Tovrea Land & Cattle Co. v. Linsenmeyer

• Decision Date: 11 March 1966
• Docket Number: No. 7589,7589
• Parties: TOVREA LAND AND CATTLE COMPANY, an Arizona corporation, et al., Appellants and Cross-Appellees, v. Otto H. LINSENMEYER et al., Appellees and Cross-Appellants.
• Court: Arizona Supreme Court

Page 47

412 P.2d 47

100 Ariz. 107

TOVREA LAND AND CATTLE COMPANY, an Arizona corporation, et al., Appellants and Cross-Appellees, v. Otto H. LINSENMEYER et al., Appellees and Cross-Appellants.

No. 7589.

Supreme Court of Arizona, In Banc.

March 11, 1966.

Rehearing Denied May 17, 1966.

Evans, Kitchel & Jenckes, Phoenix, and Norman S. Hull, Tucson, for appellants and cross-appellees.

Otto H. Linsenmeyer, and Lawrence H. Doyle, Jr., Phoenix, for appellees and cross-appellants.

BERNSTEIN, Vice Chief Justice.

The individual appellants-cross appellees, hereinafter called defendants, appeal from a judgment of the Superior Court of Maricopa County entered December 18, 1961 in favor of appellees-cross appellants hereinafter called plaintiffs.

Plaintiffs, minority stockholders of Tovrea Land and Cattle Company, an Arizona corporation, filed a complaint against the corporation and these defendants as the directors thereof, on March 24, 1958. Plaintiffs charged defendants with breach of fiduciary duty, mismanagement, and ultra vires acts since 1946, and asserted that such alleged conduct was pursuant to a conspiracy among those defendants who were directors in 1946, in which those defendants who became directors thereafter joined. The gist of these charges is (1) that defendants allowed the corporation to purchase nineteen oil tankers from the United States, on May 17, 1946 in an ultra vires purchase which resulted in so depleting capital funds that a sale of the Company's major asset, a packinghouse, was forced in the spring of 1947, (2) that defendants used corporate assets to engage in business competition with the corporation, (3) received bonuses as employees to which they were not entitled because of their mismanagement, (4) purchased stock of the corporation to gain control of the business, and (5) approved sales of assets to defendants P. E. Tovrea, Sr. and E. A. Tovrea during liquidation of the corporation on December 1, 1958, at prices and terms more favorable than had been advertised for sale.

After a lengthy trial the court made and entered findings of fact, on February 24, 1961, which were later incorporated in the judgment. In these findings, the court found that defendants used corporate assets in businesses in competition with the corporation and in ultra vires transactions, the purchase of the tankers should have been authorized by the stockholders, and the Tovreas should account for amounts equal to 5% Of the purchase price of personalty which they acquired together with real property purchased during liquidation. The trial court found that it was necessary that a master be appointed to take testimony to ascertain the amount of the judgment to which plaintiffs were entitled.

A detailed statement of facts will be presented in connection with each argument of the assignments of error. The foregoing is a general outline of the nature of the action and the following is a brief sketch of the case. Plaintiffs called defendants as witnesses under Rule 43(g), Rules of Civil Procedure, 16 A.R.S., and defendants relied upon such testimony and did not call any witnesses.

Most of the trial court's findings are mixed questions of law and fact or are legal conclusions which we are free to evaluate unrestricted by the rule compelling us to construe the evidence most favorably to support the judgment. In United States Smelting etc. Co. v. Wallapai M. & D. Co., 27 Ariz. 126, 230 P. 1109 this court said it was not bound by a jury verdict where the question was not the truth or weight of the evidence but its effect. This means that if the facts are undisputed, we may ignore the trial court's findings and substitute our own analysis of the record. This principle applies whether the record consists of pleadings, documents, affidavits and stipulations, Combustion Engineering v. Arizona State Tax Com'n., 91 Ariz. 253, 371 P.2d 879, or the testimony of parties and witnesses. Sanders v. Brown, 73 Ariz. 116, 238 P.2d 941.

We are not bound by the conclusions of law made by the trial court, Wilkinson v. Takesuye, 66 Ariz. 205, 185 P.2d 778; Daily Mines Co. v. Control Mines, Inc., 59 Ariz. 138, 124 P.2d 324. In Cantlay & Tanzola, Inc. v. Senner, 92 Ariz. 63, 373 P.2d 370 this court said it would review all evidence and inferences most favorably to support the trial court's findings and judgment and will not disturb that judgment if supported by substantial evidence, but we are not bound by the conclusions of law of the trial court as applied to those findings of fact. See also Arizona State Board of Medical Examiners v. Clark, 97 Ariz. 205, 398 P.2d 908; DeSantis v. Dixon, 72 Ariz. 345, 236 P.2d 38, 44 A.L.R.2d 513. Certain parties will be designated as follows: Tovrea Land and Cattle Company as Tovrea Company, P. E. Tovrea, Sr. as Tovrea; P. E. Tovrea, Jr. as Phil; E. A. Tovrea as Ed; and various other persons and ventures will be mentioned in abbreviated designations.

