Court Opinion

ID: 5194698
Source: CourtListenerOpinion
Date Created: 2022-01-06 15:41:31.494853+00
Date Added: 2024-06-11T08:27:02.273778
License: Public Domain

Hatch, J.
(dissenting):
The complaint states a single and indivisible cause of action. The disposition which this court made of the motion to strike out certain parts of the complaint and to make other averments more definite and certain has settled as to form and materiality the averment of matter contained therein. While no opinion was written in making disposition of that appeal (77 App. Div. 642), yet such is.the necessary effect of that determination. The cause of action averred in this complaint, stripped of all verbiage, is plain and simple. It charges that Moore & Schley for the purpose of obtaining for themselves a secret profit, did certain things and thereby obtained profits to which they were not entitled. The acts which Moore & Schley are charged with doing to effect this result consisted in procuring in the name of the defendant Eicks, who was their agent for the purpose, options for the purchase of about twenty-five *408malting plants, located in various States and cities of the United States, As no1 corporation was. at this time in existence to take over these properties, Moore & Schley,, for the purpose of procuring funds with which to make a purchase of the several plants upon which their agent held options, procured to be addressed to themselves a letter from proposed subscribers to the capital stock of a corporation thereafter to be formed by Moore & Schley. Among other things,, this letter provided for subscriptions to- the capital stock of a company to. be organized with a capital of $30,000,600,. one-half seven per cent cumulative preferred stock and the remainder common stock. The condition of the subscription was, that all of the stock issued upon the organization of the company was- to be used for the purpose of acquiring from the vendors the malting properties upon which Eieks, as agent, held options, and to provide a working capital. The condition was expressed in these words : “ It is expected that of the capital aforesaid, all but two and one-half millions of preferred and one and one-quarter million dollars of common stock to be reserved in the treasury for further corporate uses, will be issued in acquiring certain malt properties on which you and your associates control options, * * * and for working capital and that a part of the stock so to be issued, to wit: nine million dollars of preferred and four and one-half million dollars of common heretofore underwritten, will be sold upon the terms above stated ‘ deliverable when and if issued.” There were no associates of Moore & Schley. Eicks was not an associate,, as he was their agent, acting for them and entirely subject to their control. Pursuant to the agreement contained in the letter, subscriptions to the capital stock Were made, and by their' terms were payable to the Guaranty Trust Company,. which, was an agency selected by Moore & Schley. In addition to these subscriptions, the vendors of the malting plants subscribed to $3,000,000 of preferred and $1,500,000 of common stock. Having been assured of Sufficient moneys by the subscriptions to carry out the scheme, Moore & Schley proceeded to the organization of the corporation, selecting directors therefor entirely under their control. Simultaneously with the organization of the corporation they directed the trust company to, call in the amount of the subscriptions, and obtained from, such calls $9,000,000, which the subscribers paid to the trust company. This sum was *409sufficient to pay for all the properties transferred and furnish the working .capital of $2,070,000. This being accomplished,. Moore & Schley caused the directors to enter into a contract with Eicks for the transfer of the malting plants to the corporation, and pursuant thereto the several properties were conveyed directly to the eor•poration without the intervention, of any third party. The stock was thereupon issued to Eicks,. who delivered it to the trust company, and it alloted the shares of stock to the corporation and individuals entitled thereto. After the allotment had been made, there remained with the trust company $500,000 of preferred stock and $7,740,000 of common stock, which was not required or used in procuring the plants or furnishing the working capital. This stock, it is averred in the complaint, was the property of the corporation. Moore & Schley, without disclosing these facts to the subscribers or to the company, and not being subscribers to the shares of stock of the company, nor having invested any money in the enterprise in any form, directed the trust company to deliver to them the last above-mentioned shares of stock, and they appropriated the same to their own use, without paying anything therefor and have never accounted for the same to the corporation or to any other person on its behalf.
