Hambleton v. Rhind

84 Md. 456 | Md. | 1897

McSherry, C. J.,

delivered the opinion of the Court.

There are ten appeals now before us in a single record, but only one opinion will be required to cover them all; because, whilst there are some slight variations in minor details, the material facts in all the cases are identical and precisely the same legal principles are applicable to them.

Sometime in the early fall of eighteen hundred and ninety-two the appellee, Colden Rhind, a resident of the State of Georgia, obtained authority from the Governor and Treasurer of South Carolina to float for that State, upon certain stipulated terms, an issue of about six millions of her four per cent bonds, the proceeds of which were to be used in retiring an outstanding and shortly maturing prior series known as “ Brown Consols.” He proceeded to New York, and after endeavoring, without success, to organize a syndicate to purchase the bonds, suggested a change in the character of the securities and then resumed his efforts. By the new scheme the bonds instead of being four per cent, forty-year bonds were, subject to the approval of the Legislature, to be four and a-half per cent, twenty-forty-year bonds, and were, when negotiated, to net the State par. Rhind approached a banker by the name of Lancaster, who carried on business in both New York and Richmond, and agreed to give him, as compensation for his aid in forming a syndicate, one-third of the commission which Rhind himself might realize out of the transaction. Failing to secure a sufficient number of subscribers in New York, Lancaster, acting for and as the agent of Rhind, proceeded to Richmond in the month of December, and there enlisted the co-operation of the banking firm of Williams & Son, one of whose members suggested that he could probably fill up the syndicate from amongst his acquaintances in Baltimore. Accordingly, with the sanction and approval of Lancaster, I. Skelton Williams went to Baltimore in the latter part of December, approached and interviewed the appellants and others, and solicited them to join the syndicate; and if this was not done with the knowledge of Rhind, certainly it was subsequently ratified by him. Williams represented to the appellants that all the/ subscribers to the bond purchase were to be placed on the! same footing of perfect equality, and that each was to shard alike in the profits of the venture. He further represented that there were expenses connected with the syndicate that would have tó be provided for out of the profits. After considerable negotiation a sufficient amount was conditionally subscribed in Baltimore to make up with what had been taken elsewhere, the sum of two millions of dollars ; and the Baltimore Trust and Guarantee Company was selected as the agent of the syndicate toj carry out and consummate the transaction. Each of the appellants became a subscriber and each signed a memorandum setting forth the terms and specifying the amount of his subscription; and whilst these papers were executed at different times they all bear date on the thirtieth of December, eighteen hundred and ninety-two, and they were all executed in anticipation of the purchase of the bonds from the State. The material parts of these subscription contracts are in these words: “2. The said Trust Company shall pay to R. A. Lancaster & Co. of New York City, for syndicate expenses, two-thirds of the interest on said bonds from January 1st, 1893, to July 1st, 1893, that may be received by it, that is to say, a commission of 1 Per cent, out of the interest or profit received on said bonds. 3. The said * * * shall have no right by virtue of his said subscription to actual delivery of said bonds from said Trust Company, but shall, in addition to the interest provided for by section 2 hereof, be entitled to receive from said Trust Company a share of the whole profits, if any, that may be realized by the sale of said bonds by syndicate, at a greater price than that paid for the same, the share of the said * * * in the said profits to be in the proportion that the number of the said bonds subscribed for by him may bear to the whole number of bonds subscribed for by the syndicate. 4. The said Baltimore Trust and Guarantee Company is also authorized to pay R. M. Marshall & Bro. $2,500; the Bank of Charleston, N. B. A., $1,000; the Baltimore Trust and Guarantee Company $500, and such other expenses as maybe authorized by the syndicate. 5. It is understood that the syndicate shall have the same rights and privileges in the balance of about $3,800,000 of bonds as hereinbefore provided with reference to the said $2,000,000 of said bonds.” The subscriptions first made related only to the sum of two millions of the issue, but under the fifth clause an option was given to the subscribers to take the residue of the bonds, amounting to three millionsAwp_hundred_„ancL-fifty^thousand dollars, .on precisely^ the same, terms. This option was availed of on March the seventh, eighteen hundred and ninety-three. It was understood that the subscriptions for the first two millions were only to be binding in the event that the syndicate should succeed in disposing of that amount of the bonds to parties in .South -Carolina or elsewhere outside of the syndicate. This condition having been ultimately complied with, a meeting of the members of the syndicate was held in Baltimore, on January the eleventh or twelfth, eighteen hundred and ninety-three, and this meeting was attended by Lancaster. It is proved beyond the possibility of doubt that Lancaster then and there and repeatedly afterwards unequivocally declared that he had no interest beyond about five hundred dollars for travelling expenses, in the fund payable under the second clause of the subscription agreements to R. A. Lancaster and Company “for syndicate expenses.” He urged the members of the syndicate not to press him with inquiries as to what disposition was to be made of this fund for “syndicate expenses,” and strongly intimated that it was to be used in some way among parties who exercised political influence in South Carolina; though he declared emphatically that he knew not to whom the money was to go and persistently protested that he did not wish to know. This fund, as the clause already quoted from the subscription agreement shows, was to be raised by deducting two-thirds from the amount of the interest due July the first, eighteen hundred and ninety-three on the new four and a-half bonds. The syndicate agreeing to take the two millions of bonds at par fiat as of July the first, and also agreeing under the option to take the remaining three millions two hundred and fifty thousand, the interest coupons to mature that day for the preceding six months and amounting to two and a-quarter per cent., were to be the property of the syndicate, and out of their proceeds, when paid by the State Treasurer, a portion of the profits of the members was to be derived after the syndicate expenses and the other items named in the fourth paragraph of the subscription papers were first subtracted. It is obvious, therefore, that one of the things which the members of the syndicate contracted to get and one of the things that was to be their common property, under both the original subscription and the option, was this six months’ interest amounting at two and a-quarter per cent, on the two millions of dollars to the sum of forty-five thousand dollars, and on the remaining three millions two hundred and fifty thousand dollars to the further sum of seventy-three thousand one hundred and twenty-five dollars, and aggregating the gross sum of one hundred and eighteen thousand one hundred and twenty-five dollars. The Trust Company was authorized to disburse in discharge of “syndicate expenses” from this common or partnership fund for the benefit of the whole syndicate two-thirds, or seventy-eight thousand seven hundred and fifty dollars, if the entire 5,250,000 of bonds were included under the second clause of the subscription agreements, or thirty-thousand dollars if only the 2,000,000 purchase was embraced and covered by that clause.

