Wool Growers Service Corp. v. Simcoe Sheep Co.
This text of 140 P.2d 512 (Wool Growers Service Corp. v. Simcoe Sheep Co.) is published on Counsel Stack Legal Research, covering Washington Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinions
The principal characters involved are as follows: Wool Growers Service Corporation, engaged at Yakima in the business of lending money to sheep operators; J.F. Sears and Dale Simmons, its president and secretary; Ragan and Dunnett, copartners, large sheep operators in the Yakima district; Polonio Allarbe, an uneducated Spaniard, unable to read English or write it, except to sign his name; Simcoe Sheep Company, a corporation, organized by Ellis Ragan, Allarbe, and Severiano Galanena, another uneducated Spaniard, who could neither read nor write English; and Federal Intermediate Credit Bank, a corporation organized under the agricultural credit act of 1923, with an office at Spokane, which had for many years extended credit to Wool Growers on notes and mortgages assigned to it representing loans made by Wool Growers to its customers.
The action, as finally pleaded, was brought to foreclose three mortgages held by Wool Growers on all of the sheep and equipment of Simcoe. Allarbe and Simcoe filed a cross-complaint against Ragan Dunnett and Wool Growers, Simmons, and Federal Intermediate Credit Bank, alleging that these cross-defendants entered into a conspiracy to cheat and defraud them of large sums of money, praying an accounting and judgment for $37,000. Cross-defendants filed an answer denying the charges of fraud and setting up as affirmative defenses a settlement agreement signed by Allarbe and Simcoe.
At the conclusion of the evidence offered by cross-complainants, the trial court sustained a challenge to *Page 658 the sufficiency of the evidence to present a case against Federal Intermediate Credit Bank. At the conclusion of all of the evidence, the court announced its decision that the evidence did not establish fraud in the procurement of the settlement agreement, and thereafter judgment was entered in favor of Wool Growers against Simcoe for various amounts, totaling a sum in excess of $21,000, and decreeing foreclosure of the mortgages. Pending the suit, the sheep were sold by a receiver under order of court, and the net proceeds, $4,125.46, were applied on the judgment, leaving a balance owing by Simcoe of $17,153.21.
September 18, 1930, Ragan Dunnett, Allarbe, and Galanena entered into some kind of an understanding or oral agreement to engage in the sheep business by purchasing Oregon lambs, and possibly the Kays' outfit hereinafter referred to, Ragan Dunnett to have a one-third interest, Galanena, a one-third interest, and Allarbe, a one-third interest in the business. The circumstances surrounding the making of this agreement were as follows:
In the summer of 1930, Ragan Dunnett owed Wool Growers $65,000 on a note and mortgage which Wool Growers had indorsed and transferred to the Federal Intermediate Credit Bank. They owed the First National Bank of Yakima $65,000. They had entered into contracts with a firm in Oregon for the purchase of seven thousand lambs. They owed other obligations and were without funds to pay them.
Kays, owners of a band of sheep, owed Wool Growers approximately $32,000 on a note and mortgage indorsed and transferred to Federal Intermediate Credit Bank. It appears that they owed Wool Growers a further amount on a note and mortgage which had not been transferred to the bank. They owed the government $20,000 in back range fees, of which Wool Growers had guaranteed payment of a part. The Kays' loan was in a very unsatisfactory state. *Page 659
Olney, owner of a band of sheep, owed Wool Growers approximately $12,000 on a note and mortgage indorsed and transferred to Federal Intermediate Credit Bank. He owed the government $5,300 in back range fees. Ragan and wife were sureties on Olney's bond for payment of the range fees. This loan was in a very unsatisfactory condition, and Federal Intermediate Credit Bank had notified Wool Growers that it would not be renewed in the fall.
Allarbe had approximately $47,000 in cash, which he had obtained in a settlement with a former partner, Sanchez. Ragan knew that Allarbe had this amount, having been called in by Freece, Allarbe's attorney, to advise Allarbe whether or not he should accept the settlement.
Sears, president of Wool Growers, told Ragan that the Kays' sheep would be for sale. Ragan imparted this information to Galanena and sent him to see Allarbe, who was herding sheep for Coffin Bros., south of Wapato. Later, Ragan and Galanena went to Wapato and proposed to Allarbe that the three of them purchase the Kays' outfit.
The sheep business was not in a prosperous condition. We quote from a letter received by Sears, president of Wool Growers, from Buel of Evans, Snider, Buel Commission Company of Chicago, dated August 27, 1930, reporting on the sale of a shipment of Kays' lambs:
"Mr. Sears, with these heavy supplies and a limited demand, prices for lambs are very discouraging to the owner and at this time it hardly looks like the wool and lambs that the sheep man sells will pay running expenses this year. All the middle states have lots of sheep and while last year they were increasing their holdings today they are decreasing them and the low prices do not stop their shipping too many to market. Poor crops and tight money markets are going to cause these feeding lambs to sell very low the latter part of September and October and it does *Page 660 not look advisable to hold lambs back that are expected to come to market this fall."
On September 18, 1930, Ragan learned that Allarbe was in Yakima and telephoned Rodrick, a Spanish friend of Allarbe's, and had him bring Allarbe and Galanena to his house. Here, at Ragan's house, Allarbe agreed to put up $15,000 for the purchase of Oregon lambs.
On the same day, September 18, 1930, Ragan, Galanena, and Allarbe went to the First National Bank of Yakima where Allarbe kept his money, and Allarbe signed a check for $15,000, prepared by an officer of the bank, payable to Ragan Dunnett, which Ragan immediately deposited in the bank account of Ragan Dunnett. The balance in Ragan Dunnett's bank account immediately after the deposit of this check was $16,028.12. On September 22, 1930, it was $2,736.44. Ragan used the money given him to purchase Oregon lambs and to pay obligations owing by Ragan Dunnett.
On the same day, Ragan, Galanena, and Allarbe went to White Swan to look at some Oregon lambs which had been delivered at that point for Ragan Dunnett, but which had not been paid for. A few days later, Ragan, Galanena, and Allarbe went to Oregon to take delivery of more Oregon lambs. Ragan testified that this trip to Oregon was made September 27, 1930, and produced a little black book in which he had made memoranda of the date, number, weight, and price of the lambs, which price, according to these memoranda, was five, six, and seven cents per pound.
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The principal characters involved are as follows: Wool Growers Service Corporation, engaged at Yakima in the business of lending money to sheep operators; J.F. Sears and Dale Simmons, its president and secretary; Ragan and Dunnett, copartners, large sheep operators in the Yakima district; Polonio Allarbe, an uneducated Spaniard, unable to read English or write it, except to sign his name; Simcoe Sheep Company, a corporation, organized by Ellis Ragan, Allarbe, and Severiano Galanena, another uneducated Spaniard, who could neither read nor write English; and Federal Intermediate Credit Bank, a corporation organized under the agricultural credit act of 1923, with an office at Spokane, which had for many years extended credit to Wool Growers on notes and mortgages assigned to it representing loans made by Wool Growers to its customers.
The action, as finally pleaded, was brought to foreclose three mortgages held by Wool Growers on all of the sheep and equipment of Simcoe. Allarbe and Simcoe filed a cross-complaint against Ragan Dunnett and Wool Growers, Simmons, and Federal Intermediate Credit Bank, alleging that these cross-defendants entered into a conspiracy to cheat and defraud them of large sums of money, praying an accounting and judgment for $37,000. Cross-defendants filed an answer denying the charges of fraud and setting up as affirmative defenses a settlement agreement signed by Allarbe and Simcoe.
At the conclusion of the evidence offered by cross-complainants, the trial court sustained a challenge to *Page 658 the sufficiency of the evidence to present a case against Federal Intermediate Credit Bank. At the conclusion of all of the evidence, the court announced its decision that the evidence did not establish fraud in the procurement of the settlement agreement, and thereafter judgment was entered in favor of Wool Growers against Simcoe for various amounts, totaling a sum in excess of $21,000, and decreeing foreclosure of the mortgages. Pending the suit, the sheep were sold by a receiver under order of court, and the net proceeds, $4,125.46, were applied on the judgment, leaving a balance owing by Simcoe of $17,153.21.
September 18, 1930, Ragan Dunnett, Allarbe, and Galanena entered into some kind of an understanding or oral agreement to engage in the sheep business by purchasing Oregon lambs, and possibly the Kays' outfit hereinafter referred to, Ragan Dunnett to have a one-third interest, Galanena, a one-third interest, and Allarbe, a one-third interest in the business. The circumstances surrounding the making of this agreement were as follows:
In the summer of 1930, Ragan Dunnett owed Wool Growers $65,000 on a note and mortgage which Wool Growers had indorsed and transferred to the Federal Intermediate Credit Bank. They owed the First National Bank of Yakima $65,000. They had entered into contracts with a firm in Oregon for the purchase of seven thousand lambs. They owed other obligations and were without funds to pay them.
Kays, owners of a band of sheep, owed Wool Growers approximately $32,000 on a note and mortgage indorsed and transferred to Federal Intermediate Credit Bank. It appears that they owed Wool Growers a further amount on a note and mortgage which had not been transferred to the bank. They owed the government $20,000 in back range fees, of which Wool Growers had guaranteed payment of a part. The Kays' loan was in a very unsatisfactory state. *Page 659
Olney, owner of a band of sheep, owed Wool Growers approximately $12,000 on a note and mortgage indorsed and transferred to Federal Intermediate Credit Bank. He owed the government $5,300 in back range fees. Ragan and wife were sureties on Olney's bond for payment of the range fees. This loan was in a very unsatisfactory condition, and Federal Intermediate Credit Bank had notified Wool Growers that it would not be renewed in the fall.
