Dean v. Kellogg (327 Ill. App. 520, 1946)

Mr. Justice O’Connor

delivered the opinion of the court.

October 2, 1944, plaintiffs, minority stockholders of Warren-Teed Seed Company, filed their complaint in chancery against defendants, John L. Kellogg, the majority stockholder of the corporation, for an accounting of the corporation’s assets, which it was alleged were fraudulently converted by him to his own use after the dissolution of the corporation; and against defendant Kellogg Company, a corporation, for assets it had received from defendant, Kellogg, with knowledge of the fraud. John L. Kellogg filed his motion to dismiss the suit on the ground that it was barred by the Statute of Limitations (Par. 16, eh. 83-, Ill. Rev. Stats. 1945 [Jones Ill. Stats. Ann. 107.275]); that plaintiffs were guilty of laches in that they were complaining of matters which occurred more than 12 years before the institution of the suit. Defendant, Kellogg Company, corporation, filed its motion to dismiss the suit, setting up the Statute of Limitations, laches, that the matters involved had been adjudged in a decree entered by the Circuit court of Calhoun county, Michigan, April 29, 1939, and other grounds not necessary to mention here. Both motions were sustained, the suit dismissed and plaintiffs appeal.

The material, allegations of the complaint as amended are that plaintiffs are minority stockholders of the Warren-Teed Seed Company, a Nevada corporation, owning131,000 shares of its capital stock consisting of 350,000 of Class A and 400,000 shares of Class B, all of which were without par value. That defendant, John L. Kellogg, since February 24, 1926, was at all times the majority stockholder and in control of the corporation which was engaged in the business of manufacturing and operating seed cleaning machinery and buying, cleaning and selling all kinds of seed with its principal place of business in Chicago. That on November 10, 1930, Seedtown Products, Inc., was organized' under the laws of Delaware, with an authorized capital stock of 350,000 shares of Class A, and 400,000 shares of common stock, all without par value; that John L. Kellogg was one of the directors and the president of the Seedtown Corporation; that the Seedtown Corporation was organized in pursuance of a plan of reorganization by the- terms of which Seedtown was to acquire in exchange for its stock, the business and assets of the Warren-Teed Company and all outstanding capital stock of the Kellogg Terminal Warehouses, Inc., an Illinois corporation.

