Court Opinion

ID: 7936019
Source: CourtListenerOpinion
Date Created: 2022-09-08 23:09:38.00988+00
Date Added: 2024-06-11T16:33:20.279582
License: Public Domain

Campbell, J.,
dissenting, says:
“It is a well-settled principle that the same person cannot be vendor and purchaser, because his contract lacks the necessary element of two parties; neither can a trustee become interested to the detriment of his cestui que trust, or an agent to the detriment of his principal. Even these contracts, however, are not universally void. They are usually voidable at the option of the party defrauded or affected, but they are not absolutely void, except where, by reason of the identity of the vendor and vendee, a contract is, in the eye of the law, impossible. * * * The only exception seems to be the one already referred to, where the corporation cannot act at all without the action of some particular person, who is thereby disqualified from dealing with himself, and who, of course, cannot contract with himself. 1 Kyd, Corp, 180, 181; Ang. & A. Corp. § 233. In other cases, and where the contract may be made on behalf of the corporation without the assistance of a particular member or officer, a contract with him is as valid as if he were a stranger.”
The. present case is clearly within the exception referred to by Campbell, J. Defendant Dorman must be held to have made these contracts with himself. He directed, influenced, and controlled the board. They had no personal interest in the affairs of the company, and exercised, not their own judgment and discretion, but-Dorman’s will. All the authorities agree that it is essential that the majority of the quorum of a board of directors shall be disinterested *111in respect to the matters voted upon. 1 Beach, Corp. § 276; Smith v. Association, 78 Cal. 289 (20 Pac. Rep. 677).
Where a town board of three are authorized to make a grant to a railroad, and two of them, one being director of the railroad, make the grant, the court will set it aside. San Diego v. Railroad Co., 44 Cal. 106; Bill v. Telegraph Co., 16 Fed. Rep. 14.
A salary voted to the president by a quorum of three directors, two being absent, and the president being one of the three, is not enforceable. Copeland v. Manufacturing Co., 47 Hun, 235.
Where -the chief stockholder, who is president, induces the directors, his dummies, to vote a large salary to him, the corporation may defeat the officer’s action at law to recover it. Davis v. Railroad Co., 22 Fed. Rep. 883.
Where the majority of stock of a corporation was held by one family, who voted away the corporate profits for salaries, the minority may call upon a court of equity to remedy the fraud. Sellers v. Iron Co., 13 Fed. Rep. 20.
A stockholder may compel the contractors to disgorge, when they obtain a contract through their associates or hirelings being made directors. Currier v. Railroad Co., 35 Hun, 355.
Where two contractors cause a railroad corporation to be formed, in which one contractor becomes a director, and the other directors are clerks of the second contractor, and the construction contract is made with these two, by means of dummy intermediaries, at an improvident price, one of the contractors cannot compel the other to divide the profits. Jackson v. McLean, 36 Fed. Rep. 213.
The contracts fixing salaries and rentals must therefore be held not only voidable, but absolutely void. In any case the burden is upon the director to show fairness, reasonableness, and good faith, and up'on this record these trans*112actions must not only be held to be constructively fraudulent, but fraudulent in fact.
There might be some force in the contention that complainant is chargeable with laches, if he had not commenced the former suit, and the act complained of were a single one committed in 1882.. Here the same course of conduct has continued up to the very commencement of this proceeding, and been persisted in, notwithstanding its pend-ency. There is no room here for any claim that the corporation has acquiesced in or ratified this conduct. A ratification, by Lorman and his dummies, of his own act, .could not purge it of its fraudulent character.
T!ie only question of difficulty in the case is as to the remedy. There is no doubt of the power of a court of equity, in case of fraud, abuse of trust, or misappropriation of corporation funds, at the instance of a single stockholder, to grant relief, and compel a restitution; and where the holders of the majority of the stock control the directorate, . and are themselves the wrong-doers, without any showing that the directors have been requested, or the corporation has refused, to act. Dodge v. Woolsey, 18 How. 331; Pond v. Railroad Co., 12 Blatchf. 280; Brewer v. Boston Theatre, 104 Mass. 378; Gregory v. Patchett, 33 Beav. 595; Peabody v. Flint, 6 Allen, 52; March v. Railroad Co., 40 N. H. 567; Mason v. Harris, 11 Ch. Div. 97; Atwood v. Merryweather, L. R. 5 Eq. 464; Ervin v. Railway Co., 27 Fed. Rep. 625; Allen v. Curtis, 26 Conn. 456; Hersey v. Veazie, 24 Me. 9.
