Sweeney v. Heap O'Brien Mining Co.
| Citation | 186 S.W. 739,194 Mo.App. 140 |
| Parties | EDWARD F. SWEENEY, Appellant, v. HEAP O'BRIEN MINING COMPANY and GRAND HAVEN MINING COMPANY, Respondents |
| Decision Date | 26 June 1916 |
| Court | Court of Appeal of Missouri (US) |
Appeal from Jasper County Circuit Court.--Hon. Allen McReynolds Special Judge.
AFFIRMED IN PART; REVERSED AND REMANDED IN PART.
Judgment reversed and cause remanded.
George W. Earnshaw, E. T. Burr and George W. Farris for appellants.
Haywood Scott for respondent, Grand Haven Mining Company.
--This suit is founded on a promissory note. The first defendant, which we will designate as the O'Brien or old company, an Arizona corporation, is the maker. There is no question as to the plaintiff's right to a judgment against it. It is insolvent, however, having spent its capital stock in a mining venture on a tract of land which it leased from plaintiff in Oklahoma. Later it purchased this land subject to plaintiff's first lease. After mining for a year or more this company found itself with nothing but a mining plant located on nonproductive land. This mining plant was mortgaged to certain of its largest stockholders for $ 7500, which all the evidence shows was more than the plant was reasonably worth in its then condition and location. This company also owed the plaintiff the note sued on for $ 2250 with interest and a few other small claims.
As constituting liability of the other defendant on this note, the petition alleges that under this condition of affairs a new corporation known as the Grand Haven Mining Company, the other defendant herein, was organized under the laws of Arizona for the purpose of taking over the assets of the O'Brien company and removing same to the State of Missouri for the use of the Grand Haven Mining Company; that the principal incorporators, officers and directors of the Grand Haven company were and are identical with the principal incorporators, officers and directors of the O'Brien company; that the Grand Haven company was organized and the said property transferred thereto for the purpose of cheating and defrauding plaintiff out of the money due him on said promissory note sued on, by putting the assets of the said O'Brien company beyond the reach of said plaintiff; that the Grand Haven company had a contract for and afterwards procured a lease on certain mining lands located in Jasper County, Missouri; that the said O'Brien company did transfer its said mining plant to the Grand Haven company which last-named corporation removed the same to the lease in Jasper County, and said mining plant is now located thereon and is claimed by the Grand Haven company; that said transfer was without consideration and made for the purpose of defrauding this plaintiff; that the principal officers, directors and stockholders of the two corporations are identical; that the Grand Haven Mining Company had actual notice of this indebtedness existing against the O'Brien company in favor of plaintiff, had actual notice that this mining plant was the sole asset of the O'Brien company, and that the attempted transfer of said property would operate to defraud this plaintiff.
The evidence shows that when the O'Brien company was hopelessly insolvent some sixteen of the fifty-three stockholders of the O'Brien company organized the Grand Haven company for the purpose of mining on the tract of land in Jasper County, and for that purpose taking over the mining plant and machinery of the O'Brien company and moving it to and installing it on such Jasper County land. The other stockholders of the O'Brien company were offered stock in the new company, but declined same. The evidence also shows that while the mining plant had cost much more, yet as its further use necessarily involved its being dismantled, removed and re-erected on other land, it was then reasonably worth from $ 3000 to $ 5000. The new company did spend some $ 5000 or more in removing it to the new location and improving and equipping it for use there. After disposing of this mining plant the O'Brien company still owned the tract of land in Oklahoma on which it had been mining, and which it purchased for $ 7000, but its real value at this time is not shown, further than that it was subsequently sold by another creditor for a small amount.
As before stated, the O'Brien company had mortgaged this plant to several of its stockholders for $ 7500 for borrowed money and the validity of this indebtedness is not questioned. In fact the O'Brien company had borrowed this money after spending its capital stock for the purpose of putting its Oklahoma mine on a paying basis. It had been paying plaintiff, as the owner of the first lease, ten per cent royalty on all ores mined, and it purchased and extinguished his lease for $ 5000, paying $ 2500 cash out of the money so borrowed and executing the note sued on for the other $ 2500. On this note it subsequently paid $ 250 more. The organization of the Grand Haven company was unquestionably brought about by reason of the insolvency of the O'Brien company with the hope on the part of the stockholders of the latter company to recoup their losses by engaging in a further mining venture and with a view of taking over the then idle mining plant of the O'Brien company. By consent of the stockholders who held the mortgage of $ 7500 on the mining plant and all of whom became stockholders in the new, or Grand Haven company, it was arranged and agreed between the old and the new companies that the mining plant be sold and transferred by the old to the new company in consideration of $ 4000 in stock of the new company issued to and to be held by a designated trustee. The terms of this trust, as we understand it, were that this stock, amounting to practically thirty-five per cent of the capital stock of the new company, was to be held by this trustee for the benefit of (1) the holders of the $ 7500 secured notes, (2) for the benefit of the plaintiff, and (3) in case of the payment of these indebtednesses then for the benefit of the stockholders of the old company generally. The plaintiff was not consulted and did not give his consent to this arrangement. It will be readily seen that any benefit to the plaintiff from this source was highly contingent in that the $ 4000 in stock held by the trustee must prove to be worth, either in dividends or by sale, more than the $ 7500.
The effect of this transaction was to clothe the new, or Grand Haven, company with the ownership of this mining plant free from any encumbrance and to denude the old company of practically all its property, which had ceased to be a going concern, and with no provision for paying the plaintiff creditor except the possible contingency of the trust stock proving to have a value of more than two to one.
The good faith of all these transactions is not questioned. The stockholders forming the new corporation paid up the capital stock of $ 25,000 in full in money and money's worth, unless it be the $ 4000 of stock issued to the trustee in consideration of the mining plant and that was doubtless its fair value. The $ 7500 of secured indebtedness on the mining plant was bona fide and the stockholders who held this indebtedness not only took stock in the new corporation and paid for same in full, but gave full value for the stock issued to the trustee by relinquishing their security on the mining plant transferred to the new company. Looking at the matter, however, from the standpoint of the two corporations and considering them as aggregations of stockholders, the new corporation composed of the stockholders of the old acquired this property for no other consideration than the issuing of its own stock in favor of persons who were stockholders in both companies. The old company, as such, got nothing, though it is argued that, as its property was mortgaged for all it was then worth, it in fact parted with nothing. We have spoken of the new company as being composed of the stockholders of the old company, though in fact there were three new stockholders, but their holdings were small and the management of the new and of the old companies was entirely dominated by those who held stock in both.
The question presented is whether this transfer of property from the old to the new company in this manner is not constructively and as a matter of law, regardless of any intent of the stockholders, fraudulent as to the plaintiff as a creditor of the old company. The well-established rule of law is that the property of a corporation is a trust fund primarily for the benefit of creditors and cannot lawfully be diverted to any other purpose without providing for such creditors. From this follows the rule that when one corporation takes over the property and business of another, it also takes its liabilities. Since the stockholders of the corporation are not allowed to directly or indirectly...
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