Klugh v. Seminole Securities Co.

87 S.E. 644 | S.C. | 1916

Lead Opinion

January 5, 1916. The opinion of the Court was delivered by This is a cause in equity and a single question is made by the appeal. Remotely it is, are the defendants, Clark, Jones and Bryan, personally liable to the stockholders of the Seminoles Security Company for $30,000.00 for a breach of trust?

The Circuit Court found that they were not, and we agree.

It is not necessary now to write down the history of the defunct Seminole Company, and we shall not undertake it.

It suffices to recite the cardinal features of the enterprise from its inception to its dissolution.

The charter of the company was granted 8th January, 1908.

The authorized capital stock was $300,000.00. The subscribed capital was $270,000.00. The cash paid in capital stock was $97,928.87 or more. The trust agreement was executed 31st January, 1908. The stock in Southern Life was bought 3d October, 1908. Action for a receiver was begun 16th December, 1908. A receiver was appointed 29th December, 1908. A settlement with Southern Life was made 2d February, 1909. That settlement was approved by the Court 16th February, 1909.

The enterprise, therefore, ran its whole career within a twelve month.

This action is sequel thereto.

A few other essential facts need to be stated.

The plaintiff stockholders are amongst those who undertook to hoist this enterprise. They, the complaint alleges, paid to the solicitors of stock one dollar per share which was its par value, and a premium of fifty cents per share. It does not appear from the case how much stock was subscribed for before the trust agreement was made and how much was subscribed for after that event.

It is true Garlington and his immediate associates were the initiators of the scheme, but the plaintiffs and all the stockholders stood by like Saul consenting to the death. And they are those now complaining against Clark and Jones and Bryan because the scheme failed.

There is no allegation and no evidence that Clark or Jones or Bryan held any stock, or took any hand in the suggestion or direction of the Seminole Company or received any compensation thereabout. The only contention is they held the bag which had been filled by the stockholders. Amongst other things the Seminole Company was: (1) "To act as agent and manager for financial corporations and insurance companies of all kinds: and (2) to buy, sell and own stocks, bonds and other securities of other corporations, both foreign and domestic." That was to be the chief business of a company these stockholders got up. It was to manage the business of other corporations, which are required by law to manage their own business.

As the Circuit Court found, there may have been amongst the stockholders some persons who had no more wisdom than to put money into such an enterprise; but there were many who were not beguiled.

The complainants suggest that "the real purpose of the appointment of the said trustees was to lend tone, standing and credit to the scheme of the managing officers of the said defendant company, and influence the unsuspecting public to become subscribers to its capital stock." (Italics are added.)

That is to say, the president and directors of the Seminole Company, "the managing officers," put forward Clark, Jones and Bryan to mislead the public. But the stockholders put forward the managing officers as their representatives, and the scheme of these managers was thus made possible by the act of the stockholders. The stockholders vouched for Garlington; may they now say Clark, Jones and Bryan could not? If, therefore, these stockholders have been caught, it is in a trap of their own setting.

So, the question is, ought the trustees, mere volunteers without pay, and with no interest in the Seminole Company, to be made to respond to such complainants for $30,000.00 alleged to have been lost by the conduct of the trustees?

The complainants charged the trustees with "reckless conduct," but acquitted them of "intentional wrongdoing."

The Circuit Court found there was no proof of fraud on the part of the trustees; and the plaintiffs have not gainsaid that.

The cardinal duties, and, therefore, liabilities of trustees are these: (1) To carry out the trust; (2) to use due care thereabout; (3) and to act in good faith thereabout. Pomeroy's Eq., sec. 1061. These duties will be considered in an inverse order from that stated.

It is conceded by the complaint and by the plaintiffs' argument, that so far as the trustees are concerned, "this thing was not done in a corner;" so that the element of bad faith on their part is eliminated from the case.

It is true, a trustee must exercise about the performance of his trust due care, and he must do that independently of the question of good faith. But the law does not exact of the trustee the exercise of extraordinary care. If he is a man of common prudence, and used that prudence about his own business, he is not required to use more than that about his neighbor's business, which means the business of his cestui que trust.

Whether or not the trustee did so exercise common prudence in a particular case is a question of fact, and the answer depends upon that measure which the Chancellor may apply.

