9 Del. Ch. 284 | New York Court of Chancery | 1911
The seven complainants were formerly stockholders of The Christiana Window Glass Coimp any, and assert that though nominally they had assigned their shares to the company, they were still equitably entitled to the rights of stockholders to participate in a distribution of the assets of the company in liquidation. In 1886 the company was formed by seventeen practical glass- workers, including the complainants, each having subscribed and paid for an equal amount of the capital stock and until 1908 the company carried on the business of making and selling window glass, in effect on the ' co-operative plan, practically all the stockholders being engaged in making or selling glass. From time to time, in addition to regular wages, sums were paid to the several stockholders as advances, at irregular times and in different amounts, without undertaking to equalize them among the stockholders. These amounts were charged against the individual stockholders. For several years the enterprise prospered. The company first. leased, and then bought for $25,000, a plant, and paid for and improved it, until they had so expended about $37,000 from earnings. Some of the original stockholders dropped out, until only thirteen of them remained in 190$. For several years before 1908 the company had been losing money, owing to a change in the cost of production of glass elsewhere. Finally, being without money to buy supplies, the end was reached on January 10th, 1908, when the plant was shut down and opera
At the cessation of business the assets of the company consisted of the glass factory and about five acres of land in the City of Wilmington, which at a conservative estimate was then wortli about $10,000, manufactured stock valued at about $6,000, and bills receivable of face value of about $2,500, aggregating, according to John L. Byrne’s estimate, $18,500. The debts consisted of a note of $4,100, made by the company to Central National Bank of Wilmington, endorsed by Michael J. Byrne, and a bond made by the company to Michael J. Byrne for $4,000, the aggregate being $8,100. At this time the amounts charged against the several stockholders varied in amounts from $54.38, charged against William H. Myers, to $2,679.92, charged agamst John L. Byrne, $2,974.11 against Patrick J. Byrne, $3,009.92 against E. H. Byrne, and $4,772.42 against A. P. Byrne; but none of these sums were collectible, the debtors being without property available, so that these debts due the company were not of consequence as assets to be realized on.
It being clear that a further continuance of the busines8 was unwise, and that liquidation was inevitable, the advice of counsel was sought as to the best methods of winding up the company. A receivership was advised, and Patrick J. Byrne and John L. Byrne also considered together the plan of having the affairs of the corporation put in their hands to be settled. On Saturday, January 11th, 1908, a meeting of the stockholders was held, at which all were present except Michael J. Byrne and Edward H. Byrne, and another meeting was held on Tuesday, January 14th, 1908. There is so much dispute as to what in fact took place at those meetings that it is diffi
Mr. Brady was present at the meeting held on January 14th, 1908, at which all the stockholders were present, except Michael J. Byrne, who, by the way, does not seem to have participated in the preliminary arrangements. Preparations had been made by Mr. Brady of a plan, and the papers and proceedings necessary to carry them into effect had been prepared in advance by him, including the minutes of the proposed meeting. He explained to those present that it was unadvisable to liquidate by a receivership, and gave reasons; and stated the difficulties preventing the transfer of all the shares to two of the stockholders to liquidate; but that “they
(1) All the stockholders indebted to the company (and they were all so indebted, except Michael J. Byrne) signed a paper, in the form of an agreement with the company, signed for the company by Patrick J. Byrne, as president, and F. A. Eberhardt, as secretary, of The Christiana Window Glass Company, -reciting the indebtedness of the individual stockholders to the comp any, by reason of the amounts withdrawn by them, and stating the several amounts, and agreeing further as follows:
‘ ‘ That in the event of the sale of the property, real and personal, of the said party of the first part, each of the parties of the said party of the second part shall have deducted from his share of the proceeds of such sale, the amount of money in which he is indebted to the said party of the first part.”
This agreement was read to and fully understood by all present.
(2) Each stockholder signed a form for assignment of his . shares on the back of the certificate, the name of the assignee being then blank, and the certificates were left with the company.
(3) The number of directors was reduced from five to three. Three directors resigned, whereby Patrick J. Byrne and John L. Byrne were left as the only surviving directors, and Michael J. Byrne was then elected to be the third director.
