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Hill Dredging Corp. v. Risley

New Jersey Supreme Court


Decided: May 16, 1955.

HILL DREDGING CORP., A CORP., ETC., SARAH J. RISLEY, CARL F. RISLEY, HARRY A. KAUPP, E. BERTRAM WRIGHT AND HELEN M. WRIGHT, PLAINTIFFS-RESPONDENTS,
v.
ELTON RISLEY, DEFENDANT-APPELLANT, AND LAURA O. LINDSAY, WARNER LINDSAY, JR., AND ALPHONSE W. KELLEY, ADDITIONAL DEFENDANTS-RESPONDENTS

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.

Per Curiam

[18 NJ Page 506]

"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.

[18 NJ Page 507]

"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

[18 NJ Page 508]

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.

[18 NJ Page 509]

"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:

Common Preferred

Stock Stock

Elton Risley 2790 1195

Sarah J. Risley 1790 1195

Carl F. Risley 4 2

Harry A. Kaupp 440 120

E. Bertram Wright 10 5

Helen M. Wright 390 195

Estate of Jacob Schlumberger 30 15

Totals 5454 2727

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

[18 NJ Page 510]

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:

Elton Risley 43.4

E. Bertram Wright 1.

F. Wm. Schwiers, Jr. 80.

Carl Risley 74.1

Robert K. Bell 4.

Andrew K. Littlefield 2.

Sarah J. Risley, Ex. 43.4

Helen M. Wright 6.2

Jacob Schlumberger .5

Harry A. Kaupp 4.4

Hill Dredging Corp. 541.

-----

Total 800.

"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

[18 NJ Page 511]

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

Total income

(omitting cents)

47,741 60,709 65,233 74,203 89,155 106,093

Net income before

income tax

21,882 20,308 17,522 21,558 42,779 42,277

Remaining net income

after taxes,

depreciation and

all charges

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.

[18 NJ Page 512]

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 company as follows:

1947 $10 per share

1948 0

1949 $10 per share

1950 $10 per share

1951 $20 per share

"The price of $100 per share paid by Elton Risley to Hill Dredging Corp. for the stock of the bridge company was a price fixed by him. There had been no sales of the stock of the bridge company such as would establish a market price, nor did Elton Risley discuss with the other stockholders of the Hill Dredging Corp., or with his fellow directors or officers, the fair value of the stock or the price that should be paid for the same upon a sale.

"Matthew J. McQuillan, an expert called by plaintiffs, is an architect and appraiser employed by the American Appraisal Company for the past 36 years. He made a detailed inspection of the Margate Bridge property over a period of some six days and gave much detail and information respecting its construction, conditions, costs, etc.

"Archibald B. Hossack, an expert called by plaintiffs, is president and a director of American Appraisal Company, a civil engineer, and he gave detailed testimony respecting the cost of construction of the bridge and roadway and expressed the opinion that the common stock of the bridge company as of July 19, 1951 was fairly worth $300 per share.

"Paul Penhune, a civil engineer called as an expert by defendant, inspected the bridges and roadway on December

[18 NJ Page 513]

5, December 10 and December 17, 1952, and gave detailed testimony respecting the cost of the works, replacement cost, condition of the bridge, etc.

"Clinton D. Hanover, Jr., a consulting engineer and partner in the firm of Hasdesty and Horner, with much experience in bridge construction, was called as an expert by the defendants and gave detailed testimony respecting the cost of construction, cost of reproduction less depreciation, and expressed the opinion that the property had a net valuation of $729,000.

"Herbert F. Atwater, an investment banker, called as an expert by defendant, expressed the opinion, in view of the data theretofore submitted by other experts, that the stock of the bridge company had a maximum value of $89.26 per share.

"All of the stockholders of Hill Dredging Corp., excepting only the estate of Jacob Schlumberger, have joined Hill Dredging Corp. as plaintiffs in this suit. Stock of the estate of Jacob Schlumberger was purchased by the corporation July 22, 1952 and held as treasury stock.

"The names of the principal actors in this controversy, together with brief designations of their connection with the matters, are as follows:

"Elton Risley, a director and president of Hill Dredging Corp. from June 1930 to August 1, 1951. He owned a majority of the voting stock of Hill Dredging Corp. and dominated the affairs of that corporation. He was also a director and president of Margate Bridge Co. He was 82 years of age in June of 1953.

"Florence Risley is the wife of Elton Risley.

"Freeman Risley, deceased. He was brother of Elton Risley; he died in 1931; held an equal amount of stock in Hill Dredging Corp. with Elton Risley; was the husband of Sarah J. Risley and the father of Carl F. Risley. He was elected a director and officer of Hill Dredging Corp. upon its organization in June of 1930.

"Sarah J. Risley, the widow of Freeman Risley and the mother of Carl F. Risley. By the will of her husband

[18 NJ Page 514]

Freeman she took all of his stock in Hill Dredging Corp., but up to August 1, 1951 was never an officer or director of the corporation, nor did she participate or pay much attention to the business of the corporation. She was 84 years of age in September 1953.

"Carl F. Risley, son of Freeman and Sarah Risley, and nephew of Elton Risley. He has been employed by Hill Dredging Corp. for some 40 years, ever since he was a boy. For the past few years he has been a director in both Hill Dredging Corp. and in Margate Bridge Co., and was secretary and treasurer of the dredging company and vice-president of the bridge company. His stock holdings in the two corporations were merely nominal.

"Harry A. Kaupp has been employed by the dredging company for about 25 years; a director of the dredging company for eight years prior to August 1951; a director for some years in the bridge company, and up to August 1, 1951 was vice-president of the dredging company and treasurer of the bridge company.

"Laura O. Lindsay was not a stockholder in either the dredging company or the bridge company. She was assistant secretary and assistant treasurer of the dredging company and was secretary of the bridge company. She has been in the employ of Hill Dredging Corp. since its organization in 1930 and prior thereto was in the employ of and secretary of the old Hill Dredging Co.

"Warner Lindsay, Jr., a real estate broker in Atlantic City since 1910 and for several years last past an appraiser employed by the Federal Housing Administration. He acted as agent for Elton Risley in the sale of the latter's stock in Hill Dredging Corp. He is a brother of Laura O. Lindsay.

"E. Bertram Wright is one of the original stockholders in Hill Dredging Corp. and was in the employ of the company and served as a director and an officer from 1930 to March 1951 when he resigned.

"Helen M. Wright, an original stockholder in both the dredging company and the bridge company, not an officer or director of either corporation.

[18 NJ Page 515]

"Loretta A. Ortholf (Mrs. Rugan). Not an officer or director of either corporation. Employed as a bookkeeper by Hill Dredging Corp. since 1927 and by the bridge company since 1949.

"Herbert Horn, Esquire, attorney for both the dredging company and for Elton Risley personally.

"William C. Boyer, executive vice-president, the Boardwalk National Bank in Atlantic City.

"Elwood Kirkman, Esquire, president of the Boardwalk National Bank and member of the firm of Kirkman, Mulligan & Harris, attorneys.

"Alphonse W. Kelley of Barnegat, N.J., cashier of the First National Bank of Barnegat and a real estate and insurance broker.

"Dealing first with the purchase by Elton Risley from Hill Dredging Corp. of 365 shares of the common capital stock of Margate Bridge Co. at a price of $100 per share on July 19, 1951: At the time Elton Risley was president, director and owner of the majority stock of Hill Dredging Corp. He had been contemplating prior to July 19, as hereinafter mentioned, the sale of all of his stock in Hill Dredging Corp. While Hill Dredging Corp. was not insolvent and was a going operating concern, in the spring and summer of 1951 it was rather hard pressed for liquid funds and had outstanding obligations with the banks and with other creditors that it was unable to meet with current funds on hand, although it possessed large assets of a non-liquid nature. Prior to July 1951 Elton Risley personally had lent Hill Dredging Corp. the sum of $20,000, in which amount it was indebted to him. On July 10, 1951 he lent the Hill Dredging Corp. an additional $7,500. The $7,500 was repaid to Elton Risley a few days later. The minutes of a meeting of the board of directors of Hill Dredging Corp. held July 10, 1951 recite that Elton Risley had theretofore lent Hill Dredging Corp. the sum of $20,000 and was going to make a further loan of $15,000 (in fact, he made an additional loan of only $7,500). At that meeting he requested that the Margate Bridge Co. stock then held in the name of Carl Risley, but belonging to Hill

[18 NJ Page 516]

Dredging Corp., be transferred to him as collateral security for said loans and that a note for $35,000, to be dated July 10, 1951 and payable on or before September 10, 1951, be given him as evidence of the proposed total indebtedness.