It was perfectly natural that the members of the syndicate should inquire of Lancaster, himself also a member, as to what these expenses were for; and both as a promoter of and a participant in the enterprise he was bound to disclose the literal truth on this subject to his associates ; but as already stated and as the sequel will further show, he not only did not content himself with a mere concealment and a suppression of the truth, but he deliberately uttered the most unblushing falsehoods, strictly in keeping with his subsequent reprehensible efforts, during his examination as a witness, to deny, avoid and explain away his glaring duplicity. After the most unqualified declarations on the part of Lancaster, who, it must be borne in mind, was acting throughout this whole transaction as the agent and partner of Rhind, to the effect that he had no interest in these expenses and was to get no part of the proceeds of these coupons beyond the five hundred dollars already named, the arrangement to take the two millions of bonds was concluded, and on January the nineteenth, eighteen hundred and ninety-three, a contract for the purchase of the bonds with the interest coupons attached was entered into between the Baltimore Trust and Guarantee Company, as agent for the syndicate, and the Governor and the Treasurer of South Carolina in behalf of the State. By that agreement it was provided:

“ That under and by virtue of the Act of the General Assembly of the State of South Carolina, hereinafter mentioned, the parties of the first part hereby covenant and agree to sell and deliver to the party of the second part, its successors or assigns, and the party of the second part, in its own behalf, to the extent of its subscription and as agent as' hereinbefore set forth, hereby covenants and agrees to purchase from the parties of the first part, for itself and its associates, two million ($2,000,000) dollars of the bonds and stock bearing four and a-half (4%) per cent, interest, payable semi-annually, and issued pursuant to the terms of ‘ An Act of the General Assembly of the said State of South Carolina, entitled an Act to provide for the redemption of that part of the State debt known as the Brown consol bonds and stock, by an issue of other bonds and stock,’ approved the 22nd day of December, 1892, upon the following terms and conditions, that is to say: The bonds and stock so purchased shall bear date January 1st, 1893; and shall carry interest from January 1st, 1893, payable semi-annually; they shall be sold by the parties of the first part and purchased by the party of the second part at par flat; that is to say, nothing additional shall be paid for any interest which may have accrued at the time of delivery ; the purchase money of said bonds and stock shall be due and. payable one hundred thousand ($100,000) dollars thereof upon the execution of this contract and the remainder thereof on or before the 30th day of June, 1893, in such sums and at such times, as to the party of the second part may be most convenient, and the said bonds and stock shall be delivered by the parties of the first part to the parties of the second part in such amounts and at süch times as they may be called for by the party of the second part upon payment of the balance of ninety-five (95) per cent, due thereon; the said sum of $100,000, being held and taken to be 5 per cent, upon the whole purchase of $2,000,000, and that payments of said balance of ninety-five (95) per cent, may be made by said party of .the second part, either in cash or in Brown consols, due July 1st, 1893, the July coupons thereon being retained by the party of the second part.”

