Opinion
Decided July 16, 1927.
Contracts — Fearing impending peril or financial injury does not constitute duress — Question of law what constitutes duress, and existence thereof question of fact — Settlement between stockholders, acceded to as financial expedient, not cancelled.
1. Fear of impending peril or financial injury or mere fact that one acts with reluctance does not constitute "duress" which involves illegality, and implies that person has been unlawfully constrained by another to perform act under circumstances which prevent exercise of free will; it not being fraud or duress to do what person has legal right to do, regardless of pecuniary consequences to others.
2. What constitutes duress is matter of law, and whether duress exists in particular transaction is matter of fact.
3. Where plaintiff stockholders and officers in refinancing company issued preferred stock to defendant, providing that on default in payments holders of preferred stock could exercise entire voting power, settlement made on plaintiffs' default, whereby plaintiffs agreed to transfer to defendant 60 per cent. of common stock in company, declare dividend, and redeem part of preferred stock, not sought to be canceled by plaintiffs on ground of coercion and duress for nearly two years, could not be canceled, and common stock restored for duress because plaintiffs' financial condition made it expedient for them to accede to defendant's demands.
APPEAL: Court of Appeals for Lucas county.
Messrs. Ritter Brumback, for plaintiffs.
Messrs. Marshall, Melhorn, Marlar Martin, for defendant.
The five cases enumerated in the caption hereof involve the same questions of fact and law, were submitted upon the same evidence, and will therefore be considered together.
In 1917, or shortly thereafter, C.E. Thompson, J.A. Krider, and W.D. Bartlett, of Cleveland, three of the plaintiffs, acquired the entire capital stock of the Lewis Steel Products Company, located and doing business in Toledo, and then engaged in the manufacture of automobile valves. These gentlemen were, at that time, also interested as stockholders, officers, and directors in the Steel Products Company, of Cleveland, now the Thompson Products, Inc., likewise engaged in the manufacture of automobile valves.
On or about October 16, 1919, the name of the Toledo company was changed to the Toledo Steel Products Company, and thereafter land was purchased and new buildings erected. Before the completion of the buildings, the company became financially embarrassed; the cost of the new plant and the equipment thereof being more than had been anticipated. After an unsuccessful attempt to arrange for a mortgage and bond issue thereon, the Toledo Steel Products Company proposed to the defendant, the Richardson Company, that the first-named company be so reorganized as to authorize the issuance of $250,000 of first preferred stock, $150,000 of second preferred stock to be substituted for an issue of preferred stock then outstanding, and 12,000 shares of common stock to be in lieu of the common stock then outstanding, the first preferred stock and 25 per cent. of the common stock so issued to be purchased by the defendant. This proposal was accepted, and the arrangement so made was consummated in September, 1920.
The first preferred stock was issued upon and contained certain authorized terms and conditions, among which were that it was redeemable in whole or in part at $110 per share and accrued dividends, on any dividend date, the holders thereof being entitled to fixed preferential cumulative dividends at the rate of 8 per cent. per annum from the date of issue, payable quarterly on the 1st days of January, April, July, and October of each year; that a sinking fund was to be created so that 5 per cent. of the largest amount of such stock then or at any time theretofore outstanding would be redeemed on July 1st of each year at $110 per share, and accumulated dividends; that the net tangible assets of the company should at all times amount to at least 200 per cent. of such stock at any time outstanding; that said first preferred stock should have no voting power unless (a) dividends thereon were passed for two successive quarters (b) unless the net tangible assets should fall below the designated percentage and so continue for two successive quarters, and (c) default, continuing for thirty days, should be made in the performance of any of the other conditions thereof, in any of which events the holders of such stock might exercise the total voting power thereof, so long as such default continued, and by a vote of the majority in amount of such stock then outstanding declare vacant the offices of all directors and officers and elect new directors.
In June, 1921, the bank loan indebtedness of the Toledo Steel Products Company was $95,000. The dividends on the first preferred stock were passed on July 1, 1921, and for each succeeding quarter thereafter until March 26, 1924, when settlement between the plaintiffs and defendant was effected, which settlement the plaintiffs in the several actions brought by them against defendant are now seeking to avoid and have set aside. Neither was there, during this time, any redemption of first preferred stock, nor any sinking fund maintained wherewith to redeem the same.
Thereupon, at a meeting of the board of directors of the Toledo Steel Products Company, held on June 28, 1921, Charles E. Bunting was elected president of the company, and thereafter, under his management, the business and earnings of the company increased. At a meeting of the board of directors held on January 23, 1924, and repeatedly thereafter, the representatives of the defendant insisted that its investment be liquidated either by plaintiffs purchasing the first preferred and common stock owned by the defendant at a sum of $330,000, which defendant claimed was the amount of its investment, or by plaintiffs accepting from defendant the sum of $84,000 for their interest in the company, the entire book value of the property and assets thereof, as determined by Ernst Ernst, public accountants, having been placed at $414,000. But plaintiffs claimed that the value of the property was at least $100,000 more than the amount so fixed.
Nothing being accomplished in the way of settlement, defendant, on February 6, 1924, at the annual meeting of the stockholders of the Toledo Steel Products Company, by virtue of the power conferred by the conditions of the first preferred stock, deposed the plaintiffs from the directorate of the company and elected its own board of directors. On February 20, 1924, this board of directors authorized the officers of the company to seek a purchaser for all of the property of the company, and a conditional offer therefor was received.
