Franey v. Warner

Mabshall, J. It is assigned, first, as error that the court erred in holding that the complaint states a cause of action. This is based on the theory of counsel for appellants that respondent’s counsel purposed stating a cause of action to redress a wrong to the corporation, and that necessary allegations are wanting to justify the plaintiff, as a stockholder, in prosecuting such an action, in that there are no allegations to the effect that the corporation or its officers were requested to prosecute for the wrong and that they refused to comply therewith, or that such a request, if made, would have been useless. That such allegations are requisite to such an action does not admit of question. Doud v. W., P. & S. R. Co. 65 Wis. 108; Palmer v. Hawes, 73 Wis. 46; Eschweiler v. Stowell, 78 Wis. 316; Pomeroy, Eq. Jur. § 1095. But that principle clearly does not apply to this case. Appellants’ counsel misconceived the character of the action. It was not intended by the complaint to state a cause of action in favor of plaintiff and others similarly situated to redress a wrong to the corporation caused by the fraudulent acts of Warner, Warner, and Wambold, but to state a purely personal cause of action in equity against them and the corporation, as parties jointly liable for fraudulent representations and conduct, whereby plaintiff was induced to subscribe for $3,000, par value, of the stock of the defendant corporation. The theory was that the fraudulent scheme was entered into by Warner, Warner, and Wambold, and was carried out to the knowledge of the officers of the corporation in such a way as to render it a guilty'party thereto; hence that plaintiff had his election to remain a stockholder and sue at law for damages, or to tender back what he received and sue in equity for a rescission of the contract'of subscription to the capital stock and the agreement men — 228 — tioned in the complaint, and for a return of the money paid on such subscription. He chose the latter, and no claim is made by appellants but that the complaint states a cause of action for such recission, and none can be seriously made. The court, after properly holding that the complaint states a cause of action in equity for a rescission of the contract whereby plaintiff incurred the obligation to pay $3,000 for stock in the corporation, and paid thereon $1,120, proceeded to determine the rights of the parties in such a way that we cannot understand definitely upon what theory the judicial mind acted, consistent with any known rules of law or equity. Many exceptions were taken by appellants to the findings of fact, but, in so far as such findings determine facts, properly so called, we are unable to say that there is not sufficient evidence to support them; therefore, they cannot be disturbed. It is, in effect, determined that the stockholders of the «company, at a regular meeting, in ignorance of the contemplated fraud of Warner, Warner, and Wambold, authorized them to purchase the land from Siegert for $45,000, in accordance with the plan of the promoters, upon which plaintiff’s subscription was secured by such promoters; that thereafter such purchase was consummated, the land being transferred to the corporation ostensibly at a cost of $45,000, when in fact the cost of the property to such promoters was but $32,727; that they realized the difference as profits, without the knowledge of stockholders of the corporation other than themselves; that the corporation was not connected with the fraud in any way, hence not liable, and was entitled to have the complaint dismissed as to it, but without costs. If the corporation was in no way connected with the fraud, yet was brought into court charged as a guilty party, it is difficult to perceive why the complaint was dismissed as .to it without costs; but that question is not here. Refer — 229 — ence is made to it only in the course of a necessary statement of the condition of the record in our efforts to determine upon what theory the judgment appealed from was rendered. Having found that the corporation was in noway connected with the fraud, the learned trial judge, -by the first conclusion of law, determined that Warner, Warner,. and Wambold were promoters of the corporation, and its-agents, and that they acquired, as profits in the transaction,, the difference between the cost of the land to them and what, they turned the same over to the corporation for, in violation of their trust relations as such agents and promoters. In this the court appears to have drifted to the idea of appellants’ counsel that the action was one to redress a wrong to-the corporation. It, in effect, acquits the corporation of all Avrong, yet such conclusion is followed by another to the effect that plaintiff is entitled to have his subscription to purchase the land, and his subscription tó the stock of the corporation as well, rescinded, and to recover of Warner, Warner,. and Wambold the $1,120, which, by the sixth finding of fact, the court determined Avas paid to the corporation on the-contract of subscription to stock made with such corporation. By these facts we meet with the novel situation that the corporation is held free from fault, and the action as to-it is dismissed, leaving the $1,120 it received of plaintiff as-its rightful property; yet there is an apparent attempt by the judgment to rescind the contract of subscription for the-stock, so as to Avipe out any further liability of plaintiff thereon. Defendants Warner, Warner, and Wambold are required to return the $1,120, which they never received, Avith-interest, to plaintiff; the latter having delivered the certificate of stock into court, reassigned to them, as the finding states. This