Case ID: wis_103/html/0530-01.html
Source: Caselaw Access Project
Author: {"author": "BaRdeew, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

The First Avenue Land Company, Respondent, vs. Hildebrand and others, Appellants.
    June 7
    
    
      June 22, 1899.
    
    
      Corporations: Promoter: Secret profits: Officers: Bonds: Bights of sureties.
    
    1. By the term promoter is usually understood a person who undertakes to form and set going a company with reference to a given project.
    3. Defendant H. was employed by the owner of forty acres of land to sell the same, he to have as his commissions all he could obtain over a stipulated price. Not succeeding in making a sale he arranged with, others to assist him, agreeing to divide his compensation with them. Thereafter he and his coadjutors organized the plaintiff corporation, H. signing the articles of organization, subscribing for stock, and becoming an officer and director. Through the efforts of himself and those with whom he was associated the corporation was induced to purchase the land at an advance of $300 per acre over the original selling price; H, knew, while he was engaged in such transactions, that he was making a secret profit which he had agreed to divide with the other officers of the corporation, and which was in fact divided by crediting up the whole profit pro rata on the subscriptions to stock made by those interested in the scheme. H. was present at the organization meeting when the stockholders,'other than those interested with him, were assured they were going in on the ground floor, and he knew that they were not, and that he was gaining a large sum of • money by his dealings with the corporation. Held, that H. and his coadjutors were in such relation to the corporation that it might rightfully call on them to pay over their profits.
    3. H. gave bond as treasurer of the plaintiff and reported to it that he had received §22,680 and made the first payment on the land of §18,375, when in fact he had only received §11,430 and paid on the land §10,125, which was the difference between the amount reported paid and the agreed commission. In an action against H. and the sureties on his bond, held, that the reported payment on the land of more than was actually paid could be disputed by the sureties, unless they had been estopped by their own conduct.
    4. So far as the moneys of the corporation were used in carrying out the scheme of securing the secret profit, H. and his sureties were liable on his bond for whatever was used after the bond went into effect.
    5. The fact that stock had been issued and was outstanding, for which no consideration had been paid to the corporation, was not a breach of the bond, as under the" by-laws of the corporation it was the duty of the secretary to collect moneys due the corporation and turn them over to the treasurer.
    6. Liability arises on such bond only for failure to account for money actually received, or for official misconduct to the financial damage of the corporation.
    Appeal from a judgment of the circuit court for Milwaukee county: Geo. Olementsoh, Judge.
    
      Reversed.
    
    This is an action upon a bond given by the defendant Hildebrand as treasurer of the plaintiff. The bond is conditioned for the faithful performance of his duties as treasurer, and for the accounting and paying over of all moneys of the corporation which might come to his hands as such officer. The facts in proof are substantially as follows: Oipjp was the owner of about forty acres of land near the city of Milwaukee. In July, 1891, he gave the defendant Hildebrand written authority to sell the same for $2,500 per acre, the latter to have as commission all that he could ob-ta.in above the price stipulated. Hildebrand made efforts to sell, and, not succeeding, be arranged with Beidensclvwcvt'z, Babcock, Douglas, and Wilhelm to help him in the sale, and agreed to divide commissions. Some of the party conceived the idea of organizing a corporation to purchase this land, and accordingly the plaintiff corporation was formed. All the parties, except Seidensehwcvrz, with others, subscribed for stock. Hildebrand, Babcock, and Wilhelm signed the articles of organization. The first meeting of the stockholders was held on November 12,1891, at which Douglas was elected president, Babcock secretary, and Hildebrand treasurer. It was then voted to levy an assessment of twenty per cent, on the stock subscribed, and to purchase the land mentioned at the price of $2,700 per acre. At that meeting Douglas stated to the other stockholders, in effect, that the price of the land was cheap, and the other stockholders were “ getting in on the ground floor in the deal,” but, aside from those interested in the commission, none of the stockholders had any knowledge of the secret profit so secured. The land was purchased for $111,375, and the payments were to be $18,375 in cash, and balance secured by mortgage. Hildebrand filed his bond as treasurer on December 5, 1891, signed by the other defendants as sureties. He acted as treasurer, however, from the date of his election. On November 10,1892, he made and filed his written report as such officer for the previous year, showing his receipts and disbursements. In this report he acknowledges receipt of $22,680, being the first assessment upon the stock subscribed, and reports the first payment on the land as $18,375. He continued to act as treasurer until November, 1895. Some time in 1896 the other stockholders discovered that Hildebrand and the other parties named had made a secret profit in the sale of the land to the company, and that, instead of Hildebrand having paid Gipp $18,375 for the land, as reported, he had only paid $10,125. This suit was accordingly commenced on his bond.
    
