Court Opinion

ID: 4730630
Source: CourtListenerOpinion
Date Created: 2021-08-12 02:55:27.327653+00
Date Added: 2024-06-11T08:08:01.887371
License: Public Domain

Chadwick, J.
(dissenting) — I cannot agree with my associates in their disposition of this case. The rule being that trustees of a corporation act in a fiduciary capacity and are to be held to the strictest accountability, a wrong to the coi’porate body should not go uncorrected because of equities or estoppels ai’ising between individual stockholders. If plaintiff alone were concerned — that is, if the loss or gain were chargeable to him alone, it might be properly held that he was estopped to maintain this action. We may admit that appellant has by his conduct estopped himself, but in this class of cases it is not the i’ight of some individual with which we are concerned, but the fundamental principles of the law, and the rule declared should be applicable in all cases where those in authority use their place and power to exploit a corporate body for their individual gain. This suit is maintained for the benefit of the corporation which has suffered *589a wrong which, by reason of the majority stock holdings of the manipulators of the deal, it was powerless to prevent. In Morawetz on Private Corporations, vol. 1 (2d ed.), § 262, it is said:
“The benefit of an action brought by a corporation necessarily results to all the shareholders equally, even where a portion of them were parties to the wrong, or have, by acquiescence, forfeited their equitable claims to redress. And this result is not, as a rule, unfair. The only possible method of working out the rights of the parties in a case of this kind is to preserve the fiction of a separate corporate entity, and to enforce the collective and the individual rights and obligations of the shareholders separately. It is clear therefore, that the acquiescence of- a shareholder in violation of the corporate rights, or even a participation in the wrong,would not deprive him of his interest in the cause of action belonging to the corporation as an entity. He would have a share in the benefits of a recovery, even although his personal liabilities should be thereby increased.”
The record shows that the acquisition of the Mutual Light & Heat Company and the Diamond Ice Company, known as the Crane companies, was essential to the life of the power company. This was known to Mr. Latimer and his associates. They confess it, justifying the purchase of the competing companies in their own names by saying that the purchase was so made that the . Crane companies might not fall into Unfriendly hands. But the fact remains that they did not purchase it in their individual capacity, or at all, until they had a purchaser for the property at such figure as they might choose to put upon it. They controlled the stock of the buying as well as the selling corporations. They took no chances. As officers of the power company, they had a right to purchase the competing companies, of course, but only for the benefit of the power company; for equity will not allow them either to buy the competing companies which were admittedly in a position to destroy the power company, and thus take the work of destruction in their own hands in defiance of their duties as trustees, or, as they did in this case, turn the prop*590erty over to the power company at a greatly increased price and to their personal profit. The transaction should be held . to have been made for the benefit of their principal.
In Simmons v. Vulcan Oil & Min. Co., 61 Pa. St. 202, 100 Am. Dec. 628, 630, the court quoted from Lindley on Partnership, as follows:
“Judging from recent events and disclosures, nothing seems more common than for a person in getting up a company to obtain for the company property of which it is in want, and try and make the company pay him more than he gave for it. Such a transaction can never stand. There may undoubtedly be a valid sale to a company by persons engaged in getting it up; but once let it be shown that the alleged vendor obtained the property when it was his duty to obtain it for the company, and it immediately follows that he cannot, without the fullest disclosure on his part, charge the company with more than he actually gave
citing Bank of London v. Tyrrell, 5 Jur. N. S. 924, and Great Luxembourg R. Co. v. Magney, 25 Beav. 586.
