Roskay v. Niles Creamery Co. , 282 Mich. 578 ( 1937 )

In 1929 the capital structure of the Niles Creamery Company consisted of 55 shares of common stock having a par value of $100 each, 27 1/2 shares of which were owned by plaintiff Charles Roskay, and the other 27 1/2 by defendant William Saathoff. One share of the holdings of Roskay was in the name of his wife.

On July 29, 1929, Roskay gave defendant Albert G. Rooks an option to purchase his holdings for $3,000 cash and $3,000 of seven per cent. preferred stock, which was to be issued later pursuant to a proposed recapitalization of the company, agreeing "to accept said A.G. Rooks' personal note (for $3,000) secured by all my stock purchased, until such time as said preferred stock may be authorized and issued."

On or about the same date, Saathoff gave Rooks and Glen Overton an option to buy his interest in the business for $5,000 in seven per cent. preferred and $1,000 in common stock of the Niles Creamery Company, of the new issue.

Rooks exercised the Roskay option on September 3, 1929, paying $3,000 in cash, and giving his 90-day note, "subject to the terms and conditions" of the option agreement. On December 8, 1930, Rooks and Overton, without notifying either Roskay or Saathoff, increased the capitalization of the corporation to $35,000, to consist of $25,000 common and $10,000 preferred. Some time thereafter 30 shares of this preferred stock were issued to Roskay in purported payment of the Rooks note. Rooks testified that some time later he asked Roskay to surrender the note but Roskay never did this. However, there is no evidence that Rooks ever requested the surrender of Roskay's 27 1/2 shares. Dividends totaling $420 were paid Roskay on the preferred stock prior to the commencement of the instant suit.

On or about December 11, 1930, Rooks and Overton delivered to Saathoff the shares promised to him, but the latter returned the stock to them about two weeks later.

On or about October 5, 1931, Saathoff commenced a suit against Rooks, Overton, Roskay and others, seeking cancellation of his contract with Rooks and Overton, who had, in the meantime, invested an additional amount of about $19,000 in the business. This suit was founded on the theory that the Saathoff-Rooks-Overton option contract was void for ambiguity in failing to specify the amount of preferred and common stock to be issued.

On October 16, 1931, Roskay pledged the 30 shares of preferred stock to a bank as security for a loan.

The Saathoff-Rooks case was brought on for trial on March 29, 1932, before Judge White, circuit judge for the county of Berrien. During the course of this trial the judge declared that he hoped the parties would "get together" because "it looks like any remedy the court could grant, would be unsatisfactory to both sides." Judge White stated that if the contract were cancelled, Saathoff would have to reimburse Rooks and Overton for the expenditures which they had made or the assets of the corporation would have to be sold to pay them and other creditors, and anything that remained would go to Saathoff and Roskay, the stockholders. Judge White further stated that "Mr. Roskay would have to be cared for," but he thought that "he has a remedy against the gentlemen who bought his stock."

It is not clear whether the trial judge made the above remarks before or after the execution of the assignment hereinafter discussed. It appears, however, that Rooks, Saathoff and Stuart B. White, Saathoff's attorney, were all present in the court when the remarks were made.

During a noon recess in the trial of the Saathoff-Rooks case, White, Saathoff's attorney, told Rooks that he (White) believed that the court would cancel the Saathoff-Rooks contract because of its ambiguous character and order a sale of the assets of the creamery. Even if Rooks and Overton could have been reimbursed by Saathoff, the effect of cancellation would be to leave the corporation with two different capital structures, since 27 1/2 of the original shares would have to be returned to Saathoff as his interest and the 30 shares of the new preferred could be retained by Roskay as his interest inasmuch as he had not elected to rescind his contract with Rooks. White asked Roskay to assign all his rights and interest in the creamery to Saathoff, including the Rooks note, the 30 shares of new preferred and the 27 1/2 shares of the original common to enable Saathoff to settle with Rooks and Overton.

