Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co.

16 Md. 456 | Md. | 1860

Le Grand, C. J.,

delivered the opinion of this court:

This is an appeal from an order granting an injunction, and from a subsequent order continuing the same, upon the hearing of a motion to dissolve, passed by the Circuit court of Allegany county, in an equity cause therein depending, in which the Cumberland Coal and Iron Company was the complainant, and Allen M. Sherman, William B. Dean, and the Hoffman Steam Coal Company, were defendants. The motion to dissolve was made by all the defendants, and, being overruled in the opinion of the court, after an amendment was made to the bill of complaint, the formal order was filed, the amended bill having been answered by all the defendants. The Hoffman Steam Coal Company, alone, appealed.

The object of the bill is, to cause to have declared null and void certain deeds of lands from the complainant to Messrs. Sherman and Dean, and the cancellation of a contract, entered into with them by the complainant, for the transportation of coal, &c., over a railroad belonging to the latter. And, also, to procure a transfer of the aforesaid lands to the complainant, the same having been conveyed, as also the contract of transportation, to the appellant. The bill prays an accounting on the part of the defendants, as to the coal, <fcc., which have been mined and transported from the lands mentioned in the proceedings; and, also, an injunction restraining the disposition and sale of any of said lands, the stock of the appellant, or the transfer of the contract relating to transportation.

The whole equity of the complaint rests on two principal allegations. First, fraud, hi fact, on the part of Sherman and Dean in their dealings with the properly of the complainant; and, second, that if there be no such fraud, in fact, as to vitiate the whole transaction, the law, under the circumstances of this case, imputes such knowledge to the appellant of the relation of Sherman to the complainant and the course of his proceedings, as will affect its title with whatever infirmity belonged to his title.

The principal and operative facts detailed in the bill of complaint, may be thus stated:

The complainant was incorporated by the State of Maryland, at December session 1840. Andrew Mehaffey was its president from the 20th of March 1854 to the Tth of June L858. Sherman became a director, by an election to fill a vacancy, on the 21st of February 1855, and continued to be such until the 29th of May 1858. On the 4th of April 1855, Sherman was appointed chairman of a committee to prepare by-laws, and as such, on the 4t.h day of June 1855, reported to a meeting of stockholders, that an executive committee should be created, to be constituted of three directors, two of whom to form a quorum, the committee to be appointed exclusively by the president; that in pursuance of the authority conferred upon him by the adoption of the report, the president, Mehaffey, -appointed Messrs. Sherman, Francis Bloodgood and Joseph Torrey, an executive committee, and, as such, they assumed to act on the 29th of May 1858, but they never kept any record of their proceedings. That, on the 9th of October 1855, Sherman, at a meeting of the board of directors of the complainant, held in the city of New York, proposed for the adoption of the directors, which was done, the following resolution: “Resolved, that, the president appoint a committee of tfive directors, whose duty it shall be to proceed to the company’s property in Maryland, and ascertain how much and what part of their lands can be sold without interfering with the working and facilities of the company; and if practicable, ■that they apportion and set-off, by metes and bounds, such portions as they, in their judgment, shall deem advisable, and report the result of their commission to this board at the earliest day practicable.” Sherman was appointed chairman of the committee, having associated with him on il, Joseph Torrey, M. N. Falls, William Petit and Francis Bloodgood. This committee was appointed by the president, Mehaffey, who, on motion, was added to it. Only Sherman, Mehaffey and Petit acted and visited the lands. On the llth of December 1855, they made a report recommending a sale of a portion of the lands of the complainant,; a resolution was passed authorizing a sale of land for $200,000. On the 15th of January 1856, another resolution was passed, which, after referring to that of the 11 th of December, and declaring its execution to have been found impracticable, proceeds as follows: “It is understood that a sale of a less quantity of land, for $150,000, or thereabouts, may be effected, which sale, it is believed, will accomplish all the ends, &c.; therefore, resolved, that the president and secretary be, and they are hereby authorized and directed to make such sale, by executing a deed of the land to be sold, and to make and execute such covenants and agreements, on the part and in the behalf of this company, and as they may deem necessary to accomplish the ends above mentioned. Resolved, that the president be, and he is hereby authorized to modify the terms and conditions of such sale, in his discretion, if he shall deem it necessary to the accomplishment of such sale.’ ’

On the 22nd of April 1856, at the city of New York, a deed of conveyance of certain lands belonging to the complainant, and therein described, and a certain agreement relating to transportation, were executed and delivered by Mehaffey, as president, to Sherman and Dean. This transaction was, on the 13th of May 1856, reported to a meeting of the directors of the Cumberland Coal and Iron Company, and according to the minutes of its proceedings, “after explanations” it, as well as the acts of the president and secretary, were, by the board, “unanimously approved,” and a copy of the deed, together with the agreement entered into, directed to be placed on file for future reference.

