Petition for a Writ of Certiorari — Richardson v. Blue Grass Mining Co.

ae Offca- Supreme Sout AL. 8

} FILLED

C19 JUN 1 1942

CHARLES ELMORE GRGALEY

SUPREME COURT OF THE UNITED—SPATESccex« |

OCTOBER TERM, 1941

No. ME 110

. E. RICHARDSON, ry His Own Riaut anp as TRUSTEE,

AND OTHERS,

Petitioners,

vs.

BLUE GRASS MINING COMPANY anp Oruzzs.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES OCIROUIT COURT OF APPEALS

FOR THE SIXTH CIRCUIT AND BRIEF IN SUP-

PORT THEREOF. .

Banter P. Woorton,

Wa. Eenezst Favtxner,

A. B. Bowman,

J. R. Snoemonps,

Counsel for Petitioners.

INDEX.

Sussect INpEx.

Jurisdiction and reasons for invoking............

re ee ae

aie 8 Ong a Vo ice hae

RE eth hy oc Siig fu Se ee kta oe ne

Brief in support of petition.........................

penne OF dower Girt... ec vein ce

Findings of fact in the lower courts relied upon. .

Statement of case (see petition).................

Probable errors and questions presented (see

PI Se re leis vat iacre ae ok:

MO Rika oe ai ee eh ds oe ee ae

By applicable decisions of Kentucky, as well

as by the weight of authority of other cir-

cuits and of this Court, trustees guilty of

wilful fraudulent breach of trust, and who

denounce their trust and seek to appropriate

the trust estate to themselves, should be

denied all compensation for services......

The opinion and decree of the courts below

permitting the respondent trustees to hold

the stock of Black Gold Mining Company

are probably contrary to the decisions of this

Court, the courts of other circuits including

the Sixth Circuit, and to the weight of

WE. bie or Noss Fi AR ee

TABLE OF Cases CITED.

Barney v. Saunders, 16 How. 542, 14 L. Ed. 1050.....

Backus v. Finklestein, 23 F. (2d) 357................

mapt v, Boyd, S Gratis 18... ook ev cecee secon,

—585

15

li INDEX

Caldwell v. Hicks, 15 Fed. Supp. 46

Cominger v. Louisville Trust Co., 128 Ky. 697, 108 8. W.

960, 111 S. W. 681, 129 Am. St. Rep. 322..........

Davis v. Swedish Am. Nat. Bank, 78 Minn. 408, 80

N. W. 953, 81 N. W. 210, 79 A. S. R. 400..........

Drury v. Milwaukee etc. S. R. Co., 7 Wall. 299, 19

MR SEN ce Rta We a te SRA bi & ware. 4459s

Erie R. Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188. .

Flint River Pecan Co. v. Fry, 39 ¥. (2d) 457..........

Garesche v. Levering Co., 146 Mo. 436, 48 S. W. 653,

OG RR RE eee ere eee ren ee

Geddes v. Anaconda Copper Min. Co., 254 U. 8. 590,

I aye kd ee he Rew eeR YS

Highland Cotton Mills v. Rayon Knitting Mills, 194 N. E.

« } ) e Beery cise? ete ee

Hodges Estate, In re, 66 Vermont 70, 44 A. S. R. 820..

Hollins v. Brierfield Coal & I. Co., 150 U. 8S. 371, 14

Sup. Ct. Rep. 127, 37 L. Ed. 1118................

Jackson v. Ludeling, 21 Wall. 616, 22 L. Ed. 492......

Kline, In re, 280 Pa. St. 41, 124 Atl. 280, 32 A. L. R. 926.

Koehler v. Black River Falls Iron Co., 2 Black 715, 17

Lewis v. Ingram, 57 F. (2d) 463.............-02--055

Meinhard v. Salmon, 249 N. Y. 458, 164 N. E. 545,

SS a ohiy Deis) Su Wh a ae Ol OS

Munro v. Sintth, 250 Fed. 1... . 2.252. c eee enees

Paducah Land etc. Co. v. Hayes, 15 Ky. L. R. 517, 24

3 = SR ene Rr r ne ere eer

Polansky, In re, 41 F. (2d) 547... .........--- 0000s

Richardson v. Blue Grass Min. Co., 39 Fed. Supp. 658. .

