Opposition Brief — Bechtel v. Thatcher

SUBJECT INDEX.

Opinions below ---

Jurisdiction

Questions Presented

Statement of the Cage

Oral Findings of the District Court

Written Findings of the District Court

Conclusions of Law of the District Court

Propositions Relied upon for Denial of Writ

1. The findings of fact and conclusions of law of the trial

court and of the Supreme Court of Iowa did not go be-

yond the issues raised and litigated in this case _.__._____

2. The Iowa Courts did not err in holding and decreeing

invalid the new common stock received by the Bechtels

in exchange for their old worthless common stock _______

8. Money or property used to perpetrate a fraud can not

be recovered and the court was warranted in declaring

void and canceling the new stock which had been

issued for the old worthless common stock without re-

re tee Sen UN I a

4. The defendant corporation having obtained a permit from

the State of Iowa to transact business in the State of

Iowa and agreed to be bound by the laws of the State

of Iowa, the Supreme Court of Iowa did not err in finding

and holding that the so-calied reclassification was not

controlled or governed by the laws of Delaware and in

so holding did not violate any constitutional rights of

TO DEORE Sncenccecticnm

5. The Supreme Court of Iowa did not err in holding that

‘no right of petitioners under either the Constitution of

the United States or the State of Iowa had been violated __

6. There is no merit in the petitioners’ contention that they

were deprived of their property without due process of law

III: sithids th otiesiaeniip sttaaknaUnsiddousonestesbinkcinanabiaieninee

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Table of Cases Cited.

Corsicana*National Bank v. Johnson, 251 U. S. 68, 40S. Ct. 82

First Trust & Savings Bank (formerly Bechtel Trust Co.) et al

v. Iowa-Wisconsin Bridge Co., et al. 19 Fed. Sup. 127;

affirmed (8 C. C. A.) 98 Fed. (2) 416

Fitzgerald v. Fitzgerald & Mallory Con. Co., 44 Neb. 463, 62

- ae

ii

Page

Geddes v. ee eee ee 254 U. S. 590, 41 S.

Ct. 209 27, 31

German-American Coffee Co. v. Diehl, 216 N. Y. 57, 109 N. E. 875 _______ 3g

Heffern, etc. v. Gauthier, 22 Ariz. 67, 193 Pac. 1021 27

Heim v. Jacobs (8 C. C. A.) 14 Fed. (2d) 29 27

S. C. Holmes vy. E. S. Conway, 241 U. 8. 624, 36 S. Ct. Rep. 681 _.._._______ 44

Hoyt v. Hampe, 206 Iowa 206, 214 N. W. 718 26, 27

Towa Cent. Ry. Co. v. State of Iowa, 160 U. S. 389, 16 S. Ct. Rep. 344______ “4

Iroquois Iron Ore Co. v. Kruse (8 C. C. A.) 241 Fed. 433 _.........__ 4

Jones v. Missouri Edison Blec. Co. (8 C. C. A.) 233 Fed. 48 ____"__*" »_ 97

Lofland v. Cahill (Del.) 118 Atl. 1 30

Luther v. J. C. Luther Co., 118 Wis. 112, 94 N. W. 69 4

Munson v. Syracuse G. C. R. Co. 103 N. Y. 58, 8 N. B. 365 _....._______ 27

New York Life Ins. Co. v. Cravens, 178 U. S. 389, 20 S. Ct.

Rep. 962 37, 41

Paul v. Commonwealth of Va., 8 Wall. 168, 19 L. Ed. 357 _-______._____ 42

Pontiac Packing Co. v. Hancock, et al. 257 Mich. 45, 241

N. W. 268 25

Scottish Union & National Ins. Co. v, Herriott, 109 Iowa 606,

80 N. W. 655 41

Scully v. Automobile Finance Co. (Del.) 49 Atl. 54 _...-._______ 24, 27, 29

Sohland v. Baker (Del. 1927) 141 Atl. 277, 58 A. L. R. 693 _.___________ 29

State ex rel. Weede v. Bechtel, et al., 31 N. W. (2) 853 ____ 26, 34, 40, 42

State ex rel. Weede v. Iowa Southern Utilities Co., et al, 231

Iowa 784, 2 N. W. 372 38, 42

Thronson y. Universal Mfg. Co., et al. (Wisc.) 159 N. W. 575 _.________ 33

Tucker v. Natl. Sugar Refining Co. (N. J.) 84 Atl. 10 _________ 24, 27, 29

Waters-Pierce Oil Co. v. Texas, 177 U. S. 28, 20 Sup. Ct. Rep. 518 _._.____ 41

Weiditschka v. Supreme Tent Etc., 188 Iowa 183, 170 N. W. 300 dindcvpanandl 37

Weir v. Day, 57 Iowa 84 (10 N. W. 304) 32

Williams, et al v. Green Bay and W. R. Co. 326 U. S. 549,

66 Sup. Ct. Rep. 284 38

Table of Statutes Cited.

1939 Code of Iowa, Chapter 385, Sec. 8412 48

Sec. 8413 48

Sec. 8414 49

Sec. 8415 49

Sec. 8416 49

1939 Code of Iowa, Chapter 386, Sec. 8420 60

Sec. 8421 50

Sec. 8422 51

Sec. 8423 51

Fg te ey

OO RE

Page

Sec. 8424 52

Sec. 8425 52

Sec. 8426 52

Sec. 8427 52

Sec. 8428 < 53

Sec. 8430 53

Sec. 8431 53

Sec. 8432 53

1939, Code of Iowa, Chapter 387, Sec. 8433 46

Sec. 8434 46

Sec. 8435 47

Sec. 8436 47

Sec. 8437 47

Sec: 8438 19, 48

1939 Code of Iowa, Section 10960, superseded by Rule 22 of the

Iowa Rules of Civil Procedure, Code 1946, page 2146 _.________ 20, 21

1939 Code of Iowa, Section 10969, superseded by Rule 23 of the

Iowa Rules of Civil Procedure, Code 1946, page 2146 __________ 20, 21

1939 Code of Iowa, Section 11130, superseded by Rules 72, 73,

and 104, of the Iowa Rules of Civil Procedure, Code- 1946,

pages 2152 and 2155 S 20

Rule 24 of the Iowa Rules of Civil Procedure, Code 1946, page 2146 ______ 21

Rule 26 of the Iowa Rules of Civil Procedure, Code 1946, page 2147 ______ 21

Rule 27 of the Iowa Rules of Civil Procedure, Code 1946, page 2147 ______ 21

Rule 33 of the Iowa Rules of Civil Procedure, Code 1946, page 2147 ______ 21

Rule 67 of the Iowa Rules of Civil Procedure, Code 1946, page 2152 ______ 22

Rule 75 of the Iowa Rules of Civil Procedure, Code 1946, page 2152 _.____ 22

Rule 249 of the Iowa Rules of Civil Procedure, Code 1946, page 2171______ 22

Constitution of Delaware, Article 9, Section 3 29

Federal Constitvtion, Article IV, Sec. 1 41

Encyclopedias and Articles Cited.

23 American Jurisprudence Sec. 286 42

Ballantine, Private Corporations, Sec. 287 __.____._.___..._______________ 42

14 Corpus Juris, page 463, Sec. 658 _____ 25

18 Corpus Juris, Secondum, Corporations, Sec. 249 ______._-_...______ 25

Fletcher, Cyclopedia on Corporations, (Perm. Ed.) Vol. 3, page

207, Sec. 844; p. 299, Sec. 937; pp. 307-311, Sec. 944 _.._....._______ 27

Story, Equity, 14th Edition Vol. 1, page 96 ______ 25

Thompson on Corporations 3rd Ed. Sec. 6594 ______

pee PEEING ELLE ITC: ORT RI PC rer eae

ELINA T = OE SEE

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1948.

No.

GEORGE M. BECHTEL, Executor of the Will of

MARTHA R. BECHTEL, Deceased,

GEORGE M. BECHTEL and HAROLD R. BECHTEL,

Petitioners,

vs,

ILA FAY THATCHER, NANCY ROSSEAU, ELERY SCOTT

and STATE OF IOWA, ex rel J. B. WEEDE,

Respondents.

BRIEF OF RESPONDENTS ILA FAY THATCHER,

NANCY ROSSEAU, and ELERY SCOTT in Opposition.

OPINIONS BELOW.

The opinions of the Supreme Court of Iowa, 231 Iowa

784, 2 N.W. (2d.) 372. Supplemental Opinion on rehearing

published 4 N.W. (2d.) 869. They appear in the record

pages 85 to 167, inclusive.

Opinions of the Supreme Court of Iowa affirming the

judgment of the trial court published in 31 N.W. (2d.) 853,

but not yet appearing in the Iowa Reports. They are print-

ed in the record, pages 482 to 523, inclusive.

ax se

JURISDICTION.

The oral opinion and findings of the District Court is

set forth in the record pages 359 to 376, inclusive, and the

written findings of fact, conclusions of law and decree are

set forth in the record pages 328 to 351, inclusive. The

opinion of the Supreme Court of Iowa was rendered on

the 6th day of April 1948. Record p. 482 et seq. Petition

for rehearing was denied November 19, 1948. Record

p. 591. The jurisdiction of this Court is sought to be in-

voked under Paragraph (b) of Section 237 of the Judicial

Code as amended, Act of February 13, 1925.

QUESTIONS PRESENTED.

1. Whether a matter put in issue by the pleadings in

accordance with the rules of practice of the State of Iowa

and fully litigated by the parties and determined by the

trial court and the Supreme Court of Iowa is due process

within the meaning of the Fifth and Fourteenth Amend-

ments of the Constitution of the United States.

2. May an Iowa Court of Equity cancel new par value

stock fraudulently issued in exchange for old worthless

common stock by a foreign corporation in violation of the

Iowa Statutes and in violation of the rights of the pre-

ferred stockholders where the corporation has obtained a

permit to do business in Iowa on the condition that it com-

ply with the laws of the State of Iowa.

3. May a party join issue on a matter and fully litigate

it in the trial court and for the first time on appeal claim

that it was not in issue and then base a claim of want of

due process thereon under the Federal Constitution with-

out ever having claimed in the trial court that it was not

in issue, although having had full opportunity to do so.

ie Ree

ee

sia ias

STATEMENT OF THE CASE.

The petitioners in their brief refer to the summary

statement in their petition for writ of certiorari and then

set forth an enlarged statement of facts. Both of said

statements are saturated with statements not supported by

the record to such an extent that the true character of the

case before the trial court and before the Supreme Court

of Iowa is not revealed.

Petitioners on page 2 of their brief assert: “The case

as brought by plaintiff involved an entirely different cause

of action than that which the trial court decided and the

Supreme Court of Iowa affirmed against the petitioners.”

This statement is without foundation and contrary to the

record.

Because of the inaccuracies and omissions in the state-

ments submitted by petitioners it is necessary for these re-

spondents to submit a brief statement of the case with

proper record citations.

This is an action in equity commenced in November

1939 in the name of the State of Iowa on relation of J. B.

Weede, a citizen of that state, under Chapter 387 of the

1935 Code of Iowa which authorized the Attorney General

or a citizen to bring an action in the name of the State of

lowa against a foreign »ublic utility corporation violating

the Iowa statutes rele %g to the issuance of stock of such

corporations operating in the state under a permit as a

foreign corporation.

Said Chapter 387 of the 1935 Code is the same as Chap-

ter 387 of Code of 1939, and said Chapter and other Sec-

tions of the Iowa Statutes made a part thereof are set

forth in an Appendix attached to this brief. Said Chapter

was. adopted in 1913 and appears in the 1913 Iowa Code

Supplement as Section 1641-q.

ce EANDOD ET

inti stan

This action was brought against the Iowa Southern

Utilities Company of Delaware and Martha R. Bechtel,

and against George M. Bechtel, Harold R. Bechtel, Edward

L. Shutts and H. W. Deininger officers of said Company,

and against D. D. Bentzinger and Elery Scott and other

stockholders, (R. pp. 1 to 5.)

