20 F. 167 | U.S. Cir. Ct. | 1882
In these cases the two most important questions to be considered are, — First, is the contract declared upon contrary to
It clearly appears that Allen and Ebenezer Cook, who were directors of the Chicago, Eock Island & Pacific Railroad Company, and J. F. Tracy, the president, and Edward IT. Johnson, the chief engineer, of that company, entered into an agreement into which John P. Cook was admitted as a party in interest, to purchase the lands in question in advance of the location of the line and of the depots and stations of said railroad, with a view to locating the same on or near such lands. Such a contract by officers of a railroad corporation is contrary to public policy, and one which will not be enforced or made the basis of any relief in a court of equity. The directors of such a corporation are quasi public officers. They occupy a position of trust and act in a fiduciary capacity. They represent, not themselves, but the stockholders. They are, in all their official actions, to consider, not their private interest, but that of the stockholders, whose property they manage and control. If, as in this case, they are directors of a railway company, with power to locate and construct a public highway, they owe a duty to the public as well as to the stockholders, and are therefore doubly bound to abstain from entering into any scheme to pervert their trusts to their private gain. The law does not permit these officials to subject themselves to any temptation to serve their own interests in preference to the interests of the stockholders and of the public.
If the courts should enforce such contracts they would lend their sanction to a practice the inevitable tendency of which is to encourage breaches of trust to the sacrifice of private rights and of the public interest. The managing officers of quasi public corporations, possessing vast pow'ers and engaged in great enterprises, are too apt to forget that they are not to have any interest adverse to those whom they represent, and the courts of justice should not in the least relax the rule requiring of them scrupulous fidelity and entire impartiality in the discharge of their official duties.
The present case well illustrates the importance of the rule of law to which we refer. The parties interested in this contract controlled the location of the railroad and of its depots and station grounds. After they had bought lands along the line, with a view to making money by the location of the line and of the depots and stations upon or near them, it needs no argument to show that they were utterly unfit and incompetent to decide as between a location upon their owm lands and a location elsewhere.
It follows that the contract under consideration can neither be enforced nor made the basis of any relief whatever in a court of equity. The court will leave the parties to such a contract precisely where it finds them. Marshall v. Railroad Co. 16 How. 314; Bank v. Owens, 2 Pet. 539; 2 Redf. Ry. 576-584; Pom. Spec. Perf. 284-286; Wight
This brings us to the consideration of the second question, which is, have the complainants shown themselves entitled to relief independently of the illegal contract? It has been decided by the supreme court of the United States that “where several persons enter into an illegal contract for their own benefit, and the illegal transaction has been consummated, and the proceeds of the enterprise have been actually received and carried to the credit of one of such parties, so that he can maintain an action therefor without requiring the aid of the illegal transaction to establish his ease, he may be entitled to relief.” Brooks v. Martin, 2 Wall. 70; Planters' Bank v. Union Bank, 16 Wall. 483:
The rule upon this subject is accurately stated in the last-named case, as follows:
“But when the illegal transaction has been consummated; when no court has been called upon to give aid to it; when the proceeds of the sale have been actually received, and received in that which the law recognizes as having had value; and when they have been carried to the credit of the plaintiff, —the case is different. The court is there not asked to enforce an illegal contract. The plaintiffs'do not require the aid of any illegal transaction to establish their case. It is enough that the defendants have in hand a thing of value that belongs to them.”
According to this rule, the question in such cases must always be, can the plaintiff maintain his action without enforcing the illegal contract ? or, in other words, has he a cause of action independently of the illegal contract ? If it appears that the defendants in a given case have received money or property from the complainants, and which belongs to the latter, the same may be recovered without any inquiry into the nature of the contract under which such money or property was acquired. The distinction is between enforcing an illegal contract and asserting title to money and property which has arisen from it. Applying this rule, we have no difficulty in holding that the complainants in the ease last above named cannot recover.
It does not appear that Ebenezer Cook ever contributed any money, property, or services towards the acquisition of the property in question. His representatives, therefore, have no right which can be enforced without the aid of the illegal contract.' As to them, the bill, in effect, is a suit to enforce the contract by decreeing a division of profits in accordance with its terms. It follows that the bill in that case (No. 1,779) must be dismissed.
