that the utmost good faith is required in the exercise of the powers conferred upon trustees. In Munson v. Railroad Co., 103 N.Y. 58, 8 N.E. 355, the court observed of a contract: 'But we are of opinion that the contract of September 14, 1875, is repugnant to the great rule of law which invalidates all contracts made by a trustee or fiduciary, in which he is personally interested, at the election of the party he represents. There is no controversy as to the facts bringing the case as to Munson within the operation of the rule. He and his associates were dealing with a corporation...