Red Bud Realty Company v. South

• Citation: 131 S.W. 340,96 Ark. 281
• Parties: RED BUD REALTY COMPANY v. SOUTH
• Decision Date: 11 July 1910
• Court: Arkansas Supreme Court

131 S.W. 340

96 Ark. 281

RED BUD REALTY COMPANY v. SOUTH

Supreme Court of Arkansas

July 11, 1910

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

Appeal from Baxter Chancery Court; George T. Humphries, Chancellor reversed.

STATEMENT BY THE COURT.

This was an action instituted by one of the minority stockholders of a business corporation for the purpose of making one of its directors and officers account for the alleged misappropriation of its funds, and to declare him a trustee of certain property claimed to have been purchased by him with its money. The Red Bud Realty Company was organized as a corporation under the laws of the State of Arkansas on the 13th day of May, 1903, with a capital stock of $ 50,000 which was divided into two thousand shares of the par value of $ 25 each. The original stockholders were J. C. South, Thomas Combs, T. J. McClean, H. Devereaux, W. V. Powell and Frank Tuttle, each of whom was the owner of four hundred shares of said capital stock except W. V. Powell, who was the owner of 399 shares and Frank Tuttle, who was the owner of one share. The general nature of the business of the corporation consisted in purchasing, selling and dealing in real estate. The principal, and in fact the only, asset of the corporation at its organization was a tract of land situated in Baxter County, Arkansas. The White River branch of the St. Louis, Iron Mountain & Southern Railway Company was being built at this time through Baxter and other counties of north Arkansas, and this tract of land was located upon its line of railroad. The purpose of the corporators was to establish a town site upon this tract of land and dispose of the lots into which it would be divided. In pursuance of that object, the land was laid out into lots and blocks, and the town of Cotter was established thereon, and the place of business of the corporation was located at that town. At its organization, W. V. Powell was elected president, J. C. South was elected secretary, and Thomas Combs treasurer, of the corporation, and by a resolution of the board of directors Combs was employed to manage the affairs of the company and make sale of the lots, and for his services it was stipulated that he was to receive a stated monthly salary. He at once established the office of the corporation at Cotter, and during the years 1903 and 1904 he sold a great number of lots and collected the purchase money therefor.

In May, 1904, W. V. Powell purchased from T. J. McClean and H. Devereaux their stock in the corporation, and thereby became in effect the owner of three-fifths of the shares of its capital stock. Later in the year he stated to South and Combs, the remaining shareholders, that he was impatient at and dissatisfied with the slowness of the sale of the lots, and proposed that the lots should be sold on what is commonly called the "drawing plan." He proposed that each lot should be sold at the price of $ 50, and that he would select agents who would make the sales upon a commission. At that time Powell was a resident of St. Louis, Missouri, and he proposed that he would carry out this plan for the sale of the lots from that place. At first South and Combs demurred to this proposal, but finally passively acquiesced in the plan. Thereupon, Powell selected agents and proceeded with his proposed scheme of making sale of the lots, and in this manner sold something in excess of eight hundred lots during 1904 and 1905. On November 23, 1905, the lots were awarded to the purchasers by a drawing held at Cotter. From time to time, and up to November 23, 1905, Powell collected the purchase money of these lots, which amounted in the aggregate to something in excess of $ 40,000.

In April, 1905, Powell claimed that he sold four hundred shares of the stock of the corporation to R. X. DeGraw, and that in June, 1905, he sold four hundred shares to L. L. Doyle, and soon thereafter told South and Combs of these sales. The transfer of these shares of stock was never entered on the books of the company, and certificates of the transfer were never filed with the proper public official; but in October and November, 1905, both DeGraw and Doyle met with Powell, South and Combs at Cotter and participated with them at meetings when the business of the corporation was discussed and transacted. It is claimed by Powell, DeGraw and Doyle that the latter gentlemen were duly elected directors of the corporation at one of these meetings, but this is denied by South and Combs. The minutes of the proceedings of the board of directors were very imperfectly kept; the meetings were very irregular, and conducted very informally. The testimony, however, tends to prove that South and Combs recognized these two as owners of shares of the stock, if not as directors. No annual meeting of the stockholders of this corporation was ever called or held from its organization until in October, 1906, when such a meeting was attempted to be held at Little Rock, Arkansas.