Allarbe had approximately $47,000 in cash, which he had obtained in a settlement with a former partner, Sanchez. Ragan knew that Allarbe had this amount, having been called in by Freece, Allarbe's attorney, to advise Allarbe whether or not he should accept the settlement.
Sears, president of Wool Growers, told Ragan that the Kays' sheep would be for sale. Ragan imparted this information to Galanena and sent him to see Allarbe, who was herding sheep for Coffin Bros., south of Wapato. Later, Ragan and Galanena went to Wapato and proposed to Allarbe that the three of them purchase the Kays' outfit.
The sheep business was not in a prosperous condition. We quote from a letter received by Sears, president of Wool Growers, from Buel of Evans, Snider, Buel Commission Company of Chicago, dated August 27, 1930, reporting on the sale of a shipment of Kays' lambs:
"Mr. Sears, with these heavy supplies and a limited demand, prices for lambs are very discouraging to the owner and at this time it hardly looks like the wool and lambs that the sheep man sells will pay running expenses this year. All the middle states have lots of sheep and while last year they were increasing their holdings today they are decreasing them and the low prices do not stop their shipping too many to market. Poor crops and tight money markets are going to cause these feeding lambs to sell very low the latter part of September and October and it does *Page 660 not look advisable to hold lambs back that are expected to come to market this fall."
On September 18, 1930, Ragan learned that Allarbe was in Yakima and telephoned Rodrick, a Spanish friend of Allarbe's, and had him bring Allarbe and Galanena to his house. Here, at Ragan's house, Allarbe agreed to put up $15,000 for the purchase of Oregon lambs.
On the same day, September 18, 1930, Ragan, Galanena, and Allarbe went to the First National Bank of Yakima where Allarbe kept his money, and Allarbe signed a check for $15,000, prepared by an officer of the bank, payable to Ragan Dunnett, which Ragan immediately deposited in the bank account of Ragan Dunnett. The balance in Ragan Dunnett's bank account immediately after the deposit of this check was $16,028.12. On September 22, 1930, it was $2,736.44. Ragan used the money given him to purchase Oregon lambs and to pay obligations owing by Ragan Dunnett.
On the same day, Ragan, Galanena, and Allarbe went to White Swan to look at some Oregon lambs which had been delivered at that point for Ragan Dunnett, but which had not been paid for. A few days later, Ragan, Galanena, and Allarbe went to Oregon to take delivery of more Oregon lambs. Ragan testified that this trip to Oregon was made September 27, 1930, and produced a little black book in which he had made memoranda of the date, number, weight, and price of the lambs, which price, according to these memoranda, was five, six, and seven cents per pound.
Sometime later, Ragan, Galanena, and Allarbe drove to the mountains to look at the Kays' sheep. Ragan remained in his car beside a river at the foot of the mountain while the two Spaniards went up the trail in search of the sheep. When they returned, according to Ragan's testimony, they were well pleased with *Page 661 the sheep and agreed to their purchase. Ragan never saw the sheep until they were delivered to him for the joint enterprise sometime later in October.
On October 13, 1930, Allarbe gave Ragan a check for $22,900, which Ragan immediately deposited in the bank account of Ragan Dunnett. The balance in Ragan Dunnett's bank account, immediately prior to the deposit of this check, was $44.10. On November 10, 1930, it was $16.37. Ragan used all of this money given him to purchase sheep, except $5,000 which he gave to Wool Growers, as hereinafter stated, to pay obligations owing by Ragan Dunnett.
On October 14, 1930, Ragan, Galanena, and Allarbe met Sears, president of Wool Growers, at Wool Growers' office, and Sears prepared a letter addressed to them in which he agreed to sell them the Kays' sheep, consisting of about 3,500 ewes, at a price of $11.50 a head, and also to convey to them the Kays' range permit and the equipment, and acknowledged receipt of $5,000, a check for which amount was given him by Ragan. Ragan testified that the letter was read to Allarbe and Galanena, and a copy delivered to each of them, but they denied this. It may be assumed that the letter was read to them and that Allarbe understood that the price of the sheep was $11.50 a head, although that is hotly disputed.
On November 13, 1930, Ragan Dunnett gave Wool Growers a check for $25,000, marked "Kays' sheep." This was not the money given them by Allarbe. That money had already been spent. This money was part of a loan of $35,000 obtained from the First National Bank of Yakima, or National Bank of Commerce, which $35,000 was deposited in their bank account on November 13, 1930. It is interesting at this point to notice a letter written by Sears, president of Wool Growers, to the cashier of First National Bank of Yakima, November 5, 1930, recommending the granting of this loan: *Page 662
"This company is now carrying Ragan and Dunnett for $65,000 and if our capital were sufficient we would be happy to carry the entire load but our capital will not permit us to loan a greater sum to one firm or individual than $65,000. As you know, the firm of Ragan Dunnett is one of the most substantial sheep firms we have and conducts its business on very conservative and business like lines. I am sure you can recommend them to the National Bank of Commerce as highly as ourselves. It may be necessary to ask for a renewal of this note at its maturity for ninety days as it will be paid from the proceeds of the lamb sales next season. We assure you now that we will be very happy to carry and continue to carry our $65,000 and permit the liquidation of this $35,000 note from the first returns from the lamb sales."
(The $65,000 loan was not carried by Wool Growers, but by the Federal Intermediate Credit Bank, and Wool Growers, apparently, had no authority to permit liquidation of the note from the first returns from lamb sales. The $35,000 note was, apparently, paid out of the proceeds of a $100,000 note and mortgage executed by Ragan Dunnett to Wool Growers and which Wool Growers, in April, 1931, negotiated to Federal Intermediate Credit Bank in renewal of the $65,000 note and mortgage and for additional advances.)
On October 16, 1930, the Kays' sheep and equipment were delivered to Ragan, who caused them to be taken to Scotty Highfill's range, where they were placed on pasture.
On October 21, 1930, Galanena, to whom Ragan Dunnett owed $6,000 in back wages, gave Ragan $3,000, which he borrowed from his cousin, Martin Galanena, also an employee of Ragan, and which was deposited in the bank account of Ragan Dunnett.
Bernard, inspector for Wool Growers, inspected the sheep of Simcoe October 23 and 25, 1930, and made a report to Wool Growers of his inspection. The report states the number and value of the sheep as follows: *Page 663
1000 ewes (threes) ................. $9.00 $9,000
2318 ewes (fours) .................. 8.00 18,544
2100 1930 lambs .................... 5.00 10,500
1450 1930 wether lambs ............. 4.00 6,160
42 bucks ......................... 10.00 420
_______
$44,624
(In this report, Simcoe is referred to as a corporation. Ragan testified that it was not until November 13, 1930, that they discussed plans to incorporate.)
The report states that the stock was purchased from parties in Oregon and Kays, and that the price paid for the Kays' sheep was $11.50 a head, and for the lambs bought in Oregon, from $5.50 to ten cents per pound. (We may note here that counsel for Ragan state that the lambs secured in Oregon for the joint enterprise were not lambs that had been contracted for by Ragan Dunnett prior to the agreement to engage in the joint enterprise, and that the price paid for them was five, six, and seven cents per pound.) They state in their brief (pp. 72 and 73):
"These lambs, it must be recalled [the lambs contracted for prior to the agreement to engage in the joint enterprise], were purchased by Ragan under contracts made in May and June of 1930, and provided for a purchase price of 9 1/2 to 10¢ per lb. Ex. RE-177, Ragan's pocket book, together with the cancelled checks referred to as exhibits above, clearly discloses that the Simcoe Sheep Company's Oregon lambs were purchased at prices ranging from 5¢ to 7¢ per lb. It is perfectly obvious that it would have been a breach of trust relationship if in fact any such relationship existed, for Ragan to have compelled Simcoe Sheep Company to pay 9 1/2 and 10¢ per lb. for Oregon lambs when lambs were selling on the market for 5, 6 and 7¢ per pound. Instead of showing bad faith in the purchase of the Oregon lambs, the good faith of Ragan is definitely established by the documentary evidence above referred to." *Page 664
The inspector's report, above referred to, but not quoted in full, which is also documentary evidence, does not bear out this assertion.
On November 21, 1930, Ragan, Dunnett, Galanena, and Allarbe signed articles of incorporation of Simcoe Sheep Company. The articles provide that the capital stock shall be $60,000, divided into 600 shares of the par value of $100 a share. A subscription to the capital stock was signed. Ragan subscribed for 100 shares, Dunnett, 100 shares, Galanena, 200 shares, and Allarbe, 200 shares.
On November 28, 1930, Ragan, Dunnett, Galanena, and Allarbe, the incorporators and trustees of the company, met at the office of Richards, Conklin Delle to hold their first meeting. By-laws were adopted. Ragan was elected president, Galanena, vice-president, Dunnett, secretary, and Allarbe, treasurer. Ragan was appointed manager of the company
"With all the powers vested in a general manager as set forth in the by-laws of the corporation, with right and authority to borrow money in the name of the corporation as may be necessary for carrying on its business and authority to sign notes, checks and drafts in the name and on behalf of the corporation, make the bank deposits and perform any other functions and do all things necessary for the promotion of the success of the business."