Turner v. Ryan, 272 N. C. 60, 110 A. L. R. 554........

Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed.

- CR a ec ne RN ty Rene ry me ee Oe ae a eee

Wadsworth v. Adams, 138 U. S. 380, 34 L. Ed. 984....

Walker v. Beal, 9 Wall. 743, 19 L. Ed. 814...........

Ward v. Funston, 86 Va. 359, 10S. E. 415...........

Wardell v. Union P. R. Co., 103 U.S. 651, 26 L. Ed. 509.

Weakly v. Merriweather, 156 Ky. 304, 160 S. W. 1054. .

Webster Loose Leaf Filing Co., In re, 252 Fed. 959....

Wright v. Kentucky etc. G. E. R. Co., 117 U. 8. 72, 6

Sup. Ct. Rep. 697, 29 L. Ed. 821... . 2... .. eee nes

29

9, 15

INDEX iil

STATUTES CITED.

Page

Act of March 3, 1891, 26 Stat. 828, as amended... 14

Judiciary Act of Sept. 24, 1789, See. 34, Ch. 20, U. s.

eM a eg cs aes he Pa iwi nin deh WS Sw Gn w a 9

U.S. C. A., Title 28, Section 347 as amended......... 9, 14

Texts Crrep.

es a i RG oh esis eh evs aweaup exons we 24

Restatement of the Law of Trusts, Sec. 243, sub-sec. d. . 17

Te

Fh) UR ag ER RRR Bk Or ade Se, A eth Pe Hey ay eae ba CIOs | et ete LF

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1941

No. 1274

W. I. RICHARDSON, tn His Own Ricut anp as Truster,

AND OTHERS,

Petitioners,

Us.

BLUE GRASS MINING COMPANY anp Oruers.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS,

SIXTH CIRCUIT.

To the Honorable Supreme Court of ihe United States:

This suit is prosecuted by petitioners alleging themselves

to be stockholders of Blue Grass Mining Company and Pen-

dleton Store, Inc., against the corporations and their man-

aging and controlling officers, directors and stockholders,

for an accounting on behalf of the corporation, and all

stockholders, of funds allegedly taken, converted and used

by such managing and controlling individuals, and for the

recovery of property acquired by them in their own names

with corporate funds.

SEALS EORTC A AIO LINEN A ITI, TIRE PO

2

Another aspect of the suit was to establish the quantum

of petitioners’ holdings in said corporations. From the

action of the Trial Court decreeing petitioners a 50% inter-

est in the corporations and awarding judgment on certain

items of accounting, respondents appealed to the Circuit

Court of Appeals, and from the action of the Trial Court in

denying petitioners’ claims on certain items of accounting

including those herein mentioned, petitioners took a cross-

appeal.

Opinion of the District Court rendered October 17, 1939,

is published in 29 Fed. Supp. p. 658, and appears in the

record Vol. I, at p. 358, the findings of fact in R. I. p. 385,

and decree entered August 1, 1940, in R. I. p. 417.

The Court of Appeals affirmed, March 2, 1942, (R. VI.

p. 2183).

3%

Summary of the Matters Involved.

Certain individual defendants, J. E. Johnson, Sr., J. E.

Johnson, Jr., Wm. Pendleton and Arch Pendleton (known

in the record as the ‘‘Kentucky Group’’), undertook to ap-

propriate to themselves all of the capital stock of two Ken-

tucky corporations, Blue Grass Mining Company and Pen-

dleton Store, Inc., notwithstanding the right of petitioners

(since adjudicated below) to one-half thereof, and proceeded

to elect themselves directors and officers of said corpora-

tions, and assumed and exercised sole and exclusive man-

agement and control thereof, voting to themselves large

salaries or bonuses, lending to themselves or to other cor-

porations owned and controlled by them, large sums of

money, and financing and promoting new enterprises and

corporations with the corporate funds, taking title in their

own names to property bought with corporate funds, and

doing various other acts to their own interest and to the

detriment of the interests of the corporations. The ques-

3

tion involved is whether or not managing and controlling

directors and officials of corporations guilty of such fraudu-

lent conduct will be denied all compensations for acting in

their trust capacity, and be required to disgorge the stock

of corporations promoted by them with the trust funds, all

as insisted by petitioners, or whether they may, in equity,

be allowed ‘‘reasonable’’ compensation for their services,

and permitted to keep at least a part of the fruits of their

illicit investments, as held by the lower courts.

