State v. Exline Fuel Co.

• Decision Date: 16 November 1937
• Docket Number: 43986.
• Citation: 276 N.W. 41,224 Iowa 466
• Parties: STATE v. EXLINE FUEL CO. et al.
• Court: Iowa Supreme Court

276 N.W. 41

224 Iowa 466

STATE v. EXLINE FUEL CO. et al.

No. 43986.

Supreme Court of Iowa.

November 16, 1937

Appeal from District Court, Appanoose County; R. W. Smith, Judge.

In this action in equity to dissolve a corporation, a cross-petition was filed by one of the defendants. From a decree upon both the petition and cross-petition, plaintiff has appealed.

Reversed and remanded.

MITCHELL, J., dissenting.

John H. Mitchell, Atty. Gen., Harry F. Garrett, of Carydon, Atty at Law, E. P. Powers, Co. Atty., of Centerville, for the State.

Valentine & Valentine, of Centerville, for appellees and cross-petitioner.

RICHARDS Justice.

Section 8402, Code 1935, is in these words: " Courts of equity shall have full power, on good cause shown, to dissolve or close up the business of any corporation, and to appoint a receiver therefor, who shall be a resident of the state of Iowa. An action therefor may be instituted by the attorney general in the name of the state, reserving, however, to the stockholders and creditors all rights now possessed by them."

Pursuant to this statute, and shortly prior to July 2, 1936, this suit in equity was instituted in the name of the State, to dissolve, and to close up the business of, the Exline Fuel Company, an Iowa corporation. Besides the corporation, a number of individuals were made defendants. One of these individuals, W. H. Wells, filed a cross-petition on July 27, 1936, alleging that he held a chattel mortgage upon the property of the corporation. He alleged also the existence of a conditional sales contract in which he had agreed to sell to the corporation the coal mine it operated, and rights under the mining lease of the land on which the mine was located, but with reservation in himself (Wells) of the title to the property and of the possession as security for payment of the purchase price. Both instruments were dated March 13, 1936. In an amendment to the cross-petition filed August 21, 1936, Wells alleged that he had declared to be due the debt secured by the chattel mortgage, and that the unpaid portion of the purchase price named in the conditional sales contract was due on account of default in payment of one of the installments. The prayer in the amendment was that the chattel mortgage and the conditional sales contract be established as first liens on the property and that Wells have judgment against the corporation and the receiver for the amounts shown in said instruments, and that the property be sold and the proceeds applied first upon such judgment. Plaintiff filed answer to the cross-petition and amendment, to which Wells filed reply. On September 30, 1936, the cause proceeded to trial in the district court upon the pleadings and evidence of plaintiff and cross-petitioner. A decree was entered dissolving the corporation, making permanent the temporary receivership that had been previously ordered, directing the manner of closing up the business of the corporation, and also decreeing that by virtue of the chattel mortgage and conditional sales contract the amounts claimed by Wells thereunder were prior and preferred claims against the property of the corporation described in said instruments. The decree ordered foreclosure of both instruments by sale of the property by the receiver. It also was adjudged in the decree that the State of Iowa pay one-half of the court costs, including cross-petitioner's statutory attorney fees upon the notes secured by the two instruments, in event the proceeds of the sale should be insufficient to pay same. Plaintiff has appealed from the decree.

Appellant urges that the court erred in decreeing that the claims of Wells were secured by first liens because fraud, constructive or actual, inhered in each of the written instruments that purported to afford the security. Appellant says that when Wells procured these instruments he was sustaining a fiduciary relationship to the creditors and stockholders, as an incorporator, director, president, and the one in management of the corporation, and that the obligations and duties of such relationship measure the degree of fair, open, and honest dealing Wells must exhibit in the procuring of the security for his own personal advantage, if the instruments are to be countenanced in a court of equity. This was one of the defenses made by the State in its answer to the cross-petition.