Plaintiff’s petition alleged that defendant corporation

was organized under the laws of the State of Delaware

with its principal place of business at Centerville, Iowa,

and with all its property except some of its bank accounts

located within the State of Iowa (R. p. 176, lines 27 to 32).

This is admitted in defendant petitioners’ answer (R. p.

254, lines 16 and 17).

The petition alleged that the defendant corporation

made application to the State of Iowa for permit to trans-

‘act business in the State of Iowa and that such permit was

granted on the 26 day of March 1923, and by virtue of said

application and the granting of said permit the Iowa

Southern Utilities Company of Delaware has been subject

to all the laws of the State of Iowa as provided in Chapter

387, and all other laws applicable to such foreign corpora-

tions since said time, and since said time the corporate

defendant has continued to operate its business in the

State of Iowa under and by virtue of the permit granted

to it (R. p. 180, lines 24 to 34, p. 181, lines 1 to 7). The

petitioners herein admitted in their answer all of these

allegations except that they neither admit or deny the

allegations which plead the Iowa Statutes or the effect

thereof (R. p. 255, lines 8 to 17).

The petition alleged that the corporate defendant about

March 16, 1923, made application for permit to do busi-

ness in the State of Iowa as a non-resident corporation,

and as a part of the application presented the following

Resolution which was duly adopted by the directors of the

corporation, which Resolution was as follows:

a

“RESOLVED, that a certified copy of the articles

of incorporation of the company be filed with the

Secretary of State of the State of Iowa, with a request

that a certificate be issued authorizing this company

to transact business in the State of Iowa, it being

understood and hereby agreed that the certificate or

permit, when issued, shall be subject to, and subject

this company to, all the provisions of the statutes of

Iowa relating to corporations for pecuniary profit.”

which resolution was filed with the Secretary of State of

the State of Iowa, and that thereunder and by virtue of the

action of said corporation and the agreement made by

said corporation, a permit to transact business in the State

of Iowa was issued by the State of Iowa to said corporation

(R. p. 181, lines 8 to 32). This was admitted by the peti-

tioners herein in their answer (R. p. 255, lines 18 to 20).

The petition alleged violations of the provisions of

Chapter 387 of the 1935 Code of Iowa and the issuance of

stock for property in violation of the laws of Iowa with-

out the approval of the Executive Council of the State of

Iowa (R. p. 6, line 4 to p. 21, line 2); alleged corporate

action of August 1, 1938 providing that each holder of 7%

preferred stock would receive a dividend certificate of

$32.08 and 4.2 shares of new common stock for each share

of old stock held; the 644% preferred stock—the holder

to receive a dividend arrears certificate of $29.79 and 4.9

shares of new common stock for each share held; that

the holders of the 6% preferred should receive an arrear

certificate of $27.50 and 3.6 shares of the new common

stock for each share of old stock held; each stockholder of

common stock to receive 39458/100,000 shares of new com-

mon stock for each share of old common stock held which

gave to the holders of old common stock 39458 shares of

new common stock, par value $15.00 a share. (R. p. 18,

lines 18 to 34, p. 19, lines 1 to 5, p. 20, lines 20 to 34, p. 21,

lines 1 and 2).

eile

Paragraph 49 of plaintiff's petition, which was ane

by the interveners, alleged:

“That the exchange of the different classes of pre-

ferred stock for common stock and the exchange of

the existing common stock for common stock on the

basis herein set forth was all an arbitrary basis; * * *

that said exchange value was fixed without reference

to the legal rights of any of the stockholders; that at

the time said basis of exchange was fixed, the officers

and directors of said defendant corporation knew

that * * * the 100,000 shares of common stock was

worthless and without value.” (R. p. 20, lines 1 to 28).

The corporate defendant filed motion to dismiss plain-

tiff’s petition (R. p. 69).

On February 15, 1940, there was filed a petition of in-

terveners, which is denominated “Intervening Answer of

Ila Fay Thatcher and Nancy Rosseau,” which adopted the

allegations of plaintiff's petition and prayed that the

stock held by them and all other stockholders similarly

situated be decreed valid and that the stock illegally issued

be canceled and have no voting rights, and asked for

general equitable relief (R. p. 74, lines 9 to 34 and pp. 75 to

78, line 10). Amendment (R. p. 210, lines 7 to 31).

On March 18, 1940, the motion to dismiss was sustained

(R. p. 78, lines 15 to 33 and p. 79, lines 1 to 10).

An appeal was taken to the Supreme Court of Iowa

(R. p. 81, lines 6 to 34 and p. 82, lines 1 to 3). The Supreme

Court of Iowa reversed the ruling of the trial court and

remanded the case for trial on its merits. Opinions of the

Court (R. pp. 85 to 167. Also reported 231 Iowa 784, 2 N.W.

(2) 372). Court’s order of remanding and issuance of pro-

cedendo (R. p. 168).

The intervening answer of Ila Fay Thatcher and Nancy

Rosseau as amended adopts the allegations of plaintiff's

petition as true (R. p. 210, lines 9 to 28).

soils

Petitioners, on pages 3 and 4 of their brief, state that

the corporate defendant moved to strike the intervening

answer (R. p. 206, line 24 to p. 209, line 21), and interveners

filed resistance thereto (R. p. 211 to p. 214, inc.), and that

the trial court overruled the motion (R. p. 215, lines 1 to

24). That has nothing to do with the individual petitioners

herein, they did not file any motion; one of their constitu-

tional rights could have been invaded by that ruling.

The interveners in their resistance to the motion asserted

that they were stockholders and should be permitted to

protect their interests. They did not disclaim any relief

that they might be entitled to (R. p. 212, lines 33 and 34;

R, p. 213, lines 1 to 3, p. 214, lines 5 to 32). The prayer of

their original intervening answer remained (R. p. 210, lines

27 and 28; R. p. 205, lines 30 to 35 and p. 206, lines 1 to 20).

They prayed, among other things, that their stock and the

stock of all others similarly situated be held valid, and

that all stock illegally issued be decreed void and that no

stock illegally issued have voting rights, and prayed for

general equitable relief (R. p. 205, lines 30 to 35, p. 206,

lines 1 to 20).

On February 13, 1943, the corporate defendant filed

;

separate answer in which, among other things answering |

ge Paragraph 46 of plaintiff's petition (R. p. 189, lines 33 to

34, p. 190, lines 1 to 8), stated it denied that plaintiff's con-

clusion that its common stock was void under the laws of

Iowa. It denied that it represented in financial statements

to its stockholders that 100,000 shares of common stock had

a par value of $1,000,000 (R. p. 228, lines 30 to 34).

Answering paragraph 47 of plaintiff’s petition (R. p. 18,

lines 18 to 34, p. 49, lines 1 to 5, p. 190, lines 9 to 28), de-

fendants admitted corporate action as alleged in said para-

graph 47 (R. p. 229, lines 1 to 4, inc.).

Answering paragraph 49 of plaintiff’s petition, above

quoted in part, (R. p. 20, lines 1 to 28, p. 191, lines 24 to 34

witli

and p. 192, lines 1 to 14) defendants denied that the alleged

reclassification was on an arbitrary basis and without re-

gard to the legal rights of the stockholders. It denied that

the corporation had never received anything of value for

the 100,006 shares of outstanding common stock. It denied

that said 100,000 shares of common stock was worthless

and without value. Defendant admitted that no authority

of the Executive Council of the State of Iowa for the

issuance of new common stock was sought or secured. It

denied that. the new common stock had been and was

being issued in violation of the laws of Iowa (R. p. 230,

lines 1 to 16).

On February 15, 1943, the defendants Martha R. Bechtel,

George M. Bechtel and Harold R. Bechtel, petitioners herein,

filed answer to plaintiff's petition and, among other things,

answering said petition, alleged:

Answering paragraphs 3 to 11, denied that the stock

held by them was pretended stock (R. p. 254, lines 18 to

27, p. 177, lines 5 to 34).

Answering paragraph 46 of the petition, defendants,

petitioners, denied that the common stock of the defendant

corporation was void under the laws of Iowa, and denied

that said corporation represented in its financial state-

ments to its stockholders that said 100,000 shares of com-

mon stock had a par value of $1,000,000 (R. p. 259, lines 12

to 18, p. 189, lines 33 to 34, p. 190, lines 1 to 8).

Answering paragraph 47, defendants admitted the cor-

porate act alleged therein (R. p. 259, lines 19 to 24, p. 198,

lines 9 to 28).

Answering paragraph 49 of the petition (R. p. 20, lines

1 to 28, p. 191, line 24 to p. 192, line 15), the defendants,

petitioners denied that the alleged reclassification was on

an arbitrary basis and without regard to the legal rights

of the stockholders; they denied that any of the outstand-

ing preferred stock had been issued without the full par

ssillitins

value ha¥ing been paid therefor; they denied that the cor-

poration had never received anything of value for the

100,000 shares of outstanding common stock; they denied

that said 100,000 shares of common stock was worthles:

and without value, but averred that if this was so, the fact

was wholly immaterial. The defendants admitted that no

authority of the Executive Council of the State of Iowa

for the issuance of the new common stock was sought or

secured; denied that said new common stock had been

issued and was being issued in violation of the laws of

Iowa (R. p. 260, lines 21 to 24, p. 261, lines 1 to 3).

The Substituted Answer of Elery Scott, which was an

Answer and Cross-Petition (R. p. 272, line 6 to p. 274, line

30), clearly alleges that the so-called new common stock

in the amount of approximately $600,000.00 was issued for

old common stock, which was absolutely worthless and

without nominal or par value and which old stock was sub-

servient to and inferior in all ways to the Preferred stock.

The cross-petitioner, Elery Scott, prays that the Court

decree all illegally issued stock to be void ab initio and

for general equitable relief (R. p. 274, lines 12-28).

The record shows affirmatively that the petitioners as

well as the Utility Company specifically and definitely

controverted the claim of respondents that the reclassifica-

tion plan of August Ist, 1938, was illegal and unlawful,

and that the Bechtels’ stock of 100,000 shares was worthless

at said time. The record shows that the question as to

whether the 100,000 shares of Martha R. Bechtel were

worthless on August Ist, 1938, was definitely in issue and

affirmatively that much evidence was offered on that

question. The Petitioners herein having joined issues on

this matter and having introduced evidence, are not in

position to urge that it was not an issue and not litigated.

Opinion Supreme Court (R. p. 505, 31 N.W. (2) 853, at

tiian

The entire minute records of the corporation and all

resolutions relating to the recapitalization or alleged re-

classification plan and scheme were offered in evidence

(Exs. P1.1 to P1.8, off. tr. p. 143; Exs. P1.9 to P1.10, off. tr.

p. 1629; Ex. P1.11, off. tr. p. 1629; Ex. P1.12, off. tr. p. 1594;

particularly see P1.8, off. tr. p. 143, Ex. P1.9, off. tr. p. 1629,

And also particularly see minute book, Ex. P1.7, pp. 83-84,

off. tr. p. 143. Also see minute book, Ex. P1.8, pp. 92-93,

off. tr. p. 143.) The circular letter of the plan, dated June

28, 1938, sent to the stockholders (Ex. P 45, off. tr. p. 166)

and other letters sent out to the.stockholders in connection

therewith were offered in evidence (Ex. P 40, off. Tr. p.

166; Ex. P 39, off. tr. p. 166; Ex. P 41, off. tr. p. 166). The

financial statements of the defendant corporation, bearing

upon the. worthlessness of the old common stock, were

offered in evidence (Ex. D210 and D211, off. tr. p. 2247).

Petitioners’ counsel offered in evidence defendants’ Ex-

hibits D210 and D211 (Tr. p. 2244).

