Appeal from the District Court of the United States for the Eastern District of Pennsylvania; William H. Kirkpatrick, Judge.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
This was a suit in equity by the receiver of the South Penn Collieries Company, hereinafter called the South Penn Company, to recover from the defendants, administrators of the estate of William C. Sproul, deceased, and Newton P. Jackson, over a million dollars, and for a further accounting. Sproul and Jackson were the promoters of the South Penn Company. The claim was based upon (a) the receipt of alleged secret profits by the promoters and (b) upon the alleged negligent payment of certain debts of the Kresge Coal Company out of the funds of the South Penn Company by them as officers and directors of that company. The District Court dismissed the complaint on the ground that neither fraud nor negligence had been shown, and the plaintiff appealed to this court.
The appellant does not dispute the findings of fact which are based on substantial evidence. He says that the court reached an erroneous conclusion from undisputed facts. It is necessary, therefore, to summarize the facts and consider the conclusion.
From the facts found by the court, it appears that:
In June, 1924, the Kresge Coal Company was known to be insolvent by a wide margin by all those who participated in its management. The company's liabilities were in excess of $550,000. Its assets consisted of a few culm banks, equipment, and the lease of a certain coal mining property. The culm banks were unprofitable except during serious coal shortages, and as a consequence the condition of the Kresge Company was becoming increasingly hopeless.
William C. Sproul and the several other stockholders who owned the 5,000 shares of capital stock concluded that the company could be saved if new capital should be provided to enable it to acquire additional coal properties so as to keep it profitably in the coal business during the periods when the culm banks could not be worked. The plan designed to achieve the purpose was to form a new corporation to take over the properties of the Kresge Company and acquire others. Sproul and Jackson undertook to promote the new company, known as the South Penn Collieries Company. As a part of the plan, the stock of the Kresge Company was to be exchanged share for share for the common stock of the South Penn Company.
In addition to owning 1,200 shares of the capital stock of the Kresge Company, Sproul was the owner of bonds of the company to the extent of $183,000 out of the $300,000 outstanding.
Shortly after July 1, 1924, the stockholders of the Kresge Company turned their certificates of stock over to Sproul to be exchanged for stock of the South Penn Company, which had then come into existence. The offer of exchange of stock was accepted in August, but the certificates were not actually issued until February, 1925.
On August 4, 1924, the board of directors of the South Penn Company bought the first of the coal properties which it had been organized to acquire. This was the "Katherine Property," for which Sproul and Jackson paid the owners $384,000 and which they resold to the South Penn Company for $700,000, thus making a net profit of $316,000.
On November 7, 1924, the South Penn Company bought all of the stock of the Randolph Coal Company and the Middleport Coal property from Sproul and Jackson for $825,000 in cash and 50,000 shares of the common stock of the South Penn Company. This consideration, however, included payment to the promoters, who apparently controlled the board of directors, for their services in connection with the purchase of two other properties by the South Penn Company. The promoters realized from these transactions an apparent profit of $533,666.67, without considering the 50,000 shares of the South Penn Company, for they paid only $291,333.33 for the Randolph and Middleport properties.
The lower court expressly found that in purchasing the above properties from the promoters there had been a full and fair disclosure of the profits to be realized by them to all of the stockholders of the Kresge Company, who, excepting Sproul and Jackson, were the only stockholders of the South Penn Company.
On November 13, 1924, the capital stock of the South Penn Company was increased by the authorization of an issue of $4,000,000 8 per cent. cumulative preferred stock. This resulted from a plan to finance completely the South Penn Company. Sproul and Jackson obligated themselves to take the entire issue of the preferred stock at par upon the following conditions: That they would turn in the Randolph and Middleport properties at a price giving them a profit in excess of $400,000; that the South Penn Company would allow them to credit $400,000 of the purchase price of these properties against their obligation to pay ...