It is claimed by the complainants that it was the clear understanding of all present, that this was a method adopted to constitute the three directors liquidators, whose duty it was to collect the assets, including a sale of the plant, pay all the debts and divide the balance among all the stockholders equally, including all those who had technically withdrawn as stockholders, each one being charged with the amounts due
It is clear beyond doubt that the contentions of the complainants are proven by the testimony. By the testimony of the complainants, by that of Mr. Brady and of John L. Byrne, the plan of a trusteeship having been declared impracticable, the method actually adopted was substituted, in order to accomplish the same purpose, viz., constitute the three directors liquidators; and that after liquidation the stockholders, meaning all the thirteen persons, including the complainants, who held shares of stock at the cessation of business, should share the surplus, if any there was for distribution, notwithstanding the apparent termination of their interests and rights as stockholders by the assignment of their stock. The only witness most interested to deny this, not only does not do so, but practical1 y admits it to be true. In his testimony, John L. Byrne, testified as follows:
“Q. You had told these withdrawing stockholders that so far as you could bring it about, that after the debts of The Christiana Window Glass Company had been paid and its affairs settled, if there was any surplus left you would see that it was divided among the stockholders least overdrawn?
“A. Yes; I told them that and would have done more. * * * ” (The rest of the answer is immaterial.)
Again he testified:
“X. I hand you : Complainants' Exhibit No. 1,’ Mr. Byrne,*295 executed on the 14th day of January, 1908, by the stockholders, and I will ask you what you mean when you testify that this paper was executed to protect you?
“A. I had agreed personally, understand, if there was any money left over after the payment of the debts, that I would be willing and do all in my power to distribute that among the people least overdrawn. I didn’t keep the books and had no access to them. I wanted to know exactly how each man stood, so that if there was anything left, over there would be no comeback on the others, and I wanted this for my own protection, and, therefore, they all signed it.
“X. That is, if there was any distribution of the suriplus?
“A. I there was any.
“X. If there was any, the ones least overdrawn were to receive it ?
“A. That is it.
“X. That is the understanding you had with the men?
“A. What is that?
“X. What you have just testified to; if there was any money left after the payment of the debts it would be distributed among those least overdrawn?
“A. Yes.
“X. On. this 14th day of January?
“A. Yes.
“X. 1908?
. “A. Yes.
“X. Mr. Byrne, if the plant had sold for 820,000 ten days after the "fourteenth day of January, would you have divided that surplus, according to that understanding?
“A. I certainly would.”
In addition, there is the agreement between the company and all the stockholders, except Michael J. Byrne, which is the written evidence of that which was so clearly understood. This is the “Complainants’ Exhibit No. 1,” which, as John L. Byrne sa}^, was drawn for the purpose of making this arrangement clear and fixing the amounts due from the several stockholders to the company. Mr. Brady says that this was drawn and signed so that “in case there should be a distribution of
In view of the clear understanding of all the stockholders, except Michael J. Byrne, of what was intended to be done, and of the things that were done, it seems unimportant that there was no actual authority given by the directors to the president and secretary to execute for the company the agreement between it and the stockholders (Complainants’ Exhibit No. 1); or that Michael J. Byrne was not a party to it. It is equally immaterial that the minutes of the meetings of the stockholders and directors, .drawn by Mr. Brady in advance, and which were afterwards copied into the minute book, show that certain stockholders wanted to withdraw and sell their stock and had signed a declaration to that effect, when admittedly no such paper was signed and no such action was either taken or contemplated by any of those stockholders, or by any one else, except as a legal step to accomplish the main purpose of making the directors liquidating trustees. Even if the appraisement had been other than a pretense and empty formality, there was no evidence of the selection of an appraiser by the withdrawing stockholders. So also it is immaterial that these stockholders assigned absolutely to the company their shares, for this also was but another step in the general plan; and it clearly appears that it was not intended, either by assignor or assignee, to be an absolute transfer, such as would terminate all rights, legal and equitable, of the assignor in the assets of the company. It is plain from all the testimony, and indeed from the undisputed testimony, that all the thirteen stockholders retained their rights as stockholders and were subject to their liabilities as debtors to the company; and that the corporation had in effect, though not in form, become dissolved, and the three directors constituted trustees to wind up its
Finding it so clearly established by the undisputed evidence that the three directors were actually constituted liquidating directors with the duties, powers and limitations applicable to all trustees, it is unnecessary to consider the probabilities to be easily and naturally inferred from the facts. Neither John L. Byrne nor Patrick J. Byrne had any real financial interest in the company, being indebted to the company to an extent far greater than their proportionate part of the surplus assets of the company. Some of the assigning stockholders were very slightly indebted to the companjL Every one, including John • L. Byrne, felt sure that there would be some surplus for division among the stockholders. Two of the liquidating directors received a salary for their services as such by an arrangement with the stockholders. Several of the retiring stockholders showed, not only curiosity, but their personal interest in the company by visiting the plant to ascertain the progress of the efforts to sell it. The payment of $100 to each stockholder could hardly have been considered a fair transaction of purchase of their shares of stock, for their interests in the company were not equal, some being indebted to the company in large amounts and others in triflingly small amounts, the range of difference being from $4,772.42 to $54.38. These and other facts throw side lights on what was done by the stockholders of this unsuccessful co-operative venture, and make clear the real purpose that ran through the technical forms and proceedings used.
