Stewart v. Johnston, 30415.

Decision Date14 June 1948
Docket Number30415.
Citation30 Wn.2d 925,195 P.2d 119
PartiesSTEWART et al. v. JOHNSTON et al.
CourtWashington Supreme Court

Department 1

Action by Roy V. Stewart and E. R. Burkhalter, on behalf of themselves and all others similarly situated, against Eric A Johnston and others to set aside corporate reorganization and for other relief. From a judgment for defendants, the plaintiff's appeal.

Judgment affirmed.

Appeal from Superior Court, Spokane County; John A. Frater, Judge.

A. O Colburn and Harvey Clarke, both of Spokane, for appellants.

Charles P. Lund and Graves, Kizer & Graves, all of Spokane, for respondents.

HILL Justice.

In 1933, the Washington Brick, Lime and Sewer Pipe Company had fallen upon evil days. In the depths of the depression there were no orders for bricks or terra cotta and the company was insolvent within the purview of Rem.Rev.Stat. § 741 (now Rem.Rev.Stat. (Sup.) § 741), and a receiver was about to be appointed in an action then pending. To forestall the receivership, a trust deed to Eric A. Johnston, for the benefit of its creditors, was executed by the corporation on July 20, 1933, which trust deed covered all of its property real, personal, and mixed. This trust deed gave him power to carry on the business or to sell the property if and when it appeared to him that further operation was not in the best interests of the property. Prior to the execution of this trust deed and since May, 1919, Mr. A. B. Fosseen had been president of the corporation.

Appellant Burkhalter testified that, in 1933, the value of the properties of the corporation was at least seven hundred fifty thousand dollars, 'but I don't believe anybody would need to invest that much money in obtaining control of it.' At the time of the execution of the trust deed, the obligations, exclusive of those to preferred stockholders, totaled about two hundred thirty-two thousand dollars, of which thirty-five thousand dollars was for taxes, which were then five years in arrears, and theirty-five thousand dollars for labor. From Mr. Johnston's testimony, it would be gathered that there was a serious question whether, if the assets and properties of the company had been sold at that time, enough would have been realized to meet those obligations. He concluded that the only chance ultimately to pay the creditors in full was through operation of the company's properties, and he borrowed operating capital for that purpose.

The operation of the company during the trusteeship was very successful, and within the first three years of operation three quarters or more of the indebtedness was paid and it was evident that continued profitable operation was possible. Respondents attribute this primarily to Mr. Johnston's services; and appellants attribute it, in large part at least, to an increased demand for building materials.

In 1937 there occurred a transaction to which the briefs on both sides devote much space. Neal Fosseen acquired an option covering the stock owned by his father A. B. Fosseen, in the Washington Brick, Lime and Sewer Pipe Company, namely, 1,695 1/2 shares of preferred stock and 1,840 shares of common stock. The option price was two hundred dollars a month, payable to A. B. Fosseen and Florence N. Fosseen, his wife, and continuing until the death of the survivor of them. (A. B. Fosseen was then sixty and his wife fifty years of age.) Under the terms of the option agreement, new stock certificates were to be issued in the name of Neal Fosseen and it was agreed that:

'* * * in the event of the issuance of new securities for the shares of stock covered hereby, by reason of reorganization, consolidation, merger, or otherwise, of Washington Brikc Lime & Sewer Pipe Co., said securities so issued shall be substituted for the shares of stock hereinabove described.'

Neal Fosseen was at that time working for the trustee at a salary of two hundred dollars a month. Immediately thereafter, his salary was raised to four hundred dollars a month, his father withdrew from any salaried position with the company, and Neal assumed his father's duties, whatever they may have been.

Thereafter, Neal Fosseen was the leading figure in the proceedings leading to the transfer of the assets of the Washington Brick, Lime and Sewer Pipe Company, which will hereafter be referred to as the old company, to the Washington Brick and Lime Company, which will hereafter be referred to as the new company. He, with the assistance and counsel of others, presented a plan whereby all the assets of the old company would be transferred to the new company in full payment for the entire capital stock of the new company, i. e., 260,000 shares with a par value of one dollar a share. The stockholders of the old company were to receive ten shares of the stock of the new company for each share of preferred in the old, and one share in the new for each share of common in the old. Thus, 92,445 shares of the stock of the new company would be allocated to the holders of 9,244 1/2 shares of preferred in the old company and 9,218 shares would be allocated to holders of the 9,217 3/4 shares of common in the old company. This allocation left 158,337 shares, which were to be left in the treasury of the new company to provide working capital. The shareholders of the old company were to be given the privilege of purchasing this stock at the rate of twenty-five cents a share.

