Rhea v. Newton

• Decision Date: 02 December 1919
• Docket Number: 5280.
• Citation: 262 F. 345
• Parties: RHEA et al. v. NEWTON et al.
• Court: U.S. Court of Appeals — Eighth Circuit

262 F. 345

RHEA et al. v. NEWTON et al.

No. 5280.

United States Court of Appeals, Eighth Circuit.

December 2, 1919

This is an appeal from a decree holding that appellant Rhea and the Mont B. Mining Company were liable as trustees to account to appellees, who were plaintiffs below, and fixing the amount of the recovery. Two suits were begun, but later they were consolidated and heard and decided as one case. The plaintiff in one suit was Catherine Newton and in the other the plaintiffs were William H. Whitlock and his wife. The defendants were the same in both suits and were the First National Bank of Carthage, Mo., Ernest B. Jacobs, its cashier, William A. Rhea, Mont B. Fairfield, and the Mont B Mining Company, a corporation.

It was alleged that plaintiff Newton was the owner of 25,000 shares and that plaintiffs William H. Whitlock and wife were the owners of 24,990 shares, of the capital stock of the Ananias Mining Company, a corporation with an authorized capital stock of 100,000 shares, but which had issued only 87,500 shares; that Rhea owned 25,000 shares, and of the remainder W. F. Webster owned 12,500 shares, E. M. hall owned 5, and 5 were owned by C. T. Hall; that the Ananias Company owned a mining lease and mining machinery, and carried on mining operations on its land in Jasper county, Mo.; that Rhea was a director, secretary, and treasurer, and managed the mining operations; that the other directors were Whitlock and his wife and the two Halls, but that the Halls were the nominees of Whitlock and Rhea, and as directors conformed to the wishes of Rhea and Whitlock. It was alleged that the Ananias Company became involved in debts that it was unable to meet and was pressed by its creditors, and that the bank, as one of the creditors, and Jacobs, its cashier, on behalf of the creditors, proposed to the stockholders that they should permit the mining property to be placed in the hands of a trustee, to be held until by its operations it should pay its debts, or be sold by the trustee and the debts paid, after which all remaining money realized by the company's operations was to be returned to the stockholders, and that this arrangement was to be effected by the stockholders assigning and placing their stock in escrow with Jacobs and the bank.

The Whitlocks' bill then alleged that, pursuant to this proposition, they assigned to Jacobs their 24,990 shares of stock, and that Jacobs and the bank accepted the trust. Newton's bill set out copies of letters between Jacobs as cashier, and Newton's attorneys, alleged as defining the terms of the trust agreement between them. These letters are too extended to be set forth in full, but a portion of the bank's letter making the proposal is as follows:

'At this time it appears that an agreement can be reached among all creditors whereby they will enter into a contract to withhold the prosecution of their claims for a period of 90 days during which time they will place the property in the hands of a trustee, and he will operate the same with an experienced manager, and if within that time, as they confidently expect, the mine can be made to pay, then there will be no reasonable doubt that creditors will receive their money, and the property can be sold at a fair valuation. If this course is not adopted, bankruptcy proceedings will immediately ensue, and the result will be that the creditors will realize but very little upon their various claims, for the largest value of the company lies in its lease and the ground, which will immediately be forfeited by the owners of the land as soon as work is discontinued; such a course would necessarily leave the machinery as the only tangible asset out of which to pay the indebtedness.

'The creditors do not desire to advance the money necessary to put the mine in operation, unless they can feel assured that the stockholders will not interfere, or possibly stop their operations at a time which might be vital to the interest of all concerned, and it is proposed that all stock shall be assigned and placed in escrow in this bank, to be held subject to an agreement, which is to be prepared and accepted by the stockholders, whereby the creditors, after placing the mine upon a paying basis, may have the authority to make a sale of the property in order to pay the indebtedness and save the stockholders something upon their investment. Mr. Whitlock and Mr. Ray, local stockholders of the company, and who own one-half of the capital stock, have agreed to this proposition, and are willing to pool their stock as above indicated. It is also agreed by them that they shall both resign from the board, as well as other local parties and that a new board of directors, composed of the principal creditors, shall be elected in their stead.