"On or about July 17 or 18, 1951 (at which time Hill Dredging Corp. was indebted to Elton Risley for loans aggregating $20,000) Elton Risley discussed with his fellow directors, Harry Kaupp and Carl Risley, the subject of Hill Dredging Corp. pledging with him as security for said indebtedness the stock in the bridge company owned by Hill Dredging Corp., and both Kaupp and Carl Risley acquiesced in that suggestion.

"On July 18, 1951 Mr. Kaupp left on a business trip to Florida for the Hill Dredging Corp. and he returned from Florida on a Sunday, either July 22 or July 29, the date of his return being uncertain from the proofs submitted. In any event, he was out of the State of New Jersey on July 19, 1951. The same day that Kaupp departed for Florida, but after his departure, Elton Risley informed Carl Risley that he had decided to buy the bridge company stock instead of having it put up with him as collateral to secure loans. Carl Risley objected but Elton Risley said that was what he wanted and that was the way it was going to be, and further remarked, in substance, that he would get the bridge company stock even if he had to call his loan due by the dredging company and another loan owed to the bridge company by the dredging company. That was the first occasion upon which there had been any discussion concerning the sale by the dredging company of its stock in the bridge company.

"The following morning, July 19, 1951, Attorney Herbert Horn appeared at the company's office in Elton Risley's home at 5601 Atlantic Avenue, Ventnor, N.J., with a set of minutes for a meeting of the board of directors and with a resolution already drafted; a directors' meeting was called with Elton and Carl Risley present, Mr. Kaupp being away in Florida, and a resolution was thereupon adopted that Hill Dredging Corp. sell to Elton Risley 292 shares of common stock of Margate Bridge Co. owned by the dredging company

[18 NJ Page 517]

at a price of $100 per share ("which is declared to be the fair value of each share of said stock"). That was the only business transacted at the meeting. The minutes do not show a roll call or vote on the resolution but recite that it was unanimously adopted. The minutes prepared by Attorney Horn are signed by Carl F. Risley as secretary (Exhibit P-2). Annexed to the minutes is a waiver of notice of the meeting of the directors to be held July 19, 1951, signed by all three directors, including Harry A. Kaupp, and also annexed to the minutes is a statement in writing, signed by Harry A. Kaupp, reciting that he was not able to be present at the meeting of the board held July 19, 1951, but had read the minutes of the meeting and approved the same including the action taken at the meeting. Mr. Kaupp signed this waiver of notice of meeting and his approval of the action, as above mentioned, after his return from Florida and under date of July 31, 1951. The meeting of July 19, 1951 was not a regular meeting of the board, nor was any prior notice, verbal or otherwise, given of the fact that the meeting was to be held.

"The transaction of the purchase of the bridge company stock was consummated on July 19, 1951. On that date Elton Risley delivered his check to the order of Hill Dredging Corp., for $29,200, which check is made payable to Hill Dredging Corp. dated July 19, 1951, and was deposited to the credit of Hill Dredging Corp. on that date. It was so deposited at the instruction of Elton Risley, president.

"On the same date Elton Risley drew his check to the order of Carl Risley for $7,300 in payment for 73 shares of the bridge company stock registered in the name of Carl Risley, but beneficially owned by Hill Dredging Corp. The check is dated July 19, 1951, drawn to the order of Carl Risley for $7,300 and is endorsed on the back by Carl Risley payable to the order of Hill Dredging Corp. The check was never cashed and the maker's signature is torn therefrom. Elton Risley later gave another check for $7,300, likewise dated July 19, 1951, payable to the order of Carl Risley, and endorsed by Carl Risley and Laura Lindsay. That check was

[18 NJ Page 518]

paid by the bank. The first $7,300 check was not cashed or paid for the reason that it had been endorsed making it payable to Hill Dredging Corp. and at the instruction of the corporation's auditors it was desired not to show the connection of Hill Dredging Corp. with the transaction. The second check for $7,300 was cashed by instruction of Elton Risley; the currency returned to the office of Hill Dredging Corp. and delivered to Elton Risley; and was by him placed in a box in his safe and held as currency. When the dredging company moved its offices from Elton Risley's home to an address on North Missouri Avenue, Atlantic City, in the middle of September 1951, the $7,300 currency representing the proceeds of said check was still in the possession of Elton Risley and presumably is still in his possession. The Hill Dredging Corp. officers refused to take the money. Transfer of the 292 shares of bridge company stock from Hill Dredging Corp. to Elton Risley and transfer of the 73 shares of bridge company stock from the name of Carl Risley (beneficially owned by the dredging company) to Elton Risley was accomplished on July 19, 1951.

"Carl Risley claims that he did not vote in favor of the resolution authorizing the sale of the bridge company stock and claims that when his name was called he answered by saying, "What can I do?" Be that as it may, however, as secretary he signed the minutes of the directors' meeting of July 19, 1951.

"Mr. Kaupp, one of the directors of the dredging company, did not learn of the sale of the bridge company stock to Elton Risley until his return from Florida on either July 22 or July 29, the date of his return being somewhat uncertain. In fact, he did not learn of it until July 31, 1951 in the office of Attorney Horn where he signed the waiver of notice of the meeting held July 19, 1951 and also the statement approving the action taken at that meeting at which Kaupp was not present. Kaupp also signed the new certificates issued by the bridge company to Elton Risley, the one for 292 shares and the other for 73 shares, both of which are dated July 19, 1951 (a date when Kaupp was away in

[18 NJ Page 519]

Florida). He signed the certificates at the same time he signed the waiver of notice of meeting and the approval of the action taken at the meeting on July 31, 1951.

"Dealing secondly with the sale by Elton Risley on August 1, 1951 of all of his stockholdings in Hill Dredging Corp. to Carl F. Risley: I find that by reason of advancing age and physical and mental condition, Elton Risley for some years prior to 1951 desired to be relieved of his responsibilities as a director and officer of Hill Dredging Corp. and contemplated disposing of his stock in that corporation. As early as 1949, Elton Risley discussed with his fellow directors and officers, Mr. Kaupp and Carl Risley, a plan looking to Elton's retirement from connection with Hill Dredging Corp. Griffith and Co., certified public accountants, employed by the corporation, at the request of Elton Risley transmitted to him under date of March 9, 1949 a plan they had formulated, apparently after considerable prior discussion, contemplating the surrender by Elton Risley of his stock in the Hill Dredging Corp., for the considerations hereinafter mentioned, and his retirement from the corporation. By the terms of the plan formulated by Griffith and Co. and submitted to Elton Risley, Elton Risley would have transferred to Carl Risley 400 shares of the common capital stock of the dredging company; transferred 500 shares of preferred stock and 1,000 shares of common stock of the dredging company to Mr. Kaupp; and transferred directly to Hill Dredging Corp. the balance of his stock consisting of 695 shares of preferred and 1,390 shares of common, in consideration where of the Hill Dredging Corp. and its stockholders were to execute a bond guaranteeing that the corporation would pay to Elton an annuity of $6,000 for the remainder of his life and a further annuity, after the death of Elton Risley, of $4,000 to Florence Risley, wife of Elton, for the balance of her life, with the proviso, however, that neither annuity should take effect so long as Elton remained in the employ of Hill Dredging Corp. at a salary of not less than $7,500 per annum. The plan further contemplated that to guarantee payment of the annuities, the dredging company should transfer to Elton as collateral the

[18 NJ Page 520]

controlling stock interest it owned in the bridge company. A contract to carry the plan into effect was drafted by Attorney Horn in June of 1949 but was never executed. Various objections to the proposition were registered by Mr. Kaupp and also by Sarah J. Risley and by Carl F. Risley. Several revisions of the form of agreement seem to have been drafted and discussed during the years 1949, 1950 and 1951, but no agreement was ever reached and no contract was ever executed. Had the plan been consummated, voting control of the dredging company would have become vested in Carl Risley and Sarah J. Risley, his mother, by virtue of their combined ownership of 2,190 shares of common capital stock, bearing in mind that the total of 5,454 shares of common stock outstanding would have been reduced by Elton transferring 1,390 shares of common stock directly to the corporation, so that the total of common stock issued and outstanding would then have been reduced under that plan to 4,064 shares of which Carl Risley and his mother Sarah would then have owned more than 50%.