The complainants, being entitled to an accounting from the liquidators of their stewardship, claim that they have not acted right'y towards the trust property; but that one of the trustees, and through him a corporation which he had promoted, had obtained a profit by a purchase and re-sale of the greater part of the property cf The Christiana Window Glass Company. What was done by the liquidators? Two of them, Patrick J. Byrne and John L. Byrne, collected the accounts receivable, sold the manufactured product on hand and endeavored to sell the plant, paying themselves the salaries agreed
There can be no doubt that if John L. Byrne had taken title to that property, either directly from the company, or through a mesne contemporaneous conveyance to a third person, and had pa'd value for it, the stockholders would have had a right to avoid the transfer; and if he had resold it at profit, would have been entitled to participation in those profits, provided they had asserted their rights with promptness after knowledge of the transaction of the trustee. Such are the limitations upon trustees in dealing with themselves respecting the trust property, whether it be a sole trustee or one of several trustees, and such arc the rights of the cestu-i que trust. There are two cases in the Courts of Delaware where the disqual fication of the trustee to buy the trust estate was fully stated, namely, Van Dyke v. Johns, 1 Del. Ch. 93, (1819), and Downes, et al., v. Rickards, et al., 4 Del. Ch. 416, 430. In both it is stated emphatically that the trustee cannot be the purchaser of the estate for which he is trustee, however honest the circumstances of any individual case may be. In the latter case, Downes, et al., v. Rickards, et al., Chancellor Bates said:
*299 “The principle is that one shall not act for himself in any matter with respect to- which he has duties to perform or interests to protect for another. * * * The principle looks not merely to prevent fraud in the management of the sale, but to the broader object of relieving trustees from any possible conflict between duty and self-interest. * * * The prohibition does not depend upon any question of fraud or improper advantage made by the purchase. However fair the sale and adequate the price the Court will set it aside. In view of the difficulty of unraveling fraud in these transactions, the policy of the rule is to exclude the possibility of it by making the prohibition absolute.’’
Where the trustee remains in possession of the land of the cestui que trust which he has purchased, the sale is declared void; but where the trustee has parted with the land at an advanced price, he is made to account for the difference in value. Van Dyke v. Johns, supra. When the sale is declared void, or the difference in the price accounted for, all those who are interested ma;r come in to share in the amount recovered, according to their respective interests. Van Dyke v. Johns, supra. The same principles apply to cases where one trustee buys from himself, or from his co-trustees. Numerous cases to the same effect were cited by the complainant.