. The general rule undoubtedly is that courts of equity have no power to wind up a coloration, in the absence of statutory authority. This rule is, however, subject to qualifications. It has been held that, when it turns out that the purposes for which a corporation was formed cannot be attained,. it is the duty of the company to wind up its *113affairs; that the ultimate object of every ordinary trading corporation is the pecuniary gain of its stockholders; that it is for this purpose, and no other, that the capital has been advanced; and if circumstances have rendered it impossible to continue to carry out the purpose for which it was formed with profit to its stockholders, it is the duty of its managing agents to wind up its affairs. To continue the business of the company under such circumstances would involve both an unauthorized exercise of the corporate franchises and a breach of the charter contract. Mor. Corp. §§ 217, 407. The rule applicable in cases of a copartnership has been held to apply in case of a corporation or joint-stock company. In re Suburban Hotel Co., L. R. 2 Ch. App. 737. In that case Lord Cairns says:
“If it were shown to the court that the whole substratum of the partnership, the whole of the business which the company was incorporated to carry on, has become impossible, I apprehend the court might, either under the act of parliament or on general principles, order the company to be wound up. But what I am prepared to hold is this: That this court, and the winding-up process of the court, cannot be used as the means of evoking a judicial decision as to the probable success -or non-success of a company as a commercial speculation.”
In the present case, we have a corporation that for seven years has not paid a dividend. Complainant has had invested and tied up nearly $18,000. The only reason why it has failed to pay dividends, for part of the time at least, is because defendant Lorman, owning a majority of the stock, has controlled the corporation in his own interest and profit. Is a court of equity powerless to give an adequate remedy because the failure to pay dividends is not attributable to natural causes, but by reason of gross frauds perpetrated by the management? Would the court hesitate an instant in case this were a copartnership? In Ervin v. Railway Co., 27 Fed. Rep. 625 630, Wallace, J., says:
*114“Plainly, the defendants have assumed to exercise a power belonging to the majority, in order to secure personal profit for themselves, without regard to the interests of the minority. They repudiate the suggestion of fraud, and plant themselves upon their right as a majority to control the corporate interests according to their discretion. They err if they suppose that a court of equity will tolerate a discretion which does not consult the interests of the minority. It cannot be denied that minority stockholders are bound hand and foot to the majority in all matters of legitimate administration of the corporate affairs; and the courts are powerless to redress many forms of oppression, practiced upon the minority under a guise of legal sanction, which fall short of actual fraud. This is a consequence of the implied contract of association, by which it is agreed in advance that a majority shall bind the whole body as to all transactions within the scope of the corporate powers. But it is also of the essence of the Contract that the corporate powers shall only be exercised to accomplish the objects for which they were called into existence, and that the majority shall not control those powers to pervert or destroy the original purposes of the corporators;” citing Livingston v. Lynch, 4 Johns. Ch. 573; Hutton v. Hotel Co., 2 Drew. & S. 514; Brewer v. Boston Theatre, 104 Mass. 378; Kean v. Johnson, 9 N. J. Eq. 401; Rollins v. Clay, 33 Me. 132; Clinch v. Financial Corp., L. R. 4 Ch. Ápp. 117; Clearwater v. Meredith, 1 Wall. 25.
“When a number of stockholders combine to constitute themselves a majority in order to control the corporation as they see fit, they become, for all practical purposes, the corporation itself, and assume the trust relation occupied by the corporation towards its stockholders. Although stockholders are not partners, nor strictly tenants in common, they are the beneficial joint owners of the corporate property, having an interest and power of legal control in exact proportion to their respective amounts of stock. The corporation itself holds its property as a trust fund for the stockholders, who have a joint interest in all its property and effects, and the relation between it and its several members is, for all practical purposes, that of trustee and cestui que trust. Peabody v. Flint, 6 Allen, 52, 56; Hardy v. Land, etc., Co., L. R. 7 Ch. App. 427; Stevens v. Railroad Co., 29 Vt. 550. When several persons have a common" interest in property, equity will not allow one to appro*115priate it exclusively to himself, or to impair its value to the others. Community of interest involves mutual obligation. Persons occupying this relation towards each other are under an obligation to make the property or fund productive of the most that can be obtained from it for all who are interested in it; and those who seek to make a profit out ■of it, at the expense of those whose rights in it are the same as their own, are unfaithful to the relation they have assumed, and are guilty, at least, of constructive fraud. Jackson v. Ludeling, 21 Wall. 616, 622; Story, Eq. § 323.”
In Dodge v. Woolsey, 18 How. 331, Wayne, J., says:
“ It is now no longer doubted, either in England or the United States, that courts of equity in both have a jurisdiction over corporations, .at the instance of one or more of their members, to apply preventive remedies by injunction, to restrain those who administer them from doing-acts which would amount to a violation, of charters, or to prevent any misapplication of their capital or profits, which might result in lessening the dividends of stockholders or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be ■done create what is in the law denominated a breach of trust. And the jurisdiction extends to inquiry into, and to enjoin, as the case may require that to be done, any proceedings by individuals, in whatever character they may profess to act, if the subject of complaint is an imputed violation of a corporate franchise, or the denial of a right growing out of it, for which there is not an adequate remedy at law. * * * It is not only illegal for a corporation to apply its capital to objects not contemplated by its charter, hut also to apply its profits. * * * Thinking, as we do, that the action of the board of directors was not an error of judgment merely, but a breach of duty, it is our opinion that they were properly made parties to the bill, and that the jurisdiction of a court of equity reaches such a case, to give such a remedy as its circumstances may require.”
