Preston v. Howell
| Decision Date | 20 November 1934 |
| Docket Number | 42377 |
| Citation | 257 N.W. 415,219 Iowa 230 |
| Parties | BYRON W. PRESTON et al., Plaintiff, Appellees, v. H. R. HOWELL et al., Defendant, Appellees; J. H. COWNIE, Defendant, Appellant |
| Court | Iowa Supreme Court |
REHEARING DENIED APRIL 5, 1935.
Appeal from Polk District Court.--JOHN J. HALLORAN, Judge.
This is an action by bondholders and general creditors of the Commercial Building & Securities Company, to recover from the directors and officers of the corporation upon an alleged statutory liability for debts alleged to have been incurred in excess of the statutory limit under section 8380 of the Code of 1927.
The lower court found that there was no liability on the part of the directors because of an excessive debt created by the issuance of bonds; it also authorized a dismissal of the action as to the defendants McPherrin, St. John, Swanson Sears, and Loucks; continued the case for service as to the defendants Cummins and Taylor; and entered a decree and judgment against the other directors upon claims of certain general creditors. Opinion states facts.--Affirmed in part reversed in part.
Affirmed in part; reversed in part.
Bradshaw, Schenk & Fowler, for defendant-appellant J. H. Cownie.
Howard L. Bump and Salinger, Reynolds & Myers, for plaintiffs, interveners, and bondholders' committee composed of Arthur Newman, James Hubbell, Earl Linn, J. L. Parrish, and J. B. Lichty.
Howard L. Bump, for appellees G. H. Ragsdale, E. G. Ragsdale, H. B. Ragsdale, Grace H. Goodwin, J. K. & W. H. Gilcrest Co., Bankers Trust Co., Globe Machinery & Supply Co., L. H. Chamberlain, Des Moines Ice & Fuel Co. (Central Service Company). Des Moines Steel Co., Perkins Builders & Supply Co., Peoples Abstract Co., G. W. Marquardt Estate, O'Dea Hardware Co., and Iowa Pipe and Tile Co.
Addison M. Parker, for appellees A. C. Page, Addison M. Parker, and Ralph H. Plumb.
Cosson & Newcomb, for appellee H. C. Hargrove.
Rufus Scott, for appellee H. R. Howell.
Gillespie, Moody & Stewart, for appellees Queal Lumber Co. and Sanitary Plumbing Co. (Parnell Sims).
Henry L. Adams and George A. Kern, for appellee George A. Kern, receiver of the Commercial Building & Securities Co.
Paul H. Cunningham and Nelson Royal, for appellee Capital City Nurseries (Henry L. Merkel).
John A. Blanchard, Jr., for appellee Elmer Loucks.
W. E. Miller and D. L. Murrow, for appellee Grant McPherrin.
Gibson & Stewart, for appellee Harriett B. Sears, administratrix of W. W. Sears estate.
Judson E. Piper, for appellee Jewett Lumber Co.
The Commercial Building & Securities Company was a corporation organized under the laws of Iowa, in January, 1920, with a paid-up capital stock of about $ 300,000. Its business was to buy, improve, and sell real estate. For this purpose the company was authorized to borrow money upon its bonds, and secure the same by mortgages and other collateral. Between the time of its organization in 1920 and 1925, the corporation incurred a bonded indebtedness of about $ 600,000 and issued bonds therefor. These bonds were issued in series, and when issued were fairly well secured by real estate mortgages and other collateral at their then fairly estimated value. The collateral securities for said bonds were, by an indenture of trust, placed in the hands of the Central State Bank as trustee, for the exclusive benefit of the bondholders.
During that time the corporation also incurred an additional general indebtedness which, with interest, amounted to approximately $ 50,000. The claims for this indebtedness were held by general creditors of the corporation, and were represented by notes, trade acceptances, and accounts payable, all of which arose out of the purchase of materials, and for labor used in the improvement of the company's real estate.
