176 Mass. 310 | Mass. | 1900
These two cases were heard together in the Superior Court; certain findings on the material facts were made, which are set forth in a report, and the questions of law arising thereon were reserved for this court.
The suits were begun by the receiver of the East Tennessee . Land Company, an insolvent corporation, to recover from the defendants secret profits made by them as promoters of that company.
The Phoenix Land Company was a corporation organized under the laws of the State of Tennessee, on March 15,1889,— just ten days before the date of the circular mentioned above,— by Frederick Gates, his son B. W. Gates, his two partners in the real estate business at Chattanooga, A. W. Sidebottom and O. F. Jaynes, together with one Alphonso A. Hopkins of Elmira in the State of New York. These five men were all the incorporators, directors, or subscribers to stock in said corporation, and “ it does not appear that any stock of said Phoenix Land Company was actually issued, or that it had any paid-up capital stock at any time, or that it owned any land.”
The defendants, together with eight other persons, accepted this proposal, and an agreement between the Syndicate of Ten
There were thirteen incorporators of the East Tennessee Land Company. Gates and one of his associates were two; ten of the members of the Syndicate of Ten, together with the said Mason, made the thirteen; it appears that one of the original members of the Syndicate of Ten divided his interest in two, so that there were ultimately eleven members in the syndicate of Ten, two of them having a half share each.
On June 10,1889,-the first meeting of the stockholders of the East Tennessee Land Company was held, and all the incorporators and stockholders were present in person or by proxy. At this meeting it was voted that the corporation should make a contract with the Phcenix Land Company whereby, in consideration of the Phcenix Land Company’s assigning all options then held or thereafter acquired by it, and of its agreeing to secure further options at the expense of the East Tennessee
In December, 1889, the East Tennessee Land Company issued a prospectus inviting subscriptions to the capital stock of the corporation. In this prospectus it is stated, among other things, that “ The capital stock of this company represents actual value without inflation, but does not approximate the entire value of the properties on which it is based. It was the intention of the projectors and incorporators to shape this enterprise so that its stock should be as solid as that of a national bank. Over half a million dollars of its capital were subscribed before the company’s organization, at par. Subscriptions for the remainder are now solicited.” And no other reference was made to the fact that the $700,000 of paid-up shares in question had been subscribed for, and no statement was made as to the way in which those $700,000 of shares had been paid for and issued.
On November 18,1893, one Schumacher filed a bill in equity in the Circuit Court of the United States for the Southern Division of the Eastern District of Tennessee, in behalf of himself and all other unsecured creditors of the East Tennessee Land Company, alleging that the company was insolvent, and praying that its property might be realized and the proceeds distributed among its creditors; in this suit receivers were appointed to take possession of all the property of the corporation. The Central Trust Company of New York, the trustee named in the mortgage given to secure the bonds of the East Tennessee Land Company, filed a bill to foreclose that mortgage on March 11, 1894, the two causes were consolidated, and the receivership was extended to the consolidated cause. The consolidated cause was referred to a master; upon the coming in of the master’s report a decree was entered on February 27, 1897, establishing the validity of the mortgage, ascertaining the debts thereby secured and the other debts of the corporation, directing the property of the corporation to be sold, and decreeing the order of distribution of the proceeds' derived therefrom. By this decree it was found that the debt of the East Tennessee Land Company at that time -was as follows: (1) Mortgage debt, $1,164,836.58; (2) Vendors’ lien on company’s land, $165,233.81; (3) Secured debt, $202,409.09, and unsecured debt, $224,818.04; amounting to $1,757,297.52, and, in addition, $9,631.10, due on receivers’ certificates issued to raise money to pay taxes. The report on which this case comes up from the Superior Court
Stripped of the surroundings which tend to obscure its real nature, the transaction in which the defendants took part was this: Gates and his four associates, and the defendants and their nine associates, believing that a tract of some 225,000 to 300,000 acres of land in Tennessee had natural resources which could be developed at a great profit, agreed to join themselves together to secure options on the land, and then organized a corporation which was to buy the options of them at a profit; this profit, after paying all actual expenses incurred in procuring the options and organizing the corporation, was to be divided equally between Gates and his associates operating under the name of the Phoenix Land Company, and the defendants and their associates operating as the Syndicate of Ten. In this joint adventure Gates and his associates contributed their information as to the land, and the defendants and their associates contributed the money ($15,000 to $30,000) to be advanced for the expenses of the enterprise, until the corporation to be organized was organized and was in funds, when these advances were to be repaid by it. It was stated in the agreement providing for this joint adventure that the profit which they would secure from the corporation for the transfer of these options would be some $700,000; the cost of the lands being estimated to be $900,000, including $100,000 for expenses, and the value of the lands to the corporation being stated to be $1,500,000; if the $100,009 of expenses included in the $900,000 were repaid to them, the difference between the two, that is to say, the net profit to the promoters of the corporation, would be $700,000; it was also agreed that “ at least five sixths of its net profit shall be taken by each of these two contracting parties in stock of the new corporation.”
