Steinfeld v. Nielsen

DOAN, J. — It is contended by the appellants that the facts found do not constitute legal fraud, and that therefore the court erred in so finding, and in. rendering judgment for the plaintiff and against the defendants, based thereon. Summarizing the facts upon which the court predicated fraud in the purchase of the shares of stock of Nielsen, these are: (1) That Steinfeld dominated and controlled the affairs of the Nielsen Mining and Smelting Company, or, as it was later — 401 — called, the Silver Bell Copper Company, through its hoard of .directors. (2) That the corporation being in debt to the firm of L. Zeckendorf & Co., which company was under Stein-feld’s immediate control, and Steinfeld controlling a majority of the stock of the corporation, and two of the directors of the corporation being employees of the firm of L. Zecken-dorf & Co., Steinfeld having the power to determine whether credits should at any time be extended to the corporation, and the legal right to enforce payment of the debt due from the corporation to L. Zeckendorf & Co., and using the power and authority he had, by reason of the foregoing facts, over the corporation, caused the closing down of the mine and smelter of the corporation in January, 1900, when the plant was producing at a substantial profit, and the corporation was thereby materially reducing its indebtedness. (3) That Steinfeld’s purpose in causing the closing down of the mine and smelter at the time was (a) to enable him to purchase the property known as the English group of mines; (b) to get rid of Nielsen as manager and superintendent of the company; and (e) to enable him to purchase the stock held by Nielsen in the Silver Bell Copper Company. (4) That to effectuate these purposes Steinfeld, in his letter to Nielsen, falsely represented to Nielsen that the indebtedness was not at the time being materially reduced by the profits derived from the operation of the mine and smelter, when, as a matter of fact, the indebtedness was being materially reduced at the time, and failed to disclose his true purposes, and to state in said letter, or otherwise to inform him, that he had determined to shut down the mine and smelter for the purpose of acquiring the English group of claims and Nielsen’s stock. (5) That in furtherance of his said purposes to obtain the English group of claims and Nielsen’s stock he pretended to have Nielsen discharged as manager and superintendent- of the company, causing the minute-books of the company to be falsified, in that it was made to show that Nielsen’s discharge was on the 1st of February, 1900, and not later, when the discharge was actually made. (6) That the circumstances did not justify the closing down of the mine at the time this was done, in that a sufficient supply of ore might have been, developed if development work had not been stopped by the — 402 — order of Steinfeld in January, 1900. (7) That Steinfeld knew of Nielsen’s financial condition, and that all his means _ were invested in the corporation, and, taking advantage of t Nielsen’s financial distress, known to Steinfeld at the time, ; Steinfeld, to induce the sale, said to Nielsen that if he did ¡ not take the offer of Steinfeld, he (Nielsen) would get noth-I ing for his said stock. 1 Unless these facts constituted legal fraud, the judgment of I the trial court cannot he sustained. To determine this question we must first establish the legal status of Steinfeld, at 'the time of the purchase of the stock in question, to the Silver Bell Copper Company, and what fiduciary relation, if any, he sustained by reason of such status to Nielsen, as a stockholder of the company. Steinfeld was neither an officer nor director of the corporation, yet, as found by the court, he dominated and controlled its affairs through the board of directors. Although we are not cited to any authority in' point, we have no hesitation in holding that Steinfeld, because of his power over the board of directors and the affairs of the company, and the domination which the findings show he actually exerted over the corporation, sustained such a relation to the company, and to the stockholders of the company, as does an officer or director having such management and control, and that therefore he occupied such a fiduciary relation to the company and to the stockholders of the company as he would have sustained had he been such officer or director. Growing out of such relation, the question arises, what duty did Steinfeld owe to Nielsen to disclose his plans and purposes in causing the mine and smelter to be closed down, and in the second place his purpose to obtain the English group of mines? This is the essential inquiry, inasmuch as the findings do not show that there was any actual misrepresentation by Steinfeld to Nielsen as to any fact, or facts, which were not within the knowledge of Nielsen, or which might not have been readily ascertained by Nielsen by virtue of his position as manager and superintendent of the company. Undoubtedly, the law makes it the duty of an officer or director of a company, who is seeking to purchase from a stockholder the latter’s holdings of stock, to disclose to the latter facts which have come to him by virtue of his relations to the company, and not known to the stockholder, or which — 403 — may not be readily ascertained by the stockholder, and to disclose such plans and purposes as the corporation may have for the future which have a bearing upon the value of the stock of the company; but the underlying principle upon •• which