In the instant case the only duty of the trustees was to be reasonably certain that the thing they were paying out the fund for was valuable.

The testimony proves that the stock of the Southern Life was then thought to be worth much more than the trustees paid for it. There is none to the contrary.

There is no testimony to show that the trustees knew or had reason to believe that the price agreed upon for the Southern Life was too much, but the contrary. They looked into the transaction, and concluded upon the words of reputable men in North Carolina, about which there is no dispute, that the thing bought was worth more than the price paid for it.

Notice in writing was given by the directors of the Seminole Company to the stockholders of the Seminole Company of the pendency of the transaction, and the stockholders did not oppose its consummation.

It is true odor was lent to the transaction by the allowance and the payment of an exorbitant commission for the sale of the stock of the Southern Life to the Seminole Company.

But the trustees had no intimation of such a feature of the sale; and the record does not reveal to whom that commission was paid, or out of what fund it was taken; it was not taken from the trust fund. There is nothing in the testimony to charge that transaction to the negligence of the trustees, and it cannot, therefore, affect the question of their due care.

We are, therefore, of the opinion that the trustees were not so lacking in care about the payment of the fund as to make them personally responsible for any loss which may have resulted from their act.

The most complex issue has been reserved for the last, and that is, did the trustees unwarrantably depart from the terms of the trust?

It is true the trust was express, and it is also true the trustees were bound by the law to conform to the terms of it, and for a failure to do so they are liable to the cestui que trust in the event of a loss of the fund.

This enquiry is distinct from that of ordinary care by the trustee, and from that of good faith by the trustee. Manifestly a trust agreement, like any contract, may be modified by all the parties in interest.

The agreement here is out of the ordinary; it is a contrary device; and its meaning and the purpose of the Seminole Company in its making are not manifest.

One thing only is apparent, and that is, the now amazing gullibility of the three seasoned and reputable business men who consented to enter into such an agreement.

Their action proves that like that noble animal, the horse, man is a "vain thing for safety."

The parties to the contract are the Seminole Company and Clark, Jones and Bryan.

The former was a corporation with an authorized capital stock of $300,000 and a subscribed capital stock of $270,672. And the Seminole Company was to organize an Accident Insurance Company with a capital stock of $100,000, all of which was to be subscribed for, owned and controlled by the Seminole Company. And the stockholders in the Seminole Company were, by virtue of their status as stockholders, to enjoy such profits as the Accident Company might make for the parent company.

One of the expressed objects of the trust contract was to safeguard the subscribers to the capital stock of the Seminole Company.

On that clause of the contract the chief argument of the plaintiffs is built.

Had the trustees been able to follow the words of the instrument; had they waited until the Seminole Company had organized an Accident Company and subscribed for all the $100,000 of stock in the Accident Company, then the trustees must by agreement have still paid into the hands of the Seminole Company the $97,928.87 which they held. What, then, would have been the improved plight of the subscribers who supplied the above sum of money?

By the trust agreement it was provided: "It is the purpose of the said Securities Company (the Seminole) to promote and finance the said * * * Accident Company, the capitalstock of which said company shall be owned and controlled by the said Securities Company."

The real owners, then, of the $97,928.87 would have been not those who supplied it, but the Seminole Company. The subscribers to and payers of capital stock in the Seminole became entitled to share in whatever profits the Accident Company might make, only because they were stockholders in the Seminole Company. The very agreement expressly so provides, in the next clause after that above quoted.

If, therefore, the Seminole Company was to own the Accident Company, and if the trust fund was to constitute the corpus of the Accident Company, then the real beneficiary of the trust was the Seminole Company, and it was within the clear power of the Seminole Company to modify the trust agreement, and direct the trustees to pay the fund to a company other than that named in the agreement.

It was not of the essence of the trust agreement that the Accident Company to be organized should be called the "Sterling Accident Company;" nor we think was it of essence of the trust agreement that the Seminole Company should "organize" an accident company instead of buying one. The power to do one implies the power to do the other. More than this, the Seminole Company was authorized by its charter to buy stocks of other corporations. And its action in buying the Southern Life may be referred to such power; but it is not necessary to resort to that view to sustain the transaction.

