Shoen v. Sioux Falls Gas Co.
| Decision Date | 08 June 1935 |
| Docket Number | 7705,7706. |
| Citation | 261 N.W. 393,63 S.D. 527 |
| Parties | SHOEN et al. v. SIOUX FALLS GAS CO. et al. |
| Court | South Dakota Supreme Court |
Appeal from Circuit Court, Minnehaha County; Lucius J. Wall, Judge.
Action in the nature of a creditors' bill by Ellis S. Shoen and others against the Sioux Falls Gas Company and another. From orders overruling their separate demurrers to the complaint defendants appeal.
Reversed.
Judge & Chapman, of Sioux Falls, and John T. Beasley, of Terre Haute Ind., for appellants.
Danforth & Davenport, of Sioux Falls, for respondents.
Defendants have appealed from orders overruling their separate demurrers to the complaint.
The allegations of the voluminous complaint necessary to an understanding of the controversy may be summarized as follows: The defendant corporation is engaged in the business of selling gas for lighting and heating purposes in the city of Sioux Falls. Defendant Whiteman is its vice president and general manager, and is the only officer and managing agent within the state. Plaintiffs are creditors of defendant corporation, and bring this action in behalf of themselves and all other creditors who have a common interest. The ownership and control of the capital stock of the defendant Sioux Falls Gas Company passes through certain intermediate holding companies to the Associated Gas & Electric Company controlled by a group of persons who through interlocking directorates of this and other holding companies have control of approximately two hundred public utility companies as the basis of such pyramid structure. The object and purpose of this pyramid structure "has been and is to formulate, perpetuate and carry on schemes and projects for the sale and marketing of spurious, fictitious and 'watered' stocks and securities." The Associated Gas & Electric Company has uniformly pursued the scheme of selling, or attempting to sell, its securities to people of the communities where the basic companies operate, and by carefully designed propaganda led persons to believe that the securities offered are those of the basic company within the community. The Associated Gas & Electric Company prepared and furnished to the defendant gas company forms of convertible debenture certificates "for the purpose of cheating and defrauding the purchasers thereof, of leading the purchasers to think and believe that they were receiving a bona fide and valuable security when, in fact, such purchasers were receiving a security of no substantial value whatsoever, and of inducing such purchasers to part with their money for securities which were and still are substantially worthless." The certificates issued to the plaintiffs and made a part of the complaint by annexed copies contain provisions and conditions which plaintiffs allege were designed to deceive and render them of substantially no value, but we deem it unnecessary to a determination of this appeal to set them forth. The defendant gas company enlisted the aid of its officers, agents, and employees in a campaign to sell these certificates in the city of Sioux Falls and vicinity. These persons, pursuant to authorization and direction from defendant company, represented to prospective purchasers that the certificates were secured by the assets of the Sioux Falls Gas Company, and that such company was prepared and would pay to the holders at any time the full face value of any certificate issued less in some instances a small transfer charge, and the "sales campaign was so conducted and carried on that the purchasers and prospective purchasers did not have any opportunity whatsoever to inspect certificates before purchasing same." While the sales campaign was in progress, defendant company complied with such agreement, but, since the conclusion thereof, has declined and refused to comply. Plaintiff and other persons "fully believing, relying and acting upon the aforesaid representations and statements and particularly believing, relying and acting upon said statement and assurance that the Sioux Falls Gas Company would at any time upon request take over, purchase and cash such certificates," were induced to make purchases. The face value of certificates sold to residents of Sioux Falls and vicinity through the efforts of defendant company is approximately $500,000, which is substantially the total replacement value of the assets of defendant company, less depreciation, but substantial items of its properties are obsolete and of no appreciable market value, and the greater part of the remaining properties consists of pipe lines for the transmission of gas which have a value only in connection with the gas business. Defendant company operates under a franchise granted by the village of Sioux Falls in 1883 and purporting to extend for a period of 99 years. The governing body of the city of Sioux Falls has taken the position that the franchise is void on the ground that the village had no power to grant the franchise, and, under all of the circumstances existing, the fair, reasonable, and market value of the property and assets of defendant company does not exceed $100,000, which is entirely inadequate to meet the claims of plaintiffs and other creditors. The property of defendant company is not encumbered and no bonds are outstanding, but the Associated Gas & Electric Company, in pursuance of a policy that it is now following, may proceed to encumber such property and deprive plaintiffs of an effective remedy. A proceeding against the Associated Gas & Electric Company is not adequate, for the reason that said company is a foreign corporation and is, as plaintiffs are informed and believe, virtually insolvent, unable to meet its dividends on its various issues of stock, and utterly unable to meet its obligations to plaintiffs and others similarly situated. The Associated Gas & Electric Company has no property in the state, and the expense to each of the plaintiffs of proceeding in a foreign jurisdiction to prosecute their claims individually would be prohibitive. Defendants are continuously transferring to the said holding company or subsidiaries thereof outside of this state large sums of money belonging to defendant Sioux Falls Gas Company, and it is necessary, in order to protect and conserve the rights of plaintiffs and others similarly situated, that a receiver of all the property, assets, affairs, and business of defendant be appointed with power to operate the business pending final determination and upon such determination to liquidate the property and assets of the company and to distribute the proceeds equitably among creditors.
The prayer of the complaint is that the certificates be adjudged to be obligations of the defendant company; that a receiver be appointed; that the assets be liquidated and distributed pro rata among creditors; and that defendants be enjoined pending final determination of this action from marketing or otherwise disposing of assets and placing them beyond the jurisdiction of the court.
Plaintiffs contend in support of the rulings of the trial court upon the demurrers that the complaint states a cause of action in the nature of a creditors' bill, apparently conceding that the complaint cannot otherwise be sustained. The jurisdiction of equity to entertain creditors' suits or bills had its origin in those instances where relief by execution at common law was ineffectual. Pomeroy Eq. Juris. (2d. Ed.) § 2294. The nature, purpose, and scope of such a suit is to bring into exercise the equitable powers of a court to set aside a fraudulent encumbrance or conveyance preventing or hindering an execution at law or to compel the discovery and application of equitable assets or property to the payment of debts. Feldenheimer v. Tressel, 6 Dak. 265, 43 N.W 94; note, 90 Am. Dec. 288. Proceedings by creditors of an insolvent corporation for the...
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