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Timestamp: 2019-04-25 22:43:08+00:00

Document:
MARTIN HAYS vs. THE GEORGIAN INCORPORATED & Others.
December 7, 8, 1931. - June 29, 1932.
Equity Pleading and Practice, Appeal, Bill, Demurrer. Corporation, Promotion, Reorganization, Officers and agents. Fraud.
Pleadings, decrees and papers on the files of courts are commonly to be interpreted in accordance with their true character without much regard to their name or title. Per RUGG, C.J.
Where, following the hearing of a demurrer to the bill in a suit in equity, there were entered an interlocutory decree sustaining the demurrer and subsequently a final decree dismissing the bill, a paper, filed by the plaintiff within twenty days after the entry of the final decree but more than twenty days after the entry of the interlocutory decree, with the caption, "PLAINTIFF'S APPEAL FROM FINAL DECREE," and a statement that the plaintiff appealed "from the final decree" "sustaining the demurrer," was interpreted by this court as an appeal from the final decree rather than from the interlocutory decree, so that it was filed seasonably and this court had jurisdiction to consider it.
Although promoters of a new corporation are fiduciaries with respect to it and are bound to use good faith in dealing with it, a minority stockholder of such a corporation could not maintain a suit in equity in its behalf against its promoters, who also became officers and directors of it, and against certain bankers, to recover for breaches of duty to the corporation by some of the defendants, where it appeared merely that the defendants entered into a scheme whereby the defendant promoters and directors caused certain property in which they were interested to be appraised at an excessive valuation and sold to the new corporation at that valuation and caused a large number of the shares of its stock to be issued in payment therefor; the bankers thereupon either purchased or underwrote the purchase of such shares from the directors for immediate resale to the public, thus enabling the directors to obtain unconscionable profits; and the bankers thereupon sold at a large profit a large part of such shares, and other shares which they obtained by purchase directly from the corporation, to the public without disclosure of the above facts and also with misrepresentations of certain facts, it not appearing that the bankers acted either as agents for the corporation or for the persons to whom they sold the shares.
upon its formation were intended to be sold, or in fact were sold, directly by the corporation to innocent initial subscribers without disclosure to them of material facts. The bill in the suit above described was multifarious because the plaintiff, in addition to making allegations and seeking relief therein with respect to the defendants' scheme, also alleged that the defendant directors had voted themselves excessive salaries as officers of the corporation, and sought relief in that respect.
BILL IN EQUITY, filed in the Superior Court on September 30, 1930, and afterwards amended, described in the opinion.
The defendants demurred. The demurrers were heard by Qua, J., by whose order there were entered on June 23, 1931, an interlocutory decree sustaining the demurrers and on July 17, 1931, a final decree dismissing the bill. The plaintiff's appeal, filed on July 30, 1931, is described in the opinion.
D. Stoneman, (R. Clayton with him,) for the plaintiff.
P.N. Jones, (D. Comins with him,) for the defendants The Georgian Incorporated, and others.
A.J. Santry, (R. Bancroft with him,) for the defendants Lyman and another.
M. Caro, for The American Appraisal Company.
RUGG, C.J. This suit in equity is brought by the plaintiff, a minority stockholder, to recover in behalf of The Georgian Incorporated, for breaches of duty committed against that corporation by some of the defendants.
had current liabilities of $504,202.79, current assets of $176,339.78, and fixed assets of $300,000. The directors, being in control of the old corporation, well knowing its precarious financial condition, conceived the scheme of organizing the new corporation for the purpose of selling the assets of the old corporation to it, and of selling through the medium of the new corporation large blocks of stock upon a basis which would enable (1) the old corporation to pay its debts, (2) the directors to recover sums invested by them in the old corporation, and (3) the directors to obtain large profits. To that end the directors entered into a combination and agreement with the bankers and the appraisal company (A) to appraise the assets of the old corporation at an excessive valuation, (B) to cause a sale of those assets to the new corporation, and (C) to cause the new corporation to issue preferred and common stock for resale to the public so as to accomplish (1) and (2) above specified and to yield to the directors and the bankers an unconscionable profit. The details of that combination and agreement as carried into execution are alleged to be of this nature: (a) The assets of the old corporation were appraised by the appraisal company at $1,123,600, a price, as it knew, far in excess of their real value, for the purpose of sale to the new corporation; and the net value of its assets after deducting its liabilities was then fixed by the directors at $783,985, an overvaluation of about $500,000. (b) The new corporation was then organized under the laws of this Commonwealth with a capitalization of 75,000 shares of Class A preference stock, each share of the par value of $20, and 2,000 shares of common stock, each share of the par value of $5. The directors were the executive officers and directors of the new corporation when first organized, and three of them were the original subscribers, each to one share of common stock. (c) The directors thereupon caused the new corporation to take over the assets of the old corporation and to pay therefor 38,750 shares of its Class A preference stock of an aggregate par value of $775,000, and 1,797 shares of its common stock of an aggregate par value of $8,985, being a total of $783,985.
