On appeal from a judgment of the Superior Court, Chancery Division, where the following opinion was filed.
For affirmance -- Chief Justice Vanderbilt, and Justices Heher, Oliphant and Wachenfeld. For modification -- Justices Burling, Jacobs and Brennan. Burling, J. (dissenting in part). William J. Brennan, Jr., J. (dissenting in part). Jacobs, J., joins in this dissent.
"This suit arises out of a transaction occurring July 19, 1951 whereby defendant Elton Risley, president, director and the holder of the majority stock of the corporate plaintiff, purchased from the corporate plaintiff, at a price of $100 per share, 365 shares of the common capital stock of Margate Bridge Company, a New Jersey corporation, thereby acquiring effective control of Margate Bridge Company by reason of his ownership of a majority of its capital stock having voting rights.
"By their complaint filed in this cause November 14, 1951, plaintiffs seek a judgment setting aside sale of the stock of said bridge company to the defendant Elton Risley upon repayment to him of the price paid for said stock, and to compel him to account for all dividends received by him on said stock since July 19, 1951.
"By his cross-complaint filed November 28, 1952, Elton Risley, plaintiff in the cross-action, seeks certain affirmative relief against the defendants above named in the cross-action, growing out of the sale and transfer on August 1, 1951 by the said Elton Risley to Carl F. Risley of 2,790 shares of common no par value capital stock, and 1,195 shares preferred stock, of the par value of $100 per share, of the plaintiff Hill Dredging Corp., for a price of $87,500. That sale represented a transfer of the controlling interest in Hill Dredging Corp. In his cross-complaint, the said Elton Risley charges defendant Warner Lindsay, Jr., with a breach of trust in Lindsay's relation as agent for Elton Risley in the sale of said stock last mentioned; charges all of the defendants named in the cross-action with participation in the breach of trust charged to the agent Warner Lindsay, Jr.; alleges a conspiracy between and among the defendants named in the cross-action and with the perpetration of a fraud upon him, the said Elton Risley, and demands (1) an accounting of all gains and profits accruing to them, defendants in the cross-action, by reason of their alleged misconduct; (2) directing defendants to repay to him the sum of $4,375, with interest, paid by the said Elton Risley to Warner Lindsay, Jr., as commission for Lindsay's services as agent in effecting the sale of the stock last mentioned; (3) damages in an amount equal to all monetary gains or benefits realized by the defendants by reason of the matters complained of in the cross-complaint; (4) punitive damages of $25,000 against the defendants named in the cross-complaint; (5) and such further relief as may be found equitable and just.
"From the large volume of proofs, including exhibits, submitted in this case, I find the essential facts involved in this controversy to be as follows:
"Plaintiff, Hill Dredging Corp., is engaged in the business of hydraulic dredging along the eastern seaboard, particularly in the bays and rivers of New Jersey, and in the prosecution of that business operates a number of power dredges including necessary pipes and other equipment. It is a sizable
corporation showing total assets as of June 30, 1951 of $783,778.64 (Exhibit D-27) with total capital and surplus of $338,292.09. The hydraulic dredging business now carried on by Hill Dredging Corp. was originally established by Nathan Risley prior to the turn of the century and operated as a partnership under the name of N. Risley and Sons, the partners being Nathan Risley and his sons, of whom the defendant Elton Risley was one. This partnership business was taken over in 1912 by Hill Dredging Co., which operated until 1930 when Hill Dredging Corp. was organized and took over the assets of Hill Holding Co. and the business and assets of Hill Dredging Co.
"Upon organization of the Hill Dredging Corp. in 1930, defendant Elton Risley and his brother, Freeman Risley, held equal amounts of the capital stock of the corporation and they together controlled the corporation by virtue of their ownership of more than 50% of the voting stock. At the organization meeting of the corporation held June 3, 1930, Elton Risley, Freeman Risley and E. Bertram Wright were elected directors, and at the first directors' meeting held the same date Elton Risley was elected president, Freeman Risley vice-president, and E. Bertram Wright secretary and treasurer. Freeman Risley died in 1931 and his stock in the corporation passed by his will to his widow, Sarah J. Risley. Elton Risley served as president and director of the corporation continually from June 3, 1930 until August 1, 1951. E. Bertram Wright served as a director and officer from 1930 until March of 1951. After the death of Freeman Risley, Elton Risley acquired sufficient additional capital stock to give him absolute voting control of the corporation and he has been the chief executive officer and dominated the affairs of the corporation until August 1, 1951. From the organization of the corporation in 1930 until the middle of September 1951, the business and executive offices of the corporation were located in the home of Elton Risley at 5601 Atlantic Avenue, Ventnor City, the corporation occupying offices and workrooms in the basement and on the first floor of the Elton Risley home.
