149 Minn. 440 | Minn. | 1921
Lead Opinion
This action as it finally results is one to compel the defendant Ben A. Mizen to transfer to the plaintiff the royalty of 3% cents per ton granted to him in the assignment of a mining lease to Clement K. Quinn for $15,000, and by the latter assigned to the Mahnomen Mining Company. The -lease was executed to Mizen by the fee -owners in pursuance of an option which, though in his name, was the property of the plaintiff mining company, -and was by the company assigned and released to him that it might 'be assigned.
The defendant appeals from an order denying his motion for a new trial and from the judgment which in effect gives the 3 y2 cent royalty to the plaintiff. The question is whether the defendant can retain the royalty for himself or holds it under -a constructive trust for the plaintiff.
Mitzen was a mining engineer and apparently -a capable one. L. J. Pitts was found by the court to be a competent office man experienced in mining work, and A. J. Peterson was found to be -an experienced salesman of corporation stocks. Mizen had operated successfully on the Cuyuna range, in Crow Wing county. He had in prospect an option from the fee owners for a lease of lands on that range. Late in 1914 Mizen and Pitts and Peterson concluded to combine their efforts, acquire the mining option, and develop the lands covered by it to a point where the option or a lease taken under it could be sold. They were enthusiastic and -saw visions of great things to come through the development of this and other properties. To carry out their project the plaintiff corporation was organized by Pitts -and Peterson in January, 1915.
The option to Mizen was dated February 1, 1915. On February 3, 1915, he made a formal offer to transfer it to the plaintiff company in exchange for 75,000 shares of its capital stock of the par value of one dollar each. This offer was formally accepted. Twenty thousand shares were then transferred by Mizen to Pitts -and a like mumper to Peterson. Fifteen thousand shares were donated to the plaintiff to be used in raising money for development. Those who bought chanced their money
Pitts and Peterson maintained the office of the company in Duluth. An attractive prospectus was issued. The public was not greedy for the stock and sales had to be pushed. It was peddled about and sold, often in small quantities, and on instalment payments, and commissions were paid to Pitts and Peterson and subagents for selling. Something like 12,000 shares -of the donated stock were sold, but not nearly so much as $12,000 was received by the company. The exact condition of the stock account is not clear nor important just now. Thus the corporation was financed.
Mizen had the contract for the drilling at an agreed price-. The total eo'st was $10,050. He was paid $2,422, leaving due $7,628. In October, .1915, say about the twentieth, the company had no money, or, to be precise, it had $5.21 in bank. What had been realized from the sale- of the stock, except the $2,422, had ’been used in maintaining an office in Duluth and paying the salaries of Pitts and Peterson, and incidental expenses. Mizen had financed the drilling, except for the $2,422 paid him. 'The option expired on the first of .November following. The late explorations were discouraging. Pitts and Peterson were losing hope and Mizen was anxious -about his drill bill.
'Clement K. Quinn was interested in the M-ahnomen mine which adjoined. 'The property under option could be mined advantageously in connection with the Mahnomen. There was -doubt whether it could be otherwise used profitably. Quinn had been mentioned as a possible purchaser. Mizen told Pitts and Peterson that Quinn had said that he would not give more than $15,000 and this was so. He told them in effect that he -could get no- more and that it was all the property was worth. Quinn, knowing something of the condition of the company, would not deal with it. If he took the property he insisted that the option or lease come from Mizen.