"In December of 1950 or January of 1951 Warner Lindsay, Jr., real estate broker, while riding in an automobile with Elton Risley to inspect property known as the Fox Tract in West Atlantic City, casually suggested to Elton Risley that he should sell his stock in the dredging company and be relieved of further cares and responsibilities in that connection, Warner having learned through his sister Laura Lindsay that Elton contemplated retirement from the corporation. And Lindsay suggested to Elton Risley that there was a man in Ocean County with a son whom he thought he could interest in the matter. At that time Elton Risley responded that he was not ready to sell his stock.

"Again, about the Easter season in 1951, while Warner Lindsay and Elton Risley were out in an automobile together, Lindsay again mentioned or suggested that Elton Risley should dispose of his stock in the dredging company. Mr. Risley again responded that he was not ready to sell.

"Some time during this interval Mr. Lindsay stopped in to see his friend, Alphonse W. Kelley, in the Barnegat bank

[18 NJ Page 521]

and made the suggestion that they could perhaps organize a syndicate for the purchase of Elton Risley's stock in the corporation which would represent voting control of the corporation. Kelley expressed his interest and asked for further details.

"In the early part of July 1951 Elton Risley sent word to Warner Lindsay, Jr., through Warner's sister Laura, that he would sell his stock in the dredging company. He asked a price of $100,000 for all of his stockholdings, common and preferred. Lindsay immediately got in touch with Kelley at Barnegat, N.J., about the matter and Kelley asked for a financial statement and a copy of the audit of the dredging company; Lindsay reported Kelley's request back to Elton Risley and secured the latter's approval to exhibit such financial statements and audit to Kelley; about the middle of July 1951 Laura O. Lindsay and Warner Lindsay, Jr., her brother, drove to Barnegat, met Mr. Kelley, and exhibited to him financial and operating statements of the dredging company and exhibited a copy of the audit made by Griffith and Co. Lindsay informed Kelley that Mr. Risley was asking a price of $100,000 for his stock and suggested that they try to form a syndicate to purchase it. Kelley asked for a 60-day option to work on the matter and Mr. Lindsay reported that back to Mr. Risley. Elton Risley agreed to give a 60-day option, without any price being paid therefor. No option agreement was ever put in writing but the fact of the granting of a verbal option was communicated back to Mr. Kelley and Mr. Elton Risley appeared to regard the option as binding upon him. Kelley communicated to Lindsay a counter-offer of $80,000; Elton Risley reduced the price to $95,000; as the result of further negotiations and at the suggestion of Warner Lindsay, Jr., Elton Risley agreed to split the difference between $80,000 and $95,000 to the sum of $87,500. Kelley was the only person to whom Warner Lindsay tried to sell the stock. Mr. Kelley, with a view to forming a syndicate for the purchase of the stock, discussed the subject with two of his friends, namely, with former Congressman William H. Sutfin of Matawan, N.J., and with Steele

[18 NJ Page 522]

DuBosque, a New York investment banker with a home at Waretown in Ocean County, N.J. Those discussions were had sometime in the month of July 1951.

"The last Saturday in July 1951, namely, July 28, Warner Lindsay was in New York City. He received a telephone call from his sister Laura in Atlantic City indicating that arrangements were being made to have the minority stockholders of Hill Dredging Corp. purchase Elton Risley's stock and suggesting that he, Warner Lindsay, take no further steps looking to a sale of the stock to outside interests. The following Monday, July 30, on his way back from New York to Atlantic City, Lindsay stopped to see his friend Kelley at Barnegat, informed Kelley of the latest developments, and suggested to Kelley that he go along with the proposition and sell his option for $2,500. Kelley agreed.

"The prospect of Elton Risley selling out a controlling interest in Hill Dredging Corp. to a stranger was disturbing to Carl Risley, Laura Lindsay and Mr. Kaupp, all of whom worked for the Dredging Corp. for many years.

"In July when Carl Risley learned that Elton was definitely going to sell his stock in the dredging company, Carl talked to his Uncle Elton and made the suggestion that he, Carl, would buy the stock, although no price was mentioned. At that time Elton answered that Carl couldn't handle it and that he thought a man named Kelley was going to buy it.

"Sunday evening, July 22, there was a meeting at the home of Laura Lindsay in Somers Point at which Mr. and Mrs. Bertram Wright and Miss Lindsay were present, and a discussion was had concerning the proposal of Elton Risley to sell his controlling stock interest in the Hill Dredging Corp. A further meeting was arranged for the following Wednesday evening. Wednesday evening, July 25, there was a further meeting at the Wrights' home in Margate at which Mr. and Mrs. Wright, Mr. and Mrs. Carl Risley, and Warner and Laura Lindsay were present. Warner Lindsay spoke to the group of Elton's determination to sell his stock in the Dredging Corp. and a suggestion was made that Carl

[18 NJ Page 523]

should arrange to buy it. Ways and means were discussed by the group and someone suggested that Carl Risley see whether he could negotiate a loan at the bank sufficient to enable him to buy the stock. At that time Mr. Kaupp was away in Florida and was not present at the meeting. The next day, July 26, Carl Risley and Laura Lindsay went to the Boardwalk National Bank, spoke to Mr. Boyer, executive vice-president, on the subject, and made arrangements to meet Mr. Kirkman, president of the bank, the following morning, Saturday, July 28. There was a meeting July 28 at the bank between Mr. Kirkman, Carl Risley and Laura Lindsay, at which was discussed the determination of Elton Risley to sell his stock, the desire of Carl Risley to purchase it, and the possibility of a loan from the bank sufficient to enable Carl to make the purchase. Mr. Kirkman agreed to give the matter consideration and to inform them the following Monday, July 30. On Monday, July 30, the bank agreed to make a loan of $87,500 on a note to be signed by Carl Risley and his wife and by Sarah J. Risley, mother of Carl, and to be secured by all of Sarah J. Risley's stock and further secured by the stock Carl Risley was purchasing from Elton Risley, said stock to be posted as collateral for payment of the loan.

"Elton Risley was not informed by anyone that Carl Risley was to be the purchaser of the stock, but Elton Risley supposed that the stock was being taken up by A. W. Kelley and his associates.