Respondents offered much evidence on the question of

the worthlessness of the old common stock including long

examination of accountant, respondents’ witness Nuss-

baum (Trans. Vol. 1, pp. 182 to 222; 223 to 456; 507 to 750;

Vol. 2, pp. 751 to 843; 899 to 956; 1054-1055; 1358 to 1389;

1444 to 1456; Vol. 4, pp. 2811 to 2820; 2830 to 2834).

Petitioners’ counsel, Mr. Wayne G. Cook, examined at

length Edward L. Shutts ‘and V. D. Welch as to the condi-

tion of the company and considerations for the stock, and

with respect to the alleged reclassification plan and ex-

change of old common stock for new common stock (Trans.

Vol. 3, Testimony of V. D. Welch, pp. 1658 to 1796; 1874

to 2052; 2120 to 2175; Vol. 4, pp. 2176 to 2199; 2229 to 2286;

2591 to 2604. Testimony of Edward L. Shutts, Vol. 3, pp.

1636 to 1645).

The minutes of the directors’ meeting which contained

the report of Mr. E. F. Bulmahn, referred to and quoted

ER ARSE POSTS NIL I I

snililces

from in the Court’s opinion 31 N.W. 853 at 864, were offered

in evidence on the question of the worthlessness of the old

common stock and were received without objection. (Ex.

P17.1-Minute book, pp. 79-86 and particularly pp. 83-84).

Mr. George M. Bechtel was chairman of that meeting and.

Mr. H. R. Bechtel secretary, and Mr. Bulmahn, then presi-

dent and treasurer of the company, held one qualifying

share (Ex. P1.1 - Minute book, pp. 148-149) which he re-

ceived from the Bechtels, and what occurred at that meet-

ing is clear proof that the old common stock was wholly

worthless.

Petitioners’ assertion on page 4 of their brief that neither

the interveners nor their counsel appeared at the trial

and no evidence was offered in their behalf, is not sus-

taind by the record. At the afternoon September 1, 1943

Session of the trial the Court said:

“I assume that in the case like those represented by

Lane & Waterman and by Clark, Pryor & Hale firm, that

we will take their—it is a form of default not to be here

seven days, consider they are nof in default.

“Mr. Havner: Yes, that is all right.

“The Court: What I had ih mind that technically they

are in default, it is a form of default not to appear at the

trial, they are not to be cohsidered in default any more

than the clients represented by Lane & Waterman, if they

are needed here at the trial.

“Mr. Havner: That is all right with us your Honor.”

(Tr., Vol. 1, pp. 41 and 42.)

No response was made by petitioners’ counsel to the

Court’s statements, but they made no objection and ac-

quiesced therein. Clark, Pryor & Hale appeared for inter-

veners but under the record didn’t need to be there all the

time. The respondent-cross-petitioner Elery Scott appeared

pro se at the trial (Tr. p. 2).

It is not necessary for a party to establish all the allega-

———aEEEEeEeEeEeeeEeEeEeEyE——E

celine

tions of his pleading by his own evidence if the evidence

in the case sustains the pleadings, it makes no difference

by whom it was offered. Quite a number of the small stock-

holders similarly situated to the interveners and cross-peti-

tioner Elery Scott testified (Court’s statement, Tr., Vol. 4,

bottom p. 2862).

The trial commenced on the First day of September

1943 and at the afternoon session of the Court, petitioners’

counsel being present, counsel for plaintiff called attention

to Paragraph 49 of plaintiff's petition (R. p. 20, lines 1 to 28,

p. 191, lines 24 to 34 and p. 192, lines 1 to 14) and stated

that the petition alleged that the exchange value of the

stock was fixed without reference to the legal rights of any

of the stockholders, and that at the time said basis of ex-

change was fixed, the officers and directors of said defend-

ant corporation knew that a large part of the preferred

stock had been issued without the full par value having

been paid therefor, and knew that the 100,000 shares of

common stock was worthless and without value (Tr., Vol. 1,

p. 42).

The petitioners’ assertion, bottom page 4 of their brief,

that the trial court limited the issues is not sustained by

the record. Judge Graven’s oral findings in which the

various issues and evidence introduced are discussed show

clearly what Judge Graven considered to be the issues and

what was involved in the case tried and determined. (Tr.,

Vol. 4, pp. 2861 to p. 2863; which also appears, R. p. 359 to

p. 376, inc.)

The trial in the District Court commenced on the Ist

day of September 1943. The evidence closed on the 18th

day of December 1943 (R. p. 359).

Argument of counsel for plaintiff began December 23,

1943 and continued through December 29, 1943 (R. p. 359).

Argument of counsel for defendant corporation began

and closed on December 30, 1943 (R. p. 359).

i ee

<a

Argument of Mr. Cook, counsel for petitioners, began

on January 6, 1944 and closed on January 10, 1944 (R. p.

359). eae

Reply arguments of counsel for plaintiff occupied Jan-

uary 11 and 12, 1944 (R. p. 359).

Further arguments by Mr. Cook, Mr. Havner and Mr.

Ontjes were made at the morning session January 13, 1944,

and Court adjourned until January 19, 1944 (R. p. 359).

On January 19, 1944 the Court made his oral findings

(R. p. 359 to p. 376).

In these oral findings, among other things, the Court

said:

“Now just prior to the meeting, they had eight mil-

lion dollars worth of stock, preferred stock outstanding,

which was entitled to full preference ahead of the

common stock; they had around two million back divi-

dends outstanding, which was ahead of the common

stock, and yet in the meeting of August Ist, 1938, the

assets of the company were not sufficient to pay much

more than half of the preferred stock, so this common

stock belonging to Bechtels was absolutely worthless,

yet in the re-classification meeting of August 1st, 1938,

this worthless common stock was changed over so that

on the first of August, 1938, the Bechtels, instead of hav-

ing one hundred thousand shares of no par common

stock, absolutely worthless, they own six hundred thou-

sand dollars of new common stock, fifteen dollars par

value, on a par with the old preferred. In other words

I regard that as taking six hundred thousand dollars

out of the pockets of these preferred stockholders.

They are given thirty nine thousand shares, and they

are put on a par with the preferred stockholders. Now

that transaction of August Ist, 1938, so far as the Bech-

tels are concerned, must meet my condemnation. Now

there has been some question raised by counsel whether

we can do anything about that stock. I will say that

I am going to try to do something about it. Now this

is a court of equity and we have jurisdiction of a cor-

mee TKS

poration, jurisdiction of the Bechtels, we have the

intervenor stockholders in here; we have a gross wrong

perpetrated upon the preferred stockholders, and I

don’t believe—it has been suggested the only place you

can do anything about it is down in Delaware; I don’t

believe these four thousand people have to go to Dela-

ware. The Supreme Court say in its prior opinion

to all effects this was a domestic corporation, while it

is foreign. We have an intervenor stockholder here;

true the plaintiff is not a stockholder, so far as that

is concerned, but there are intervenors here and I think

they have a right to protest here against this six hun-

dred thousand dollar stock issue to Bechtels, and they

don’t have to go down to Delaware to do it; that is one

theory that they have that right. There is two theories,

the first that it should have been submitted to the Execu-

tive Council. Upon argument.it is claimed this is re-

classification, not exchange. I am inclined to the view

that these re-classifications should be submitted to the

Executive Council. What happened in this case shows

the need of it. There is more need to submit it, any re-

classification, where it is involuntary than it is in a

voluntary case; I am inclined to think that it should

have been submitted to the Executive Council.” * * *

(R. p. 371, bottom 9 lines, and p. 372 and p. 373, top 6

lines).

“It is my finding that I cannot reinstate the Bech-

tels for their old no par stock; in this case they attempt-

ed, I feel, to take advantage of the preferred stock-

holders; the thing has not worked out so far, but I am

declaring that invalid, I am not going to reinstate them

because, as we say in the law, I regard them as parties

to something that is particeps criminus; so that the

capitalization of the company will be reduced by the

amount of the Bechtel stock.” * * * (R. p. 374, line 11

to line 19, Inc.)

“Now, there is another theory that is argued I think

most strongly by Mr. Ontjes and that was that even

under Chapter 387 the stock is invalid, because there

was no consideration for the stock, the stock was worth-

Se:

ee

less; some authorities from Delaware lend strength to

that view. So I say on the cancelling of the Bechtel

stock there is about three different theories on which

it is done.” (R. p. 375, line 11 to line 19, Inc.)

The petitioners did not make any claims in the trial

court that the findings went beyond the issues in the case

nor claim any surprise (Tr., Vol. 4, p. 2878).

The written findings and conclusions of the trial court

were not made and filed until two days later, January 21,

1944 (R. p. 328, lines 15 to 20).

The Court’s written findings and conclusions of law,

among other things, contained the following:

WRITTEN FINDINGS.

“V. The Court finds that the said re-classification

as to the issuance of the 39,468 shares issued to Martha

R. Bechtel, that the re-classification plan so far as it

provided for and permitted the issuance of 39,468

shares to the said trustees of Martha R. Bechtel was

unjust and unfair and inequitable as to the former pre-

ferred stockholders represented in this case by the in-

tervenors, Ila Faye Thatcher and Nancy Rosseau. The

corporation did not report to the Secretary of State of

the State of Iowa under Section 8416, 1939 Code, the

issuance of the certificates representing the new com-

mon stock in lieu of the certificates representing the

old common and preferred stock. The corporation did

not apply to the Executive Council of the State of Iowa

under Section 8413-8415 Code of Iowa, 1939, for auth-

ority to issue certificates of new common stock in lieu

of certificates representing the old common and pre-

ferred stock.” (R. p. 343, lines 9-26.)

“z.aa. That on August 1, 1938, prior to the meeting

for the re-classification of the stock, there was issued

and outstanding 80,102 shares of cumulative preferred

stock of the par value of $8,010,200.00. That there

was due and unpaid accumulated dividends on the

pan

same in the sum of $2,442,102.36. That this preferred

stock under the articles of incorporation of the cor-

poration had priority and preference to the full extent

of its par value and accrued dividends thereon over

the existing no-par common stock. That on August 1,

1938, prior to said re-classification, the net assets of the

corporation were such as to lack several million dol-

lars of being equal to the par value of the preferred

stock and the accumulated dividends thereon. That the

said no-par common stock immediately prior to said

re-classification was wholly worthless. That under

the re-classification: plan there was issued in lieu of

said no par common stock 39,468 shares of new com-

mon stock, with a par value of $15.00 per share, which

except as to the matter of accrued dividends was placed

on an equality with the shares of new common stock

issued to the former preferred stockholders. That

the no par common stock for which the new common

stock was issued, was worthless, that there was no

consideration for the issuance of the said 39,468 shares

of new common stock.” (R. p. 346, lines 8-33.)

CONCLUSIONS OF LAW.

“That the 39,468 shares of new common stock issued

in lieu of the former no par value common stock, un-

der the re-classification meeting are void and invalid.”

(R. p. 349, lines 22-25, Inc.)

“It is further adjudged and decreed that the 39,468

shares of new common stock into which the old com-

mon stock was transmuted is void and invalid, and

shall not be recognized by the corporation as being

stock of the corporation, and shall not be re-instated

as to its former position, of no par common stock.”

(R. p. 350, lines 22 to 27, Inc.)

The contention (1) that the findings of fact and con-

clusions of law and decree cancelling petitioners’ shares of

stock was not responsive to any issue and deprived peti-

tioners of their property without due process of law; and

— . ee LLL ee

—j7—

(2) that the refusal to restore petitioners’ to their former

positions as holders of original common stock similarly de-

prived them, were never presented in the trial court al-

though petitioners had ample opportunity to do so. They

never claimed in the trial court that the findings of fact

and conclusions of law and decree went beyond the issues,

nor did they ask for any further hearing nor file any mo-

tion to set aside any part of such findings of fact, con-

clusions of law and decree.

PROPOSITIONS RELIED UPON FOR DENIAL

OF WRIT.