language is obviously used on the theory that the money Avas paid to Warner, Warner, and Wambold, and the stock received from them. Plaintiff could not be said' to havTe reassigned the stock to them unless it Avas preAdously assigned to plaintiff. — 230 — It is, as said before, difficult to perceive, consistent with any known rules of law or equity, upon what theory the trial court proceeded; but the legal effect of the judgment, acquitting the corporation of all wrong and dismissing the' action as to it, leaves the contract of subscription to the stock, between plaintiff and the corporation, in full force, ¡notwithstanding the language of the judgment rescinding such subscription. The judgment of rescission of the subscription can have no greater effect upon the corporation, in view of the fact that the action against it was dismissed, than as if the corporation had not been joined as a party at all. To hold otherwise would render the judgment so conflicting as to be void for uncertainty. Plaintiff has not appealed from the judgment in favor of the corporation on the cause of action set out in the complaint. That part of the judgment is in force as to all parties. The contract of subscription to the stock is binding on plaintiff, and the corporation is the lawful owner of the $1,120 paid thereon, and of the claim against plaintiff for the unpaid portion thereof. Upon what theory, then, can the judgment of rescission and for a recovery against Warner, Warner, and Wambold for a ■ return of the $1,120, which they never had, upon a reassignment of stock to them, which was not received from them, stand? This question is one upon which neither counsel for appellants nor respondent have furnished the court any light. The construction which the court gave to the paper signed by respondent, whereby he originally became a party to the scheme to form a corporation to purchase the property, may furnish some explanation of what followed. Such paper, omitting the description of the land, is in the following words: “We, the undersigned, hereby subscribe to the amount set opposite of our respective names in a corpora-' tion to be formed and known as the Wauwatosa Park Co., for the purchase and selling of the following property, . . r for the sum of forty-five thousand dollars ($45,000),'and — 231 — agree to pay for the same as follows, to wit: Thirty-three and one-third per cent. (33%$) of the amount subscribed in cash, or more, within thirty (30) days from the date of subscription; the balance within five (5) years from said date; the deferred payments bearing interest at the rate of six per cent. (6$), payable semi-annually.” By the third finding of fact, so called, which was excepted to by appellants, the court construed such paper as a contract, binding the parties thereto to join in the purchase of the land at $45,000, and a subscription to the stock of the corporation. The judgment, in terms, rescinds the obligation which plaintiff incurred by signing this paper upon the theory that it was a contract between plaintiff and the other bona fide stockholders and Warner, Warner, and Wambold to buy the land, which plaintiff was induced to sign by the fraudulent representations of the appellants, and by means of which he parted with the $1,120. Upon no other theory can we see any ground whatever-for the judgment against appellants for' the return of the $1,120 as úpon the rescission of a contract made with them. The trouble with such theory is that it proceeds on a misconstruction of the instrument. Such in-' ■strument was a mere proposal by the signers thereof to take stock in a corporation to be formed for the purpose of buy-' ing the land. By signing it, plaintiff did- not contract to join with appellants as individuals to buy the land, nor did he thereby subscribe to stock or become a stockholder in the corporation in any sense. It was a proposal not binding upon anybody until accepted by the corporation. When it was presented to the corporation, and accepted by it, each of the subscribers thereto became a stockholder therein, and became liable to pay for stock to the amount indicated opposite his name in the subscription paper. The contract of subscription made by such proposal and such acceptance' could not thereafter be rescinded for any fraud' for which the corporation was not liable; The character of' such a1 — 232 — subscription paper was recently discussed and determined in this court in Badger Pamper Co. v. Rose, 95 Wis. 145, where many authorities on the subject are cited. It follows from the foregoing that it was error to hold that plaintiff could recover of the appellants on the rescission of a contract made with a third person, the corporation. But if the contract of subscription, so called, contained in the paper referred to, could be considered a contract with appellants to buy the land, and if it were true that the $1,120 was paid to them (two very necessary elements for a recovery on a rescission in equity), it must yet be borne in mind that such an action will not lie unless the defrauded .party is in a condition to restore the person charged with the fraud to his former situation. Potter v. Taggart, 54 Wis. 395 ; Churchill v. Price, 44 Wis. 540. The interest in the land which plaintiff acquired, if any, was conveyed to the corporation, and thereby placed beyond the control of respondent; hence it was impossible for him to restore such interest to appellants. Therefore, necessarily, his cause of action to-rescind the contract and recover back his money, if it ever existed, is gone. Looking at the case in the most favorable light for respondent, Getty v. Devlin, 54 N. Y. 403, 70 N. Y. 504, appears to touch it' ict every point, and unfavorably to