On the 19th day of August 1858, the Hoffman Steam Coal Company of Allegany county was formed, under the Act of Assembly, of this State, of 1852, chapter 322. On the 20th of August 1858, Sherman and wife, and Dean, conveyed to tiie Hoffman Company, the land which had been conveyéd by Mehaffey to Sherman and Dean, and, according to the bill, were about “to execute and deliver to the said company an assignment of the aforesaid contract for transportation, or other instrument purporting to impart to the said compan3r, rights under and by virtue of the said contract.” The bill alleges the capital stock of the Hoffman Company to consist of five thousand shares, of which, they charge, “on information and belief,” Sherman and Dean became subscribers to the number of four thousand nine hundred and ninety shares; that Sherman was a subscriber for about five-eighths of the shares, and Dean for about three-eighths of the shares; and that the other two shares were nominally taken by other parties for the purpose of enabling the said parties to participate in the formation of the said company and become directors thereof. The bill charges, that Sherman, in the form of stock issued by the Hoffman Company, still retains his interest in the lands mentioned in the deed executed by the president of the complainant, and also, in the contract of transportation, and that he retains possession of the deeds and contract; that he is an officer as well as director of the company, and has and exercises entire practical control of the company, and that the change or conversion of his ownership in the lands into an interest in the stock, is a fraudulent device, for the purpose, and with the design, of evading the jurisdiction and process of the court. It also charges, that the Hoffman Company had, before the execution and delivery to the said company of the deed by Sherman and Dean, and before its agreement to purchase the lands thereby conveyed, and before the formation of any contract, whereby the 'said company was to acquire or enjoy any of the advantages conferred by the said contract for transportation, and that the defendant Dean also had, before he entered into the purchase of the lands, or into the contract for transportation, full notice of the frauds in said sale, in the procurement, origin, formation, execution and delivery of the deed, and of the contract for transportation, and of all the facts relating thereto.

In addition to the fraud alleged in the procurement of the deed and contract by Sherman, the bill alleges, the price agreed to be paid for the land to be grossly inadequate, and the terms of the contract of transportation to be ruinous to the Cumberland Coal and Iron Company. It also denies there has been a payment according to the terms of the purchase, and asserts that Dean was but a mere “representative man,” by which is meant one without pecuniary substance.

The gravamen of the bill is, that Sherman, with others, but principally Avith Mehaffey, conspired to despoil the complainant of its property by proceedings conducted by them, as its officers, and that full knoAvledge of all the facts and circumstances Avas had by the Hoffman Company, Sherman being, practically and really, the company; and that, whether or not there be sufficient evidence of fraud in fact on the part of those charged Avith it, nevertheless, in the contemplation of the law, the transaction is such as will be declared null and void, and of non-effect, on grounds of public policy.

Sherman and Dean, in their answers, deny all fraud, the latter disclaiming all knowledge of Sherman or of his transactions until he became connected Avith the purchase of the land. The Hoffman Company in its answer, sworn to by its president, S. Brooke Postley, admits the formation of the company, and that Sherman and Dean conjointly took the capital stock thereof to the extent of 4990 shares, and avers that the other ten shares were, at the same time, subscribed for by other parties, and denies that it is true that the said ten shares Avere nominally subscribed for by so,id other parties, and says they Avere paid for by such other parties, and were not subset ibed for on behalf of Sherman and Dean or either of them. It states that Sherman and Dean have since sold, actually and bona fide, a large part of their stock, so that they are not the large holders they originally were. It denies the frauds alleged in relation to the conveyance and contract of transportation, and insists, that even if they existed, the company had no knowledge of them, but became the purchaser of said property,. and assignee of said contract, of transportation, bona fide and for a full and valuable consideration. It admits the mining of coal on the property, and sets up, as a confirmation of the original deed and contract, the fact of the receipt by th.e complainant of the price of transporting under the contract.