The minutes recite that the matter of payment of the stock subscriptions was taken up, and it appearing that Ragan, Dunnett, Galanena, and Allarbe
"Have purchased and have on hand "3631 head of lambs "3340 head of ewes " 40 bucks
pack horses, wagons, camp outfit and all equipment necessary for the running and caring for said sheep and lambs and carrying on the business connected therewith, and that said sheep and outfit have cost said parties the sum of $60,000, which amount they have actually paid therefor, and which is the present reasonable *Page 665 market value thereof, and that they will turn over to the corporation said property in payment of subscriptions to the capital stock as above made, and the trustees deem it for the best interests of the corporation to accept the proposition, and being satisfied that the property to be turned into the corporation is worth the par value of the stock subscribed by the parties, and is a full consideration therefor, it was moved, seconded and carried by the unanimous vote of all the trustees that the corporation accept the property above enumerated in full payment of the subscriptions to the capital stock heretofore made by Ellis Ragan, Alex Dunnett, Severiana Galanena and Polonio Allarbe and that upon the transfer to the corporation by good and sufficient bill of sale of said property that said parties be credited with full payment of their capital stock, and that said stock be issued to them as fully paid and nonassessable and certificates representing said stock be made and delivered to each of said parties to the amount of his subscription thereto."
(It may be noticed here that the property turned in to the corporation in payment of the stock subscriptions had not cost the parties $60,000, but only $45,900, $42,900 of which amount had been contributed by Allarbe and $3,000 by Galanena. Ragan testified that, prior to incorporation, he had expended for feed $9,500, and that it was agreed that he should receive $4,600 for services performed by him, but this testimony seems to be refuted, or at least not sustained, by the books.)
At this meeting, Ragan Dunnett, the copartnership, Galanena, and Allarbe signed an instrument called a "pooling agreement," which, however, is not referred to in the minutes. This agreement is too long to incorporate here. It recites that a corporation has been organized under the name of Simcoe Sheep Company, with a capital stock of $60,000, divided into 600 shares of the par value of $100 each, that each of the parties has subscribed for 200 shares, that the stock has been paid for by transfer to the corporation of certain *Page 666 personal property, and that the property turned in to the company in payment of the capital stock was purchased with money advanced by the parties, as follows:
Allarbe .................................. $42,900 Galanena ................................. 3,000 Ragan Dunnett .......................... 14,100(It may be noticed here that this statement is untrue. Ragan Dunnett had not advanced $14,100 which was used in the purchase of the property that was turned in to the corporation.) It then recites that the parties are to be equal owners of the stock, and that the money advanced by Allarbe over that advanced by the other parties is to be treated as a loan, i.e., Galanena owes Allarbe $17,000, and Ragan Dunnett owe him $5,900, which indebtedness is to be paid within five years, with interest at six per cent, and secured by the stock issued to Galanena and Ragan Dunnett, which is to be placed in the hands of a trustee. It then recites that the parties have certain plans for financing the company, that all of the stock shall be pooled and placed in the hands of a trustee, with power to vote the stock, and that Wool Growers shall be the trustee. The agreement then provides that, if, within five years, Galanena shall pay Allarbe $17,000, the 200 shares subscribed for by him shall be his, and, if Ragan Dunnett shall pay Allarbe $5,900, the 200 shares of stock subscribed for by them shall be theirs. The agreement provides that each stockholder appoints Wool Growers his irrevocable proxy to vote the stock during the life of the agreement; that, in voting the stock, the proxy shall exercise its best judgment for the selection of suitable trustees and officers, to the end that the affairs of the corporation shall be properly managed, and that the trustee shall incur no responsibility for any error of law or any matter or thing done or omitted under the agreement, except its own individual malfeasance. It *Page 667 finally provides that no transfer of the stock owned by Galanena and Ragan Dunnett shall in any wise affect the lien of Allarbe thereon as security for the money due him, nor release the trustee from its duty to hold said stock as such security. At the bottom is an agreement, signed by Wool Growers, accepting the trust and undertaking to perform the trust in accordance with the terms of the agreement.
Mr. Richards testified that at this meeting he was unable to understand Allarbe, and Allarbe was unable to understand him, and he suggested that Allarbe call in an attorney. Rodrick, a truck driver friend of Allarbe, a Spaniard who could read and speak English, was called in to act as interpreter. Richards testified that the pooling agreement was carefully read and explained, and that Allarbe signed it of his own free will and accord. Galanena also testified that "the contract" was read at the meeting. Allarbe denied that it was read or explained to him.
The minutes recite that a resolution to borrow $30,000 from Wool Growers was adopted at this meeting and set forth a copy of the resolution authorizing the president and secretary to borrow from Wool Growers $30,000 and to secure the same by mortgage upon all of the property of the company, and from time to time renew the loan and to borrow from Wool Growers or from any other party, an additional sum not exceeding $20,000, and to secure the same by mortgage of all of the property of the company. The last page of the minutes containing this resolution is written in smaller type than the rest of the minutes. Mr. Richards testified that it was not prepared in his office, but probably sometime later in the office of Wool Growers. Galanena, Allarbe, and Rodrick deny that any resolution to borrow money was discussed or adopted at the meeting.
Simcoe, by Ragan president and Dunnett secretary, executed a note and mortgage to Wool Growers, dated *Page 668 November 28, 1930, payable May 28, 1931. The note is indorsed by all of the stockholders, including Allarbe. December 1, 1930, Wool Growers transmitted the note and mortgage to Federal Intermediate Credit Bank, with a letter stating:
"We are enclosing papers for loan of $30,000 to Simcoe Sheep Company, secured by a first mortgage on their sheep and feed. This is the company that bought the Kays sheep and from the proceeds of the loan you are to deduct the amount due on the Kays note discounted with you."
The records of the bank disclose that this loan was authorized by the executive committee of the bank November 21, 1930. The bank applied $18,144.50 of the proceeds of its loan in payment of the balance due on the Kays' note and remitted the balance of $11,855.50 to Wool Growers. Wool Growers also transmitted to the bank a copy of a resolution purporting to have been adopted at the meeting of November 28, 1930, certified by Dunnett, secretary, authorizing the loan. There is a discrepancy between this copy and the copy appearing in the minute book, in that the copy sent to the bank recites:
"Whereas, it is deemed advisable for this corporation to borrow money for the purpose of paying current indebtedness, defraying the operating expenses and carrying on the sheep business of Simcoe Sheep Company."
The copy inserted in the minutes omits the words "paying current indebtedness." The copy sent to the bank is upon a printed form, with the words above quoted filled in with a typewriter, and it is possible that it was prepared first and the stenographer, when copying it into the minutes, omitted the words "paying current indebtedness."
Wool Growers also transmitted to the bank a statement prepared by Simmons, secretary of Wool Growers. of the financial condition of Simcoe on November *Page 669 22, 1930. This statement lists the assets of the corporation as follows:
Cash on hand and in bank ........................... $27,000
Hay ................................................ 1,500
Corn ............................................... 1,340
Livestock .......................................... 63,140
Equipment .......................................... 1,500
_______
Total ....................................... 95,980
And the liabilities:
Wool Growers ....................................... $33,760
Hay ................................................ 1,500
Corn ............................................... 1,340
_______
Total ....................................... 36,600
Net worth ................................... $59,380
(It may be observed here that this statement is not correct, in that the company did not have on hand and in the bank $27,000 — it had no bank account at all until October 11, 1932 — and neither the cost nor the value of the livestock was $63,140, and the company did not owe Wool Growers at that time $33,760, or any other sum, unless it was a balance due on the purchase of the Kays' sheep of approximately $8,000.)
On December 3, 1930, Wool Growers entered upon its books application of the proceeds of the loan to Simcoe, as follows:
"Purchase of Kays sheep ........ $38,760
Less amount paid in cash ...... 30,000 $ 8,760
Due from Ragan Dunnett,
interest on $65,000 loan ..... 4,137.11
17,102.89
__________
$30,000.00"
And on December 3, 1930, it issued its check for $17,102.89, in favor of Simcoe Sheep Company, which check was deposited on December 3, 1930, in Ragan Dunnett's bank account. Simmons, secretary of Wool Growers, testified that he applied $4,137.11 of *Page 670
the proceeds of the $30,000 loan to Simcoe on Ragan Dunnett's note to it for $65,000, because Ragan told him to do so. The application was not made inadvertently, as respondents claim in their briefs.
The balance in Ragan Dunnett's bank account on December 3, 1930, immediately prior to the deposit of the $17,102.89 check, was $699.59. On December 5, 1930, Ragan Dunnett used $13,500 of the $17,102.89 proceeds of the loan to Simcoe to pay an obligation owing by them to Guaranty Trust Company. (There is some intimation in the testimony that this obligation was for the purchase of Oregon lambs. If so, the lambs were not turned in to the corporation.)