But it is argued by the plaintiffs, that the trust agreement stipulated that the Seminole Company should own the entire issue of the capital stock of an accident company, and that the transaction it entered into with the Southern Life did not make it sole owner of the Southern Life.

That is true; but such a provision is no more unchangeable than the other which bound the Seminole Company to organize the Sterling Accident Company. The appellants' whole argument amounts to this, that the trustees were by the contract representatives of the individuals who paid the $97,928.87.

As before stated that is not true. The Seminole Company owned the stock of the proposed Accident Company, and was in law and fact the real beneficiary under the deed; and if the trustees had undertaken to vote the stock of an accident company, they would have done so as trustees for Seminole Company, the owners of it.

It was beyond the power of the Seminole Company to organize, own and direct an Accident Company as a separate corporate entity from the Seminole Company. Nobody denies that. The subscription of the plaintiffs was to the capital stock of the Seminole Company, and the money they paid was a payment on that subscription.

The trust contract made by the Seminole Company to dedicate $100,000 of the so subscribed money to the stipulated end, was a vain thing. The money paid became stock in the Seminole Company, and was subject to control of the directors of the Seminole Company.

When the trustees found themselves in this predicament, it surely would have been a wiser thing for them to have gone into a Court of equity and craved its direction in the premises. But if the other party to the trust contract was unable to execute its provisions to the letter, and was able to modify the terms of the contract, the trustees ought not to be held personally liable, under the circumstances of the case.

We conclude, the stockholders of the Seminole, the plaintiffs amongst them, got up the corporation, set it agoing and named the directors. It was on its face a balloon floated by hot air.

These directors, who made the contract with the trustees, had the power to modify it; to buy stock in an existing company instead of organizing a company; and to permit the trustees to take a part, and not all, of the stock of an accident company.

If the stockholders in the Seminole have been deceived, it has been by the action of men they put forward to represent them, to wit, Garlington and his confederates.

The event proves that those hitherto unknown and untried men hoisted a scheme which neither their stockholders nor trustees understood; and which, but for the timely initiative of the plaintiffs themselves, and the bold action of the Court to which they went, might have wrought serious damage.

This conclusion renders it unnecessary to consider the effect of the compromise agreement which the receivers made with the Southern Life, and which the Court approved.

The judgment of the Circuit Court is affirmed.

MR. JUSTICE WATTS concurs in the opinion of the Court, announced by MR. JUSTICE GAGE.

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Dissenting Opinion

The Seminole Securities Company obtained a charter that enabled it "to act as the agent and manager for financial corporations and insurance companies of all kinds; to buy, sell and own stock and bonds and other securities of other companies, both domestic and foreign."

The capital stock was not to exceed three hundred thousand dollars. The face value of the shares was to be one dollar per share. The management of the company seemed to have thought that it needed something to inspire the confidence of the investing public and executed the following deed of trust:

"Memorandum of agreement made and entered into this 31st day of January, 1908, by and between the Seminole Securities Company, a corporation duly incorporated by and under the laws of the State of South Carolina, and hereinafter called the Securities Company, the party of the first part, and Washington A. Clark, Wilie Jones, Thos. S. Bryan, hereinafter known and referred to as trustees, all of the city of Columbia, party of the second part, witnesseth:

Whereas, The Securities Company, under charter derived from the State of South Carolina, is authorized and empowered to engage in certain mercantile and financial pursuits, and, among other things, to promote and finance other corporations; and,

Whereas, The Securities Company is authorized to issue capital stock in an amount not exceeding $300,000 in the form of ____ shares of ____ each, and for this purpose is now offering stock for sale; and,

Whereas, It is the purpose of the Securities Company as soon as $100,000 of capital stock shall have been subscribed and paid in, then to proceed to organize an accident company, to be known as the Sterling Accident Company, the said company to be incorporated by and under the laws of the State of North Carolina or the laws of some other Southern State; the object and purpose of which said accident company shall be to write and issue accident insurance and other cognate or collateral insurance; and shall be organized upon a basis of a capital stock of $100,000 — all of which shall be fully paid up, the same to be subscribed and paid for and taken by the said Securities Company; and,

Whereas, It is the purpose of the said Securities Company to promote and finance the said Sterling Accident Company, the capital stock of which said company shall be owned and controlled by said Securities Company; and,

