Las Ovas Co. v. Davis

Mr. Justice Robb delivered the opinion of the Court: We will first consider the errors assigned by the defendants, Davis and Phillips. Their first contention is that the bill should have been dismissed because the suit was not properly authorized. This contention was urged upon the trial court. The record shows that when the resolution authorizing the bringing of the suit was passed, the president of the company and all the members of the board of directors save two, Davis being one, were present, and all save Davis had notice of the meeting. It is urged that, this being a special meeting of the board, Davis should have had notice. Davis, who resided in Cuba, and who was there when this meeting was held, had, before leaving Washington, given Reid a power of attorney to vote for him at meetings of the board of directors, saying that notice of special meetings need not be sent him as he could not come here to attend them. While a director may not legally delegate his powers, we see no reason, especially where he is without the jurisdiction, why he may not waive notice; and having waived notice, as in this case, he is estopped subsequently to allege lack of notice. The second ground for the dismissal of the bill is the defect of parties, the contention being that Herbert and Micou should have been joined as parties defendant. This contention is without merit. When the suit was instituted, the complainant was without knowledge that Mr. Micou had received anything more than his share of the promoters’ stock, and the answer of the defendants did not disclose that he had received anything inore. It is nowhere intimated in the record that Mr. Herbert knew, or had reason to know, of his partner’s participation in secret profits. Herbert and Micou were not indispensable parties. Stockton v. Anderson, 40 N. J. Eq. 486, 4 Atl. 642. Except in the case of indispensable parties, the rule is well established that objection for want of parties, to be available, must be made early. Landram v. Jordan, 25 App. D. C. 299, 300. Moreover, Micou, on the institution of this suit, had parted with his stock, and, since the decree appealed from does [380] not charge the defendants with liability for the secret profits of Micou, they are in no way prejudiced by the failure to include him as a party. The last ground for the dismissal of the bill is that the petitioner was not competent to maintain suit for the relief sought. The defendants base this contention upon the opinion in Old Dominion Copper Min. & Smelting Co. v. Lewisohn, 210 U. S. 206, 52 L. ed. 1025, 28 Sup. Ct. Rep. 634. In that case members of a syndicate acquired properties for the purpose of conveying them, at an excessive valuation, to a corporation they were-to organize. The new company, composed entirely of themselves, was formed, every incorporator having full knowledge of all the facts.. Thirteen fifteenths of the stock of the company was held by the original incorporators, and two fifteenths subsequently passed into the hands of innocent holders. Thereupon a bill was brought by the corporation against the estate' of one of the deceased promoters, who had acted nominally as a vendor to the company of part of the property, but who was really acting for the benefit of all the proposed incorporators, to rescind the sale of that portion of the property, or to recover damages. A demurrer was interposed and sustained by the trial court. The Supreme Court sustained the decree on the ground that, the company having “assented to the transaction with the full knowledge of the facts,” its action remained binding on itself after changes in its members and an increase in its capital stock, such changes and increase not affecting its identity. The court said: “The difficulty that meets the petitioner at the outset is that it has assented to the transaction with the full knowledge of the facts. If there had been innocent members at the time of the sale, the fact that there were also guilty ones would not prevent a recovery. Here thirteen fifteenths of the stock had been taken by the syndicate, the corporation was in full life, and had assented to the sale with knowledge of the facts before an outsider joined.” From our reading of the decision we think the defendants have misconceived its purport. As we read it, it is a reaffirmation of the doctrine that members of a syndicate to purchase property [381] for a corporation to be formed by them stand in a fiduciary relation towards that corporation, and that they will not be permitted to make a secret profit on the sale of such property to the corporation. Yeiser v. United States Board & Paper Co. 52 L.R.A. 724, 46 C. C. A. 567, 107 Fed. 340; Loudenslagar v. Woodbury Heights Land Co. 56 N. J. Eq. 411, 41 Atl. 1115, affirming 55 N. J. Eq. 78, 35 Atl. 436; Erlanger v. New Sombrero Phosphate Co. L. R. 3 App. Cas. 1218, 6 Eng. Rul. Cas. 777. In the latter case the facts did not differ materially from the facts in the case at bar. There a syndicate entered into an agreement to sell at a profit, to a company to be organized