POINT ONE. The findings of fact and conclusions of law

of the trial court and of the Supreme Court of Iowa

did not go beyond the issues raised and litigated in

this case. That the so-called re-classification plan was

unfair, illegal and fraudulent, and that the Bechtel

stock of 100,000 of old common was worthless was

directly in issue under both the pleadings and the

evidence.

POINT TWO. The Iowa Courts did not err in holding and

decreeing invalid the new common stock received by

the Bechtels in exchange for their old worthless com-

mon stock. Under the laws and statutes of Iowa the

courts had full power to declare the stock invalid and

void issued by the corporation and received by the

Bechtels in violation of the laws of the State of Iowa.

The stock was issued to the Bechtels in fraud of the

rights of the preferred stockholders and without con-

sideration and the court of equity had full power to

cancel it.

POINT THREE. Money or property used to perpetrate

a fraud can not be recovered and the court was war-

ranted in declaring void and canceling the new stock

om

which had been issued for the old worthless common

stock without restoring the status quo ante. The new

common stock, having been issued to the Bechtels in

violation of Chapter 387 of the Code of Iowa which pro-

hibited it and in violation of the public policy of the

state and in fraud of the rights of the preferred stock-

holders, was properly canceled without restoring the

status quo ante. .

POINT FOUR. The defendant corporation having ob-

tained a permit from the State of Iowa to transact busi-

ness in the State of Iowa and agreed to be bound by

the laws of the State of Iowa, and all of its business

and property and books and records being located in

the State of Iowa, and all of its officers and directors,

save one, being residents of the State of Iowa, the

Supreme Court of Iowa did not err in finding and

holding that the so-called re-classification was not con-

trolled or governed by the laws of Delaware and in

so holding did not violate any constitutional rights of

the petitioners.

POINT FIVE. The Supreme Court of Iowa did not err in

holding that no right of petitioners under either the

Constitution of the United States or the State of Iowa

had been violated.

POINT SIX. There is no merit in the petitioners’ conten-

tion that they were deprived of their property without

due process of law in violation of Section 1 of Article

IV. of the Constitution of the United States and of the

Fifth and Fourteenth Amendments to the Constitution

of the United States.

—19—

POINT ONE.

THE FINDINGS OF FACT AND CONCLUSIONS OF

LAW OF THE TRIAL COURT AND OF THE SUPREME

COURT OF IOWA DID NOT GO BEYOND THE ISSUES

RAISED AND LITIGATED IN THIS CASE. THAT THE

SO-CALLED RE-CLASSIFICATION PLAN WAS UNFAIR,

ILLEGAL AND FRAUDULENT, AND THAT THE BECH-

TEL STOCK OF 100,000 OF OLD COMMON WAS WORTH-

LESS WAS DIRECTLY IN ISSUE UNDER BOTH THE

PLEADINGS AND THE EVIDENCE.

(Answer to Petitioners’ Point 1, Brief pp. 6 to 8).

Chapter 387 of the 1939 Code of Iowa, Section 8438,

grants broad and practically unlimited power to a court

of equity to determine any controversy that arises under

the Statute of the State of Iowa affecting the rights of any

stockholder. It gives Courts of equity full power

“to dissolve, close up ‘or dispose, of any business or

property owned, or operated, or controlled in violation

of the provisions of this chapter; to dissolve any cor-

poration owning or controlling the capital stock of

any other corporation in violation of the provisions

of this chapter and to close up or dispose of the busi-

ness or property of the said corporation; and if the

court finds that, in order to carry out the purposes of

this chapter, it is necessary so to do, it may dissolve

the corporation issuing the stock which is owned in

violation of the provisions of this chapter, close up

the business of said corporation and dispose of its

property, and the court may appoint a receiver who

shall be a resident of Iowa for any business or for any

corporation which has violated the provisions thereof

or of the corporation issuing the stock which is held

in violation thereof.”

=_ =

If the Court has such power then in the exercise of that

power it might do anything less than the exercise of the

full extent of its power, and if the power given to the

court could be invoked where any stock had been unlaw-

fully issued, then certainly under the issues in this case

the court had the right and the power and the authority

to determine the rights of the stockholders. There are no

sound procedural considerations forbidding joinder of

suits and disposing of the entire matter under the record

in this case. There is no question about the Bechtels hold-

ing the new common stock in violation of the provisions

of the statute.

The assertion of petitioners, on page 7 of their brief,

that there was no issue between the interveners and de-

fendant stockholders regarding the fairness or equity of

the re-classification, is not sustained by the record as has

been pointed out in our statement of the case.

Iowa Code, 1939, Sections 10960, 10969 and 11130 were

all repealed by the adoption of the new Iowa Rules of

Civil Procedure prior to the trial of this case in the trial

court. The new Rules of Civil Procedure went into effect

July 4, 1943, and the trial of this cause was not commenced

until September 1, 1943. (Tr. Vol. 1, p. 1) and was tried un-

der the new rules. See Rules of Civil Procedure, Volume

2, Code of Iowa, 1946, page 2145.

Section 10960, Code of 1939, superseded by Rule 22. See

page 2146, 1946 Iowa Code.

Section 10969, Code of 1939, superseded by Rule 23. See

page 2146, 1946 Iowa Code.

Section 11130, Code of 1939, superseded by Rules 72, 73

and 104. See page 2152, 1946 Iowa Code.

The Iowa Rules of Civil Procedure provide:

“22. ACTIONS JOINED. A single plaintiff may

join in the same petition as many causes of action,

-

-2]1—

legal or equitable, independent or alternative, as he may

have against a single defendant.”

See Iowa 1946 Code, Volume 2, page 2146.

“23. MULTIPLE PLAINTIFFS. Any number of

persons who claim any relief, jointly, severally or al-

ternatively, arising out of or respecting the same trans-

action, occurrence or series of transactions or occur-

rences, may join as plaintiffs in a single action, when

it presents or involves any question of law or fact com-

mon to all of them. They may join any causes of

action, legal or equitable, independent or alternative,

held by any one or more of them which arise out of

such transaction, occurrence or series, and which

present or involve any common question of law or fact.”

See Iowa 1946 Code, Volume 2, page 2146.

“24. PERMISSIVE JOINDER OF DEFENDANTS.

“(a) Generally. Any number of defendants may

be joined in one action which asserts against them,

joiptiy, severally or in the alternative, any right to re-

lief in respect of, or arising out of the same transac-

tion, occurrence, or series of transactions or occur-

rences, when any question of law or fact common to

all of them is presented or involved.”

See Iowa 1946 Code, Volume 2, page 2146.

“26. PARTIES PARTLY INTERESTED.- A party

need not be interested in obtaining or defending against

all the relief demanded. Judgment may be given re-

specting one or more parties according to their re-

spective rights or liabilities.”

See Iowa 1946 Code, Volume 2, page 2147.

“27. REMEDY FOR MISJOINDER.

“(a) Parties. Misjoinder of parties is no ground

for dismissal of the action, but parties may be. dropped

by order of the court on its own/motion or that of any

party at any stage of the action, on such terms as are

just, or any claim against a party improperly joined

may be severed and proceeded with separately.”

—22—

“(b) Actions. The only remedy for improper

joinder of actions shall be by motion. On such motion

the court shall either order the causes docketed sepa-

rately or strike those causes which should be stricken,

always retaining at least one cause docketed in the

original case. Before ruling on such motion, the party

whose pleading is attacked may withdraw any of the

causes claimed to be misjoined.”

See Iowa 1946 Code, Volume 2, page 2147.

“67. TECHNICAL FORMS ABOLISHED. All com-

mon counts, general issues, demurrers, fictions and

technical forms of action or pleading, are abolished.

The form and sufficiency of all motions and pleadings

shall be determined by these rules, construed and en-

forced to secure a just, speedy and inexpensive deter-

mination of all controversies on their merits.”

See Iowa 1946 Code, Volume 2, page 2152.

“33. CROSS-PETITIONS.

“(a) Against coparties. A cross-petition may be

filed by one party against a coparty, on a cause of

action arising out of a transaction or occurrence which

is the basis of the original action or any counterclaim

therein. It may include the claim that such coparty

is, or may be, liable to cross-petitioner for all or part

of a claim asserted in the principal action against the

cross-petitioner.”

See Iowa 1946 Code, Volume 2, page 2147.

“75. INTERVENTIONS. Any person interested in

the subject matter of the litigation, or the success of

either party to the action, or against both parties, may

intervene at any time before trial begins, by joining

with plaintiff or defendant or claiming adversely to

bo %”

See Iowa 1946 Code, Volume 2, page 2152.

“249. ISSUES TRIED BY CONSENT—AMEND-

MENT. In deciding motions under rule 243 or 244, the

court shall treat issues actually tried by express or im-

= re

plied consent of the parties but not embraced in the

pleadings, as though they had been pleaded. Either

party may then amend to conform his pleadings to

such issues and the evidence upon them; but failure

so to amend shall not affect the result of the trial.”

See Iowa 1946 Code, Volume 2, page 2171.

No motion was ever made by the petitioners herein

attacking the pleadings of the inierveners or of Elery Scott.

It will be noted that Rule 27 of Iowa Rules of Civil Pro-

cedure provides that the only remedy for improper joinder

of causes of action is by motion. The petitioners did not

make or file any such motion in the trial court. The claim

of misjoinder could not be asserted for the first time in

the Supreme Court of Iowa, nor can it be urged as a basis

for the claimed violation of a Constitutional right in this

Court.

It will be noted that the substituted answer of Elery

Scott (R. pp. 272 to 274) which was in effect a cross-petition

was properly filed under Rule 33 of the Rules of Civil Pro-

cedure. This cross-petition also directly charged that the

old common stock was utterly worthless and was sub-

servient and inferior in all ways to the preferred stock and

prayed that all illegally issued stock be decreed void and

for general equitable relief (R. p. 273, lines 16 to 25).

It should be noted that Rule 75 of Iowa Rules of Civil

Procedure on interventions provides that any person in-

terested in the subject matter of the litigation may inter-

vene.

The pleadings of the interveners adopted the plaintiff's

petition and charged invalidity of the Bechtel stock. The

interveners prayed that all invalid stock be cancelled and

for general equitable relief (R. p. 74, line 9 to p. 78, line 10,

p. 202, line 18 to p. 206, line 22). Amendment (R. p. 210,

lines 7 to 31, and particularly R. p. 205, lines 30 to 35 and

p. 206, lines 1 to 19).

=v

The interveners did not disclaim any of their rights.

They prayed that all illegally issued stock be decreed to be

void, and prayed for general equitable relief (R. p. 206,

lines 1 to 19). The fairness of the reclassification and the

invalidity of petitioners’ old common stock was directly in

issue. It was charged that it was worthless. The intentional

over valuation of property in exchange for stock is «.<tual

fraud. ;

Scully v. Automobile Finance Company (Del.), 49

Atl. 54;

Tucker v. National Sugar Refining Company (N. J.),

84 Atl. 10 at 15.

The interveners appeared by Clark, Pry*«, Hale & Plock.

The case of Luther v. J. C. Luther Co., 118 Wisc. 112,

94 N.W. 69, decided March 21, 1903, cited by petitioners on

page 8 of their brief, has no application. The Iowa Rules

of Civil Procedure are controlling and the decision of the

Iowa Supreme Court construing the Iowa Statutes and

Iowa Rules is controlling, and the very rules and the very

statutes which are involved in this case and have been con-

strued by the Iowa Supreme Court adverse to the petitioners’

contention, and the decision of the Supreme Court of Iowa

is controlling on the subject of the construction of the Iowa

Statutes and of the Iowa Rules of Civil Procedure.

—

POINT TWO.