It is evident that Moore & Schley from the inception of the enterprise and in all of the steps taken to the distribution of the stock stood in relation thereto as promoters. While it is true that they were owners of the options it is equally true that they procured those options for the purpose of transferring them to a corporation, to be thereafter formed, and in the entire transaction they intended to. and did make use, not of their own money, bnt of money paid in by the subscribers, which in amount was sufficient to pay the purchase price of the property and furnish the working capital. The excess of stock was provided for the purpose of being appropriated by Moore & Schley, and the complaint avers that in accomplishing it the scheme took this form. It is evident, therefore, that Moore & Schley in relation thereto were promoters. Cook on the Law of Stock and Stockholders defines a promoter to be: “A person who brings about the incorporation and organization of a corporation. He brings together the persons who are interested in the enterprise^ aids in procuring subscriptions, and, generally, is the representative of parties who wish to sell property to the corporation or to construct *410its works.” (§ 651.) This definition is approved in Dickerman v. Northern Trust Co. (176 U. S. 181, 203). In Brewster v. Hatch (122 N. Y. 349), where the persons devising and carrying out the scheme were held to be promoters, it was said by Chief Judge Follett : “ The end which Brown and his associates sought to and did accomplish, as stated in their testimony, and as found by the court, was the acquisition of the mining property by the corporation to be organized wholly at the cost of such persons as should subscribe and pay'for shares to be issued at the rate fixed, and to retain for themselves a majority of the stock without expense or risk.” The scheme in the present case was quite similar, as the averred purpose of Moore & Schley was to procure the subscriptions and obtain the money therefrom to pay for the properties for thé corporation and appropriate the stock without providing any funds for the enterprise or running any risk in the venture, and this they have succeeded in doing. They are, therefore, literally promoters of the transfer of the property and of the organization of the company. Of such relation it has been said: “ A promoter is considered in law as occupying a fiduciary relation towards the coloration. He is an agent of the corporation and his compensation is derived from it or from the persons who are the principal stockholders of the corporation. The promoter is not allowed to- receive and retain a secret profit given to him by the parties with whom the corporation contracts. Frequently the promoter himself owns or has an interest in the property which is sold to the. corporation. In such cases if he openly acknowledges such interest and deals with the company at arm’s length the transaction is allowed to stand. But if the promoter conceals his interest in the property sold to the corporation the sale may be set aside, the property returned and the money recovered back.” (Cook Stock & Stockh § 651, and cases cited.) This rule of law has received approval in Dickerman v. Northern Trust Co. (supra). and in many other cases. (Brewster v. Hatch, supra; Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218; Gluckstein v. Barnes, App. Cas. [1900] 240; Colton Improvement Co. v. Richter, 26 Misc. Rep. 2; Hayward v. Leeson, 176 Mass. 310.) If we are right in our conclusion that the averments of this complaint show that Moore & Schley were promoters of the corporation for the purpose of making this secret profit at the expense of the subscribers and the *411coi'poration, without making disclosure of the same, then it would seem to follow that they are liable to account for the property or its proceeds at the instance of the party who has suffered by the act.
It is averred in the complaint that the stock appropriated by Moore & Schley was the property of the corporation and was required to be placed in its treasury, and that, therefore, it being its property, a wrong has been done to it, and that it has been damaged to the extent of the value of the stock so appropriated. It seems clear that after the corporation was formed, the stock, which was issued, was and continued to remain its stock until transferred for some purpose of corporate use, and that no one could appropriate it to himself without giving value therefor. Certainly the board of directors were not authorized to make a gift of it to any person. Moore & Schley had no more authority to appropriate the stock to their use without giving value therefor than would the board of directors be authorized to make a gift of it. . Taking the stock- from the corporation was an appropriation of its property, and if no value was given therefor it operated to deplete the property of the corporation or to create an obligation against it, and in law it constitutes a fraud upon the corporation and its stockholders. Under similar circumstances it has been held that an action would lie either by the corporation or its representatives to compel the persons who have misappropriated the stock to account for the same, or its value, within well-settled equitable principles. (Brewster v. Hatch, supra; Colton Improvement Co. v. Richter, supra, and cases cited; Hayward v. Leeson, supra; Spaulding v. North Milwaukee Town Site Co., 106 Wis. 481; Pittsburg Mining Co. v. Spooner, 74 id. 307.) The rule is the same in England. (Erlanger v. New Sombrero Phosphate Co., supra; Gluckstein v. Barnes, supra; Matter of Lady Forrest [Murchison] Gold Mine, Ltd., 1 Ch. Div. [1901] 582.)
In Burland v. Earle (App. Cas. [1902] 83) it was held that where a director purchased property upon his own motion without any mandate from the company directing him so to do, and under such circumstances that he did not become a trustee, and subsequently sold the same property to the company at an advance in price, he could not be compelled to account for such difference by a share*412holder, and that no recovery could be had for such, act.;" that if any wrong was- done., it was a wrong , done to the company, and it was-the party, to sue to redress the wrong. There the wrong- would be in the sale, if it fell within any prohibition. In.the present-case. the wrong is done to the company,, not in any sale,, but in the* appropriation of: its stock without giving, value therefor. To the-same, effect is Cavendish Bentinck v. Fenn (12 App. Cas. 652). Many other, cases might be cited in other jurisdictions to the» same effect. So far as I am aware, there has never .been any denial of the jurisdiction, of equity to lay'hold of such a transaction . and grant relief, whether it be between individuals, who* have suffered, or corporations. (Getty v. Devlin, 54 N. Y. 403; 70 id. 504.) The fact being established, the person or corporation-wronged may maintain the action, and as we have, before observed,, in the present case the. wrong ivas done to the corporation for the-reason that the stock was its property and. Was- misappropriated by Moore & Schley. The. present action is to be treated as one, brought by the corporation and for its benefit, for. by the averment of the-complaint it appears that.not only has a. demand been.made upon the corporation to bring the action and been, refused but that a. demand would be unavailing if one had been made and this gives-the right to the plaintiffs to maintain the action. (Flynn v. Brooklyn City R. R. Co, 158 N. Y. 493 ; Hutchinson v. Stadler, 85 App. Div. 424.)
