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PUERTO RICO INDUS. DEVELOP. CO. v. J.H. MILLER MFG.

April 20, 1959

PUERTO RICO INDUSTRIAL DEVELOPMENT COMPANY, A CORPORATION, PLAINTIFF,
v.
J.H. MILLER MANUFACTURING CORPORATION, A CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Poos, District Judge.

Plaintiff, Puerto Rico Industrial Development Company, a Corporation, hereinafter referred to as Pridco, in its complaint alleges that J.H. Miller Manufacturing Corporation of Puerto Rico, hereinafter referred to as Miller of Puerto Rico, entered into a written lease with it on or about September 23, 1951, on a rental basis of $1,698.27 per month; that Miller of Puerto Rico defaulted in the rental payments from December 1, 1953, to June 30, 1954, totalling $11,887.89, plus an additional $569.24, representing rent adjustments from May 1, 1953 to November 30, 1953, and claimed a total due of $12,457.13 as of June 30, 1954; that the rent was guaranteed in the sum due by J.H. Miller Manufacturing Company, an Illinois Corporation of Quincy, Illinois, hereinafter referred to as Miller of Illinois; that suit was entered against the Miller of Puerto Rico in the Superior Court, San Juan Section of the General Court of Justice of Puerto Rico, which Court entered judgment in the above amount for the rent past due; that in accordance with the process of the court at a marshal's public sale certain property of Miller of Puerto Rico was sold in the amount of $900, and credit allowed against the rent due, thereby reducing the judgment to $11,557.13, leaving this balance due and owing to plaintiff, and that because of the guaranty of the lease and failure of payment by Miller of Puerto Rico, is now due and owing from the defendant. The original lease is attached to the complaint, and was signed Miller of Puerto Rico by John H. Miller, President, and by Miller of Illinois, by John H. Miller, President. It is here pointed out that J.H. Miller was the president of both corporations. The lease is attached to the complaint and has therein in so far as material here, the following clause:

    "The performance of the above contract is
  hereby guaranteed in all its terms and conditions
  by the `J.H. Miller Manufacturing Corporation' of
  Quincy, Illinois, as evidenced

  by the signature of its President hereinafter
  appearing."

The lease was dated September 23, 1951.

The defendant filed an answer, admitting the amount of the rent, but denied that the lease was guaranteed by the defendant or that it was liable for the rent due. It alleges in its first defense that plaintiff seized a sufficient amount of assets of Miller of Puerto Rico, and illegally and wrongfully seized assets of other corporations and parties in an attempt to satisfy said rents, which more than offset and paid in full the rent due under the lease sued on; that through wrongful seizure and negligence in selling said property the proceeds of sale were insufficient to pay the rent sued for; and in the first affirmative defense it sets up the allegation that neither the stockholders or the Board of Directors of defendant, Miller of Illinois, either before or after the execution of the lease between plaintiff and Miller of Puerto Rico, authorized John H. Miller to guarantee the lease in question, and by its second affirmative defense, the defendant under its charter and by-laws had at no time any authority to guarantee the terms and conditions of the lease and that the attempt of John H. Miller to do so on behalf of the corporation was an invalid and ultra vires act.

By way of counterclaim, defendant alleges that it shipped to Miller of Puerto Rico, the defendant, molds and materials to be used in fabricating figures and figurines which were to be shipped back in finished form, and in addition thereto sent funds to Miller of Puerto Rico for the purpose of purchasing supplies and raw materials to be fabricated into finished products for the defendant; that at no time did the title to said molds, plaster, paint and other supplies and raw materials, or the figures or figurines as so fabricated ever pass to Miller of Puerto Rico; that under the agreement and arrangement between Miller of Illinois and Miller of Puerto Rico, Miller of Puerto Rico was only to be paid for its services in fabricating the finished products; and that notwithstanding the fact that title to the molds, materials and fabricated products were in Miller of Illinois, plaintiff wrongfully and illegally, and without authority and consent of defendant on, to wit, December 14, 1954, seized, misappropriated, sold and disposed of property of defendant located in the plaintiff's factory building of the fair cash market value of $25,482.80, and prayed judgment in this amount. The plaintiff denied the allegations by way of reply.