Whereas, It is understood and agreed that the subscribers to the capital stock of the Securities Company shall thereby become interested in the capital stock of the said Sterling Accident Company and thereby participators in the profit and benefits which shall grow out of the operation of said company; and,

Whereas, In order to insure and safeguard the subscribers to the capital stock of the said Securities Company, it is proposed to place so much of the funds arising from the sale of the stock of the Securities Company as may be necessary to purchase and pay for the entire issue of capital stock in the Sterling Accident Company, to wit, the sum of $100,000, and such further sum as may be necessary to pay for any premium upon bonds which may be purchased as hereinafter provided for, in the hands of trustees to be hereinafter named; and when the said Sterling Accident Company shall have been fully organized, then to invest the funds so placed in the hands of said trustees in such State, corporate or municipal bonds as may be required by the authorities of the State wherein the said company shall be organized, to be deposited and pledged under its act of incorporation; and, further, to place the entire issue of stock in the said Sterling Accident Company in the hands of said trustees for a period of not less than ten years, giving and granting unto the said trustees the exclusive power of voting the same at all elections;

Now, therefore, we, the Seminole Securities Company, in consideration of the premises and in consideration of the sum of $1.00 to us paid by the said trustees, do hereby nominate, constitute and appoint the said Washington A. Clark, Wilie Jones and Thos. S. Bryan, trustees, and do hereby covenant and agree to deposit with the said trustees, as the same shall be collected, the funds which shall arise from the sale of stock in the Seminole Securities Company, in an amount which shall be sufficient to pay for the $100,000 of capital stock to be subscribed and paid for in the Sterling Accident Company, and such further sum as may be necessary to pay for the premium on the bonds to be deposited as hereinafter referred to, the same to be held by the said trustees upon the following trust and for the following purposes, viz.:

1. In trust to hold the said funds as the same shall be paid over to the trustees and deposit the same in some approved national bank or bank (sic) at interest upon the most favorable terms.

2. And when the said funds so deposited shall amount to the sum of $100,000, then on behalf of the said Securities Company to invest the same in a like amount of capital stock of the said Sterling Accident Company, which shall have been subscribed for by the said the Seminole Securities Company. And upon further trust from time to time as the said funds shall be received and turned over to the trustees to invest the same in such State, corporate or municipal bonds as may be agreed upon, and such as shall be required under the laws of the State wherein the said Sterling Accident Company shall be incorporated; which bonds, when so purchased, shall be held upon like trust to be used by the said trustees in behalf of the said Seminole Securities Company in the payment of stock in the said Sterling Accident Company, and on behalf of the said Sterling Accident Company to be pledged and placed with the proper State authorities wherein the said Sterling Accident Company has been incorporated, under the provision of the laws of the said State.

And the said Securities Company agrees that the entire issue of the capital stock of the said Sterling Accident Company, when issued, shall be placed in the hands of said trustees to be held by them for a period of ten years. Giving and granting unto the said trustees full power and authority at their stockholders' meetings, whether regular or special, to vote upon all questions which may arise, as in their judgment shall best subserve the interest of the stockholders of the said Sterling Accident Company; and also at all annual meetings to vote for such board of directors of the said Sterling Accident Company as shall, in their judgment, best subserve and most safely protect the interest of the said stockholders.

And we, the said Washington A. Clark, Wilie Jones and Thos. S. Bryan, trustees as aforesaid, hereby agree to accept the said trust and to do and perform all of the duties herein imposed upon us as trustees in behalf, both of the stockholders of the said the Seminole Company and the stockholders of the Sterling Accident Company.

In witness whereof, the said Seminole Securities Company has caused these presents to be executed by John Y. Garlington, its president, and J.S. Young, its secretary, and the corporate seal thereof to be attached; and the said trustees have each, in their own behalf, affixed their hands thereto the day and year above written. Seminole Securities Company, by John Y. Garlington, President; J.S. Young, Secretary. Signed, sealed and delivered in the presence of Paul A. Cooper, James J. Robb, witnesses as to signature of Jones, Clark and Bryan. Wilie Jones, W. A. Clark, T.S. Bryan. M.G. Jeanes, W.H. Antrum, Jr., witnesses as to Garlington and Young."