'I believe I have outlined the matter sufficiently for you to obtain a fair idea of the situation, and I wish to urge that the stock held by the Newton estate be deposited with Mr. Whitlock's and Mr. Ray's, in order to consummate the plan above referred to. It is the only chance to save anything out of the property, either for creditors or stockholders, and if this course be not carried out and a bankruptcy court be the only resort, creditors will naturally be inclined to take such recourse as may be possible upon the individual liability of stockholders, through irregularities in the corporation, which appear to be numerous, as well as stock which has been unpaid for by various shareholders.'

The answer of Mrs. Newton's attorneys contained the following:

'In further reply to yours of April 26th will say that I find that the stock of the Ananias Mining Company, owned by the estate of A. Newton and Catherine E. Newton, is already on deposit with you under certain agreement with Mr. Whitlock. That agreement is hereby canceled, and the stock is placed in your hands in accordance with the request contained in yours of April 26th. We desire to give you full authority to deposit the same in accordance with the wishes of the creditors as set forth in your letter, with this condition, however, that nothing must be done by which the estate of Mr. Newton or Mrs. Newton will become liable for $1 of any indebtedness or obligation whatever. Rather than do that, we would let the entire thing go. Hoping that in the end there will be something left for Mrs. Newton, we have, however, told her to forget all about the stock, and if she receives no return, well and good, and if in the end she does she is just that much better off.'

To this letter the bank replied:

'I have neglected earlier replying to your letter of the 1st inst. in relation to the Ananias Mining Company stock owned by the estate of A. Newton and Catherine Newton. I have filed the stock with your instructions attached, and sincerely hope that better results may be reported for the future than the past; but Mr. Whitlock has gotten this company badly involved, and whether or not it can be pulled out of the hole will depend upon various conditions.' In each of the bills it was then alleged that the bank and Jacobs, after accepting the trust, took possession of the property of the Ananias Company and selected Rhea as the manager of the property. The Newton bill alleged that Rhea had full knowledge of the trust. The Whitlock bill alleged that Rhea was selected by Jacobs and the bank as manager of the property for the purpose of carrying out the trust alleged in their bill. In each bill it was averred that Rhea conspired with Jacobs, the bank, and with Mont B. Fairfield to obtain the title to the property, and in order to do so induced a creditor of the Ananias Company, holding a judgment against the Ananias Company, to levy an execution against its property and to sell it, and that at that sale Rhea caused the property to be bid in in the name of Mont B. Fairfield, and that the sheriff thereupon executed a bill of sale for the property to Fairfield. It was alleged that Fairfield conveyed the property to the Mont B. Company, but that this transfer was in breach of the trust. The bills then charged that all creditors of the Ananias Company had been paid out of the proceeds of the trust, but that defendants still retained plaintiffs' shares of stock and the property of the Ananias Company, and had made large profits therefrom. The prayers were for a decree declaring a trust to exist, as alleged, in the property of the Ananias Company, notwithstanding the form of a sale to Fairfield, and for an accounting.

There was a denial by Rhea of the alleged trusts, or of knowledge of them, or of purchase of the property through conspiracy. He alleged that the execution sale was fair and conveyed the title to Mont B. Fairfield, and that the Ananias Company also executed a conveyance of all its property to him; that the Ananias Company was in an insolvent condition, and the stockholders agreed to assign their stock to the creditors and that the creditors should take the corporation and its property in full payment for their debts, with the right either to sell the corporate property or to continue the corporate existence for their own benefit, and that the property of the corporation and the shares of stock (except those belonging to W. F. webster) were delivered to the creditors pursuant to this agreement, together with the resignation of the officers and directors, and that the new stockholders elected new directors, who chose new officers for the corporation. He alleged that the Ananias Company, by its new officers, made a written agreement to sell him the property, if he should be able to pay the claims of the creditors; that on the faith of this contract he expended a large amount in improvements on the property and in acquiring new mining ground adjacent to the property of the ...