About the time of, and frequently after, the drawing and awarding of the lots, which was had upon November 23, 1905, both South and Combs requested Powell to make an accounting of the funds received by him for the lots. He claimed, as a reason for postponing the accounting, that there were certain expenses which were not liquidated, and others that might probably be incurred, and also objected to paying the money over to Combs, the treasurer, because the bank at Cotter was insecure to keep such large funds. Upon their becoming more insistent for a settlement, he paid to Combs $ 2,000 and to South $ 1,000, but still failed to make an accounting.

In September, 1906, as president of the corporation, Powell called a special meeting of the stockholders, to be held at Little Rock, Arkansas, on October 15, 1906. He testified that he mailed notices of the meeting to each of the shareholders, but South claimed that he never did receive such notice. On the stated day all the shareholders except South met at Little Rock, Arkansas; and held an alleged stockholders' meeting of the corporation. They reduced the number of directors from five to four, and elected Powell, Combs, DeGraw and Doyle directors, and changed the place of business of the corporation from Cotter, in Baxter County, to Roe in Monroe County. These alleged directors then met on the same day at the same place, and elected Combs president, Powell vice-president and Doyle secretary and treasurer of the company. At this meeting Powell presented an account of the collections and disbursements made by him of the purchase money of the lots which had been sold through his agency. This account, without reference and without investigation, was immediately approved. A dividend was then declared which Powell claimed disposed substantially of all the funds of the corporation. He claimed that the funds in the hands of Combs were sufficient to pay the amount of the dividends payable to South and Combs, and that he would pay out of the funds in his hands the dividends payable to himself, DeGraw and Doyle. He also claimed that this left in his hands a balance of $ 659.20 a part of which he disbursed in paying the expenses of the shareholders in attending the above meeting, and subsequently he paid the remainder as a retainer fee to his attorney in defending this suit.

On November 30, 1906, J. C. South as sole plaintiff instituted this suit in the Baxter Chancery Court, making W. V. Powell, L. L. Doyle, R. X. DeGraw, Thomas Combs and the Red Bud Realty Company parties thereto. In his complaint, amongst other things, he alleged that Powell was attempting to fraudulently appropriate to his own use funds of the corporation, and had wrongfully misappropriated same; that the statement made by him of expenditures was false, and was for the purpose of depriving the other shareholders of the assets of the company; that Doyle was a brother-in-law, and DeGraw was a business associate and close friend of Powell, and that they did not actually own any of the stock of the corporation, but were merely representatives and dummies of Powell; that Powell, by thus controlling the majority of the stock and the affairs of the corporation, was misappropriating its funds to the injury of the minority shareholders. Subsequently, he alleged in an amended complaint that Powell had purchased the shares of stock from McClean and Devereaux (amounting to eight hundred shares) with money of the corporation, and on this account the purchase of said shares resulted to the benefit of the corporation, and that it became thereby the equitable owner of the shares. He also alleged that Powell had deposited with Combs these certificates of stock, and also the stock which had been issued to him, in order to secure the payment of all indebtedness due by him to the corporation. He asked that the parties be restrained from disposing of any of the above shares of stock; that Powell be required to account for all funds of the corporation, and that a lien be declared upon the shares of stock deposited with Combs for the payment of the amount due by him; and, finally, that the affairs of the corporation be wound up and its assets distributed amongst its shareholders according to their respective interests.

Subsequently, Combs aligned himself as a party plaintiff in the suit, and adopted as his own the complaint of South. The other defendants interposed a demurrer to the complaint, which was overruled. They then made answer thereto, in which they denied the various allegations of the complaint, and in substance alleged that the affairs of the corporation had been properly conducted, and that Powell had correctly and honestly accounted for all its funds which he had received.

When the original complaint was filed, a temporary...