Fox v. Hale & Norcross Silver Mining Co. (108 Cal. 369, 1895)

Beatty, C. J.

The Hale & Norcross Silver Mining Company is a corporation, organized under the laws of California, with its principal place of business at the city of San Francisco. It is the owner of one of the mining claims on the Comstock lode, in the state of Nevada, where for many years it has been' engaged in the business of mining gold and silver bearing ores.

The plaintiff, M. W. Fox, since the year 1887, has been at all times a stockholder of said corporation. In August and September, 1890, he addressed communications to its board of directors, and to the individual members of the board, charging, in substance, that for three years the corporation and its stockholders had been systematically plundered, and its property stolen, to the amount of more than $2,000,000, by means of a fraudulent conspiracy and combination between said directors and the owners or lessees of the mills employed in the reduction of the ores extracted from the company’s mine; that the devices resorted to in furtherance of the object of this conspiracy were the mixture of worthless rock with high-grade ores so as to obscure their value, and at the same time increase the quantity of material to be put through the mills; the concealment from the stockholders of the average value of the ores, as thus reduced; a fraudulent system of milling by which only a small portion of the precious metals contained in the ores was returned to the company; and a disposition of the stolen bullion in a manner intended to conceal the theft. He further stated in his communication to the board that he was prepared to furnish sufficient evidence of the truth of his charges, and demanded that the directors should institute an action in the proper court, in the name of the company, to recover from the conspirators the full amount of its losses.

Nothing having been done by the directors in response to this demand, the plaintiff commenced this action, in which he joined as defendants the corporation, all the individuals who had served as its directors from 1887 to 1890 inclusive, and the owners of the several mills in which its ores had been reduced during the same period — these last being sued by fictitious names. The summons does not appear to have been served on any of the mill-owners, but the other defendants filed their answer to an amended complaint, and on the issues so made the cause was brought to trial November 18,189 L. During the progress of the trial the complaint was further amended by the insertion of the true names of the mill-owners sued by fictitious names, and by the addition of some new allegations; and on March 6, 1892, at the close of the trial, a final amended complaint was filed, for the purpose, as stated, of conforming the pleadings to the proofs.

All the material allegations of these amended complaints were either denied by the answers of the several defendants, or were by the court treated as denied. On June 11, 1893, the superior court filed its findings and conclusions, and entered its decree in favor of the plaintiff for the benefit of the corporation defendant, and against the other defendants (except Hobart, a mill-owner, who had died on June 2d, and as to whose estate all proceedings were continued) severally for various sums. As against Hayward and the Nevada Mill & Mining Company (a corporation)—mill-owners—and Levy, who had been president of the Hale & Norcross company during the whole period from 1887 to 1890 inclusive, there were several judgments for the entire amount of the company’s losses, estimated at $1,011,-835. As against the other defendants—directors of the corporation—there were several judgments in smaller and varying amounts, corresponding, as it is claimed, to the losses sustained by the corporation during their respective terms of office from overpayments to the mill-owners for the crushing and reduction of ores.

Execution was directed to issue upon these judgments, but it was provided that no more should be collected thereon than said sum of $1,011,835, with accruing interest and costs. And a receiver was appointed, to whom the amount so collected was to be paid, and who was authorized and directed by the judgment to pay over to the attorneys for the plaintiff—as compensation for their services—25 per cent of all sums collected. In due time all of the defendants against whom judgment had been rendered moved for a new trial upon a settled statement of the case, and, their motion having been denied, they have taken this appeal from said order and from the judgment.

The large amount involved in the controversy, the difficulties presented by the subjects of investigation, the great length of the trial, the immense mass of evidence, consisting largely of closely printed columns of figures, and the ability, industry, and ingenuity of counsel have combined to raise an unusual number of difficult questions for our decision, in the discussion of which it will be necessary to state in considerable detail many of the matters contained in the record. It will be more convenient to make a particular statement of these matters in connection with the several assignments of error to which they relate, but it will facilitate the discussion to state at the outset the general nature of the issues presented by the pleadings, and the facts as found by the superior court.

