Court Opinion

ID: 9716492
Source: CourtListenerOpinion
Date Created: 2023-08-26 06:41:58.737976+00
Date Added: 2024-06-11T18:23:46.026085
License: Public Domain

Keville, J.
(dissenting). From the findings of the master and the reasonable inferences which may be drawn therefrom, I reach the following conclusions:
1. It is obvious that the promoters, when they subscribed for their stock for “cash,” and paid no cash, were relying upon outside stockholders for the seed money to provide the initial financing. The source of the $300,000 deposit required by the banks before they would furnish the ultimate financing for the construction of the motel came from the payments made to the promoters by the outside stockholders for their shares. This dependency upon outside cash furnishes a significant explanation for the failure of the promoters1 to make full disclosure to the outside stockholders that they had not in fact paid cash, and their misrepresentation to those individuals that they had paid cash for their stock.
The master found that the promoters had not agreed among themselves or with the corporation upon a method to compensate themselves for services to the corporation. It is significant that their claim for services came only after the disclosure of their misrepresentation that they had paid cash for their stock. That revelation resulted from an order for an audit following personal financial difficulties suffered by one of their number (Lipton) who had resigned as treasurer and director.
Not only did the promoters have a contractual obligation by virtue of their subscription agreements to pay cash for their stock2 (Bridgeport Window Hardware Co. v. Osborne, *678222 Mass. 517, 520-523 [1916]; Buckman v. Gordon, 312 Mass. 6, 9-10 [1942]; compare H. B. Humphrey Co. v. Pollack Roller Runner Sled Co. Inc. 278 Mass. 350, 352-353, 356 [1932]), but more importantly, they stood in a fiduciary relation to those persons who were to invest in the enterprise as future stockholders. In the absence of full disclosure that they were claiming remuneration for promoters’ services, they could not honestly make such a claim without the approval of the outside stockholders. Hayward v. Leeson, 176 Mass. 310, 318-320 (1900), and cases cited.
Since it would have been improper in the first instance for the promoters to have made payment for their stock in the form of organizational services without full disclosure, I find no basis for the validity of their claim of credit for those services made only after the outside stockholders had learned of their misrepresentations that they had paid cash for their stock. For the reasons just stated, the repurchase by the corporation of Parsons’ shares stands on the same footing. That transaction was also tainted by the misrepresentation that he had paid cash for his stock.
I, therefore, feel obliged to part company with the majority view that it would be “rank injustice” to limit credit on the promoters’ stock subscriptions to cash payments and that the cases should be remanded to give them an opportunity to receive credit for their services to the corporation. In the circumstances, the promoters were entitled to claim only reimbursement for their expenses in organizing the corporation. Hayward v. Leeson, supra, at 322. The master found that Parsons had been reimbursed by the corporation for his expenses and the final decree in the first case gives credit to Lipton for his expenditures in behalf of the corporation. No finding was made, apparently, that the Freedmans had incurred such expenses.
*6792. Much of the same reasoning is applicable to the issue whether Parsons may rightly retain his profit from the sale of his real estate to the corporation. With respect to that transaction, he and his fellow promoters stood in a fiduciary relation to the corporation and future stockholders. In the absence of full disclosure, he was not entitled to retain his secret profit. Hayward v. Leeson, supra, at 321, 322. Kane v. Klos, 50 Wash. 2d 778, 789 (1957). Restatement, Restitution, § 197, p. 808 (1937). The true nature of that transaction was concealed by the devious maneuver of causing corporate shares to be issued to an uncle and a sister of Parsons, payment for which was made to him rather than to the corporation in the sum of $75,000, the sale price of his real estate to the corporation. No corporate record was made of the transaction, no vote of approval was taken by the directors, nor was the transaction ratified by the stockholders. At the time of the sale, Parsons was not only a promoter but an officer and director of the corporation as well.
Parsons seeks to justify the transaction by reliance upon the master’s finding that the real estate was worth approximately $150,000. In my view that consideration is irrelevant. It is no defense against a claim by the corporation for secret profits realized by a promoter in the sale of property to the corporation that the property was worth as much as or more than the corporation paid for it. Victor Oil Co. v. Drum, 184 Cal. 226, 237 (1920). Compare Moore v. Warrior Coal & Land Co. 178 Ala. 234, 242 (1912). See Frick v. Howard, 23 Wis. 2d 86, 91-94 (1964). Restatement, Restitution, § 197, comment (c), pp. 809-810 (1937).
I see no necessity for remanding the cases to the Superior Court. I would affirm the final decrees.

 At the time of their concealment and misrepresentation, they were not only promoters but officers, directors, and collectively, owners of a majority (52%) of the corporation’s authorized stock. See generally, Donahue v. Rodd Electrotype Co. of New England, Inc. 367 Mass. 578, 586, 587-588, 592-597 (1975).

 Parsons now claims that he should be credited with the difference ($75,000) between his sale price of the real estate to the corporation *678and its value ($150,000) as found by the master — in payment for stock which he had initially agreed to pay for in cash. That was, of course, not part of his agreement with the corporation, and he may not now rely upon consideration for the stock in the form of services which was not a part of his original bargain with the corporation. Compare Blair v. F. H. Smith Co. 18 Del. Ch. R. 150, 160-162 (1931).