The Circuit decree finds that Gen. Jones and Mr. Bryan are inseparably bound with Mr. Clark, and from this finding there is no appeal. Mr. Clark wrote a circular letter setting out the terms of the trust and this letter was used to secure subscriptions of stock.

The trustees set about the preparation of the preliminary work of creating the Sterling Accident Company, but before they had proceeded very far, the Seminole Securities Company, through its directors, made a contract with Southern Life Insurance Company of Fayetteville, North Carolina, for the purchase of a majority of its stock. This life insurance company had life policies issued to the extent of about five millions of dollars. The life insurance company had the right, under its charter, to do an accident insurance business, but at the times herein referred to had issued few, if any, accident policies. At this time the trustees had in their hands $97,928.87 of the $100,000 trust funds. The trustees, Clark, Jones and Bryan, were directed by the directors of the Seminole Securities Company to pay over the trust fund to Southern Life Insurance Company in part payment of the purchase money of the stock. This fund, together with other funds retained by the Seminole Securities Company, made up the cash payment demanded by Life Insurance Company. The total amount to be paid for the stock was $325,000. Terms cash, $162,500, notes for balance of $162,500 payable in one year, secured by an assignment of the stock purchased.

The trustees, believing that they were bound to obey the orders of the board of directors of the Seminole Securities Company, turned over the funds held by them to complete the purchase of this stock. Soon after the sale was consummated, it was discovered that large commissions, to wit, about seventy thousand dollars, had been paid to agents who negotiated the sale. The trustees protested, and the stockholders brought suit for accounting against the trustees, an injunction against directors of the Seminole Company and asked for the appointment of a receiver. Receivers were appointed. The receivers and Southern Life Company agreed upon a settlement of their differences and gave notice to the trustees that they would apply to Judge Hydrick (then Circuit Judge) for an order confirming the settlement. The trustees allowed the hearing to go by default.

1. The order confirming the settlement concluded as follows: "Without prejudice to the right of the said receiver to proceed against any other parties to said transaction, parties to this suit to recover any loss sustained by the said Seminole Securities Company, on account of said transaction, if so advised."

From this portion of the order the trustees appealed. The exception that raises this question can not be sustained. The record shows that the trustees were served with a copy of the proposed settlement. The office of trustee imposes an obligation to execute the trust and for failure to do that duty the trustee renders himself liable. If the settlement was a good one, they should have been present to urge its approval, and if the proposed settlement was bad, they should have been present to oppose it. Parties who are in default can not be heard to say they did not consent until the default is set aside by proper proceedings. Besides this, the portion of this order appealed from created no right and destroyed no right. It merely declared that it did not prejudice the right to proceed. It simply confined the effect of the order to the matters set up in the notice.

2. The Circuit Judge who heard the case on Circuit, found that the trustees were bound to obey the orders of the directors of the Seminole Securities Company under the statute of this State, and held that the trustees were not liable for any loss that the stockholders suffered. The first exception questions this holding. By reference to the contract set forth in the first part of this opinion and the record in the case, it will be seen that the Seminole Securities Company agreed to set aside one hundred thousand dollars of its three hundred thousand dollars of capital, and put this amount in the hands of these three trustees of known integrity and financial skill; that these three gentlemen were to organize an accidental insurance company to be called "Sterling Accident Company," that they were to subscribe and pay for "all the stock in said Accident Insurance Company." That they (the trustees) were to vote the stock, appoint the directors and hold the stock for ten years. The trustees not only accepted the terms of the trust, but through Mr. Clark, wrote a circular letter setting forth the terms of the contract. After this had been done, the soliciting agents proceeded to sell the stock.

It is undisputed in this case that the circular letter tended to procure subscriptions to the stock. The face value of the shares was one dollar per share, but the agents sold it for one dollar and a half per share. The extra fifty cents per share over its face value has nothing to do with this case as it did not go into the treasury or the hands of the trustee, except to show that there was supposed to be some peculiar and unusual advantage in the ownership of the stock of the Seminole Securities Company.

Three inducements to the purchase of this stock are claimed in the record:

1. Accident insurance, in which the profits are very large.

2. The personal and financial ability and integrity of the trustees.

3. The guaranteed management by these trustees, for a term of ten years, of the one hundred thousand dollars.

There are three kinds of insurance with which our people are accustomed to deal: (a) life; (b) fire; (c) accident.

