State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co.

• Decision Date: 30 April 1964
• Docket Number: No. 36959,36959
• Citation: 64 Wn.2d 375,391 P.2d 979
• Court: Washington Supreme Court
• Parties: The STATE of Washington, on the relation of HAYES OYSTER COMPANY, an Oregon corporation, Respondent, v. KEYPOINT OYSTER COMPANY, a Washington corporation, and Joseph W. Engman, the president thereof, and Edith M. Engman, the secretary thereof, Appellants, Coast Oyster Company, a Washington corporation, Joseph W. Engman and Edith M. Engman, Appellants, Sam Hayes and Verne Hayes, Respondents.

Page 375

64 Wn.2d 375

391 P.2d 979

The STATE of Washington, on the relation of HAYES OYSTER

COMPANY, an Oregon corporation, Respondent, v. KEYPOINT OYSTER COMPANY, a Washington corporation, and Joseph W. Engman, the president thereof, and Edith

M. Engman, the secretary thereof, Appellants,

Coast Oyster Company, a Washington corporation, Joseph W.

Engman and Edith M. Engman, Appellants,

Sam Hayes and Verne Hayes, Respondents.

No. 36959.

Supreme Court of Washington, Department 2.

April 30, 1964.

Rehearing Denied July 21, 1964.

Orville C. Hatch, Helsell, Paul, Fetterman, Todd & Hokanson, William A. Helsell, Seattle, for appellants.

Cook, Flanagan & Berst, George S. Cook, Seattle, for respondents.

DENNEY, Judge. ^*

This is an action to determine ownership of an interest in the capital stock of a corporation under circumstances requiring consideration of corporate morality and ethics in the conduct of the president, manager and director of a corporation in the sale of corporate assets.

The parties are Hayes Oyster Company, an Oregon corporation, hereinafter called Hayes Oyster; Coast Oyster Company, a Washington corporation, hereinafter called Coast; Keypoint Oyster Company, a Washington corporation, hereinafter called Keypoint; Joseph W. Engman, his wife, Edith M. Engman; Verne Hayes and Sam Hayes. Verne Hayes will be referred to as Hayes unless designated otherwise.

The action was commenced against Keypoint to require transfer of 50 per cent of its stock to Hayes Oyster. Keypoint disclaimed ownership of the stock and interpleaded other parties heretofore mentioned.

Hayes was one of the founders of Coast which, over the years, became a public corporation and acquired several large oyster property holdings, among which were oyster beds and facilities for harvesting oysters located at Allyn and Poulsbo, Washington. These properties will hereafter be referred to as Allyn and Poulsbo. Hayes was an officer and director of Coast from its incorporation and was president and manager and owner of 23 per cent of its stock in the year 1960, and a portion of 1961, during which time the events leading to this litigation occurred.

On October 21, 1958, Coast and Hayes entered into a full employment contract by which Hayes was to act as president and manager of Coast for a 10-year period and to refrain directly or indirectly from taking part in any business which would be in competition with the business of Coast, except Hayes Oyster.

Hayes Oyster was a family-owned corporation in which Sam Hayes owned about 75 per cent and Verne Hayes about 25 per cent of its stock.

In the spring of 1960, Coast owed substantial amounts to several creditors and it became apparent that the corporation must have cash if it was to continue in business. Several alternatives were considered by the directors of Coast, among them Hayes' suggestion to sell Allyn and Poulsbo. In June, 1960, Hayes inquired of Engman, a long-time employee of Coast and a man thoroughly familiar with the operation of the oyster properties, if Engman would be interested in purchasing Allyn and Poulsbo. Engman was interested but needed capital with which to commence operations. Engman then asked Hayes if he would 'come in' with him. Hayes replied that his full-employment contract with Coast might forbid it, but he would consult Ward Kumm, hereinafter called Kumm, attorney for and long-time director of Coast.

Hayes testified that in July, 1960, he told Engman that he had consulted with Kumm and his brother Sam Hayes and that Hayes Oyster could aid Engman in securing the initial capital required by Engman. (Kumm denied that he ever talked to Hayes on the matter.) At this time, Engman told Hayes he would attempt to secure a loan from relatives.

On August 4, 1960, an informal meeting was held in Long Beach, California, attended by Hayes, Kumm, and representatives of Van Camp Seafoods Company, owner of 23 per cent of Coast stock, and Rupert Fish Company, a wholly owned subsidiary of British Columbia Packers, Ltd., owner of 38 per cent of such stock. Hayes' plan to sell Allyn and Poulsbo was approved and a meeting of Coast's board of directors was called. On August 11, 1960, the board of directors of Coast approved the sale of Allyn and Poulsbo to Engman at a price of $250,000, nothing down, payment of $25,000 a year, interest at 5 per cent on unpaid balance. Coast was thereby relieved of the expense incident to raising and harvesting oysters at Allyn and Poulsbo and was to receive instead at least $25,000 a year, thus improving Coast's cash position. Hayes informed Engman of the action of the board of directors and put him in possession of Allyn and Poulsbo on August 16, 1960.