The transactions on which the fraud is said to rest have their beginning in the summer of 1934 when Wells, through foreclosure of a chattel mortgage, acquired the property of an earlier corporation known as the Exline Coal Company. The property so acquired consisted of a coal mine and its equipment, the lessee's interest in the mining lease, and an undivided one-third interest in the lessors' rights to royalties fixed by the terms of the same mining lease. In August or September of 1934 there were negotiations in which Wells and a number of miners, some of them defendants in this action, took part. The reopening and operating of this mine was discussed. Wells offered to accept $1,500 for the mine and lease, the amount approximately that he had bid at the foreclosure sale. The price was satisfactory to the miners. Later in 1934 labor was expended and new materials used in preparing the mine for operation. Much of this preliminary labor was donated by the miners. Wells advanced funds for necessary materials and was later reimbursed. The actual mining of coal began toward the end of 1934, and to carry on the project the defendant corporation was formed in January, 1935. The articles provided that the general nature of the business of the corporation should be coal mining, etc.; that the business should be co-operative; that the amount of authorized capital stock should be $10,000, divided into 100 shares of $100 each; that the officers should be a president, vice president, secretary and treasurer. Wells was one of the incorporators, and in the articles was named as the president and one of the directors until the first annual meeting of the corporation to be held in April, 1935. No annual stockholders' meeting was held, and Wells continued to act as such president and director from the incorporation until the decree of dissolution, and at all times had the general management and direction of the corporation's affairs. Much stressed by appellant are the written contracts that were entered into between the corporation and each miner at the commencement of his employment. In the words of these instruments, each employee " does purchase stock in Mine # 1 of the corporation," upon the following terms: The corporation agreed to pay the union wage scale; the employee agreed to have the corporation check off from his wages what ever the board of directors might see fit in the running of business, paying of indebtedness and pay rolls, and upkeep of the property and whatever it might take to carry on the corporation's business, with the limitation that at no time should the check-off exceed 40 per cent. of the wages. Each contract also contained an agreement that for every $100 so checked off the corporation would issue to the employee " a stock certificate in the Exline Fuel Company." Under this arrangement with the employees, mining operations were carried on. On March 16, 1936, the amount checked off had reached the sum of $14,768.89. Of this $14,768.89 the portion that had been checked off in full $100 amounts was $10,900. The balance of the $14,768.89 is made up of sums less than $100. No stock of this corporation was issued to any of these employees. No order was made by the executive council permitting capital stock of this corporation be paid for in any other thing than money. Nor was application made for such permission. The record also shows that the corporation was insolvent at the time of and previous to the execution of the chattel mortgage and conditional sales contract.

From the foregoing it is quite evident that the record sustains appellant's proposition that when Wells procured the two instruments upon which he declares, he (Wells), as an incorporator, director, president, and person having the management and control of the affairs of an insolvent corporation, was occupying a fiduciary relation toward the stockholders and also the creditors. Dawson v. National L. Ins. Co., 176 Iowa 362, 157 N.W. 929, L.R.A.1916E 878, Ann.Cas.1918B, 230; Wabash R. Co. v. Iowa & S.W. R. Co., 200 Iowa 384, 202 N.W. 595; Hoyt v. Hampe, 206 Iowa 206, 214 N.W. 718, 724, 220 N.W. 45; Clapp v. Wallace, 221 Iowa 672, 266 N.W. 493.A general rule governing the acts of a fiduciary is that he may not, directly or indirectly, appropriate the funds to himself without the concurrence of the cestuis with full knowledge of the facts. Hoyt v. Hampe, supra." The policy of the law is to put fiduciaries beyond the reach of temptation by making it unprofitable for them to yield to it. To that end an act by a fiduciary in which personal interest and duty conflict is voidable at the mere option of the beneficiary, regardless of good faith or results." Hoyt v. Hampe, supra. When the appropriation of assets by the fiduciary is accomplished by procuring execution of mortgage or lien instruments to secure the fiduciary to his personal advantage as a creditor, the policy of law just stated has application if personal interests and duty conflict. In Garrett v. Burlington Plow Co., 70 Iowa 697, 29 N.W. 395, 398, 59 Am.Rep. 461, it is said: " It is true that the courts will scan with care, and even with suspicion, such transactions, and demand that they be accompanied by the utmost good faith." Not only is the sustaining of such contracts dependent upon a showing of utmost good faith and fairness, but the holding in this jurisdiction is that the burden is on the...