This action involves the claims of (1) the plaintiff bondholders against the defendant directors for an alleged statutory liability for incurring a bonded indebtedness in excess of the debt limit authorized by statute, and (2) the claims of general creditors for an alleged statutory liability for incurring an indebtedness in excess of the statutory debt limit, which was two-thirds of its paid up capital stock. During the time in question, sections 8351 and 8380 of the Code of 1927 were in effect. These provide:
The action for the bondholders was commenced July 29, 1930. None of the general creditors were made parties in the original action. Under the law as announced in Platner v. Hughes, 200 Iowa 1363, 206 N.W. 268, 43 A.L.R. 1141, this kind of an action is of an equitable character, in which all directors and creditors must be made parties, for the purpose of determining once and for all their rights and liabilities. After the commencement of the action the plaintiffs moved that all creditors be made parties. This motion was sustained, and the creditors came in by intervention, or as parties defendants.
The record shows that if the bonded indebtedness be considered a debt, then the corporation indebtedness was greatly in excess of the statutory limit. The securities placed in the hands of the trustee for the benefit of the bondholders were, at such times, estimated at a value fairly equal to the bonded indebtedness. During the last few years of its existence, however, the corporation, on account of declining property values, had hard sledding. Its financial condition became gradually worse until July, 1925, when its affairs were placed in receivership.
The defendant directors held their positions as such during the following periods:
H. C. Hargrove, 1920 to January 3, 1923, inclusive.
J. H. Cownie, 1920 to January 27, 1925, inclusive.
Addison M. Parker, 1920 to January 27, 1925, inclusive.
H. R. Howell, 1920 to July 22, 1925, inclusive.
Ralph H. Plumb, June, 1920, to July 22, 1925, inclusive.
A. C. Page, February 4, 1921, to July 22, 1925, inclusive.
J. T. Blackburn, 1920 to January 5, 1921, inclusive.
Frank Cummins, January, 1925, to July 22, 1925, inclusive.
H. S. Taylor, 1920 to July 22, 1925, inclusive.
Grant McPherrin, 1920 to January 1, 1924, inclusive.
Fred W. Swanson, June, 1920, to March 28, 1924, inclusive.
Elmer Loucks, June, 1920, to January 28, 1925, inclusive.
Walter St. John, June, 1920, to July 22, 1925, inclusive.
W. W. Sears, 1920 to July 22, 1925, inclusive.
The action as to the defendants Cummins and Taylor was continued by the lower court for service; the action as to defendants McPherrin, St. John, Swanson, Sears, and Loucks was settled and dismissed under a contract not to sue; judgment for $ 30,191.35 in favor of certain general creditors was entered against Directors Hargrove, Cownie, Parker, Howell, Plumb, and Page, as more fully stated in a following division of this opinion. All these defendants appeal except Hargrove and Howell. There was also a judgment rendered in favor of the defendant directors upon claims of the bondholders, from which plaintiff bondholders appeal.
Directors Howell and Taylor, respectively, were also at all times president and secretary of the corporation, and, as such, were also appointed general managers of the corporation, and continued in the direct management of the company's affairs until it went into receivership in July, 1925. Aside from the managing officers of the corporation, the directors were all prominent business men engaged in other lines of business.
The record shows that the various bond issues were consented to and voted for by all of said directors during the periods, and at the times, each was on the board, as hereinabove shown.
I. The first question for consideration is the liability of the directors to the bondholders because of the bonded indebtedness of several hundred thousand dollars in excess of the alleged debt limit authorized by statute. There is some contention that the bonds do not constitute a general debt of the corporation. The indenture of trust, however, contains the following provision: "It is understood and agreed that the Company shall be liable for the payment of said bonds, in the event the collateral security deposited with said Trustees shall be, for any reason insufficient to fully pay the same."
Payment on all bonds was stopped, and they all matured on the appointment of a receiver in July, 1925. It is conceded that at that time the collateral in the hands of the trustee was grossly inadequate to pay more than a small per cent of the bonded indebtedness. It must therefore be conceded that the bonds are corporation debts, and that the debt limit authorized by law was, by the bond issues, exceeded by several hundred thousand dollars.
(1) It is contended, however, by the directors that the bondholders, in purchasing their bonds, agreed to and released the officers and directors of the corporation of and from any and all personal liability created by the statute. The bonds in question were issued under an indenture of trust, and all of the bonds contain upon their face and in the body of each bond the following reference to the provisions in the indentures of trust:
"These bonds are issued by authority of the Board of Directors of...
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