We submit that substantially every material fact to

support petitioners’ insistence under the law, was found

by the Trial Court and approved by the Circuit Court

of Appeals, and we therefore shall not question the find-

ings of facts, but shall rely thereupon in support of this

petition. Since the facts are fully found by the Trial

Court, concurred in on appeal and not now challenged

(See Opinion, 29 Fed. Supp. 658; R. I. p. 358, and Find-

ings of Fact R. I. p. 385), it would seem to be necessary

here only to epitomize said opinion and findings in so

far as material to the issue here raised.

II.

Statement of the Case.

So far as necessary to a consideration of the questions

here involved the facts may be stated as follows:

In December, 1929, the Kentucky group acting in the

name of J. E. Johnson, Sr., entered into a contract with

the petitioners, known in the record as the ‘‘Tennessee

Group’’, acting then in the name of M. T. McArthur, Trus-

tee (later sueceeded by W. E. Richardson, Trustee), under

which the Tennessee Group acquired a 50% interest in a

bid then pending and unconfirmed, on a certain coal mine

and equipment, and a certain commissary stock of mer-

chandise and fixtures, in the State of Kentucky, and also

SEMI EARTH A AONE APRS I YE BENE RA AE Sit NOE aa

4

under which the two groups were to join in the formation

of two corporations to operate said properties and venture

and to receive the titles, each group to own 50% of the

stock of the corporations (R. I. 53). The bid was con-

firmed in the court in which the sale was ordered and

the corporations were chartered, the members of each group

subscribing to 50% of the stock (R. II, pp. 1-12; 44-46;

218-19; 320-21; R. IL, pp. 762-65). The Tennessee Group

put up their share of agreed working capital (R. II, 82;

320-23). However, no certificates of stock in the corpora-

tions were ever issued. The corporations went into pos-

session of the properties and immediately began successful

operations. The Kentucky Group, two of whom, J. E.

Johnson, Sr., and J. E. Johnson, Jr., were lawyers, held

the organization meetings of the corporations in Decem-

ber 1929, and January 1930, and unknown to the Tennessee

Group, attempted to allocate the entire capital stock to

themselves, in violation of the subscription agreements,

and elected themselves sole directors and officers, without

furnishing any minutes or records of the meeting to the

Tennessee Group, or giving them any information other

than that an organization meeting had been held (R. II,

pp. 46; 80-81; R. VI, pp. 1812-20). In the summer of

the year 1930, the Kentucky Group again unknown to

petitioners, purported to pay for this stock by entry of

accounts on the books in their favor as alleged salaries

and charging these with alleged payments for stock. The

original sale of the coal properties was reversed on appeal

in May, 1930, but the corporation remained in possession

under an interim lease with the receiver, and at the second

sale held in the autumn of 1930, the coal properties were

purchased for the Blue Grass Mining Company, which

paid for them after the second bid and sale was affirmed

on appeal. The original sale of the commissary stock of

merchandise and fixtures was never reversed.

5

In February, 1931, the Tennessee Group were induced

by fraudulent representations of the Kentucky Group,

to sign, through their representative, W. E. Richardson,

Trustee, a purported agreement’ the effect of which would

have been to reduce their stock interest in the corpora-

tions from 50% to 30% (Findings of Fact 22-23, R. I,

p. 391).

The Tennessee Group kept in touch in a general way with

the enterprise, but were not furnished statements, and knew

nothing of the financial matters. Repeated requests to the

Kentucky Group by the Tennessee Group to issue the stock

of the corporations be: vaded, the Tennessee Group de-

manded an audit, which, though at first resisted, was finally

made in 1935. This audit revealed that the Kentucky Group

had consistently used the funds of the corporations to pro-

mote their own interests and affairs, some of which had

been paid back with interest, most of it without interest,

and some not at all; that they had by the aid of corporate

funds acquired property in their own names adverse to the

interests of the corporation, and that they had withdrawn

under the guise of salaries to themselves, practically the

entire corporate earnings (R. I, p. 390).