In Wallworth v. Holt, 4 Mylne & C. 635, Lord Cottenham says:
“I think it is the duty of this court to adapt its practice and course of proceeding- to the existing state of society, and not, by too. strict an adherence to rules and forms *116established under different circumstances, to decline to administer justice, and to enforce rights for which there is no other remedy.”
Sir James Wigram, in Foss v. Harbottle, 2 Hare, 491, says:
“ Corporations of this kind are in truth little more than private partnerships; and in cases which may be easily suggested it would be too much to hold that a society of private persons associated together in undertakings which, though certainly beneficial to the public, are nevertheless, matters of private property, are to be deprived of their civil rights inter se, because, in order to make their common objects more attainable, the crown or legislature have conferred upon them the benefit of a corporate character.”
In Bacon v. Robertson, 18 How. 480, which was a proceeding to compel the trustees to distribute among the stockholders the effects of a corporation whose charter had been forfeited, there is an able discussion by Campbell, J.,. of the powers of courts of equity relating to corporations. Campbell, J., referring to the cases just cited, says:
“These just views which have afforded to wise chancellors a sufficient motive to enlarge the scope and relax the vigor of the rules of chancery proceedings, so as to bring-the civil rights of individuals, in whatever form they may exist, or however complicated or ramified, under the protection of legitimate judicial administration, have been adopted in the United States, not simply for the improvement of methods of proceeding, but also for the adjustment of rights and the assertion of responsibilities among the members of such associations.”
The present case furnishes an instance of gross abuse of trust. Must the cestui que trust be committed to the domination of a trustee who has for seven years continued to violate the trust? The law requires of the majority the utmost good faith -in the control . and management of the corporation as to the minority. It is of the essence of this trust that it shall be so managed as to produce for each stockholder the best possible return for his investment. The trustee has so far absorbed all returns. What is the out*117look for the future? This Court, in view of the past, can give no assurances. It can make no order that can prevent some other method of bleeding this corporation, if it is allowed to continue. If Lorman be removed, who shall take his place? He has the absolute power to determine. Once deposed he may elect a dummy to fill his place. There are practically but three persons concerned, Miner, Lorman, and Lorissa Carpenter, and she has for 'seven years, in fraud of complainant’s rights, been paid a dividend to secure her acquiescence. Who has any right to complain if ample and complete justice is awarded to Miner? Who should be permitted to stand between him and an adequate remedy? This corporation has utterly failed of its purpose, not because of matters beyond its control, but because of fraudulent mismanagement and misappropriation of its funds. Complainant has a right to insist that it shall not continue as a cloak for a fraud upon him, and shall not longer retain his capital to be used for the sole advantage of the owner of the majority ■of the stock, and a court of equity will not so far tolerate such a manifest violation of the rules of natural justice as to deny him the relief to which his situation entitles him.
I think a court of equity, under the circumstances of this case, in the exercise of its general equity jurisdiction, has the power to grant to this complainant ample relief, even to the dissolution of the trust relations. Complainant is therefore entitled to the relief prayed. A receiver will be appointed, and the affairs of this corporation wound up. Defendant Lorman must account, and pay over all moneys illegally received by him, paid to him, or paid out by him from the funds of the corporation:
1. For all moneys advanced to Lorissa Carpenter.
2. For all moneys paid to.or received by him as salary, *118since and including the year 1882, in excess of the sum of $2,400 per annum.
3. For the amount paid by said corporation to him, the said Lorman, on account of the three parcels of property, whether interest or principal, and for all moneys paid out by said corporation by reason of said purchase, including the said sum of $400 paid by said corporation to equalize the values of the parcels of said steam-power property jon said partition, and including all expenses and costs to said corporation by reason of said partition, as well as all interest paid by said corporation upon the two mortgages, subject to which said corporation purchased the dock property and the creek property; provided, however, that said Lorman shall be allowed rents for each of said parcels for any period for which rents have not been paid by reason of such purchase, at the rate of $150 per annum for the creek property until January 1, 1886, and thereafter at the rate of $200 per year; at the rate of $500 per annum for the-steam-power property; and for his share at the rate fixed by the lease between the company and Lorman and Miner for the dock property.
4. For all rents wich have been paid since 1886 by said company to said Lorman in excess of the following: For the creek property $200 per annum, for the steam-power property $550 per annum, and for the dock property such sum as may be fixed by the circuit court for the county of Wayne, having reference to that paid prior to that time for the same property.
5. For all rents paid or allowed to said Lorman for the Beniteau property in excess of an annual rental to be fixed by the said Wayne circuit court.
6. For any sums which shall have been paid by the said corporation as costs, fees, or expenses of this proceeding, or which may be paid by said corporation, or for which it may be held or adjudged liable.
The decree below is therefore reversed, and a decree will be entered here in accordance with the foregoing, and the cause remanded for further proceedings in accordance herewith. Complainant will be entitled to recover the costs of both courts against defendant Lorman.
The other Justices concurred.