A subsequent clause of the same agreement reads as follows :

“ And in consideration of the purchase aforesaid by the party of the second part, the parties of the first part hereby further covenant and agreee to sell and deliver to the party of the second part, its successors or assigns, so much of the remainder of the bonds and stock issued, or to be issued, by virtue of the said Act, as is saleable by the Governor and Treasurer under the said Act, or any part thereof, said bonds and stock to bear date January 1st, 1893, to carry interest from January 1st, 1893, and to be paid for at par flat, said remainder of such bonds and stock being understood to be $3,800,000.”

On the second of January, eighteen hundred and ninety-three, and consequently before the syndicate was fully formed and before its obligation to take the bonds was complete, and before Lancaster made his false representations, Rhind and Lancaster entered into a secret agreement by which it was stipulated that in the matter of the refunding of the South Carolina State debt “the commissions we expect to earn thereon of one and one-half per cent., is to be divided between us in the proportion of two-thirds to Col-den Rhind and one-third to R. A. Lancaster & Co.”

When it was concluded to avail of the option provided for in the clause quoted above, as to the residue of the bonds over and beyond the first two millions, a second contract, bearing date March the seventh, was made between the Trust Company and the State officials of South Carolina. Some of the members of the first syndicate declined or failed to unite in the second purchase and other parties took their places; and this is what is called in the record, the second syndicate. One of the questions to be disposed of is, whether two-thirds of the July, 1893, interest on these three millions two hundred and fifty thousand dollars of bonds covered by the second purchase in execution of the option, is payable to Lancaster and Company under clause two of the original subscription agreements for “ Syndicate Expenses.”

The Trust Company conducted the business for the syndicate with the State’s officers, and the proceeds of the July coupons were remitted to it or treated as if in its ac tual possession. On the sixth of June, 1893, Lancaster and Company drew five drafts, aggregating twenty-five thousand two hundred and fifty dollars on the Trust Company, payable to the order of Colden Rhind, which Rhind at once indorsed in blank without recourse and delivered to Lancaster, who procured them to .be accepted by the Treasurer of South Carolina with the consent of the Trust Company in part payment of the bonds bought by Lancaster. The drafts for this sum of twenty-five thousand two hundred and fifty dollars were drawn upon and were ultimately paid out of the fund set apart in the subscription agreement for “ syndicate expenses.” When it was discovered by other members of the syndicate that Lancaster, one of their number and a copartner with them in the transaction, had received a large sum in excess of his legitimate share of profits, they promptly notified the Trust Company not to pay out any further portions of this fund and asserted a claim to the residue. The Trust Company was thus confronted with conflicting claims to the fund—on the one hand, Rhind asserted that he was entitled to it for two reasons ; first, under three drafts drawn in his favor by Lancaster and Company on the Baltimore Trust and Guarantee Company, for sums aggregating forty eight thousand five hundred dollars; and secondly, because, though the fund was made payable to Lancaster and Company, it was known and understood by the members of the syndicate that the money was really payable and belonged to Rhind. On the other hand the appellants insisted that the fund belonged to them to the extent that was necessary to equalize them with Lancaster; and they further contended that only two-thirds of the interest due on the first,two millions purchase was payable for syndicate expenses under "clause two of the subscription agreements.

Threatened by these opposing demands and unable to decide between them, the Trust Company filed a bill of interpleader against the appellants and other members of the syndicate, including Lancaster, and against Rhind, praying that they be summoned into the Circuit Court of Baltimore City and be there required to interplead and adjust their conflicting claims and demands upon this fund amongst themselves. Most of the defendants filed answers. Lancaster disclaimed any interest in the controversy, having been paid by Rhind all he claimed to be entitled to. Subsequently a cross-bill was filed which was later on dismissed by a decree of June the thirteenth, 1894. By, this decree the original bill of interpleader was dismissed as to Lancaster and several other defendants, who disclaimed any interest in the fund; and it was adjudged as to certain others of the defendants who had failed to answer, that they were not entitled to any part of the money in controversy. It was further provided that the remaining defendants should interplead, and for that purpose all except Rhind were made plaintiffs, and Rhind was made defendant. Ah agreement was then signed to the -effect that Rhind would not, in the subsequent proceedings, make claim or contention that Lancaster was a necessary party to the suit. Quite a mass of evidence was taken, and after a hearing the Court below, on May the fifth, eighteen hundred and ninety-six, adjudged and decreed that the funds in Court belonged to Colden Rhind, free from any claims or interest of the other parties in the cause. From that decree these ten appeals have been taken.