At the first and only stockholders meeting ever called

and held on February 8, 1936, the Tennessee Group com-

plained that their entry into the alleged contract of Febru-

ary 18, 1931, reducing their stock interest to 30% in the

corporations had been fraudulently induced, and demanded

to participate as owners of 50% of the stock. The Ken-

tueky Group demanded that they participate as owners of

30% of the stock or leave the meeting. The Tennessee

Group did the latter, and filed this suit on the theory that

they were the undisputed owners of 30% of the stock of

the two corporations, and claiming to be the rightful owners

vi 50% of the stock, and also seeking an accounting on be-

half of the corporations and all stockholders, with the

Pee ee a eT aoe

fre

Cerrerene renin e AMR IAIN RE EO

6

Kentucky Group constituting their officers and directors

(R. I, pp. 1-53, 137, 144, 152, 182, 255, 326, 332, 391-2). The

Kentucky Group answered for themselves and the corpora.

tions denying that petitioners, the Tennessee Group, were

entitled to the ownership of any of the stock of either of the

corporations, or were entitled to an accounting (R. I, pp.

102, 157, 164, 211, 285, 339, 348).

Among other illegal acts the Kentucky Group loaned to

themselves, or to a corporation organized by them, labor,

material, and money to the extent of thousands of dollars

to start another coal mining operation under the name of

Black Gold Mining Company, on lands adjoining Blue

Grass Mining Company properties, mining the same seams

of coal, and entering a competitive market with Blue Grass

coals. The Kentucky Group put little, if any money into

this proposition, though they borrowed some money for it,

to be repaid on a per ton basis, which together with Blue

Grass Mining Company money, financed it. This Black

Gold Mine proved a profitable enterprise from the begin-

ning, and members of the Kentucky group repaid the money

which they borrowed for it from its earnings, and drew

large sums as salaries therefrom at the same time they

were drawing large sums from Blue Grass Mining Com-

pany and Pendleton Store, Inc., under the guise of sala-

ries (R. I, pp. 399-400).

Had the Kentucky Group been working in the interest

of Blue Grass Mining Company instead of their own in-

terest, this Black Gold property would have been acquired

in its name instead of theirs. The properties adjoin the

Blue Grass properties and carry the same seam of coal (R.

II], pp. 616-17). The coal is sold in the same market and

office, buying and selling facilities are shared (R. III, p.

753; R. IV, pp. 1098-9, 1203-6; R. V, pp. 1523-27). They

have a common executive and supervisory management and

are operated practically as one property, except the profits

hh age

7

go to different sources. The property would have been

advantageous to Blue Grass, respondent Johnson, Sr., tes-

tifying that one reason for its organization was that Blue

(irass needed additional tonnage for efficient conduct of its

sales facilities (R. VI, p. 1749).

The Kentucky Group were guilty of many other acts of

misconduct and breach of trust, too numerous to mention

here.

In that phase of their suit on behalf of the corporations

and all stockholders, against said Kentucky Group, peti-

tioners, among other things sued (1) to compel the mem-

bers of the Kentucky Group as recreant trustees, to refund

to the treasuries of the Blue Grass Mining Company and

Pendleton Store, Inc., the funds withdrawn by them as

alleged salaries, and (2) to require them to issue to Blue

Grass Mining Company the stock of Black Gold Mining

Company, and its subsidiary holding company, Jeda Coal

Company, because said last named corporations had been

financed with Blue Grass Mining Company funds.

The first of these prayers was granted in part, the trial

court requiring a part of the so-called salaries to be re-

funded to the corporate treasuries, that although the mem-

bers of the Kentucky Group would be required to make

restitution for their fraudulent breach of trust, they would

not be penalized by denial of compensation, and would be

allowed reasonable salaries. As to the second proposition,

the trial court held that, although the use of the trust funds

by the Kentucky Group in promoting Black Gold Mining

Company was wrong and indefensible, the money was re-

paid and the Company sustained no loss, and, therefore, the

Kentucky Group should be allowed to keep this property

and the salaries they had drawn therefrom (R. 339-400).