- It is claimed that such result does not necessarily folloAV fertile reason that in every action brought by a stockholder to-enforce a corporate right, two elements are presented Avhich are-essential to the cause, of action. One, a cause of action in favor of' the company against the. party liable to it, and secondly, a cause of" action in the stockholder’s favor to compel the company to enforce* such liability. The argument is that there is a variety of things,., ■out of Avhich arise a right in favor of the corporation which may be-enforced in an action, which right, however, it is neither desirable-nor beneficial to enforce, and that such determination must of" necessity'be left to the control of the directors, charged with the-duty of management, and that before a stockholder can enforce the*» right of the company, it becomes incumbent upon him to establish,, as a part of his cause of action, that it is such a right as it would of: *413necessity be of benefit to the corporation to enforce, -and in which the stockholders of the company 'would be advantaged in property right, or otherwise, by reason of its enforcement. . It 'is now not essential that we pass upon this question as an abstract proposition •of law. It may very well be that a contract which may be avoided by- a corporation might, nevertheless, be of very great benefit to it, ■and which in sound business judgment ought not to be avoided but continued. It may very well be that under such circumstances a •court of equity would not enforce a cause of action at the instance •of the stockholder suing in the right of the company. With this ■question, however, we are not presently concerned. It is now only needful to determine whether the company, as such, will be benefited by enforcing its right, and whether the plaintiff has such interest as will be advántagedthereby. It is evident that if Moore & - ¡Schley have misappropriated this very considerable amount of stock, •the company is benefited by its cancellation or a return of its value to its treasury. It certainly will realize what such value is, if it •succeed in the action; for by so doing it will retire to that extent obligations upon which it is required to pay dividends or it will liave funds in its hands with which to discharge the obligations represented by the stock. Consequently,, it appears in the present •case to be for the distinct advantage of the corporation to.enforce the cause of action. As the retirement of the stock, or payment of its value, increases the "'property of the corporation, or diminishes its •obligations, it is of direct benefit to the stockholders. If, therefore, we adopt the view contended for by the learned counsel for the . appellant, the present situation answers his requirement and shows a cause of action in favor of the plaintiffs to enforce the cause of action of the corporation. It would seem, therefore, as if this action was properly brought, and if the averments of the complaint be ■established-by proof Moore & Schley are bound to account to the corporation for the stock or its proceeds, and this upon principles of equity so plain that no further discussion of that subject is needed.
There can be. no doubt of this rule, unless' we have wholly misapplied the rules of law and made construction of the acts of Moore <& 'Schley not justified by the actual transaction. It is earnestly insisted by .the learned counsellor the appellants that our conclusion *414can only be based upon such a result. His claim is that no wrong was done by Moore & Schley to the company which gives it the right to call upon them or any of the defendants to account. He construes the complaint, reaching its simplest form, as averring: “ Moore & Schley caused properties and cash to be conveyed to a company organized at their instance, in which they and their representatives only were interested, receiving therefor a certain amount of stock. With less than the whole amount of stock, received they procured the properties and cash to be conveyed and paid, and had left some of the stock as profits. Might they retain such profits,.or were they accountable therefor to the company ? ” The argument then proceeds to show that the company procured all of the property under the Eicks agreement; that it knew what it was obtaining ; that the only parties in interest issued all of the stock for a particular purpose; that the company was only interested in obtaining the properties for the stock which it issued and in providing the working capital; that the stock which it issued was understood by the company and all the parties in interest to, be solely issued for such purpose, and that when the company obtained the properties under the agreement and the money was provided for the working capital by the stock, which is issued, and every party then in interest in the company knew the facts and nothing was secret; that it could not be wronged by the appropriation of the stock by Moore & Schley, for the reason that the company obtained all the property and money which it expected to obtain, or which it had any right to obtain, or which the parties understood it would obtain; and, consequently, no wrong was done to. the company or to any one else. This, it seems to us, overlooks entirely the fact that the agreement of subscription, which was addressed by the subscribers to Moore & Schley, provided in terms that all of the stock which was issued upon the organization of the company would be used for the purpose of acquiring the malting properties and furnish a working capital. None of the subscribers to the stock, who furnished all the money and were interested in the corporation, had any notice, nor was any disclosure made to them that any excess of the issue of stock for these purposes would be appropriated by Moore & Schley. The corporation- was interested in procuring the properties and obtaining its working capital with as small an issue of *415capital stock as was possible for the purpose, and Moore & Schley had no more right, in promoting the organization of this company arid transferring the property to it, to appropriate to themselves the excess of the stock issued over and above what was necessary for a purpose which the subscription agreement provided, than they would have had to take an equivalent in money from the treasury of the company. True, it was not secret from them, nor was it secret to the board of directors, nor was it secret to those having control of the company, but Moore & Schley stood in such relation to the company that they were required to protect its property and interests and to act towards it with the utmost good faith, for they were making a creature which could take and hold the properties upon which they held options, and under which it could acquire title. Being vendees of the property, through their agent, every element of open dealing was required, not alone of themselves and of the board of directors, which they controlled, but to the. company that was purchasing from them property, and when its obligations were taken, because it had issued an excess of stock beyond that which was necessary to accomplish the purpose of its creation, a wrong was committed against the company, because it was an appropriation of its property, for which nothing was given. Such transactions can no more be supported and upheld than could be a gross overvaluation in the purchase price of the property.