THE IOWA COURTS DID NOT ERR IN HOLDING AND

DECREEING INVALID THE NEW COMMON STOCK RE-

CEIVED BY THE BECHTELS IN EXCHANGE FOR THEIR

OLD WORTHLESS COMMON STOCK. UNDER THE LAWS

AND STATUTES OF IOWA THE COURTS HAD FULL

POWER TO DECLARE THE STOCK INVALID AND VOID

ISSUED BY THE CORPORATION AND RECEIVED BY

THE BECHTELS IN VIOLATION OF THE LAWS OF THE

STATE OF IOWA. THE STOCK WAS ISSUED TO THE

BECHTELS IN FRAUD OF THE RIGHTS OF THE PRE-

FERRED STOCKHOLDERS AND WITHOUT CONSID-

ERATION AND THE COURT OF EQUITY HAD FULL

POWER TO CANCEL IT.

(Answer to Petitioners Point 2, Brief pp. 8 to 11).

1. The Courts under Chapter 387, Section 8438, of the

Iowa Code had full power to cancel the new common stock

that was issued in exchange for the Bechtels old worthless

common stock. A Court of Equity has power to cancel

stock illegally or fraudulently issued at a suit of a stock-

holder (18 C. J. Sec., Corporations Sec. 249).

Pontiac Packing Co. v. Hancock et al., 257 Mich.

45, 241 N.W. 268;

In 14 Corpus Juris, page 463, Section 658, it is stated:

“Since the creation of invalid stock and the issue

of certificates therefor is not only a wrong against

the corporation but also creates a cloud upon the

rights of other stockholders, a court of equity will re-

move the same by decreeing a cancellation thereof and

a surrender of the certificates at the suit of a com-

plaining stockholder, or of the corporation itself.”

As to the power of a court of equity the language of the

profound Jurist, Story, is particularly applicable to the

= a =

a

present situation. In Story Equity, 14th Edition, Volume

1, page 96, the author says;

“Every just order or rule known to equity courts

was born of some emergency, to meet some new condi-

tions and was, therefore, in its time, without precedent.

If based on sound principles, and beneficent results fol-

low their enforcement, affording necessary relief to the

one party without imposing illegal burdens on the other,

new remedies and unprecedented orders are not un-

welcome aids to the chancellor to meet the constantly

varying demands of equitable relief.”

In State ex rel Weede v. Bechtel et al., 31 N.W. (2) 853,

the Iowa Supreme Court in speaking with reference to the

various statutes in question and as to the power of a court

of equity acting under and by virtue of said statutes and

the general rules of equity, at 861-862 s>id:

“Applying the above statement to the situation in

the instant case the beneficent result afforded by the

decree of Judge Graven was to restore to the preferred

shares their rights as they existed prior to the plan

adopted as of August, 1938. Further, it imposed no

illegal burden upon the Bechtel stock. What Mrs.

Bechtel had before that date was worthless. The de-

cree added nothing to the burden of such old stock. No

doubt the trial court had in mind that most wholesome

equitable maxim, ‘Equity suffers no wrong to be done

without a remedy.’ See Pomeroy’s Equitable Jur., 5th

Ed., Vol. 1, Section 35 et seq.”

2. Directors are primarily trustees for the corporation

and its stockholders, and their relation to the corporation

is of such a fiduciary nature that in transactions with the

corporation the burden is on them to show entire fairness

and full adequacy of consideration.

Hoyt v. Hampe, 206 Iowa 206, 214 N.W. 718.

‘ "

,

;

a) 7 Sa

Geddes v. Anaconda Copper Mining Co., 254 U. S.

590, 41 S. Ct. 209.

Such transactions are presumptively fraudulent.

Corsicana Natl. Bank v, Johnson, 251 U. S. 68, 40

S. Ct. 82. ....

3. Directors cannot, either directly or indirectly, in

their dealings on behalf of the corporation with others, or

in any other transaction in which they are under a duty

to guard the interests of the corporation, make any ‘profit

or acquire any personal benefit for themselves or for an-

other corporation to the disadvantage of the corporation

they control and are acting for.

Corsicana National Bank v. Johnson, 251 U. S. 68,

40 S. Ct. 82;

Jones v. Missouri Edison Elec. Co. (C. C. A. 8), 233

Fed. 49;

Heim v. Jacobs (8 C. C. A.), la S=4, (2d) 29;

Heffern, etc. v. Gauthier, 22 Aria. 67, 193 Pac. 1021;

Hoyt v. Hampe, 206 lowa 206, 214 N.W. 718;

Munson v. Syracuse G. C. R. Co. 108 N. Y. 58, 8

N. E. 355, 358;

Fitzgerald v. Fitzgerald and Mailory Con. Co., 44

Neb. 463, 62 N.W. 899;

, Fletcher Cyc. Corporations (perm. Ed.) Vol.’ 3, p.

207, Sec. 844; p. 299, Sec. 937; pp. 307-311, Sec.

944;

Iroquois Iron Ore. Co. v. Kruse (8 C. C. A.), 241

Fed. 433, 441, 442;

Scully v. Automobile Finance Co. (Del.), 49 Atl.

at 54;

Tucker v. National Sugar Refin. Co. (N. J.), 84

Atl. 10 at 15.

a

—282—

4, The issuance of new common stock in exchange

the old common stock was in violation of the statutes ¢

laws of Iowa, and in fraud of the preferred stockhold

and without consideration and void.

1939 Code of Iowa, Sections 8412 to 8416 and §

tions 8420 to 8428, and Chapter 387.

In First Trust and Savings Bank (formerly Bechtel Tr

Company) and Phoenix Finance Corporation vs. lot

Wisconsin Bridge Company, et al., 19 Fed. Sup. 127; affirn

(8 C. C. A.) 98 Fed. (2) 416; certiorari denied 305 U. S. 6

rehearing denied 305 U. S. 676; wherein bonds had b

fraudulently issued without proper consideration, :

bonds had beer fraudulently issued in exchange for f

ferred stock held by Phoenix Finance Corporation,

Court cancelled the bonds. The Court in 19 Fed. Sup.

said:

“Anticipating an adverse ruling, the petition

alternatively pray for a modification of the decree v

provisions commanding the re-issuing of certain sha

of stock to Phoenix Finance Corporation, which it c

celed when fraudulently obtaining the bonds. (

might conceive some invidious analogies to this sit

tion. Having attempted the strong box of another, :

being hosit by what is now claimed to be a premat

explosion, they volubly invoke the compassion of

Court to restore valuable implements of their c1

left behind. I see no reason why a court of eq

should be deeply concerned in giving an affirmat

relief to the Phoenix Finance Corporation. On

- other hand I think the petitions for rehearing sho

be denied and the motion to dismiss and vacate

decree overruled, and it will be so Ordered.”

oa

————While the Supreme Court of Iowa determined this n

ter under the laws of Iowa and the statutes of Iowa,

regardless of that fact the stock of the Bechtels is also al

— 29.

jutely void and entitled to be canceled under the laws of

the State of Delaware.

5. The issuance of new common stock in exchange for

the Bechtel old worthless common stock was also in viola-

tion of the laws of Delaware.

The Constitution of Delaware peividin Article 9

“Sec. 3. No corporation shall issue stock, except

for money paid, labor done or personal property, or

real estate, or leases thereof actually acquired by such

corporation.”

The conscious and intentional overvaluation of property

in exchange for stock IS ACTUAL FRAUD. The issuance

of new common stock for worthless old common stock was

actual fraud.

Scully v. Automobile Finance Co. (Del.), 49 Atl.

at 54;

Tucker v. National Sugar Refining Co. (N. J.), 84

Atl. 10 at 15;

In Sohland v. Baker (Del. 1927), 141 Atl. 277, 58

A. L. R. 693, at 708 the Court said:

“Various bankers testified that the stock pledged

had no collateral value in August of 1922.

“There is no evidence whatever that it had any

market value at that time from which the Bankers’

Mortgage Company could have hoped in any manner

to realize anything from this stock and Sohland had

no reasonable ground to believ "

___—“Fhe contentions of the appellants are almost entire-

ly based on the uncorroborated testimony of Alfred

Sohland, and our conclusion is that the Chancellor was.

correct in holding that the stock in question had no’

cash value when the stock of the Bankers’ Mortgage

Company was issued. The Foundry & Machine Works

stock haying no cash value there was no consideration

—_ |

for the issuance of the Bankers’ Mortgage Company

stock to the Sohlands and there was no error in tl

court below in decreeing that such stock be cancele

Ellis v. Penn Beef Co., 9 Del. Ch. 213, 89 Atl. 666.”

In Lofland v. Cahall (Del.), 118 Atl. 1, at page 5 tl

Court said:

“Our conclusion is, that the appellants, acting as d

rectors, issued to themselves the ninety shares of stoc

on September 19, 1911, not only without paying fe

the same AS REQUIRED BY THE CONSTITUTIO)

but without any consideration at all. They parted wit

nothing of value, paid nothing for the stock and ha

no thought of paying for it. Their act was a pu

gift from themselves as directors to themselves as it

dividuals without the consent or knowledge of th

other stockholders, and CONSTRUCTIVELY FRAUDI

LENT.”

Under the Constitution of Delaware stock can not |

issued without proper consideration. The old Bechtel con

mon stock was wholly worthless and did not constitute an

consideration for the new common stock, as noted in th

cases above cited. The Delaware Constitution is the si

preme law of Delaware and the old worthless Bechtel con

mon stock could not be exchanged for new par value stoc

a so-called reclassification plan.

6. The Bechtels were directors and officers of th

defendant corporation and in the exchange of the stoc

were dealing with themselves in fraud of the preferre

stockholders and under such a state of facts the burden

on them to show full fairness and adequacy of consider:

tion, and in this the record shows they gave no consider:

tion.

adios

In Geddes v. Anaconda Copper Mining Co., 254 U. S. 590,

41 S. Ct. Rep. 209, at 212 it is stated:

“The relation of directors to corporations is of such

a fiduciary nature that transactions between boards

having common members are regarded as jealously

by the law as are personal dealings between a director

and his corporation, and where the fairness of such

transactions is challenged the burden is upon those

who would maintain them to show their entire fairness

and where a sale is involved the full adequacy of the

consideration. Especially is this true where a common

director is dominating in influence or in character.

This court has been consistently emphatic in the appli-

cation of this rule, which, it has declared, is founded

in soundest morality, and we now add in the soundest

business policy. Twin-Lick Oil Co. v. Marbury, Mi

Co., 109 U. S. 522, 3 Sup. Ct. 315, 27 L. Ed. 1018; Wardell

v. Railroad Co., 103 U. S. 651, 658, 26 L. Ed. 508; Cersi-

cana National Bank v. Johnson, 251 U. S, G8, 9, 40 Sap.

Ct. 82, 64 L. Ed. 141.” (Italics supplied)

—32—

POINT THREE.

MONEY OR PROPERTY USED TO PERPETRATE

FRAUD CAN NOT BE RECOVERED AND THE COU!

WAS WARRANTED IN DECLARING VOID AND CA

CELING THE NEW STOCK WHICH HAD BEEN ISSUE

FOR THE OLD WORTHLESS COMMON STOCK WIT

OUT RESTORING THE STATUS QUO ANTE. THE NE

COMMON STOCK, HAVING BEEN ISSUED TO THE BEC

TELS IN VIOLATION OF CHAPTER 387 OF THE COI

OF IOWA WHICH PROHIBITED IT AND IN VIOLATIC

OF THE PUBLIC POLICY OF THE STATE AND IN FRAL

OF THE RIGHTS OF THE PREFERRED STOCKHOLDER

WAS PROPERLY CANCELED WITHOUT RESTORD

THE STATUS QUO ANTE.

(Answer to Petitioners’ Point 3, Brief pp. 11 and 12).

First Trust & Savings Bank (formerly Bechtel Trust Co:

pany) and Phoenix Finance Company vs. lowa-Wiscons

Bridge Company, et al., 19 Fed. Sup. 127; affirmed (8

C. A.) 98 Fed. (2) 416; certiorari denied to Supreme Con

of U. S. 305 U. S. 650; rehearing denied 305 U. S. 676. TI

case has been quoted from, supra, this brief, sustaining tl

proposition.