"On or about July 30, or July 31, Warner Lindsay informed Elton Risley by telephone that the transaction of the sale of the stock was going to be consummated and requested that Elton Risley deposit his stock with Mr. Boyer at the Boardwalk National Bank with a sight draft attached for $87,500, and also requested Mr. Risley to send along a check for $4,375 in payment of Lindsay's 5% commission on the sale. Accordingly, on July 31, 1951, Elton Risley, accompanied by Mr. Kaupp, went to the office of his attorney, Mr. Herbert Horn, where a letter was prepared, directed to Mr. Kelley at the Boardwalk National Bank in Atlantic

[18 NJ Page 524]

City, and transmitting Elton Risley's certificates representing 2,790 shares of common and 1,195 shares of preferred stock of Hill Dredging Corp. Mr. Elton Risley and Mr. Kaupp delivered this letter, dated July 31, 1951 to Mr. Boyer at the Boardwalk Bank, and at the same time deposited with him the certificates of stock endorsed by Mr. Elton Risley for transfer in blank. At the bank Mr. Boyer prepared a letter dated July 31, 1951, addressed to himself, signed by Elton Risley, enclosing a sight draft for $87,500 drawn on A. W. Kelley of Barnegat, to which was attached the stock of the Hill Dredging Corp. in question, and authorizing delivery of the stock to Mr. Kelley, or his authorized representative, upon payment of the draft. Mr. Boyer likewise prepared the draft for $87,500, drawn on Kelley and signed by Elton Risley. The two letters, Elton Risley's stock endorsed in blank, and the draft for $87,500, were left at the Boardwalk Bank by Mr. Elton Risley with Mr. Boyer on July 31, 1951.

"Settlement was made at the bank on the morning of August 1, 1951. On a collateral note signed by Carl Risley and wife and also by Sarah J. Risley, secured by the collateral aforementioned, the bank advanced $87,500 required to pay the draft; Mr. Kelley signed an assignment of his rights in the stock to Carl F. Risley; Mr. Kelley was paid by the check of Carl F. Risley dated August 1, 1951 the sum of $2,500 for Kelley's surrender or assignment of his rights in the stock; a check of Elton Risley to the order of Warner Lindsay, likewise dated August 1, 1951, in the sum of $4,375, was delivered to Mr. Lindsay in payment of his 5% commission on the transaction; and at the same time Warner Lindsay lent to Carl F. Risley the sum of $2,500 and took Carl Risley's note therefor. The loan was made necessary because Carl Risley was not possessed of sufficient funds to complete the transaction at that time without the loan from Lindsay. The settlement was made in the office of Mr. Kirkman, president of the bank. Present at settlement were Carl Risley, A. W. Kelley, Francis Tanner, attorney for Mr. Kelley, Bertram Wright, Warner Lindsay, Jr., Laura Lindsay, Mr.

[18 NJ Page 525]

Boyer, executive vice-president of the bank, and Mr. Kirkman, president of the bank. Neither Elton Risley nor Mr. Kaupp were present at the settlement.

"The afternoon of August 1, 1951 a special meeting of the board of directors was held in Mr. Kirkman's office at which Sarah J. Risley was elected a director in place of Elton Risley who had become disqualified by having sold and transferred all of his stock in the dredging company; Mr. Kaupp was elected president, Carl F. Risley vice-president and treasurer, and Laura O. Lindsay secretary and assistant treasurer, of the Hill Dredging Corp.

"The afternoon of August 1, 1951 Mr. Kaupp informed Elton Risley that it was Carl Risley who had purchased Elton Risley's stock in the corporation and that he, Kaupp, had been elected president at a meeting held that afternoon. Elton Risley mentioned the matter to Carl Risley who confirmed the information. Thereafter Hill Dredging Corp. continued to occupy its offices in Elton Risley's home until about the middle of September 1951. Mr. Kaupp and Carl Risley were in frequent contact with Elton Risley during that period and received advices from Elton Risley on some matters affecting the Dredging Corp. Elton at no time during that period voiced any objection to the fact that Carl Risley had purchased Elton Risley's stock in the dredging company. In fact, the relations appeared to be friendly because Elton Risley offered to let the dredging company continue to occupy offices in his home at 5601 Atlantic Avenue, and the dredging company did continue to occupy said offices until about the middle of September 1951 when it moved to new offices on North Missouri Avenue, Atlantic City.

"At a meeting of the board of directors of the dredging company held September 4, 1951, a resolution was adopted authorizing Attorney Eugene N. Harris to inquire into the transaction whereby Elton Risley acquired from the dredging company stock of the Margate Bridge Co., and further resolving that pending completion of the investigation the corporation refrain from accepting the $7,300 from Elton Risley for the purchase of the 73 shares of the bridge company

[18 NJ Page 526]

stock registered in the name of Carl Risley but beneficially owned by the corporation.

"At a meeting of the board of the dredging company held September 21, 1951, Attorney Harris reported that he had discussed the matter with Attorney Horn, representing Elton Risley, and that Mr. Horn, after conferring with Elton Risley, had informed him that Elton Risley would not reassign the stock of the bridge company to the dredging company upon payment of the consideration price paid therefor by Elton, but would be willing to reassign the stock of the bridge company to the dredging company at the price paid by him if the shares of the Hill Dredging Corp. sold by Elton to Carl Risley, were transferred back to Elton Risley for the price paid therefor. A resolution was then adopted by the board demanding of Carl Risley a return of the 73 shares of common and 74.1 shares preferred A stock of Margate Bridge Company which belonged to the dredging company, but were registered in Carl Risley's name, and which common stock Carl Risley had theretofore on July 1951 transferred to Elton Risley. The resolution further provided that demand be made upon Elton Risley for the return of 292 shares of the bridge company stock acquired by him from the dredging company on July 19 and that the monies paid by Elton to the corporation be returned to him.

"At a meeting of the board of the dredging company held October 5, 1951 it was reported by president Kaupp that he, together with Carl Risley, had called upon Elton Risley at the latter's home in Ventnor on September 27, 1951, and had delivered to Elton Risley a letter (Exhibit P-12) from the Hill Dredging Corp. demanding a return of the 292 shares of the bridge company stock acquired by Elton and offering to repay to Elton the money paid by Elton to the corporation for the stock. And at the same meeting Carl Risley reported that he had also delivered to Elton Risley on September 27, 1951 a signed copy of the letter from the dredging company to Carl Risley demanding a return to the corporation of 73 shares of common and 74.1 shares preferred stock of the bridge company, which common stock Carl had

[18 NJ Page 527]

transferred to Elton Risley on July 19, 1951. Copy of the letter is in evidence as Exhibit D-5. Mr. Kaupp and Carl Risley reported at the meeting that Elton Risley refused to commit himself respecting the demands made in the said letters. At that meeting (October 5, 1951) a resolution was then adopted that the matter of the bridge company stock acquired by Elton Risley from the dredging company be referred to counsel with instructions to make demand upon Mr. Horn, attorney for Elton Risley, for the return of the stock and that upon failure or refusal of Elton Risley to return the stock, that suit be instituted.

"I find in fact that the letters referred to and marked respectively Exhibits P-12 and D-5, containing a demand upon Elton Risley for the return to the dredging company of the bridge company stock, were served upon Elton Risley on September 27, 1951.

"Upon failure to comply with the demand, this present suit was instituted by complaint filed November 14, 1951.

"The suggestion was made at the trial that Warner Lindsay, Jr., who collected the commissions of $4,375 from Elton Risley, and A. W. Kelley of Barnegat, who collected $2,500 from Carl Risley for the sale and assignment of his option, worked together and in fact divided up their profits on the transaction. There is no proof to support that suggestion and I find as a fact that Warner Lindsay did not divide his commission of $4,375 with A. W. Kelley or with anyone else, and that A. W. Kelley did not divide his profit of $2,500 with Warner Lindsay or with anyone else, with the exception that Kelley, at the request of Lindsay, paid Lindsay, by Kelley's check, the sum of $312.50, dated August 1, 1951, to reimburse Lindsay for certain expenses incurred by him in connection with his various attempts to negotiate a sale of the Elton Risley stock in the dredging company.

"Elton Risley never voiced to any of the defendants in his cross-action any objection to or dissatisfaction with the fact that Carl Risley had purchased Elton Risley's stock in the dredging company until a date subsequent to the institution of the present litigation on November 14, 1951.