      The complaint contains two counts. The first alleges the failure to account for the sum of $8,375, the amount of Hildebrand's commission. The second sets up that Douglas became obligated to pay the company on his stock subscription for the first assessment $2,414, Babcock $1,000, Wilhelm $1,000, and Hildebrand $2,416, and that they entered into a conspiracy to defraud the company by obtaining its stock without the payment of the sums so due, and that stock was accordingly issued for the amounts and to the persons stated, without any money being paid therefor. The answers as to the first count allege that Hildebrand had accounted for all money received by him; and, as to the second, the answer admitted that the parties named became obligated to pay the amounts stated on their stock, and sets out that they have paid it in the manner as will more fully appear in the opinion. On the trial the facts as stated were developed, and the court thereupon directed a verdict for plaintiff for $8,250, and interest from the date of the commencement of the action. A discrepancy between the amount claimed and the amount for which the verdict was directed arises from the uncertainty in the proof as to whether the payment to Gipp on the land was $10,000 or $10,125, the court apparently adopting the latter finding for safety. Other facts important to be noted sufficiently appear in the opinion. The defendants appeal from the judgment entered on the verdict as directed.
    
      James F. Trottman, attorney for appellants Gipp and Seidensehwm'z.
    
    
      Ohristiam, Doerfler, attorney for appellant Hildebrand.
    
    For the respondent there was a brief by Quarles, Spence (& Quarles, and oral argument by George Hues.
    
   BaRdeew, J.

'The trial court evidently proceeded upon the theory that Hildebrcmd and those with whom he was associated were promoters of the plaintiff corporation, and that the transactions which eventuated in the issue of stock to them, under the circumstances mentioned, were sufficient to charge him on his bond. That these men were promoters of the corporation seems quite clear from the evidence. While the term promoter may not be capable of precise definition, yet, as usually understood, it has reference.to the persons who undertake to form and set going a company with reference to a given project. Alger, Promoters, § 1. Hildebrand had obtained the right to sell the Gipp premises. He engaged the efforts of Douglas, Babcock, and Wilhelm, who became jointly interested in the commission he was to receive. Babcock seems to have originated the scheme to form the corporation to buy this land. Hilbebrand joined in the plan, subscribed for stock, signed the articles of organization, and became an officer and director. Through his efforts and those with whom he was associated the corporation was induced to purchase the land at an advance of $200 per acre over the original selling price. While he was engaged in these transactions and conducting these negotiations, he knew that he was making a secret profit, which he had agreed to divide with the other officers and directors of the company. His 'relation and that of his associates to the corporation was that of fiduciaries, and demanded full disclosure and the utmost good faith. He was present at a meeting when the other stockholders were assured that they “ were going in on the ground floor,” and, although he says he did not hear any such statement made, he knew that they were not, and that by his dealings with the corporation he was gaining a large sum of money. His relations were such as to bring his conduct within the condemnation of many cases in this court, cited and commented upon in Hebgen v. Koeffler, 97 Wis. 313, and Zinc Carbonate Co. v. First Nat. Bank,, ante, p. 125. We are quite well satisfied, from the circumstances in proof, that the parties mentioned were in such a position as that the corporation might rightfully call upon them to disgorge. Whether this right can he enforced in this action is quite another question. The plaintiff seeks to enforce this right and to sustain a recovery in the action upon the defendant’s bond. No doubt but that, when plaintiff proved the making of the report by Hildebrand, which showed that he had received $22,68.0, and that, instead of paying out $18,375, he had only paid out $10,000 or $10,125, as the case may be, it had made & prima facie case. It is insisted, however, that this report is conclusive upon both him and his sureties, within the principle of U. S. v. Girault, 11 How. 22. Whatever may be the holdings elsewhere, this court seems committed to the rule that a surety may dispute the showing made by the principal of the money on hand at the time the bond went into effect, and no good reason is perceived why they may not also show the exact-amount received while the bond is in force, unless they are estopped by their own conduct. See Vivian v. Otis, 24 Wis. 518; Clark v. Wilkinson, 59 Wis. 543; Milwaukee Co. v. Pabst, 70 Wis. 352.