It is said, however, that the subscription agreement did not constitute a contract between the subscribers thereto and the corporation ; that as it acquired no interest thereunder it has no right upon which an action can be founded, and it is, therefore, entitled to no relief. By the terms of this instrument each subscriber agrees/ to take shares of preferred and common stock of the corporation when and if issued. There is no agreement to take any shares from Moore & Schley at any time, nor does the agreement contemplate that any shares issued to Moore & Schley will be delivered by them to the subscribers as such. The language is that each subscriber will pay to the Guaranty Trust Company of New York the amount of his subscription to the shares of stock of a corporation to be organized when called for by the trust company. It is with the corporation that the contract is made to take the shares when it comes into existence and issues its stock. There are no words which impose *416upon Moore & Schley an obligation to issue, sell or deliver to any subscriber any stock issued to them, or which may come into their possession. They are mentioned as holding options upon malt properties, .and that it-is expected that a certain number of shares will be issued for such properties and to secure the working capital.. With that sale the subscribers had no interest, save in the amount of the purchase price. Such matter was purely between Moore & Schley and the corporation; the subscribers, it is true, .approved of the proposed plan, but that did not change their relations .as purchasers of the stock. When they paid in the amount of their subscriptions, if the corporation, having come into existence, ref used to deliver the shares to which the subscribers were entitled, the latter, it seems to me, would have had an undoubted right to compel such ■delivery by action against the corporation. Under such circumstances no right of action would accrue against Moore .& Schley for .a failure to deliver the shares, as they did not contract to deliver .any, either to the subscribers or to any one else. They were bound to pay for the properties which they sold to the corporation, but hey were not required to deliver stock for such purpose. If the (Subscriber could compel a delivery of Ms shares of stock, so likewise the corporation could compel payment of the subscription, and Moore & Schley, by the terms of this agreement, had no more ■interest in such question than would any other vendor of property to thé corporation or any other shareholder of its stock. Certainly this would be true to the extent of the money provided for a working capital. That at all times belonged to the corporation, and I take it that there can be no distinction between the amount of the (subscription set aside for the working capital and for which the corporation issued its stock and that portion of the subscription which went to pay for the properties purchased. In each case the money was procured from the subscribers by virtue of the contract between such subscribers and the corporation. With such question Moore & Schley were not concerned, save as promoters of the corporation and vendors of the property which they sold. If this be the proper -construction of the subscription agreement it is evident that the ■relation was the ordinary ene of subscriber to the capital stock of a •corporation. The rights in such relation are reciprocalin the -corporation to -compel payment and in the subscriber to compel .delivery,. *417and this being the relation, it' must follow that the shares of stock were the property of the corporation until paid for. When its shares were issued it was entitled to- receive either money or property therefor, and- if it received neither, then a right of action accrued in its- favor against the persons who acquired its shares without giving value therefor. The cases relied upon by the defendants do not support their several contentions. In Parsons v. Hayes (14 Abb. N. C. 419) the transfer was- of property to the corporation. The stock was issued by it for the property which it obtained at a gross overvaluation, but the only persons interested-therein at that time were the persons- who owned the property, who transferred it to the corporation and who received all of its stock. While occupying that relation neither the company nor anyone connected with it could by any possibility be damaged or deceived. The transaction enabled the owners of the property to place such value upon it as they chose and represent it to be of that value in stock, which was issued. The company by this arrangement could not be damaged, nor could the' individuals whose active efforts created the relation, and who were the owners of the entire stock issue. If anybody could be deceived they were the subsequent purchasers of the stock, who might pay for it upon the supposition that the property which it represénted was worth the value of the stock issued. Very likely such condition operated as a misrepresentation of the value of the stock and might result in perpetrating