There are two questions involved. First. It is insisted that the one and a-half per cent, for syndicate expenses out of the two and one-quarter per cent, interest, does not extend^ t.o_ and include one and a-half per cent, on the three millions two hundred and fifty thousand dollars of bonds taken by what has been called the second syndicate. And, secondly, if the one and a-half per cent, does extend to the second, purchase,.then it is maintained that Rhind ought to be required, to account for and pay to the appellants out of the funds in Court and which are claimed by him, the amount that he stipulated to pay Lancaster under the secret agreement between them, in prejudice of the rights of the other members of the syndicate.

With regard to the first question but little need be said. Whilst there is some conflict of opinion amongst the witnesses who, being members of the syndicate, have testified as to what their understanding of the matter was, we lay that out of view altogether and look alone to the face of the written instruments themselves; and from their tenor and terms, construed in the light of the surrounding circumstances, this first contention must be judged. Now, what the syndicate agreed to purchase from the Governor and Treasurer of South Carolina was, first, a block of two millions of certain bonds with attached coupons ; and secondly, if the syndicate availed of an option given to it, another block of three millions two hundred and fifty thousand of the same series of bonds with attached coupons. The separate obligation of each member of the syndicate bound the individual signing it to^pay, first, for such portion of the two millions as he had agreed to take, and, secondly, should the option be availed of, then to pay such proportion of the residue as his original subscription would entitle him to in the larger amount. Each subscriber further stipulated that out of the interest which would accrue July the first on the bonds subscribed for, the Trust Company should pay to R. A. Lancaster and Company for syndicate expenses two-thirds, or in other words “ a commission of one and one-half per cent, out of the interest or profit received on said bonds.” So that the rights of the members as to the profits of the venture were restricted to the excess for which the bonds might sell over and above the cost at which they were purchased, plus a share in three-fourths of one per cent, of the July interest—this three-fourths of one per cent, being the amount of the July interest remaining after the commission of one and one-half per cent, was paid by the Trust Company. Therefore, though the title to the proceeds of the July coupon vested in the Trust Company under the agreement with the State of South Carolina, it vested in trust for specified purposes. When the option to take the remaining three millions two hundred and fifty thousand dollars of bonds was exercised, the syndicate was to “ have the same rights and privileges in ” them “ as hereinbefore provided with reference to said two millions of said bonds.” That is to say, with respect to the three millions two hundred and fifty thousand, the title to the proceeds of the coupons should vest in the Trust Company subject to the same trusts declared with respect to the proceeds of the July interest on the two million block, viz., for the payment of two-thirds to R. A. Lancaster & Company for syndicate expenses, and for the payment of the other one-third, or the three-fourths of one per cent., less other syndicate expenses, to the subscribers as part of their profits. As the rights and privileges which the members of the syndicate were to have under the two millions purchase depended in part on what disposition was provided to be made of the proceeds of the coupon on that block of bonds ; and as they were to have precisely the same rights and privileges and none other with respect to the second purchase that they had in regard to the first, it follows that the right to share in the proceeds of the July coupon on the three millions two hundreds andjifty thousand block could not be larger or more extensive than the right to share in the proceeds of the coupon on the two million block ; andThat consequently the option subscription was also subject to the provision that two-thirds of the proceeds of the July Interest was-to be deducted for syndicate expenses or commissions.

This brings us to the other question respecting the claim of the appellants to a portion of the funds now in Court.