As to the other case there is more difficulty. The evidence does show that John P. Cook contributed his services, and probably, also, he expended some money to acquire the property in question. His representatives, therefore, are, upon the principle above stated, entitled to an accounting, and to receive from the joint account such sum
It is insisted that the suit is barred by the two-years limitation provided by section 5057 of the Revised Statutes of the United States, which requires that all suits at law or in equity against an assignee in bankruptcy, touching any properly or rights of property transferable to or vested in such assignee, shall be brought within two years from the time when the cause of action accrued. It will be borne in mind that this suit is brought to set aside for fraud the release executed by complainants to Allen, as well as to recover the complainants’ share in the joint account. The suit was not brought within two years from the execution of said release, but we think the proof shows that it was brought within two years from the time when the complainants discovered the facts. If the facts were such as to render the transaction fraudulent, then the statute did not begin to run until they were discovered. Bailey v. Glover, 21 Wall. 342.
In that case it was held that the statute above referred to is a statute of limitation precisely like other statutes of limitation, and that in construing it we aro to apply the rule that, where the action is intended to obtain redress against a fraud concealed by the party, or which from its nature remains secret, the bar does not commence to run until the fraud is discovered.
Without discussing at length tho question of fact presented, we bold that the release was obtained by Allen under circumstances which renders it fraudulent and void. The relation which existed between the parties was one of trust and confidence. The title was vested in Allen, to be held for the use and benefit of the other parties in interest. He was advised as to the situation and value of the property, and as to the state of the joint account. He was bound, therefore,, to make a full and fair disclosure of all the facts so as to enable the other parties to deal with him upon terms of perfect equality. He seems to have assumed, on the contrary, that he was at liberty to make the best bargain possible for himself. ITe did not accurately state to them the condition of the joint account, or the amount of his claim against the same, and by his actions and words lie led them to believe that it was extremely doubtful whether any profit could be realized out of the transaction, and in this belief they executed the release. It must therefore be held to be fraudulent and void.
The complainants did not discover the facts constituting this fraud until within less than two years from the time of the commencement of this suit. It is insisted by counsel for respondents that the statute does not apply to this case because the assignee in bankruptcy, who pleads the limitation, is not charged with the commission or concealment of any fraud. It is said that the rule applies only to a case
It is also insisted that this case does not fall within the rule laid down in the case of Bailey v. Glover, because the fraud was not concealed by any affirmative acts of Allen. Is it true that complainants are bound to show such affirmative acts? The rule upon the subject by which we must be governed is thus stated in the opinion of the court, pronounced by Justice Miller, in Bailey v. Glover:
“We also think that, in suits in equity, the decided weight of authority is in favor of the proposition that where the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party. ”
In this case, as we have already seen, the fraud was committed by a trustee against his cestui que trust by failing to make a full disclosure as to the state of the joint account, and as to the value of the joint estate. The proof shows, as we hate already said, that the
In view of the relation existing between the parties, we are of the opinion that the complainants were at liberty to rely upon the representations of Allen as to the value of the lands acquired under the contract, without visiting and examining the lands, or investigating for themselves the question of their actual value. But a further and more conclusive answer to this suggestion is to be found in the fact that the misrepresentations and concealments by moans of which the release was obtained did not relate exclusively to the value of the lands, but had reference in part to the joint account, the amount of Allen’s claim against the same, and the balance in Ms hands for distribution, all being matters exclusively within Allen’s knowledge, and concerning which the complainants were obliged to rely upon him. The amount of Allen’s claim against the joint account was largely overstated by him, and the quantity of land sold and the sum realized from sales by him was largely understated, as was also the amount of hills receivable held by him. These matters of themselves were sufficient to render the transaction null and void, without reference to the representations made concerning the value of the lands, and they are manifestly matters which could not be discovered so long as Allen chose to conceal them. In other words, they constituted a fraud which was of such a nature as to conceal itself.