In Weir v. Day, 57 Iowa 84 (10 N.W. 304), which was :

: action to recover property conveyed in fraud of credito

the Court at page 86 said:

“If the plaintiff caused the conveyances to be ma

to the defendant with intent to hinder, delay or ¢

fraud his creditors, or any them, he is not entitled

recover. Holliday v. Holliday, 10 Iowa 200; 1 Sto

Eq. Jur., 61; Kerr on Frauds and Mistake, 375; Stephe

v. Harrow, 26 Iowa, 458. The evidence abundan!

shows that such was his intention.”

en ees

There is no question under the record in the instant

case that the Bechtels by the exchange of their old common

stock for new common stock intended to perpetrate a gross

fraud on the preferred stockholders of the defendant cor-

poration, and the issuance of that new common stock in

exchange for the old worthless stock was a gross fraud

against the preferred stockholders and the Court was right

in canceling the new common stock without restoring the

status quo ante. The Bechtels were not entitled to it.

In Thronson v. Universal Manufacturing Company, et al.

(Wisc.), 159 N.W. 575, where state courts prohibited sale

by corporation of its stock except for money, labor, or

property received at par value and making sales in con-

travention thereof void, it was held that the purchaser of

the stock could not recover the consideration he paid be-

cause the transaction was prohibited by law and in violation

of the public policy of the state of Wisconsin, and void.

The decree cancelled the new common stock which the

Bechtels had obtained in violation of the public policy of

the laws of the State of Iowa and in violation of the statutes

of Iowa and in fraud of the preferred stockholders. They

were not entitled to that stock and the decree canceled

what they were not entitled to. They had voluntarily sur-

rendered and canceled their old worthless common stock

while fraudulently obtaining the new common stock and

the old common stock had ceased to exist; it was ~—

worthless. DaTEece oe ee

The so-called “plan of reclassification” was never legally

adopted because of the fraud which inhered in it and

because it violated the statutes and public policy of the

State of Iowa. The petitioners in the trial court contended

that the status quo ante could not be restored and offered

testimony to that effect (Walter Hulstedt, Tr., Vol. 4, pp.

2615 to 2679; Court’s oral finding, R. p. 366, lines 8 to 24).

—34—

The petitioners in their opening brief on appeal in the

Supreme Court of Iowa, stated:

“The stocx records introduced by plaintiff for other

purposes show that there were innumerable sales and

purchases of the new common in the period from

August 3, 1938 to February 15, 1940, as there were bound

to be in a corporation with some four thousand small

individual stockholders. It is therefore clear that the

task of unscrambling the eggs necessary to restore the

status quo ante would be an impossible one,” (R. p. 450,

lines 21 to 29).

The effect of the so-called reclassification plan is very

tersely stated in the opinion of the Iowa Supreme Court.

In State v. Bechtel, 31 N.W. (2) 853, at 865, paragraph

number 7 of the opinion, the Court said:

“Let us see what the effect of this reclassification

was so far as the 100,000 shares of worthless stock were

concerned. This worthless stock under such plan was

to be cancelled and there were reissued in lieu thereof

the 39,468 shares of new common stock each with

a value of $15.00 per share, thus giving to such shares

a total dollar value of $592,020.00 of equal parity to

the retired preferred stock, save as to the payment of

overdue dividends. In argument, counsel characterized

this transaction as ‘reaching up and pulling over a

half million dollars out of thin air.’ Judging from

its effects it cam hardly be said that such was an over-

statement. It seems to us that to put into effect such

a transaction would be shocking to a moral or equitable

conscience. It seems to us that those who professed

to speak for the preferred stockholders were derelict

in their duty to protect the interests of those in whose

interests they were bound to act. Most of the preferred

stock of the August 1, 1938 meeting was in the hands of

proxies. As such proxies they would be bound to pro-

tect the interests of those for whom they were to act.

It can hardly be said that they did so at this meeting.”

CO reer oe

—35—

The new common stock which the Bechtels received

was properly cancelled without the restoration of the

status quo ante, not only because it had been used as an

instrumentality to perpetrate a fraud and contrary to the

public policy of the State of Iowa but also because equity

required it. The Bechtels were not entitled to profit by

their own wrong. They asserted in the Supreme Court

that the status quo ante could not be restored, obviously

intending to retain the loot of approximately $600,000

of new common stock without paying therefor. Equity

required that the new common stock issued to the Bech-

tels be canceled. Having taken that position before the

Supreme Court of Iowa they are not now in any position

to contend before this Court as a reason for writ of certio-

rari that status quo ante should have been restored which

they contended in the lower court and in the Supreme

Court of Iowa could not be done. The petitioners are not

entitled to benefit by their own fraud and wrong.

enone ead

ree

EEE EOE 2a:

— =

POINT FOUR.

THE DEFENDANT CORPORATION HAVING OB-

TAINED A PERMIT FROM THE STATE OF IOWA TO

TRANSACT BUSINESS IN THE STATE OF IOWA AND

AGREED TO BE BOUND BY THE LAWS OF THE STATE

OF IOWA, AND ALL OF ITS BUSINESS AND PROPERTY

AND BOOKS AND RECORDS BEING LOCATED IN THE

STATE OF IOWA, AND ALL OF ITS OFFICERS AND

DIRECTORS, SAVE ONE, BEING RESIDENTS OF THE

STATE OF IOWA, THE SUPREME COURT OF IOWA DID

NOT ERR IN FINDING AND HOLDING THAT THE SO.

CALLED RE-CLASSIFICATION WAS NOT CONTROLLED

OR GOVERNED BY THE LAWS OF DELAWARE AND

IN SO HOLDING DID NOT VIOLATE ANY CONSTITU-

TIONAL RIGHTS OF THE PETITIONERS.

(Answer to Petitioners’ Point 4, Brief pp. 12, 13 and 14).

The defendant corporation obtained a permit to do

business in Iowa and agreed to be bound by the laws of the

State of Iowa while incorporated in Delaware. All of its

business and all of its books and records and property are

located in the State of Iowa, and all of its officers and

directors, save one, are residents of the State of Iowa and it

is subject to all of the laws of the State of Iowa.

In German-American Coffee Co. v. Diehl, 216 N. Y. 57,

109 N. E. 875, at 876, the eminent Justice Cardoza, speaking

for the court said:

“As long as a foreign corporation keeps away from

this state it is not for us to say what it may do or not

do. But when it comes into this state and transacts

its business here, it must yield obedience to our laws.

(Sinnott v. Hanan, 214 N. Y. 454, 458, 108 N. E. 858). For

many purposes the fic“°on of its residence in the state

of its origin must then be disregarded. (citing cases).

<x

This statute makes no attempt to regulate foreign cor-

porations while they keep within their domicile. It

is aimed against them only while they elect to live

within our borders. The duty which it imposes arises

only when they come to us, and ends the moment that

they leave us. Such a statute, however phrased, is, in

effect, a condition on which the right to do business

within the state depends. (Citing cases.) * * * If they

take the corporation out of the state, they may declare

dividends as they please. If they elect to keep it with

us, they must not lead it into paths of ruin. In these

days, when countless corporations, organized on paper

in neighboring states, live and move and have their

being in New York, a sound public policy demands that

our Legislature be invested with this measure of con-

trol. If the control is irksome, it may be avoided by

leaving us.”

In the case of Weiditschka v. Supreme Tent K. M. W.,

188 Iowa 183, 170 N.W. 300, 301, 175 N.W. 835, speaking of

the right of a foreign corporation to do business in lowa

the court (Ladd, C. J.) said:

“The defendant association had no right to trans-

act business in this state without permission, and even

then was bound to proceed in acccordance with its

laws.” (Citing many cases)

In New York Life Insurance Co. v. Cravens, 178 U. S.

389, 20 Sup. Ct. Rep. 962, at 967 the Court said:

“The power of a state over foreign corporations is

not less than the power of a state over domestic cor-

porations. No case declares otherwise. We said in

Orient Ins. Co. v. Daggs, 172 U. S. 557, 43 L. ed. 552,

19 Sup. Ct. Rep. 281:

“*That which a state may do with corporations of

its own creation it may do with foreign corporations

admitted into the state. This seems to be denied; if

not generally, at least as to plaintiff in error. The denial

—niice.

is extreme and cannot be maintained. The power of

a state to impose conditions upon foreign corporations

is certainly as extensive as the power over domestic

corporations, and is fully explained in Hooper v. Cali-

fornia, 155 U. S. 648, 39 L. ed. 297, 5 Inters, Com. Rep.

610, 15 Sup. Ct. Rep. 207, and need not be repeated.’”

The Court had jurisdiction of the subject matter; it had

jurisdiction of the corporate defendant and jurisdiction of

the. individual defendants, all of whom resided in Iowa,

with all the books and records of the corporation within

the jurisdiction of the court; nearly all the witnesses re-

sided in Iowa and the case could be most conveniently tried

in Iowa. The petitioners claim that it involved the internal

affairs of the corporate defendant is wholly without merit.

Under the facts developed “the corporate defendant was _

nothing except what is known to the law as a tramp cor-

poration” and its residence was in fact more in Iowa than

it was any pluce else.

Williams, et al. v. Green Bay and W. R. Co., 326

U. S. 549, 66 Sup. Ct. Rep. 284.

In State, ex rel Weede v. lowa Southern Utilities Co. of

Delaware, 231 Iowa 784, 2 N.W. (2) 372. In passing on the

question as to rights of the Iowa courts to determine the

matters presented by the petition of the plaintiff, the Court

made an exhaustive review of the authorities and, among

other things, said: (Record p. 110 to p. 135)

“In passing upon these propositions, it must be

kept in mind that while the appellee is a corporation

organized under the laws of Delaware, it is what the

authorities or decisions speak of as a ‘tramp’ or ‘migra-

tory’ corporation. (Citing cases) ‘While this practice

of taking out a charter in one state to do business solely

in another is probably too general and too long recog-

nized to be questioned. The courts of a state in which

such business is to be done are ordinarily reluctant to

oiiie

adopt a construction of the local laws which would

enable corporations, by resorting to such practice, to

receive, by reason of foreign incorporation, more fav-

orable treatment than similar corporations.” * * *

(R. p. 110)

“Speaking generally, a state may exclude a foreign

corporation from transacting business within its bor-

ders, or condition its admittance, as it sees fit, provid-

ing it does not thereby violate its own Constitution or

the Constitution of the United States. We have men-

tioned two exceptions to this rule of law. Some other

exceptions are referred to in Hanover -Fire Ins. Co. v.

Carr, 272 U. S. 491, 47 S. C. 179, 71 L. Ed. 372, 49 A. L. R.

713, but the appellee comes within no exception. Many

authorities could be mentioned.” (Citing numerous

cases from the Supreme Court of the United States and

of the Supreme Court of Iowa.) * * * (R. p. 112)

“In Am. Fidelity Co. v. Bleakley, supra, (157 Iowa

442, 446) this Court said: The state has the undoubted

right to say whether foreign corporations shall be per-

mitted to do business here at all, and, if such permission

is granted, it may be upon such terms and conditions

as the state shall prescribe. And where it is the mani-

fest intention to limit or restrict the powers given to

such corporation by its charter, courts have no authority

to override such legislation on the ground of comity

between the states. Within its power, the state, through

its legislature, is supreme, and the court’s duty is ended

when it determines what the statutory law is.’” (R. pp.

115-116) * * *

“In Am. Jur. Sect. 439, p. 433, the author states:

‘A state has visitorial po'ver over foreign corporations

insofar as they are doing business within the state, and

in connection with the acts constituting such business;

and such regulation by a state is not deemed to inter-

fere with the internal affairs or management of such

corporations.’” (Citing U. S. Supreme Court cases.)

