Baker v. Seattle-Tacoma Power Co.

Morris, J.

In May, 1907, appellant commenced this action on behalf of himself and other stockholders of the respondent company. The theory of the action is, that in April, 1905, N. H. Latimer and some fifteen associates organized a syndicate, to acquire the stock and. properties of' two corporations named the Mutual Light & Heat Company and the Diamond Ice & Storage Company; that at the time of this transaction, Mr. Latimer and all his associates save-one were connected with the respondent company as stockholders and in various official capacities, owning and controlling the majority stock of the company; that this syndicate fraudulently combined and conspired to obtain control of the stock and property of the Mutual Light & Heat Company and the Diamond Ice & Storage Company, and to transfer the same to the respondent company, to its great loss and detriment and to the great financial profit of the syndicate, the fraudulent purpose and intent being consummated by the transfer of these properties to the respondent company in June, 1905, some fifty-nine days after the purchase, at an estimated profit of $50,000, which was divided among the syndicate pro rata with the amount contributed. The relief asked for originally was the setting aside of the transfer to the respondent company, and for the restitution of the purchase price, or for a recovery of the profits made by the syndicate, or those of its members who stood in a fiduciary relation to the contpany.

The answer admits the organization of the syndicate and the purchase of the properties of the Mutual Light & Heat Company and the Diamond Ice & Storage Company, and the subsequent transfer and sale to the respondent company; denies any fraud or conspiracy to defraud; and affirmatively alleges that the transactions complained of were authorized at a regular meeting of the stockholders of the respondent company; that the appellant was present and voting at such meeting, and was opposed to the action of the maj ority; that at the time of such authorization, the respondent company had under consideration the execution and delivery to the Northern Trust Company óf Chicago of a mortgage or trust deed, to secure an issue of $7,500,000 of its bonds; that it was the intention to then issue $1,150,000 of such bonds and sell the same to N. W. Harris & Company, for the purpose of supplying the company with funds for its corporate uses, among which was the purchase of the stock and .properties of the two corporations referred to; that the company was not willing to execute said mortgage, nor to issue said bonds, nor were the owners of the transferred properties willing to transfer the same to the company unless appellant' would waive and withdraw his objection; that thereupon appellant did waive all objections to the transaction, and did signify his acquiescence in the same by executing, after a complete investigation and with full knowledge, the following waiver:

“Seattle, Wash., July 17, 1905.

“Messrs N. W. Harris & Co., and N. H. Latimer and his associates in what is known as the Diamond Ice & Storage Co., Syndicate:

“Gentlemen: While the purchase by the Seattle-Tacoma Power Company of the properties of the Mutual Light & Heat Company and the nineteen hundred ninety-four (1994) shares of the capital stock of the Diamond Ice & Storage Co., as authorized and directed at the meetings of the stockholders of the Seattle-Tacoma Power Company and of the board of trustees of that corporation, held on June 15, 1905, and June 19, 1905, did not meet with my approval as a matter of business expediency, yet after a further and full investigation of all the facts, and in view of the figures submitted and explained to me by Mr. Latimer, and in order that the proposed purchase of certain first mortgage bonds of the said Seattle-Tacoma Power Company may be completed by Messrs Harris & Co., and in order that the sale and transfer of the properties of the Mutual Light & Heat Company and the said shares of stock of the said Diamond Ice & Storage Co. may be finally effected and completed free from any objection upon my part, and in order that the said properties and stock may be brought under the lien of the mortgage securing the said bonds, I do hereby ratify and confirm each and all of the proceedings taken and done at any and all of the said meetings of said board of trustees and of the stockholders of said Seattle-Tacoma Power Company in accordance with and as shown by the copies of the minutes hereto attached.

“Executed in presence of Chas. H. Baker.

“Thomas B. Hardin.”

The answer further set forth that, relying upon this waiver of all objections, the aforesaid mortgage was executed in August, 1905, covering the property acquired from the syndicate, and $1,982,000 of bonds issued and sold thereunder. It is further alleged that, in June, 1906, the power company executed an additional or supplemental mortgage to the same trust company, to secure these bonds, and that the property acquired by the power company from the syndicate was purchased in good faith; that is, was fully worth the amount paid, and that no objections were ever made after the purchase until appellant commenced his action, some two years after the transaction complained of. Appellant sought to overcome the effect of this waiver of his objections by pleading in his complaint, in evident anticipation of its value to respondent as a defense, that it was signed under duress, and that he did not withdraw or surrender his opposition to the alleged wrongful acts of respondent in bringing about the sale and transfer to the power company; and evidently anticipating a charge of laches, he pleaded further that he delayed in bringing suit, hoping some favorable contingency would arise in which the matter might be satisfactorily adjusted. Upon the trial, appellant waived any claim to rescind the sale, and confined his efforts to an attempt to obtain a restitution to the power company of the profits of the sale. Those profits he alleged were about $50,000, while respondent admits the profits to be $24,278.87.