By the minutes of the meetings of directors of The Christiana Window Glass Company it appears that the option was given to John L. Byrne by the directors; and by the answer of the company, which John L. Byrne was authorized by the directors to make for the company, and which is filed in this suit, it is stated that the agreement was made to enable John L. Byrne to organize a corporation to take the title to the property. It was a transaction, then, by which one of the three liquidating directors bought the chief asset of the corporation without the knowledge of the stockholders. Being one of three persons charged with the duty to sell the property, he became the purchaser of it, or at least obtained a rght to buy it, and so obtained control of the disposition of it. The testimony establishes the ignorance of the complainants of the acts complained of until shortly before the filing of the bill. The defendants, meaning thereby chiefly the Byrne Gass Company and John L. Byrne, assert that the rule respecting trustees docs not apply to this case, and cite numerous cases to support the
On the other hand, the complainants claim that in all the cases so cited the sale by a corporation to a director was either previously consented to, or subsequently ratified, by its stockholders, or that there had been loches in attacking the sale. The complainants’ counsel assert, and probably correctly, that these cases show an application of the general rule that a trustee may, with the consent of the cestui que trust, purchase trust property, subject to an impeachment thereof for actual fraud. There is, in fact, an apparent divergence in the strictness of the rule applied respecting the dealings of the directors of the corporation with the corporation respecting its property. There are numerous decisions which prohibit a director from purchasing property of a corporation without the consent of the majority of the stockholders, including the following cases cited by the complainant: Robbins v. Butler, 24 Ill 387; Abbot v. American Hard Rubber Co., 33 Barb. (N. Y.) 578; Hoyle v. Plattsburgh, etc., Co., 54 N. Y. 314; Hoffman, etc., Co., v. Cumberland, etc., Co., 16 Md. 456; Bowes v. Iron Co., 11 Moore P. C. 463. But even if it would have been a ligitimate transaction with respect to the officers of a corporation under ordinary circumstances, the purchase of the property by John L. Byrne was not proper under the facts in this case. Patrick J. Byrne and John L. Byrne, two of the three directors, in addition to the duties towards the stockholders which they had in common' with all directors of other corporations, had assumed a special
The option to buy the plant was given by the two trustees to one of them, and it was so given in order that another corporation could be formed to take title to the property. This1 is proved by the minutes of the directors of The Christiana Window Glass Company, and by the answer of the company. Possessing this option, obtained from his co-trustees, this director, with his wife and son, about November 1st, 1908, formed a new corporation, the Byrne Glass Company, to which company the conveyance was made on November 18th, 1908, through Edward J. Byrne, acting concededly as a conduit, he having no interest or pretense of interest. These two deeds were not recorded until June 14th, 1909. Of this new corporation this trustee director was not only a stockholder, director and the president, but quite evidently the leading spirit and active manager, as well as the originator and promoter of it. True, he held only three of the 127 shares of the capital stock of the Byrne Glass Company, and his wife held 121 and his son three shares. It should be noted, however, that the evidence of John L. Byrne shows that his wife put only $400 into the company for shares, being money borrowed by her from her father, and that about $1,000 more, put into it for her, was money which John L. Byrne had made in carrying on business after the closing down of The Christiana Window7 Glass Company and was substantially his money and not hers (page 912 of the testimony). There was some evidence that John Doyle, the father of Mary E. Byrne, furnished $2,000 to her, and that this went to the Byrne Glass Company; but she did not obtain
So it appears that probably the only person really interested as stockholder in the Byrne Glass Company, besides John L. Byrne, was his wife to the extent of $400, about one-third of the actual alleged capital, and'no clear proof is given of the actual payment by her to the treasury of the company of even the sum of $400. None of the moneys of the stockholders of the Byrne Glass Company were used to buy the property of The Christiana Window Glass Company, for the only consideration claimed for that sale was the assumption of the debts of the grantor company. But even assuming that the wife and son had paid in full for the stock held by them, and were without notice or knowledge of the peculiar relationship of John L. Byrne to the plant, is the Byrne Glass Company in such a position that it can hold the title as against the stockholders of The Christiana Window Glass Company, or any profit which may have been made by a re-sale?
The defendants urge that the sale and conveyance was from The Christiana Window Glass Company to the Byrne Glass Company, and that a contract between the two corpora- " tians is not rendered vulnerable by the fact that John L. Byrne was a director in both corporations, and cited 3 Thomspon on Corporations, 4079, 4080; Rolling Stock Co. v. Railroad Co., 34 Ohio St. 450; Booth v. Robinson, 55 Md. 419; Leavenworth v. Chicago, etc., Co., 134 U. S. 688, 10 Sup. Ct. 708, 33 L. Ed. 1064; Pauly v. Pauly, 107 Cal. 8, 40 Pac. 29; Public Hall Co. v. Bank 144 Ind. 34, 42 N. E. 1097 Library Hall Co. v Pittsburg Ass’n, 173 St. Pa. 30, 41, 33 Atl. 744; Shaw v. Davis, 78 Md. 308, 28 Atl. 619, 23 L. R. A. 294; Manufacturers, etc., Bank, v. O’Reilly, 97 Mo. 38, 10 S. W. 865; Genessee, etc., Ry. Co. v. Retsof, etc., Co., 15 Misc. Rep. 187, 36 N. Y. Supp. 896; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17.