As above stated, Olney owed Wool Growers approximately $12,000, and the government, $5,300 in back range fees. Ragan and wife were sureties on Olney's bond for payment of the back range fees. On December 6, 1930, Sears, president of Wool Growers, wrote a letter to the bank, stating:
"We are submitting a renewal of the Philip A. Olney loan in the amount of $10,000.00, the proceeds of which will be used to take up his note discounted with you and a note to us for additional money we have advanced to him. . . . It was our plan originally to sell this layout to the Simcoe Sheep Company but they are not inclined to make the purchase now. However, they told us they would be interested in purchasing these sheep next spring or summer. Our idea is to renew the loan secured by a mortgage on all of his sheep, feed and 1931 crops, and if we are unable to make a sale of the sheep in the spring we shall require Mr. Olney to pay all of the proceeds of his lamb sales to us and to make a sale of these ewes regardless of the prices."
In response to this letter, the bank, December 9, 1930, wrote a letter to Wool Growers, stating:
"The financial statement supporting this loan is of little value, yet comparing this statement with his statement of last year we find that he has had a decrease in his net worth of approximately $15,000 due largely *Page 671 to the depression in livestock prices. The borrower is an Indian and may not be considered reliable, or as being a good risk. This loan was discussed with you at the time of my recent examination of your company and it was your thought that if our bank would be willing to purchase the renewal for the amount offered, you would be in a position to liquidate this loan during the coming year. It appears that Ragan Dunnett, large sheep operators, feel that Mr. Olney's range rights would prove an attractive addition to their present holdings and that they have indicated to you that they may take over this layout in the spring. I trust that this arrangement can be carried out by your corporation. In discounting this loan we feel that we are not following policies which are consistent with good credits, but have given our consideration to the loan with the thought of being of service to your corporation in granting this accommodation. As we view it, we should not be called upon to make any additional advances to this borrower and we know that you will give this loan your very close supervision. In the event that your suggested plans in working out this proposition with Ragan Dunnett should fail to materialize, we believe that you should take steps to liquidate this loan during the coming year as we do not consider financing this type of paper as being of material service to the industry."
On December 10, 1930, Sears wrote the bank, as follows:
"Your understanding with reference to our plans in handling the above loan is correct. We will not call on you for any additional funds in connection with this loan, but, as stated in the letter submitting the loan, we will have to use the wool money. I feel sure we have handled it in the proper way for the time being and I also feel sure we can make disposition of this property next summer and in a way which will be satisfactory to all parties."
On July 7, 1931, Olney transferred possession of the sheep to Ragan. Olney testified that he did not know to whom he was selling the sheep. There was no written transfer, although there is in evidence a written draft of a formal agreement between Olney, Simcoe, *Page 672 and Wool Growers, which, however, is not signed by any of the parties. (PE-68.) This draft provides that Wool Growers accepts Simcoe in place of Olney as owner of the sheep. Simcoe assumes and agrees to pay all sums due and owing on the range permits, and agrees to save and protect Olney and his bondsmen (Ragan and wife) harmless from any and all sums. The understanding between Olney and Wool Growers was that Wool Growers would release him from his obligation to pay the loan, and would pay the back range fees of $5,300. On July 8, 1931, Sears wrote a letter to the bank, stating:
"I just returned last night from a trip in the hills where I spent some time looking over the Olney sheep and getting them to a corral where they could be counted. I had Mr. Ellis Ragan with me and I believe we have made a deal with the Simcoe Sheep Company for the Olney outfit, although there are a few details to be worked out yet. On account of the range permit, which does not expire until November 1st, I believe, it may be necessary for us to work out a plan whereby the Simcoe Sheep Company will take over the Olney sheep and agree to pay the obligation of Olney. In my opinion this will be a very fine solution of this problem. I hope to be able to write to you shortly that a satisfactory deal has been completed and I feel reasonably certain now that it will go through."
Simcoe funds were used by Ragan and Wool Growers to pay this mortgage and the back range fees. On September 4, 1931, Wool Growers sent the bank a check for $10,296.99, the balance due on the Olney note held by the bank, and in November, 1931, used $2,462.91 of Simcoe funds to pay the balance due it from Olney. Very shortly after the Olney sheep were transferred to Ragan, most of them were sold, and there is reason to think that the proceeds were applied by Wool Growers on Ragan Dunnett's account. Ragan testified that he spoke to Allarbe about the purchase of the Olney sheep in June, 1931, at Bull Canyon, and that Allarbe told him to go ahead and purchase the *Page 673 sheep. He admits, however, that he did not mention to him anything about the back range fees or the fact that he was liable on Olney's bond. Simmons, secretary of Wool Growers, in a letter, October 29, 1931, requesting release of certain proceeds from the lien of the mortgage, makes the following comments upon the Olney transaction:
"They need the proceeds of this sale to use in the operation of their business and inasmuch as it is a workout proposition and no doubt avoided a loss to us from the Olney loan, we hope you will consent to the release as outlined and permit them to use this money for operating expenses. We naturally feel under some obligation to them for the service they have performed for us.While it may appear that they paid more than the sheep areworth, they obtained some very valuable range rights with thepurchase which was the incentive for them to go into thetransaction." (Italics ours.)
The Olney range permit was taken out in the name of Ragan, and he, at the time of the settlement hereinafter referred to, refused to transfer it to Simcoe. Ragan testified that Ragan Dunnett sheep were not ranged on the Olney range at any time during 1931, 1932, and 1933, but there seems to be some question about that.
On June 1, 1931, Simcoe, by Ragan president and Dunnett secretary, executed a note and mortgage to Wool Growers for $35,000. This note and mortgage were transmitted by Wool Growers to the bank, with a letter stating:
"We are enclosing the papers for a loan of $35,000 to the Simcoe Sheep Company, the proceeds to be used to take up their note discounted with you and give them approximately $4,000 additional money to be used for operating expenses. Their financial statement indicates a loss which is in the valuation of their inventory and not from operation, consequently we believe that after the lambs are marketed their financial statement should show up better. We happen to *Page 674 know that they have paid some range leases in advance. We areespecially anxious to serve these people now as we arenegotiating with them for a sale of the Phillip Olney outfit andwe feel reasonably certain it will be consummated within a shorttime." (Italics ours.)
No meeting of the stockholders or trustees of Simcoe was held between November 28, 1930, and December 21, 1932. The authorization for the execution of this note and mortgage is that contained in the resolution of November 28, 1930, authorizing the president and secretary to renew the $30,000 loan from time to time and to borrow an additional amount not exceeding $20,000. The note is indorsed on the back by all of the stockholders, including Allarbe. The evidence does not disclose when or where or the circumstances under which Allarbe indorsed this note. Dunnett testified that he obtained the signature of Allarbe on papers two or three different times, or maybe more, and, on these occasions preceding the signing by Polonio, they would have a conversation in which he would tell him what the note was for.
On November 10, 1931, Simcoe, by Ragan president and Dunnett secretary, executed a note and mortgage to Wool Growers for $33,600, which, on November 25, 1931, were transmitted to Federal Intermediate Credit Bank, with a letter stating:
"The proceeds of the loan are to be used to take up their note discounted with you, the balance of which is $30,000, together with interest and a note of $2,462.91 due us, which is the balance due on the cleanup of the Phillip A. Olney account."
On December 21, 1932, Simcoe, by Ragan president and Dunnett secretary, executed a note and mortgage to Wool Growers for $47,365. (The face amount of the note is $50,000, but there is an indorsement on the note reducing the amount to $47,365.) In the minute book appear minutes of a meeting held December 21, 1932, authorizing the loan and a waiver signed by Allarbe of *Page 675 notice of the time, place, and purpose of the meeting and consent that it might be held December 21, 1932. The note is indorsed by all of the stockholders, including Allarbe. It is claimed by respondents that Seijas, a Seattle attorney of Spanish descent, whom Allarbe had employed some months before, also attended the meeting. Respondents attempted to prove at the trial that the note was indorsed by Allarbe at this meeting. Ragan testified that he recalled the meeting, that Seijas and Allarbe were present, and that the note for $50,000 was indorsed by Allarbe at that meeting. He testified that, at first, Polonio let on that he did not want to indorse the note, but he and Seijas went out of the room, and then he indorsed it. It is also stated in Wool Growers' brief that this note was indorsed by Allarbe at this meeting. Seijas was not a witness at the trial. The correspondence file introduced in evidence shows conclusively that Allarbe did not indorse the note at this meeting. On December 24, 1932, Sears, president of Wool Growers, wrote a letter to Seijas at Seattle, stating:
"We cannot complete the renewal of the Simcoe loan until we have Polonio Allarbe's indorsement on the note. We wrote for a copy of the note [here he is referring to the previous note of $35,000] as I told you I would do but we did not receive it this morning. However, you may rest assured we do have the note and that Polonio's indorsement is on it. As I told you in conversation, notes for corporate loans must bear the indorsement of each stockholder on the back. This rule is followed by us without exception. Therefore, I would appreciate it very much if you would advise Polonio to come to our office immediately and indorse the note so we may send it in. Unless this loan gets on the books of the Spokane bank and our books previous to January first it will stand in bad repute and you know in these times that would be a very dangerous situation for a creditor to get into. We believe you understand our position sufficiently to know that our requirements must be lived up to with reasonable accuracy. Therefore, please notify Polonio to call and *Page 676 indorse the note so that the renewal may be forwarded to Spokane for their consideration."
On December 27, 1932, Wool Growers sent Seijas the following telegram:
"Papers asking for renewal of Simcoe loan finished except Polonio's signature. Stop. Received copy of note today from Spokane bank mailing it to you today. Stop. Necessary for Polonio's signature immediately to give time for consideration of renewal before January first. Please wire immediately what you have done."