The showing made by the sureties discloses the fact that, instead of the treasurer receiving $22,680 on the first assessment, as reported by him, he only received $14,430. This amount he has faithfully accounted for, except three items. One for $1,300 was received and paid out by him to Seiden-schwarz before the bond in suit was given. The other two, $50 and $200, respectively, were paid out to Douglas and Babcock, under circumstances hereinafter noted. In order to make his accounts balance, the treasurer reported that he had received $22,680, the amount of the first assessment, and had paid the first payment on the land, $18,375. According to the evidence, there was due on the first assessment from the parties interested in Hildebrand's commission in the sale of the land, and who were stockholders, as follows: Hildebrand, $2,416; Douglas, $2,414; Babcock, $1,000; Wilhelm, $1,000. Of these assessments Hildebrand only paid into the company $130. Under Ms arrangement with the others, they became interested in the commissions received by him in the following proportions:

Seidensehwarz.§1,300

Douglas., 2,464

Babcock. 1,200'

AVilhelm. 1,000

Hildebrand. 2,286

§8,250

Instead of collecting the amounts due upon the assessment on the stock as stated, and paying over to Gipj> the full amount due on the purchase price of the land, it was. arranged that only $10,125 should be paid (which is the difference between the amount due and the commission agreed upon), and that the $8,250 commission should be applied on the stock assessments. In carrying out this arrangement, Hildebrand paid Seidensehwarz his share of the commission in cash, and also paid Douglas $50 and Babcock $200, being the difference between the amounts of their assessments and their share of the commission. His share being less than the amount of his assessment, he pays over the $130 mentioned. Thus it will be seen that the scheme originally entered into, to secure their profit on the sale of the land,, resulted in their securing the stock of the corporation. In so far as the moneys of the corporation were used in the consummation of this deal, there can be no doubt but that Hildebrand is liable, as are his sureties, for whatever was. used after the bond went into effect. This has application only to the payments made to Douglas and Babcock, the payment to Seidensehwarz having been made before the bond was given. The transaction between Hildebrand, Douglas, and Babcock was only one step in the alleged conspiracy, and the result is simply that they have obtained the stock of the company without having paid for it. They are each liable to the corporation; and it might be, if it were-shown that the stock had been transferred to innocent parties, and-that the corporation was unable to make collection, the treasurer would be responsible as for a breach of his-bond for the faithful discharge of his duties. No such showing being made, we see no ground, under the facts stated,, upon which to hold the sureties liable. The fact that stock has been issued and is outstanding, for which no consideration has been paid, as against the corporation, cannot be held to be a breach of the bond. Under the by-laws, it was the duty of the secretary of the company to collect the moneys due the company and turn them over to the treasurer. It is only for failure to account for money actually received,, or official misconduct to the financial damage of the corporation, that a liability arises on the bond.

The action of the court in directing a verdict for plaintiff was therefore erroneous.

By the Court.— The judgment of the circuit court is reversed, and the cause is remanded for a new trial.