The Miller of Illinois is a going concern, having been in business in Quincy, Illinois for many years, prior to the organization of the Puerto Rico Corporation, and on December 9, 1946. The Puerto Rico Miller Corporation was organized in July, 1952. Prior to this time J.H. Miller learned through advertising of plaintiff that tax savings could be made under the Internal Revenue Laws by corporations of Puerto Rico, doing business there. After conferring with agents of plaintiff corporation he decided to organize a corporation in Puerto Rico under Puerto Rican law. Apparently his purpose in so organizing a Puerto Rico Corporation was to procure the benefit of the favorable law. The place of business of this Corporation was in San Juan, Puerto Rico. On July 23, 1952, this Corporation executed a chattel mortgage and note for $49,250. This note and mortgage is not involved here, except as the sale under the chattel is involved. This mortgage had as its security certain chattel property. The mortgage was legally foreclosed under the laws of Puerto Rico. Also a judgment was entered in the Superior Court of Puerto Rico, and the property of the Puerto Rico Corporation was legally sold under the process of this Court, and credit for this sale was given to the Puerto Rico Corporation for the net proceeds of this sale. These proceedings were regular in all particulars and in accordance with the Laws of Puerto Rico. The defendant had notice of the attachment judgment and chattel mortgage sales and could have protected the property values if it so desired. Accordingly the contention of defendant that these sales were improperly held and that these sales of property under the process of these courts for less than market value, were illegal and void has no force.

Defendant also makes the contention that the act of the president of defendant in guaranteeing the payment of the rent under the lease was ultra vires. The evidence in the record shows that John H. Miller and his wife, Shirley A. Miller owned all but one share of the capital stock of the Illinois guaranteeing company, and that she permitted her husband to have complete control of the management of this company. The record further shows that J.H. Miller owned a majority of the capital stock of Puerto Rico Miller Company. The wife knew of the Puerto Rico Miller Company. The record does not show that she owned any of the capital stock of Puerto Rico Miller Company, but it does show that he had complete management control of both companies. The charter of Miller of Illinois shows 250 shares of authorized stock, par value of $100.00 per share, total capitalization, $25,000. The facts concerning the stock ownership, officers and directors of J.H. Miller Manufacturing Corporation (Illinois) are as follows: J.H. Miller, Director, President and Treasurer, 100 shares; C.J. Majerus, Director and Vice-President, 1 share; Shirley A. Miller, wife of J.H. Miller, Director and Assistant Secretary, 149 shares; and B.M. Geers, Secretary, without share ownership. Shirley A. Miller, the principal stockholder, testified that J.H. Miller, her husband, ran the Corporation, and what he did had her approval; the shareowners, officers and directors of J.H. Miller Manufacturing Company of Puerto Rico are as follows: J.H. Miller, Director, President and Treasurer, 650 shares; Max E. Miller, Director, First Vice-President and Secretary, 230 shares; and Eugene M. Miller, Director, Second Vice-President and Assistant Treasurer, 120 shares. It is evident that J.H. Miller and Shirley A. Miller had the controlling interest of Miller of Illinois, and that J.H. Miller had the controlling interest of Miller of Puerto Rico. Under this status of control J.H. Miller executed the lease in question on behalf of Miller of Puerto Rico and guaranteed the lease on behalf of Miller of Illinois. The evidence shows that there was no Board of Directors' meeting of Miller of Illinois authorizing the execution of the guaranty agreement, and that J.H. Miller took upon himself the execution of this guaranty agreement; that he, with the consent of his wife, had complete control of the management of Miller of Illinois. Likewise he was the controlling owner and manager of Miller of Puerto Rico, and it can be said from this record without dispute that he had complete control of the business management of both Corporations. The plea against the rent guaranty is that the act of signing the guaranty agreement was ultra vires.