It is insisted that the complainants, or some of them, had information more than two years before the commencement of this suit, which was sufficient to put thorn on inquiry and charge them with notice of the fact. The proof is that E. E. Cook heard Thomas E. Withrow remark, more than two years before the commencement of this suit, that Allen had defrauded or swindled the other parties.in interest; but the remark was made in a casual way. No particulars of any alleged fraud were given, and Cook, having strong faith in Allen’s integrity, might well have disbelieved and disregarded the statement. There is nothing to show that his confidence in Allen was shaken by the remark, and, if not, he was not called upon to act upon it. We hold that the suit is not barred by the statute.
Another question of some difficulty arises in this case. It is whether the complainants were bound, immediately upon the discovery of the fraud, to give notice of rescission, and to offer to return the consideration for the release, within the principle of Grymes v. Sanders, 93 U. S. 62. After much consideration we have reached the conclusion that the doctrine of that case does not apply here.
It may be said that, in order to hold that Allen was a trustee for John P. Cook with respect to the services or property put into the joint account by the latter, it is necessary to take notice of the provisions of the illegal contract, and that this court cannot do. A suffi-cifent answer to this suggestion is that while the illegal contract cannot be enforced or made the basis of relief, there is nothing in the law of evidence, or in the principles of equity, to prevent its being considered as evidence in a case between the parties to it, and as de-' fining their relations to each other with respect to the property acquired under it. As evidence, the contract may be competent as tending to show the right of plaintiff to recover independently of any contract rights conferred by it.
The result of these views is that there must be a decree in. this case setting aside, as fraudulent and void, the release, assignment, and conveyance executed by the executors of John P. Cook, and the said Edward E. Cook individually, to said B. E. Allen of their respective interests in the joint account and property, and for an accounting, to the end that the complainants may recover to the extent of the value of the services rendered and money contributed by John P. Cook to the joint account; and for the purpose of ascertaining the sum to which they are entitled, this case will be referred to a master for such accounting and for report.
A question may arise as to the proper measure of damages. Can complainants recover upon the basis of the contract, or only for 'the value of the services, etc., contributed by him to the joint account? We do not decide this question now, but will direct the master to re
T. Relations of Confidence between DiRectoks and Stockholders -JÍFFEOT OF DIRECTORS BEING- INTERESTED ADVERSELY TO CORPORATION. The ease of Goodin v. Cincinnati & Whitewater Canal Co.
In Rolling Stock Co. v. Railroad Co.
II. Regent Cases. It is not my purpose in this note to consider the question at large. It is so fully discussed in the works named that all that will be attempted here will be to refer to some of the very recent cases upon the subject.
A court will refuse to give effect to arrangements by directors of a railroad
ill. Nature oe Adverse Interest Necessary to Render Contract Invalid. In Hallam v. Indianola Hotel Co.
Y. Directors Occupy Confidential Relations also to Creditors of Corporation. The directors of a corporation stand in confidential relations to its creditors, towards whom they are bound to act with perfect fairness. They are, at least, quasi trustees for the creditors, and where the corporation is insolvent, good faith forbids that the directors should use their position to save themselves, or one of their number, at the expense of other creditors. Where the board of directors of an insolvent corporation confessed a judgment against the corporation in favor of one of their number, who was also president of the corporation and principal stockholder, with a view of giving him priority of lien over another creditor, who was about to obtain a judgment in a judicial proceeding, hold, that such preference could not be upheld, but that the two judgments must stand on a footing of equality in respect to-the commencement of the lien, and share .pro rata in the proceeds of the property available for their payment.
YI. Effect of a Minority only of the Directors being Interested. In tlie case of the U. S. Rolling Stock Co. v. A. & G. W. R. Co.
It may be questioned, from the authorities heretofore referred to, and the ’ general tendency of decisions upon the relations of directors and other officers to the stockholders and creditors, whether the foregoing will be accepted as the correct view of the effect of the presence of an adversely interested minority. It is respectfully suggested that the stockholders and creditors contracted for a full board of impartial, disinterested directors. Judge 'Welch well said, in the Goodin Case,
VII. DIRECTORS Pehsonaltw Liarle. Directors are personally responsible for frauds and losses resulting from gross negligence and inattention to the duties of their trust.
