Buerck v. Mid-Nation Iron Products Co.

*274 which will be referred to as the “Buerck Case,” comes here upon a special appeal granted by one of the judges of this court from an order of Division No. 14 of the Circuit Court of the City of St. Louis, overruling a motion of defendant Mid-Nation Iron Products Company to vacate the appointment of a receiver.

The second of said two cases, which will be referred to as the “Trust Company case,” comes here upon an *275 appeal granted to intervening- plaintiffs and the receiver defendant by the Circuit Court of Butler County from an order refusing to set aside and vacate its order appointing E. E! Penzel receiver for the same property involved in the Buerck Case. The two cases were separately briefed and have been consolidated in this court and were argued and submitted together.

I. In the Buerck Case the petition in substance alleged that plaintiffs, respondents here, are bondholders and stockholders in defendant Mid-Nation Iron Products Company,herein referred to as “Iron Products Company,” and bring the action on behalf of themselves and others similarly situated; that said Iron Products Company is a Missouri corporation, having its principal office and place of business in the city of St. Louis; that on or about January 20, 1917, defendant Earl A. Clemons and others caused said Iron Products Company to be organized as a corporation as an instrument for their, fraudulent purposes and to take title to a certain tract of iron-ore-bearing land in Wayne and Butler counties in this State, comprising about 25,000 acres; that the incorporators of said Iron Products .Company did not own said land at the time said corporation was organized, and falsely swore in the articles of association that they did own the same and that it was of the value of $2,000,000; that said corporation did not acquire deed to said land until several months thereafter; that defendant Clemons and his associates caused stock to be issued to themselves as follows: $1,614,700 par value to Earl A. Clemons; $5,000 par value to William E. Leeper; $5,000 par value to W. F. Groetzinger; $100 par value to J. F. Lindsay; $100 par value to E. Abby Lindsay; $100 par value to F. J. Quinn.

Said petition then proceeded to allege that none of the above named persons invested any real money in said Iron Products Company; that they proceeded to issue bonds in the sum of $1,000,000 secured by mortgage upon said lands and that defendant Clemons sold *276 $160,000 in par value of said bonds before he had secured title in the corporation to more than a small part of said lands; that Clemons and his associates paid to Concrete Investment Company of St. Louis the sum of $120,000 and to a St. Louis bant the sum of $18,000, which represented the total purchase price of said lands, and thereafter had title conveyed to one Cochran, trustee, and by him to said Iron Products Company.

That, upon the conveyance of the property to Iron Products Company, defendant Clemons caused said corporation to issue to himself promissory notes' aggregating $220;000, secured by double that amount in face value of the first mortgage bonds of said corporation as collateral, without any consideration whatever therefor to said corporation; that while said corporation property cost defendant Clemons and his associates only about $140,000, it thereupon became and was subject to a $2,000,000 capital stock issue of said corporation, $220,000 liability to defendant Clemons on said notes and a million dollar bond issue; that out of $160,000 first received from the sale of bondsj $138,000- went to apply on the purchase price of the lands, and $22,000 thereof was wrongfully appropriated by said Clemons to his own use, in addition to the $220,000 note.

That the $160,000 of bonds were sold to Mid-Yale Steel Company, and the real consideration for the payment of the money'by that company was not the security supporting said bonds, but was a contract from the Iron Products Company giving such Steel Company the right to prospect, mine and take ore from the land, and that if said company was not satisfied with the land from an ore standpoint it might cancel the contract and retain the bonds; that after Spending a large amount of time and money said Steel Company rejected the property as not being a satisfactory ore proposition; that after such rejection, defendant Clemons began selling such bonds of the Iron Ore Products remaining in its treasury as he was able to sell to plaintiffs and others sim *277 ilarly situated “under every variety of false representation which could he made,” and sold to plaintiffs and such others approximately $100,000 of such bonds and applied the greater portion of the proceeds from such sales upon the aforesaid $220,000 note payable to himself, so issued to him by the corporation without consideration therefor, and thereby reduced the alleged amount of said note to approximately $140,000; that all but a small amount of the remainder of said bonds have under various pretexts been converted by defendant Clemons and his associate, defendant Thomas B. McPherson, to their own use and ‘ ‘have been traded, bartered, exchanged and pledged by them in a great variety of ways and manner unknown to these plaintiffs” and not disclosed by the books of the corporation, and are now outstanding and an apparent lien against the corporation; that there is now an apparent outstanding indebtedness against the corporation in excess of $700,000 and that the property is worth no more than when it was purchased in the year 1917.

