Court Opinion

ID: 3583306
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:33:57.937617+00
Date Added: 2024-06-11T07:41:37.089143
License: Public Domain

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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. They testified and the court found that their purpose was not disclosed to the plaintiffs. The question is, was the relation between these litigants simply that of vendors and vendees of shares to be issued, or was it one of trust and confidence, binding the defendants to the exercise of good faith and to disclose such information as they possessed affecting the value of the property in which the plaintiffs were induced to purchase an interest? The learned counsel for the respective parties substantially agree *Page 360 
on the rule of law governing the rights of the parties. They agree that if the plaintiffs were simply the vendees of the defendants, that the action cannot be maintained; but if the defendants stood in a fiduciary relation to the plaintiffs, a liability exists. The true relation existing between these parties must be sought for in the contracts found by the court to have been entered into, in the prospectus which the defendants put forth and in the circumstances involved in the transaction. When the plaintiffs subscribed for their shares there was no corporation in existence. Brown had acquired for himself and his associates the right to purchase the mining properties within a given time at prices agreed upon. These options ran to Brown, but he was acting in the interests of his associates, and the legal relation of the defendants is not different from what it would have been had the contracts stood in their own names. Brown and his associates were under no obligation to purchase and pay for the mines, and their loss, if they did not, would be measured by the amount paid for the options and such expenses as might be incurred. This being the situation, the defendants fixed the terms and conditions upon which the corporation should be organized. They devised and put forth the subscription paper and prospectus, stating in the paper last mentioned that: "Among the officers and trustees who will manage its affairs and who will receive subscriptions for stock, may be mentioned Walter T. Hatch, of W.T. Hatch  Sons, 34 Wall street; J. Warren Brown, 62 Broadway; S.B. Elkins, Hotel Bristol, Forty-second street and Fifth avenue; Charles E. Quincey, of Heath  Co., 19 Broad street; Emory Thayer, 547 Broadway; H.H. Duncklee, 62 Broadway." It is recited in the prospectus and in the subscription paper that the corporation was thereafter to be organized for the purpose of acquiring title to mines, which were specified. The plaintiffs did not subscribe for shares then in existence, but for shares to be thereafter created by the defendants, and it is certain that it must have been understood by the plaintiffs and those similarly situated, that the defendants were to carry forward the enterprise, acquire the *Page 361 
property, organize the corporation and to generally protect the interests of those who should join in furnishing the money to pay for the property. The documents clearly indicate that the defendants, as trustees, were to control and direct such proceedings as should be taken anterior to the formation of the corporation, as well as after. The prospectus so states, and they actually performed or directed everything that was done preliminarily to the organization, when these defendants, and they only, executed the certificate by which the corporation was brought into existence, making themselves trustees for the first year. In the subscription paper Mr. Hatch is called the trustee of the subscribers, and so he was, but he was one of the promoters, jointly interested with them, and all are as responsible for his acts as though all had been named as trustees for the subscribers. As against these facts it is urged that it being stated in the subscription that the mines were to be capitalized at $1,500,000, to be divided into shares of the par value of $10 each, to be issued to Brown in payment for the mines; and in the prospectus that only a portion of the shares are offered for sale at $4 per share, and that the stock is to be fully paid up, and non-assessable, was a distinct notice to the plaintiffs of how the corporation was to be set on foot, and that they and the defendants were dealing solely as vendors and vendees. These papers read in the light of the purpose of the defendants, as disclosed by their evidence, seem to have been devised to cover the underlying scheme by which the corporation was to be organized, largely for the benefit of the promoters, but wholly at the risk and expense of the subscribers. We do not think that the inference contended for by the defendants can be justly drawn from the meager disclosures which they made in the documents put forth. They knew that they, and they only, absolutely controlled the scheme, and were to determine whether it should be carried out, and if so, when and how. We think that the plaintiffs were led to believe, and had the right to believe, from the documents and from the circumstances that the defendants were acting in the interests of all of the investors, and that they knew that the *Page 362 
plaintiffs so believed. These defendants were the promoters of the corporation and occupied, before its organization, a position of trust and confidence towards those whom they induced to invest in the enterprise. (Getty v. Devlin, 54 N.Y. 403; 70 id. 504;Erlanger v. N.S.P. Co., L.R. [3 App. Cas.] 1218; Simons v.V.O. Co., 61 Penn. St. 202; Twycross v. Grant, L.R. [2 C.P. Div.] 503; W.B.C.P. Co. v. Green, L.R. [5 Q.B. Div.] 109; Morawetz on Corp. § 545; Cook's S.  S. § 651; Thomp. on Liab. of O.  A. 218, § 20.) It is conceded and found by the court that the defendants did not disclose the amount which they were to pay for the mines, or the fact that they did not intend to exercise their options, unless sufficient funds were furnished by others to pay for the property and all of the expenses of organizing the corporation, leaving for distribution among themselves a majority of the stock. It is clear, we think, that if the defendants had avowed their purpose, the plaintiffs would not have taken an interest in the enterprise, and that they are liable for the damages sustained by the plaintiffs who were induced to invest in shares to be issued.
The judgment should be reversed and a new trial granted, with costs to abide the event.
All concur.
Judgment reversed.