VIII. Limitations ewon Power oe Majority of Stockholders. The holders of a majority of the stock of a corporation may legally control tho company’s business, prescribe its general policy, make themselves its agents, and take reasonable compensation for their services. But, in thus assuming the control, they also take upon themselves tho correlative duty of diligence and good faith.' They cannot lawfully manipulate the company's business in ihe,'r own interests to the injury of other stockholders. They cannot by their votes in a stockholders’ meeting lawfully authorize il® officers to lease its property to themselves, or to another corporation formed for the purpose and exclusively owned by them, unless such lease is made in good faith and is supported by an adequate consideration; and, in a suit properly prosecuted to set aside such a contract, the burden of proof, showing fairness and adequacy, is upon the party or parties claiming thereunder. All doubts will bo solved in favor of the corporation for whom such stockholders assumed to act.
IX. Stockholders Lvieeachiní!- Action oe Directors — Pee requisites. A stockholder in a corporation cannot set aside the transactions of its directors unless he held his interest at the time of the proceeding complained of, nor unless he has exhausted all the means within his reach to obtain redress without resort to a court of law.
X. Demand upon Directors to Sue, before Stockholder can do so, not Necessary, avhen. “If the agents of the corporation, in whom the authority to direct its litigation is vested, are themselves guilty of a wrong against the corporation, a court of equity will interfere at the suit of a stockholder to protect his interest in the corporation, without requiring him first to request the guilty agents to proceed in the name" of the corporation against themselves. ”
XI. Compensation of Officers. When an oflicer of a corporation performs the usual and ordinary duties of his office, -as defined by the charter and by-laws, he cannot recover any compensation therefor unless it has been so specially agreed.
For extra services an officer receiving a salary is not entitled to compensation, unless there was an express agreement, or such circumstances as to raise a presumption, that the parties intended them to be paid for; and the mere fact that the services were rendered would not raise such presumption.
Cincinnati, May, 1884. J. 0. Hapjpisr.
18 Ohio St. 169.
Story, Eq. 1252; Aberdeen R. Co. v. Blackie, 1 Macq. 461; Wood v. Dummer, 3 Mason, 309.
Pages 182, 183.
34 Ohio St. 450, 460, (1878.)
Cumberland Coal Co. v. Sherman, 30 Barb. 553; Aberdeen Ry. Co. v. Blackie, 1 Macq. 461; York Buildings Co. v. Mackenzie, 3 Paton, H. L. 378; Koehler v. Black Riv., etc., Co. 2 Black, 715; Cumberland Coal Co. v. Parish, 42 Md. 598; Blake v. Buffalo Creek R. Co. 56 N. Y. 485; Covington, etc., R. Co. v. Bowler, 9 Bush, 468 ; Port v. Russell, 36 Ind. 60; Cook v. Ber lin, etc., Co. 43 Wis. 433; Harts v. Brown. 77 Ill. 227; Stewart v. Lehigh Valley R. Co. 38 N. J. Law, 505; Rice’s Appeal, 79 Pa. St. 168; First Nat. Bank v. Gifford, 47 Iowa, 575; Levisee v. Shreveport, etc., Co. 27 La. Ann. 641; Austin City R. Co. v. Swisher, (Tex. Ct. App.) 15 Reporter, 760.
Sections 243 et seq..
Sec, also, Pierce on Railroads, 36 et seq.; Thompson, Liab. of Officers, etc., of Corp, 360 et seq.; 16 Amer. Law Rev. 917; Bissit v. Ky. Riv. Nav. Co. 15 Fed. Rep. 353, and note.
Wardell v. Union Pac. R. Co. 103 U. S. 651, (S. C. 12 Cent. Law J. 559,) affirming 4 Dill. 330; Thomas v. Railroad Co. 109 U. S. 522 ; S. C. 3 Sup. Ct. Rep. 315; Mecker v. Winthrop Iron Co. 17 Fed. Rep. 48, and note by Francis Wharton.
Sellers v. Phœnix Iron Co. 13 Fed. Rep. 20.
Bill v. Western Union Tel. Co. 16 Fed. Rep. 14.
Thomas v. Brownville, etc., Ry. Co. 2 Fed. Rep. 877; affirmed, Thomas v. Brown ville, etc., R. Co. 109 U. S. 522; S. C. 3 Sup. Ct. Rep. 315.