In an amended finding the court, referring to the conditions then existing, found: “Under these circumstances it was agreed between said Peterson. and -said Pitts 'and said defendant that each of them
An agreement and 'an assignment or release in writing dated October 28, 1915, and acknowledged October 29, 1915, were deposited in escrow to be delivered to Mizen upon his performance, within 21 days, of the conditions. Mizen was not required to perform or take the property. The instruments were, as observed by the trial court, somewhat in the nature of an option. However, as noted later, he did perform. The agreement recited that the company had given the defendant 75,000 shares of stock in consideration of the option and that he held 20,000 Shares. It recited that he had carried on explorations at a cost of $10,-050, for Which he had been paid $2,422. Paragraphs 1, 2 and 3 were as follows:
“1. The party of -the second part [Mizen] does hereby agree, upon the delivery of this agreement in the manner hereinafter provided, to pay to the party of the first part [plaintiff] the sum of eight thousand*444 ($8,000.00)-, and to deliver or assign to it fifteen thousand shares of the capital stock of the party of the first part now appearing upon the company’s records in the name of one Fallo, and the party of the second part does further agree to fully release and discharge the party of the first part from any or all claims of any kind whatsoever, -Which he may have or assert against it by reason of any of the transactions heretofore had between the parties hereto.
“2. The party of the first part, in consideration thereof, does hereby grant, bargain, sell, convey and release to the party of the second part any and -all rights which it may have or might assert in or to said option for a mining lease, and in and to any mining lease which may be executed pursuant to ‘said option, and in and to the leasehold estate which may thereby be created, and in and to the lands described in said option, and does assign, set over and release to the party of the second part anj and all right to the proceeds or the consideration which he may in any manner receive out of said option or said lease, and does further release him from any or all .claims Which it might have or assert against him on account of 'any transactions heretofore had between the parties hereto.
“3. It is further agreed 'by and between the parties hereto that each of the parties hereto shall execute to the other a simple release of all rights or claims which it, or he, might assert against the other.”
The assignment or release was executed at the same time 'and deposited in escrow in accordance with the terms of the agreement. The portion now quoted is sufficient for present purposes:
“That the party of the first part [G-reat Northern Exploration Company], in consideration of the sum of one dollar ($1.00) and other gooc and valuable considerations, to it in hand paid by the party of the second part, the receipt of which is hereby acknowledged, does herebj grant, bargain, sell, convey and release to the party of the second pari ■any -and all rights which -it may have, or might assert, in or to thai certain option for a mining lease, dated on or. about February 1, 1911 [naming fee owners and describing the property], and also all the right title and interest, which it might have or assert in any mining leas! which may be issued pursuant to said option, and in and to the lease! hold estate Which thereby may be created, and in and to the lands del scribed in said option, and in and to the proceeds or -other considera!*445 tion or profits which the said party of the second part may, in any manner, receive out of said option or said lease; and the party of the first part, for said consideration, does hereby further forever release and discharge the party of the second part from any or 'all claims which it might have or assert against the party of the second part on account of any transactions heretofore had between the parties hereto.”
Mizen performed the conditions of the escrow agreement and received the two instruments about November 6, 1915, or soon afterward.
v On October 29,1915, he notified the fee owners of his election to take a lease. Under date of November 6, 1915, he assigned the lease to Clement K. Quinn. Before this he had obtained a reduction of the minimum output -after the third year from 75,000 tons to 50,000 tons and also cleared some minor defect in the title. 'The assignment of the lease was acknowledged December 9, 1915. By -an instrument -dated and acknowledged on November 11, 1915, Quinn assigned the lease to the Mahnomen Mining Company. This instrument recited that the lease from Mizen to Quinn was delivered on November 10.
In performing the terms of the escrow agreement, Mizen, -so the court finds, used the money obtained from Quinn. Something of this kind was contemplated when the agreement was made. The company received the equivalent of $8,000, and Mizen took $7,000 for hi-s claim of $7,628. This was in substantial accordance with the agreement.
The court finds that about October 20, 1915, Mizen became convinced that he could sell to Quinn for -at least $15,000; that he told Pitts and Peterson that he thought he would dispose of it 'for such sum; that he told them he could get no more for it; that he told them 'he had tried to get an increase over the royalty fixed; that Pitts and Peterson believed these statements and relied upon them, and that so relying executed the two agreements.