*** (R. p. 119)

oo eccmnen re pr vile map emewee nine oe fe

Page err er et ETT Ie » *

joie

“There was a time when courts would have given

weight to such a statement, but we may now say it is

uniformly conceded that the question is not one of

jurisdiction or power in the court of a state which is

not the legal domicile of a foreign corporation, but it

is a question rather of discretion in the court as to

whether it will exercise jurisdiction. It is a question

of the balance of convenience, of whether considera-

tions of public policy, efficiency, expedience and‘justice

to all parties interested demand that jurisdiction be

retained in the foreign court, or that it be declined un-

der the rule of forum non conveniens.” * * * (R. p. 123.)

In the opinion of the Supreme Court of Iowa, 31 N. W.

(2) 853, Record pages 482 to 523, the Court definitely lays

down the rule that the Court had full jurisdiction of all of

the necessary parties and of the corporation and approved

definitely the rule as laid down in the opinion by Chief

Justice Bliss, heretofore referred to. We direct the Court’s

particular attention to Record page 507, Division VIII of

the opinion to and including that part of Division VIII

appearing on Record page 510, and in this the Court, among

other things, said:

“Neither justice nor the practical necessities of the

modern world can lend a sympathetic ear to the claim

of a foreign corporation, with all of its business in lowa

—plants, records, officers, etc., that under its articles

issued to it by the authority of the foreign state, it can

come into our state and violate its statutory require-

ments.” (R. p. 509)

The Statutes of Iowa under which the corporate defend-

ant procured a permit to do business are controlling and

it cannot be claimed that sch statutes interfered with the

contractual rights or liberties of the corporation by virtue

of the Constitution of the United States since the State of

Iowa has the power to compel foreign corporations to be

subject to its statutes as a condition of the right to do busi-

eis,

ness in the state. The legislature of Iowa had the power to

pass laws regulating and prescribing the conditions under

which foreign corporations may do business in Iowa, and

such legislation is not in conflict with any provisions of

the Constitution of the United States. The Supreme Court

of the State of Iowa has passed on and construed these

statutes and this Court has held in similar cases that where

the Supreme Court of a state has passed on its statutes

and laws relating to conditions permitting foreign corpora-

tions to transact business within a state that this Court will

follow such decisions. The enforcement of a statute applic-'

able to a foreign corporation transacting business in Iowa

can not be held to be a violation of the Constitutional rights

of any stockholder of such corporation.

New York Life Insurance Co., plff in err., v.

Cravens, 178 U. S..389, 20 Sup. Ct. Rep. 962.

Waters-Pierce Oil Co. v. Texas, 177 U. S. 28, 20 Sup.

Ct. Rep. 518.

POINT FIVE.

THE SUPREME COURT OF IOWA DID NOT ERR IN

HOLDING THAT NO RIGHT OF PETITIONERS UNDER

EITHER THE CONSTITUTION OF THE UNITED STATES

OR THE STATE OF IOWA HAD BEEN VIOLATED.

1. Section 1 of Article IV. of the Federal Constitution

is the full faith and credit provision.

2. No act, record, or judicial proceeding of Delaware

has been denied full faith and credit. Simply because Dela-

ware chartered the corporation that does not require the

State of Iowa to admit it to transact business within its

border unconditionally, nor to breach its laws.

Scottish Union and National Ins. Co. v. Herriott,

109 Iowa 606, 611 et seq., 80 N.W. 665.

Le APO NRO Neg ran) De ane

—

3. The corporate defendant was not a citizen under

Section 1 of the Fourteenth Amendment which could enter

the State of Iowa in violation of conditions imposed by that

state. It is being treated the same as all foreign and do-

mestic corporations of its class. It has not been deprived

of any property rights under the due process clause of the

Federal Constitution, nor been subjected to any arbitrary

or unreasonable conditions and has been granted equal

protection of the laws.

Paul v. Commonwealth of Va., 8 Wall. 168, 19 L. ed.

357;

Ballantine, Private Corp., Sec. 287;

Thompson on Corporations, 3rd. Ed., Section 6594;

23 Am. Jur., Sec. 286;

State, ex rel Weede, v. lowa Southern Utilities Co.,

(R. p. 135), 231 Iowa 784, 2 N. W. (2) 372, at 395;

State, ex rel Weede, v. Bechtel, et al., (R. par. VIIL,

pp. 507, 508, 509), 31 N.W. (2) 853, at 864-865.

POINT SIX.

THERE IS NO MERIT IN THE PETITIONERS’ CON-

TENTION THAT THEY WERE DEPRIVED OF THEIR

PROPERTY WITHOUT DUE PROCESS OF LAW IN VIO-

LATION OF SECTION 1 OF ARTICLE IV OF THE CON-

STITUTION OF THE UNITED STATES AND OF THE

FIFTH AND FOURTEENTH AMENDMENTS TO THE

CONSTITUTION OF THE UNITED STATES.

1. The violations of the Iowa Statutes and the fraudu-

lent character of the so-called re-classification plan and

the fraudulent character of the issuance of the new common

stock for the old worthless Bechtel common stock was di-

rectly in issue, not only was it directly in issue but it was

ae

also fully litigated by the petitioners. The petitioners were

represented by their present counsel from the commence-

ment of and throughout the trial (Tr., Vol. 1, pp. 1 and 2

and throughout the Trans.). The petitioners were given

full opportunity to defend and have had a fair trial.

2. The trial commenced on the First day of September

1943 (Tr. Vol. 1, p.1). The evidence closed on the 18th day

of December 1943 (R. p. 359). The trial continued for

three months and eighteen days and the petitioners had

ample opportunity to offer any evidence that they desired

to offer.

3. The arguments of counsel for plaintiff began on

December 23, 1943 and continued through December 29,

1943, six days. The argument for the corporate defendant

began and closed on December 30, 1943. The argument of

Mr. Cook, counsel for the defendants and for the petitioners

herein, began January 6, 1944 and closed January 10, 1944,

lasted four days. The reply arguments of counsel for plain-

tiff occupied January 11 and January 12, 1944. Further

arguments by Mr. Cook, Mr. Havner and Mr. Ontjes were

made at the morning session January 13, 1944, and then

the Court adjourned until January 19, 1944 (R. p. 359). It

will be noted that full hearing was had and ample time

given to counsel for the various parties including the peti-

tioners herein to argue the cause.

4. On January 19, 1944 at ten o’clock A. M., the trial

court made his oral findings in which he discussed the

issues and the evidence and stated what his findings were

(R. p. 359 to p. 376).

5. It was not until two days later, January 21, 1944, that

the court made and filed his written findings of fact and

conclusions of law (R. p. 328, line 14 to p. 351, line 12).

6. The record shows the petitioners made no claim

that the oral findings went beyond the issues nor decided

any matter that was not involved. They did not suggest

_— -

eR YR ROTI OE eine See ic

NN ene

cup tt LEOL LILLIE A

pap Wis

any surprise on their part nor a desire for any further hear-

ing and did not ask leave to offer additional testimony, al-

though they had two days to do so between the time of the

court’s oral findings and his written findings of fact and

conclusions of law (R. p. 376; Tr., Vol. 4, p. 2878).

7. The petitioners did not serve their notice of appeal

to the Supreme Court of Iowa until February 21, 1944 (R. p.

351, line 14 to p. 352, line 15), not until thirty days after the

court had made and filed its written findings of fact and

conclusions of law. During that thirty days the petitioners

made no motion to re-open the case nor ask for further

hearing or opportunity to offer further evidence, and did

not make any motion to set aside or to modify any of the

court’s findings of fact and conclusions: of law,

In S. C. Holmes, Pliff., in Err., v. E. S. Conway, 241 U.S,

624, 36 Sup. Ct. Rep. 681, at 683, the Court said:

“At the final trial he was given full opportunity to

defend himself in his own way and to an extent satis-

factory to himself. Consequently every requirement of

due process of law has been satisfied, * * *

“Considering Holmes’s position as an officer of the

court, and patient hearings accorded him, his own

testimony, and duty to offer in evidence whatever was

obtainable and material, his actual presence at every

stage of the proceedings, his failure to suggest surprise

or desire for any further hearing, the inquiry touching

his conduct, pending for many months, his perfect ac-

quaintance with all the unusual circumstances including

his own liability, and looking at the substance, and not

mere form, of things, we are unable to say that he has

been deprived of adequate notice or fair opportunity

to defend, and thereby denied due process of law.”

(Italics supplied)

In Iowa Cent. Ry. Co. v. State of Iowa, 160 U. S. 389, 16

Sup. Ct. Rep. 344, it is held: “It is not a right, privilege,

or immunity of a citizen of the United States, within the

ee ae ee

esti

meaning of Const. Amend. 14, to have a controversy in the

state court prosecuted or determined by one form of action,

rather than by another. The Court said:

“Whether the court of last resort of the state of

Iowa properly construed its own constitution and laws,

in determining that the summary process under those

laws was applicable to the matter which it adjudged,

was purely the decision of a question of state law, bind-

ing upon this court. Mere irregularities in the proced-

ure, if any, were matters solely for the consideration of

the judicial tribunal within the state empowered by the

laws of the state to review and correct errors committed

by its courts. Such errors affect merely matters of state

law and practice, in no way depending upon the consti-

tution of the United States, or upon any act of Con-

gress. Ludeling v. Chaffe, 143 U. S, 301, 305, 12 Sup. Ct.

439. (Italics supplied.)

“As said by this court, speaking through Mr. Chief

Justice Fuller, in Leeper v. Texas, 139 U. S. 462, 11 Sup.

Ct. 577: ‘Law in its regular course of administration

through courts of justice, is due process; and, when

secured by the law of the state, the constitutional re-

quirement is satisfied.’ There was a ‘regular course

of administration’ in the case at bar, as that term was

employed in the case cited.”

CONCLUSION.

We respectfully submit that the petition for writ of

certiorari should be denied.

H. M. HAVNER,

FRED A. ONTJES,

Counsel for Respondents..

HAVNER & POWERS,

Of Counsel.

—46—

APPENDIX.

CODE OF IOWA, 1939.

Chapter 387.

Section 8433. Capital Stock and Permit. Sections

8412 to 8416, inclusive, and 8420 to 8428, inclusive, are here-

by made applicable to any foreign corporation which di-

rectly or indirectly owns, uses, operates, controls, or is con-

cerned in the operation of any public gasworks, electric

light plant, heating plant, waterworks, interurban or street

railway located within the state, or the carrying on or any

gas, electric light, electric power, heating business, water-

works, interurban or street railway business within the

state, or that owns or controls, directly or indirectly, any

of the capital stock of any corporation which owns, uses,

operates or is concerned in the operation of any public gas-

works, electric light plant, electric power plant, heating

plant, waterworks, interurban or street railway located

within the state, or any foreign corporation that exercises

any control in any way or in any manner over any of said

works, plants, interurban or street railways or the business

carried on by said works, plants, interurban or street rail-

ways by or through the ownership of the capital stock of

any corporation or corporations or in any other manner

whatsoever, and the ownership, operation, or control of any

such works, plants, interurban or street railways or the busi-

ness carried on by any of such works or plants or the owner-

ship or control of the capital stock in any corporation own-

ing or operating any of such works, plants, interurban or

street railways by any foreign corporation in violation of the

provisions of this chapter is hereby declared to be unlaw-

ful. (S13. Sec. 1641-1; C24, 27, 31, 35, Sec. 8433.)

Section 8434. Holding Companies. The provisions of

this chapter are hereby made applicable to all corporations,

including so-called “holding companies” which by or

through the ownership of the capital stock in any other

corporation or corporations or a series of corporations

owning or controlling the capital stock of each other can or

—47—

may exercise control over the capital stock of any corpora-

tion which owns, uses, operates, or ie concerned in the oper-

ation of any public gasworks, electric light plant, electric

power plant, heating plant, waterworks, interurban or street

railway located in the state, or the business carried on by

such works or plants. (S13, Sec. 1641-m; C24, 27, 31, 35

Sec. 8434)

Section 8435. Annual Report—fee. All corporations

subject to the provisions of this chapter are hereby required

to pay the annual fee and to make the annual report in the

form and manner and at the time as specified in Chapter

388. (S13, Sec. 1641-n; C24, 27, 31, 35, Sec. 8435.)