[18 NJ Page 528]

"Respecting the 60-day verbal option given by defendant Elton Risley to Kelley, mentioned above, Mr. Risley himself testified that he agreed to give Kelley and associates a two months' option, that he did not want any money for the option, and that he would stick to his word. Notwithstanding the weakness, from a legal point of view, of a verbal option unsupported by consideration, Mr. Risley seemed to regard the option as binding upon him because he had given his word.

"Respecting the suggestion made by Carl Risley to the defendant Elton Risley that he, Carl, would buy Elton's stock, referred to above, Elton Risley testified that he was unwilling to sell his stock to Carl because he thought Carl didn't possess financial ability to carry on the business. It is to be observed, however, that under the plan advanced by Elton Risley, with the assistance of Griffith and Co., and of his attorney Herbert Horn, Esquire, looking to the retirement of Elton Risley and the payment of an annuity to him for life, and to his widow after his death, voting control of the corporation would have been vested in Carl Risley and his 84-year-old mother, Sarah J. Risley. That plan was advanced by Elton Risley and was under discussion, with inconclusive results, at least from 1949 to 1951. In his testimony Elton Risley asserted that he bought the control of the bridge company stock from the dredging company because if his stock in the dredging company were bought by strangers, such buyers controlling the dredging company would have control of the bridge company, and that Elton Risley, Mr. Kaupp, Carl Risley and the others would all be out.

"Prior to July 1951, Elton Risley, Mr. Kaupp and Carl Risley constituted the whole membership in the board of directors and they were likewise the executive officers of the corporation. And, as heretofore mentioned, Elton Risley owned an absolute majority of the voting stock of the dredging corporation so that he had effective control thereof. It has been suggested that the executive officers of the corporation, who were the same persons as the directors, managed the business of the corporation without the formality

[18 NJ Page 529]

that might be desired in corporate business and that the stockholders paid little attention to the business affairs of the corporation. That, no doubt, is true in part. An examination of the minute book of the corporation covering the period from January 1948 to August 1951 shows that during that period there was only one stockholders' meeting, namely, on July 10, 1951, and that during the same period there were eight directors' meetings in 1948, three directors' meetings in 1949, four directors' meetings in 1950, and eight directors' meetings in 1951 up to August 1, 1951. Sarah J. Risley, the next largest stockholder after Elton Risley, partially due, no doubt, to her age, took little interest in the affairs of the corporation. She attended no meetings of the stockholders, but gave her proxy therefor. Nor did she attend any meetings of the board of directors, although of course she was not a member of the board. Mr. Elton Risley was the dominant member of the organization. Harry Kaupp, one of the directors and vice-president of the dredging company, testified that he and Carl Risley never went contrary to the wishes of Elton Risley. At the directors' meeting on July 19, 1951 when Carl Risley was called upon to vote on the motion or resolution authorizing the sale of bridge company stock to Elton Risley, although he had verbally objected to the sale the day before, he responded "What can I do?" and his remark was recorded as an affirmative vote. And as secretary he signed the minutes of the meeting showing that the motion or resolution had been adopted. Kaupp and Carl Risley both drew salaries from the dredging company and also from the bridge company. Elton Risley, by virtue of his control of the dredging company, which in turn controlled the bridge company, had it within his power to terminate the employment of Kaupp and Carl Risley in both corporations.

"While there had been some talk prior to July 19, 1951 between Elton Risley on the one part and Carl Risley and Harry Kaupp on the other part about having the dredging corporation pledge as collateral with Elton Risley stock owned by the dredging corporation in the bridge company, the only stockholder with whom Elton Risley discussed his purchase

[18 NJ Page 530]

of the bridge company stock from the dredging corporation prior to the consummation of the transaction on July 19, 1951 was Carl Risley. The other five stockholders, including Sarah J. Risley, were not consulted.

"The $7,300 paid by Elton Risley in the form of a check to Carl Risley dated July 19, 1951 for the purchase of 73 shares of the bridge company stock registered in the name of Carl Risley but beneficially owned by the dredging company was converted to cash at the direction of Elton Risley, placed in a box in his safe awaiting instructions of his auditors as to how the matter should be handled, and is still in his possession, the corporate directors having refused to accept the same from him.

"The price of $29,200 for the 292 shares of stock in the bridge company purchased by Elton Risley from the dredging company was paid in the form of a check for that sum, payable to the company, and deposited to the corporation account in the bank at the direction of Elton Risley, president. $20,000 of the sum was used to repay the debt of the dredging company to Elton Risley. The purchase price has never been returned by the dredging company to Elton Risley, although following the directors' meeting of the dredging company on September 4, 1951 the subject of having Elton return the bridge company stock to the dredging company and accepting return of the money paid by him therefor was discussed, and on September 27, 1951 a definite demand in writing for the return of the stock was served upon Elton Risley, which demand included an offer to repay to him the price he had paid for the bridge company stock (Exhibit P-12).

"So much for the essential facts of this controversy.

"Given the factual findings above set forth, the legal principles applicable to this controversy are not obscure but are quite well settled:

"The directors of a private corporation bear a fiduciary relationship to the corporation and to its stockholders. They are quasi -trustees for the stockholders. Marr v. Marr, 73 N.J. Eq. 643 (E. & A. 1905); Stephany v. Marsden, 75 N.J. Eq. 90

[18 NJ Page 531]

(Ch. 1908); Whitfield v. Kern, 122 N.J. Eq. 332, at 340-341 (E. & A. 1937); Eliasberg v. Standard Oil Co. of N.J., 23 N.J. Super. 431 (Ch. Div. 1952); 13 Am. Jur., corporations, sec. 997.

"While a director of a corporation is not absolutely precluded from dealing with or entering into a contract with his own corporation, nor is such transaction void per se (Booth v. Land Filling and Improvement Co., 68 N.J. Eq. 536 (Ch. 1905); Stephany v. Marsden, supra; Eliasberg v. Standard Oil Co. of N.J., supra; 13 Am. Jur., Corporations, sec. 1005), yet such transactions are subject to close scrutiny and must be characterized by absolute good faith. 13 Am. Jur., Corporations, sec. 1005.

"It is a rule firmly imbedded in our jurisprudence that directors of a corporation may not enter into a contract or other transaction with their own corporation without the knowledge and consent of the stockholders. The object of the rule is to prevent directors from secretly using their fiduciary position to their own advantage and to the detriment of the corporation and of the other stockholders. U.S. Steel Corp. v. Hodge, 64 N.J. Eq. 807, at pages 813-814 (E. & A. 1902); Booth v. Land Filling and Improvement Co., supra; King Machine Co. v. Caporaso, 2 N.J. Super. 230 (Ch. Div. 1949).

"Where a director enters into a contract or transaction with his own corporation, without the approval of the stockholders first having been obtained, the burden is upon the director to completely justify the transaction. Eliasberg v. Standard Oil Co. of N.J., supra.

"True it is that the rights of stockholders to object to a contract or transaction between a director and the corporation may be lost by acquiescence, ratification, express or implied, or laches of the stockholders. However, relief may be granted against the illegal or unconscionable act of a director, notwithstanding acquiescence, ratification or laches of some of the stockholders, if even a single stockholder is not subject to those defenses. Marr v. Marr, supra. Furthermore, laches is a defense only when the stockholder or stockholders,

[18 NJ Page 532]

with full knowledge of the facts, have deferred an unreasonable length of time in bringing action. Endicott v. Marvel, 81 N.J. Eq. 378 (Ch. 1913).

"It is well settled as a general rule that a majority stockholder may not take advantage of the control which such position gives him to purchase the property of the corporation at a low price to the detriment of the interests of the minority stockholders. 13 Am. Jur., Corporations, sec. 426.