A great deal of testimony was taken, on the side of the complainant, to show, what is alleged to be, the unconscionable character of the contract, and that what was done at the meeting of the stockholders of the Cumberland Coal and Iron Company, held on the 1st of June 1857, other than the voting for president and directors, was unauthorized, and that of 27,997 votes cast, 22,508 were given by proxy; that the parties voting by proxies were only empowered to vote for president and directors, and several parties were examined to show, that they, as stockholders, had no knowledge whatever of the conveyance to, and contract with Sherman and Dean, and never intended to ratify them. It is not necessary the testimony, on the one side or the other, should be critically examined, inasmuch as, on this appeal, the chief inquiry will be, whether the Hoffman Company has a standing in court as an independent litigant, and as a bona fide purchaser for value, and without notice of the circumstances preceding and conducing to its acquisition of title.

Much was said, and earnestly said, in argument, in impeachment of the integrity of the actors in these transactions, and, especially, in the arraignment of the honesty of Sherman and Mehaffey; fraud, studied and systematic, was imputed to them throughout the whole of their dealing with the matters involved in this controversy. Whatever may have been their true motives of action, the facts disclosed in evidence do not demand that we should brand them as wilfully dishonest. .One of the most distinctive features in the histoiy of the development of the mineral regions of our Slate lias been, the insane spirit of speculation which has characterized it at almost every step. Honest men, as well as dishonest men, uninfluenced, by the disastrous failures of their predecessors, have, from time to time, embarked in enterprises under the delusive hope of speedily, and as it were by magic, realizing princely fortunes, and have only been awakened to a sense of the unreality of their calculations and hopes, by the crash occasioned by their utter prostration and ruin. This spirit of wild speculation ordinarily blinds those who are engaged in it, and subjects them to the condition in which the}r are unable to see things as others see them. Legal disabilities rarely occur to them; it being, with most of them, an axiom of public or political economy, that the exchange of one article for another, at fictitious rates, and without the bestowal of labor on either, increases the value of both. Men, involved in transactions of this kind, very frequently, without the slightest consciousness of dishonesty of purpose, do things which the law condemns, and which it declares to be of no value. It is to guard against this proneness to a nonobservance of what is strictly right and proper in the dealings of corporations, the law has wisely interposed its checks and prohibitions; and, we think, in the present aspect of this case, these are all sufficient to justify the action of the Circuit court, without staining the reputation of any of the parties to the controversy with fraud or perjury Uprightness and integrity of character are too precious a possession to be dealt with lightly anywhere, and ought not. especially, to be sullied by the judgment of a court of justice, except on clear and conclusive evidence.

The- first matter of inquiry is, the nature and legal effect of the transactions of Sherman with the Cumberland Coal and Iron Company.

The whole evidence incontestibly establishes these facts:

1st. That Sherman was a director of the Cumberland Coal and Iron Company, from the 21st of February 1855, to the 29th of May 1858.

2nd. That, on the 9th of October 1855, on motion of Sherman, a committee was appointed to visit the lands of the company in Maryland, and report, on the expediency of selling a portion of them, and of which committee he acted as chairman, and, as the organ of which, he recommended a sale, (fee., &c.

3rd. That, on the 22nd of April 1856, Sherman received the deed to himself and Dean for the land, and the contract relating to the transportation over the railroad of complainant.1

It thus appears that Sherman was a director in the Cumberland Coal and Iron Company, from the incipiency of the project to dispose of a part of its property down to its consummation. and so remained for more than two years thereafter. He actively participated in all measures tending to the completion of the sale, and, of course, had full knowledge of all the circumstances attendant on its progress. About this the documentary proof allows of not a shadow of doubt.

Under this state of case the question is, whether Sherman was competent to become a purchaser of the property of the plaintiff.

' In considering the capacities of a trustee to purchase the property of his cestui que trust, the authorities regard them under two classifications: first, where a trustee buys or contracts with himself, or several trustees, of which he is one, or a board of trustees; second, where the dealing of the trustee is with a cestui que trust, who is sui juris and competent to deal independently of the trustee in respect to the trust estate.