White claims that he told Roskay that the latter's rights in the creamery were valueless, for if a receiver were appointed and the creamery ordered sold, no stockholders' equity would remain and Roskay agreed that he had no capital with which to protect his interest by buying in at the sale. White claims that he also told Roskay that he would ask for such a sale in order to protect his client, Saathoff, if Roskay did not execute the requested assignment. All of White's claims were denied by Roskay. In telling Roskay that his rights were valueless, White insists that no specific mention was made of the Roskay-Rooks note.

Roskay assigned his rights to Saathoff, as requested, for a recited consideration of $1, which was paid to him.

No decree was ever entered in the Saathoff-Rooks case, the parties effecting the settlement hereinafter mentioned.

Roskay never delivered the stock to Saathoff, although he was asked to do so, and he still has the note, the original 27 1/2 shares of common and the 30 shares of preferred, the latter, however, as before noted, having been pledged with the bank.

After securing the assignment, Saathoff settled with Rooks and Overton, paying the latter $6,000 in cash and giving the former $10,000 in stock, which was issued by virtue of a new recapitalization effected subsequent to the Saathoff-Rooks trial. Under the subsequent management of Saathoff and Rooks the creamery has paid off a large portion of the heavy debt with which it was burdened at the time of the assignment, and appears to be fairly successful.

The present chancery suit was commenced by Roskay on December 2, 1935. He claims if the consideration for the assignment was only $1, it was grossly inadequate and that the whole transaction was unconscionable. He asks that the assignment be set aside and defendants be required to account or that defendant Saathoff be required to pay reasonable, proper and just compensation for the rights assigned. The bill also includes a general prayer for relief. Plaintiffs' claim is that the preferred stock issued by Rooks in payment of the latter's note was illegal because of failure to call a stockholders' meeting to authorize its issuance; that therefore the note was unpaid at the time of the assignment and worth $3,000. Plaintiff also contends that the transaction was made even more inequitable because of the representations of White that the assigned rights were of no value.

The trial judge refused to cancel the assignment, believing that, if he did so, the only relief that could be afforded Roskay would be restoration to him of the entire interest in the note and contract with Rooks, both of which he said were outlawed at the time. The trial court, therefore, ordered Saathoff to pay Roskay $3,000 on condition that the latter transfer to Saathoff the note and all the stock he had in the creamery.

No question is raised in this appeal as to the power of the trial court to grant the relief provided for in the decree. Appellant claims that the consideration for the assignment was adequate, since Roskay's rights were indeed valueless at the time; that, in any event, Roskay is guilty of laches and comes into court with unclean hands.

The solution of this matter is thus rendered more difficult by the limited character of appellants' grounds of appeal.

This court has defined the term "gross inadequacy of consideration," but only in those cases where the relief given was rescission of the contract at the suit of the party who obtained an inadequate consideration from his bargain, or a denial of the specific performance that was sought by the other. See Albright v.Stockhill, 208 Mich. 468; Van Norsdall v. Smith, 141 Mich. 355;Engle v. Engle, 209 Mich. 275. But it seems illogical to say that, because of a gross inadequacy of consideration, defendant Saathoff may be required to pay what, in the trial court's opinion, constitutes adequate consideration, unless he was guilty of actual or constructive fraud, in which case "adequate considerations" might, in effect, be given in equity by way of damages for that fraud. See Gray v. Trick, 243 Mich. 388. In the instant case, however, plaintiff expressly disclaimed any reliance on a fraud theory.

Notwithstanding the fact that the question of the trial court's power has not been expressly raised, the question of whether or not consideration is inadequate must be determined in the light of the nature of the relief requested.

The unsoundness of the theory contended for by appellee may be well illustrated by the following. It would hardly be denied that $2,500 in cash would be ample consideration for a $3,000 note and that a court of equity may not decree payment of the additional $500. Yet, merely because the consideration in the instant case was only $1, the court was asked to award plaintiff the full claimed face value of the note, $3,000.