In his last amended complaint, filed" as above stated, after the evidence was all in, and for the declared purpose of conforming the pleadings to the proofs, the plaintiff alleges, among other things: That between the 1st of January, 1887, and the 1st of July, 1890, the Hale & Norcross Silver Mining Company delivered to the Chollar or Nevada mill, and to the Vivian and Mexican mills, at or near Virginia City, in the state of Nevada, not less than 80,000 tons of gold and silver bearing ore, the property of said company, to be by said mills crushed and milled. That said ores were crushed and milled at said mills, and were of the value of not less than $3,250,-000. That said Chollar or Nevada mill was the property of the Nevada Mill & Mining Company, a Nevada corporation, organized under the laws of that state for the purpose of owning, leasing, and operating mills for crushing gold and silver bearing ores, and of which the defendants, Hayward and Hobart, were large stockholders. That the said Hayward and Hobart, acting with other persons in a conspiracy to defraud the Hale & Nor-cross Silver Mining Company, controlled and directed all the affairs of said Nevada Mill & Mining Company and of the Mexican mill during all the times mentioned in the complaint, and that all the fruits of said conspiracy Paine to the hands of said Hayward and Hobart. That said persons and corporations (owners, stockholders, and managers of mills) were at all times mentioned in the complaint also the owners of a large number of shares of the capital stock of the said mining company» and fraudulently and unlawfully, in aid of said conspiracy, procured a sufficient number of proxies of other persons in whose names stock was standing, but who were not the real owners thereof, to elect all the directors of said mining company at the annual elections, held March 9, 1887, March 14,1888, March 13,1889, and March 12, 1890. That said directors, so chosen, were at all times controlled by, and acted in subserviency to and conspired with, said mill-owners and managers in all their official acts and proceedings, and in all matters connected with" the management and business of the mining corporation and its mine. That immediately after the election of said directors they formed and organized a fraudulent combination and conspiracy with said mill-owners for the purpose of cheating and defrauding the Hale & Norcross company and its stockholders by divers cunning and unjust practices, among which were the following: That the mill-owners appointed and selected all the agents and employees about.the mills, and having, by means of said combination and conspiracy, the control of the mining company, they caused all of the ore extracted from its mine to be crushed and milled at the mills belonging to or controlled by them, and caused the superintendent of the mining company to suppress or withhold from its stockholders any report of the assays of such ores. That said superintendent did cause assays to be made of every carload of ore extracted from the mine, and reported the same to the directors, not, however, for the purpose of protecting the stockholders, or as a check upon the mills, but merely as a basis for a division of the fraudulent gains of the combination. That said directors, with the consent and approval of the millmen, caused the superintendent of the mine to extract large quantities of low-grade ores of a value below the cost of mining and reduction, and to mix these with the high-grade ores for the double purpose of concealing from the stockholders the real value of such ores, and of giving constant employment to the mills at an extravagant rate of compensation. That the loss to the mining company caused by the mining, transportation, and milling of said low-grade ores amounted to about $500,000. That the mill-owners caused false and fraudulent assays to be made of the pulp of said ores, and, knowing them to be false, represented them to be true. That said mill-owners, in furtherance of the objects of the conspiracy, caused all of said ores to be handled by a fraudulent system of imperfect milling and reduction, intended to leave in the tailings, slimes, and residues a large portion of the gold and silver contained therein, which tailings, slimes, and residues were afterward worked over for the joint benefit of the conspirators, to the damage of said mining company and its stockholders in the sum of about $1,000,000.

That said directors, in furtherance of the conspiracy, ordered and permitted all of said ores to be milled at said Mexican, Vivian, and Chollar or Nevada mills, at the exorbitant and excessive rate of $7 per ton, $3.50 per ton being a fair and reasonable price—to the damage of said mining company and its stockholders in the sum of $280,000.

That about 6,000 tons of ore were delivered to the Virginia & Truckee Railway Company, to be transported to the Chollar mill, which were never accounted for, causing a further loss to the company and its stockholders of $480,000.

That the aggregate losses occasioned by these various acts of the conspirators amounted to $2,100,000, a large portion of which has been divided up and distributed to the directors of the mining company.

The defendants were not permitted to file any answer to this last amended complaint, but their answers to the second amended complaint were allowed to stand as. answers to the last amended complaint, and, so far as its allegations were new or different from previous allegations, they seem to have been treated as if they were in issue, and I shall assume that they were so treated. The answer of the corporation and its directors admits the delivery of its ores to the mills named in the complaint, for the purpose of milling and reduction, and the answers of the mill-owners admit the receipt of said ores, but it is denied that they were of the value alleged, or of any greater value than $1,879,094.68, less the cost of transportation and reduction. Aside from these admissions, it may be said with substantial accuracy that every material allegation of the complaint is put in issue. Hayward and Hobart deny that they were owners or lessees of, or engaged in operating, any of the mills named in the complaint. The Nevada Mill & Mining Company, of which they were stockholders, admits that it owned and operated the Chollar or Nevada mill, and received and worked a portion of the Hale & Norcross ores.

Upon these issues the findings of the superior court were generally in favor of the plaintiff, and I shall merely note, in this connection, some of the more important particulars in which they were otherwise.

It was found that Hayward, Hobart, the Nevada Mill