The petition then alleges that no mining machinery has been placed on the property or any buildings erected thereon and that no mining or development work has been done thereon and no ore sold therefrom, and that expenses have at all times been paid from proceeds of bonds sold to plaintiffs and others similarly situated, and that defendant and his associates and defendant directors of said corporation are selling and attempting to sell the bonds remaining in the treasury for the purpose of maintaining their salaries and other expenses and for application upon the said Clemons note.

*278 charge to be in excess of $100,000; that he has already paid himself, as aforesaid, $235,000 on the alleged purchase price of said property, has drawn a munificent salary from said company all these years, all without ever having invested a dollar in actual money in the said company and without ever having done or performed any services of benefit to said company or to anyone else, except himself.

“That defendant Thomas B. McPherson has been an active aider and participant in all the fraudulent acts of said defendant Clemons heretofore enumerated, has received from said company a very large amount of the bonds of said company without any. consideration whatever to said company for the receipt of same, is selling or attempting to sell, is pledging or attempting to pledge, said bonds for his own personal advantage wherever he may be able to do so, and is in addition thereto claiming to own $75,000 of the outstanding stock of said company; that defendants James N. Hull, James P. Pierce and J. Hartzler Redhead are nominal stockholders in said company and constitute the board of directors, were placed there by and with the connivance and solicitation of defendant Earl A. Clemons and defendant Thomas B. McPherson, and are used merely to further the ends and purposes of defendants Earl A. Clemons and Thomas B. McPherson.

“That a bankruptcy petition has been filed against defendant Earl A. Clemons, that he owes a very large amount of money, and that he is attempting to use, and will attempt to use, the bonds of this company now in his possession and his so-called note indebtedness of this company as aforesaid to offset and pay up the debts claimed against him, unless a court of equity immediately intervenes and appoints a receiver to look after and protect the interests of the said Mid-Nation Iron Products'Company in its claim to said bonds and in its defenses against the said pretended indebtedness of said Clemons.”

*279 Said petition then alleges that 46,000 acres of additional land in Wayne and Bntler counties were .conveyed by Concrete. Investment Company to one Cochran, acting as a dummy for title for said Clemons and his associates, for $77,478, paid for by three notes secured by deed of trust and no actual money, and that said Cochran placed thereon a second deed of trust for $172,522, securing five other notes executed by him, and then conveyed the equity in said land to Iron Products Company for a consideration of $325,000 of the capital stock of said corporation, and as a part of the consideration said corporation assumed and agreed to pay the said two deeds of trust; that said defendant Clemons then caused two of the notes secured by the second deed of trust,' aggregating $110,000, to be placed in the hands of defendant McPherson, who thereupon, in conjunction with defendant Clemons, turned said notes over to the Iron Products Company and received in lieu thereof $110,000 of its first mortgage bonds; that the remaining three notes, secured by said second deed of trust on said 46,000 acre tract, of approximately $20,000 each, are in litigation in the city of Chicago; that no attempt was made to pay the notes secured by the first deed of trust on said 46,000 acres of land and said deed of trust was foreclosed and Iron Products Company lost all rights in said land; that by .said transaction said corporation obtained nothing whatever, and parted with $375,000 of its capital stock to defendant Clemons and $110,000 of its first mortgage bonds to -defendant McPherson, “all of which plaintiffs say is a fraud on their rights as bondholders and stockholders.”

“Plaintiffs state that they purchased their stock and bonds without knowledge of the foregoing facts, or without having any opportunity to gain such knowledge ; that the said facts were not of record in the office of the company, but were all zealously concealed by the officers and directors thereof; that the purchase price of said property was represented to be very near many *280 times that actually paid for it by the said directors and officers and that the money so paid by these' plaintiffs was going’ into the purchase of machinery and the development of the property and not into the pockets of the officers and directors thereof, as herein charged. That it would be useless to apply for redress, to the company itself, as the officers and directors thereof are the wrongdoers and are in control of same.

*281 rectors from this company, in accordance with the provisions made by the statutes of the State of Missouri, and all other and farther adequate relief furnished plaintiffs which the evidence in this cause may disclose as necessary.