It has been stated in a preceding part of this opinion that the syndicate acquired title to the proceeds of the July interest, through the Trust Company, on the whole issue of five millions two hundred and fifty thousand dollars of bonds; but the reasons for that conclusion have not yet been set forth. The correctness of this position is of vital consequence in the discussion still to follow; and it is therefore appropriate that it should now be clearly established. What was it that the syndicate agreed to purchase ? Was it the bonds less the coupons, or the bonds plus the coupons ? This inquiry is answered by the written contract between the syndicate on the one side through its agent the Trust Company, and the State of South Carolina by her Governor and Treasurer on the other. Under that contract, dated as already stated on January the nineteenth, 1893, the parties of the first part, that is, the Governor and Treasurer, agreed to sell and deliver to the party of the second part, that is, the Trust Company for the syndicate, and the party of the second part on behalf of itself and as agent for the others whose subscriptions were appended, agreed to purchase from the parties of the first part two millions of bonds and stock of the State ; and it was stipulated that “ the bonds and stock so purchased shall bear date January the first, 1893, and shall carry interest from January the first, 1893, páyable semi-annuallyJTHey shall be sold by the parties of the first “part and purchased by the party of the second part at £ar__flat; that is to say, nothing additional shall be paid for any interest which may have accrued at the time of delivery.” The same terms were prescribed with reference to the remaining bonds over and above the first two million. It seems too clear for controversy that under this contract the bonds and their accrued interest up to the time of delivery were sold by the State and bought by the syndicate. No other meaning can be ascribed to the written contract; and if this be so then, as a matter of course, each and every one of the coupons was included in the sale to the syndicate, and of necessity, therefore, the coupon to mature on the first of July, 1893. There being no reservation of this July coupon, and no exception of it from the sale, but on the contrary, the clearest manifestation of an intention that it should accompany and go with the bonds to which it was attached; when the bonds were sold to the syndicate the July coupon or interest was also sold, and the syndicate—the purchaser—through the Trust Company, acquired title to that July interest. Under the individual subscriptions antecedently made, the proceeds of the July coupon thus acquired by the syndicate were impressed with a trust, and the Trust and Guarantee Company was authorized to disburse the fund for account of syndicate expenses and in a particularly designated way. Whatever the antecedent arrangements between Colden Rhind and the authorities of South Carolina may have been they were obviously superseded by the contracts of January the nineteenth and March the seventh, and no title to this interest passed to Rhind. Whatever claim he has, or can assert, to any part of this interest, whether the claim be preferred as commissions or as syndicate expenses, must now be made through the syndicate, and must be derived from and founded on the second clause of the individual subscription contracts which were , the basis of the final transaction and of the actual purchases of JanuaryAhe nineteenth and March the seventh, 1893. As the claim made by Rhind must, to have any standing at all, come through the syndicate, it is necessary to describe his relations with and attitude towards that syndicate and to define the legal consequences flowing from that relation and attitude, as bearing upon his asserted right to the fund in controversy.

Now, a syndicate, according to the undisputed evidence, is an association of individuals, formed_ for the. purpose , of conducting and carrying out some particular business transaction, ordinarily of a financial character, in which the members are mutually interested. It is as respects the persons composing it, a partnership, and in so far as these same persons are concerned the legal obligations assumed by them are, as between themselves, substantially the same as those which the. law imposes on the members of an ordinary copartnership. Scrupulous good faith is naturally, if not necessarily, implied from the very nature and character of the relation of partnership; and consequently, intrigues by one member for a private benefit to himself are clearly offences against the partnership at large, and as such are relievable in a Court of Equity. For, as observed by Lord Eldon in Crawshay v. Collins, 15 Ves. 227, there is an implied obligation among partners to use the property for the benefit of those whose property it is. A secret agreement, therefore, that one of the partners shall reap an advantage out of the partnership property to the prejudice and injury of his associates, and of which they are kept in ignorance by his fraud and deception, is essentially at war with the good faith upon which the relation is founded. The evidence in this record illustrates the truth of this proposition, as the appellants, without exception, all testify that had they been informed that Lancaster was to receive any share of the sum set apart for “syndicate purposes” they would never have entered the syndicate, for the obvious reason that to the extent that Lancaster received a part of this sum he paid less for his bonds and could, therefore, sell them at a price below that which the other members were required to pay; whereby he secured an advantage over them wholly at variance with any notion of equality. It was the duty of Lancaster, acting for himself and as the agent of Rhind, to be perfectly candid and frank in his dealings with his associates; but he was not, and both he and his principal are answerable for his deception.