This plan was approved by six of the eight directors of the old company, appellant Burkhalter and A. B. Fosseen being the directors who did not approve. At a meeting of the stockholders of the old company on May 24, 1938, it was approved by 6,650 shares of preferred stock and 5,552 shares of common stock. Against the proposal were only three shares of common stock, with 122 shares of preferred [30 Wn.2d 929] and 41 shares of common stock represented but not voting. The rest of the stock was not represented at the meeting.

Appellant Burkhalter owned fifty shares of the preferred stock recorded as not voting. Appellant Stewart, who owned 120 1/2 shares of preferred stock of the old company, was in Spokane on the day of the meeting and knew that it was being held but did not attend. Thereafter, the plan was ratified by an additional 889 shares of the preferred stock and 1,669 shares of the common stock, making an affirmative approval by more than two thirds of both the preferred and common stock of the old company.

Only eleven stockholders availed themselves of the privilege of purchasing additional shares at twenty-five cents a share, and they purchased only 8,557 shares. At the urgent request of the directors of the new company and in pursuance of a formal resolution of March 17, 1939, requesting him so to do, Eric A. Johnston bought 23,500 shares for $5,875, or twenty-five cents a share, which purchase appellants regard as highly reprehensible. (Mr. Johnston has subsequently acquired additional stock, and at the time of trial owned 26,631 shares.)

On April 17, 1943, the actual transfer of the assets of the old company to the new company was made by the trustee, and the new company has operated very profitably at all times subsequent thereto. (A quarterly dividend was paid in October, 1943, and a dividend was paid each quarter thereafter up to the time of trial. Total dividends to that date amounted to thirty-nine cents a share.) Due to oversight and the fact that Mr. Johnston was not in Spokane during the greater part of the intervening time, the deed by the trustee transferring the real property of the old company to the new company was not executed until December 21, 1945.

That reorganization of the old company was essential to successful operation was apparent. It is conceded that there were 9,244 1/2 shares of preferred stock outstanding. This preferred stock had a par value of one hundred dollars a share and called for cumulative annual dividends of eight per cent, to be computed from July 1, 1910, or any subsequent date of issue. No dividends had ever been paid on this stock, and in the spring of 1938, when the proposed plan of reorganization was under consideration by the trustee and stockholders, preferred and common, the accrued and unpaid dividends amounted to almost two million dollars, to which would be added another $73,956 on July 10th of that year. The by-laws of the old company provided that the preferred stock should be paid out of the assets of the company in the event of dissolution, Before anything was paid on the common stock.

Appellants criticize the reorganization plan as adopted because it recognized rights on the part of the common stockholders. Appellants insist that, since all of the assets of the company could not have paid off the amount due the preferred stockholders, the latter were entitled, in the event of dissolution, to all of the property of the corporation; and that the entire control of any new corporation should be vested exclusively in them. They also criticize the plan because it reduces the proportionate interest of the preferred stockholders and makes it possible, by the sale of treasury stock, to deprive the preferred stockholders of control of the corporation. They urge that, conceding the necessity of reorganization, it could have been done by amending the articles of incorporation of the old company. They raise the issue that the authorization of the sale and transfer of the assets of the old company to the new was carried out under the terms and provisions of the uniform business corporations act, adopted by this state in 1933, and in violation of rights they had acquired prior to the effective date of that act. Weight is given to their position by our reasoning and holding in the very recent case of State ex rel. Swanson v. Perham, 130 Wash. ----, 191...

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  • Snohomish County v. Thorp Meats
    • United States
    • Washington Supreme Court
    • March 3, 1988
    ...a delay in filing an action; however, it may also serve to bar a suit for a plaintiff's post-filing delay. See Stewart v. Johnston, 30 Wash.2d 925, 934, 941, 195 P.2d 119 (1948); 27 Am.Jur.2d Equity § 155 (1966). Laches may be invoked whenever there has been unreasonable neglect in prosecut......
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    ...is a question of fact dependent largely upon the particular circumstances. No rigid rule has ever been laid down."Stewart v. Johnston, 30 Wn.2d 925, 935-36, 195 P.2d 119 (1948) (quoting Fed. United Corp. v. Havender, 24 Del. Ch. 318, 345, 11 A.2d 331 (1940)). The chief element of laches in ......
  • Washington State University v. Bernklow
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    • January 17, 2017
    ...Bernklow next argues that a delay of four years is per se unreasonable because, she contends, decisions of the Washington Supreme Court in Stewart and Hogan require immediate action. She presumably cites the cases for their language that a party '"should commence the proceedings for relief ......
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    ...years. RCW 4.16.040(2). Whether delay is unreasonable is dependent upon the circumstances of the specific case. Stewart v. Johnston, 30 Wn.2d 925, 938, 195 P.2d 119 (1948); Hogan v. Kyle, 7 Wash. 595, 601, 35 P. 399 (1894). The reasonableness of the delay is usually dependent not upon the s......
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