Sicklesteel v. Edmonds

— 124 — The following opinion was filed June 17, 1914: Timlin, J. The plaintiff brought this suit for dissolution and winding up of the affairs of an alleged copartnership between himself and thirty-one defendants. Eighteen of these defendants appeared in the action in person or by attorney. Others defaulted or were not served with process. No copartnership was proven. No objection was made on the ground of lack of equity jurisdiction and the case is before us on its merits. Edmonds and Grell appeal from a judgment in favor of their codefendant Lorenze and against them for upwards of $6,000, and Lorenze appeals from the same judgment, claiming only that sufficient damages were not allowed to him. All other parties acquiesce in the judgment of the court below by not appealing and not joining in either appeal. By the judgment all of the notes were ordered to be returned to the subscribers. One J. A. Ryan had paid cash and he was awarded a judgment against Lorenze for $1,216.39; Lamb was awarded a like judgment for $3,642; Halverson for $80; and it was further decreed that Ryan and Lamb have each a lien to the amount of his allowance against Lorenze upon the judgment in favor of Lorenze and against Edmonds and Grell. The two appeals may be considered together. The facts found by the circuit court together with the undisputed facts which are not all covered by the findings may be set forth as follows: On May 1, 1909, J. P. Malick and Abraham Lorenze 'secured from Messrs. J. O. Terrell and Edward Roos of Tesas a contract for the sale by the latter to the former of about 72,000 acres of land in Brewster county, Texas, part at $1 and part at $1.20 per acre, paid down $4,000, and agreed to pay $16,000 additional upon the execution and delivery of a bond for title from the vendors, and this bond for title was to be executed upon the acceptance of the title by the vendees after an abstract of title was fur — 125 — nished by vendors and thirty days allowed in which to examine the same. They also assumed and agreed to pay, in the event of their acceptance of the title, liens to the amount of $28,000 resting upon the land, and the balance, or about $36,000, by two notes which they agreed to have negotiated and cashed at face value, but if such notes were not cashed, then to be paid with interest at seven per cent, and to be secured by a trust deed, not specifying what property the trust deed should cover. When the $16,000 and the $28,000 were paid, or at any time after fifty per cent, of the purchase price was paid, the vendees were to receive a deed, while the vendors were to retain a vendor’s lien for unpaid remainder. The $4,000 first paid was to be forfeited to the vendors in case of default by the vendees. Malick advanced this first $4,000 payment for himself and Lorenze. Malick and Lorenze did not have the means to carry out this contract or make the payments due thereon, and immediately upon their return to Wisconsin with their duplicate original had drawn up and circulated a subscription agreement which the plaintiff calls a partnership agreement, and this continued open to subscription until about November 18, 1909, when thirty-two signatures, including those of Malick and Lorenze, for amounts varying from $1,000 to $5,000 and aggregating $53,000, were obtained. Of this amount Malick subscribed $5,000, Lorenze $5,000, and Edmonds $5,000, and a person named Julius Cohn of Kansas Oity, Missouri, who is named as a defendant in this action, subscribed $5,000. All other subscriptions were for lesser amounts. Malick turned over what is termed the “financing” of this matter to Lorenze, the latter employed one Margraf and personally and through Margraf procured all the subscriptions mentioned. Some of these were procured by fraudulent representations and conceal-ments, some like Edmonds and McKenny mere decoys, that is to say, they subscribed under a private agreement with Lorenze which was intended to guarantee them against lia — 126 — bility on tbe subscription, and some subscribed witb knowledge that Lor&nze was making a profit. Malick was apparently held out by Lorenze as a person interested in this contract as vendee, subscriber, and trustee, and all subscribers signed, of course, with reference to the subscription paper as written. Malick died prior to judgment, leaving little or no estate. This subscription agreement declared that the signers subscribed for and agreed to pay Malick, trustee, the sums set opposite their respective names for the purchase of the lands in question. The subscriptions were to he paid, twenty-five per cent, cash, balance in notes running three, six, and nine months, respectively, with interest at six per cent. These notes were to be payable to Malick as trustee and the purchase price of the land was to be $1.50 per acre, with five cents per acre additional for expense of consummating the purchase. The writing also contained this statement: “It is distinctly understood that the subscribers do not incur any other liability than the amount set opposite our names and that we assume no other