“Wherefore plaintiffs pray that the said pretended indebtedness of the said Clemons as hereinbefore set forth be cancelled, that an accounting he required of the said Clemons for all moneys heretofore received by him on said pretended indebtedness, and that a judgment be entered against him for same; that he be ordered and directed to surrender the bonds now in his custody so surreptitiously taken from the treasury of this company, and that an accounting be had with the said McPherson; that the said officers and directors be removed as officers and directors of said company and be barred from further participating in the management or conduct of the affairs of said company, and that a receiver be appointed to administer upon the affairs of said corporation pending the further orders of this court; that in view of the premises herein stated, it is necessary and essential that a receiver be immediately appointed to appear in the bankruptcy proceedings heretofore set forth as pending against the said Earl A. Clemons.

“That an order to show cause be issued, returnable forthwith, requiring the said defendants herein to show cause, if any they have, why pending a final hearing hereon a receiver should not be immediately appointed to take charge of the Mid-Nation Iron Products Company and to conserve its assets from further dissipation $nd wasting and to properly protect and care for the interests of said corporation, and for such other and further relief as to the court shall seem meet and just in the premises.”

Upon the filing of said petition on April 29, 1920, the cause was assigned to Division 14, presided over by Honourable Charles B. Davis, and the following order was made:

*282 “Now at this day come the plaintiffs by their attorneys and submit to the court their verified petition this day filed, praying, among other things, for the appointment of a receiver, and the court having seen and examined said petition, and being sufficiently advised thereof, doth order that each of the defendants be and appear in Division No. 14 of this court on "Wednesday, May 5, 1920, at 10 a. m., then and there to show cause, if any they have, why a receiver should not be appointed for tlie defendant, Mid-Nation Iron Products Company, a corporation, to take charge of and to conserve the assets of said corporation from dissipation and wasting and to protect and care for the interests of said corporation.”

The Sheriff of the City of St. Louis served said notice by delivering a copy thereof to1 Earl A. Clemons, president of the Mid-Nation Iron Products Company, and to defendants Clemons and McPherson on April 29, 1920. and a copy thereof to defendant Hull on May 1, 1920, and failed to find defendants Pierce and Redhead in, the city of St. Louis. On May 13,1920, plaintiffs were given leave to and did amend the prayer of their petition by asking for a temporary injunction, restraining defendants Clemons and McPherson from acting as officers of the corporation and removing its property or selling, assigning or hypothecating its bonds, notes or other obligations held by them. On the' same day the said Circuit Court of the City of St. Louis granted such restraining order and appointed Odón Jr., of the city of St. Louis, as receiver. The order recited that the plaintiffs were present and offered testimony in support of the petition and that defendants made default.

On May 15, 1920, defendant Iron Products Company and defendants Clemons and McPherson filed their joint motion to Set aside the order granting an injunction and appointing said receiver, but since we have concluded that only the record proper is before us, it is *283 improper to consider the averments of this motion or the proof offered in support thereof.

On June 21,1920, defendant Iron Products Company and defendants Clemons and McPherson filed their separate demurrers to the petition, and on July 1, 1920, the trial court overruled said demurrers, and also on the same day overruled the motion of the defendants to set aside its order appointing a receiver and granting an injunction. On May 18, 1921, said defendants filed their separate answers to said petition. On May 9, 1921, an authenticated copy of the record made in the Circuit Court of the City of St. Louis was filed in this court, and on June 11, 1921, a special appeal under the provisions of Section 1474, Revised Statutes 1919, was granted by one of the judges of this court, and on June 17, 1921, super-sedeas bond was filed and approved.

II. The petition in the Trust Company case recited the corporate capacities of that company and of the ¡Mid-Nation Iron Products Company, and the appointment of Odón Guitar, Jr., as receiver, by Division No. 14 of the Circuit Court of the City of St. Louis, in the Buerck Case, and that said receiver is acting as such receiver by virtue of said appointment.