the directors from the new corporation and paid therefor into its treasury $4 per share, or $40,000 in all. When subscriptions from the public were solicited, no disclosure was made to the public of any of the facts recited in the bill. The bankers and directors also sold to the public large blocks of common stock at $14 per share in addition to the 10,000 shares just referred to. The bankers offered for sale to the public 55,000 shares of Class A preference stock acquired by them from the directors and from the new corporation at $21 per share. There are further allegations of misrepresentations to the public by the bankers and directors as to the value of the assets turned over to the new corporation by the old corporation, as to the value of the stock, and in numerous other particulars. These representations are alleged in rather general terms. If described with sufficient particularity to constitute the basis of legal liability, they appear to be wrongs not to the corporation but to those who may have relied upon such representations to their harm. They relate mainly to methods used in selling the stock of directors and bankers. (f) The directors caused themselves to be elected officers of the new corporation and voted themselves unreasonably large annual salaries, far in excess of their real value, viz.: treasurer, $40,000; president, $30,000; vice-president, $15,000, and assistant treasurer, $15,000.
There are eleven prayers for relief, the substance of all being that the defendants be ordered to account to the new corporation for all money received by them in excess of the true value of the assets transferred to the new by the old corporation, whether from the sale of stock or otherwise, and for all profits received by them out of the several transactions; that the directors be ordered to account for all salaries received by them from the new corporation in excess of their true value, or that, in the alternative, relief be granted to the plaintiff in behalf of the new corporation by way of rescission, or part rescission and part damages.
stated, and (2) that the bill was multifarious. Interlocutory decree was entered sustaining the several demurrers on these grounds on June 23, 1931. A final decree was entered dismissing the bill, on July 17, 1931. The plaintiff claimed an appeal on July 30, 1931, in the following terms: "PLAINTIFF'S APPEAL FROM FINAL DECREE. Now comes the plaintiff in the above entitled cause of action and appeals to the Supreme Judicial Court from the final decree entered in the Superior Court sustaining the demurrers of the defendants to the plaintiff's Substitute Bill of Complaint."
1. It is contended that the case is not rightly before us and that the court is without jurisdiction to consider it, on the ground that by its terms the appeal is limited to the interlocutory decree and does not apply to the final decree, and that the appeal was not filed within the period of twenty days allowed by the statute after its entry, which is the maximum limit of time. If this be an appeal from the interlocutory decree, it was not seasonably filed; if it be an appeal from the final decree, it was seasonably filed. G.L.c. 214, §§ 19, 26.
Pleadings, decrees and papers on the files of courts are commonly to be interpreted in accordance with their true character without much regard to their name or title. Frati v. Jannini, 226 Mass. 430, 432. E.S. Parks Shellac Co. v. Jones, 265 Mass. 108, 110. The plaintiff's appeal in its title was described to be from the final decree. In the body of the appeal it is stated to be from the final decree; the reference to it as sustaining the demurrers specified the conclusion of the trial judge which led to the entry of the final decree. This reference was an error. It might in some circumstances have been perilous. It does not, however, destroy the real effect of the paper. It is to be presumed that the plaintiff intended by his appeal to accomplish something and not do a futile act. To attempt to appeal on July 30, 1931, from the interlocutory decree would have been vain. To appeal on that date from the final decree would be effectual to secure to the plaintiff a review of the final and decisive action of the trial court.
In our opinion the paper filed by the plaintiff on July 30, 1931, and already quoted, is to be construed as an appeal from the final decree.
Upon this appeal the correctness of an interlocutory decree, so far as the final decree is affected erroneously thereby, is open for consideration. O'Brien v. O'Brien, 238 Mass. 403, 408.
2. Since the case comes before us on bill and demurrers, no intendments can be made in favor of the bill. The plaintiff must plead every material fact essential to establish a right to relief. Bowker v. Torrey, 211 Mass. 282, 286. Lexington Board of Survey v. Suburban Land Co. 235 Mass. 108, 112.
the scheme of promotion as an original issue are the persons interested in such sale and profit. Where, therefore, it is a part of the scheme of promotion that capital stock be issued to the public as original subscribers, and no disclosure is made to such original subscribers or to an independent board of officers acting for the corporation, and there is no subsequent ratification of the transaction by the corporation after full disclosure, then, if other necessary factors are present, profits made by promoters in sale of their own property to the corporation may be recovered by the corporation. There may be such recovery of secret profits even though all the stockholders who have become subscribers at the time of the transaction may know and assent, provided, as a part of the scheme of promotion, there is unissued capital stock to be directly and subsequently in fact sold, for the purpose of securing working capital, to members of the public as original subscribers to whom no disclosure is made of the profit of the promoters and who have no knowledge of it. But the corporation cannot recover profits made by its promoters in selling to it their own property, provided the promoters either (1) are or become the real, original subscribers of all the shares of capital stock contemplated as a part of the scheme of promotion, or (2) make a full disclosure of the material facts to each original subscriber of capital stock. The reason for this limitation is that all persons contemplated by the scheme of promotion as having a present or potential interest in the corporation as original subscribers of capital stock have assented to the profit or, knowing of it, have failed to repudiate it. Buyers of stock from such original subscribers take it subject to its incidents and burdens in the hands of their vendors. Such subsequent transferees may sustain an injury personal to themselves, but that is not an injury to the corporation or to all the stockholders collectively.