obligation than this.” It is also provided that as soon as a sufficient amount was subscribed to insure the first payment of $25,000, then a company should be organized and incorporated to take over the lands above mentioned at’the purchase price of not less than $2 per acre. There was in fact no first payment of $25,000 to be made. This remarkable document states the quantity of land to be about 12,000 acres and the price to he $1.50 per acre, which would make the cost $108,000, or $111,600 with the five cents per acre for expenses. The total subscriptions procured were only $53,000 at most, according to the subscription agreement only one quarter of these, or $13,250, was payable in cash, and the liability of each signer was limited to the amount subscribed by him. The land was to be turned over to a corporation at $2 per acre after a sufficient amount was subscribed to insure the payment of $25,000, and there is no provision that the subscribers should — 127 — iave any interest in the lands or any shares in the corporation •or with reference to their proportionate interest in either. Nor is it stated how much is expected to be procured in subscriptions before the subscriptions become binding. The true interpretation of such a subscription agreement is that the vendee in the land contract who procures the subscriptions will carry the unsubscribed portion of the liability thereon. Where each subscriber is bound as he comes in, whether more ■subscriptions are obtained or not, this must be the case. Mr. Lorenze, having at this stage sole charge of the matter, immediately disabled himself from getting the cash therein subscribed by taking a note from each subscriber for the whole amount of his subscription, due for the most part later than December 6, 1909, and by failing to pay over or collect the $2,500 cash due from himself and Malick according to the subscription agreement. He did not give his own note or cash for his $5,000 subscription, except as hereafter stated, nor did he take any note or cash from Malick for the $5,000 subscription of the latter, nor any note or cash from Julius Cohn for his $5,000 subscription. He did, however, take notes, or cause notes to be taken, from the other subscribers to the amount of $27,900 upon the $53,000 subscriptions, Why he did not get notes from the others is not shown. Lorenze did take a note from :Edmonds for the amount of the subscription of the latter, but made an agreement in writing, the substance of which was to protect Edmonds from liability on this note. On August 23d Malick assigned all his interest in this contract to his associate vendee, Lorenze, but Malick continued to act as trustee and to appear interested in the contract. The situation at this time was such that there was no prospect of' getting any money from the subscribers to make the $16,000 payment due upon the laud contract to Terrell and Eoos, much less the remaining payments. Lo-renze sent Mr. Burke, his attorney, to Texas and obtained an extension of time for the payment of the $16,000 due upon — 128 — tbe land contract until December 6, 1909, tbe vendors making it clearly known that no further extension would be granted. On or about November lOtb Lorenze sent out notices to tbe subscribers in the name of Malick calling a meeting of said subscribers at tbe office of tbe “syndicate” in tbe Majestic Building in Milwaukee for November 18, 1909. He also sent out proxies with these notices, to be signed by each subscriber who could not attend, appointing Lorenze attorney in fact for such subscriber at-said meeting with broad powers. Tbe meeting was accordingly held. A small number of the subscribers attended. Tbe defendant Grell was present but Edmonds was not, be having signed one of tbe proxies to Lorenze. It was apparent to all that neither tbe vendees nor tbe subscribers, nor both together, bad funds or resources with which to meet tbe payment of $16,000, much less tbe $25,000 specified -in tbe subscription agreement. No one seemed to have any very clear idea of bow much money was on hand? or bow much was required or whether tbe payment to be made was $25,000 or $20,000 or $16,000. Proposed articles of incorporation of a Texas corporation authorized to go into tbe business of cattle ranching and bold and deal in land necessary for that purpose were submitted by Burke and approved. These were not executed by any person except Lorenze, and tbe names of tbe other incorporators were blank. In attempted conformity with tbe laws of Texas, however, a paragraph in these proposed articles of incorporation stated tbe names of tbe directors for tbe first year and named Ed-monds, Lorenze, Grell, and Lamb as Wisconsin members, and it was testified to without contradiction that tbe name of tbe necessary Texas member or members should be inserted after tbe committee hereinafter mentioned reached Texas. Tbe meeting was organized by tbe election of a chairman and secretary, and tbe secretary kept what be called minutes of the meeting, which state that “it was moved by Mr. Grell — 129 — and carried: to provide sufficient funds to take