The plaintiffs were indebted in approximately the sum of $800,000 to various banks, one of which was the Union Trust Company of Cleveland, and stock of the Toledo Steel Products Company owned by the plaintiffs was deposited as collateral to their loans. These facts were known to defendant and its representatives, and the plaintiffs claim that with this knowledge, and with the knowledge that plaintiffs were unable to obtain sufficient funds to liquidate the investment of defendant in the Toledo Steel Products Company, the defendant, through its representatives, constituting the board of directors of the Toledo Steel Products Company, and its attorney, conspired to obtain a sufficient amount of the common stock of the company to control it by falsely representing that the defendant desired to liquidate its investment in the Toledo Steel Products Company, and, if necessary to accomplish this purpose, intended to cause the entire business and assets thereof to be sold; that the representatives and the attorney of defendant misrepresented the value of the property and falsely stated that it had no opportunity for gain beyond its interest as a preferred stockholder; that the acts of defendant's representatives on the board of directors of the Toledo Steel Products Company were taken by them for and in behalf of the defendant and not in behalf of the stockholders of the products company, and against the interests of plaintiffs, for the sole purpose of forcing plaintiffs to surrender to defendant a part of the shares of the common stock owned by them.
After the action taken by the board of directors of the products company as to the proposed sale of its property, negotiations ensued, proposals and counter proposals being made, which finally resulted in plaintiff's respectively offering to transfer to defendant such pro rata amount of the common stock of the company held by them as would give to the defendant 60 per cent. of the entire common stock of the company, and, in addition thereto, to waive all accrued dividends on the second preferred stock, except $12,500 thereof, which was to be paid to them in cash. This tentative settlement having been made, the plaintiffs C.E. Thompson, Krider, and Bartlett, were restored to their membership on the board of directors. Thereupon these plaintiffs participating in the meeting, and voting favorably thereon, a dividend of $55,000 was declared on the first preferred stock, and a dividend of $12,500 on the second preferred stock, the holders of the latter stock by the acceptance thereof to waive all claims against the company on account of dividends thereon prior to January 1, 1924. The redemption of $25,000 par value of the first preferred stock and $15,000 par value of the second preferred stock, at $110 per share, was also authorized, and the defendant, as one of the considerations for the settlement and adjustment of the matters in controversy among the stockholders, having agreed to loan the company sufficient money to carry out the program so agreed upon, the Toledo Steel Products Company, by unanimous vote of its directors, was authorized to borrow not in excess of $150,000 for these purposes.
The plaintiffs C.E. Thompson, Krider, and Bartlett attended either in person or by proxy the various stockholders' and directors' meetings thereafter held, and continued to act as, and now are, directors of the company, and they made no outward claim of coercion, duress, or dissatisfaction with the settlement effected between them and defendant until July 13, 1926, when they severally filed petitions in the court of common pleas, from the decrees entered wherein appeals were taken to this court, which actions so appealed we are now considering and determining, so that approximately two years had passed before plaintiffs in any way sought or demanded a cancellation of the settlement and the restoration to them of the common stock so alleged to have been taken from them by coercion and duress.
There can be no question that the financial condition of plaintiffs, and their fear of the effect of the proposed action of defendant upon themselves and their Cleveland company, by reason of the probable attitude of the banks to which they were heavily indebted, alone moved them to acquiesce in the demands made by defendant. Neither can there be any question that the representatives of the defendant chose the psychological time to effect the result accomplished, regardless of whether they did not desire thereby, as they testify, in any way to embarrass the plaintiffs, or whether, as plaintiffs claim, their determined intention was to acquire control of the Toledo Steel Products Company without consideration of the consequences to plaintiffs.
We are not here concerned with the conduct of defendant as an ethical question. It may be that, if the relative positions of the plaintiffs and the defendant had been reversed, the urge of what plaintiffs might have thought was "good business" would have impelled them to proceed as did the defendant.
The conditions imposed by the first preferred stock not having been performed, defendant was thereby authorized to proceed in the manner therein provided, and the plaintiffs, when the first preferred stock of the Toledo Steel Products Company was sold to the defendant, were bound to anticipate the possible consequences which might ensue therefrom. All of them were business men of experience, and none of them claimed to have been misled in any way by anything that the representatives of defendant said or did. They counseled with and followed the advice of their personal attorneys, one or the other of whom, in company with the plaintiffs, attended the several meetings held by the directors of the Toledo Steel Products Company, and both of whom were men of recognized ability. Plaintiffs frankly testify that their financial condition was such that expediency induced them to accede to the demands of the defendant, as unconscionable and unjust as they then believed them to be.
The fear of some impending peril or financial injury, or the mere fact that one acts with reluctance, does not constitute duress. Duress involves illegality, and implies that a person has been unlawfully constrained by another to perform an act under circumstances which prevent the exercise of free will, and it can never constitute fraud or duress to do as and what a person has a legal right to do, whatever the pecuniary consequences may be to those with whom he deals.
The only question in the cases at bar is whether the plaintiffs were duressed into doing what they did. What constitutes duress is a matter of law; whether duress exists in a particular transaction is a matter of fact. The record in these cases is voluminous and the briefs of counsel exhaustive. The latter show the expenditure of much time and thought and the careful examination and consideration of many authorities. We also have carefully read the record of the evidence and the briefs of counsel, and have examined many, if not all, of the cases cited by them.
This court is unable to conclude that plaintiffs acted under duress within the meaning of the law, and their several amended petitions are accordingly dismissed.
Petitions dismissed.
RICHARDS and WILLIAMS, JJ., concur.