Again: Both Rhind and Lancaster were promoters of the syndicate, and it was their plain andlmperative duty towards the persons who were invited “to-co-operate in the enterprise, not only to abstain from stating as a fact that which was not a fact, but not to have omitted to state any circumstance within their knowledge, the existence of which might in any way affect the extent or the quality of the advantages held out as inducements to the others. Cortes Co. v. Thannhauser, 45 Fed. Rep. 730, and numerous cases collected, in a very full note to Yale Gas. Stove Co. v. Wilcox, 25 L. R. A. 90. Or, as put by Vice-Chan. Bacon in Bagnall v. Carlton, L. R. 6 Ch. Div. 385, relying on Imperial Mercantile Credit Asstn. v. Coleman, L. R., 6 H. L. 189: “The law I take to be clear, that under such circumstances an agent, whatever may be the nature of his employment, or under whatever circumstances, is bound, if he has any interest in the matter, not only to declare that fact, but to specify the nature of his interest; and that all persons who act with him, and who share in that interest, are jointly and severally bound to make good, when their interest is discovered, to the principals, the whole benefit which has been obtained without the sanction of the principals.”

The application of these familiar principles to the facts in these cases inevitably leads to but one result. If we treat the syndicate as a partnership subject to the law incident to that relation, and the fund arising from the July, 1893, interest on the whole five millions two hundred and fifty thousand dollars of bonds, as a partnership fund belonging to the syndicate, then all third persons who dealt with that fund in an unwarrantable way knowing that it was a partnership fund devoted to a particular purpose, must take the consequences which the law affixes to unauthorized dispositions of trust or partnership property. Rhind knew of the existence of the syndicate. He had commissioned Lancaster to form it. He likewise knew that the money to which he lays claim was payable by the State of South Carolina to the Trust Company as the money of the syndicate; and he knew this because it was the legal result of the purchase of the bonds by the syndicate. He also knew that Lancaster Was a member of the syndicate and he was chargeable with knowledge that Lancaster could not stipulate with him for a share of these very funds unless by the consent of the other members of the syndicate; and he was bound to know that the advantage derived by Lancaster under that secret arrangement was one which, under the law, would enure to the use and the benefit of the copartnership. The payment made by Rhind to Lancaster of twenty-five thousand two hundred and fifty dollars out of the syndicate funds and pursuant to the terms of the secret agreement, was, under the facts in evidence, a clearly illegal diversion of the partnership funds. As concisely stated by Col. Marshall in his brief: “ That money was clothed with a trust— as it were—a partnership money dedicated by contract to the payment of syndicate expenses and while other persons might become entitled to it for lawful consideration, there was one person who could not become entitled to it without the full knowledge and acquiescence of his associates, and that person was Lancaster.” Rhind turned over part of this fund to his confederate and' he used every device to keep the other members of the syndicate in profound ignorance of what he had done. He thus gave to a person who was not entitled to receive any part of the fund and who was bound in good faith not to receive it, nearly one-third of the sum set apart for expenses; and having thus unlawfully dealt with the partnership property by giving it to a person who he knew was not entitled to receive it and to whom he knew he had no right to give it, he is as accountable for that misapplication as is his jmnfederate who clandestinely received it. This was an offence by both Rhind and Lancaster against the partnership and as such is clearly cognizable in equity under the general principle upon which equity prevents the abuse of undue influence and of fiduciary relations. The arm of a Court of Equity is strong enough to strike down such transactions as this. That Court will not falter or hesitate before mere technical forms of procedure when gross injustice has been done; and where a fund claimed by a wrong-doer is under its control it will devise a remedy to meet each new emergency and will enforce a restitution if the ends of justice require it. It is for such exigencies that a Court of Equity exists. If a decree can be made upon the record to meet the substantial justice of the case it will be passed. Crain v. Barnes and Ferguson, 1 Md. Ch. Dec. 155. As said by Lord Justice James in Panama, &c., Co. v. India Rubber, &c., Co., L. R. 10 Ch. Ap. 526: “ According to my view of the law of this Court, I take it to be clear that any surreptitious dealing between one principal and the agent of the other principal is a fraud on such other principal, cognizable in this Court. That I take to be a clear proposition, and I take it, according to my view, to be equally clear that the defrauded principal, if he comes in time, is entitled at his option to have the contract rescinded, or, if he elects not to have it rescinded, to have such other adequate relief as the Court may think right to give him. It is said there is no authority and no dictum to that effect. The clearer a thing is, the more difficult it is to find any express authority or any dictum exactly to the point.”

