Opinion
01-08-1908
McMASTER v. DREW et al.
Norman Grey, John M. Enright, and J. M. Marshall, for complainant James P. Northrop and Charles D. Thompson, for defendants.
Action by John S. McMaster, as receiver of the American Waterworks Company of New Jersey, against Charles H. Drew and others, to cancel certain shares of stock issued to defendants as stockholders. Decree for complainant
The American Waterworks Company of New Jersey was declared insolvent in a suit brought for that purpose by certain complainants, to wit, the Denver (Colorado) Waterworks Company, William A. Underwood and Catherine Archer, as stockholders in the company, and the Renselaer Manufacturing Company as a creditor. As a result of that bill one E. Hyde Rust was appointed receiver. Mr. Rust acted as such receiver for several years and until his death in February, 1901. Subsequently Mr. John S. McMaster was appointed receiver in the place of Mr. Rust, and later on, in July, 1904, a petition was presented to the Chancellor by the Denver City Waterworks Company asking a direction to the receiver to bring a suit against certain stockholders of the insolvent company to procure the cancellation of certain shares of stock issued to them. That petition set forth the principal ground upon which the petitioners conceived that a right of action for that purpose existed. Upon notice to the receiver the Chancellor made an order directing the receiver to bring suit, provided he was properly indemnified as to costs and expenses by the petitioners. In pursuance of that order, the present bill was filed in February 10, 1905, and process issued. Shortly afterwards interlocutory proceedings were taken for an injunction restraining the defendants from transferring their stock pendente lite. The defendant Venner appeared, and contested that motion. He at the same time filed an elaborate petition, with a prayer that the original order authorizing the suit should be vacated and the suit dismissed. These matters came before the Chancellor in person, with the result that the injunction was granted, and the motion to discharge the order authorizing the suit was denied. At the hearing in the present cause, it was supposed that the petition of Venner just mentioned had been mislaid, but it is now among the papers. Venner then demurred and that demurrer was overruled for the reasons given by the Chancellor, as reported in 70 N. J. Eq. 6, 62 Atl. 559. The cause was then brought to hearing.
Norman Grey, John M. Enright, and J. M. Marshall, for complainant James P. Northrop and Charles D. Thompson, for defendants.
PITNEY, Advisory Master (after stating the facts as above). At and before the organization of the insolvent company, a Coloradocompany, which I will call the "Denver Company," was the owner and in possession of and operating the waterworks which supplied the city of Denver with water. At the same time there was in existence a corporation organized under the laws of Illinois by the name of the American Waterworks Company, which owned and was in possession of and was operating the waterworks which supplied the city of Omaha, in Nebraska, with water. I will call this latter company the "Omaha Company." A gentleman named Clarence H. Venner, a banker in New York City, and head of the firm of C. H. Venner & Co., seems to have conceived the idea of financially uniting these two companies, and for that purpose caused to be incorporated in New Jersey the present insolvent corporation. Preliminary to its incorporation he procured to be executed certain contracts containing the scheme of incorporation, which was, briefly stated, that each of the two corporations, the Denver and the Omaha, should convey to the New Jersey corporation all their several properties and franchises at a certain price agreed upon and understood, and should issue to those corporations in block shares of stock equaling the valuation, and that each of those corporations should distribute that stock among its stockholders according to their several holdings of stock. Those several conveyances were made and the shares of stock were issued. The certificate for the stock to the Omaha Company came into the hands of Mr. Venner, and was broken up into parcels and distributed to the shareholders of that company, and the certificates held by those shareholders were surrendered to Mr. Venner. He was himself a very large stockholder in the Omaha Company. The certificate issued to the Denver Company was held by that company, and its subsequent history is, so far as I know, unimportant, except as constituting it and the other persons associated with it stockholders in the New Jersey Company, and giving them, as such, a standing to file the bill under which it was declared insolvent, and to file the petition in that insolvent suit which resulted in the bringing of the present suit. Under the conveyance by the Omaha Company, the New Jersey Company entered into possession of the works. Later on certain stockholders, and, I believe, creditors of the Omaha Company filed a bill in the federal court at Omaha to set aside the conveyance made by the Omaha Company to the New Jersey Company, to which suit, of course, the New Jersey Company was made a party with others. The result of that suit was a decree declaring in the plainest terms that the sale was void, decreeing the property not to have passed by the conveyance, and revesting the title in the Omaha Company. Possession was taken from the New Jersey Company and restored to the Omaha Company under that decree, and the New Jersey Company was obliged to account for the rents and profits which it had received. Briefly these are the facts upon which the complainant founds his bill to cancel and declare void the stock issued to the Omaha Company in the hands of the defendants. That the proof of these facts, which was complete and consisted mainly of records and documents, makes a prima facie case for the complainant, seems quite clear. There seems to have been on this show a complete failure of consideration.