It is further alleged that the Kellogg Warehouses, Inc., owned 8.64 acres of land improved with several buildings used for warehouses and manufacturing purposes located in Chicago, which properties were valued at $3,000,000, subject to a mortgage of $925,000. That 4,160 shares of its capital stock were outstanding, practically all of which, with the exception of qualifying shares, were owned by defendant, John L. Kellogg. That pursuant to the plan of reorganization, the Seed-town Corporation, on November 14, 1930, acquired all of the outstanding stock of Kellogg Warehouses in exchange for 66,282 shares of its Class A stock and on December 24, 1930, acquired all of the assets of the Warren-Teed Corporation subject to all its liabilities in exchange for 11,094 shares of its Class A and 392.862.2 shares of its common stock. That the Seed-town Company assumed an alleged indebtedness of Warren-Teed Corporation to John L. Kellogg of $219,740.05, a bank loan of $25,000 and an alleged indebtedness of $283,534.18, to the John L. Kellogg Seed Co., a corporation wholly owned by defendant, John L. Kellogg. That as a part of the reorganization the liabilities were cancelled and the bank loan assumed by John L. Kellogg, personally, in exchange for shares of Seedtown on a basis of $15 a share of Class A stock, as a result of which 16,316 shares of Class A stock of the Seedtown Company were issued to John L. Kellogg, and 18,902 shares of Class A stock to the John L. Kellogg Seed Company. That as a result of the reorganization Seedtown acquired assets in excess of $3,750,000, of which $2,200,000 represented a net value of the Kellogg Warehouses; $1,000,000 represented by patents and $480,000 represented seed cleaning machinery, and Warren-Teed became a holding company, its sole asset being 11,094 shares of Class A and-392.862.2 shares of common stock of Seedtown which were never distributed to the stockholders' of Warren-Teed. That because of John L. Kellogg’s control of the several corporations involved in the reorganization he so manipulated the hooks and accounts of the several corporations by means of fictitious and arbitrary entries that Warren-Teed Company, and later Seed-town, were indebted to him and to the John L. Kellogg Seed Co.; that in 1931 the books of the Seedtown Company erroneously showed a fictitious indebtedness to John L. Kellogg in excess of $215,000 and a fictitious indebtedness to John L. Kellogg Seed Company of $65,000; that in June 1931, John L. Kellogg embarked upon a fraudulent scheme to convert the assets of Seed-town to his own use. And to carry out the scheme he filed suit in the Municipal court of Chicago against Seed-town to recover the $215,000 above mentioned, and the interest thereon and on August 4, 1931, judgment was entered by default for $220,006.90; that he caused the dissolution of the Kellogg Seed Company December ll, 1931 and the dissolution of Seedtown December 21, 1931, and permitted the charter of Warren-Teed to be revoked in March, 1932, for failure to file a list of its officers and pay a fee of $7.50; that upon the dissolution of the Seedtown Co., defendant, Kellogg, fraudulently converted to his own use and benefit all of the assets of the Seedtown Corporation without ever ac-' counting for them to the other stockholders. That among the assets fraudulently converted by John L. Kellogg to his own use were secret formulae and inventions for popping cereal grains, particularly rice and wheat formulae and inventions developed by Warren-Teed and its successor Seedtown, which were rightfully the property of those corporations. That afterward John L. Kellogg, unknown to plaintiffs, conveyed some of the assets, including the secret formulae, etc., to the defendant, Kellogg Company, a Delaware corporation, which took such assets with knowledge of the fraud. That afterward defendant, Kellogg Company, proceeded to, use the commercial formulae, etc., and made large profits which, in equity and justice, should belong to the stockholders of Warren-Teed and Seedtown corporations. ‘ ‘ That by reason of the dissolution of Seedtown Products, Inc. title to all of its assets passed by operation of law to its stockholders, of whom the largest was Warren-Teed Seed Company which owned a. majority of the outstanding stock of Seedtown Products, Inc. ’ ’ That by reason of the subsequent dissolution of Warren-Teed “the equitable and legal ownership of its assets passed by operation of law to its stockholders of whom plaintiffs are a number.”

It is further alleged that John L. Kellogg sent a letter dated December 7, 1931, to the stockholders of Warren-Teed Company which owned a big majority of the outstanding shares of Seedtown, urging the immediate dissolution of Seedtown, in which letter statements appeared which were false, which Kellogg knew or by the exercise of due diligence should have known were false; in which letter it was said that Seedtown was indebted to him for some $220,000, and it is alleged in the complaint that, as a matter of fact, upon proper statement of the account, he Kellogg, was indebted to Seedtown in an amount exceeding $190,000 ; that at the meeting of the stockholders of Seedtown, at which its dissolution was voted, Kellogg was the owner or in control of over 500,000 shares of the capital stock, holding it in his various capacities, which number of shares he cast for the dissolution of Seed-town.

It is further alleged that upon receipt of Mr. Kellogg’s circular letter above mentioned, Julia E. Dean, one of the plaintiffs, filed a stockholders’ suit in the Superior court of Cook county to restrain the dissolution of Seedtown, the transfer of any of the corporate property and for an accounting. That the suit was dismissed on April 13, 1933, without an adjudication on the merits and on April 21, 1933, Julia Dean filed a stockholders’ representative suit in the United States District Court in Chicago against John L. Kellogg, W. K. Kellogg and Kellogg Company, for an accounting and for all property and assets appropriated by them for their own use in fraud of the stockholders of Seedtown and Warren-Teed Companies; that that suit was dismissed October 13, 1936, for want of valid service on defendants without an adjudication of the merits. That in May, 1938, plaintiffs in