up tbe contract before it expires, two notes of $5,000 eacb shall be made out and arrangements made for Mr. Lorenze and Mr. Edmonds to eacb raise tbe money on one of tliese notes after they shall be indorsed by tbe other members of the committee on organization who have agreed to do so.” It otherwise appears that a committee consisting of the persons last named was selected to go to Texas and talce up the contract and organize the corporation. “On motion the meeting adjourned, subject to call of the secretary and treasurer, with the understanding that nothing now stands in the way of acquiring the land and carrying on the business of the company (cattle raising). As arrangements have been completed for money to take up the contract, the remainder of the financing was considered by those present a simple matter.” It must be observed here that these minutes are not true. Arrangements had not been completed. Mr. Edmonds was not present and had not given his assent to act as director oí-as committeeman or to go to Texas or to advance money or to borrow money for this purpose. The expected money lender had not yet given his consent to loan any money, and the financing of the enterprise in its then desperate condition could not be considered a simple matter except by a very simple person. Erom the fact that they arranged to borrow $10,000 we may infer that they thought they had either $6,000 or $10,000 or $15,000 on hand. In fact they had nothing but the notes of some of the subscribers. Oral testimony is given to the effect that it was not at this meeting decided whether the land should be conveyed to a corporation or to three trustees. This was to be decided after the committee got to Texas. But no one could be made trustee without his consent, no one had yet consented, the trustee would have to assume heavy obligations, a fact they did not seem to know, and it was extremely doubtful whether the corporation, even by calling itself a cattle company, could hold lands in — 130 — Texas. In answer to the question, “What was stated there as to the duties of the committee, if any?” Mr. Burke, the attorney for Lorenza, who was present and observant, answered : “Well, the transaction had to be closed on the 6th of December. They were going down at some future time. At that meeting there was no designated time that they were to go, but it was understood and stated at the meeting that more money would have to be raised. There was not sufficient at that first meeting, and the idea was principally at that meeting to get in more money, and this committee was when they were done, was to go down and close up the transaction. . . . Mr. Grell stated as long as there was necessity for quick action and as long as some of these subscriptions were not coming in there should be two notes executed ... I think the notes were signed that night. . . . And these notes were to be used at a subsequent meeting . . .” These are the two notes of $5,000 each, one- of which was expected to be indorsed and discounted by Mr. Lorenze and ' one by Mr. Edmonds. Manifestly there was up to this point no contract made between the subscribers and the persons who were to go to Texas upon which any liability of the latter could be predicated. The next meeting was held November 29, 1909. The purpose of this meeting was to see what finances had been gotten together. Mr. Edmonds was present at this meeting and he was told that he had been selected for president, refused to accept it, told of the necessity of borrowing money and what was expected of him with reference to the $5,000, and that he was expected to go to Texas as a member of this committee and malee this payment on the land contract. Tie accepted the agency, but, instead of dis< counting the $5,000 note and raising money on it, took $5,000 of his own funds and went to Texas with the other members of the committee. The substance, therefore, of the agreement arising from this transaction between the subscribers present at the meeting through those who communicated it to — 131 — Mr. Edmonds and Mr. Edmonds was that he should loan money or credit to the amount of $5,000 to the subscribers and that he should exercise good faith and due diligence in the matter of his agency, and his agreement went no further than this. Noble v. Libby, 144 Wis. 632, 129 N. W. 791, and cases cited in opinion. He did not guarantee success nor agree to assume any liability under the contract nor to put in his advance or loan or money regardless of how desperate the affair appeared. Mr. Grell also went to Texas as a member of the committee under the same obligation except as to loaning money or credit, and Grell took with him $1,000 of his own money and $1,000 intrusted to him by Dr. Engs-berg, another subscriber. The following evidence is uncon-troverted: “I had $1,000 from my friend Dr. Engsberg and I was to use my own judgment there to pay it or not. . . . Dr. Engsberg was not at the November meeting. I might have had his proxy. I think there were good reasons for talcing the money back.” Lor eme also went down to Texas as a member of the committee