But this argument omits from the case the fact that the defendants, together with their associates in the Syndicate of Ten, and Gates with his associates in the Phoenix Land Company,
If the fullest effect is given to the finding of the court, that the defendants intended no actual fraud in taking two hundred and fifty shares each, and did not intend to defraud or cheat
The defendants say that they did disclose the fact to the East Tennessee Land Company, and that they did get the consent of the East Tennessee Land Company to the payment of this $700,000 of stock to them for their remuneration as promoters; and that is not only enough, but it is final. It is true that the vote, authorizing the issue of this stock to them as the profits which they were to have for the organization of the company, was voted unanimously by all the incorporators of the East Tennessee Land Company and by all, who were then subscribers to its capital stock, that is, by all the persons who then had any interest in that corporation, in short it is true that the fact, that the promoters were to receive $700,000 of paid-up capital stock tas remuneration for their services, was disclosed, and consented to, by all the persons who then had any interest in the corporation. But it is also true that at that time no person except the promoters had any interest in the corporation, barring one Mason, in whose name some of the options were subsequently taken, and who was plainly a mere nominee of the promoters; and that at that time no capital stock of the corporation had been issued to the public. Payment to promoters of remuneration for their services is not made valid by a vote passed by the corporation, when the corporation is in the sole
In this case it is found that “ neither of the defendants personally did anything to conceal the paper marked ‘ No. 31,’ the agreement of March 25th, or took any part in concealing or keeping it from the knowledge of future stockholders or creditors of the corporation. I find, however, that as a fact it was kept from the knowledge of the stockholders other than the thirteen directors aforesaid, and of future creditors, probably by the original inventors of the scheme, — the officers of the Phoenix Land Company, — until after the failure of the East Tennessee Land Company.” That finding is conclusive of the defendants’ liability; but there is a further finding which gives to the defendants’ actions a more serious character, and that finding is this: “ The prospectus made an exhibit to the deposition of A. A. Hopkins was issued with the consent and approval of the defendants Leeson and Hopewell, and was widely circulated among the general public.” That prospectus contains the following statement: “ The capital stock of this company repre
The defendants’ next contention is that the action cannot be maintained until the East Tennessee Land Company tenders back - to the Phoenix Land Company the lands acquired by it under the contract of June 11. But this is not a suit to recover damages from promoters for fraud in a sale of their property to the corporation organized by them as promoters ; if it were, it is clear that it could be maintained without returning the lands which bad been bought; if at the time when a fraud is discovered, which was perpetrated by promoters in a sale to the corporation of property owned by them, the property is no longer in the condition in which it was when the company took it, the company may, keeping the property, sue the promoters for the secret profits which it was their duty not to make without notifying the company thereof. In re Olympia [1898], 2 Ch. 153.
In the case at bar, the Phoenix Land Company has never been anything but a paper corporation, with five of the promoters of the East Tennessee Land Company as its incorporators, without capital stock, and without property. The lands bought by the East Tennessee Land Company were bought by that company from strangers who owned them. The suggestion that the East Tennessee Land Company must turn over to the Phoenix Land Company the lands which it bought of strangers means that the East Tennessee Land Company must turn over its lands to the promoters of the East Tennessee Land Company; the Phoenix Land Company was merely the paper corporation under whose shelter the promoters sought to obscure the real nature of their
In ease of such a fraud by promoters, the corporation is entitled to follow the shares taken by the promoters or the proceeds thereof in the hands of the promoters, and to recover them specifically, or to recover damages for the. loss thereof. Carling’s case, 1 Ch. D. 115, 126, 127. Nant-y-glo Blaina Ironworks Co. v. Grave, 12 Ch. D. 738, 747, 748. Eden v. Ridsdales Railway Lamp Lighting Co. 23 Q. B. D. 368, 371, 372. Pearson’s case, 5 Ch. D. 336, 341. Chandler v. Bacon, 30 Fed. Rep. 538. Promoters who have wrongfully taken remuneration for their services and have paid the promoters’ expenses and the expenses of organizing the corporation are entitled to deduct those expenses in an accounting with the corporation. Bagnall v. Carlton, 6 Ch. D. 371, 400, 403, 407, 408. Emma Silver Mining Co. v. Grant, 11 Ch. D. 918, 939. Metropolitan Coal Consumers’ Association v. Scrimgeour [1895], 2 Q. B. 604. In this case it appears by the seventeenth finding that all payments made in procuring the options after June 11, 1889, were repaid by the East Tennessee Land Company, but it does not appear that the $6,008 prepaid purchase money expended under options held by the Phoenix Land Company on June 10, 1889, has been repaid; and there may be other expenses incurred by the promoters in the name of the Phoenix Land Company or otherwise in organizing the company, which, if not heretofore repaid to them, should be deducted by them in an accounting with the company.