appellants. . The facts there were that four persons had acquired some oil lands at an expenditure of not to exceed $30,000. They combined to form a corporation for the purpose of selling such lands thereto for $126,000. In furtherance of such scheme they prepared and sent out a subscription paper,, signed by each of them, for $5,000, worded as follows: “We,, the undersigned, do hereby subscribe and agree to pay forthwith the amount set opposite our names for the purchase of property in Washington, Monroe, and Athens counties, Ohio, as per memorandum annexed, . . . at the sum of. $126,000; payments to be made to Daniel Devlin, Esq., at — 233 — Broadway Bank, trustee for tbe purchasers, in whose name the title to the property shall be taken; said property to be put into an association for development upon such terms as these subscribers may elect after this subscription is complete.” None of the promoters of the scheme intended to pay anything upon their subscriptions. They let several persons into their secret, including some relatives, from whom they obtained other fictitious subscriptions, and obtained Iona fide subscribers for the balance of the stock; the amount being $64,500. Such Iona fide subscribers became parties to the transaction without knowledge that the promoters owned' or controlled the land, and upon the faith of the representations contained in the paper, and made otherwise by the promoters, that all the subscribers were to stand equally. They did not know that such promoters were the real sellers, and purposed turning the property over to the corporation at a large profit to themselves. Such bona fide subscribers paid their money to Devlin in accordance with the subscription paper. The title was thereafter taken as provided in such paper. The corporation was organized and stocked at $1,000,000, and, in order to have such stock fully paid, the1 property was conveyed to the corporation, and the entire stock delivered in payment thereof. The stock was thereafter, except $20,000 retained for working capital, divided between all the subscribers, fictitious and bona fide as well, in proportion to their respective subscriptions. The promoters of this scheme obtained their stock without paying anything therefor, and divided among themselves upwards of $30,000 as profits. On discovery of the facts, several of the-defrauded stockholders tendered to Devlin, the trustee, the stock they had received, and demanded back their money, ■which was refused, and thereupon they brought an action to-rescind the contract whereby they joined in the scheme for the purchase of the land, and for a recovery from the promoters of the money which they had paid. — 234 — The case so presented was much stronger in support of recovery than the one before us, because the action was brought against the persons from whom the stock was received, and to whom the money was paid. The court held that the action of the promoters in inducing others to join with them in the purchase of the land upon the pretense that all were to share in such purchase at the original cost, without disclosing their ownership, and the fact that they purposed making a large profit in the transaction, was a fraud upon all subscribers who were ignorant of the facts. The court reached the conclusion without difficulty that plaintiffs were entitled to relief against the promoters in some form, but not to a rescission of the contract of subscription, and a return of all the money plaintiffs had advanced, for the obvious reason that they, were not in a situation to return to the promoters the interest in the land such subscription represented. Such interest had been transferred to the corporation by the promoters, and a delivery •of the stock to the latter did not restore such interest as •they possessed it before the transfer. Eael, J., speaking for the court, said: “ Plaintiffs could not recover back all the money paid by them, because they could not restore the promoters to the position they were in before the transfer of the real estate to the company.” True, the facts were that the real estate had been lost to the corporation, so that a tender of the stock did not carry with it, even indirectly, any interest in the land; but, in our opinion, the fact that the corporation had parted with the land made no differ■ence. Whether it had or had not, the transfer of the stock to the promoters could not restore them to their former position. The cause was reversed, and on the second appeal '(70 N. T. 504) the court held the action maintainable in ■equity for an accounting of the profits received by the pro-, xnoters, and a recovery by the plaintiffs of their share of such profits. On both appeals, but most distinctly on the — 235 — first, the court held also that each of the stockholders might have maintained an action at law to recover of the promoters the increased cost of his stock growing out of the profits made by such promoters. The doctrine of the case, which we approve, may be stated as follows; If a person invites others to join with him in the purchase of property at a given price, falsely representing that the purchase is to be made of a third person, and that all are to share equally in the cost and equally in the benefits of the enterprise, and such others join with such person on the faith of such representations, and the purchase is made accordingly, each of the bona fide purchasers paying his portion of the money, and such person acquires secretly' a profit to himself by reason of having obtained the property after the making of the mutual agreement at a much less sum than the price to his associates, or by reason of having acquired the property at a much less sum before such sale, it is a fraud upon