Two defenses are set up. One is that the conveyance of its tangible property and franchises to the New Jersey Company was not the sole consideration for the issuance of the stock by it to the Omaha Company. It is alleged that, in addition thereto, the New Jersey Company received from the stockholders of the Omaha Company all their stock in that company. To that allegation the complainant replies, first, that the statement is not true in fact; and, second, that the stock is of no value because the mortgage on the property of the Omaha Company was shortly afterwards foreclosed, and all its property swept away. I think the complainant's contentions are well taken. The whole transaction of the delivery of the conveyance by the Omaha Company and the issue to that company by the New Jersey Company of a certificate or certificates of stock according to the contract, and the breaking up of those certificates—there were two kinds of stock, preferred and common—into certificates to the individual stockholders of the Omaha Company in accordance with their several holdings, was carried on and carried through under the supervision of the defendant Venner, either in his individual capacity or as the head of the firm of C. H. Venner & Co.
As a matter of course, each stockholder of the Omaha Company was required to surrender his certificate of stock in that company to Mr. Venner before he could receive the corresponding certificate in the New Jersey Company, and that formal surrender to Mr. Venner was all there was shown in the way of basis of fart for the allegation that those certificates of stock in the Omaha company were given to the New Jersey Company. In the original scheme of consolidation, which was manifested by three several elaborate contracts, there was no mention whatever of any assignment or transfer to the New Jersey Company of the stock of the Omaha Company, or, indeed, of the Denver Company. Indeed, there was no need for any such assignment or transfer, for manifestly that stock became valueless as soon as the conveyances had been completed. Mr. Venner frankly admitted that there never was any actual transfer of any shares in the Omaha Company to the New Jersey Company. On the contrary, the Omaha Company was kept alive for years after the alleged transfer, and Mr. Venner and his associates were elected directors and officers of that company and voted upon the very shares of stock which he now contends wereassigned to the New Jersey Company. Moreover, Mr. Venner alleged and swore at the hearing that he had been a very large creditor of the Omaha Company, and that he had taken from it a very large amount of its stock in payment of his debt, and that after the conveyance to the New Jersey Company, and while, by virtue of his holding a majority of the Omaha Company, he was controlling it and keeping it alive, he had taken proceedings in its board of directors to have a very large block of the very stock which he says was assigned in equity to the New Jersey Company restored to the Omaha Company, and the transaction by which he had accepted that stock in the payment of the indebtedness of that company to him set aside, and he restored to the position of a creditor of the Omaha Company. This transaction was entirely inconsistent with the notion that the stock belonged to the New Jersey Company. An immense amount of documentary evidence was introduced entirely inconsistent with this part of the defense now put forward. I shall not take the trouble to abstract it or elaborate it. It is sufficient to say that the allegation is unsupported by proof, and is entirely inconsistent, not only with the original written contracts but with the whole theory of facts.
But, as the stock has admittedly never been actually transferred on the books of the Omaha Company to the New Jersey Company, all trouble on that score is at an end, because, granting Mr. Vernier's allegation to be true, that the surrender of the certificates of stock of the Omaha Company by the stockholders to Mr. Venner amounted in equity to a transfer of that stock to the New Jersey Company, so that it constituted a part of the consideration of the conveyance, it manifestly constituted only a part, and the only result would be that the complainant would be put upon terms for its relief prayed for in this bill of restoring to Mr. Venner and the other defendants the shares of stock which were so transferred to it. But, as before remarked, as there never was any actual transfer the only terms that can be put on the complainant will be that he will never make any claim to have the shares transferred to him. I find, then, that this defense wholly fails.
The next defense set up by the defendants is that the doctrine of de minibus lex non curat applies. The defendant alleges that it abundantly appears that the stock which the complainant is trying to recover is of no pecuniary value, and he cites in support of his contention a line of eases in New Jersey commencing with Swedesborough Church v. Shivers, 16 N. J. Eq. 453, and coming down to Allen v. Demarest, 41 N. J. Eq. 162, 2 Atl. 655, including Ocean City R. R. Co. v. Bray, 55 N. J. Eq. 104, 35 Atl. 839, and Thiefes v. Mason, 55 N. J. Eq. 456, 37 Atl. 455, and Kelaher v. English et al., 62 N. J. Eq. 674, 50 Atl. 902, decided by Vice Chancellor Stevenson. I understand this point was urged before the Chancellor in the argument on the demurrer to the present bill, and was overruled by him as not applicable to the present situation. I will remark here that I infer that the present suit may have been promoted by the parties interested as stockholders in the present ownership of the Denver waterworks from considerations arising out of the following circumstances. After the conveyance to the New Jersey Company the underlying mortgage or mortgages on the Denver waterworks were foreclosed, and the properties all sold and bought in, leaving nothing to be distributed among the stockholders, and thereby rendering the interest in those works held in that company by the New Jersey Company valueless. But the company was reorganized and the works are now owned by a second Denver Company.
