Case ID: ohio-st_54/html/0549-01.html
Source: Caselaw Access Project
Author: {"author": "Burket, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Greenville Gas Company v. Reis et al.
    
      Corporation — Director of, dealing in its property on own account— Chargeable with notice — President made trustee of bond for sale — Cannot convert to own iise.
    
    1. A director of a corporation dealing in its property on Ms own account, is chargeable with notice of the action of the board of directors as to such property, whether he was present or not at the meeting which took such action.
    2. The president of a corporation, to whom a bond has been delivered by the board of directors in trust for sale, has no right to convert such bond to his own use in payment of a claim due him from the corporation, without the consent of the board of directors.
    3. A director or stockholder of a corporation, may be compelled by an equitable action, to surrender to the corporation, a bond which he holds in trust for it, but which he claims to hold in his own right.
    (Decided May 26, 1896.)
    Error to the Circuit Court of Darke county.
    The Greenville Gas company, plaintiff in error, is a corporation under the statutes of this state, and at a meeting of its board of directors, on the fifth day of December, 1887, the following preamble and resolution was unanimously adopted:
    “That whereas, the bonds of said gas company issued January 1, 1882, and running five years from date, calling for the sum of $15,000.00, and secured by the first mortgage on the real and personal property of said company, will fall due January 1, 1887, and that it will be necessary to build a new gasholder, at the works of said company, and make other improvements at a cost of $5,000.00, be it therefore resolved, That the president and secretary of said company issue bonds in the sum of $20,000.00, of the denomination of $1,000.00 each, and to be numbered from one to twenty in-elusive, and bear date of January 1, 1888, and run five years from date, and bear six per cent, interest from date, payable semi-annually, and that said bonds be made payable to the order of John Devor, as trustee, to dispose of said bonds at the best advantage for said company to redeem the aforesaid' bonds.
    “And that said bonds be secured by first mortgage on the real and .personal property of whatever kind and description of said company. ’ ’
    The bonds were issued, but were made payable to John Devor or order, nothing being said as to his being a. trustee, and were secured by mortgage on the gas works made to John Devor, who was president of the company. The mortgage securing the bonds, recites the substance of the above resolution, and further recites that there are outstanding bonds of the company to the amount of fifteen thousand dollars which have matured, and that it is necessary to make certain improvements in and about the works of the company to the amount of five thousand dollars. It is further recited in the mortgage that “whereas, it was further ordered by said board of directors that said bonds, having been negotiated to John Devor, that said party of the first part should make, execute and deliver to said John Devor, party of the second part, the purchaser of said bonds, a mortgage deed of all the franchise and property of the party of the first part to secure the payment of said bonds and interest which have been issued in accordance with said resolution. Now, therefore, The Greenville Gas company, for and in consideration of the premises and the sum of $20,000.00 to it in hand paid, the receipt whereof is hereby acknowledged, does hereby bargain, sell and convey unto the said John Devor, his. heirs and assigns, the following described real estate, etc.”
    The bonds recite on their face that they are secured by mortgage, recorded on the 27th day of December, T887, in book 56, page 479, of records of mortgages of Darke county, Ohio.
    The defendants in error having possession of bond number 17 of said series, an action was brought against them and the company by a stockholder to compel its surrender and cancellation. A demurrer having been sustained to this petition, the company filed its cross petition against said defendants in error, who were also defendants below, and by its amended cross petition, after setting out said resolution, the issuing of said bonds, and the execution and record of said mortgage, together with the recitals averred that said bonds were placed in the hands of said John Devor, president of said company, for sale, for the purposes specified in said resolution; that in the year 1888 said defendants became surety for said John Devor on an individual debt in the sum of one thousand dollars; that said John Devor delivered to them said bond number 17 as collateral, to indemnify them against loss as such sureties; that said bond belonged to the company and was held by said John Devor as trustee; that the said defendants did not pay anything further for said bond; that the company received nothing for said bond; that John Devor was insolvent, and well known to be so by said defendants; that said defendants, at the time of receiving said bond, had knowledge of the facts set out in the petition, and of the trust relation in which said Devor held said bond; that the said defendants claim to be tona fide owners of said bond, and that there is danger of their disposing of the same to an innocent purchaser.
    The defendants, by their answer, deny that the bond was placed in the hands of John Devor for sale, deny that the company was at the time of the transaction the owner of the bond, deny that at the time he. held the bond as trustee; deny that the company received no consideration for the bond; deny that they paid no consideration for the bond other than signing* said note as sureties ; deny the insolvency of John Devor ; deny notice of such insolvency ; deny knowledge of said resolution and deny knowledge that John Devor received or held the bond in trust, and aver that before said transaction the bond had been sold to John Devor by the company; that the company received a fair and full consideration for the bond; that said defendants paid a full consideration for said bond, and that they had no notice or knowledge that the company had or claimed any interest in the bond. As a second defense said defendants say that at the time of said transaction John Devor was the owner and holder of the bond; that it was payable to him or order, was regular and negotiable on its face, that John Devor indorsed and delivered the bond to them, that they are innocent holders of the bond, and at the time had no notice that the company had or claimed any right to, or interest in, the., bond, and that Devor became insolvent in April, 1890, and they were compelled to pay and take up the note at a cost to them of $1,119.92.
    There were two other defenses which were on motion stricken out by the court.
    The reply is a general denial of the new matter contained in the answer.
    