by the sellers; but there were innocent stockholders, when the company was organized, and, as the Supreme Court said in its review of the facts in its opinion in the Lewisohn Case, supra, “there never was a moment when the company had assented with knowledge of the facts.” So here, there never was a moment when the Company, with knowledge of the facts, consented to pay $35,000 for property which it should, have obtained for $20,000. The complainant was, therefore, imposed upon and defrauded, and, we think, entitled to maintain this suit. We will here consider complainant’s assignment of error relating to that part of the decree below allowing the defendant Davis to retain the twenty-two shares of promoters’ stock now held by him. In entering upon the consideration of this question, it must be remembered that this is a proceeding in equity, and addressed to the conscience of the court. One of the last things which a court of equity should do is to reward duplicity, or make it possible for those guilty of a.fraud to reap substantial benefit therefrom. The members of this syndicate engaged therein for the purpose of acquiring and developing land in Cuba. The defendants represented, and Eeid supposed, that they were acting in good faith, and advancing their pro rata share of the money necessary for the preliminary work of investigation, and later towards their pro rata share of the amount of the purchase money of the property acquired. Instead of acting in good [382] faith, as their fiduciary relation especially demanded, they deceived and defrauded complainant, by requiring it to pay $35,000 for property which had really cost but $20,000. Instead of advancing in good faith the pro raía amounts required of them in the legitimate prosecution of the enterprise, they advanced nothing, and, by the before-mentioned fraudulent methods, obtained assessable stock of the complainant. This the court has rightly ordered canceled. Oan it be possible that equity demands that the promoters’ stock which these men procured under the conditions mentioned, and which is now in the possession of one of the guilty parties, and burdened with all the evidences of the fraud, should escape the condemnation of the court ? As we view this record the fraud of these parties taints the entire proceeding. There never was a moment, according to the record, when they really intended to invest a dollar in the enterprise. To be sure they devoted some time to the project, but their good faith was at no time apparent. The theory upon which the assessable stock has been ordered to be surrendered and canceled is that it represents secret profits derived from the complainant. What does the promoters’ stock now in the hands of Davis represent? It was acquired upon the theory that the members of the syndicate, having in good faith devoted their time and invested their money in inaugurating and prosecuting the enterprise, were entitled to special consideration by reason thereof. Instead of acting in good faith, the defendants practised deceit upon the complainant, which, we think, is of such a nature and so closely related to the question now under consideration, as not to justify a court of equity in distinguishing between the two kinds of stock. Of course it was necessary for some one, if this property was to be acquired, to furnish the money. The defendants not only did not furnish any, but in addition to all the stock which they acquired there still remains in their hands over $15,000 secret profits. Can it be that such a betrayal of trust should be rewarded by recognizing the validity of the promoters’ stock thus acquired? Can it be that in a court of equity such gross breach of trust as these men have been guilty [383] of is to be rewarded to such an extent? The assessable stock which has been ordered canceled represented the fruits of a fraudulent conception, and yet, but for the fraud practised upon the complainant, the defendants would not have received'the promoters’ stock. It is evident that they received that stock because it was then supposed that they were honestly acting in the interests of the complainant, and assuming their share of the burdens arising. Had it been known that they were not acting in good faith, and that they were not investing a dollar in the enterprise, it is evident that they would have received no promoters’ stock, for they had earned none. As the matter stands, therefore, the twenty-two shares of promoters’ stock, which the decree below has awarded the defendants, represents remuneration for faithful and honest services freed from all taint of fraud. We are unable to concur in this result. In our view this stock is entitled to no greater consideration than the assessable stock. The character of the profit realized by the defendants cannot purify its source. Their deceit should avail them nothing at the expense of the party defrauded. The decree will therefore be reversed in part, with costs to the appellant in No. 2030, and the cause remanded with directions to enter a decree in conformity with this opinion. Reversed in part.