Stearns Coal & Lumber Co. v. Van Winkle

• Decision Date: 14 April 1915
• Docket Number: 2550.
• Citation: 221 F. 590
• Parties: STEARNS COAL & LUMBER CO. v. VAN WINKLE et al.
• Court: U.S. Court of Appeals — Sixth Circuit

221 F. 590

STEARNS COAL & LUMBER CO. v. VAN WINKLE et al.

No. 2550.

United States Court of Appeals, Sixth Circuit.

April 14, 1915

J. N Sharp, of Knoxville, Tenn., for plaintiff in error.

A. C Van Winkle, of Louisville, Ky., for defendants in error.

Before KNAPPEN and DENISON, Circuit Judges, and SATER, District Judge.

KNAPPEN Circuit Judge.

The Wayne County Beaty Oil Well Company was incorporated by act of the Legislature of Kentucky January 31, 1865. By later legislation its charter was made to expire January 31, 1895. At the time its charter expired it owned mineral rights and incidental timber and surface rights in five tracts of land in Wayne county, Ky., aggregating 1,000 acres. It owed no debts, and had carried on no mining operations on the land in question. Section 561 of the Kentucky Statutes provides that:

'When any corporation expires by the terms of the articles of incorporation * * * it may thereafter continue to act for the purpose of closing up its business, but for no other purpose; and it shall be the duty of the officers to settle up its affairs and business as speedily as possible,' with provision for publication of notice, requirement of payment of debts, etc.

No steps were taken to wind up the corporation, evidently because the stockholders were ignorant that the charter had expired, and some meetings of stockholders were had after January 31, 1895. In 1907 the corporation began suit in ejectment in a state court of Kentucky (for the recovery of the mineral and incidental rights referred to) against the Rock Creek Property Company (predecessor in interest of defendant here), which had obtained all rights in the land excepting the mineral and incidental rights mentioned, and was claiming those latter rights adversely to the Beaty Company. On the trial it developed that the Beaty Company's charter had expired, and accordingly the court dismissed the action. The present suit was begun in December, 1910, in a state court of Kentucky, by several stockholders of the Beaty Company, on behalf of themselves and all other stockholders, for the recovery of the mineral and incidental rights referred to. The suit was docketed on the equity side of the court. It was then removed to the court below by reason of diversity of citizenship of the parties. In the latter court it was first docketed on the equity side, and then transferred to the law side. Defendant denied that plaintiffs had any meritorious claim to the interests sued for, and pleaded adverse possession and the statute of limitations. The case was tried, by agreement of the parties, to the court without a jury, and judgment rendered for plaintiffs. This writ is brought to review the judgment.

The pivotal question on which the validity of the judgment below must turn is whether the stockholders of the expired corporation had legal capacity to recover in ejectment the rights owned by the corporation at the time it expired. We say this because, first, when its charter expired the corporation owned the rights in question, and neither it nor its representatives have in any way conveyed or lost the right so held by the corporation, unless through adverse possession, and the latter defense is entirely unsustained; second, while plaintiffs comprise but a small proportion of the stockholders of the expired corporation, the stockholders are numerous, and it is apparently impracticable to bring them all before the court, and the questions involved are common to them all, and their rights thus rest upon the same foundation. The suit is therefore authorized by the express provisions of section 25 of the Code of Kentucky, cited in the margin. ^[1]See, also, Humphrey v. Burnside, 4 Bush (Ky.) 215; Payne v. McClure Lodge (Ky.) 115 S.W. 764; Penny v. Central Coal & Coke Co. (C.C.A. 8) 138 F. 769, 71 C.C.A. 135

The recovery was purely representative; that is to say, 'on behalf of (the recovering plaintiffs) and all other stockholders, vendees, heirs and devisees of stockholders of the Wayne County Beaty Oil Well Company. ' This being so, the point that certain of the plaintiffs held only as administrators is immaterial, because the recovery was permitted only in favor of certain natural persons; and the Code (section 369) expressly provides that:

'Judgment may be given for or against one or more of several parties.'