The defense of ultra vires was at one time permitted by the law of Illinois. However, since July 1, 1933, the defense is practically cut off, Section 157.8, Business Corporation Act, Chap. 32, I.R.S. 1957, Smith-Hurd A.S. Chap. 32, Sec. 157.8, as amended on the above date provides as follows:

    "No act of a corporation and no conveyance or
  transfer of real or personal property to or by a
  corporation shall be invalid by reason of the
  fact that the corporation was without capacity or
  power to do such act or to make or receive such
  conveyance or transfer, but such lack of capacity
  or power may be asserted:
    "(a) In a proceeding by a shareholder against
  the corporation to enjoin the doing of any act or
  acts or the transfer of real or personal property
  by or to the corporation. If the unauthorized
  acts or transfer sought to be enjoined are being,
  or are to be, performed or made pursuant to any
  contract to which the corporation is a party, the
  court may, if all the parties to the contract are
  parties to the proceeding and if it deems the
  same to be equitable,

  set aside and enjoin the performance of such
  contract, and in so doing shall allow to the
  corporation or the other parties, as the case may
  be, compensation for the loss or damage sustained
  by either of them which may result from the
  action of the court in setting aside and
  enjoining the performance of such contract, but
  anticipated profits to be derived from the
  performance of such contract shall not be awarded
  by the court as a loss or damage sustained.
    "(b) In a proceeding by the corporation,
  whether acting directly or through a receiver,
  trustee, or other legal representative, or
  through the shareholders in a representative
  suit, against the officers or directors of the
  corporation for exceeding their authority.
    "(c) In a proceeding by the State, as provided
  in this Act, to dissolve the corporation, or in a
  proceeding by the State to enjoin the corporation
  from the transaction of unauthorized business."

The Statute defines three ways in which an ultra vires act may be attacked. None of these provisions are applicable here in a suit to enforce the guaranteed rent provision of the lease sued on. Even prior to the statute in a closely held corporation, the courts of Illinois have denied the defense. Royal Drug Co., Inc. v. Levin, 273 Ill. App. 231; Jaffe v. Chicago Warehouse Lumber Co., 4 Ill. App.2d 415, 124 N.E.2d 618.

The theory of the third defense is that of appropriation and conversion of property of defendant. Defendant relies on this by way of confession, and avoidance of plaintiff's claim for rent, and by which it seeks to offset the claim of plaintiff and on which it also relies in support of the counterclaim. This defense depends upon the evidence.

Max Miller, Secretary, stockholder and director of Miller of Puerto Rico, was called as a witness for the defendant. He stated that he is a brother of J.H. Miller, was Secretary of Miller of Puerto Rico, and that he was familiar with the various equipment, materials in the process of manufacture and completed materials on the premises of Miller of Puerto Rico; that he was a full time employee at the Plant at Puerto Rico, and was there five to six days a week; that his employment was discontinued when Pridco, by its agent, Pablos Matos, locked the doors and took his key on June 29, 1954; that he was present at the Plant the day previous to locking up the Plant, and for some days prior thereto. He was handed Exhibit A, which was composed of a listing of property attached to Interrogatory 13. This list contained some 54 items describing various molds which had a value listed thereon of $8,789.59. This listing also contained miscellaneous materials for copyrighted scatter plaques of the value of $2,122.24, advances for raw material, and goods in process inventory of the value of $13,303.50, and prepaid inventory of the value of $1,267.44, total valuation, $25,482.80. He stated that the molds have a value of $8,135, were on the premises of the Miller of Puerto Rico at the time Mr. Pablos Matos locked it up; that these molds were owned by the J.H. Miller Manufacturing Corporation of Illinois; that the accountant and the witness had just completed taking an inventory and this inventory showed the molds to be on the premises at the time Pablos Matos locked up the Plant; that these molds were owned by Miller of Illinois and were never owned by Miller of Puerto Rico. He also identified the miscellaneous materials for copyrighted scatter plaques which he stated had a value of $2,122.40; that these were also on the premises at the time of the closing of the Plant, and were the property of Miller of Illinois. This item consisted of articles such as pressure stickers that went on the back of plaques, printed cards on which the cast and decorated plaques were mounted, and polyethylene bags in which they were packed, and many of the materials that also went into the assembly of these plaques; that all of the items represented were paid for and owned by Miller of Illinois, and that these materials were on the premises when the Plant was locked up by Pablos Matos on the 29th of June, 1954.