On December 28, 1932, Seijas wrote the following letter to Wool Growers:
"I have today ordered Polonio Allarbe to drop into the office and sign the new note."
On December 30, 1932, the note and mortgage were transmitted by Wool Growers to Federal Intermediate Credit Bank, with a letter stating that the proceeds were to be used to take up the note of November 10, 1931, on which there was a balance unpaid of $31,386.91, and for further advances, and further stating:
"We were very particular that the Simcoe Sheep Company fulfilled all necessary legal requirements in connection with our loan as two of the stockholders are Spaniards who do not understand these matters. Therefore, under the supervision of our attorneys, a stockholders' meeting of the Simcoe Sheep Company was held and the loan approved as indicated by the enclosed resolution. This was done rather hurriedly as we were not able to get all the stockholders together until late one evening and the two Spaniards are now in the hills with the sheep and to again bring them in would be a difficult matter. Therefore, we hope that the loan will be acceptable in the present form. . . . By asking you to increase the loan from $32,978.63 to $47,365.00 we are making quite a heavy demand on you, especially in view of the fact that all but 2100 head of their ewes are ages 5 or older. However, the loan should not at any time exceed this amount and it will be reduced quite rapidly from the proceeds of their wool and lamb sales during the summer, and *Page 677 since we cannot liquidate the loan at this time, the only thing we know to do is carry on with it and closely supervise their operations so they will be able to operate well within the budget and obtain maximum production from their sheep. They have very good range permits and we believe they will make a much better showing this year than last on account of better weather conditions and the fact that they are better organized and more determined to operate successfully."
(Galanena, apparently, did not attend this meeting. The minutes of the stockholders' meeting, reducing the number of trustees from four to three, which was held on the same day, recite that Galanena was present by his power of attorney and proxy to Ellis Ragan. Galanena had previously resigned as an officer and trustee of the company, and, on December 13, 1932, gave Ragan an irrevocable power of attorney to represent him in all matters until the last day of December, 1937. Apparently, the two Spaniards were out in the hills with the sheep.)
Transmitted with the papers to the bank was also a statement of the financial condition of Simcoe which showed, under "Accounts Receivable," an item of $30,736.46 owing by Ragan Dunnett to Simcoe. On January 3, 1933, the bank wrote a letter to Wool Growers referring to this item and stating:
"We assume that the accounts receivable item shown in the borrowers' financial statement of $30,736.46 carries little value as the amount is owing by Ragan and Dunnett personally. If, however, you believe that there is any equity in these accounts they should be assigned your corporation and this bank as additional collateral to this loan. We, of course, assume that you are securing an assignment of these borrowers' leases, which should be sent to us promptly."
On January 16, 1933, in response to a second letter from the bank with reference to the same matter, Wool Growers wrote a letter to the bank, stating: *Page 678
"We do not believe the $30,736.46 accounts receivable item shown in their statement as the amount owing by Ragan and Dunnett, personally, represents sufficient value to warrant being assigned as additional collateral to the above loan."
On December 27, 1933, Simcoe, by Ragan president and Dunnett secretary, executed a note and mortgage to Wool Growers for $37,000. This is the mortgage to Wool Growers sought to be foreclosed in this action. Execution of the note and mortgage was authorized at a meeting of the trustees of the company held December 27, 1933. Allarbe refused to attend this meeting, and Ragan caused a subpoena to be served upon him by the sheriff. He attended, in response to this subpoena, with Jack Connor, a sheepherder, but did not vote or participate in the meeting. The minutes of this meeting recite that a resolution to borrow $37,000 was adopted by the unanimous vote of all the trustees present, except Polonio Allarbe not voting. It is also recited, at the end of the resolution, "The minutes were prepared before the meeting adjourned and on motion made, seconded and carried, were unanimously adopted and approved and the president and secretary authorized to sign the same." The note and mortgage were transmitted by Wool Growers to the bank, December 29, 1933, with a letter stating:
"Polonio Allarbe is an ignorant Spaniard who absolutely refuses to sign anything. We are enclosing minutes of the meeting at which a resolution was passed authorizing the loan."
(Throughout the record of these transactions, there are many references to Allarbe's ignorance and lack of business understanding. These occur mainly in letters written by Wool Growers whose officers had a much better opportunity to judge of that matter than we have or the trial judge had.)
A full copy of the minutes was transmitted to the bank. The note was indorsed by Ragan Dunnett, but *Page 679 not by Allarbe. Enclosed with the papers was a statement of the financial condition of Simcoe, showing that the loan was approximately 110 per cent of the appraised or market value of the security. The bank accepted the loan, although it was its almost invariable practice to require all corporate notes assigned to it to be indorsed by all of the stockholders of the corporation.
We will now refer to the method of bookkeeping adopted by Ragan Dunnett and Wool Growers, and to the way the affairs of Simcoe were managed by Ragan Dunnett. No bank account for Simcoe was opened until October 11, 1932. No books for Simcoe were opened until almost two years after the corporation was formed. This bank account and these books were opened after Attorney Hubbert had written a letter to Ragan Dunnett demanding an inspection of the books and threatening suit. Ragan Dunnett, on their own books, charged themselves with the entire capital stock of Simcoe; that is, they charged themselves with the $42,900 advanced by Allarbe, the $3,000 advanced by Galanena, and the $14,100 which the pooling agreement recited had been expended by them for sheep that had been turned into the corporation. As expenditures were made for Simcoe, they credited themselves accordingly. Supplies for Simcoe were purchased in the name of Ragan Dunnett. Lambs and wool of Simcoe were commingled with lambs and wool of Ragan Dunnett, and sold as lambs and wool of Ragan Dunnett. The costs of supplies and the proceeds from the sale of lambs and wool were apportioned between the two companies. In 1931, Wool Growers received large sums of money, running into the tens of thousands of dollars, from the sale of lambs and wool which were released to it by Federal Intermediate Credit Bank. It kept no account with Simcoe, except its loan account. The proceeds of these sales were deposited by Wool Growers in its own *Page 680 bank account, and credit therefor was entered upon its account with Ragan Dunnett. Wool Growers itself made deposits of Simcoe funds in Ragan Dunnett's bank account. Even after Simcoe opened its bank account, Wool Growers deposited large sums of money in Ragan Dunnett's bank account to meet outstanding checks of Ragan Dunnett, and reimbursed itself out of Simcoe funds upon Ragan's alleged statement that the outstanding checks had been issued for the benefit of Simcoe. It is impossible to determine from the evidence, voluminous as it is, what became of the large sums of money borrowed during 1930, 1931, 1932, and 1933 by Simcoe. Appellants endeavored to show that the proceeds of the $47,365 loan of December 21, 1932, were misappropriated by Ragan Dunnett, but were precluded from doing so by the rulings of the court.
In the summer of 1932, Allarbe became suspicious that all was not right with Simcoe. He saw Hubbert, an attorney at Yakima, who, in August, 1932, wrote a letter to Ragan Dunnett demanding an inspection of Simcoe's books and threatening suit. After receiving this letter, Ragan Dunnett drove out into the hills where Allarbe was tending the sheep and spoke to him about the matter, and, apparently, satisfied him for the time being that the corporation was being properly managed.
In October, 1932, Simcoe opened a bank account and a set of books. The entries in these books are copied from entries in Ragan Dunnett's books and information furnished by Ragan. In the fall of 1932, Galanena became disgusted with the way affairs of the corporation were being managed and resigned as a trustee and officer of the company. December 13, 1932, he gave Ragan an irrevocable power of attorney to represent him at all meetings of the stockholders and trustees of the company, and to act as his irrevocable agent in all matters until the last day of December, 1937. The *Page 681 power of attorney refers to the pooling agreement between Ragan Dunnett, Galanena, and Allarbe, entered into November 28, 1930. A copy of this power of attorney was transmitted to the Federal Intermediate Credit Bank.
In the fall of 1932, Allarbe saw Seijas, a Spanish attorney at Seattle, and employed him to investigate the affairs of Simcoe. It is testified that he charged Ragan Dunnett and Wool Growers with numerous misappropriations and threatened to institute suit. He received a salary of forty-five dollars a month, which he received through Wool Growers. He also received a check for $400, dated July 28, 1933, which was drawn on Simcoe's bank account, payable to Allarbe and indorsed by Allarbe. Ragan testified that Allarbe requested him to draw the check, as he wanted to get rid of Seijas, and that he gave the check to Allarbe. Allarbe denied that he had any knowledge of the issuance of the check. It seems probable at least that this check was given to Seijas by Ragan. It appears that Ragan visited Seijas at his office in Seattle. Ragan at first emphatically denied that he ever did so. He later testified that he met Seijas in the elevator, went with him to his office, and talked with him about the affairs of Simcoe. Allarbe and Connor testified that Seijas stated to them that an automobile owned by him had been given to him by Ragan, that they made complaint to the grievance committee of the bar association, and that the bar association investigated the matter. The appellants offered to prove the result of the investigation, but respondents objected, and the evidence was not admitted. Ragan denied that he gave Seijas an automobile. Seijas was not called as a witness by either party. Allarbe employed Bolin, an attorney at Toppenish, and gave him a check for forty-five dollars, which, he testified, was all the money he had at the time. Bolin obtained the assistance of Allen, an attorney at Yakima, and the two attorneys entered into an *Page 682 agreement with Allarbe whereby they were to receive for their services twenty-five per cent of the amount of any recovery, and a larger amount in case of an appeal. Allen undoubtedly made as thorough an investigation as the books of Simcoe and Wool Growers permitted, and thereafter charged Ragan Dunnett and Wool Growers with having misappropriated funds and property of Simcoe, and with most of the acts alleged in the cross-complaint. It is evident, however, that there were many things which Allen did not discover, and some others which he did not report to Allarbe. He testified that he did not report to Allarbe the fact that Simcoe funds had been deposited in Ragan Dunnett's bank account.