Section 8436. Sale of Capital Stock. The provisions of

this chapter are hereby made applicable to the sale of its

own capital stock by any corporation subject to the pro-

visions of this chapter, whether said capital stock has been

heretofore issued by said corporation or not, including the

sale of so-called “treasury stock” or stock of the corporation

in the hands of a trustee or where the corporation partici-

pates in any way or manner in the benefits of said sales,

and also to the sale of any of the obligations of any corpora-

tion subject to the provisions of this chapter, the payment

of which is secured by the deposit or pledge of any of the

capital stock of said corporation. (S13, See. 1641-0; C24, 27,

31, 35, Sec. 8436.)

Section 8437. Violations—stock void. Shares of capi-

tal stock of any corporation owned or controlled in viola-

tion of the provisions of this chapter shall be void and the

holder thereof shall not be entitled to exercise the powers

of a shareholder of said corporation or permitted to partici-

pate in or be entitled to any of the benefits accruing to

shareholders of said corporation, and sections 8430 to 8432,

inclusive, are hereby made applicable to violations of the

provisions of this chapter; and courts and juries shall con-

strue this chapter so as to prevent evasion and to accomplish

the intents and purposes hereof. (S13, Sec. 1641-p; C24, 27,

31, 35, Sec. 8437)

Le INS EEE Re

es

Section 8438. Dissolution—receiver. Courts of equity

shall have full power to dissolve, close up, or dispose of

any business or property owned, operated or controlled in

violation of the provisions of this chapter; to dissolve any

corporation owning or controlling the capital stock of any

other corporation in violation of the provisions of this

chapter and to close up or dispose of the business or prop.

erty of said corporation; and if the court finds that, in order

to carry out the purposes of this chapter, it is necessary s«

to do, it may dissolve the corporation issuing the stock

which is owned in violation of the provisions of this chap

ter, close up the business of said corporation and dispose o|

its property, and the court may also appoint a receiver whe

shall be a resident of Iowa for any business or for any

corporation which has violated the provisions thereof o1

of the corporation issuing the stock which is held in viola.

tion thereof. Any action to enforce the provisions of thi:

chapter may be instituted by the attorney general in the

name of the state of Iowa or by a citizen in the name o!

the state of Iowa at his own proper cost and expense, re

serving, however, to the stockholders owning capital stock

not held in violation of this chapter all rights possessec

by them. (S13, Sec. 1641-q; C24, 27, 31, 35, Sec. 8438)

CHAPTER 385.

Code of 1939.

Section 8412. Par value Required. No corporatior

organized under the laws of this state, except building anc

loan associations, shall issue any certificate of a share o

capital stock, or any substitute therefor, until the corpora

tion has received the par value thereof. (S13, Sec. 1641-b

C24, 27, 31, 35, Sec. 8412)

Section 8413. Payment in property other than cash

If it is proposed to pay for said capital stock in property

or in any other thing than money, the corporation proposing

the same must, before issuing capital stock in any form

apply to the executive council of the state for leave so t

do. Such application shail state the amount of capital stock

ation

- and

re of

0ra-

41-b;

cash.

perty

osing

—49—

proposed to be issued for a consideration other than money,

and set forth specifically the property or other thing to be

received in payment for such stock. (S13, Sec. 1641-b; C24,

27, 31, 35, Sec. 8413)

Section 8414. Executive Council to Fix Amount. The

executive council shall make investigation, under such

rules as it may prescribe, and ascertain the real value of

the property or other things which the corporation is to

receive for the stock. It shall enter its finding, fixing the

value at which the corporation may receive the same in

payment for capital stock; and no corporation shall issue

capital stock for said property or thing in a greater amount

than the value so fixed. (S13; Sec. 1641-b, C24, 27, 31, 35,

Sec. 8414.)

Section 8415. Elements Considered in Fixing Amount.

For the purpose of encouraging the construction of new

steam or electric railways and manufacturing industries

within this state, the labor performed in effecting the

organization and promotion of such corporation, and the

reasonable discount allowed or reasonable commission

paid in negotiating and effecting the sale of bonds for the

construction and equipment of such railroad or manufac-

turing plant, shall be taken into consideration by said

council as elements of value in fixing the amount of capital

stock that may be issued. (S13, Sec. 1641-b; C24, 27, 31, 35,

Sec. 8415.)

Section 8416. Certificate of Issuance of Stock. It shall

be the duty of every corporation, except corporations quali-

fied under chapter 386 or chapter 417, to file a certificate

under oath with the secretary of state, within ten days

after the issuance of any capital stock, stating the date of

issue, the amount issued, the sum received therefor, if pay-

ment be made in money, or the property or thing taken, if

such be the method of payment. (S13, Sec. 1641-c; C24, 27,

31, 35, Sec. 8416.)

—

CHAPTER 386.

Code of 1939.

Section 8420. Application for Permit. Any corporatic

for pecuniary profit organized under the laws of anoth

state, or of any territory of the United States, or of a

foreign country, which has transacted business in the sta

of Iowa since September 1, 1886, or desires hereafter.

transact business in this state, and which has not a perm

to do such business, shall file with the secretary of state

certified copy of its articles of incorporation, duly attest

by the secretary of state or other state officer, in who

office the original articles were filed, accompanied by

resolution of its board of directors or stockholders authori

ing the filing thereof, and also authorizing the filing therec

and also authorizing service of process to be made up

any of its officers or agents in this state engaged in tran

acting its business, and requesting the issuance to su

corporation of a permit to transact business in this stat

said application to contain a stipulation that such pern

shall be subject to the provisions of this chapter. (C97, S

1637; S13, Sec. 1637; C24, 27, 31, 35, Sec. 8420.)

Section 8421. Details of Application—Secretary

State as process Agent. Said application shall also co

tain a statement subscribed and sworn to by at least ty

of the principal officers of the corporation, setting for

the following facts, to-wit:

1. The total authorized capital of the corporation.

2. The total paid up capital of the corporation.

3. The.total value of all assets of the corporation, i

cluding money and property other than money represent

by capital, surplus, undivided profits, bonds, promisso

notes, certificates of indebtedness or other designatic

whether carried as money on hand or in bank, real este

or personal property of any description.

ration

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4. The total value of money and all other property the

corporation has in use or held as investment in the state, at

the time the statement if made (if any).

5. The total value of money and all other property

the corporation proposes or expects to make use of in the

state, during the ensuing year.

6. Certified copy of the resolution of the board of

directors of said corporation giving name and address in

lowa of a resident agent on whom the service of original

notice of civil suit in the courts of this state may be served.

Failing which, or in the event such agent may not be found

within the state, service of such process may then be made

upon said corporation through the secretary of state by

sending the original and two copies thereof to him, and on

the original of which he shall accept service on behalf of

said corporation, retain one copy for his files and send the

other by registered mail to the corporation at the address of

its home office as shown by the records in his office, which

service shall have the same force and effect as if lawfully

made upon said corporation within the county where such

civil suit could be maintained against it under the laws

of this state. (S13; Sec. 1637; C24, 27, 31, 35, Sec. 8421.)

Section 8422. Secretary of State to Determine Values.

The secretary of state can make such independent and

further investigation as to the property within this state

owned by any such corporation as he may desire, and upon

the true facts determine the value thereof, and fix the fee

to be paid by such company. (S13, Sec. 1637; C24, 27, 31,

35, Sec. 8422)

Section 8423, Fees. Before a permit is issued authoriz-

ing such corporation to transact business in the state, said

corporation shall file with the secretary of state a certified

copy of the articles of incorporation, with resolution and

statement as previously set forth, and pay a filing fee of

twenty-five dollars upon ten thousand dollars or less of

money and property of such company actually within the

state, and of one dollar for each one thousand dollars of

~~

such money or property within this state in excess of

thousand dollars. (C97, Sec. 1637; S13, Sec. 1637; C24

31, 35, Sec. 8423.)

Section 8424. Increase of capital—blanks. If from |

to time the amount of money or other property in us

the state by said foreign corporation is increased,

corporation shall at the time cf said increase, or at

time of making annual report to the secretary of stat

July of each year, file with the secretary of state a sy

statement showing the amount of such increase and s

pay a filing fee thereon of one dollar for each one thou:

dollars or fraction thereof of such increase. The secre

of state shall upon request furnish a blank upon whic

make report of such increase of capital in use within

state. (C97, Sec. 1637, S13, Sec. 1637; C24, 27, 31, 35,

8424.)

Section 8425. Exemption. Any corporation transac

business in this state prior to September 1, 1886, shal

exempt from the payment of the fees required under

provisions of sections 8423 and 8424. (C97, Sec. 1637;

Sec. 1637, C24, 27, 31, 35, Sec. 8425.)

Secti . 8426. Issuance of permit—effect. The s«

tary of state, shall thereupon issue to such corporatio

permit, in such form as he may prescribe, for the transac

of the business of such corporation, and upon the receij

such permit said corporation shall be permitted and aut

ized iv conduct and carry on its business in this state. (

Sec. 1637; S13, Sec. 1637; C24, 27, 31, 35, Sec. 8426.)

Section 8427. Denial of Right to Sue. No foreign s

corporation doing business in this state shall maintain

action in this state upon any contract made by it in

state unless prior to the making of such contract it :

have procured such permit. This prohibition shall

apply to any assignee of such foreign stock corporation

to any person claiming under such assignee of such foi

corporation or under either of them. (C24, 27, 31, 35,

8427.)

of ten

C24, 27,

ym time

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state, in

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id shall

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thin the

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ration, a

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eceipt of

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gn stock

tain any

t in this

it shall

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tion and

n foreign

, 35, Sec.

— ws

Section 8428. Alphabetical Records Required. The

secretary of state shall number consecutively all such certi-

fied copies heretofore and hereafter filed in his office and

shall maintain a card index thereof arranged and shall

preserve the same and the originals of said certified copies

as permanent records of his office. (C24, 27, 31, 35, Sec.

8428.)

Section 8430. Violations by corporations. Any foreign

corporation that shall carry on its business in violation of

the provisions of this chapter in the state of Iowa, by its

officers, agents, or otherwise, without having complied with

the preceding sections of this chapter and taken out and

having a valid permit, shall forfeit and pay to the state,

for each and every day in which such business is trans-

acted and carried on, the sum of one hundred dollars, to

be recovered by suit in any court having jurisdiction. (C97,

Sec. 1639, C24, 27, 31, 35, Sec. 8430.)

Section 8431. Violation by Officers. Any agent, officer,

or employee who shall knowingly act or transact such busi-

ness for such corporation, when it has no valid permit as

provided herein, shall be guilty of a misdemeanor, and for

such offense shall be fined not to exceed one hundred dol-

lars, or be imprisoned in the county jail not to exceed

thirty days, or be punished by both such fine and imprison-

ment, and pay all costs of prosecution. (C97, Sec. 1639, C24,

27, 31, 35, Sec. 8431.)

Sev..on 8432. Status of Corporation and Officers. Noth-

ing contained in this chapter shall relieve any person, com-

pany, corporation, association or partnership from the per-

formance of any duty or obligation now enjoined upon or

required of it, or from the payment of any penalty or lia-

bility created by the statutes heretofore in force, and all

foreign corporations, and the officers and agents thereof,

doing business in this state shall be subject to all the lia-

bilities, restrictions and duties that are or may be imposed

upon corporations of like character organized under the

general laws of this state, and shall have no other or greater

powers. (C87, Sec. 1639; C24, 27, 31, 35, Sec. 8432.)