Thomas v. Brownville, etc. Ry. Co. 109 U. S. 522; S. C. 3 Sup. Ct. Rep. 315; reversing upon that point the same case, 2 Fed. Rep. 877.
Hubbard v. N. Y., etc., Investment Co. 14 Fed. Rep. 675.
Grant v. Attrill, 11 Fed. Rep. 469. See 19 Amer. Law Rev. 919.
9 N. W. Rep. 111; 12 Reporter, 361; 21 Amer. Law Reg. (N. S.) 443, and note by Mr. Adelbert Hamilton,
Combination Trust Co. v. Weed, 2 Fed. Rep. 24.
European Ry. Co. v. Poor, 59 Me. 277.
Davis v. Rock Creek, etc., Co. 55 Cal. 359; S. C. 36 Amer. Rep. 40.
Gallery v. Nat. Ex. Bank, 41 Mich. 169; 36 Amer. Rep. 149.
Farmers’ & Merchants’ Bank v. Downey, 53 Cal. 466; S. C. 31 Amer. Rep. 62.
Stevenson v. Bay City, 26 Mich. 44.
8 Fed. Rep. 1, and note, in which the authorities axe fully collected and considered.
Moores v. Citizens’ Nat. Bank, 15 Fed. Rep. 141. See same case in 4 Sup. Ct. Rep.
Coons v. Tome, 9 Fed. Rep. 532. See also, Thompson, Liability of Officers, etc., p. 397, § 24 et seq.; Goodin v. Canal Co. 18 Ohio St. 169.
34 Ohio St. 450.
Pages 465, 467. See, also, Morawetz, Priv. Corp. $ 245, note 3, and oases cited; Flagg v. Manhattan Ry. Co. 10 Fed. Rep. 413, 433; Harts v. Brown, 77 Ill. 226.
18 Ohio St. 183.
Thomas v. Ry. Co. 2 Fed. Rep. 879.
See saino case, 109 U. S. 522. S. C. 3 Sup. Ct. Rep. 315, where the holding of Judge MoG’bart as to the voidability of the contract was affirmed.
Trustees v. Bosseiux, 3 Fed. Rep. 817; Ackerman v. Halsey, 17 Cent. Law J. 433, (N. J. Ch. Ct.)
18 Fed. Rep. 5.
Meeker v. Winthrop Iron Co. 17 Red. Rep. 48, and note by Francis Wharton.
Dimpfel v. Ohio & M. Ry. Co. 3 Sup. Ct. Rep. 573; 110 U. S. 209.
Memphis City v. Dean, 8 Wall. 73; Cook v. Berlin Mills Co. 6 Reporter, 188; Davenport v. Dows, 18 Wall. 626 : Taylor v. Holmes, 14 Fed. Rep. 498; Detroit v. Dean, 106 U. S. 537; S. C. 1 Sup. Ct. Rep. 560; Bissit v. Ky. Riv. Nav. Co. 15 Fed. Rep. 361, note.
104 U. S. 450; S. C. 21 Amer. Law Reg. (N. S.) 252; 14 Cent. Law J. 288.
Morawetz, Priv. Corp. $ 386, and eases cited. See, also, note to Bissit v. Ky. Riv. Nav. Co. 15 Fed. Rep. 353, 361.
Citizens’ Nat. Bank v. Elliott, 7 N. W. Rep. 506; S. C. 55 Iowa, 104; 39 Amer. Rep. 167; Austin City R. Co. v. Swisher, 15 Reporter, 760, (Tex. Ct. App.)
Pierce, R. R. 31; Loan Ass’n v. Stonemetz, 29 Pa. St. 534; Kilpatrick v. Bridge Co. 49 Pa. St. 118; Dunston v. Gas Co. 3 B. & A. 125; Holder v. L., etc., Co. 71 Ill. 106; Maux Ferry Gravel Co. v. Branegan, 40 Ind. 361; N. Y., etc., R. Co. v. Ketchum, 27 Conn. 170; Austin City R. Co. v. Swisher, supra. And see cases collected in Pierce, R. R. 31, and notes.
Supra.
Pew v. First Nat. Bank of Gloucester, 330 Mass. 391.
49 Md. 389; S. C. 33 Amar. Rep. 264.