Said petition then alleged that the Iron Products Company on July 19, 1917, executed and delivered to the Trust Company its first and general mortgage deed of trust, conveying to the Trust Company as trustee the 25,000-acre tract of land above mentioned to secure a total authorized issue of its first and general mortgage gold bonds in the aggregate amount, face value, of $l,000,0p0, describing said bonds in detail and the amount and terms thereof; that said Iron Products Company issued $750,000 of the authorized million dollars of said bonds, and same were certified by the trust company as trustee and delivered to said Iron Products Company and issued by said corporation, and that bonds are now outstanding and unpaid; that said deed of trust *284 provided for foreclosure thereof upon the written request of .one-fifth of the outstanding bonds in the event of default in payment of interest or principal when due or default in other conditions of said deed- of trust in specified respects, or in the event of the appointment of a receiver of the corporation or the property covered by the mortgage, and other conditions usually found in similar instruments providing for notice, public sale, deed to purchaser, etc.

Said petition then alleged defaults in several particulars on the part of the Iron Products Company, including the allegation that said corporation caused or allowed the appointment of a receiver by the Circuit Court of the City of St. Louis for the property covered by said mortgage, and prayed for judgment and foreclosure of the mortgage and equity of redemption of said Iron Products Company and sale of the property, and for the appointment of a receiver, and that summons issue to defendant Iron Products Company and Odon Guitar, Jr.

On October 7, 1920, Odon Guitar, Jr., filed answer as receiver, entering his appearance, denied each and every allegation of the petition, and advised the court that it was to the interest of stockholders and bondholders that the receiver’s administration be closed as rapidly as practicable, and asked that the cause be set down and heard at that term of court.

Thereafter, by leave of court, John F. Green and others, as a committee of bondholders of Iron Products Company, filed an intervening petition, making in a general way the same allegations made in the petition in the Buerck Case, and recited the appointment of Odon Guitar, Jr., as receiver by the Circuit Court of the City of St. Louis for property involved in the Trust Company Case. Said Green and others prayed to be made parties plaintiff, and that the relief prhyed for by the Trust Company be granted, and “that a hearing be had on all the bonds and the title thereto in the individual holders, particularly those now claimed by the said Earl *285 A. Clemons or Ms wife, Rose B. Clemons, or the said Thomas B. McPherson, or their assigns.”

At the July term, 1921, of said Butler County Circuit Court, one C. P. Boll filed a motion, asking for the appointment of a receiver in the, Trust Company case, alleging that he was the owner of $3,300 of the^ bonds of the Iron Products Company and $1,650 of its stock; alleged that the value of the property as raining and timber lands wras approximately $1,000,000 and sufficient, if properly managed, to pay off the debts against the corporation and leave a surplus for the stockholders; that the holders of the stock and bonds of said corporation were in danger of losing their investments, unless the court took possession of said property through its receiver appointed by the court; that owing to general financial conditions prevailing at the time, the property should not then he sold, but a receiver was necessary to preserve such property, and asked that the prayer for a receiver contained in plaintiff Trust Company’s petition be granted, etc.

On July 23, 1921, Odon Guitar, Jr., filed Ms motion to strike from the files' the motion of said Boll for the appointment of a receiver, on the ground that said Boll had no standing in court and because the-court had no power to appoint a receiver on his petition; that said GMtar was duly appointed receiver of said property by the Circuit Court of the City of St. Louis in the Buerck Case, and said St. Louis Circuit Court had full jurisdiction of the matter and of all issues involved therein, except as such jurisdiction was affected by the appeal from the order of said Circuit Court in the City of St. Louis refusing to vacate the appointment of a receiver; that no appointment of a receiver by the Butler County Circuit Court was necessary, even if one had not already been appointed by the Circuit Court of the City of St. Louis.

On July 25,1921, the Circuit Court of Butler County appointed E. E. Penzel as its receiver for the same pro *286 perty, and the parties to the suit were enjoined from interfering with the property placed in the hands of said receiver or with his custody thereof. On the following day John F. Oreen and'others, intervening plaintiffs, and Odon Guitar, Jr., filed their motion to vacate and set aside said order appointing Penzel as receiver, because of want of jurisdiction of the Butler County Circuit Court to make such appointment, for the reason that a prior suit was pending in the Circuit. Court of the City of St. Louis (referring to the Buerck Case) and that such court had theretofore appointed a temporary receiver and an appeal was pending in relation thereto' in the Supreme Court, and urged other reasons not necessary to relate here. This motion was overruled, and on the same day an appeal from such order was gTanted.