But this rule, if it be a sound one is not applicable here, for the facts in this case show that the transaction with the Byrne Glass Company should be tested by the same rules as
Hav'ng reached the conclusion that John L. Byrne was in legal effect one of the trustees in liquidation of the affairs of The Christiana W ndow Glass Company, by special arrangement, and not entirely as the ordinary result of the relationship of stockholder and director, it is not a question of intercorporate dealings of independent bodies, but one where the ordinary rules applicable to trustees dealing with corporate property. Should a court of equity allow a trustee to sell and convey trust property to a corporation organized by the trustee to buy it, and of which purchasing corporation the trustee and his wife, or even the trustee, his wife and son, were the sole stockholders,. particularly if there is grave doubt that the son had paid value for his,stock in the purchasing corporation? To state the question is to show the answer. No court would justify a trustee in organizing a corporation in which he and his wife were the only stockholders to buy trust property from himself. This is surely within the danger line where there may be a mixing up of interests, and that conflict of duty and self-interest which courts try to prevent by enforcing rigidly a rule which prohibits a trustee from dealing with himself. The possibility of fraud is excluded by such absolute prohibition. This prohibition is the ounce of prevention of fraud or injustice which is better than the pound for the cure thereof. The trustee is relieved even of temptation to deal unfairly with the trust property, or to obtain some advantage from the management
There is in the bill no allegation of actual fraud in the transaction, but only of- illegality therein. There are, however, some indications of secrecy by the withholding of the deeds from The Christiana Window Glass Company to Edward J. Byrne and from him to the Byrne Glass Company for nearly seven months, which if necessary might be considered as evidence of fraudulent intent, and there is also evidence as to the inadequacy of the price fixed for the land. But as the limitation on the dealings of the trustee is independent of fraud, or inadequacy of price, no stress is laid on the above features of the case.
What was done with the property by the Byrne Glass Company? After using the plant for a short time in its business, the Byrne Glass Company sold the real estate to Bennett, Brown and Bennett, Incorporated, for $18,750, and by deed dated July 17th, 1909, conveyed the property to the purchaser. The purchase price was paid and secured as follows: $6,250 in cash and a purchase money mortgage given for the balance, $12,500, payable in four years in installments, with interest at the rate of five per cent. This mortgage was assigned by the mortgagee to Artisans’ Savings Bank as collateral security for the payment of $6,000 loaned August 5th, 1909, to the Byrne Glass Company by the assignee. Bennett, Brown and Bennett, Incorporated, also made a second mortgage to William S. Prickett for $1,200. This conveyance and these mortgages and the assignment of the purchase money mortgage, are not alleged to be invalid, nor is it sought to set them aside. The rights of the grantee and of the assignee of the purchase money mortgage arc recognized. It is the interest of the Byrne Glass Company in the mortgage that the complainants seek to reach. It is the refusal to account with the stockholders of The Christiana Window Glass Company for the proceeds of the sale of
John L. Byrne being disqualified to purchase the trust property, if the conveyance thereof had been made to him and he still held title to it, the conveyance would be declared void. The same prohibition applied to the conveyance to the Byrne Glass Company, and if it still held the legal title," the deed would be declared void. Inasmuch as that company paid no value for the property, but as a consideration for the conveyance assumed payment of the debts of The Christiana Window Glass Company, and paid these debts after the re-sale by it of the property to Bennett, Brown and Bennett, Incorporated (now called Peninsula Cut Stone Company), out of the proceeds of that sale, there is no equity to be adjusted with the Byrne Glass Company, or its stockholders. As the sale to Bennett, Brown and Bennett, Incorporated, was a bona fide purchase without notice of any trust, and for value paid, the conveyance to it cannot be avoided. So also the transfer to the Artisans’ Savings Barde is valid as a transfer as collateral security for the loan of $6,000 made by it to the Byrne Glass Company.
Therefore the prayers of the bill will be granted and a decree will be made accordingly. Each of the complainants will be declared to be equitable owners of ten shares of the capital stock of The Christiana Window Glass Company and entitled to their rights as such, subject to their liabilities as debtors to the company; and the purchase money mortgage will be declared to be an asset of The Christiana Window Glass Company, subject to the debt due the Artisans’ Savings Bank. In addi