"I am satisfied from the proofs in this case that the defendant Elton Risley purchased from Hill Dredging Corp., of which he was president, director and the holder of the majority of the voting stock, 365 shares of the common capital stock of Margate Bridge Company on July 19, 1951, without the knowledge or consent of Sarah J. Risley, Harry A. Kaupp, E. Bertram Wright, Helen M. Wright and Jacob Schlumberger, minority stockholders of the dredging company. The defendant Elton Risley and the plaintiff Carl F. Risley were the only two stockholders having knowledge of the transaction at and before the time it occurred. The price of $100 per share paid by the defendant for the stock was not fixed by reference to market value because there was no established market; it was not fixed by consultation with the stockholders of the dredging company; but it was a price dictated by the defendant himself. Can he justify the transaction? The burden is upon him.

"With reference to the value of the stock of the bridge company, it is to be noted that the dredging company, by virtue of its ownership of a clear majority of the voting stock, controlled the bridge company and that by the purchase of 365 shares of the capital stock of the bridge company from the dredging company, control of the bridge company passed from the dredging company to the defendant Elton Risley. That carried with it the power for the defendant to perpetuate himself in office as a director and president of the bridge company; power to continue to receive his salary of $100 per week as president of the bridge company, and perhaps to increase the salary if he saw fit; and possibly other emoluments and advantages that would go with the absolute voting

[18 NJ Page 533]

control of the bridge company. The proofs show that the business of the bridge company was enjoying a substantial growth. Its gross income increased from $47,741 in 1946 to $106,093 in 1951. After paying $100 per week salary to each of its three principal executive officers (the identical persons constituting the board of directors of the dredging company), for the year 1951, and somewhat lesser salaries for prior years, and after charging off depreciation and paying income taxes and other charges, for the six-year period from 1946 to 1951, both inclusive, the bridge company had aggregate net earnings for the six-year period of $110,024, an average of $18,374 per annum. The amount required for payment of dividends on the two classes of preferred stock of the bridge company was $4,800 per year. That sum, subtracted from the average net income of $18,374, would leave on the average for the six-year period $13,574 per annum net applicable to the 800 shares of common stock, or average earnings per share on the common stock of just under $17. Dividends paid on the common stock for the five-year period from 1947 to 1951, both inclusive, aggregated the sum of $50 per share or an average of $10 per share per annum for that period, and the dividend for the year 1951 alone amounted to $20 per share.

"Plaintiffs' experts fixed the fair market value of the common stock of the bridge company as of July 1951 at $300 per share, whereas defendant's experts fixed the value at $89.26 per share. I find it unnecessary to determine precisely what the fair value of the bridge company stock was in July of 1951, but I do find the value was substantially in excess of $100 per share paid therefor by the defendant. Independent of the fact that the purchase of the bridge company stock by the defendant gave him voting control of the bridge company, I am not satisfied from the proofs that the common stock of the bridge company, whose business was showing a steady growth in volume and which was able to earn over a six-year period nearly $17 per share net on the common stock

[18 NJ Page 534]

and which, over a five-year period had paid dividends on the common stock averaging $10 per share per annum, did not possess a value greater than $100 per share.

"The defendant has not carried the burden of justifying his purchase of a controlling interest in the bridge company from the dredging company. On the contrary, he obtained a bargain to his advantage and to the detriment of the other stockholders of the dredging company who had not assented to the transaction and possessed no knowledge thereof until it was an accomplished fact.

"But there is another ground upon which I think the transaction regarding the stock of the bridge company was not only voidable at the instance of dissenting stockholders, but was absolutely void ab initio. By statute the management of every corporation is vested in its board of directors. R.S. 14:7-1. The board of directors of the dredging company consisted of three persons, namely, the defendant Elton Risley, Harry A. Kaupp and Carl Risley. The meeting of the board of directors held July 19, 1951, at which action was taken purporting to authorize the sale of the bridge company stock to the defendant Elton Risley, was not a regular stated meeting but was a special meeting. The meeting was held without prior notice, either verbal or written, in the offices of the company which were located in the home of the defendant Elton Risley. The minutes and resolution purporting to authorize the sale of the bridge company stock were prepared in advance by defendant's attorney, Mr. Horn, and brought to the meeting. Actually present at this directors' meeting were the defendant Elton Risley and the plaintiff Carl Risley. Mr. Kaupp, the other director, was absent in Florida. No quorum to hold a directors' meeting was present. The defendant Elton Risley had a personal interest adverse to that of his corporation in the purchase of the bridge company stock from the dredging company. Under those circumstances, he could not be counted to make up a quorum for the transaction of business. Metropolitan [Telephone &] Telegraph Co. v. Domestic Telegraph Co., 44 N.J. Eq. 568, at pages 573-574 (E. & A. 1888); 13 Am. Jur., Corporations,

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secs. 960 and 1003. Disqualifying the defendant Elton Risley from making up the quorum, we only have one director, namely, Carl Risley, voting on the proposition, and he certainly did not constitute a quorum of the board of directors authorized to act for and bind the corporation.

"Furthermore, there was no legal convocation of the directors at the meeting of July 19, 1951. Elton Risley and Carl Risley were actually present at the meeting so that they, of course, needed no notice of the meeting. Harry Kaupp, however, neither received notice of the meeting nor was he present. Every director is entitled to an opportunity to be present and participate in the deliberations of the board and to express his opinion with respect to any proposed action. A special meeting such as was the meeting of July 19, 1951, held without notice to one of the three directors, is not a legally convened meeting and the action purported to be taken at such meeting is not the act of the corporation nor binding upon it. Metropolitan [Telephone &] Telegraph Co. v. Domestic Telegraph Co., supra; Holcombe v. Trenton-White City Co., 80 N.J. Eq. 122 (Ch. 1912), affirmed o.b., 82 N.J. Eq. 364 (E. & A. 1913); Moffatt v. Niemitz, 102 N.J. Eq. 112 (Ch. 1928); Worley v. Dunkle, 2 N.J. Super. 161 (Ch. Div. 1948); 13 Am. Jur., Corporations, sec. 952.

"Nor can the fact that Harry Kaupp, upon his return from Florida and under date of July 31, 1951, signed a waiver of notice of the meeting of July 19, 1951 and an express approval of the action taken, serve to make the meeting legal or to validate the action purported to have been taken. Audenried v. East Coast Milling Co., 68 N.J. Eq. 450, at [ page ] 466 (Ch. 1904); Clement v. Young-McShea Amusement Co., 70 N.J. Eq. 677 (E. & A. 1905); Holcombe v. Trenton-White City Co., supra. In the case last cited, the late Chancellor Walker, in 80 N.J. Eq., at page 134, said with reference to a meeting of corporate directors of which no notice was given:

"'If, however, they had notice and failed to attend they waived their rights, likewise if they signed a waiver of notice prior to the

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meeting; but consent given subsequent to the meeting looking to ratification of what was done, is without force to validate the action taken.'

"Director Kaupp had no notice of the meeting of July 19, 1951 nor was he present. Elton Risley, by reason of his interest adverse to the corporation of which he was a director, was disqualified from voting as a director at said meeting and could not be counted to make a quorum. Hence there was no quorum at the meeting of July 19, 1951. For these reasons, that meeting was a nullity and the purported action of the board authorizing the sale of the bridge company stock to Elton Risley at a price of $100 per share was null and void and was not binding upon the dredging company.

"The defendant says that the stockholders acquiesced in the action taken and are now estopped from complaining. That may be true as to Carl Risley, who attended the purported meeting of July 19, 1951 and who signed the form of minutes, prepared by Attorney Horn, purporting to authorize the sale of the Bridge Company stock. And it may likewise be true as to Harry Kaupp who, upon his return from Florida and under date of July 31, 1951, signed waiver of notice of the meeting of July 19 and signed his express approval of the action taken. Certainly, however, the defense of acquiescence does not apply either to the dredging company or to the stockholders, Sarah J. Risley, E. Bertram Wright, or Helen M. Wright.