a fraud upon vendees, but it did not damage the company, nor did the' transaction give any right of action in its favor against any one. The cause of action under such circumstances would necessarily rest in deceit, and the only person damaged would be the purchaser, and so the court held that an action could not be maintained either in the name of the company or by a stockholder suing in its interest, as no wrong to it had been done. This holding is fully supported upon very satisfactory reasoning in the case of Matter of Ambrose Lake Tin & Copper Mining Co. (14 Ch. Div. 390), The transaction was in all respects similar to that which obtained in the Parsons Case (supra) and the several opinions delivered therein clearly point out the distinction between such a case and the one we are now considering. In that case the vice-warden, having charge *418of the liquidation- of the company; sought to compel an accounting by the incorporators for the profits they had made by the incorporation, and it was held that no such action would- lie for the. -reaspn that the company was not damaged; although it might have been organized and probably was for the purpose of deceiving the public and the purchasers of the stock, yet that such act did no- mischief to the corporation, and1, therefore, it had no cause of complaint. In the recent case of Tompkins v. Sperry, Jones & Co. (96 Md. 560; 54 Atl. Rep. 254) the Court of Appeals of Maryland determined, that a bill in equity would not lie at the instance of thé receivers of a corporation for "'purposes of liquidation for a claimed injury done to that company under similar circumstances. Therein the defendants Sperry, Jones &■ Co. were the, promoters, .of a corporation for the consolidatioñ of several breweries ; one. brewer made a conditional Contract for the transfer of his brewery ;. its fulfillment was dependent upon the procurement of Other contracts of a similar character for -the transfer of other breweries. The Conditions upon which the contract was made were not complied with and it, consequently, never became a binding instrument, nor fixed the terms upon which Sperry, Jones & Co. became obligated to organize the company, or the brewer to convey his property. Subsequently Sperry, Jones & Co. purchased this property in their own names, and thereafter transferred it to the company at a less price than that for which the conditional contract called, taking payment therefor in the stock and bonds of the company. It was held that as to that transfer. Sperry, Jones & Co. occupied no fiduciary relation to the company, All of the property in that case which was transferred to the company was owned by the defendants Sperry, Jones & Co. and they conveyed this property to the company, taking in exchange therefor its stock and bonds. No prospectus was issued, no invitation was extended to any person or to the general public at that time to subscribe for the-stock'or bonds of the company, and none had been subscribed for. The sole persons in interest, were Sperry, Jones & Col who owned the property which was transferred, and ■ in the formation of the company they owned the stock and bonds; consequently the transaction constituted a simple exchange of .property for stock and bond's. No fiduciary relation existed, nor" could it exist in such a transaction between the company and Sperry, Jbnes *419& Co. and,, consequently, no one could be defrauded, as the only persons in interest owned both the property and the stock and bonds. In addition to this all of the stockholders present at a meeting with full knowledge of the situation, ratified the transaction and authorized an additional issue of stock and bonds for other property transferred by Sperry, Jones & Co. Nothing was concealed. The value of the property was understood and the character of the exchange was consented to by every party in interest. The case in principle is precisely like Parsons v. Hayes (supra). When the property was transferred and the stock and bonds were issued to the defendants, if they had continued to hold the same and carry on the business, no one could have any just cause of complaint. In selling the stock to purchasers as they subsequently did, they stood in the relation to, such transaction and the purchaser as vendor and vendee, and were subject only to the rules which obtain in such relation. No cause of action by reason of that transaction could accrue in favor of the company or its representatives upon liquidation, and the court so held, stating that if there was any liability it was in favor of the purchasers of the stock if they had been defrauded upon a sale of the same. The court cites with approval the cases of Salomon v. Salomon & Co. (App. Cas. [1897] 22); Matter of Ambrose Lake Tin & Copper Mining Co. (supra), and 1 Morawetz Corp. [2d ed.] § 290.) But the court had no difficulty in reconciling these cases and their doctrine with that announced in Gluckstein v. Barnes (supra) and Erlanger v. New Sombrero Phosphate Co. (supra), and stated “ there is no real conflict between these authorities.”