"On August 1, 1951 and for some years prior thereto, there were a total of 5,454 shares of common capital stock and a total of 2,727 shares of preferred capital stock of Hill Dredging Corp. issued and outstanding, divided among the several shareholders up to August 1, 1951 as follows:
Sarah J. Risley 1790 1195
Estate of Jacob Schlumberger 30 15
Voting rights in the corporation were limited to the common stock.
"August 1, 1951 all of the common and preferred stock of Hill Dredging Corp. registered in the name of the defendant Elton Risley was sold and transferred to Carl F. Risley, thus eliminating Elton Risley as a stockholder and director and increasing Carl F. Risley's holdings to 2,794 shares of common and 1,197 shares of preferred stock.
"July 22, 1952 all of the common and preferred stock owned by the estate of Jacob Schlumberger was purchased by the corporation, to be held as treasury stock.
"It will be observed that up to August 1, 1951, defendant Elton Risley owned more than 50% of the total outstanding common stock, in which the voting rights were vested.
"About the middle of September 1951 the offices and workrooms of Hill Dredging Corp. were removed from the home of Elton Risley at 5601 Atlantic Avenue, Ventnor City, to 921 North Missouri Avenue, Atlantic City, N.J.
"For some time prior to August 1, 1951, the directors of Hill Dredging Corp. were Elton Risley, Harry A. Kaupp and Carl F. Risley. E. Bertram Wright had also been a director for some years prior to his resignation in March of
1951. After the resignation of Wright, the board was reduced to three members by amendment of the by-laws.
"At and prior to August 1, 1951, the officers of Hill Dredging Corp. were Elton Risley, president; Harry A. Kaupp, vice-president; Carl F. Risley, secretary and treasurer; and Laura O. Lindsay, assistant secretary and assistant treasurer.
"Respecting Margate Bridge Co., control of that property was acquired by Hill Dredging Corp. at purchase at foreclosure sale. For some years prior to July 19, 1951 it had issued and outstanding 800 shares of common capital stock, 800 shares of Class A preferred stock, and 800 shares of Class B preferred stock. Exclusive voting rights were lodged in the common stock. The common stock was held as follows:
Sarah J. Risley, Ex. 43.4
"The 74.1 shares of common stock registered in the name of Carl Risley were beneficially owned by Hill Dredging Corp.
"In July of 1951 the directors of the Bridge Company were Elton Risley, F. William Schwiers, Carl F. Risley, Robert K. Bell and Harry A. Kaupp. The officers were Elton Risley, president; Carl F. Risley, vice-president; F. W. Schwiers, Jr., second vice-president; Harry A. Kaupp, treasurer; and Laura O. Lindsay, secretary.
"It is to be noted that Hill Dredging Corp. owned 541 shares, out of a total of 800 shares, of the common capital
stock of Margate Bridge Co., thus having effective voting control of the Bridge Co. -- and in addition it owned beneficially 74.1 shares registered in the name of Carl Risley.
"The Margate Bridge Co. owns and operates a toll road and bridges leading from Margate westwardly across the meadows toward the mainland. The company owns four bridges and 1.3 miles of improved roadway. The length of the four bridges were, respectively, 554, 706.8, 814, and 350 feet.
"In the year 1951, Elton Risley as president, Carl Risley as vice-president, and Kaupp as treasurer, each drew $100 per week salary from the bridge company. And they drew salaries in somewhat lesser amounts for the years 1946 to 1950, both inclusive. A comparative operating statement of the bridge company (Exhibit P-3) exhibit for the years 1946 to 1951, inclusive, the following items:
1946 1947 1948 1949 1950 1951
47,741 60,709 65,233 74,203 89,155 106,093
21,882 20,308 17,522 21,558 42,779 42,277
16,116 15,708 13,616 15,918 28,265 20,401
"Class A and Class B preferred stock of the bridge company were each entitled to $3 per share per annum, with no dividends to be paid on the common unless dividends on the preferred A and preferred B stock had been paid in full. Preferred A stock was entitled to preference on liquidation over both common stock and preferred B stock, and preferred B stock on liquidation was entitled to preference over the common stock.
"On July 19, 1951 defendant Elton Risley owned 43.4 shares of common stock of the bridge company as shown above. On that date he purchased from Hill Dredging Corp.
292 shares of the bridge company stock and he also purchased 73 additional shares of common stock, beneficially owned by the corporation but registered in the name of Carl Risley at a price of $100 per share. This purchase of 365 shares of common stock of the bridge company by Elton Risley, added to the 43.4 shares he already owned, gave him a total of 408.4 shares of the common capital stock of the bridge company, out of a total of 800 shares outstanding, thus vesting in Elton Risley voting control of the bridge company.
"Dividends on its common stock were paid by the bridge ...