But to deal with the transaction from another point of view: Lancaster was confessedly Rhind’s agent to form the syndicate—he was entrusted with full authority to accomplish that end—and Rhind is obviously bound by and responsible for the representations and concealments made by Lancaster in the line and within the scope of his employment. Rawlings v. Wickham, 3 De. G. & J. 304; Andrews et al. v. Clark, 72 Md. 396; West. Md. R. R. Co. v. The Franklin Bk., 60 Md. 36. Now, as we have said already, before the final formation of the syndicate and at least a week prior to the execution of the contract of January the nineteenth, with the State of South Carolina, consummating the purchase of two millions of the bonds, Lancaster falsely represented to the appellants that he had no interest different from theirs in the undertaking, though at that very time he had in his possession a secret written agreement signed by himself and Rhind, under which he was to receive one-third of the sum that might go to Rhind as commissions. He deceived, misled and deliberately imposed upon the appellants and induced them to incur obligations to large amounts which they would never have entered into had he revealed the truth with respect to the advantage which this secret agreement gave him. Rhind now comes forward and claims under drafts drawn by his agent Lancaster, the very funds which if demanded by the agent would be payable to the syndicate, and they would be payable to the syndicate upon the theory that the stipulation made by the promoter for his own gain enures to the_ concern which hejorganized. "'The rulé is well settled that if the principal sues upon a contract made with and in the name of his' agent,"the opposite party is entitled to be placed in the same position at the time of the disclosure of the principal, as if the agent had been the real contracting party. Balto. Coal, Tar and Manf. Co. v. Fletcher & Murdock, 61 Md. 295. If Lancaster were seeking to recover the funds in Court for his own benefit and behoof after his explicit declarations that he was not to receive any portion of them beyond five hundred dollars, there can be no question that he would be denied relief, because as promoter and partner he would not be entitled to them; and as Rhind occupies no better position than his agent could have maintained, he will not be permitted to receive the same funds except those in excess of the amount he unlawfully agreed to pay to Lancaster. In other words, before he can be paid through Lancaster under the drafts he now holds, any part of the fund now in Court he must make restitution of the amount which he participated in the diversion of from the syndicate. There is nothing in the evidence to show that more than one or two of the appellants ever knew that Rhind claimed any of the commissions when the syndicate was organized; and his right to them depends, therefore, not upon any understanding with the appellants, but upon the drafts drawn by Lancaster in his favor and not yet paid. There is, however, a part of the fund payable to Rhind under assignments from members of the syndicate other than the appellants, but this is not in controversy.

It is clear that Rhind has no greater or better right to these funds under the drafts drawn by Lancaster than Lancaster had at the time the drafts were drawn, and it is not material, so far as the consideration of this proposition is concerned, whether Lancaster is still a party to the case or not. He could not transfer to Rhind under the circumstances stated, a right to or claim upon the funds which would be superior to that which he possessed himself; and consequently any equities which the members of the syndicate had against Lancaster or the fund, growing out of his dealing with them in respect to it as the agent of Rhind, still attach to the fund when claimed by Rhind under the drafts drawn by Lancaster, because Rhind simply stepped into Lancaster’s shoes. If Lancaster could not recover the fund, and we have said he could not under the circumstances stated, in what better position does Rhind, his associate and assignee stand? By his own acts he enabled Lancaster to take an unlawful advantage of Lancaster’s fellow-partners, and the advantage thus taken and participated in by Rhind is the very occasion that gives the copartners a claim upon the residue of the fund. Rhind comes, therefore, to a Court of Equity and asks it to decree to him a fund which it would not have directed to be paid to the very person under whom Rhind claims.

But it is retorted that Rhind was at liberty to employ such agents as he thought fit to form the syndicate, and that he could agree for and pay them such commissions as he might be inclined to; and that this was a matter which concerned only him and his agent, and that, therefore, he is in no sense blamable for not disclosing the secret agreement in which no one but himself and Lancaster were interested. This contention may be briefly but satisfactorily answered in the following sentences from Bagnall v. Carlton, supra: But although this may have a certain air of plausibility, and it might be true if the vendors and their agents were the only persons concerned in the transaction, it is wholly fallacious when applied to the facts of this case. It wholly omits the consideration that the employment of the agent was for the purpose of forming a company, and of inducing other persons to subscribe in reliaiTceupon a representation which was untrue.”

But itTis insisted that the case of Whaley Bridge Calico Printing Co. v. Green aud Smith, L. R. 5, Q. B. Div. 109, establishes and applies a principle which sustains the decree appealed from. The learned Judge who decided these cases below relied exclusively upon the case just cited. We fail after a most patient study of that case to see that it conflicts with any conclusion we have reached. Indeed it is an authority directly in point to support a part of the appellant’s contention as will appear in a moment.