      Upon trial in the common pleas, judgment was rendered in favor of defendants, and the company appealed the case to the circuit court.
    A motion to dismiss the appeal was overruled and exceptions taken. Upon the trial in the circuit court the company having introduced its evidence and rested, the court found that said evidence did not sustain or establish the cause of action set out in the amended answer and cross petition of the company and found the issues”joined in the pleadings in favor of the defendants, and rendered judgment accordingly. A motion for a new trial was overruled and exceptions taken, and a bill of exceptions containing all the evidence was allowed, signed and filed, and made part of the record.
    Thereupon a petition in error was filed in this court, seeking to reverse the judgment of the circuit court.
    Knox, Mct/rtz <& Rv/pe and Safer <& Robeson, for plaintiff in error.
    John Devor certainly, no more than his brother, had any right to use this bond in his personal affairs, to the loss and damage of the corporation of which he was a trusted officer, and this fact was well known to Messrs. Shuffelton and Reis when they received the bond. Angelí and Ames on Corp., section 312.
    There is “no difference in principle or precedent between the agents of corporations and those of natural persons.” A. & A., section 315. Ib., section 276.
    Shuffelton and Reis are not innocent holders. Strong v. Straus, 40 O. S., 87; Board of Education v. Sinton, 41 O. S., 504, 513; Long v. Mulford, 17 O. S., 509.
    
      Shuffelton and Reis took the property knowing of the trust, and well knowing that the sale was not in the interest of the trust, and acquired no title to the property if the trustee misappropriated the proceeds of the sale. In such case the purchaser is put upon inquiry, and buys at his peril. He can stand in no better position than 'the trustee himself, and must be held to be a trustee for the beneficiary. The N. Y. Ins. Co. v. National Ins. Co., 14 N. Y., 85-91 and authorities there cited. Jackson v. Neely, 10 Johnson, 374, 376. Parker v. Nickerson, 112 Mass., 195-6; Gardner v. Butler, 30 N. J. Eq., 702, 721; Cook v. Mill Co., 43 Wis., 433.
    In the case at bar, Devor had no right whatever to pledge the bond in question, either individually or as trustee. Davoue v. Fanning, 2 John Ch., 252; Story’s Eq. Jur., section 400.
    It has likewise been held, that the words “ ‘Agent Glass Buildings,’ added to the signature to a check, are enough to put one who receives it in payment of a debt from the signer on inquiry as to his authority to use the fund for such payment.” Girard v. McCormick, 14 L. R. A., 234, 130 N. Y., 261.
    And good faith in receiving the payment of a debt with notice that the money belongs to the debtor’s principal will not relieve the creditor from liability to refund it to the principal, if the agent had no authority to use it for such payment. 14 L. R. R. A., 237; 130 N. Y., 266; Stock Yard Bank v. Gillespie, 137 U. S., 411; Shaw v. Spencer, 100 Mass., 382; Duncan v. Jaudon, 15 Wall., 165; Gaston v. The Bank, 29 N. J. Eq., 98; The National Bank v. The Ins. Co., 104 U. S., 54, Syl.2.
    ■ The relief sought for by the plaintiff in error in this case is to be obtained in a suit in equity, rather than by oue at law.
    