In April, 1934, it was proposed by Ragan that the parties get together and try to effect a settlement of the matter. A meeting was held at Wool Growers' office. As we read the record, the evidence shows that the only meetings attended by Allarbe were the meeting of May 28, 1934, and the meeting at Allen's office of May 31, 1934. It was proposed that Ragan Dunnett resign as officers and trustees of the company, turn over all of their stock to Allarbe, and that Allarbe cancel their note for $5,900; that Galanena transfer all of his stock to Allarbe. (It appears that Galanena, on April 6, 1934, had executed an instrument transferring all of his stock to Allarbe. The instrument, as originally prepared, named Allen and Bolin as the assignees, but their names were scratched out with a pen and the name of Allarbe inserted.) Allen insisted that Ragan transfer to Simcoe the Olney range permit, which belonged to Simcoe, but which stood in Ragan's name, but Ragan refused to do this, and the meeting broke up. Other meetings were held at which it was proposed that Wool Growers, so it is claimed, agree to finance Simcoe for the remainder of the season. Simmons, manager of Wool Growers, agreed to this, provided a competent person was placed in charge of the sheep. *Page 683 Allen testified that he and Bolin sat down and figured out that, if the sheep were properly managed, there would be sufficient funds from the proceeds of the sale of lambs and wool to pay the mortgage and have the sheep left. He was so impressed with this proposal that he agreed to recommend its acceptance by Allarbe, and that Ragan be permitted to retain the Olney range permit.
A meeting, at which Allarbe was present, was held at Wool Growers' office May 28, 1934. Richards had prepared an agreement between Ragan Dunnett, Allarbe, Galanena, and the creditors. The agreement, in substance, provides that Ragan, Dunnett, and Galanena shall turn all of their stock over to Allarbe; Ragan Dunnett shall resign as trustees and officers of the company; the pooling agreement shall be dissolved; Allarbe shall release Ragan Dunnett and Wool Growers of all indebtedness; Simcoe shall release them from all obligations, and Allarbe shall assume liability on the unpaid stock subscriptions; and Simcoe shall execute a mortgage to Guaranty Trust Company, trustee, securing certain creditors whose claims amounted to $3,879.19. Prior to the meeting, Ragan had circulated the agreement among the creditors and obtained their signatures. Allarbe signed the agreement. Ragan Dunnett indorsed their certificates of stock over to Allarbe and resigned as officers and trustees.
A meeting of Simcoe was held at Allen's office May 31, 1934. New officers were elected and further releases signed by Allarbe and Simcoe, a little broader in scope than the so-called creditors' agreement. Simcoe executed a mortgage to Guaranty Trust Company, trustee, for $3,879.19, payable November 1, 1934; also a mortgage to Allen and Bolin securing a note to them for $7,500 for their services. McGuffie, an employee of Ragan Dunnett, was placed in charge of the sheep. Between August 10, 1934, and November 30, 1934, *Page 684 McGuffie sold sheep and lambs, the proceeds amounting to $18,773.74, which were applied on the mortgage. Wool Growers, in compliance with its own agreement to finance Simcoe for the remainder of the season, made advances of $1,774.73 on August 13, 1934, $696.54 on September 17, 1934, and $519.86 on December 3, 1934 (the suit to foreclose was instituted December 4, 1934), to pay operating expenses. The funds for the advances of August 13, 1934, and September 17, 1934, were borrowed by Wool Growers from Federal Intermediate Credit Bank on notes executed by Simcoe. The note of December 3, 1934, for $519.86, was forwarded by Wool Growers to the bank with a request for a loan, but the loan was not granted. The mortgage matured October 27, 1934. Except for the loan of $519.86, Wool Growers refused to make further advances. Efforts were made by Allarbe and Allen to procure range leases and finances for the following season.
September 17, 1934, Allarbe assigned all of his shares in the corporation to Maud Bolin (447 shares), Reta Laup (150 shares), Charles F. Bolin (1 share), Frank J. Allen (1 share), and Stephen Rodrick (1 share), they orally agreeing that he should receive one-half of the profits. Maud Bolin, wife of Charles F. Bolin, was of Indian blood and entitled to preference rights in securing leases on the Indian reservation. On September 18, 1934, the new trustees of the corporation, Maud Bolin, Reta Laup, and Charles F. Bolin, held a meeting and adopted the following motion and resolution:
"It was moved and seconded that Maud Lillie Bolin proceed to Spokane and negotiate regarding the securing of moneys for the purpose of refinancing and continuing the corporation for the ensuing year. Likewise it was moved and seconded that she proceed to take such steps as necessary to secure the necessary range of the Yakima Indian Reservation."
"Resolved, that the president of this company be and she is hereby authorized to borrow from the Wool Growers Service Corporation or the Federal Reserve Bank, a sum of money sufficient for the re-financing *Page 685 and operating, and that she purchase or secure the money to purchase 3600 head of new sheep, and that she is hereby authorized to secure the same by mortgage on any and all of the property of this company which shall be executed in the name of the company by its president."
On September 20, 1934, Simmons, secretary of Wool Growers, wrote the following letter to Federal Intermediate Credit Bank at Spokane:
"All range leases on the Yakima Indian Reservation are open for bid on September 25, 1934, and it is necessary for the Simcoe Sheep Company to bid on their ranges if they want to continue to operate there next season. The bids must be accompanied by a certified check in payment of ten per cent. of the annual range fee. In the case of the Simcoe Sheep Company the ten per cent. will amount to approximately $500.00 or $600.00. The Simcoe Sheep Company has applied to us for an advance of this amount to be used for the payment. We advised them we would take the matter into consideration and let them know in a day or two, and explained explicitly that we were making no promises whatsoever regarding additional advances. We planned to have a directors' meeting to discuss the matter, but as we were unable to get our Board together, the writer talked with Mr. Sears, T.H. Smith, Archie Prior and Mr. Anderson, and we are all of the opinion that it is to our best interests to decline the application. We arealso of the opinion that we should require payment of the loan atmaturity on October 27, 1934.
"This letter is written to you to keep you advised as to the change in the setup of their affairs and our attitude regarding it. It has occurred to us that the stockholders may go toSpokane to see you and try to work out some arrangement forrefinancing. Our reasons for rejecting their application are that they are not experienced sheep operators, are not willing to put any money into the company to increase the margin of our security and as far as the bidding on the ranges is concernedthey will be in direct competition with many of our customers nowoperating on the Reservation." (Italics ours.) *Page 686
Allen and Mrs. Bolin started out in his car for Spokane, but the car broke down. Allen called the bank by long distance telephone and made application for a loan of $600 to apply as a down payment on Mrs. Bolin's application for a lease in the Indian reservation. The loan was refused. Ranges and finances for the following year were not obtained, and thereafter all of the shares of the capital stock of the corporation were reassigned to Allarbe. It appears that Ragan Dunnett got the ranges on the Yakima Indian Reservation formerly held by Simcoe.
We will now note some of the facts attending institution of the suit. December 4, 1934, Wool Growers instituted suit against Simcoe to foreclose the mortgage of December 27, 1933, which had been reassigned to it by Federal Intermediate Credit Bank, and on which there remained a balance unpaid of approximately $6,000, and interest. It made Guaranty Trust Company, trustee, holder of the second mortgage, and Allen and Bolin parties defendant. Guaranty Trust Company, trustee, through its then attorneys, Cheney and Hutcheson, who now represent Federal Intermediate Credit Bank, December 18, 1934, filed an answer and cross-complaint, in which it alleged that Wool Growers misappropriated large sums of money belonging to Simcoe; that the settlement agreement was procured by fraud, and that, instead of Simcoe owing Wool Growers any money, Wool Growers was indebted to Simcoe in a sum in excess of $20,000. The cross-complaint was verified by Sylvester, the accountant who formerly kept the books of Ragan Dunnett. Simcoe, a few days later, filed a cross-complaint containing substantially the same allegations contained in the cross-complaint of Guaranty Trust Company. Allen also filed an affidavit containing charges that Wool Growers and Ragan Dunnett had entered into a conspiracy to cheat and defraud Simcoe. Wool Growers thereupon dismissed the suit without prejudice. The note and mortgage were reassigned *Page 687 to Federal Intermediate Credit Bank, and that bank, December 24, 1934, instituted suit to foreclose the mortgage. It made Guaranty Trust Company, trustee, and Allen and Bolin parties defendant. Guaranty Trust Company again filed a cross-complaint, verified by Sylvester, containing the same charges contained in its cross-complaint filed in the suit instituted, and later withdrawn, by Wool Growers. Thereupon Federal Intermediate Credit Bank insisted that Wool Growers maintain the suit, and reassigned the note and mortgage to Wool Growers, and Wool Growers was substituted as plaintiff in place of the bank. In the meantime, Wool Growers purchased the mortgage held by Guaranty Trust Company, trustee, at a large discount, and the $7,500 mortgage held by Allen and Bolin, paying Allen and Bolin $1,000 therefor. Thereupon, Guaranty Trust Company, trustee, and Allen and Bolin were dismissed from the suit. Wool Growers thereupon filed an amended complaint against Simcoe containing three causes of action; the first, to foreclose the $30,000 mortgage executed to it, the second, to foreclose the Guaranty Trust Company mortgage, and the third, to foreclose the mortgage to Allen and Bolin for $7,500.