It does not seem that Mizen had abandoned hope -of getting an additional royalty when the agreements recited were made -and put in escrow'. On the day of their execution he suggested to Quinn -an increased royalty and received encouragement. He had before been negotiating with the fee owners for a decrease of the minimum output and finally obtained the reduction stated. This was advantageous to the purchaser of the lease, m-ade the lease more salable, but was less favorable from an in
The question now comes whether Mizen could take to himself the 3 cents additional royalty, or whether it should be applied to the use of the plaintiff corporation. That a stranger making the agreements Which Mizen made would be entitled to the additional royalty is clear. The trial court was of the opinion that Mizen was not in a position where he was dealing at arm’s length with the company, and it was of the opinion that Mizen when he learned, as he did before the closing of the deal with Quinn, that he could get a royalty of 3 cents, was 'bound to disclose and could not take it for himself. This latter view was based on the doctrine stated in 13 C. J. 389, § 291, as follows: “If a person malees a representation believing it to be true but afterward discovers it to be false, he must not allow the party to go on and act on the faith of the representation; if he does so he is guilty of fraud.”
A number of cases are cited in support of the doctrine. They, in general, are cases of actual fraud, or cases where in the course of negotiations, and before the fixing of rights by a completed contract, a material change comes or a fact is discovered which malees a previous representation untrue. Then the maker of the representation must disclose. The trial court seems to have applied this principle, upon the supposition that when Mizen found that he could get a royalty from Quinn he had not changed his position. In a later memorandum the court indicates that it was mistaken in this respect, for Mizen at the time had taken the lease and assumed the obligations attaching to it. We gather from the findings and amended findings and the memoranda that the court was not of the view that there was actual fraud prior to October 29 avoiding the agreements then made. And we do not understand that the court would have held that a stranger could not have taken to himself the benefits of such an advance royalty as was secured.
In commenting upon the relation of the parties the trial court says in its first memorandum: “Defendant’s alliance with Pitts and Peterson was an unfortunate one for him. All the benefit he derived from it was the use for a time of $2,422.00 paid to him on account of the drilling, while it costs him more than two-thirds of the ultimate profits of the transaction. In entering into the arrangement he undoubtedly
The venture initiated in the fall of 1915 by Mizen, Pitts and Peterson, was a joint one. Each was entitled to repose confidence in the others and to insist upon the utmost good faith. Each was to work for all. All three contemplated that money for development would come from stockholders investing in the hope of profit. The three received $60,000 in stock which was taken as representing the value of the option. They risked nothing, or next to nothing, just the cost of organization. Pitts and Peterson got salaries and commissions; Mizen presumably profited on the drilling. The men who purchased the $15,000 of donation stock, if that much had been sold, paid for the development and risked their money with no hope of getting all of it back, unless the property proved to be worth $75,000, and for a value in excess of that they shared in the proportion of one-fifth to four-fifths. Pitts and Peterson and Mizen could not be unfair to them. The relation was confidential. Each owed to his associates and the stockholders open good faith and active diligence in their interests. Neither of the three could speculate upon the sale of the property for the development
The position of Mizen, from the viewpoint of his counsel, is forcefully presented, and merits and has received thorough consideration. It is argued that in October, 1915, when negotiations commenced, the company was without funds, and that it owed Mizen over $7,000, and owed others, and all this is true; that the mine was not showing well; that things looked gloomy; that the three promoters were discouraged; that Mizen thought he could sell for $15,000; that, unless something was done by November 1, all was gone; that Mizen was anxious for h'is $7,000; that it was desired to protect the stockholders who had chanced their money on the development; that the 'arrangement made would do this, and would leave them their stock, while the original $60,000 stock would be reduced to $15,000; that Mizen, by talcing the lease, assumed liabilities which would not have rested upon him if the contract had not been carried out; that he took the risk of not being able to-sell it; that he assumed liabilities when he assigned to Quinn with a warranty; that he obtained a reduction of' the minimum output, Which he did not owe the duty of doing for the plaintiff company, and likewise cured defects in the title; that What Quinn got by the assignment was not a lease -such as was called for by the option, but a lease with a reduced minimum output, and with the warranty of Mizen; that the plaintiff, after full consideration and upon authority of its board of directors, gave him just what he now claims; that, but -for the contract with 'him, the company and its stockholders might have gotten nothing; that he was taking a chance of losing; that .he might have sold for $10,000, if he could get no more, in which event he would have been required to pay $8,000 to the plaintiff just as when he made a better sale; that the contract was made openly and was fair; that the agreement of the company was to convey to him “all rights which it may have or might assert” in the option, and “all right to the proceeds
It is true of course that even a director or officer may make a fair contract with his corporation. Minnesota L. & T. Co. v. Peteler Car Co. 132 Minn. 277, 156 N. W. 255, and cases cited. We are, however, of the opinion that the relation of Mizen to the stockholders, those who were furnishing the development money, as well as those who were promoters with him, was such that he could not make a private profit out of turning the property, though in .disposing of it he assumed liabilities which he was not under obligation to the company to incur, and though he was not guilty of intentional wrongdoing.