should acquire the interest of some one or more of those persons. Such third persons are bound by the acquiescence of their vendors, and such a corporation is bound by the acquiescence of all its stockholders." This was said as a part of the chain of reasoning upon which the decision rested. This principle was followed in the later decision in the same case in 203 Mass. 159. In substance and effect this is a succinct statement of the principle that, if the promoters and those acting in concert with them are the original subscribers to the entire capital stock contemplated to be immediately issued and they then sell those shares, without disclosure of the profits of the promoters, to outside parties, there is no fraud on the corporation and no ground for complaint by it even though the promoters may derive large profits from the transaction. That principle seems to prevail generally. Old Dominion Copper Mining & Smelting Co. v. Bigelow, 203 Mass. 159, 185, 186, 190, and cases collected. Mile Wide Copper Co. v. Piper, 29 Ariz. 129. Hamilton v. Hamilton Mammoth Mines, Inc. 110 Or. 546, 553. Metcalfe v. Mental Science Industrial Association, 127 Wn. 50, 58. Attorney General for Canada v. Standard Trust Company of New York,  A.C. 498. Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 210 U.S. 206, at page 215. Allenhurst Park Estates, Inc. v. Smith, 101 N.J. Eq. 581, 594-595. Mason v. Carrothers, 105 Maine, 392, 405-408. See 14 C.J. pages 293-295, and Ehrich on Promoters, § 120, for collections of further authorities.
No exception to this principle has been established to cover instances where the promoters intend an immediate resale to the public of stock actually issued to them. Relief is granted against frauds on the part of the promoters which bear only a superficial resemblance to the case at bar. It is not necessary to review them. Many are discussed in 203 Mass. 159. See, also, Davis v. Las Ovas Co. Inc. 227 U.S. 80; Official Receiver & Liquidator of Jubilee Cotton Mills, Ltd. v. Lewis,  A.C. 958; In re Darby,  1 K.B. 95, and California-Calaveras Mining Co. v.
subscriber. He becomes a holder of stock because of a direct relation not to the corporation but to his vendor.
The case at bar, in our opinion, comes within the sweep of the general principle. The circumstance that the bankers, after the establishment of the new corporation, took title directly from it as original subscribers from time to time of shares of common stock and resold to the public, does not take the case out of the operation of the general principle. It is not alleged that the bankers in this respect acted as agent for the new corporation, or as agent for the persons to whom they sold those shares. On the contrary, the allegations are that the stock was issued "for resale to the public" and that the bankers were acting for themselves and the directors. No relation of trust and confidence is shown in these transactions. In view of these allegations the purchasers of stock from the bankers cannot be regarded as equitable original subscribers with all the rights accorded to actual original subscribers. No question is here involved between bankers and their customers. The case at bar is distinguishable from California-Calaveras Mining Co. v. Walls, 170 Cal. 285, where the original promoter practised a fraud on those associated with him in the enterprise and, although as a part of that fraud all the capital stock was issued to him, most of it was turned back into the treasury of the corporation for distribution to his associates and for sale to the public. It is also distinguishable from Fred Macey Co. v. Macey, 143 Mich. 138, where the promoters had sold a large amount of treasury stock to the public before the corporation was organized and thus the buyers were in truth original subscribers. The same principle was followed in Allenhurst Park Estates, Inc. v. Smith, 101 N.J. Eq. 581.
by which to determine multifariousness. Each case must depend largely on its own circumstances. It is manifest that the bankers and the appraisal company had no connection with the excessive salaries alleged to have been voted by the directors to themselves. That was not a part of the promotion of the new corporation. There is no allegation that any party save the directors alone had connection with voting or receiving the salaries. This matter does not appear to be in any manner bound up with the other grounds of complaint. We think that the bill in this particular is open to the objection of multifariousness. Reno v. Cotter, 236 Mass. 556, 563. Raynes v. Sharp, 238 Mass. 20, 25. Spear v. H.V. Greene Co. 246 Mass. 259, 269-270. Farquhar v. New England Trust Co. 261 Mass. 209, 216. Cedar v. Superior Credit Corp. 276 Mass. 197.
It is not necessary to consider the other grounds of demurrer.

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