See W. E. Richardson v. Blue Grass Min. Co., et al.,

29 Fed, Supp. 658 (R. I, p. 358).

a

*<

8

The Cireuit Court of Appeals affirmed the decree of the

District Court, without opinion (R. VI, p. 2183).

IIT.

Findings and Decree of Courts Below.

The action of the District Court, affirmed by the Court of

Appeals, which forms the basis of petitioners’ complaint

here, may best be illustrated and most succinctly presented

by the two quotations following from the findings of fact

and cone!usions of law by the learned trial Judge, pursuant

to which decree was entered, to-wit:

‘While the members of the Kentucky group have

been guilty of fraudulent breach of trust in using the

funds of .the affiliated corporations to finance various

corporations and enterprises organized or promoted

by them, in the purchase of property necessary or ad-

vantageous to the corporations for their personal gain

and enrichment, in denying to Blue Grass Mining Com-

pany title to properties purchased by or for it and paid

for by it, in attempting to appropriate to themselves

all the capital stock of Blue Grass Mining Company,

Pendleton Store, Inc., and Blue Grass Coal Company,

and in attempting to exclude complainants as rightful

and bona fide stockholders of Blue Grass Mining Com-

pany and Pendleton Store, from all interest in or benefit

of the corporations and their assets, and in other ques-

tionable transactions, for these derelictions the Court

will require full restitution, and equity does not de-

mand that they be denied reasonable compensation for

their services. There is room for judicial discretion.

I conclude therefore, that reasonable compensation for

services of the Kentucky group for the period ending

March 1, 1937, would be: J. E. Johnson, Sr., $5000.00

per annum, or a total of $35,833.32; William Pendleton

$4,800.00 per annum, or a total of $34,400.00; J. E.

Johnson, Jr., $2,400.00 per annum, or a total of $17,

200.00; Arch Pendleton $3,000.00 per annum, or a total

of $21,500.00.” (R. I, p. 416.)

9

‘*With the aid of funds and credits advanced by Blue

Grass, Black Gold became an operating company and

began shipping coal in January or February, 1931,

before any funds were put into it by its organizers and

stockholders in March and April, 1931. From the

operation of the business of Black Gold and Jeda Com-

panies, J. E. Johnson, Sr., J. E. Johnson, Jr., and Wm.

Pendleton, received substantial annual salaries. Such

use of the assets of Blue Grass Mining Company was

clearly wrong and indefensible, but the evidence shows

that for all services rendered and credit extended to

Jeda and Black Gold, Blue Grass Mining Company

has been fully paid and that all loans or advancements

made have been repaid with interest. While it is true

that the aid received from Blue Grass Mining Com-

pany was a substantial advantage to the Kentucky

group in promoting their interests in Black Gold and

Jeda, the claim that these corporations were financed

entirely by Blue Grass Mining Company is not sus-

tained by the evidence. Blue Grass Mining Company

appears to have suffered no actual loss on account of

any of these transactions.’’ (R. I, p. 400.)

Other findings are pertinent, but the above quotations

present the issue clearly and in the shortest possible space.

IV.

Jurisdiction and Reasons for Invoking.

Jurisdiction of this Court is invoked under U. S. Code

Annotated, Title 28, Section 347, as amended by the Act of

February 13, 1925, C. 226, See. 1, 43 Stat. 938; Jan. 31, 1928,

C. 14, See. 1, 45 Stat 54; June 7, 1934, C. 426, 48 Stat. 926,

Rule 38 Sub. See. 5(b), and See. 34 Judiciary Act of Sept.

24, 1789, Ch. 20, U. S. C. A. 725, and Erie R. Co. v. Thomp-

kins, 304 U. S. 64, 82 L. Ed. 1188.

The reasons for invoking the jurisdiction of this Court

are three fold.

2r

10

First: That the common law of Kentucky concerning

compensation of trustees, as determined by the highest court

of that state, may be applied.