The facts upon which there seem to be now no contention are these: . The Seattle-Tacoma Power Company was, in 1905, engaged in supplying electricity to the cities of Seattle and Tacoma, and had been seeking to establish itself in Seattle as a retailer of such power. In this effort it found itself confronted with serious opposition, especially in the business section of the city where the most profitable business was to be found. This opposition was furnished by the Seattle Electric Company, and the Mutual Light & Power Company, each of which was owning and operating a steam-heating plant in connection with its electric lighting business. The Seattle Electric Company’s heating franchise covered that portion of Seattle’s business district south of Madison street, and the Mutual Light & Power Company and the Diamond Ice & Storage Company’s franchise covered that portion north of Madison street. The Mutual Light & Power Company and the Diamond Ice & Storage Company were closely allied corporations, being controlled by a Mr. Crane, and were virtually operated as one company. The situation was therefore this: The Seattle-Tacoma Power Company could sell only light and power; the rival companies could sell heat, light, and power, and in order to obtain the business, could, and did, make rates for light and power at comparatively low rates, while exacting a high rate for heat, which could be done because of no competition in the territory covered by the respective franchises. These low rates for light and power the power company could not meet and do business on a profitable basis. It therefore found itself in a precarious financial condition. It could not get business, it could not pay dividends, it could not even pay its taxes. At this juncture of affairs it became known that the Mutual Light & Power Company and the Diamond Ice & Storage Company — the Crane properties — were for sale, and it was at once evident that should these properties fall into the hands of the Seattle Electric Company, the power company would virtually have to go out of business so far as the big business of the city was concerned. It was therefore not only desirable, but almost necessary, that the Crane companies should be controlled by the power company.

This situation was called to the attention of the trustees by the manager of the company, in a letter in which he showed how the power company was losing some $60,000 a year by virtue of the situation, and how imperative it was that the Crane properties be acquired and the power company thus put in a situation where it could obtain business in the down-town section of the city. The power company, however, had no money to make this purchase, and it was then that Mr. Latimer, the president of the company, after consultation with its other officials and local stockholders, organized this syndicate and eventually purchased the Crane properties, in order that such properties might be in friendly hands until such time as the power company was in a position to take them over. The purchase by the syndicate was in April, 1905, and on June 19, 1905, at a called meeting of the stockholders, after hearing the report of a committee previously appointed to investigate the Crane properties and report on their value, the purchase by the power company was authorized by the stockholders.

It is apparent from what happened at this meeting that there was a full and complete disclosure of all the facts in relation to the matter; it was very fully discussed by a number of those present, and all seemed to have a full knowledge and understanding of the situation at the time the purchase was authorized. In addition to the other facts upon which the stockholders acted at this meeting of June 19, were three reports, made in full detail by certified public accountants, showing the exact situation of the Crane properties at the time of the taking of the option to purchase by the syndicate, some time prior to April, the situation in April at the time of the purchase by the syndicate, and the situation on June 19, the day of the purchase by the power company. These reports covered the condition of the Crane properties for the years 1902-3-4-5. The,evidence shows, in addition to making known the price at which the syndicate purchased— $320,000 — and the price asked of the power company— $349,600 — a full statement was made of moneys expended by the syndicate in its control of the property, and the profits of the business during the period of its ownership. In fact, it is difficult after reading the record to imagine what additional knowledge could have been communicated to the stockholders in-order for them to obtain a full and complete ■ understanding of the situation. That they did so is evidenced best by their act. Appellant admits the wisdom of their act, by saying in his brief, “the evidence is conclusive in this case upon the point that the properties of the Mutual Light & Heat Company were properties which it was almost necessary for the power company to acquire.” It is equally conclusive to our mind, as found by the court below, that at the meeting of the stockholders of the power company on June 19, held to consider the purchase of the Crane properties from the syndicate, “said meeting was fairly held, and that all the facts and circumstances in connection with said sale were fully and clearly disclosed to the stockholders of said Seattle-Tacoma Power Company; that it was fully known and understood by said stockholders at said meeting and prior to said sale, who were the owners of the property and from whom the same was being purchased and the amount of profit which the sellers were making on such sale; that plaintiff, prior to the consummation of said sale, and with full knowledge of all the facts and circumstances connected with the same, acquiesced in such sale and waived all objections thereto.”