this duty rests is that the officer or director, being the agent of a corporation, and so in a sense the agent of a stockholder, may not take advantage of the knowledge which he _ thus acquires, and which every member of the corporation is entitled to know, in dealing with such stockholder. Stewart v. Karris, 69 Kan. 498, 105 Am. St. Rep. 178, 77 Pac. 277, 66 L. R. A. 261; Oliver v. Oliver, 118 Ga. 362, 45 S. E. 232. The difficulty in applying that rule in this case is that Nielsen was himself an officer and director of the company, and, as such, presumptively informed of the condition of the mine, of its value and future prospects, and of the condition of its affairs. It is certaintly a fair presumption of fact that the manager and director of a mining corporation would be as familiar with the affairs of the company and with its property as any other member of the corporation. It' may be true that Nielsen was misled by the statement of Steinfeld that the mine, at the time of its closing down, was not being operated at a material profit, but if he relied upon the statement, it does not appear that his means of ascertaining the true condition of the affairs of the company were not at hand and the truth readily ascertainable. Further, as director and manager of the company, it must be presumed that he was familiar with the plans of the corporation for the future working and development of the company’s properties, and that, if the acquisition of other properties were essential to those plans, he must have known of it. The court does not find as a fact that Nielsen did not in fact know that Steinfeld intended and expected that the Silver Bell Copper Company would acquire the English group of mines, but the finding is that Steinfeld did not disclose said fact to Nielsen. If Nielsen did know of such plan and intent on the part of Stein-feld, or on the part of the corporation, certainly there was no duty — conceding that Steinfeld owed such a duty in the absence of such information on the part of Nielsen — to disclose such plan and intent to Nielsen. It is true that Steinfeld withheld from Nielsen any plan or intent on his part to get rid of Nielsen, either as manager and superintendent of the — 404 — company, or to purchase his stock at the time he closed or caused the closing down of the mine and smelter; but this plan or purpose in itself would not constitute fraud, unless it was accompanied by some actual representation or withholding of some fact not within the knowledge of Nielsen or readily ascertainable by him, which he was entitled to know. Considering the facts in the light of the situation and the relation of the parties, we are unable to find wherein Stein-feld violated any duty which he owed to Nielsen, either in the way of misrepresenting any fact not within the knowledge of Nielsen, or presumptively readily ascertainable by him, which would reasonably have had an effect in bringing about the sale of the stock, or in failing to disclose any fact not known to Nielsen, or presumptively readily ascertainable by him, which he was entitled to know, which may have put him at a disadvantage in his dealings with Steinfeld. We do not consider the mere fact of Nielsen’s financial distress at the time of the purchase as in itself constituting legal fraud, for 'in the absence of any misrepresentation or concealment of fact Steinfeld was in the position of any other purchaser in dealing with Nielsen, and violated no legal duty in purchasing the stock, no matter "how great Nielsen’s necessities may have been. It is true that the court found that at the time Steinfeld paid the $10,000 for the stock this was a grossly inadequate price therefor. This, however, was more than three years after the contract of purchase had been entered into. The court does not find that at the time the contract was executed the' price was grossly inadequate, but merely finds that the price agreed upon was not then an adequate consideration for the stock, and that Steinfeld knew that fact at the time. To determine whether the price agreed upon was so grossly inadequate, using the language of the supreme court of the United States in Graffam v. Burgess, 117 U. S. 180, 6 Sup. Ct. 686, 29 L. Ed. 839, “as to shock the conscience,” and of “so gross a nature as to amount in itself to conclusive and decisive evidence of fraud,” we must look to the facts as they existed at the time of the contract, and not at the time when the money was actually paid under the contract. It is not mere inadequacy of price that will void such a contract, but the inadequacy must be so great as in itself to furnish a — 405 — strong, if not a conclusive, presumption that an undue advantage has been taken of the ignorance, weaknes, distress, or necessity of the vendor. Kerr on Fraud and Mistake, 186; Butler v. Haskell, 4 Desaus. (S. C.) 651. The court does not so find. Indeed, considering the indebtedness of the Silver Bell Copper Company at the time, and the situation of the property as disclosed by the findings, no basis for such a finding is apparent. In our judgment the findings do not support the legal conclusion made by the trial court that such fraud was perpetrated by Steinfeld in the purchase of the stock as to warrant the rescission of the contract, and the recovery of the stock and of the dividends which have been received by Steinfeld thereon. For this reason the judgment of the trial court must be reversed, and the case remanded, with directions to the trial court to enter judgment for the defendants. SLOAN and NAYE, JJ., concur.