In Thompson on Corporations (2d ed.), § 1246, it is said of the duties owing a corporation by the directors, that:
“Well-settled rules forbid them acquiring for themselves the property which it is their duty to acquire for the corporation and which is necessary for its purposes. It is said that such dealing would be equally as obj ectionable as purchasing-from the corporation land which it was their duty to sell on its behalf. ‘In respect to this class of dealings, directors of corporations stand upon the same footing as ordinary trustees/ It is a familiar rule that a trustee is disqualified to act by the intervention of a personal interest in the performance of his duties as such trustee; and such trustee is not permitted to obtain title to property where he has any duty to perform which is inconsistent with the character of a purchaser on his own account. The rule was stated by the-supreme court of Utah as follows: ‘The president and board of directors of a corporation are trustees, and act in a fiduciary capacity for its stockholders and while doing so are forbidden, in equity, to acquire any interest in a property hostile to the interests of the stockholders/ Officers acting as agents of a railroad corporation cannot be permitted while acting as. *591such, to buy lands ostensibly for their corporation and take conveyances to themselves for the purpose of reselling it to the corporation at an advance. Thus, the law will not permit directors of a corporation formed for the purpose of constructing a railroad, whose duty it is to acquire the right of way, to expend the funds of the corporation in making expensive improvements upon land necessary for the roadway, but which the corporation has not acquired the right to use, and at the same time to purchase the identical land in their individual right, and avail themselves of the title thus acquired to make extortionate demands upon the company for the use of such land. The rule as to the duty of directors in such cases has been stated thus: ‘It is a breach of their fiduciary obligations which equity will not tolerate for such officers, in antagonism to the corporate interest, to oust the corporation from beneficial property rights which ought to be preserved to it by acquiring the property themselves. Derelictions of this kind are treated as a fraud on the corporation from which equity will raise a constructive trust in its favor.’ On this principle, the officers of a corporation were not permitted to purchase lands on which the corporation had a lease. A director will not be permitted to act in hostility to the corporation and to acquire for his own benefit a lease of the premises occupied by such corporation or of premises necessary for its use. In such a case he will be treated as trustee of the lease so acquired by him.”
In Pepper v. Addicks, 153 Fed. 383, at page 405, the court, speaking to the same subj ect, says:
“His liability rests upon the fundamental principle that one who occupies a position of trust and confidence — such as the president, or a director, of a corporation — shall never be permitted to abuse his official position by dealing with the corporate property for his private gain. If he so deals, by whatever tortuous devices, his acts are voidable if his trail can be followed, and he may be called upon to account for the profits that he has wrongfully made. If authority is needed for so plain a proposition, it may be found in Wardell v. Railroad Co., 103 U. S. 651; Fox v. Mackreth, 1 Lead. Cas. Eq. (4th Am. Ed., Hare & Wallace’s Notes) 237 et seq.; McCants v. Bee, 16 Am. Dec. 616, note; Wilson v. Brookshire, 9 L. R. A. 792, note; Hindman v. O'Connor, 13 L. R. A. 490, note; 4 Thompson, Corporations, §§ 4672, 4674.”
*592In this case the promoter of the deal was the president of the corporation and also a director. He controlled 26,792 shares of stock. A majority of the directors of the corporation Avere interested in the syndicate and profited thereby. Members of the syndicate had control of 30,551 shares of the total 35,000. It is because of situations like this that courts have intervened and frowned upon all attempts of favored stockholders and officers of corporations to enrich themselves at the expense of their companies..
Much has been said about a full disclosure of the facts. It is utterly immaterial and should in no way affect the issue. That the syndicate should make a full disclosure to the power company was a mere pretense to satisfy the law, for the men composing the syndicate were at the same time the majority stockholders of the poAver company. They were merely passing the property from their right hand to their left. They disclosed to themselves only what they already knew, and did what they Avould not have undertaken to do if they had not been in control with power to receive the property. When the same man buys and sells, what comfort to the minority stockholder or the corporate entity is there in finding that, precedent to the transfer, he made a full disclosure of the facts — to himself? The record in this case shows simply an artful deal in high finance, and the profit, less a just return to the promoters of the scheme, for the use of the money advanced ; and such expenses or expenditures as were put out for the maintenance of the Crane companies should be covered back into the treasury of the power company. It should not be possible, for it is against the policy of the law, to defeat these just principles by bookkeeping methods which can at best cover the real transaction with a transparent veil.