Second: That there may not result from the opinion of

the District Court (29 Fed, Supp. 658), and decree thereon,

and from the decree of the Cireuit Court of Appeals affirm-

ing same, any confusion in or modification of the repeated

decisions of other Cireuit Courts of Appeals, and of this

Court to the effect that a Trustee found guilty of wilful and

fraudulent breach of his trust will not be allowed compen-

sation or be permitted to keep the gains from his fraudu-

lent manipulation of the trust funds.

Third: that there may be no deviation from or weak-

ening of the rule, repeatedly announced by this and other

courts, that one who gains through the wilful and fraudu-

lent misuse of trust money and property will be required

to disgorge his illegal gains and be penalized by denial of

compensation. This rule is so fundamental to business

and civic morality and to the preservation of society itself,

that its slightest relaxation, even in matters of private

enterprise, must be charged with a public interest.

V.

Questions for Decision.

We, therefore, present to this Court for decision but

two questions, to-wit:

(1) Whether or not managing and controlling directors

and officers of a Kentucky corporation, administering their

trust in Kentucky, who are found to be guilty of wilful

and fraudulent breach of trust imposed upon them by law

as such, and who finally denounce their trust and seek to

appropriate to themselves the entire trust estate, are

entitled to any compensation, under the applicable law

—

11

of Kentucky, or the law as announced by this Court and

the courts of other Circuits.

(2) Whether or not officers of a corporation who have

used the funds and credit of the corporation to acquire

other property, the ownership of which would be advanta-

geous to the corporation, and have wilfully and wrongfully

used the credit of the corporation to promote and organize

corporations for the exploitation of the property so acquired,

are entitled to the ownership of the property so acquired,

and the stock in the corporations so organized, as between

them and the parent corporation so entrusted to them.

VI.

Probable Errors.

We submit that the Courts below probably erred in the

application of the law to the facts as found. According to

the opinion and findings of the learned trial Judge, equitable

principles had to be called in to extricate the guilty trus-

tees from the position in which their misconduct has placed

them. Equity is a protection for the innocent and should

never be a shield for the wrongdoer. Therefore, the prob-

able errors consist in

(1) Failure to give effect to the applicable Kentucky law

as to compensation for trustees guilty of wilful and fraudu-

lent breach of trust.

(2) Allowing ‘‘reasonable’’ or any compensation to trus-

tees guilty of wilful fraudulent misconduct, and who attempt

to appropriate to themselves the entire property enirusted

to them, and who, in the final accounting, denounce their

trust.

(3) In allowing such trustees to hold property acquired

by the use of trust funds, which property would be advan-

12

tageous to the trust estate or would be harmful in the hands

of strangers to the trust estate.

(4) In resorting to the aid of equity to extricate the

wrongdoers from the difficulties in which they had placed

themselves.

WHEREFORE your petitioners respectfully pray that a

writ of certiorari issue out of and under the seal of this

Honorable Court, directed to the United States Circuit

Court of Appeals, Sixth Circuit, commanding that Court to

certify and send to this Court for its review and determi-

nation on a day certain to be therein named, a full and com-

plete transcript of the record and all proceedings in the

case numbered and entitled on its docket Blue Grass Min-

ing Company et als., Appellants and Cross-Appellees, y.

W. E. Richardson, Trustee, ete., et als., Appellees and

Cross-Appellants, numbers 8870-8871; that the judgment

of the said Circuit Court of Appeals may be reversed by

this Honorable Court, and that petitioners may have such

other and further relief in the premises as may seem meet

and just. And Petitioners will ever pray.

W. E. Ricuarpson, Trustee, etc., et als.,

Cross-Appellants, Petitioners,

By Battey P. Woorron,

Wo. Ernest Fautxner,

A. B. Bowman,

J. R. Smmmonps,

Their Attorneys.

Battey P. Woorton,

Wo. Ernest Fau.xner,

Stmmonps & Bowman,

Counsel for Petitioners.

SAOSIN aN RBA ta Doge Oe iC Ore ear Aaa PLGERIE NL IT bah PLONE OR x