The plaintiff claims that under the twenty-fifth finding of the Superior Court he is entitlód to a decree against each defendant for $25,000 and interest-, less his share of the expenses, which we have already dealt with. If the balance of this stock amounting to $1,300,000 par value had been subsequently issued for cash at par, the plaintiff would be entitled to such a decree. Ordinarily the damages are to be assessed as of the date of the taking; yet when, as in this case, the property taken had no value at that time, because it was stock of a corporation not then launched
But we are of .opinion that the twenty-fifth finding ought not to be acted on as a finding warranting that decree ; it is not in terms a finding as to the market value of the stock, neither is it in its terms a satisfactory finding, and it was not made in the light of the principles which it is now established govern the defendants’ liability. The case therefore must stand for a hearing as to what the net profits are for which these defendants must severally account. At that hearing the plaintiff may follow the shares or the proceeds, or recover damages, as he may elect one or the Other remedy. The defendants must account for the shares with the dividends received by them, or the proceeds with interest from the date when the proceeds were received by them, or for the fair market value of the stock with interest from the date when the market value may be found to have been established, as the plaintiff may have elected to proceed; and in any event the plaintiff must repay to the defendants or deduct from the sum due them the defendants’ share of the expenses of the formation of the corporation paid by them and not heretofore repaid to them.
By the frame of the ■ bills in equity in these two cases, and from the scope of the argument made in behalf of the plaintiff, the relief which the plaintiff seeks to recover from each defendant is limited to the two hundred and fifty shares issued to him, and the plaintiff does not seek to recover the one tenth of one half of the two hundred shares of stock originally subscribed for by the Phoenix Land Company, to which each defendant was entitled under the agreement between the Phoenix Land Company and the Syndicate of Ten by providing that all profits should be divided equally between the two contracting parties,
The last objection made by the defendants is that the plaintiff as receiver cannot bring the suit in his own name ; and we think that this objection is well taken.
The final order directing the receiver to prosecute these suits is as follows : “ Said Jno K. Hayward, receiver, be and is hereby directed to proceed with said causes in the courts of Massachusetts, either in his own name as receiver, or in the name of the East Tennessee Land Company, or jointly in his name as receiver and in the name of the East Tennessee Land Company, as he may be advised by counsel to be proper, and in accordance with the rules of practice in the courts in which such cases are being prosecuted.” This order does not operate as an assignment to the receiver of these choses in action. Neither did the previous orders, under which this receiver was acting, operate as an assignment of them; the plaintiff was appointed a receiver by order dated April 20, 1897, providing that he should “ possess the power and authority conferred by former orders ” on the receivers ; the original order appointing receivers under the general creditors’ bill provided that the receiver should “ collect, take possession of, preserve and care for all of the property, real, personal and mixed, bonds, notes, bills, drafts, and other choses in action of the defendant wherever found, as well as of the accounts, books and papers of the defendant, and . . . hold and dispose of the same under the order of this court.” There is nothing in the original order under which the bills in equity in
There is nothing in the objection that by the terms of the orders of the United States Circuit Court for the Southern Division of the Eastern District of Tennessee these suits are now .being prosecuted for the benefit of the Harriman Land Company and one Rhodes, to the exclusion of other creditors, if any, of the East Tennessee Land Company, and the further objection that it was not proved in the suits now before the court that the Harriman Land Company and Rhodes were creditors of the East Tennessee Land Company. This is a fact, and the fact came about in the following way: The receivers of the East Tennessee Land Company were originally appointed under the general creditors’ bill. When a bill was filed to foreclose the mortgage of the East Tennessee Land Company, the two causes were consolidated and the receivership was extended to the consolidated cause. The bill to foreclose was terminated by a decree directing a sale of the property, and after that decree had been carried into effect, the trustee of the mortgage filed a motion asking that the receiver should be discharged, or that it, the trustee, be absolved from costs of the receivership thereafter incurred. On this motion, the court entered an order directing that the costs and expenses of the receiver thereafter incurred should in no event be taxed to the plaintiff, the trustee of the mortgage, and directing that the funds theretofore realized should not be used to pay those costs and expenses. The order then recited that, as the receivership was continued to enforce
Upon substituting the East Tennessee Land Company as plaintiff in place of John K. Hayward, the causes are to stand for hearing as to what the net profits are, which the defendants have respectively received, or as to what the damages are, which the plaintiff has suffered, as the plaintiff shall elect to proceed for the property or its proceeds on the one hand, or for damages on the other hand. Decree accordingly.