under at least the same obligation to the subscribers, but also under a direct obligation to the vendors. He did not discount the $5,000 note intrusted to him nor, except his $5,000, bring down any considerable sum of money. Lamb, a Rock county farmer who was shofn to°the extent of $3,000, was present at both November meetings and says the amount to be raised was at the first meeting $25,000, at the second it had come down to $20,000. According to this, it must have been assumed that there was money on hand besides the $10,000 to be borrowed. Lorenzo makes various ingenious excuses to account for this which are immaterial. If Edmonds impliedly or expressly agreed to have $5,000 ready to pay over to the vendors and Grell $2,000,' Lorenze by at least the same obligation agreed to have the remainder ready for the same purpose. Suffice it here to say that he breached his contract by failing so to do. Instead of doing so, he busied himself in the interim in — 132 — trying to.sell or discount some of tbe notes taken from tbe subscribers. Two of these notes be disposed of to Shoemaker for $1,980, receiving Shoemaker’s checks therefor under an agreement that he would not use these checks for some time. The note of the subscriber Mr. Lamb for $3,000 he discounted to Mr. Cunningham, receiving $2,940. He borrowed $2,500 from one Ilackett on personal'collateral of his own. It is very difficult from his testimony to tell how much money he had with him in Texas. He, or Malick for him, must have had still more than $20,000 in notes of subscribers on hand, but did not or could not use them. The evidence tends to show that he had with him about $9,'000, the proceeds of notes sold or cashed by him and including money of his own in the form of checks and drafts. The vendors declined to receive‘private checks. A telegram to Wisconsin elicited the information that Shoemaker had stopped payment on his checks for $1,980. This diminished the funds that Lorenza had by about $2,000. It left the whole, counting Edmonds’s $5,000, Qrell’s $2,000, and the remaining available funds of all kinds in Lorenzo’s hands, $2,000 short of the requisite $16,000 for making the payment then due. They found an agent to whom the vendors owed $2,000 commission, and this agent agreed to take Lorenzo instead of the vendors as his debtor for this amount, the vendors agreed, to accept this $2,000 waiver as part of the $16,000 payment, and the drafts carried by Qrell and Edmonds were turned over to Lorenzo to be by him handed to the vendors as and for the first payment. These with what "money and checks Lorenzo had left amounted to only $14,000. Mr. Qrell at this stage demanded back his $2,000. This was immediately followed by a demand on the part of Edmonds for his $5,000. Much acrimonious discussion followed, and the vendors returned to Lorenzo and Lorenze returned to Qrell and Ed-monds their drafts. The contract was at an end and the $4,000 initial payment was declared forfeited. — 133 — There is.much conflict in the evidence with reference to whether Orell and Edmonds demanded the return of their drafts because Lorenze had refused to divide with them a commission or profit of twenty-odd thousand dollars which he was making on the deal, being the difference between the amount agreed to be, paid by him to the vendors and $1.50 per acre, the amount at which the land was put in to the subscribers. There is no express finding upon this point and none is necessary. Assuming they made this claim, they had other ample grounds for backing out. The failure of the subscribers and Lorenze to raise $9,000 of the $16,000 to be paid, the fact that $28,000 more might come due within sixty days and no funds provided for its payment, and that there was no person, or persons, of financial ability to raise it, and that $36,200 more obligations were to be assumed or cash raised, that no corporation capable of taking the land was organized, that those who might consent to be trustees must assume personal obligations of $64,000, and the.utter hopelessness and helplessness of the situation, was then apparent, together with the enormous profits insisted on by Lorenze Avhich had not been disclosed to all the subscribers, the necessity of resort to the agent of the vendors to waive his commission for the present, the same to become due later, made it to the advantage of all persons interested except Lorenze to withdraw from this venture as soon as possible. The fact that the vendors were satisfied with the waiver of their agent’s commission and the assumption of it by the buyers is of little or no weight. The subscribers and Mr. Ed-monds and Mr. Grell had a right to insist that the remainder of the $16,000 be furnished not by ingenious devices but in money. The necessity of resorting to this also further disclosed the utter financial inability of Lorenze to carry out the contract or to save his fellow adventurers from total loss of any amount which they might pay in. Take the case of Mr. Gi'e-ll with $1,000 intrusted to him by his friend Dr. Engsberg to use his judgment whether to pay it over or — 134 — not. Grell would bave been derelict in bis duty to Dr. Engs-berg if be did not demand back money so intrusted to him. lie should never bave turned this money over to Lorenze. To turn this money over under tbe circumstances then apparent would be to throw it away, because there were no means in band or in prospect with which to make tbe other payments. Without this $1,000 belonging to Dr. Engsberg and after tbe waiver of commission by tbe seller’s agent there was not money enough available to make tbe payment of $16,000. ’ Lorenze bad brought tbe enterprise into this condition by not obtaining sufficient subscriptions, by taking long-time notes from tbe subscribers for tbe full amount of their subscriptions, by failing to procure any notes or cash from Malick, Oobn, and others, by failing to give bis note or cash upon bis own subscription, and by bis fraudulent practices in obtaining subscriptions which could not be enforced. Tbe learned circuit court held that Edmonds and Grell, by demanding back their drafts and refusing to proceed with tbe purchase, breached a contractual duty due to all the subscribers, including Lorenze, assumed or agreed to by them when they undertook to serve on tbe committee which was to go to Texas and close up the land purchase. This may be looked at from the standpoint of law or equity. At'law the duty of an agent, employee, or committeeman is to exercise good faith and diligence and exert himself in his employment for the benefit of his principal or master, but he malms no agreeJ ment to achieve absolute results.' He is not required in order to achieve a result to incur heavy personal obligations for the benefit of an irresponsible principal. Noble v. Libby, 144 Wis. 632, 129 N. W. 791. He may like other parties to a contract withdraw from a contract because of a serious breach by the other party thereto. Lorenze, representing himself and the other subscribers, committed a serious breach in failing to have present and ready for payment on the contract such sum that, with the contribution of Grell and Edmonds, — 135 — tbe first payment would have been covered. There was perhaps a temporary waiver of this breach when Orell and Ed-monds handed in their drafts to Lorenzo, but before any of the subscribers had changed his position for the worse on this account they demanded and received them back. They had good cause for doing so and there was therefore no liability. But we are in a court of equity, and in that court there are additional rules which go to prevent any recovery against them for the benefit of Lorenzo. The latter occupied a fiduciary relation to all the subscribers. lie not only committed a breach of agreement in failing to have with him at the place of payment money sufficient, with that produced by Qrell and Edmonds, to make the first payment, but he was guilty of fraud in the particulars above mentioned. In addition to what has been already stated, it was a fraud upon all the subscribers to present to them for signature a list containing a purported subscription by men who were not bona fide subscribers, but who lent their names thereto at the request of and because indemnified against liability thereon by Lorenzo. Downie v. White, 12 Wis. 176; Davidson’s Case, 3 De Gex & S. 21; 1 Cook, Corp. (7th ed.) p. 420 and cases. There were at least two of such subscriptions, viz. Edmonds and McIIenny, and the alleged subscriptions of Malick and Cohn were probably in the same category. It was not explained why the latter did not pay in or give notes, and after what was shown it was incumbent upon -the fiduciary, Lorenzo, to explain. Edmonds of course could take no advantage by affirmative action of the fraudulent arrangement he made with Lorenzo relative to the subscription, by which he allowed his name to be used as a decoy for other subscribers, and this doubtless would have prevented Edmonds coming into equity to recover his $5,000 and rescind the whole transaction. But as against a suit by Lorenze, other subscribers could rescind on this ground unless they knew it when they signed. If Edmonds could not obtain relief in equity the — 136 — transaction would have the same effect as to Mr. Lorenze. They were as to this in pari delicto. The recovery here is solely for the benefit of Mr. Lorenze. He cannot stand upon the equities of the innocent subscribers. It is also highly probable that, instead of causing loss to the last named subscribers, Grell and Edmonds rather, did them good service by withdrawing. They saved the amount subscribed to all those who had not yet paid their subscription. We need not speculate on what would happen if the vendors refused to' surrender the drafts of Grell and Edmonds or if Lorenze refused to surrender them. He 'did surrender them and he is in a court of equity, and equity will leave him just where he put himself. As to him this surrender must stand. This view of the case disposes of the appeals by reversal upon the Grell and Edmonds appeal and by Lorenze taking nothing on his appeal. We cannot admit his right of recovery for damages or for. disbursements. But there is