Engman instructed Kumm to draw the necessary documents to incorporate the new enterprise to be known as Keypoint Oyster Company, which was to enter into the contract with Coast for the purchase of Allyn and Poulsbo. Engman, his wife, and Sam Hayes were the incorporators, directors and officers of Keypoint. The initial paidin capital was $500. Certificate No. 1 for 250 shares of stock was issued to Engman, certificate No. 2 for 249 shares to Engman's wife, and certificate No. 3 for one qualifying share to Sam Hayes. Kumm forwarded the stock certificates to Engman, accompanied by a separate assignment in blank of certificate No. 2. Kumm also drew the contract of sale in accordance with instructions from Engman and Coast.

The incorporation of Keypoint was completed on October 1, 1960. Kumm believed that it was necessary, or at least prudent, to secure the approval of the shareholders of Coast to the contract for sale of such valuable properties. A shareholders' meeting was held on October 21, 1960, at which time Kumm explained the contract. Hayes held proxies, which, with his own stock, authorized him to vote a majority of Coast stock. He did so in favor of a resolution authorizing Hayes to sign the proposed contract on behalf of Coast. Hayes signed as president of Coast; Engman signed as president of Keypoint.

Shortly thereafter, Engman delivered to Verne Hayes Keypoint certificate of stock No. 2, issued to Edith Engman, together with the separate assignment signed by her in which the name of the assignee was left blank. It is undisputed that the words 'Hayes Oyster Company' as assignee were not typed in said assignment until July 5, 1962.

We must now retrace our steps to late August and early September, 1960. Engman decided against pursuing his intent to seek a loan from relatives for initial operating capital, and instead made an application to a Poulsbo bank for a loan of $15,000. Engman's financial statement did not satisfy the bank as sufficient to justify such a large loan. Engman then solicited the aid of Hayes, who co-signed a note for $15,000, and the funds secured thereby provided sufficient capital for Engman to commence operations. This note was paid in full on March 13, 1961.

The trial court found that, on September 1, 1960, Hayes and Engman agreed that Hayes Oyster would acquire 50 per cent interest in Keypoint in consideration of Hayes co-signing the note. Hayes did not sign the note as an officer of Hayes Oyster, nor did he reveal to the bank that Hayes Oyster had any interest in the transaction. The trial court also concluded that Hayes' signature on the note was adequate consideration for Engman's promise to give Hayes Oyster a one-half interest in Keypoint. We accept this conclusion.

Hayes made no mention at the meeting in Long Beach on August 4, 1960, or at the Coast directors' meeting on August 11, 1960, that Hayes or Hayes Oyster might acquire some interest in Keypoint. Hayes made no disclosure to any officer, director, stockholder or employee of Coast at the shareholders' meeting or at the time Hayes signed the contract for Coast on October 21, 1960, that Hayes or Hayes Oyster were to participate in or have a financial interest in Keypoint. Indeed, Coast acquired no knowledge of the Engman-Hayes deal until subsequent to the termination of Hayes' administrative duties as president and general manager of Coast in May, 1961; and subsequent to the time Hayes sold his stock in Coast and the execution of an agreement on March 7, 1962, between Hayes and Coast, by which Hayes' rights and obligations under the 1958 full-employment contract were settled.

On June 23, 1962, Verne and Sam Hayes made demand on Engman for transfer on Keypoint's books to Hayes Oyster of Mrs. Engman's 249 shares. ¹ Engman did not comply, but made full disclosure to Kumm of his agreement with Hayes to give Hayes or Hayes Oyster a one-half interest in Keypoint and that such had been done. Soon thereafter Engman made formal demand for return of the stock which had been delivered to Verne and Sam Hayes. Coast quickly followed with a formal demand on Verne and Sam Hayes for the Keypoint stock in their possession and return of any benefits received by Hayes from the Engman-Hayes agreement. This case was commenced shortly thereafter.

After a lengthy trial, the trial court acquitted Verne Hayes of any breach of duty to Coast, held the agreement between Engman and Hayes that Hayes Oyster should acquire one-half interest in Keypoint to be valid; held that Engman had no just claim to the stock; and ordered Keypoint to deliver the stock to Hayes Oyster, and transfer it on Keypoint's books. ² Coast also failed in its effort in the trial court to secure judgment for $5,100 against Hayes for alleged secret profit or benefit secured by Hayes in connection with employment by Keypoint of T. R. Ito at $100 per month and payment to one Kuwahara, a resident of Japan, of $250 per month.

Coast, Keypoint and Engman appeal.

Coast does not seek a rescission of the contract with Keypoint, nor does it question the adequacy of the consideration which Keypoint agreed to pay for the purchase of Allyn and Poulsbo, nor does Coast claim that it suffered any loss in the transaction. It does assert that Hayes, Coast's...