The contention of appellant is that the trustees of a corporation stand in a fiduciary relation to the corporation, and are to be regarded as its agents to transact its business for the benefit of its stockholders ; that so standing and so acting, all their acts must be for the benefit of the corporation, and not for their own benefit; and if by their acts they receive any profit from the corporation’s business, equity will regard such profit as the property of the corporation. As an abstract statement of a legal proposition, that such is the law will readily be admitted; but like every other rule of law, it must be concreted with proper facts, before it will be announced as the law in any given case. No such facts are present in this record. There is nothing in the law to prevent trustees or other officers of a corporation, who may as individuals own certain property which it is necessary or advantageous for the corporation to acquire, from selling such property to the corporation at its fair value, and making a profit on the transaction, when such sale is made with a full disclosure on the one side and a full understanding on the other side of all the facts entering into or affecting the transaction. In so doing they are not within the rule contended for by appellant — dealing with the property of the corporation and reserving to themselves the profits. They are dealing with their own property,' which, if desired by the corporation, can be sold and purchased as may any other property derived from any other source.

Appellant in his argument urges the fact that members of the syndicate represented the maj ority of the stockholders, either in their own holdings or by virtue of proxies from other stockholders, and says, in making disclosures and in selling, they were disclosing to themselves what they already knew, and purchasing in one relation what they already owned in another. It does not alter the legal situation that the syndicate represented the maj ority of the stock either in person or by proxy. In voting their own stock, or that which they represented by proxy, they were within their legal rights. The proxy clothed them with full power to represent such portions of the stock, and binds the absent stockholder to the same extent as if so voted in person, in the absence of any fraud or exceeding of authority, as between him and his principal. Synot v. Cumberland, 117 Fed. 379. Accepting as a further rule contended for by appellant, that in cases of dealing between a stockholder of a corporation and the corporation itself, the burden is on the stockholder to show good faith and honesty in every feature of the transaction and to such end the transaction will be carefully scrutinized by the courts, the respondent has fully sustained such burden in this instance, and the most exacting scrutiny discloses no evidence of actual or intentional fraud, or other circumstance that should be permitted to impair the validity of the transaction.

We are further of the opinion that appellant, by reason of his written waiver the execution of which induced the purchase, the execution of the trust mortgage and the issuance of bonds, is now estopped from seeking to overthrow such purchase. Neither can we, as pleaded by him, find any duress or other intimidating reason for his execution of such waiver. At the time of the purchase on June 19, 1905, he opposed the purchase. Doubtless he had reason satisfactory to himself for such opposition. One month later he says: “After a further and full investigation of all the facts and in view of the figures submitted and explained,” he withdraws his opposition and ratifies and confirms the entire transaction. He then waits two years before again expressing his attitude toward the transaction, when he returns to his first opinion and brings this action. to set aside the sale and restore the profits. Then he waits another two years before he seeks a trial of his action. That such conduct is laches seems to us irrefutable. Wright v. Tacoma Gas & Elec. L. Co., 53 Wash. 262, 101 Pac. 865.

One other feature of the record requires a ruling. The court below found that, subsequent to the commencement of the action, N. W. Harris & Company and Howard. W. Baker, although not made parties by service, yet because of the comJnencement of the action, paid into the power company the sum of $12,195, and being of the opinion that the corporation had profited to that extent by reason of appellant’s suit, it awarded him $750, as an attorney’s fee in this action. Prom this portion of the decree the power company brings a cross-appeal, contending that, inasmuch as the court found no equity in plaintiff’s action, it was not justified in awarding him $750 as an attorney’s fee for bringing an unjustified suit; and further, there is nothing to justify a holding that these payments were made because of this suit. We are referred by appellant to a number of cases holding that, where a stockholder brings an action for the benefit of the corporation, and recovers property of which it has been deprived, he is entitled to recover a reasonable attorney’s fee. Two things occur in these cases which are not present here. The corporation had been wrongfully deprived of its property, and the suing stockholder had been successful in recovering it. The corporation in the case at bar has not been wrongfully deprived of its property; neither has any such property been recovered. Howard Baker paid back his share, it appears, because the amount was small, and he could not afford to bother with it, regardless of the right or wrong of the matter, and have trouble with appellant who is his brother. Harris & Company thought they had a legal right to the money, but inasmuch as they had made a profit on the bonds and were associated in various ways with the Bakers, in the affairs of the Baker estate, they preferred to return the money rather than to have any question raised by appellant. It therefore appears that, while appellant has not been successful in his action in demonstrating that there is property belonging to the corportion that should be restored to it, he has, by reason of his position in the matter, caused the corporation to receive $12,195 it would not otherwise have received. The bringing of this action has enriched the corporation that much. It does not seem equitable to us, although conceding the case is not within the rule generally applied, to permit the corporation to retain this money and appellant bear all the burden of its acquirement. It is probably true that in most cases where counsel fees have been allowed in actions of this chax-acter, the payments have been involuntary. Here the payment was voluntary, but it was apparently induced by the commencement of the action, and we think the same rule should obtain.

The cross-appeal is therefore denied, and the judgment as appealed from is affirmed.

Rudkin, C. J., and Ckow, J., concur.

Dunbak, J., concurs on the ground of estoppel alone.