      
      Anderson c& Bowman, for defendants in error.
    That this court will not examine the evidence for the purpose of determining its weight is well settled by the repeated decisions of this court. Ford v. Osborne, 45 Ohio St., 1; Ferry et al. v. Gottlieb et al., 45 Ohio St., 195; Seville v. Wagner, 46 Ohio St., 52; Damarin & Co. v. Huron Iron Co., 47 Ohio St., 581 ; Ratterman, Treas., v. Ingalls, 48 OhioSt., 468; Railway Co. v. Erick, 51 Ohio St., 146; Wetzel v. Richcreek, 53 Ohio St., 62.
    The testimony showed that the bond was rightfully in possession of Devor for negotiation and sale. Therefore, he did not fraudulently obtain possession of the same. If Devor failed to account for this bond, it was a breach of trust on his part.
    If plaintiff in error was entitled to have them surrendered up and cancel the bond, it was equally entitled to recover from them the value thereof in ease they had sold and transferred the same.
    Therefore, plaintiff in error had an adequate remedy at laxo, and there was no occasion for the interposition of a court of equity.
    This could in no event happen if defendants in error were solvent. This claim is’ well settled. Bruner v. Meigs et al., 64 N. Y., 506; The Globe Mutual Life Ins. Co. v. Reals et al., 79 N. Y., 202; Town of Springport v. Teutonia Savings Bank, 75 N. Y., 397; Lewis v. Tobias et al., 10 Cal., 574; Grand Chute v. Winegar, 15 Wall., 373; Farmington Village Corporation v. Sandy River National Bank et al., 85 Me., 46; Bank v. Weyand, 30 Ohio St., 126.
    The bond in controversy is negotiable in form, and is a negotiable instrument having all the qualifications and incidents of commercial paper. Beech on Corporations, section 684. City of Lexington v. Butler, 14 Wall., 282.
    
      The defendants in error took the bond in question before due for a valuable consideration, without knowledge of any defect of title in Devor, and in good faith. Murray v. Lardner, 2 Wall., 110.
    The fact that the defendants in error are pledgees does not change the rule. Colebrooke on Collateral Securities, sec. 43; Swift v. Smith, 102 U. S., 442; Morris, Admx., v. Preston, 93 Ill., 216; McNeil v. The National Bank, 46 N. Y., 325; Long Island Loan & Trust Co. v. Railway Co., 65 Fed. Rep., 455; The Notional Bank v. Dakin, 54 Kan., 656.
    Of course if the defendants in error took said bond from Devor with knowledge that he held the same as a trustee, only, and with full knowledge that in pledging the same to them for his personal benefit, he was exceeding’ his trust and acting without authority, the rule would be otherwise. Dowden v. Cryder, 55 N. J. L., 331; State of Ohio ex rel. v. Board of Education, 35 Ohio St., 519.
    But the plaintiff in error is aprivcote corporation, and this rule does not apply. This distinction is well settled and made very clear in the case of Board of Education v. Sinton, 41 O. S., 504.
   Burket, J.

It is not necessary to determine as to the weight of the evidence in this case, because the ease can be disposed of upon a construction of the written documents and the undisputed facts.

As any business man would understand the transaction, when thinking honestly without reference to technicalities, the company issued its bonds secured by mortgagee, and put them into the hands of its president in trust to be sold for cash with which to take up its fifteen thousand dollars of outstanding bonds, and make certain improvements at its works. John Devor, in his testimony, says that the company owned the bonds, and that he held them as trustee to sell. There is nothing in the ease to contradict this, and upon the face of the transaction this must be true.

As John 'Devor received and held the bonds as trustee for the company, he could get rid of them only in one of three ways; either execute his trust and sell the bonds, or end his trust by returning the bonds to the company, or by disposing of the bonds in some other way by order of the board of directors.

He did neither. He pledged this bond number 17 as collateral security to indemnify the defendants against loss as sureties on his note. This was in violation of his trust, and as to parties with notice gave no title to the bond.

But defendants claim in their answer that they are innocent holders of the bond for value and without notice of the trust, but admit that they received it from John Devor as collateral to indemnify them against loss as his sureties on his individual note.

It conclusively appears by record evidence, that the defendant, Shuffelton, was at and before the adoption ofsaid resolution and the issuing of said bonds, a director of said gas company, and that the defendant, Reis, was a stockholder, and had been a director the two years immediately preceding that time. The record shows that Mr. Shuffelton was not present at the meeting at which the resolution was passed authorizing the issuing of the bonds. But that fact does not aid him. When it comes to dealing in the property of a corporation, a director is charged with notice of all that has transpired at the meetings of the board of directors. He is not allowed in such case to plead ignorance or want of notice or knowledge.

Mr. Reis was a stockholder, and had been a director, but the law does not charge him with notice as it does a director, and it may be possible that he acted in good faith and without notice, and if so he should be protected.