We do not find it necessary to examine in detail all of the cases cited by the learned counsel for the appellants in support of his proposition. The cases to which attention has been called are those which are mainly relied. upon by him and are as strong in support of his contention as any to be found. All of the cases which he cites and relies upon, save Colton Improvement Co. v. Richter (supra), which he criticises as being erroneously decided, fall into one of two classes: First, those cases where one or more persons own an entire property or business,, incorporate a company for purposes of convenience or to prevent complication in dealing with the property, and the organization so formed does not intend or expect any other persons to join them as stock*420holders. In such transaction it is of no consequence what value is attached to the property or what is the amount of the stock or bonds issued, as the company and its creators- do- not represent con‘fLieting interests and no fraud upon the company is, therefore, possible. Such a -case is represented in this State by Seymour v. S. F. C. Assn. (144 N. Y. 333) and in England by Salomon v. Salomon & Co. (supra) and many others. Second, where a corporation is ■formed by owners of property and the property is taken in exchange ■for stock and bonds at an excessive overvaluation, and after the •organization is completed and the property is represented in Stock or bonds, they are sold to the public. It will be found in all such •cases that the organizers of the company owned the property or furnished the money to buy it before the creation of the company, and sold the shares to the public after the company had been formed and the stock had all been issued. Under such circumstances, as we lave seen, df any fraud is perpetrated, it is not upon the company but upon the- purchasers of the stock, and no action will lie to redress any wrong by the company, because it has suffered none. If fraud be perpetrated in the sale- of stock, the action is in deceit, and lies in favor of the individual wronged against the person doing wrong. ■ Such case falls within Parsons v. Hayes (supra); Tompkins v. Sperry, Jones & Co. (supra); Barr v. N. Y., L. E. & W. R. R. Co. (125 N. Y. 263), and Drake v. N. Y. Suburban Water Co. (26 App. Div. 499) in this country and Matter of Ambrose Lake Tin & Copper Mining Co. (supra); and Matter of Lady Forrest (Murchison) Gold Mine, Ltd. (supra) in England. It is evident that the ■.transaction averred in this complaint falls within neither class of these cases, for here this property was not transferred nor the corporation created as matter of convenience in holding and disposing of property, in which those in interest were both owners and incorporators. Nor were Moore & Schley owners of the property purchased with their money, nor was the corporation formed for ■the purpose of taking over the property and issuing all of the stock therein to the owners of it. so that both interests combined in ownership and were changed in form only. Such was not the condition which existed, nor do the facts correspond to make it such in relationship.
Bather does it fall within a third class, where the promoter *421for his own. interest and in order to make a profit,, promotes a company and invites the public to subscribe, for shares, not yet issued, but thereafter to be issued, by "which the property which is to become the assets- of the corporation is to be purchased with money thus furnished, and the wiiole scheme is consummated without pecuniary aid ©u the part of the- promoter and without risk of any of his own money in the transaction. In the first and second classes named there is and can be no. fiduciary relation between the owners, of the property and the corporation, or its- creators. Both own all there is in property and in stock. They deal with themselves and there is no obligation of good faith,, because nothings . either person or corporation, is in existence, or comes into existence requiring such .observance. In the third class from beginning to end it deals with others and with their property and money in order to make a profit. From beginning to end it makes use- of means by which money is obtained, not from tliemselves, brat from outside parties and by and through which alone it js enabled to fulfill and carry ou t the- scheme. Under such circumstances the promoter continually stands in a fiduciary relation to- persons and corporation. His relation is fiduciary when he invites subscriptions to shares of stock ; his relation is fiduciary when, having obtained the money, he 'causes- the corporation to he formed to take over the- property to be purchased by the money thus obtained, and it continues to be fiduciary in all dealings with the corporation during the, time it is undersucli control. Under such circumstances the language of Lord! PeKzaitoe in Erlanger v. New Sombrero Phosphate Co. (supra) finds precise applicatidn : “First, that the. company never had am opportunity of exercising, through independent directors, a, fair andi independent judgment upon the subject of this purchase; and,, secondly., that this result was brought about by the conduct and contrivance -of the vendors themselves. It was the vendors,, in their character of promoters, who had the power and the opportunity of creating and forming the company in such- a manner that with, adequate disclosures of fact, an independent judgment on the company’s behalf might have been formed. But instead of so doing they used that power and opportunity for the advancement of their own interests. Placed in this position of unfair advantage over the company which they were about to; create, they were, as *422it seems to me, bound according to the principles constantly acted upon in the courts of equity, if they wished to make a valid contract of sale to the company, .to nominate independent director® and fully disclose the material facts. The obligation rests upon them to show they have not made use of the position which they occupied to benefit themselves.” In speaking of the opportunity which gives to persons unlimited power to create corporations, Lord O’Hagan says (S. C., p. 1255): “It required in its exercise, the utmost good faith, the completest truthfulness, and a careful regard to the protection of the future shareholders. The power to nominate a directorate is manifestly capable of great abuse, and may involve in the misuse of it, very evil consequences to multitudes of people who have little capacity to guard themselves. Such a power may or may not have been wisely permitted to exist. I venture to have doubts upon the point. It tempts too much to fraudulent contrivance and mischievous deception ; and, at least, it should be watched with jealousy and restrained from employment in such a way as to mislead the ignorant and the unwary. In all such cases the directorate nominated by the promoters should .stand between them and the public, with such independence and intelligence that they may be expected to deal fairly, impartially, and with adequate knowledge in the affairs submitted to their control.”In that case the property was purchased by a syndicate, who transferred it to the corporation at an excessive valuation, and it was held that the relation between the company and the persons transferring the property'was fiduciary in character -and they owed to it the obligation. In Gluckstein v. Barnes (supra) the syndicate was formed to purchase the property at a judicial sale and make a resale to the company, subsequently to be formed. The syndicate bought some of the debenture bonds at a discount and also a mortgage, by which they made a profit of £20,000. They purchased the property at the sale for £140,000 and contracted to transfer it to the company, for £180,000, concealing the profit which they made in the purchase of the debentures and the mortgage. After the company ivas formed they issued a prospectus, stating the price for which the property was purchased and the price at which it would be transferred to the-company, but did not disclose therein the £20)000 Secret profit, although the prospectus did state: ’ “ Any other profits *423made by the syndicate from interim investments are excluded from the sale to the company.” Under these circumstances it was held in an action on behalf of the company to compel an accounting of the undisclosed profits which had been made that, although it appeared that the company, its trustees and directors, were the same persons who bought in the property, formed the company and offered its debenture bonds for sale, yet that they owed to the subscriber who paid for the debentures and bonds the duty of fully disclosing all of the profits which they made, and that they were bound to protect the company in such matter as trustees and directors, and that their failure so to do was not only a fraud upon the purchasers of the debentures and bonds, but was a fraud upon the company, and they were bound to account to it for the undisclosed ¡irofits which they made. We are not required to go so far as does the doctrine announced in that case to sustain the cause of action averred in this pleading.