Whether the transactions of Sherman be considered, under the one or the other head, is immaterial so far as this appeal is concerned, for, in our judgment, in either case, they cannot be upheld if resisted. The distinction between the two classes of cases consists in this: that in the first, the contract is voidable absolutely at the instance of the cestui que trust, without regard to its fairness; whilst, in the second, although the presumptions of the law are against the contract, yet, permission is given to the trustee, to show the perfect bona fides of the transaction and circumstances relieving it from the censure of the law. This is a distinction recognized in most of the books, but, it is not universally so. So far from it, some of the cases insist, with great earnestness, that the governing principle ought to be, and is, the same in both cases It is not necessary we should investigate the solidity of this last mentioned doctrine; for, whether the dealings of Sherman belong to the one or the other class, they equally fall under the correction of a court of equity.

The necessity of good faith — and that free from suspicion, as far as practicable-between the principal and agent, is the main pillar of support to the doctrine; the necessity of it underlies all the decisions. Remembering the weakness of humanity, its liability to be seduced, by self-interest, from the straight line of duty, the sages of the law inculcate and enjoin, a strict observance of the divine precept: “Lead us not into temptation.”

In this State, as elsewhere, it is well settled that trustees cannot purchase at their own sales, either directly or indirectly, and if they do, such purchase will be set aside, on the proper and reasonable application of the parties interested. Richardson vs. Jones, 3 Gill & Johnson, 184. This doctrine, which is applicable to trustees, applies also to purchases by persons acting in any fiduciary capacity, which imposes upon them the obligation of obtaining the best terms for the vendor, or which has enabled them to acquire a knowledge of the property. The authorities supporting it are numerous and uncontradictory; they will be found brought together to a considerable number in the notes to the case of Fox vs. Mackreth, 1 White & Tudor’s Leading Equity Cases, 105. A director in a company holds such a relation to its stockholders. The House of Lords, in the case of the Aberdeen Railway Company vs. Blaikie, 1 Macqueen Rep., 461, held that a contract, entered into by a manufacturer for the supply of iron furnishings to a railway company of which he was a director, or the chairman, at the date of the contract, was invalid, and not enforceable against the company; and Lord Cranworth, in delivering the opinion, said: “A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation, whose affairs they are conducting. Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application, that no one having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a per sonal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised, as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far, in any particular case, the terms of such a contract have been the best for the cestui que trust, which it was possible to obtain. It may sometimes happen., that the terms on which a trustee has dealt, or attempted to deal, with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person; they may even, at the time, have been better. But still so inflexible is the rule, that no inquiry on that subject is permitted. The English authorities on this subject are numerous and uniform.” The same views are expressed in the case of Michoud vs. Girod, 4 Howard, 303, a case elaborately discussed by counsel and court. “The rule,” say the court, “embraces every relalion in which there may arise a conflict between the duty which the vendor or purchaser owes to the persons with whom he is dealing, or on whose account he is acting, and his own individual interest.”

These citations are sufficient to show, that the dealings of the defendant, Sherman, with the property of the complainant, fall directly within the prohibition of the rule, and, as a consequence, obnoxious to disavowal.

But, it is said, however this may be, the whole transaction was fully ratified and confirmed by the complainant, which ratification and confirmation relieved it from all legal infirmity. An attentive consideration of its whole history, as detailed in the record, has not brought us to this opinion. The law governing questions of ratification, in cases like the present, is well settled. To render the act of ratification effective and conclusive, certain considerations are necessary. At the time of the supposed ratification, the principal must have been fully aware of every material circumstance of the transaction, the real value of the subject of the contract, and his act of ratification must have been an independent and substantive act, founded on complete information, and of perfect freedom of volition. And, in addition to all this, the cestui que trust must not. only have been acquainted with the facts, but apprised of the law, how those facts would be dealt with if brought before a court of equity. Lewin on Trusts, (Ed. of 1858,) page 615.

This last requisite, it is nowhere shown in the proof, has been complied with. But, on the contrary, it is fairly to be inferred that the stockholders believed they were concluded by what had been done, and this inference is particularly strengthened by the circumstance, that the modification in the contract of transportation was solicited and granted, not as a matter of right, but as a concession on the part of the beneficiaries under it. In this view, it is not necessary we should dwell more fully on the other facts attending the negotiation and sale. Such commentary properly belongs to the final hearing.

