Ryan v. Old Veteran Mining Co.

• Citation: 37 Idaho 625,218 P. 381
• Parties: THOMAS RYAN, Appellant, v. OLD VETERAN MINING COMPANY, a Corporation, et al., Respondents
• Decision Date: 04 August 1923
• Court: Idaho Supreme Court

218 P. 381

37 Idaho 625

THOMAS RYAN, Appellant, v. OLD VETERAN MINING COMPANY, a Corporation, et al., Respondents

Supreme Court of Idaho

August 4, 1923

CORPORATIONS - PROMOTER'S CONTRACT - ACTION OF STOCKHOLDER AGAINST DIRECTORS - FRAUD AND MALFEASANCE OF DIRECTORS-FIDUCIARY RELATION OF DIRECTORS TO STOCKHOLDERS-STATUTE OF LIMITATIONS-SUFFICIENCY OF COMPLAINT.

1. Ordinarily the corporation is the proper party to maintain an action for fraud, misfeasance or malfeasance of its officers. But where it appears that the officers whose acts are complained of are in complete control of the corporation, a stockholder may maintain the action.

2. Directors of corporations act in a fiduciary capacity. They hold the corporate property in trust, and any attempt on their part to divert the use of such property to their personal profit or interest is a violation of the trust imposed by virtue of the office of director.

3. The statute of limitations does not begin to run against an action based upon fraud until the plaintiff in the exercise of proper diligence discovers the facts constituting the fraud.

4. Held, that the plaintiff in this case exercised due diligence in his endeavor to discover the state of facts constituting the fraud upon which his action is based.

5. Held, that the complaint sets forth the time, manner and circumstances of the commission of the fraud alleged with sufficient particularity, and states a cause of action.

APPEAL from the District Court of the First Judicial District, for Shoshone County. Hon. A. H. Featherstone, Judge.

Action upon complaint charging defendant directors with conspiracy fraud and malfeasance. Demurrer to complaint sustained. Reversed and remanded.

Reversed and remanded, with instructions. Costs awarded to appellant.

Isham N. Smith and Therrett Towles, for Appellant.

The directors of corporations stand in the relation of trustees to the corporation and its stockholders with reference to the corporate property, its assets and corporate affairs, and by reason of their fiduciary position the management of the corporate affairs and business of the corporation requires the utmost good faith. They are individually liable to the corporation for fraud, malfeasance or gross negligence whereby its property is wasted, and stockholders deprived of dividends, or their shares depreciated or rendered valueless. (Smith v. Rader, 31 Idaho 423, 173 P. 970; 2 Thompson on Corporations, 2d ed., secs. 1267, 1268; Bowerman v. Hamner, 250 U.S. 504, 39 S.Ct. 549, 63 L.Ed. 1113; Horn Silver Mining Co. v. Ryan, 42 Minn 196, 44 N.W. 56; Riley v. Callahan Mining Co., 28 Idaho 525, 155 P. 665; Pfirman v. Success Mining Co., 30 Idaho 468, 166 P. 216; Hall v. Nieukirk, 12 Idaho 33, 118 Am. St. 188, 85 P. 485; Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N.W. 218, 17 L. R. A. 412; Frontier Milling & Elevator Co. v. The Roy White Co-op. Merc. Co., 25 Idaho 478, 138 P. 825.)

The defense of laches, on the ground that appellant, by inquiry, might have learned the facts relied on, and filed his complaint earlier, is not available to respondents, who occupied a fiduciary relation toward him and were under obligation to disclose to him such facts without inquiry; especially where the delay has worked no inequity to them; and appellant is not chargeable with knowledge of the affairs of the corporation to the same extent as are the officers and directors. (Krohn v. Williamson, 62 F. 869; Wills v. Nehalem Coal Co., 52 Ore. 70, 96 P. 528; 14 C. J., sec. 1285, p. 845; Just v. Idaho Canal etc. Co., 16 Idaho 639; 133 Am. St. 140, 102 P. 381; American Mining Co. v. Trask, 28 Idaho 642, 156 P. 1136; Montgomery Light Co. v. Lahey, 121 Ala. 131, 25 So. 1006; Tilden v. Barber, 268 F. 597; 7 R. C. L., sec. 58, p. 79; Baker v. Schofield, 243 U.S. 114, 37 S.Ct. 333, 61 L.Ed. 626; Diamond v. Connolly, 251 F. 234; Pearsall v. Smith, 149 U.S. 231, 13 S.Ct. 833, 37 L.Ed. 713.)

This action is not barred by the statute of limitation, because it is based on fraud which was not discovered by appellant until shortly before the commencement of the action and the statute of limitations did not commence to run until appellant discovered the facts constituting the fraud. (C. S., sec. 6611, subd. 4; Diamond v. Connolly, supra; 2 Thompson on Corporations, sec. 1318; Tarke v. Bingham, 123 Cal. 163, 55 P. 759; Hillock v. Idaho Title & Trust Co., 22 Idaho 440, 126 P. 612, 42 L. R. A., N. S., 178; 12 C. J., secs. 182, 183, p. 612.)