Tovrea Company was incorporated as Arizona Packing Company in 1929 by Tovrea's father. By amendment of its articles of incorporation, adopted February 1, 1937, it possessed extremely broad powers, including the power to lend money and deal in all kinds of property. Tovrea became its president in 1932, and he continued as president until his death in 1962. As president he was authorized by the corporation to be in general charge of the business, and had power to bind the company by contract. He and his family owned approximately 75% Of the capital stock. The members of its board of directors have changed from time to time. Of defendant directors, Haldiman served during the years 1948 to 1953, and Wambach served from 1955. Plaintiff Ernest J. Linsenmeyer was a director in 1954, and defendant Wambach succeeded him as the representative of the interests of the Linsenmeyer family and the testamentary trust of which the Linsenmeyers were the beneficiaries which amounted to approximately 10% Of the outstanding stock. Defendants Ed and Phil resigned as directors on November 28, 1958, and they were succeeded on the board by Wayne M. Aiken and Marshall C. Christy.

Tovrea Company's primary business activity prior to 1947 was operating a meat packinghouse which was sold that year. Thereafter, the Tovrea Company primarily conducted a custom feeding operation described in detail below. The oil tankers were purchased in 1946 which plaintiffs allege so depleted Tovrea Company's assets as to force a sale of the packinghouse to satisfy the indebtedness. We will now consider the facts relating to each argument.

The defendants' thirteen assignments of error will be dealt with to correspond with their six arguments. The first argument challenges the trial court's finding that the defendant directors organized, controlled and operated certain businesses, named below, solely for their personal benefit and in direct competition with Tovrea Company thereby violating their fiduciary duty owing to the company. The court also found that the defendants used Tovrea Company assets to conduct their personal businesses. In addition, the trial court found that the defendants secured secret profits 'pursuant to a scheme and design * * * through their willful, fraudulent, and ultra vires acts, and mismanagement, and breach of fiduciary relationship, * * * resulting in ultimate damage and loss to the stockholders of the corporation.'

Fraud must be established by clear and convincing evidence. Dunahay v. Struzik, 96 Ariz. 246, 393 P.2d 930. The uncontradicted testimony shows the folllowing facts. From the time of incorporation until 1947, the principal business of Tovrea Company was operating a packinghouse and buying and selling cattle. Other business operations included a farm and hardware store, lumberyard and fertilizer plant. The Tovrea Company also operated five breeding herd ranches in New Mexico with a total of about 350,000 acres. After sale of the packinghouse in 1947 the custom feeding operation, theretofore a small part of the business, was expanded and became the Tovrea Company's primary business activity. Cattle owned by people in the feeding business, traders and ranchers came by truck and rail to Tovrea Company pens. The pens handled about 40,000 to 60,000 cattle annually for custom feeding. The average stay was 90 to 150 days and the cattle were fed special rations from the mixing mill including ground hay, grain, cottonseed meal and hulls, molasses and biotics. Complete records on weight and the amount of feed consumed were kept on each owner's cattle which were segregated. When they left the pens they were ready for slaughter. The pens were also used for approximately 150,000 to 200,000 transient cattle annually which stayed from 1 to 21 days to rest, feed and be offered for sale. Tovrea Company offered some cutomers the service of buying, feeding, selling and financing cattle.

The capacity of the custom feeding pens was 25,000 and it required 10,000 cattle in the pens for Tovrea Company to break even. The uncontradicted evidence further shows that under Tovrea Company policy, if and when the number of cattle in the yards was too small to achieve a break-even basis, Tovrea Company bought cattle to that extent and would also buy if the market was firm and there was a prospect of a good profit. But the purchase, fattening and sale of cattle was not regarded as a safe and conservative investment for Tovrea Company. It was too speculative because of market fluctuations which caused variations from $10 to $100 a head market value within a six month period. Fattened cattle could not be held for a higher market price because the cost per pound of gain was too high.

Tovrea Company also loaned surplus funds on interest to Tovrea, Ed, Marley, Gro-Gren, Agricultural Products, BarVee, the Maybes, T&C, General Farms and Tovrea Equipment. The companies mentioned were owned and operated by the individual defendants and will be discussed below. There is no evidence of loans...