The case of Amster v. Stratton, 259 Mich. 683, cited by plaintiff in support of the trial court's conclusion, is not in point. In that case a vendor sued in equity to foreclose a land contract which the purchaser claimed was procured by the vendor's fraud in representing that he (the vendor) had paid $6,500 for the property, whereas in fact he had paid only $4,600, a difference of $1,900. The decree of the trial judge, granting the foreclosure but reducing the amount of the deficiency judgment by the $1,900, plus $500 for improvements made upon the premises by the purchaser, was affirmed. The $1,900 item was upheld as an equitable deduction from plaintiff's judgment because of his fraud; and the $500 was upheld merely as a rough adjustment of the extremely confused state of the accounts between the parties.

The trial court in the instant case, notwithstanding plaintiff's disclaimer of reliance upon fraudulent acts, was of the opinion that, in addition to the gross inadequacy of consideration, defendant was guilty of certain inequitable conduct tantamount to "constructive" or "legal" fraud. Plaintiff also urges this argument in his brief. The inequitable conduct complained of appears to have consisted of the foregoing representations by defendant's agent, White, to Roskay, that his (Roskay's) rights were of no value to the latter, and the retention by defendant of the "benefit" of the assignment after learning of the falsity of the representation through the remarks of Judge White to the effect that Roskay still had some remedy. This amounts, in reality, to a charge of fraud, but it is of no consequence since plaintiff denied that such representations were made. The decision cannot rest upon this ground as there is no proof that Roskay relied upon any fraudulent representations.

Plaintiff's claim may be reduced to his contention that the note was worth $3,000 at the time of the assignment and he presently expected to get more for it eventually than the recited consideration of $1. There is no showing of any inequitable conduct on the part of defendants which plaintiff may rely upon in support of his contention. Whatever representations may have been made by White to Roskay before the assignment was consummated, all of the testimony justifies the conclusion that White honestly believed, and continues to do so, that Roskay's rights were valueless in that the note was paid and the corporation was in such financial distress as to render the stockholders' equity practically worthless in the event of a forced liquidation. The trial judge's statement that Judge White's remarks in the Saathoff-Rooks case should have made defendants realize that the assigned rights were valuable and that it was unconscionable not to return them is too weak a foundation upon which to erect a charge of inequitable conduct. Judge White's remarks not only failed to indicate whether Roskay's rights were of any value, but they were made in regard to a matter which was not at all in issue in the case before him.

Plaintiff makes much of the argument that defendant Saathoff had the actual benefit of his assigned rights during the period after the assignment and, therefore, should be held liable for the "reasonable value" of the note and stock. This proposition presumably rests on an analogy to quasi-contractual recovery on a theory of waiver of tort. The trial court expressly stated that defendant must be held to have "impliedly contracted" to pay the reasonable value of Roskay's rights. The difficulty with the application of this theory in the instant case is that the appropriation, if any, by defendant of plaintiff's rights has not, in any sense of the word, been wrongful.

The practical difficulty in this case arises out of the trial court's position that the assigned note and contract have been outlawed and that rescission of the assignment, although it might possibly be warranted under the facts presented, would be of little actual value to plaintiff. This factor, however, does not improve plaintiff's equitable position and should not influence the adoption of the theory propounded by him. Defendant's failure to enforce the note within the statutory period is not ascribable to any fault on his part but to a belief, probably still held and possibly correct for all that is determined herein, that the note has been paid.

We conclude, therefore, that, however inadequate the consideration, it does not justify the relief granted by the trial court under the facts presented in this record and its decision must therefore be reversed. In view of this conclusion, it is not necessary to determine whether plaintiff is guilty of laches and comes into this court with unclean hands.

The decree of the trial court is vacated and one may be entered here dismissing plaintiff's bill of complaint, with costs to appellants.

FEAD, C.J., and NORTH, BUTZEL, SHARPE, POTTER, and CHANDLER, JJ., concurred with BUSHNELL, J.