The rule of law applicable in this ease to Mr. Reis, a stockholder, and to Mr. Shuffelton, a director, is well expressed in the case of ex pcui'te Brown, 19 Beav., 97, thus: “In a former case (16 Beav., 500), I held that a shareholder of the company is not bound to have knowledge of what is contained in the books of the company; * * * but as regards the directors of a company, the case stands on a totally different footing. A person when he becomes a director accepts a trust which he undertakes to perform for the benefit of the company. If in the due performance of that trust, he must necessarily have acquired certain knowledge, it appears to me but fit that he should be charged with the knowledge of those facts which it was his duty to have become acquainted with. It is merely saying that a person shall be held to know that which it was his bounden duty to know. It appears to me that Mr. Brown .was bound to know what took place at the meetings of the board of directors, of which he was a member. * * * I must hold Mr. Brown to have had knowledge of that of which he ought to have known, and whether he had actual knowledge of it or not, is, in my opinion, immaterial for the present purpose.”

. To same effect is Merchants Bank v. Rudolf 5 Neb., 527, in which it is held that “Whatever knowledge a director has or ought to have officially, he has, or will be conclusively presumed at law to have, as a private individual. ” To the same effect is Brown v. Finn, 34 Fed. Reporter, 124.

John Devor had no power to pledge the bond for his own debt while he held it in trust for sale as trustee for the company, and with the knowledge with which Mr. Shuffelton stood charged, he had no power to acquire the bond from Mr. Devor, except by a sale made to him by Mr. Devor under his authority as such trustee. The knowledge which Mr. Shuffelton acquired, and with which he stood charged while he was a director, adhered to him thereafter as to his dealings with the trust property of the company. He therefore had notice at the time he received the bond, and he cannot be regarded as an innocent holder.

It was attempted at the trial, to show that Mr. Devor had expended some money of his own for the gas company, and was therefore entitled to hold this bond as his own to reimburse himself. This cannot be tolerated. He received the bond in trust for sale, and he was bound to hold it in trust until he sold it, or until by action of the board of directors he purchased the bond from them, or was by their action otherwise relieved of the triist. He could not deal in the trust property with himself as president. If he spent money for the benefit of the gas company, it may -have become his debtor therefor, but he could not of his own motion take a bond held by him in trust, and apply it in payment of such debt. In such case, to make the bond his property, would take the action of the board of directors. No such action was had, and therefore he held the bond in trust at the time he pledged it; and as Mr. Shuffelton knew that fact, or at least is chargeable with such knowledge, he also received and holds the bond in trust for the company, and if he has disposed of it, he should-make compensation therefor.

And if Mr. Reis had notice of the trust relation with which Mr. Devor held the bond, he also received and holds the bond in trust for the company, and should be held to return the same, or make compensation. Whether or not Mr. Reis is chargeable with notice, under all the circumstances, may involve a weighing of the evidence, and that might well be left to the court below. His dealings in the bonds of his company received from its president for his individual benefit, and to the detriment of the stockholders, should be closely scrutinized, and if he had notice of the trust, or knowledge of facts which would charge him with notice, he had no right to receive the bond as collateral, and having so received it, he holds it in trust for the company. He was bound to know that an officer cannot use the securities belonging to the company, for his own benefit.

It is urged that the case cannot be maintained in equity, but should be at law, by way of defense to the bond.

The'facts disclosed in the record, as claimed by the plaintiff, make this an action by a corporation against a director and stockholder, who hold a bond of the corporation in trust, but claim to hold it in their own right; and in such cases equity will always interfere to compel the delivery to the corporation of such bond so held in trust. If the pleadings are not sufficiently specific and certain, leave should be granted to amend so as to conform to the real facts of the case.

When it appeared that Mr. Shuffelton was a director, the circuit court should have held that he was charged with notice of the fact that John Devor held the bond in trust, and with such notice on his part, the judgment should have been against him, and as it was not, the judgment is contrary to law. Ford v. Osborne, 45 Ohio St., 1. The judgment in favor of both defendants must therefore be reversed, and a new trial granted; and if upon such trial it should appear that Mr. Reis, under all the circumstances, is entitled to hold said bond to indemnify him for one-half of the amount of said note, a decree can be entered protecting his rights, and also the rights of the gas company; but should it appear that Mr. Reis, under all the circumstances, is chargeable with notice, then a decree should be rendered against both defendants for the surrender of the bond, of-for compensation.

Judgment reversed and cause remanded.