It is evident, therefore, that by the averments of this complaint Moore & Schley fall into the category of promoters, owing a fiduciary relation to the company which they created, and charged with the obligation of protecting its interests and they could not make a profit out of the company in the transaction without fully disclosing the same and dealing in respect thereto fairly and openly. Such open and fair dealing is not had and proper protection is not given to the corporation which they control, when, without giving anything of valué, they take the stock issued by the company and appropriate it to their own use. Under such circumstances, and well within the authorities which we have cited, a wrong is done to the company and a case is created where equity will lay hold of the transaction and compel an accounting. Nor is the rescission of the contract of sale the remedy in such a case.' There are no averments in this complaint showing or tending to show that there was any wrong done to the corporation in transferring to it the malting properties. From all that appears the corporation received full value for the stock which it gave in exchange for the properties, and such transaction is not tainted in any respect with wrongdoing. There is, therefore, no ground upon which a rescission of the transfers of the malting properties could be based. There is a class of- cases holding that *424rescission of the contract is the proper remedy of the company where it has been defrauded in making it, and if no changes have taken place in the property or right accrued in connection with it, rescission may be proper. Where, however, there have been changes, a rescission will not be made, and an action lies for an accounting, (Yale Gas Stove Co. v. Wilcox, 64 Conn. 101; Matter of Olympia, Limited, 2 Ch. Div. [1898] 158.) The only remedy which can be invoked in this case is to compel Moore & Schley to make restitution of the stock which they have taken and converted to their own use, or to account for the same, or its proceeds, if they have disposed of it. The corporation under the avervents of this complaint has made no contract which requires rescission. It avers in legal effect a breach of trust resulting in a conversion of this stock by the defendants Moore & Schley, and it is to recover it or its value that the action seeks, and the action will clearly lie for such purpose.!
It is further claimed that the plaintiffs have been guilty of such laches as defeats the right to maintain this action. „ Laches is ordinarily to be presented by answer and not by demurrer. (Sage v. Culver, 147 N. Y. 241; Zebley v. F. L. & T. Co., 139 id. 461.) The complaint avers the time when the misappropriation was discovered and, if there has been any laches in prosecuting the claims, it can be made to appear upon the trial; the court will not dispose of such question upon demurrer. The complaint is sufficient to show that of the secret profit no one had notice save Moore <fc Schley, and the directors of the company, whom they controlled, and the averments in this respect are sufficiently broad to permit showing that there was no ratification or knowledge by the plaintiffs or by their predecessors in title. Under such circumstances "there is no basis Upon which to predicate an estoppel. Estoppel, like laches, usually constitutes matter of defense. Estoppel in this case cannot be enforced, based upon the acquiescence of the directors of the company and Eiclis, the holder of the stock, and this for the reason that Eicks’ holding was fiduciary for the company and those legally entitled to the stock and no transfer of it could be justified tinder the facts averred, except to those who subscribed for it and who were entitled to the respective allotments, either for property or cash. The acts leading up to the appropriation by Moore & *425Schley of the stock were a breach of the 'relation which existed between them and the company which they were bound to protect, land out of such circumstances there could arise no estoppel as ■against subsequent holders of the stock who took the same without knowledge of the facts. - Promoters are held to liability even though all of the stock is issued in the first instance to them and they have control of the company. (Brewster v. Hatch, supra; Pittsburg Mining Co. v. Spooner, supra.)