III. In the Buerck Case respondents contend there is nothing before us for consideration except the record proper, and that the only questions for our consideration are whether the petition stated facts justifying the appointment of a receiver, and whether the Circuit Court of the city of St. Louis had jurisdiction over the subject-matter.

The bill of exceptions was allowed and filed October 3, 1921. The special appeal was granted June 11, 1921. In Brockmann v. United Railways, 271 Mo. 696, this Division held that the special appeal granted under Section 2043, Revised Statutes 1909 (now Sec. 1474, R. S. 1919), must be determined upon the record ex-i sting when'the appeal was allowed, and which shows the errors complained of and to be determined when the case is heard; that the statute provides that such appeal should not be granted by a judge of an appellate court “unless it appear from an inspection of a copy of the record that error was committed by the trial court” and if a copy of the evidence .had not at that time been approved and filed in the trial court, no error, except errors in the record proper, can *287 be considered when the case is heard in this court. The rule laid down in that case seems to be controlling and to render it unnecessary and improper for us to conand said motion cannot be considered. [Cantwell v. Lead Company, 199 Mo. l. c. 41; Bank v. Bank, 169 Mo. 74.]

200,000 shares of common stock of the par value of $10 each, fully paid and non-assessable; issued $1,000,000 of first mortgage gold bonds to be authorized and sold $160,-000 of the bonds to another corporation. Out of the proceeds, $138,000 was paid as the purchase price of the lands and Clemons appropriated $22,000 to his own use.

He then had the directors of the company, who were mere dummies and absolutely under his control, execute the note of the corporation, payable to himself, in the sum of $220,000, without any consideration whatever to the corporation therefor, and secured the same by double that amount in face value of the bonds of the corporation as collateral. This left as the entire assets of the corporation the 25,000 acres of land of a value not to exceed the purchase price, subject to the liabilities of the corporation for $2,000,000 authorized capital stock, over 16,000 shares of which were issued to- Clemons, $1,000,000 authorized bonds, at least $600,000 of which were outstanding, either sold or pledged, and said $220,000 note.

*288 Not only this, but the petition alleges said Clemons caused 46,000 acres of other land to be conveyed to one Cochran as a dummy for title at the stated consideration of $77,478, paid for by notes secured by first deed of trust on said tract and then caused said Cochran immediately to place thereon a second deed of trust to secure notes aggregating $172,522 and then secured the conveyance of the equity in said lands to the corporation for $325,000 par value of the stock and assumption and agreement to pay the notes secured by said first and second deeds of trust. Clemons then caused $110,000 of the notes secured by the. second deed of trust to be placed in the hands of defendant McPherson and, acting together, they turned said notes over to the Iron Products Company and received therefor $110,000 of the bonds of the corporation. The first mortgage on said 46,000 tract was then permitted to be foreclosed and said lands lost to the corporation. The net result of this manipulation was that the corporation parted with $325,000 par value in stock and $110,000 face value in bonds without receiving any benefit therefor whatever, and in addition is engaged in litigation over three notes of approximately $20,000 each given by Cochran and which the corporation assumed and agreed to pay.

It is alleged that the plaintiffs and others paid approximately $100,000 for their "stock and bonds without knowledge of the foregoing facts, and Clemons applied the greater portion of this upon the $220,000 note held by him, for which no consideration passed to the corporation, and same was thereby reduced to about $140,000. 'Nothing has been done by Clemons and the other directors to mine the property, to erect necessary buildings or purchase mining machinery. Clemons as president and his associates as dummy directors completely dominate the corporation and are drawing large salaries and maintaining useless and expensive offices. Clemons owns or claims to own in excess of three-fourths of the capital stock and absolutely controls the acts of the majority of *289 the directors and it would be useless to seek redress witbin the corporation itself.

At the time of the suit, defendants Clemons, McPherson and the directors whom they dominate, were about, to move the offices of the company to Chicago, outside the jurisdiction of the court. The relief sought was an accounting between Clemons and McPherson on the one side and the corporation on the other, the cancellation of the note held by Clemons and the surrender of bonds wrongfully held by Clemons and McPherson, and their return to the treasury of the corporation, the removal of said officers and directors and the appointment of a receiver. The subsequent amendment asking for an injunction need not be considered, since the correctness of the granting of such injunction is not involved in this appeal.