A stockholder may in his own name sue in equity to enforce the liability of directors of a corporation for fraud, malfeasance or gross negligence, when the corporation refuses, or the present directors in control are themselves answerable, or have an identity of interest with the parties charged. (Smith v. Rader, supra; Just v. Idaho Canal & Imp. Co., supra; Wills v. Nehalem Coal Co., supra.)

C. W. Beale, for Respondents.

The third amended complaint does not state facts sufficient to constitute conspiracy, fraud or unlawful conduct. ( Nelson v. Hudgel, 23 Idaho 327, 130 P. 85; Frank v. Davis, 34 Idaho 678, 203 P. 287; Van Weel v. Winston, 115 U.S. 228, 6 S.Ct. 22, 29 L.Ed. 384; Ambler v. Choteau, 107 U.S. 586, 1 S.Ct. 556, 27 L.Ed. 322; C. S., secs. 4752, 5435.)

The third amended complaint does not allege any conspiracy. ( Pettibone v. United States, 148 U.S. 197, 13 S.Ct. 542, 37 L.Ed. 419.)

Appellant cannot plead ignorance as to the organization of the respondent mining company, or as to any of the acts or things complained of in his third amended complaint, because it appears therein that such organization and such acts and things all became matters of record, either public or corporate, within his knowledge, or which he was bound to know. (Morawetz on Private Corporations, sec. 591; Frank v. Davis, supra; Stout v. Cunningham, 33 Idaho 464, 196 P. 208.)

Appellant was guilty of the grossest laches in not commencing this cause sooner, and has not shown any excuse for his delay, or that he could not have forced an earlier examination of the books and records of the respondent mining company, and is barred from maintaining this cause by such gross laches. ( Olympia Mining & Mill. Co. v. Kerns, 24 Idaho 481, 135 P. 255; Kelly v. Dolan, 233 F. 635, 147 C. C. A. 443.)

MCNAUGHTON, District Judge. McCarthy, William A. Lee and Wm. E. Lee, JJ., concur.

OPINION

MCNAUGHTON, District Judge.

--This suit was commenced September 30, 1919. It is an action by plaintiff, a shareholder of Old Veteran Mining Company, against F. H. Harper and the directors of the company charging Harper and the directors with unlawfully conspiring and agreeing together to do, and doing, certain acts and things therein set forth for the purpose of cheating and defrauding plaintiff out of certain mining claims and rendering his stock in the corporation worthless, and cheating and defrauding the corporation out of a large amount of money and a large number of its shares of corporate stock. Plaintiff asks that a receiver be appointed, that 300,000 shares of the stock issued to Harper and the directors be declared to have been issued without consideration and canceled and surrendered to the company, or that plaintiff have judgment for the par value of the same with interest for the use of the corporation; that the directors be ousted from office and that all defendants be required to account to plaintiff, for the company, for all moneys collected by them as such officers.

Defendants demurred generally, and on the ground that the cause was barred by the statute of limitations, also specially on the ground that the complaint is indefinite and uncertain.

The pleadings, both complaint and demurrer, are voluminous, setting forth matter relied upon with much particularity, but the gist of plaintiff's claim is that on January 6, 1915, plaintiff and Charles Eckel were the owners of certain mining claims hereinafter referred to, together with cabins, fixtures, mining machinery and tools situate thereon, upon which claims there was on said date more than $ 15,000 worth of development work performed; that on said date plaintiff and Eckel entered into an agreement with F. H. Harper, wherein, after describing the seven mining claims and reciting that first parties were desirous of selling same and second party was desirous of purchasing them, it was agreed that party of the second part would form a corporation with a capital stock of $ 150,000 divided into shares of the par value of ten cents each; that upon the organization of the corporation first parties would convey to the corporation said mining claims in consideration of 200,000 shares of non-assessable stock in said corporation, and $ 4,140 payable in instalments, said payments to be secured by mortgage on the claims.

That on February 25, 1915, defendant Harper, together with defendants M. J. Farrell and L. L. Brainard, executed articles of incorporation of Old Veteran Mining Company, which were shortly thereafter duly filed. The articles are made a part of the complaint, and it appears that G. H. Harper, M. J. Farrell, Allan G. Kennedy, Bert Farrell and L. L. Brainard were stock subscribers, each subscribing for one share of stock.

Article 8 of the Articles of Incorporation is as follows: "The said corporation is formed upon the basis of a conveyance to it by the owners thereof of the following named lode mining claims, situate, lying and being in the Lalande Mining District, County of Shoshone, State of Idaho, to wit: 'Idaho,' 'Knocker,' 'Never Miss,' 'Release,' 'Curry,' 'Gopher,' and 'Lifter' lode mining claims. And in consideration of the conveyance as above set forth it is expressly stipulated, understood and agreed, and the board of directors of this corporation may, by proper...