We conclude, therefore, that upon the main questions this complaint states a good cause of action and the demurrer thereto was properly overruled. As to "the demurrer of the defendant Picks the allegations are that he acted as the agent of Moore & Schley, audit is not shown that he is liable to respond in anywise for any of his acts. While he may not be a necessary party to the action, yet, inasmuch as the transactions were largely through him he is a proper party, and the action being in equity he is properly made a party within section 447 of the Code of Civil Procedure as he may have some interest in the controversy.
In support of the demurrer of the executors of John Gr. Moore, •deceased, it is claimed that it must be sustained for the reason that no facts are alleged showing that complete satisfaction cannot be procured from the surviving members, of the firm of Moore ,& Schley, and that such averment is essential to the statement of a cause of action against them. Assuming that the complaint is to be treated as averring a cause of. action against Moore & Schley as copartners we think the contention of the executors cannot be sustained. It may be. admitted that at common law an action could not be maintained, even in equity, which joined surviving partners with the personal representatives of a deceased copartner in the absence of allegations showing insolvency of the'surviving copartners. Such seems to be the rule announced in Lawrence v. Trustees, etc. (2 Den. 577). The rule was otherwise in England, where it was finally settled that in an" action in equity the personal representatives of the deceased copartner could be joined, even though a legal remedy existed only against the survivors of the copartnership. (Wms. Exrs. [6th Am. ed.] 1848.) Whatever doubts may have existed in this State respecting the right to make personal representatives of a deceased copartner parties with the survivors in an .action *426in equity where equitable relief may be properly invoked, it was set at rest by the provisions of section 118 of the Code of Procedure where the right was expressly given, and such rule has been con- ’ tinned in the provisions of section 447 of the Code of Civil Procedure. In Voorhis v. Childs’ Executor (17 N. Y. 354), Judge Sblden, writing for the court, exhaustively considered the subject. That was .an action at law for the recovery of a debt wherein the personal representatives were joined, and in sustaining the demurrer that the joinder. ■could not be had in a legal action the court stated: “ As, therefore, the present action must be regarded as one of a purely legal nature, brought against the surviving partners, upon their legal liability, it follows that the exécütors of the deceased partner, who is liable only in equity, were improperly made parties.” In Potts v. Dounce (173 N. Y. 335) the action was also one at law to. enforce a debt, and .Judge Cray in writing for the court therein said :: “'But, while the • legal rule of liability has been changed, the rule of procedure is not ■and when the personal representatives of the deceased joint debtor are directly proceeded against at law, the plaintiff should still allege and prove the insolvency, or inability to pay, of the survivors.” Hotopp v. Huber (160 N. Y. 524) was likewise an -.action at law, and the ■same rule; was applied. It must, therefore, be now regarded as settled that in an action at law the personal representatives of a ■deceased copartner are not proper parties unless it be averred and proved that the survivors are insolvent and unable to meet the demand sought to be established. In an equitable action the rule is •otherwise, and the personal representatives are proper parties without averring or proving the insolvency of the survivors. The rule, however, that the representatives of deceased copartners could not be joined in the first instance, or.proceeded against in equity, was never extended to’ that class of equitable actions which involved ■a breach of trust. Where the relations out of which arise the cause <of action are predicated upon an obligation involving a wrong, or violation of duty, as agent or trustee, the personal representatives were ■■always proper parties in the settlement of the controversy involving .an examination of the quality of the acts. (Bailey v. Inglee, 2 Paige, 278; Cunningham v. Pell, 5 id. 607; Sortore v. Scott, 6 Lans. 271.) And in similar actions to this, involving th,e same relief ■which is sought for herein, personal representatives have been *427regarded as proper parties. (Getty v. Devlin, 54 N. Y. 403; 70 id. 504; Erlanger v. New Sombrero Phosphate Co., supra.) It is quite possible to construe this complaint as stating personal acts of the several defendants therein, in the accomplishment of the scheme, for its averment is that the “said Moore and said defendants ‘ Schley, Chapman, Timmerman, Casilear and Eieks committed and performed the acts hereinafter set forth.” This is an affirmative allegation of personal acts upon the part of the defendants, and the characterization of such acts, thereafter, under the name of Moore & Schley, is rather matter of brevity than of substance. If the complaint is ambiguous in this respect, it is doubtless to be taken most strongly against the pleader. But whether this construction be given to it or not, we do not consider of consequence, as we have reached the conclusion that this being inherently an equitable action to redress a wrong that all of the parties affected thereby are properly made parties.
It follows from these views that the interlocutory judgment should be affirmed, with costs, with leave to the defendants to withdraw the demurrer and serve an answer within twenty days upon the payment of costs in this court and in the court below.
Laughxin, J., concurred.
Judgment reversed, with costs, and demurrer sustained, with costs, with leave .to plaintiff to amend on payment of costs in this court and in the court below.