The foregoing allegations of the petition, which we assume to be true for the purposes of this appeal, are much stronger than those in the well considered case of Cantwell v. Lead Company, 199 Mo. 1, supra. There a formerly solvent corporation had become insolvent, or of doubtful solvency, through incompetent or fraudulent management. There was a row between majority and minority stockholders for control. Here the corporation was conceived in fraud, and there never has been a moment since its organization when it has been a solvent, going concern. Without knowledge of .the true facts and through alleged positive misrepresentations on the part of Clemons and his associates, the plaintiffs invested about $100,000 in the concern. Clemons had misappropriated these assets and was about to appropriate other assets of the corporation by applying same to the payment of the fraudulent liabilities of the corporation and would have made further payments on the note held by himself had not the property been taken out of the control of himself and his -dummy directors. These facts, as stated in the petition, cry aloud for the aid of a court of equity in seizing and protecting the pitifully *290 few remaining assets and in seeking to recover misappropriated assets of the corporation. The petition clearly stated a canse of action and authorized the appointment of a receiver in aid of the relief sought. Suing as stock-holders were not to invoke the aid of the trustee in the deed of trust. In that capacity their interests were adverse to the interest of the trustee, but no relief was sought against the trustee or against the lands owned by the corporation and covered by the deed of trust.

Nor can there be any question concerning the jurisdiction of the Circuit Court of the City of St. Louis over all the property of the corporation for the purposes of the action. The corporation maintained an office there, alleged to be its principal office. [Sec. ver the corporation’s equity in the'1 lands. By answering over defendants have waived any question of jurisdiction over their persons, want of capacity in plaintiffs to sue and all such questions.

The record shows the court notified the defendants of the hearing set for May 5th. They were in court for such purpose and were also in court upon the adjourn-ment or continuance of such hearing to May 12th and the order made on May 13th. The *291

IV. The sole question for determination in the Trust Company Case is the propriety of the appointment of a receiver by the Butler County Circuit Court and the refusal of that court to vacate such appointment. The jurisdiction of that , „ ■, ... . court m the foreclosure suit is not questioned. Part of the lands covered by the deed of trust are in that county. As we have already concluded, the Circuit Court of the City of St. Louis rightfully appointed Guitar as receiver of the Iron Products Company. His appointment was not vacated by the special appeal granted in the Buerck Case. [State ex rel. v. Reynolds, 209 Mo. 161; Reed v. Railway Co., 209 S. W. 892.]

The only effect of the supersedeas bond given by appellants in the Buerck Case was to take the property of the corporation out of the receiver’s hands, pending the appeal from the order refusing to vacate his appointment. Such appeal did not suspend or vacate the appointment. [State ex rel. v. Reynolds, supra.] The fact of the appointment of Guitar by the St. Louis court was patent on the face of the petition in the Trust Company case, and he was made a defendant as such receiver in that case and it was alleged in said petition that he was still acting as such receiver under and by virtue of the appointment of the St. Louis Court. The petition was filed September 17, 1920, and, although it prayed for the appointment of receiver, no appointment was made by the Butler County Circuit Court until July, 1921, when C. B. *292 Boll intervened and asked for such, appointment. This after the special appeal had been granted in the Buerck Case. In spite of the protest of Guitar, the appointment was made and the court refused to vacate such appointment. The subsequent appointment of receiver by the Butler County Circuit Court created an unseemly conflict of jurisdiction and was in excess of the jurisdic-' tion of said court; Although the deed of trust authorized the appointment of a receiver, the court should not have made the appointment under the circumstances, either on the application of Boll or any of the parties in the case. After being made, such appointment, should have been vacated and the court erred in refusing to do so.

Even though the Circuit Court of St. Louis ordered its receiver to enter his appearance in the Trust Company Case, as contended by respondent, it did not thereby surrender its jurisdiction. The property of the receivership estate was sought to be sold under the mortgage deed of trust, was the duty of the receiver to see to it that the rights of the estate were protected. Such conduct is entirely consistent with the assertion of jurisdiction by the St. Louis court.

It is unnecessary to notice other reasons urged for the reversal of the order refusing to vacate the appointment.

V. It results from the foregoing that in the Buerck Case the appeal of defendants should be dismissed, and in the Trust Company Case the order of the Butler Counand the cause, remanded with directions to sustain said motion and set aside said order.

It is so ordered.