The trial judge found that no conspiracy was shown. We are profoundly sensible of the fact that the trial judge had the advantage of seeing the witnesses, hearing their testimony, and observing their demeanor while on the witness stand and about the court. Among other things, he had an opportunity of observing Polonio Allarbe, which is denied to us. Much in this case depends upon Allarbe's degree of intelligence or lack of it. We realize that a man may not be able to read or write the English language, or speak or understand it very well, and yet know his way around in a business deal. But, as we have already shown, as late as December, 1933, Wool Growers, which by that time had had ample opportunity to judge of the matter, wrote a letter to the bank in which it included this significant statement: *Page 688 "Polonio Allarbe is an ignorant Spaniard." Furthermore, Allarbe's simplicity is clearly manifested by his acts after the settlement, and, indeed, in making the settlement itself.
In certain cases, a reviewing court has an advantage over the trial court. What we have in mind was so cogently stated by Roscoe Pound, while serving as a court commissioner of the supreme court of Nebraska, that we quote from a decision written by him forty years ago:
"It must not be forgotten, however, that there are sometimes advantages on the side of the reviewing court. In long and complicated equity cases, especially where an accounting is involved, there is a marked difference between reaching a finding on one's recollection of what he has heard in the course of a trial lasting weeks or even months, and a finding as a result of patient investigation of a written record, with the aid of printed briefs, where comparisons may be made, computations tested, circumstances weighed, and conflicting statements sifted, upon the certain and assured foundation of a written page."Faulkner v. Simms,
The trial judge said, among other things, in delivering his well-considered opinion:
"I do not believe that there was any deliberate or planned conspiracy between plaintiff [Wool Growers] and Sears, Simmons, Ragan and Dunnett or the bank."
Nor do we believe that there was any deliberate and planned conspiracy. Concert of action grew and developed. Ragan's firm was in desperate need of cash. He acquired more than $42,000 of Allarbe's money. Needing further financing, he got it by bailing Wool Growers out of a couple of bad loans to Kays and Olney. This was of material benefit to both Wool Growers and Ragan. Wool Growers realized in full on a bad loan. Olney's $5,300 back range fees, for which Ragan and wife were sureties, were paid, and Ragan even kept the range. Allarbe's money made these things possible. *Page 689 In other transactions, Allarbe's money, and afterwards Simcoe funds and property, were, with the knowledge, and indeed with the assistance of Wool Growers, so commingled with the funds of Ragan Dunnett that they cannot be segregated, at least under the evidence so far produced in this case. There appear to have been repeated misuses of corporate funds in which both Ragan Dunnett and Wool Growers participated. For example, Ragan should have paid the back Olney range fees. They were discharged by the use of Simcoe's money. Wool Growers paid obligations of Ragan Dunnett to themselves with Simcoe money. The evidence is, we think, well-nigh conclusive that Ragan sold sheep belonging to Simcoe and kept the proceeds. Supplies for both Simcoe and themselves were purchased by Ragan Dunnett. Lambs and wool of Simcoe were commingled with lambs and wool of Ragan Dunnett. Wool Growers itself made deposit of Simcoe funds in Ragan Dunnett's bank account. These things were going on for nearly two years before a bank account or books were opened for Simcoe. During this period, Ragan was general manager, with the broadest possible powers, and Wool Growers, as trustee, held all its stock, except four shares, with the duty of selecting proper trustees and officers, to the end that the affairs of the corporation should be properly managed.
This case was first argued before a department of the court, and, later, En Banc. In each instance, a decisive majority of the judges sitting were of the opinion that Allarbe was unjustly deprived of his money by the acts of Ragan Dunnett and Wool Growers, and they thought it of little consequence whether or not their concerted acts could be properly denominated a conspiracy. But with the crucial question in the case the court has had great difficulty: Is Allarbe estopped from demanding an accounting by the settlement hereinbefore referred to? The respondents say that, at the *Page 690 time the settlement was made, Allarbe believed that Ragan, Wool Growers, their officers, and the bank were, all and sundry, absolutely unworthy of any trust and confidence whatsoever; and without doubt, considering the various charges he had been making with respect to them for the better part of two years, that Allarbe had no longer trust or confidence in Wool Growers or Ragan must be conceded. They also point out that Allarbe was represented by attorneys, and further, that these attorneys, during a period of more than a year and a half, had carried on an investigation of Allarbe's charges and had been given full right to inspect all books and records, and that that right had been quite fully exercised. Hence, they say that the parties dealt at arm's length, and that, even if it be admitted, arguendo, that Allarbe had any valid claims against them or any of them, they were extinguished by the settlement and release. These contentions they supplement by the familiar and well-grounded principle that the law favors the amicable settlement of disputes, and is inclined to clothe them with finality.
[1, 2] On the part of Ragan, it is further contended that his fiduciary relationship, if any, was of the most technical kind as a director and officer of a corporation in which Allarbe had a third interest. On the part of Wool Growers, it is said that it did not even stand in a technical fiduciary relationship to Allarbe, merely being a trustee of a voting trust. The majority of this court have come to the conclusion, however, that the situation was such that Ragan, Wool Growers, and its officers did occupy a fiduciary relation to Allarbe. Ragan got possession of his money. A corporation was ultimately formed in which Allarbe was assigned a third interest, and from the start Ragan was manager, with these all-inclusive powers:
"With all the powers vested in a general manager, as set forth in the by-laws of the corporation, with right and authority to borrow money in the name of the corporation, as may be necessary for carrying on *Page 691 its business, and authority to sign notes, checks, and drafts in the name and on behalf of the corporation, make the bank deposits and perform any other functions and do all things necessary for the promotion of the success of the business."
From the very date of the organization of the corporation, Wool Growers held all of the Simcoe stock, except four shares, in a nonrevocable voting trust, charged with the duty of selecting proper and suitable officers. It may be said here, parenthetically, that it continued Ragan as director and manager long after the time it knew that he was taking undue personal advantage of his powers, and indeed assisted him in doing so, to the disadvantage of the corporation and its stockholders. The principles which govern the situation before us are elementary:
"Undoubtedly the directors of a corporation in the management of the corporate affairs occupy a position of extreme trust and confidence and exercise great power for good or bad over the corporation and its shareholders. They are agents for the corporation. Toward it and the stockholders they undoubtedly stand in a fiduciary relation as far as corporate business is concerned." 1 Bogert, Trusts and Trustees, p. 59, § 16.
(Our corporation statute provides that officers and directors shall be deemed to stand in a fiduciary relation to the corporation. Laws of 1933, chapter 185, p. 796, § 33, Rem. Rev. Stat. (Sup.), § 3803-33 [P.C. § 4592-63].)
It will be seen, by reading further in the section just quoted from Bogert, that majority stockholders occupy a fiduciary relation toward the minority stockholders. It must logically follow that a trustee of voting stock holds an even stronger fiduciary relation as to the stockholders themselves. He has been constituted their sole and irrevocable agent to select fit and proper officers for the corporation.
[3, 4] At all events, Ragan, of Ragan Dunnett, and Wool Growers were in complete control of Simcoe *Page 692 affairs, and, therefore, complete masters of the interests of the two Spaniards, Allarbe and Galanena, and it is equally clear, from what we have already said, that they breached their trust for their own private gain. The relationships of which we have spoken, it must be remembered, continued right up to the instant of settlement. The confidential relation had ceased, but the fiduciary relation continued until the settlement became an accomplished fact.
"b. Fiduciary relation. A person in a fiduciary relation to another is under a duty to act for the benefit of the other as to matters within the scope of the relation. . . . If the fiduciary enters into a transaction with the other and fails to make a full disclosure of all circumstances known to him affecting the transaction, or if the transaction is unfair to the other, the transaction can be set aside by the other. (See § 170 (2))" Restatement, Trusts, p. 7, § 2, comment (b).
"§ 170. Duty of Loyalty. . . . (2) The trustee in dealing with the beneficiary on the trustee's own account is under a duty to the beneficiary to deal fairly with him and to communicate to him all material facts in connection with the transaction which the trustee knows or should know." Restatement, Trusts, p. 431, § 170.
[5] In the instant case, the fiduciaries are standing upon a release. As to this, we quote further from the Restatement, as follows:
"§ 217. Discharge of Liability by Release or Contract.
"(1) A beneficiary may preclude himself from holding the trustee liable for a breach of trust by a release or contract effective to discharge the trustee's liability to him for that breach.
"(2) A release or contract is not effective to discharge the trustee's liability for a breach of trust, if . . .
"(e) the transaction involved a bargain with the trustee which was not fair and reasonable."
