Riles v. Coston-Riles Lumber Co.

• Decision Date: 26 October 1922
• Docket Number: 6 Div. 538.
• Citation: 208 Ala. 508,95 So. 43
• Parties: RILES ET AL. v. COSTON-RILES LUMBER CO.
• Court: Alabama Supreme Court

95 So. 43

208 Ala. 508

RILES ET AL. v. COSTON-RILES LUMBER CO.

6 Div. 538.

Supreme Court of Alabama

October 26, 1922

Rehearing Denied Dec. 7, 1922.

Appeal from Circuit Court, Jefferson County; J. C. B. Gwin, Judge.

Bill by the Coston-Riles Lumber Company against I. M. Riles and others. From a decree overruling their separate demurrers, I M. Riles, William Varner, and the Farmers' State Bank appeal. Reversed, rendered, and remanded.

The objection that the bill was without equity as to the respondents who resided within the county where the suit was brought, so that they were not, therefore, material respondents who resided in the county within the contemplation of Code 1907, § 3093, is available by demurrer to other respondents residing in other counties.

The bill is filed by the Coston-Riles Lumber Company, a corporation organized under the laws of Alabama, with principal place of business in Bessemer, Jefferson county Ala., against W. L. Coston, E. C. Coston, C.J. Donald, T. C Donald, M. C. Thomas, O. W. Lewis, and William Waldrop residents of Jefferson county; I. M. Riles, B. H. Oats, A. P Mize, R. P. Prowell, and Fleetwood Rice, residents of Tuscaloosa county; William Varner, resident of Macon county; A. J. Krebs, resident of Atlanta, Ga.; the First National Bank of Tuscaloosa, with principal place of business in Tuscaloosa; and Farmers' State Bank, with principal place of business in Macon county.

The bill alleges that I. M. Riles, as a promotor, conceived, and with the co-operation and assistance of William Varner executed, the design and plan of forming complainant into a corporation, resulting in the frauds and wrongs alleged and complained of, in substance, as follows:

About January 31, 1920, Riles procured from one E. R. Alexander an option on the timber and timber rights on a large tract of land in Macon county, and at about the same time procured from William Varner a like option on lands in the same county, at prices, respectively, of $20,000 and $26,000. At that time, or soon thereafter, Riles and Varner, one or both, conceived the idea of organizing a corporation to which they would sell the timber and timber rights on the Alexander and Varner lands at a price greatly in excess of that fixed in the options. About March 15, 1920, Riles, with the knowledge and consent of Varner, went to Bessemer and proposed to W. L. Coston, T. C. Donald, C.J. Donald, O. W. Lewis, and M. C. Thomas the formation of the complainant corporation, representing to them that he had had much experience in the timber business; that he had until recently been connected with a lumber concern in Tuscaloosa county, as manager, and that he had disposed of his stock in that concern for $18,000, which he desired to put into the proposed corporation; that he had options on the timber rights on a large body of land in Macon county; that he was desirous of giving the proposed corporation and his prospective associates the benefit of such options, and would procure sales of such timber rights to the corporation at the prices and under the terms provided in his options, without any profit to himself; that he would take and pay for one-half of the paid-up capital stock, his prospective associates to take and pay for the remaining half; and that with such funds the corporation would exercise the mentioned options.

On June 12, 1920, Riles and W. L. Coston, T. C. Donald, C.J. Donald, O. W. Lewis, and M. C. Thomas entered into an agreement to form the proposed corporation, with a capital stock of $100,000, of which $43,000 was to be paid in, provided satisfactory terms could be secured for the purchase price of the timber rights mentioned. Riles secured a satisfactory arrangement with Varner for such purchase, and thereafter, in accordance with the agreement, the corporation was formed, but with paid-in capital stock of $60,000. It is alleged that in the agreements looking to the formation of the corporation Varner was apparently not known as one of the original incorporators, but that he was to receive and did get a part of the original issue of capital stock.

Following the formation of the complainant corporation, it is alleged, Riles and Varner procured Alexander to execute a deed to the corporation to the timber rights covered by his option to Riles; and Riles also procured a deed to be executed by Varner to the corporation to the timber rights covered by his option. It is averred that, while the recited consideration in the deed from Alexander was $20,000, the real consideration paid by the corporation was $30,000; and that Riles and Varner realized from the transaction a secret profit of $10,000 at the expense of the complainant corporation. It is further averred that, while the recited consideration in the deed from Varner was $12,750 and "other and further good and valuable consideration to be paid," the real consideration was $12,750 in cash and $42,750 in notes executed by Riles, in the name of complainant, payable to Varner, and indorsed by the organizers of complainant corporation, all of the notes being delivered to Varner; that by this transaction Riles and Varner, one or both, realized a secret profit, at the expense of complainant, of $29,000; and it is averred that of the $42,750 in notes $10,000 has been paid and has been equally divided by Riles and Varner.

It is alleged that the notes so delivered to Varner were three for $10,000 each and two for $6,375 each; that Varner delivered to Riles one of the notes $10,000 and one for $6,375, in addition to one-half of the proceeds of the note for $10,000 which was paid by the complainant.

The bill alleges that the notes delivered by Varner to Riles are now held by the First National Bank of Tuscaloosa, which is not a bona fide holder; but that said Bank had notice at the time it took the notes of the frauds and wrongs complained of, or was in possession of sufficient facts to charge it with notice of the fraud practiced on complainant and its innocent shareholders by Riles and Varner; and that the bank did not pay full value for the notes.

By the fifth paragraph of the bill it is alleged:

"That while the certificate of incorporation of complainant recites that $60,000 was paid in at its organization and on that amount it purports to have commenced business and that this amount was paid in in cash, said statement is not true, in that $5,000 of the amount credited to respondents W. L. Coston, T. C. Donald, C.J. Donald, M. C. Thomas, and O. W. Lewis, $1,000 to each, was in fact a transfer by them to complainant of a sawmill and sawmill outfit at a value fixed at $5,000, which complainant avers was a fraud on it, in that the said sawmill and sawmill outfit was not of a value in excess of $1,500 or $2,000, and complainant further avers that as a consideration for said sawmill and sawmill outfit there was issued to and is now held by said parties $1,000 of the capital stock of complainant each, which said issue of stock to said five respondents was a fraud on this complainant and was issued without proper consideration therefor."

It is further alleged that the Farmers' State Bank holds $4,500 of the capital stock of complainant as collateral security, which stock was issued to Riles without consideration and as the result of fraud; that said stock has not been transferred on the books of complainant, and that complainant has a superior lien thereon; that that bank had knowledge or notice of the fraud; that said stock is held as collateral for a note purporting to have been executed by Riles and Coston; that said bank has filed suit on the note against the complainant; and that Riles and Coston did not have authority to bind the complainant by said note.

Paragraph 10 of the bill is as follows:

"That in January, 1921, the said respondents who had control of complainant corporation issued to the respondent William Waldrop $7,200 of the capital stock of complainant, for which said sum Waldrop paid full value, which said stock is now held by said William Waldrop and of which he is a bona fide purchaser for full value; and complainant avers that the said $7,200 was turned into the treasury of complainant corporation, and that the said Riles

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