As to Dean, it is only necessary to observe, that it is impossible to believe he was ignorant, when he became associated in the transaction, of the fact that Sherman was a director in the Cumberland Coal and Iron Company. We cannot suppose him to have become a party to a contract, involving enonnoüs sums of money and great liabilities; without some knowledge of the existence and organization of the corporation, with which he was dealing to so great an extent. Imputing to him the possession of ordinary intelligence, and judging of his transactions by the rules which usually influence human conduct, when taken in connexion with all the facts and circumstances surrounding him, we are led to the conclusion, that he had knowledge of the relation which Sherman bore to the Coal and Iron company, and is, therefore, affected with whatever of legal disability belonged to Sherman., by reason of that relation.

But it is urged that however defective the title of Sherman and Dean may, under the circumstances, have been, the title of the Hoffman Steam Coal Company of Allegany is, nevertheless, good and free from blemish, it having been acquired bona fide and without notice.

In view of the facts of this case, it is immaterial to inquire, what would be the principles applicable to a case in which the defendant had, in point of fact, become possessed •of title bona fide, and without notice of the circumstances impairing that claimed by those from whom it was derived. The facts of this case are too palpable to allow of conjecture; and they all show that, whatever knowledge Sherman had, must have been possessed by the Hoffman Steam Coal Company of Allegany county. This company was incorporated ■under the act of 1852, on the 19th of August 1858, and, on ■the day following, the deed was made to it in pursuance, ■clearly, of one entire plan. Sherman and Dean becoming ■the owners of 4996 of the five thousand shares, into which the capital stock was divided; it was, in fact, but a contrivance, whereby the same property was held by the same parties, but under a different name. The testimony of Shoemaker shows, that his ownership of one share was unreal; that he never did pay for it, and that his participation in the •organization of the company was merely to oblige other parties, towards whom he held friendly relations; and, notwithstanding the statement of Postly to the contrary, it is no violent: presumption, that others, whose names were used in the organization of the company, occupied the same relation to it as did Shoemaker. If the facts of this case were deemed insufficient to establish notice, then, it is difficult, if not absolutely impossible, to imagine a combination of circumstances adequate to such a result. The whole case shows, that in the early stages of the existence of the appellant, so far as its property and transactions were concerned, it and Sherman were one and the same. In conveying to the Hoffman Company he was but conveying to himself.

It appears, from the evidence, that some of the shares in the stock of the Hoffman Steam Coal Company were held by other persons than Sherman and Dean, prior to the sixth day of December 1858, the date of the filing of the original bill, and, it is contended, that as to them, they being bona fide holders without notice, the objections urged against Sherman and Dean are not applicable. There is no doubt that where a purchaser, with notice from a trustee, conveys for valuable consideration to another person, who has no notice of the trust, the estate will not be affected with the trust in the hands of the second purchaser. Hill on Trustees, 516, {marginal.) But, as to shareholders so situated, there is no question presented by this appeal. It is only as to the right of the appellant to ask a reversal of the order of the court, that we are now called upon to decide. We need not, therefore, look into the testimony for the purpose of discovering what number, if any, shares of stock were held by innocent parlies before the filing of the bill.

(Decided July 13th, 1860.)

We think the objections to the sufficiency of the bills of complaint were properly disposed of by the judge of the Circuit court. The charge of fraud is made specifically, and the invalidity of the deeds given subsequently to that of the 22nd of April 1856, is assailed on the same ground as is that.

We are of opinion there is an abundance in the case, as now made, to justify the continuance of the injunction until final hearing, and we accordingly affirm the orders of the Circuit court of the 25th day of May 1859, refusing to dissolve the injunction, and, also, the order of the third day of October 1859, overruling the motion, made by the appellant, to dissolve the injunction.

Orders affirmed.

EcclestojV, J.,

delivered the following opinion:

Without deciding whether, at the time Dean became first associated in the transaction mentioned in the proceedings, he was or was not ignorant of the fact that Sherman was a director in the Cumberland Coal and Iron Company, I think there is enough shown by this record to authorize the court, in the exercise of its equitable discretion with regard to the dissolution of injunctions, to continue the present injunction uniil the final hearing. And, therefore, I concur with my brothers in affirming the orders appealed from.