Covering somewhat the same subject, Bogert says, in volume 3, p. 1566, § 493: *Page 693
"All direct business dealings between persons in a fiduciary or confidential relation are affected by the doctrine under consideration. Gifts, contracts, sales, releases, and mortgages are controlled by the rule." (Italics ours.)
And on the following page, under a heading, "What is Fair Play," he says, in part:
"The point generally regarded as most important in making a showing of good faith is that the fiduciary made a full and frank disclosure of all the relevant information which he had."
And, after discussing that at some length, he says, on the following page:
"Secondly, the courts place upon the fiduciary who has received an advantage in a direct transaction with his principal the burden of showing that, if the arrangement purported to be one for a consideration, the consideration was adequate."
Was there a full and frank disclosure? Due to the fact that proper books were not kept, and, indeed, for a considerable period, no books at all, the submission of such data as Ragan and Wool Growers had to Allarbe's attorneys did not serve the purpose of a full disclosure. Mr. Allen, one of Allarbe's attorneys, who spent considerable time in examining such data as was available, discovered a considerable number of diversions, conversions, or misapplications of Allarbe's and Simcoe funds, but, as he said, he was not a bookkeeper, and, even if he had been, he could not have furnished the whole truth. Sylvester, of Sylvester Straight, accountants, who kept the Ragan Dunnett books, testifying in regard to a sum that was turned over to Ragan Dunnett, and which was part of a larger sum which came partly from refunding a mortgage and partly from the sales of wool and sheep, testified as follows:
"Q. In other words, the only way you could determine the amount of money of Ragan Dunnett that was turned over to them of this $21,240.01 would be by an *Page 694 audit of your books and a report on them? A. Yes. Q. That is the only way? A. And all our accounts."
Although this matter has been investigated in a trial lasting two months, and we have before us this immense mass of oral testimony and documents, it is clear that it does not tell the whole story.
Before discussing the matter of adequacy of consideration, it may be noted that the evidence shows that Wool Growers was very active in arranging the settlement. The preliminary negotiations were held at its office. Its attorneys drafted the papers and generally supervised the negotiations and the closing of the matter. In its correspondence with the bank, Wool Growers repeatedly referred to Allarbe and Galanena as ignorant Spaniards. On May 17, 1934, when the negotiations for the settlement were pending, and, but two weeks before the settlement was made, its secretary, Simmons, in a letter to the bank, said:
"The Spaniards are not capable of handling the outfit without help of Ragan Dunnett. They are ignorant, and Polonio cannot get along with any of the herders. Therefore, we have reached the conclusion that it will be best for all concerned if the loan is liquidated next fall."
About a month earlier (April 10), Simmons said, in a similar letter:
"We do not think it advisable to fill up their bands, as we want to liquidate the loan this season."
This was natural enough, for the reports to the executive committee of the bank show that the loan secured by the mortgage on all the property of Simcoe, and which was being increased month by month by advances to keep the flocks serviced, had gotten into a somewhat hopeless condition. We quote briefly from the reports made just shortly prior to the settlement:
"This loan is approximately 110 per cent of the appraised or market value of the security." (Report of January 2, 1934.) *Page 695
"This loan is approximately 115 per cent of the appraised or market value of the security." (Report of April 10, 1934.)
"This loan is approximately 120 per cent of the appraised or market value of the security." (Report of May 18, 1934.)
Thirteen days later, Allarbe signed the releases and received two-thirds of the stock of Simcoe, a corporation, whose assets were mortgaged for more than 120 per cent of their value. He also received the oral promise of Wool Growers to finance the operation of the sheep until fall, and, as we have already seen, Wool Growers did supply approximately three thousand dollars for that purpose, but there is a letter among the exhibits which shows that it did not consider that promise binding, and the master motive for supplying this money may well have been to protect its security. The sheep had to be maintained. We have already seen that, before and during the settlement negotiations, and after their consummation, it had the fixed intention of liquidating its loan in the fall, and we have, earlier in this opinion, quoted its letter of September 20, 1934, in which it said it was making no promises to Simcoe in regard to additional advances and impliedly asked the bank not to furnish Simcoe with funds to bid for Indian range, closing with:
". . . As far as the bidding on the ranges is concerned, they will be in direct competition with many of our customers now operating in the Reservation."
For two-thirds of the stock in the corporation, the property of which was mortgaged for upwards of 120 per cent of its value, and the oral promise, Allarbe, individually or as the future sole owner of the corporation, agreed to do the following things: He assumed any liability there might be on the unpaid stock subscriptions; canceled Ragan Dunnett's note for $5,900; gave up the Olney range; released all indebtedness of Ragan Dunnett to the corporation, which, we have previously *Page 696 seen from correspondence from Wool Growers to the bank, amounted to $30,736.46 in January, 1933, as well as all personal claims against them; released all corporate and personal claims against Wool Growers; and made a second corporate mortgage to the Guaranty Trust Company to secure certain creditors in the amount of $3,879.19. He received legal, but not equitable, consideration. To say the consideration he received for this release was inadequate would be a gross understatement. In so far as value is concerned, it was less than nothing.
In spite of all the explanations which were made to Allarbe, and we do not for a moment doubt that Mr. Conklin for the Wool Growers made a full explanation of the settlement papers, we think it quite possible, though we do not so hold, that he had no conception of what he was doing. Certainly, the comments of Mr. Allen, his own attorney, could easily have misled a person of his acknowledged ignorance, except as to the care and herding of sheep. Mr. Allen testified that, before Allarbe had agreed to the settlement, he said to him:
"Now, Polonio, understand that if this goes through, if you agree to this, then you have waived any right you may have to any claims at all through or for the benefit of the Simcoe Sheep Company, and there would be no more lawsuits. It is all settled. You won't have any — you will get your sheep back, but you won't have any claim against them."
And, after the settlement, Allen told Allarbe:
"Now, Paul, you are the boss. You have got it all. You are a good sheepherder. You look after the sheep. Now, see how good a business man you are. Now, don't forget you have got to get range and get refinanced. It is up to you to handle this thing. These people say you can't run this business. Now, you see if you can show them that you can."
Whereupon, at once, on the very day the settlement was fully consummated, May 31, 1934, Allarbe, as sole *Page 697 owner of the Simcoe stock and president of the corporation, gave to Allen and Bolin for their services the corporation's note in the amount of $7,500. Allarbe executed a long and elaborate corporate chattel mortgage on all the corporate property, together with all increase and replacements thereof, to secure this note; the mortgage, however, being expressly made junior to the Wool Growers' mortgage and the Guaranty Trust Company's mortgage. The note and mortgage to Allen and Bolin, made, as aforesaid, contemporaneously with the settlement, was subsequently sold by them to Wool Growers. The foreclosure of that mortgage forms the subject matter of Wool Growers' third cause of action in this suit.
[6, 7] In our opinion, neither Allarbe nor Simcoe is estopped by the release from demanding an accounting from Wool Growers and Ragan Dunnett, for the reason that no full disclosure was made, and because the consideration, if what he received can be dignified by that term, was inadequate, if any. The whole transaction was so grossly unfair that it cannot be recognized as valid in equity. The trial court refused to allow amendments, offered fairly early in the trial, which would have permitted the cross-complainants to pursue the theory upon which we render this decision. This action is before us de novo, however, and, in the interests of justice, as we have the right to do, we have considered the cause as if the amendments had been allowed.
[8] The trial court dismissed the Federal Intermediate Credit Bank, on motion, at the close of cross-complainants' evidence. It can scarcely be supposed that the officers of that institution were ignorant of the misapplication of funds belonging to Simcoe, in view of the correspondence concerning the Olney deal, as well as some other matters in the record. It appears to have knowingly profited by some of the misapplications. Yet, the bank did not, as we read the record, come into *Page 698 a fiduciary relationship with the cross-complainants, and we have concluded that the action of the trial court in dismissing it should be, and it is, affirmed. On the theory upon which we rest this decision, Dale Simmons must also be dismissed, and it is so ordered.
[9] We realize the difficulties which will inhere in an accounting of these matters, due principally to the failure of the cross-defendants to keep proper accounts. There is a well-established rule, however, which will make an accounting possible and partially effective at least. We find the rule well-stated, with many supporting citations, in Backus v.Finkelstein,
"The persistent failure to keep accurate books of account, and to preserve important records, alone places defendants in an almost hopeless position. In dealing with the property and rights of others, the necessity for keeping such accounts and of preserving such records in cases like this is unqualified, and is apparent to every one. The duty in that behalf is clear and beyond question. [Citing cases.]
"Failure to perform this duty, and to comply with this obvious requirement, properly entails consequences which follow almost automatically and as a necessary result therefrom. The almost necessary presumption is that the purpose of a failure in this respect has been to cover up or conceal what the records accurately kept would disclose. [Citing cases.]
"There is a compelling necessity for strictly enforcing the provisions of these rules and of this presumption. The failure to keep accurate accounts often means endless confusion from which there is no relief. `No court is equal to the examination and ascertainment of the truth of the claims in much the greater number of cases' where the fiduciary lends his efforts to confuse. King v. Remington,
The judgment is reversed (except as hereinabove noted) and the cause remanded, with directions to require a full and complete accounting from Wool Growers Service Corporation and Ragan Dunnett of all *Page 699 moneys and properties of Polonio Allarbe and Simcoe Sheep Company which came into their possession.
BEALS, STEINERT, and JEFFERS, JJ., concur.
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