"Nor do I find anything in the proofs which would support the conclusion that the dredging company or its stockholders have expressly or impliedly ratified the transaction in question. The proofs indicate that Sarah J. Risley, the next largest stockholder to Elton Risley, had no knowledge or information respecting the matter before August 1, 1951. At the meeting of the board held September 4, 1951 steps were taken to initiate an inquiry into the circumstances by which the defendant Elton Risley acquired the bridge company stock, and after some verbal exchanges between the parties a formal written demand for the return of the bridge

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company stock was served upon the defendant Elton Risley and an offer was made to repay to him the price he had paid therefor. That sort of conduct does not spell out ratification.

"Nor do I think the plaintiffs can be successfully charged with laches. Delay for an unreasonable length of time, not satisfactorily explained, coupled with a change in defendant's position by which his defense is prejudiced, may work an estoppel against the plaintiff and make a plea of laches a good bar in defense of an action. Gahn v. Gahn, 30 N.J. Super. 427, at 430 (Ch. Div. 1954), and cases therein cited. The plaintiff corporation was under control of and dominated by the defendant Elton Risley up to August 1, 1951. Formal demand was made upon him by the corporation on September 27, 1951, and this suit followed on November 14, 1951. There was neither an unreasonable delay by the plaintiffs in seeking to enforce their rights nor is there proof of any change in the circumstances of the defendant after August 1, 1951 that would tend to prejudice his defense of this suit.

"Finally, defendant argues that to succeed in this suit the plaintiffs must show the defendant's purchase of the bridge company stock had been legally repudiated and that that could be done by the stockholders only in a regular or special meeting assembled. Not so. I think the transaction was void ab initio because the purported meeting of the directors on July 19, 1951 was a nullity and conferred no authority whatever upon the officers to sell and transfer the stock in question to the defendant. It was not the act of or binding upon the corporation. The corporation itself, plaintiff in this suit, would have the right to bring this suit. And the action of all of the stockholders, excepting the Schlumberger estate, in instituting this suit after the demand of September 27, 1951, constitutes a repudiation of the transaction, if repudiation were needed.

"The action of the defendant Elton Risley in acquiring control of the bridge company under the circumstances above set forth constitutes a most flagrant violation of his duties

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and obligations, as a director and president of the dredging company owing by him to the minority stockholders. The transaction cannot be allowed to stand.

"Respecting defendant's cross-complaint against the several individuals named as defendants therein (not including, however, the corporate plaintiff), and the relief demanded by him as set forth early in this opinion: The cross-action arises out of the sale and transfer by the defendant Elton Risley of all of his stock, common and preferred, of Hill Dredging Corp. to Carl Risley at a price of $87,500. Elton Risley had contemplated the sale of his stockholdings in the dredging corporation at least as far back as 1949, and with the assistance of Griffith and Co., the auditors and accountants, there was formulated a plan whereby his stock would have been transferred in such fashion as to vest control of the dredging company in Carl Risley and Sarah J. Risley, Carl's mother, in consideration whereof Elton Risley during his lifetime, and his wife Florence after his death, if she survived him, would each have been guaranteed payment of certain annuities as long as they respectively should live. Contracts were drafted in furtherance of that plan but were never executed because Carl Risley and his mother, and to some extent Mr. Kaupp, objected. Finally, in the early part of July 1951 he authorized Warner Lindsay, Jr., as agent, to endeavor to sell his stockholdings in the dredging company. Lindsay had suggested that he thought a Mr. Kelley, and some associates of Kelley's, could be induced to purchase Elton Risley's stock which would carry with it control of the dredging company. Elton Risley had no acquaintance with Kelley and, in fact, never met Kelley until sometime subsequent to August 1, 1951. At first $100,000 was the price asked for the stock. As a result of a counter-offer and further negotiations, the price was reduced by Elton Risley to $87,500 as the figure at which he was willing to sell. And through Warner Lindsay, Jr., Elton Risley gave Kelley a 60-day verbal option to try to work out arrangements for the purchase of the stock. In fact, arrangements never were consummated so far as Kelley was concerned. Instead, Laura Lindsay,

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an employee of and the assistant secretary and assistant treasurer of the dredging company, took the initiative, arranged a meeting with Mr. and Mrs. Wright at Laura's home in Somers Point on the evening of July 22, arranged and attended another meeting at the home of Mr. and Mrs. Wright in Margate on July 25 at which several of the minority stockholders were in attendance; she accompanied Carl Risley to see Mr. Boyer, executive vice-president of the Boardwalk Bank, in an effort to arrange a loan whereby Carl could buy the stock; and she was in fact the moving force that finally resulted in the acquisition of the stock by Carl Risley. Both she and Carl Risley had reason to be concerned with the threatened sale of the stock to a stranger. Had Kelley and his associates purchased the stock, the positions of both Laura Lindsay and Carl Risley as officers and employees of the corporation might well have been jeopardized. Neither Laura Lindsay, nor Carl Risley, nor Mr. or Mrs. Wright, nor Sarah J. Risley, owed any allegiance or obligations to the defendant Elton Risley. None of them were employed by him. The allegiance of Laura Lindsay and Carl Risley was to the corporation by which they were employed and not to Elton Risley individually. I know of no reason in law or in good morals why Laura Lindsay, Carl Risley, Sarah J. Risley, and Mr. and Mrs. Wright should not have cooperated with one another in the plan which resulted in the acquisition by Carl Risley of the stock which Elton Risley desired to sell.

"Nor do I find Warner Lindsay, Jr., guilty of a breach of trust or a breach of duty toward Elton Risley. The latter wanted to sell his stock and he received the full price of $87,500 for which he was willing to sell. That sale took him completely out of Hill Dredging Corp. He had no further financial interest in the corporation after the sale was consummated. While it is true that Warner Lindsay, as agent of Elton Risley, had suggested that he thought he could interest Alphonse W. Kelley of Barnegat, and Kelley's associates, in the purchase of Elton Risley's stock, Elton Risley had no acquaintance whatever with either Kelley, or with Kelley's associates, and in authorizing Lindsay to sell

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he did not impose upon Lindsay any conditions with respect to the identity of the purchaser. When he delivered his stock to the Boardwalk Bank with a sight draft attached for the $87,500, the stock was endorsed in blank and could have been transferred to anyone who might have paid the agreed consideration therefor. Nor was any condition imposed upon Kelley that he should buy and continue to hold the stock that Elton Risley was selling. Certainly there was nothing in the terms of the sale that would have prevented Kelley from having the stock transferred to his name one day and then to have sold and transferred it the following day to Carl Risley or to whomsoever Kelley might find as a purchaser. In fact, the only hold that Kelley had in the matter was that Elton Risley had given him a verbal option, without consideration, which Elton seemed to regard as binding upon him, and that enabled Kelley to sell his so-called option and to collect $2,500 therefor.

"Elton Risley, from 1949 until sometime in 1951, was not opposed to the acquisition of his stock by Carl Risley. Had Elton's plan looking to the payment of an annuity to him, and after his death to his widow, been consummated, control would have been vested in Carl and his mother. It is true that when Carl Risley learned in early July of 1951 that Elton was going to sell his stock representing control of the dredging corporation, Carl spoke to his Uncle Elton about he, Carl, purchasing the stock, and Elton declined to sell to Carl upon the ground that Carl did not possess the financial ability to handle the matter. As events afterwards turned out, however, Elton was wrong because Carl, with the assistance of his mother who joined him in signing the note to the bank and who pledged her stockholdings as part of the collateral for the payment of the note, was able to finance the purchase through the Boardwalk Bank as above set forth. And when Elton Risley learned on the afternoon of August 1, 1951 that in fact Carl was the purchaser of Elton's stock, for six weeks thereafter he made no complaint and voiced no objection to the fact that Carl had been the purchaser rather than Kelley.

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"In his cross-complaint Elton Risley charges the defendants with an unlawful conspiracy. The common definition of a conspiracy is an agreement, manifesting itself either in words or deeds, by which two or more persons confederate to do an unlawful act, or to use unlawful means to accomplish a lawful result. No conspiracy has been established by the proofs in this case because I think the purchase by Carl Risley of the stock of Elton Risley was neither accomplished by the use of unlawful means nor was the result achieved an unlawful act.