The Whaley Bridge Company's case was this : One Robert Ellis Green purchased certain calico printing works for the sum of fifteen thousand pounds. Green and John Smith associated themselves together as promoters of a company-formed for the purchase of the works from Green, and for the purposes of the negotiations for such purchase, a contract, which the jury found to be a sham contract, was entered into between them for the pretended sale of the works by Green to Smith for twenty thousand pounds. The company was ultimately formed, its directors being nominees of Green and Smith, and the works were conveyed by Green and Smith to the company for twenty thousand pounds. It was agreed between Green and Smith that Green should pay the sum of three thousand pounds out of the twenty thousand pounds purchase money to Smith, but this agreement was not communicated to the directors of the company when the sale to the company was effected. It was held by Bowen, J., that Smith, as a promoter of the company was not entitled to secure any profit to himself oiit of the formation of the company without the knowledge of the directors, and that such being the case the company were entitled to treat the agreement made between Green and Smith for the payment of the three thousand pounds, as made by Smith on the company’s behalf and to enforce it against Green, and that consequently the company could recover from Green so much of the three thousand pounds which he had agreed to pay Smith, as remained unpaid. The action was founded on the contract between Green and Smith, and the company sought to enforce that contract for the payment of the three thousand pounds as a contract made for the profit of the company and not for the profit of Smith. The sole defence was made by Green—Smith not appearing—and he claimed “ that as Smith could not enforce against Green a contract based on an illegal consideration, so neither-can the company.” But this was brushed aside with the remark that “ It does not lie in Green’s mouth to say that his own bargain with Smith was a fraudulent one and therefore cannot be enforced; ” and it was decided that it was enough for the company to show that the three thousand pounds was a profit coming to its agent, Smith, to entitle it to claim the same. As eight hundred pounds of the three thousand had been paid by Green to Smith a judgment was entered against Green for twelve hundred pounds and the negotiation of one of the company’s promissory notes held by Green for one thousand pounds and which had been given him in part payment of the purchase money, was restrained and an order was passed directing the note to be delivered up to be cancelled. Apparently no claim was made against Green for the eight hundred pounds actually paid by him to Smith. If such a claim had been preferred it is not easy to see how logically there could have been any escape from allowing it. If it was rightly decided that the undisclosed contract between Green and Smith for the payment to the latter of the three thousand pounds out of the purchase money, was a contract for the benefit of the company and not of Smith, then the money was payable by Green to the company and to no one else ; and if payable only to the company, obviously a payment by him to Smith was no payment to the company and was no discharge of Green’s obligation ; and consequently such a payment would have been no defence to a demand by the company that the eight hundred pounds should be paid to it. In a word, if the money was legally payable to the company, Green could not properly pay it to some one else ; but if he did pay it to some one else that fact did not relieve him of liability to the company. This is inevitable, and to this conclusion the case relied on must logically lead. But the case does not decide that the company could not recover from Green the eight hundred pounds which Green had paid to Smith—it merely decides that the company could recover the twenty-two hundred pounds remaining unpaid by Green to Smith; whereas in the pending cases what is sought is not only a decree to compel Rhind to pay over to the syndicate what is still unpaid to Lancaster under the secret agreement, but to require him to make good the sum he actually did pay to Lancaster thereunder—this latter exaction being precisely the very thing not discussed and not decided one way or the other in the Whaley Bridge case.

(Decided January 5th, 1897).

The appellants each claim, in the first syndicate, an amount that will bear the same, proportion to the one and a-half per cent, on two millions of bonds, that the amount of subscription of each bears to the entire two millions ; and in the second syndicate, an amount which will bear the same proportion to the one and a-half per cent, on $3,250,000 of bonds that the amount of the subscription of each bears to the whole $3,250,000.

We hold then, for the reasons we have given, that Colden Rhind is accountable for the $25,250 actually paid over by him to Lancaster; and on the authority of the Whaley Bridge case we further hold that he is accountable for the one thousand dollars not paid over—it being part of" the $26,250 agreed to be paid by Rhind to Lancaster as the latter’s one-third of the one and -one-half per cent, commission under the secret agreement of January the second, 1893; and that this sum of $26,250, with interest from July the first, 1893, and the costs of these cases above and below must be deducted from the funds in Court and paid to the appellants, the residue being payable to Rhind. It follows, therefore, that the decree appealed from must be reversed and the cause must be remanded for a new decree.

Decree reversed and cause remanded that a new decree may be passed comformably to this opinion, the costs in this Court and in the Court below to be paid by Rhind out of the funds in Court.

Case Details

Case Name: Hambleton v. Rhind

Court Name: Court of Appeals of Maryland

Date Published: Jan 5, 1897

Citation: 84 Md. 456

Court Abbreviation: Md.