In life insurance, every man insured will die. Whether the death will be a loss to the company or not depends on the insured, and not on the company.

In fire insurance the loss is not so certain, as some houses stand for a hundred years and then the policies are of short duration and may be cancelled after a short notice, if desired by the companies. In accident insurance, the danger of loss is very small.

The fund was diverted from the smallest to the greatest liability. There was not a single provision of the trust executed. While the Seminole Securities Company collected more than one hundred thousand dollars, the trustees did not get possession of the full amount, nor does the record show that they made any effort to do so. They did not even demand it. They did not organize an accident company as they agreed to do; they did not keep possession of what they did get. The stock was to be kept free and unencumbered except for its accident policies and they assumed the liabilities of a life insurance company to the extent of five millions dollars. They then pledged the stock, they did get, for more money that the Seminole Security Company had any expectation of getting, or right to get by twenty-five thousand dollars. There is no question of fraud. The complaint distinctly disavows it.

It makes no difference how honest the trustees are, or how firmly they might have believed that they were bound to obey the orders of the directors, the result has been that they surrendered trust funds they had agreed to keep and manage. A part of it has been recovered by the receivers.

The question in the case is, — Can a trustee surrender to the creator of the trust or any one else the trust fund, or divert it to any other purpose than that declared by the instrument creating the trust, without being liable for the loss? The answer is that he can not.

In Womack v. Austin, 1 S.C. pg. 438, this Court says:

"When left to his own judgment the trustee must exercise his discretion in the manner in which a prudent man would in the management of his own affairs. Where, however, the course which he is to pursue is dictated and directed by the authority which originates the trust, he is provided with a chart, from which he is not allowed to depart, unless forced by a necessity which he can not resist." Further citation of authority is not necessary. Indeed, this principle is not denied. The application to this case is denied. It is stated and held that the necessity did exist and is contained in the order of the directors of the Seminole Securities Company.

It is said that by the statutes of this State the directors and not the stockholders have the right to make contracts for the corporation and to manage its affairs. If that be true, it cannot affect this case.

The contract by which the trustees were appointed is not in question. The question here is the right to break and not the right to make a contract. No authority has been suggested and I know of none to sustain the right to break a contract. It is urged that one hundred thousand dollars was too small a capital on which to do a successful insurance business. That may be. If the trustees had organized the accident company, as their chart required, and had lost it all through no fault of their own, they could not have been held responsible for the loss. When the trustees depart from the chart, and loss occurs, they are liable for the loss, without reference to negligence, mismanagement or want of skill. It is urged that under the circumstances of this case the organization of the accident company was impossible. That may also be true, but that did not authorize the trustees to surrender the fund they had agreed to hold for ten years. It is further said that the Southern Life Insurance Company had the right to do an accident business. That is true. Its main business was life insurance. The main feature of the Sterling Accident Insurance Company was to have been accident insurance and any other business was to have been subsidiary.

Again, it is said that the Seminole Securities was thecestui que trust and the cestui que trust consented. The chart does not say so. It says: "In order to insure and safeguard the subscribers to the capital stock of the said Securities Company."

It was the platform upon which the campaign for subscriptions of stock was to be conducted. It was a pledge that at least one-third of the corporate funds would be safe from corporate mismanagement and fraud of corporate officials. Corporations are held to their contracts and can not rescind them at will. The trustees did not follow their chart, and I think are responsible for the loss occasioned thereby.

2. The loss from the purchase of the stock in the Southern Life Insurance Company was thirty thousand dollars and the appellants demanded judgment for that amount. The trustees were held not to be liable for the loss at all, so, of course, this judgment was refused.

The amount paid to the Southern Life Insurance Company was made up of two funds, to wit, the trust fund and the corporate funds held in the Seminole Securities Company's treasury. The trustees claim that inasmuch as the receiver recovered more than one hundred thousand dollars, their loss is covered. The trustees did not pay the whole of the cash payment, and can not claim the whole recovery. I think the loss, therefore, should be divided between the two funds in the proportion to the amounts paid from each fund.

I think the judgment appealed from should be reversed.

MR. JUSTICE HYDRICK was disqualified, and MR. CHIEF JUSTICE GARY did not sit on the hearing of this case.