It is likewise unimportant, as applied to plaintiff Van Winkle, whether an assignment of stock certificate amounted to a legal conveyance of his father's rights as stockholder, for the father died before the corporate life terminated, and his widow became thereby the owner of the stock, and at her death all her property (including the stock in question) passed to certain heirs, including plaintiff Van Winkle. By virtue, thus, of the general terms of her will, whatever legal interest she held in the corporate assets passed, without reference to certificate of corporate stock, to her heirs, of whom plaintiff Van Winkle was one; and his right of recovery will be the same, being representative in character, whether or not the other heirs had by valid instrument conveyed to him.

The right of the stockholders to maintain this action depends upon the nature of the title which they, as former stockholders, had in the corporate assets at the time this suit was begun. On the termination of the corporate life the stockholders were at least the equitable owners of its assets, including the real estate in question (Mormon Church v. United States, 136 U.S. 1, 47, 10 Sup.Ct. 792, 34 L.Ed. 478); but a merely equitable ownership would not have sustained an action in ejectment in the federal courts, where the distinction between legal and equitable actions and defenses is strictly maintained (Johnson v. Christian, 128 U.S. 374, 9 Sup.Ct. 87, 32 L.Ed. 412; Courtney v. Pradt (C.C.A. 6) 160 F. 561, 87 C.C.A. 463), except so far as modified by Act No. 278 of the Sixty-Third Congress (March 3, 1915), passed since this case was brought into this court. The controlling question, therefore, is whether at the time this suit was instituted the corporate stockholders held the legal title to the real interests in question. Judge Cochran, who heard the case below, was of opinion that under the law of Kentucky, as construed by the highest court of the state, the legal title to the corporate assets passed to the stockholders after the lapse of two years from the termination of the corporate existence (and thus before suit was begun), basing this conclusion upon the decision in Ewald Iron Co. v. Com., 140 Ky. 692, 131 S.W. 774, and 142 Ky. 465, 134 S.W. 481. Of course, if the decisions of the Kentucky Court of Appeals were rightly construed, the judgment below must be sustained; for the decisions of the highest court of a state upon questions affecting title to real estate within such state are binding upon the federal courts.

The Ewald Case involved this situation: The Iron Company was a Kentucky corporation and a resident of Lyon county, Ky. Its charter expired November 5, 1905; Ewald, who resided in Jefferson county, Ky., was its sole stockholder; he took no steps to wind up the corporate affairs, but continued business in the corporate name until his death in July, 1909, after which the corporation was formally dissolved and its affairs wound up. On September 1, 1909, the Iron Company had on deposit in various banks in St. Louis, Mo., a large sum of money, representing the undistributed, accumulated earnings and profits of the company, all of which were carried on the latter's books as company assets. The sole question was to whom should this money be assessed for taxation, to the company, in Lyon County, or to Ewald's executor, in Jefferson county. The question was practically important. It was held that, when a corporation continues to carry on business after the expiration of its charter rights, the stockholders are simply doing business as partners, their acts not being those of the corporation, but of themselves, the money thereby made, being the property of the partners and not of the corporation; that section 561 of the Kentucky Statutes, to which we have before referred, required the closing of the corporate business within a reasonable time, and that by analogy to the statutes regulating the settlement of estates of deceased persons (Kentucky Statutes, Secs. 3858, 3859) two years was a reasonable time for such closing of business; that the property held in the corporate name should be taxed in its name and as its property until November 5, 1907 (two years after the corporation expired), and after that date in the name of Ewald, the stockholder, and as his property.

A conclusion that the money should be taxed to Ewald after the expiration of the corporate life could have been rested upon the ground that he, as sole stockholder, held the entire equitable title; for section 4023 of the Kentucky Statutes makes it the duty of the holder of the equitable title (whether in possession or not), as between himself and the holder of the legal title, to list the property...