such others, and each may, by restoring such person to his original situation, rescind the contract and recover back his money in an action at law; or he may offer to restore, and, by keeping such offer good, sue in equity for a rescission of the contract and for a recovery of his money; or, without restoring, he, or all similarly interested joining, may sue in equity to charge such person as a trustee of the profits fraudulently retained by him, and for an accounting; or each may sue such person at law for damages for the fraud to the extent of the enhanced value he paid by reason thereof. A person so circumstanced stands in a relation of trust and confidence to all his bona fide associates, and holds all profits secretly made for the common benefit of all engaged in the common enterprise, in proportion to their respective interests. A violation of his duty in that regard constitutes actionable fraud, and such is the case whether the purchase be made before or after the agreement for the mutual enterprise. — 236 — Snob is tbe settled law by the great weight of authority. Cases cited, where a person sells his own property to a company in which he is interested at an increased price, fairly and openly, free from representations that he is selling the property of another, have no application to this case. Bergeron v. Miles, 88 Wis. 397; Whitney v. Fairbanks, 54 Fed. Rep. 985; Bentley v. Craven, 18 Beav. 75; Teachout v. Van Hoesen, 76 Iowa, 113; Brewster v. Hatch, 122 N. Y. 349; Whigham’s Appeal, 63 Pa. St. 194; Simons v. Vulcan O. & M. Co. 61 Pa. St. 202; Paddock v. Fletcher, 42 Vt. 389; Fountain Spring Park Co. v. Roberts, 92 Wis. 345. It is evident from what has preceded that there was no contract between respondent and appellants other than the mutual arrangement that they should take stock in the corporation to be formed to buy the land. It was error to adjudge a rescission of it: First. Because respondent was not in a position to restore the appellants to their former position. An assignment of stock to them which they never owned did not accomplish such restoration. Second. Because the money was paid by respondent, not on the mutual agreement to take stock, made with appellants, but on the contract of subscription to the capital stock of the corporation, made with it. It follows from the conclusions reached that the judgment must be reversed, though not that plaintiff is not entitled to any relief, on the facts found and facts disclosed by the evidence, for the wrong done him. In our opinion, the complaint states a cause of action, in equity for an accountings and a recovery of profits retained by the promoters, which in justice and equity belong to plaintiff, and that the allegations in that regard are fully covered by the findings of fact. Such was the determination of the court in Getty v. Devlin, supra, and is supported by Brewster v. Hatch, supra; Petrie v. Torrent, 88 Mich. 43; Pomeroy, Eq. Jur. §§ 910, 912; Hill v. Lane, L. R. 11 Eq. 215. Says Mr. Justice Rapallo, — 237 — in. effect, on tbe second appeal in Getty v. Devlin, supra, there can be no doubt of the liability of parties so circumstanced to account to their associates for the profits made by them, nor that such an accounting is a proper subject for ■cognizance of a court of equity. In our opinion, plaintiff is entitled to recover in this action upon another principle, well established in equity jurisprudence, and broadly applied where the distinction between courts of equity and courts of law has been abolished, as in this state. Such principle is that, if a person in good faith brings an action in equity, alleging facts sufficient to constitute a good cause of action within some recognized principle of equity jurisprudence, but fails to establish some fact essential thereto, yet does establish a state of facts entitling him to some relief by way of damages or otherwise, the court' will not dismiss the bill, and thereby render further litigation necessary, but will retain it and render such judgment as will do complete justice between the parties. Hall v. Delaplaine, 5 Wis. 206; Tenney v. State Bank, 20 Wis. 152; Kelley v. Sheldon, 8 Wis. 258; Combs v. Scott, 76 Wis. 662; Cole v. Getzinger, post, p. 559 ; Wyckoff v. Victor S. M. Co. 43 Mich. 309. The court found that the appellants made out of the scheme a clear profit of $12,272. Such profits obviously consisted largely of full paid stock, but which, under the circumstances, should be accounted for at its par value in money, though without interest up to the time of the commencement of the action; and the cash profits should be accounted for without interest as well, inasmuch as plaintiff paid only ■a little over one third upon his stock, and is not liable for interest on the balance until in default on calls. On that basis, on a just and true accounting, plaintiff, as owner of ■one fifteenth of the stock, is entitled to one fifteenth of the profits, or $851.47, with interest at the rate of six per cent, per annum from the time of the commencement of this ac — 238 — tion; and, if damages are assessed .on the theory that, though plaintiff cannot have judgment rescinding the contract and. for a recovery of the money paid, he is entitled, under the ■circumstances, to have his damages assessed, and recover the same in this action, instead of being sent out of court to sue therefor at law, the result is the same. The rescission of a subscription to stock for fraud Or misrepresentation is the subject of a note to Fear v. Bartlett (81 Md. 435) in 33 L. R. A. 721. — Rep. By the Oourt.— The judgment of the circuit court as to the appellants is reversed, and the cause remanded with directions to enter judgment in accordance with this opinion.