"I fail to see any legal connection between the purchase by Elton Risley of the controlling stock of the bridge company and the sale by Elton Risley of his controlling stock in the dredging corporation. The first act was consummated on July 19, 1951 and the latter act on August 1, 1951. Neither was dependent upon or connected with the other. I regard them as different and distinct transactions.

"For the reasons heretofore stated, judgment will be entered in favor of the plaintiffs in the original suit, voiding and nullifying the purported sale and transfer on July 19, 1951 of 365 shares of the common capital stock of Margate Bridge Company by Hill Dredging Corp. to Elton Risley, and requiring Elton Risley to transfer the stock back to Hill Dredging Corp. upon payment to him of the sum of $29,200. He is already in possession of the $7,300 representing the price paid for 73 shares of the stock, a part of the total of 365 shares above mentioned. And the defendant Elton Risley will also be required to pay over to the plaintiff corporation any dividends received by him on the 365 shares of Margate Bridge Company stock subsequent to July 19, 1951.

"On the cross-complaint, judgment of dismissal of the cross-complaint will be entered in favor of the defendants and against the plaintiff.

"The form of the judgment, unless consented to as to form, may be settled upon notice pursuant to R.R. 4:55-1."

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The judgment is affirmed for the reasons expressed in the opinion of Judge Ewart in the court below.

BURLING, J. (dissenting in part).

I agree with the affirmance of the judgment against Elton Risley on the complaint, but I disagree as to the disposition of Elton Risley's cross-claims.

The cross-complaint as reiterated in the pretrial order charged Warner Lindsay, Jr., with breach of trust; charged Laura O. Lindsay, Alphonse W. Kelley and the individual plaintiffs (as cross-claim defendants) with malicious interference, i.e., conspiracy with and inducement of Warner Lindsay to breach his trust; and charged all the cross-claim defendants with fraud in inducing Elton Risley to part with his Hill Dredging Company stock.

The trial court found that Warner Lindsay, Jr., was guilty of no breach of trust. In this respect I am in accord with the views expressed by Mr. Justice BRENNAN in his dissenting opinion filed this day.

Alphonse W. Kelley was on the proofs an innocent party having a bona fide aim to purchase the Hill Dredging Company stock from Elton Risley. Therefore I agree with the trial court's disposition of the cross-claim against Kelley.

The evidence supports the cross-claim as to the fact of malicious interference with the negotiations between Elton

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Risley and Alphonse W. Kelley; and it supports the cross-claim as to the fact of the inducement of Warner Lindsay's breach of trust. Nevertheless, these were but steps in the scheme to defraud Elton Risley. It seems to me, therefore, that the burden was upon Elton Risley to prove not only the fraud but participation in the fraud by the cross-claim defendants. The applicable rule of law is that fraud must be demonstrated clearly and convincingly.

The evidence clearly and convincingly shows the inception, formulation and effectuation of the scheme to induce Elton Risley to part with his Hill Dredging Company stock to his detriment, and the participation of Carl F. Risley, Sarah J. Risley, Laura O. Lindsay and Warner Lindsay, Jr., therein. However the evidence fails to meet this test as to Harry A. Kaupp, E. Bertram Wright and Helen M. Wright.

Therefore I would: affirm the judgment in favor of the plaintiffs on their complaint against Elton Risley; affirm the judgment of dismissal of the cross-complaint as against Alphonse W. Kelley, Harry A. Kaupp, E. Bertram Wright and Helen M. Wright; and reverse the judgment of dismissal of the cross-complaint, and direct the trial court to enter judgment declaring liability, as to cross-claim defendants Carl F. Risley, Sarah J. Risley, Warner Lindsay, Jr., and Laura O. Lindsay, and remand the cause to the trial court for determination of the damages and incidental relief to which the cross-claim plaintiff, Elton Risley, may be entitled to recover from these four cross-claim defendants.

WILLIAM J. BRENNAN, JR., J. (dissenting in part).

I agree with the affirmance, on Judge Ewart's opinion, of the judgment for plaintiffs on their complaint and with the dismissal of defendant Elton Risley's cross-claim as to Alphonse W. Kelley. I dissent, however, from the affirmance of the dismissal of the cross-claim as to the individual plaintiffs and the cross-claim defendants Warner Lindsay, Jr., and Laura O. Lindsay.

Elton Risley held stock control of Hill Dredging Corp. He wanted to dispose of his interest but would not sell to

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Carl Risley. The gist of his cross-complaint is that the individual plaintiffs conspired with Warner Lindsay, Jr., and his sister Laura O. Lindsay, a long-time employee of the dredging corporation, to have Carl Risley acquire Elton's shares under the guise of their sale to Alphonse W. Kelley, and he demands punitive and compensatory damages, including the refund of a commission of $4,375 paid to Warner Lindsay, Jr., for effecting the sale.

Elton Risley in early July 1951, through Laura O. Lindsay, authorized Warner Lindsay, Jr., to endeavor to sell Risley's shares to Kelley. Lindsay apparently undertook to have Kelley organize a syndicate (to include Lindsay) to acquire the stock. He obtained an oral 60-day option from Elton to Kelley at an original asking price of $100,000 later reduced to $87,500 upon Lindsay's persuasion that Kelley would not pay the higher price. Lindsay's interest in a sale to Kelley waned when Laura, anxious about her own position with the company, sought his help to have Carl Risley acquire the stock. This occurred shortly after Lindsay obtained the option; I cannot find in the record that Lindsay ever actually communicated the option to Kelley. Instead, about July 25 Lindsay participated at a meeting at which were arranged the details of a transaction whereby Lindsay would see to it that Carl Risley acquired the stock for $87,500 provided he could borrow that sum for the purpose. This was agreed although Lindsay knew that Carl was willing to pay at least $90,000 for the stock. Carl succeeded on July 30 in obtaining a loan for $87,500 from the Boardwalk National Bank of Atlantic City.

Lindsay, the individual plaintiffs and Laura told Elton nothing of the plan. Whatever may be said of the obligation of the others, plainly Lindsay's silence was a breach of his fiduciary obligation. Indeed, he went so far as to lead Elton to believe that he had closed a sale with Kelley. He caused Elton on July 31 to deliver his stock to the Boardwalk National Bank of Atlantic City, accompanied by a sight draft on Kelley for $87,500 and also a check for $4,375 to Lindsay, as commission. He then arranged a closing of the

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sale to Carl at the bank on August 1, at which Elton would not be present, after having induced Kelley on the previous day to give up any rights to purchase he might have. The consideration to Kelley was a payment by Carl's check for $2,500, ostensibly for the assignment of the alleged option. The $2,500 was actually paid from Lindsay's commission. Kelley gave back to Lindsay $312.50, so that the sum realized by Kelley was $2,187.50. That sum is exactly one-half of the $4,375 commission. The transaction with Kelley has more the appearance of an equal split of the commission than of the claimed payment by Carl to Kelley for the assignment of the option. The proofs do not show, however, that Kelley had any knowledge of or part in the plan to conceal from Elton the identity of Carl as the real purchaser.

It is plain to me that Lindsay, at the least, was guilty of a breach of his fiduciary relationship, which should result not only in the forfeiture of his commission but also render him liable for the damage suffered by his principal. This should be the result merely from his failure to disclose to Elton that Carl was willing to pay a higher price than $87,500. Mechem, Outline of Agency (4 th ed. 1952), sec. 509, p. 352. And the individual plaintiffs and Laura O. Lindsay are equally liable for having joined with Lindsay in the breach of his fiduciary duty. Judson v. Peoples Bank & Trust Company of Westfield, 17 N.J. 67, 83 (1954).

I would modify the judgment to declare the liability of the individual plaintiffs and the cross-claim defendants Warner Lindsay, Jr., and Laura O. Lindsay on the cross-claim, and remand the cause for the determination of compensatory and punitive damages.

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