another aspect of the case. Lorenze, acting for the subscribers who had given notes and for himself, sold the notes of two of the subscribers, J. A. Ryan and J. R. Lamb, which were given for their subscriptions, and received the avails of such sales, and the makers were obliged to pay the notes. It was provided in the judgment appealed from that J. A. Ryan on this account have judgment against Lorentfe for $1,216.39, and Lamb a judgment against the same appellant for $3,642. It was further decreed that said Ryan and Lamb each had and each was given a lien upon the judgment which Lorenze recovered against Grell and Edmonds to the amount of their respective judgments against Lorenze aforesaid. This judgment of Lorenze against Edmonds and Grell we are constrained to reverse, and that leaves Ryan and Lamb unprovided for to the extent that they were protected by the decree below. The two latter apparently signed the subscription list after Edmonds did and Edmonds was apparently going in upon the same level as his fellow subscribers, but in fact — 137 — his subscription and Ms note given pursuant thereto were by agreement between Mm and Lamb, in substance and effect, but the liability of Lorenze, who had indemnified Ldmonds against all liability thereon. The liability of Edmonds is not concluded hereby, but is open to investigation and determination. By the decree of the court below as now modified by this court, each of the co-adventurers gets back Ms note on the theory that the adventure failed and was at an end, but Eyan and Lamb receive for their money only a judgment against Lorenze. ■ This does not seem equitable. So far as the subscribers guilty of no fraud and who complied with the conditions of subscription by giving notes are concerned, they form a class because their relations to the enterprise are identical. Among the members of that class the maxim “Equality is equity” obtains. '1 Pom. Eq. Tur. (3d ed.) §§ 405, 411. In the same attempt to benefit all in the ratio of their subscriptions these notes were given. The failure of the project found some who had been compelled to pay the notes so given for their subscriptions, while for the most part the like notes of their fellow subscribers were in the hands of the payee named therein and by the decree properly ordered surrendered to the makers. Equity requires that among such persons there be a pro rata contribution to such losses. But those who failed to carry out the conditions of their subscriptions by giving notes and those who committed fraud upon their fellow subscribers are manifestly not within this class. Indeed it is very doubtful whether subscribers who gave no note prior to the failure of the project and who were not bound as vendees in the land contract become bounden as parties. Lathrop v. Knapp, 27 Wis. 214; S. C. 37 Wis. 307; 37 Cyc. 484. But all who closed their subscription by the required note and who have been served with process or who have appeared therein should contribute in proportion to their respective subscriptions to make good the losses of Eyan and.Lamb and any other subscriber who may have paid cash — 138 — upon Ms subscription. Snob persons should be allowed to file a cross-bill and complaint against the plaintiff and tbo other described1 defendants and against- Edmonds to recover, if they can, from each such proportion of their loss as the amount subscribed by the plaintiff or any other defendant bears to the whole amount of subscription of plaintiff and all defendants who had been served with process or who have appeared herein. In other words, Ryan and Lamb, the plaintiff, and such defendants belong in the same class and must each contribute in proportion to make good the loss of Ryan and Lamb and any other person who paid in cash on his subscription. But no' disbursements for traveling expenses or other expenses should be allowed to any of such subscribers or to any person. A subscription agreement like this is something like a composition agreement. Equality among the subscribers is implied by the law from the very nature of the transaction. Lee v. Sellers, 81 Pa. St. 473; Henry v. Murphy, 54 Ala. 246; Hefter v. Cahn, 73 Ill. 296; Musgat v. Wybro, 33 Wis. 515. It is considered, therefore, that the judgment be reversed upon the appeal of Edmonds and Grell, that Lorenze take nothing by his appeal, and that the defendants <T. A. Ryan and J. R. Lamb and any other defendant who has paid cash upon his subscription be permitted to file a cross-complaint against the plaintiff and all their codefendants who have been served with process or who have appeared in this action for the purpose of recovering from each such proportion of the loss sustained by such cash-paying subscribers as the subscription of that subscriber bears to the whole amount of subscriptions by persons who have been served with process or appeared in this action, and also to make such claim against their codefendant Edmonds on account of fraud as they may be advised. But one satisfaction to be allowed. By the Court. — It is so ordered. One bill of costs by Ed-monds against Lorenze only.