In reference to the goods in process inventory shown on Exhibit A totalling $13,303.53, this witness said that this item was for raw materials and goods in process inventory, and consisted of over 460 bags of art casting plaster, $1,900 worth of mask rubber used for casting masks which was owned and processed by Miller of Illinois, and sent to Miller of Puerto Rico for certain types of processing; that there were many gallons of paint shown upon the inventory by Mr. Cassiona, the accountant, and I at the end of the month, all of which was purchased by the Corporation in Illinois; that it was a special type of paint unavailable in Puerto Rico and was used for the finishing of certain items such as masks and plaques, and all that material was there, and all of these materials had a value of $13,303, and he knew this because of his knowledge of the value of such materials; that the prepaid inventory item of $1,267.44 consisted of china craft paint which was manufactured, bottled and labelled in the plant of the Illinois Corporation and this is proven by Exhibit 4, an invoice in evidence, showing Miller Craft Paint product, and showing a value of $1,267.44, and this was the property of Miller of Illinois and was on the premises at the time Pablos Matos took over and locked up the Plant. He further stated that all of these items having a total value of $25,482.80 were there on the premises when Mr. Matos took possession; that he did not know what happened to them, that he was locked out and unable to get in the building; that Mr. Pablos Matos held an official capacity with Pridco and that his title was Special Service Agent attached to the office of the Chief of the Accounting Department, and that his duties were mainly to deliver to industrialists all the buildings when completed, the following-up of the collection of rent due, the sale of surplus property belonging to Pridco, and other incidental services of like nature; that the valuation that he placed on the above mentioned items of property were the values exclusive of the cost of shipping; that Matos was also appointed Custodian of said property by the Superior Court of Puerto Rico; that after he became custodian he maintained his official capacity, because this witness called on him several times at his office in the Fomento Building where the offices of Pridco are located, in an attempt to make arrangements for a meeting at Manati where the Plant was located, so that he could get into the building for the purpose of purchasing some of the items and for the purpose of salvaging some of the personal effects of employees of the Company which had been locked up; that after four calls he was permitted to go into the building to remove an automatic clothes washing machine; that at this time the witness pointed out to Pablos Matos that the jeep truck did not belong to either Miller of Illinois or Miller of Puerto Rico.

The witness also stated that he inquired about making a bid for a number of items such as spray guns, castings and air conditioners, but that Mr. Matos told him that he would have to wait until the chattel mortgage property sale before he could make a bid; that he was later told in a conversation in the office of Pablos Matos in the Fomento Building as the sale date was approaching, that the witness could come to the sale, but that there would be little point in so doing because the entire lot would be purchased at the chattel mortgage sale by Pridco, that I could come if I thought I could bid against Pridco; that he notified his brother, J.H. Miller, who was in the States, that they had been locked out and further stated that they had property of other persons and individuals in addition to the property of Puerto Rico Corporation and Illinois Corporation locked up; that he had heard read the answer of Mr. Matos contained in his deposition, the answer to Interrogatory 17. The Interrogatory and Mr. Matos' answer is quoted as follows:

    "Answer: Mr. Max Miller asked for an
  appointment with Attorney Guillermo Silva,
  representing Puerto Rico Industrial Development
  Company and said appointment was set for August
  31, 1954 at the office of said attorney. Mr. Max
  Miller expressed his desire to surrender
  possession of the building because operation had
  ceased even before the attachment of the property
  and in order not to incur into any further
  liability for the payment of rent. The letter was
  prepared by Mr. Max Miller and Mr. Silva jointly
  and transcribed by ...

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