The defendant complains that Pitts and Peterson did not dispose of the $8,000 for the -benefit of the stockholders, as the agreement was, but appropriated it largely to themselves. The finding is that the “agreement was carried out in part only by Pitts and Peterson.” They are not parties and nothing can be done about it here. If they did wrong in the disposition of the $8,000 relief can be had in some form, but not in this proceeding .as it now stands.
Order and judgment .affirmed.
Dissenting Opinion
(dissenting).
The situation and the claims of the parties are clearly and concisely stated by Justice Dibell, but the result reached does not appeal to me as right nor compelled 'by the doctrine invoked. The findings and record accord to defendant the utmost good faith in all his dealings with
From the beginning defendant refused to be an officer of plaintiff, but, concede that he was in the same condition as if 'an officer, he could, nevertheless, properly enter into a fair contract with the corporation. Minnesota L. & T. Co. v. Peteler Car Co. 132 Minn. 277, 156 N. W. 255. It seems to me the contract he did make was fair, and, under all the circumstances, fairly made. When it was entered into there was hope and belief, but no certainty, that defendant would be able to dispose of the option thereby transferred to Quinn so that he could pay $8,000 to the corporation and get sufficient to pay the whole or most of the claim that he held against it. plaintiff was then at that stage where it was evident to all that no profit could be realized for the stockholders. It was a question of saving something for them and paying the liabilities. Defendant stood a chance of losing a large sum which he alone had risked in exploring for ore under the option, and, unless he was willing to make the effort to realize something therefrom, all concerned would certainly sustain a loss. In order to be able to realize the amount defendant was to pay under the contract, it was, no doubt, clearly understood that he would have to -sell and dispose of the option. The contract so indicates. In order to dispose of the option to Quinn he had to secure a modification of its terms, and incur certain personal obligations. The option he transferred to Quinn was in a more valuable state than when transferred to him. It was, no doubt, well understood that for the efforts he was to make he stood the chance of loss or gain. The contract was deliberately made by plaintiff and its officers. It was completely executed and irrevocable as to them. It could not be taken out of escrow or recalled by them because of anything thereafter developing. It contains no provision looking towards its cancelation by plaintiff, if defendant could dispose of the option at a bigber price than the one he had represented that Quinn might be induced to give.
It is clear to me that the parties dealt at arm’s-length, not only when the contract was negotiated, but also intended that when it was put in escrow it terminated all confidential relations that ever existed, so that as to what was developed thereafter and 'as. to- any knowledge or advantage thereafter gained, no obligation rested on defendant to disclose it. Neither the contract nor any tacit understanding required defendant to sell the option to Quinn or to any one.' Suppose he had taken it over himself and successfully mined so as to make many times the profit now made, would that have given the plaintiff a cause of action? It would seem not. Again, suppose he had not succeeded to dispose of the option to Quinn, but had sold it to some one else for a 'better price and better royalty than he did obtain, could this action have been maintained? The answer must be the same, for even if he had informed plaintiff and Peterson and Pitts that he had made such a sale, before he took the contract out of escrow, I see no way in which he could have been prevented from holding onto a bargain fair and just when made. On the findings of fact as they stand I think defendant is entitled to judgment.