Subsequently Mr. Venner instituted a suit in the state court of Colorado to set aside that foreclosure and sale, and, so to speak, obliterate the reorganization, hoping thereby to recover something for the New Jersey Company, in which he was a large stockholder by reason of the stock now here in dispute. As, I suppose, a counter move to that suit the Denver people instituted this suit in New Jersey; the inference being that the object was to prevent Mr. Venner from deriving any benefit from his Colorado suit, even if he succeeded. The result of the Denver suit last mentioned in the first instance was against Mr. Venner. From that decision he took an appeal, which was pending at the time of the hearing herein, but since that hearing the decree below has been affirmed in the Supreme Court of Colorado, and that result was made known to the court by consent of the parties. This failure of Mr. Venner to give some value to the stock of the New Jersey Company intensifies his allegation that it has no value; but it was abundantly proven in the case that there is a claim, having some show of foundation on the part of the receiver complainant, that Mr. Venner himself, or as a member of the firm, is largely indebted to the New Jersey Company. As a part of the voluminous records in the insolvent cause in this court is a report made in due course of practice by one of the masters of the court showing such indebtedness, and a bill was filed against Mr. Venner to enforce that or some other indebtedness against him by the late receiver in this court, to which Mr. Venner appeared and answered, and that cause has been revived in favor of the present receiver, and is now pending against Mr. Venner. Moreover, as I understand the evidence, the defendant Venner admitted in writing in an examination in supplemental proceedings after execution upon a judgment recovered against him in New York City that he was indebted to the construction account of the old Denver Company in a very large amount of money, and it appears that that debt wastransferred by the Denver Company to the New Jersey Company. It thus appears that there is a prospect of assets. Moreover, the complainant must settle his accounts, and he is entitled to know with whom he has to deal as stockholders, so that I am of the opinion the question of assets and their value under the maxim de minibus does not apply.
One other thought in that connection: It seems to me that the question of value must be determined as at the commencement of the suit. That, in my judgment, is the time from which the rights of the parties are to be determined. I so held in Beach v. Sterling Zinc & Iron Co., 54 N. J. Eq. 65, at pages 81 and 82, 33 Atl. 286, at page 292, in a case, however, not entirely analogous to this, and my opinion was affirmed by the Court of Errors and Appeals, 55 N. J. Eq. 824, 41 Atl. 1117, for the reasons stated by me. That the subject of the controversy in this suit—the ownership of the shares of stock held by the defendant Venner—was at that time considered to be of considerable value is shown by the fact that Venner was willing to expend a large sum of money in defending his title thereto.
Certain objections of a highly technical character are raised by the defendant, and which are clearly waived by such of the defendants as have answered, comprising the defendant Venner, but which I will notice. The first is that the defendants whose names first appear in the prayer of the bill are not named in the body or charging part of the bill. The allegation of the bill in that respect is "that the present holders of said shares and number of shares held by each and the respective certificates therefor are as appears upon the schedule hereto annexed and marked 'Exhibit F,' and made a part of this bill to which your orator refers." The schedule is annexed and contains the names of each stockholder, the number of his certificate, and the number and the class of shares. Then in the prayer for relief these names are all repeated, and there is a prayer that they may answer and the relief prayed for is set forth. This, it seems to me, is entirely equivalent to having mentioned them severally in the charging part of the bill.
The next point made against the bill is that, while there is a prayer for relief and answer, there is none for process. Process, however, did issue against all of the defendants, and a decree pro confesso was taken against such as did not answer. The sole question, then, is as to whether process having issued and been served on such as were found in the state, and proceedings having been had against the nonresidents and a decree pro confesso taken against them who did not answer, it will be competent for the court to enter a final decree against them. I do not deem it worth while to determine that question at present. Clearly the objection, as before remarked, cannot prevail in favor of those defendants who appeared and answered.
I will advise a decree that as against all those who have answered there shall be a decree as prayed for by the complainant. The complainant is also entitled to costs and a counsel fee.