Court Opinion

ID: 3224093
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:00:05.890935+00
Date Added: 2024-06-11T13:51:35.266607
License: Public Domain

[EDITORS' NOTE:  THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 510 
The bill charges, and the facts averred show, that I. M. Riles was the promoter of the complainant corporation, and that in order to induce Coston and other subscribers to organize the complainant corporation he made certain false and fraudulent representations as to the amount of certain timber options held by him, and that the proposed corporation should receive this timber for the price as fixed by his option, when in fact and in reality he subscribed the timber and received therefor stock and other valuable consideration in excess of the price paid or called for under his option with the vendors of the timber — that Varner, one of the vendors of said timber, knew of the purpose or scheme of the said Riles to promote the corporation and to unload the options upon it at an enhanced valuation, and with a knowledge of said facts aided and abetted said Riles in the perpetration of a fraud upon the corporation and received a share of the profits obtained by said Riles as a result of the transaction. It is a well-settled principle that promoters of a corporation occupy a fiduciary relation to it and have no right to derive any advantage over other stockholders without a full and fair disclosure of the transaction, and any secret profits which they may acquire through promoting the corporation must be refunded and may be recovered in equity by the corporation or its legal representative and in many cases at law. Moore v. Warrior Coal Co., 178 Ala. 234, 59 So. 219, Ann. Cas. 1915B, 173, and authorities there cited.
"H. Liability of Aiders and Abettors of Fraudulent Promoters.
— If there is not only not a full and fair disclosure by a promoter in dealings with the corporation, but affirmative misrepresentation, fraud, and deceit, then not only the promoter, but other persons as well, who stand in no fiduciary relation toward the corporation or its members, but who, with knowledge of the fraud, concur with the promoter in carrying out his fraudulent scheme, will become liable to the corporation in an action for what it has lost thereby. And third persons who participate with promoters in a fraud upon subscribers for stock in a corporation will be jointly and severally liable with the promoters to such subscribers for the fraud as in other cases of joint tort-feasors. Such liability on the part of third persons participating with promoters in a fraud upon the corporation or upon subscribers for its stock exist irrespective of their motives or the degree of their culpability, and although they originally may not have been parties to the fraudulent scheme and may not have shared at all in the profits of the fraud. And a vendor of property to a corporation may as principal be liable for false and fraudulent representations made by a promoter as his agent in respect to the property in effecting the sale. But to recover against others than the promoter or promoters actually perpetrating the fraud it is necessary to show that they were participants in the fraudulent scheme either as principals or agents, or else that they participated in the proceeds of the fraud with knowledge. Persons who are not promoters, but merely sell property to the corporation, are not responsible for false representations in a prospectus issued by the promoters, although they may have knowledge of them. Nor is a vendor of property to a corporation through a promoter as his agent liable for the fraud of the promoter which is not within the scope of his employment. Where a person makes fraudulent misrepresentations to individuals to induce them to form a corporation, and to have the corporation, after its organization, enter into a contract with him, the fact that he never has any direct communication with the corporation previous to its entering into the contract will not relieve him from responsibility to it for damages resulting from his fraud." 14 C. J. p. 303; Moore v. Warrior Coal Co., 178 Ala. 234,59 So. 219, Ann. Cas. 1915B, 173.
The bill contains equity as to Riles and Varner and the respondents banks and others who are charged to be holders with notice. Indeed, the equity of the bill as to these respondents is not seriously controverted in brief of counsel.
The next question is: Does the bill contain equity as to Coston, Donald, C. J., Donald, T. C., Thomas and Lewis, who reside in Jefferson county, so as to give the chancery court jurisdiction, the other respondents not residing in said county? While the bill shows that Riles was a promoter, it may be questionable as to whether or not the above-mentioned respondents were, though we may concede without deciding that they were, as there is no averment that in the promotion or organization of the corporation they practiced any fraud or deception. The *Page 512 
only charge whatever against them is that pursuant to being deceived by Riles, they entered into a contract for the organization of a corporation wherein they agreed to subscribe $30,000, or $6,000 each, and that they subsequently paid for $5,000 of said stock with a sawmill and outfit that was not of a value in excess of $1,500 to $2,000, and that this was "a fraud on the corporation." This averment of fraud is a glaring conclusion, as there is not the slightest intimation in the bill that these parties made any false or fraudulent representations as to the quality, condition, or value of the sawmill, nor does the bill question the fact that the property was not accepted with a full knowledge of the value and condition. True, the Constitution, § 234, and section 3467 of the Code, forbid the issuance of fictitious stock, but they authorize a discharge of the subscription by the transfer of property at a reasonable value, and if the corporation accepts the same, in the absence of fraud or deception, the acceptance is binding on the corporation, though if the valuation is grossly excessive as to creditors, including innocent stockholders, they may proceed individually as for an unpaid subscription. Roman v. Dimmick, 115 Ala. 233, 22 So. 109; Elyton Land Co. v. Birmingham Warehouse Co., 92 Ala. 407,9 So. 129, 12 L.R.A. 307, 25 Am. St. Rep. 65; Nicrosi v. Irvine, 102 Ala. 648, 15 So. 429, 48 Am. St. Rep. 92. The present bill is filed by the corporation and not the creditors. It is true, the bill avers that the transfer of the property was a fraud on the corporation, but this is a mere conclusion and the facts set forth do not support the conclusion. A demurrer to a bill in equity confesses only matters of fact which are well pleaded and not conclusions or inferences of law or fact, and when fraud is averred in general terms and no facts are alleged constituting such fraud, the court cannot consider such averments in passing on a demurrer to such bill. McCreery v. Berney National Bank, 116 Ala. 224, 22 So. 577, 67 Am. St. Rep. 105; Henley v. Rucker, ante, p. 165, 93 So. 879.
The bill was without equity as to the above-named Jefferson county respondents, and they were not therefore material respondents, who resided in said county within the contemplation of section 3093 of the Code of 1907, and this point was available by demurrer to Varner and the other respondents residing in other counties. Lewis v. Elrod, 38 Ala. 17; Harwell v. Lehman, 72 Ala. 344; Ala. Pyrites Co. v. Merritt, 145 Ala. 252, 40 So. 1028; Crawford v. Walter,202 Ala. 235, 80 So. 73.
The trial court erred in overruling the appellants' demurrer to the bill of complaint, and the decree is reversed, and one is here rendered sustaining the same, and the cause is remanded.
Reversed, rendered, and remanded.
SAYRE, GARDNER, and MILLER, JJ., concur.