Francis Oil & Refining Co. v. David A. Manville & Co.

MAYER, Circuit Judge (after stating the facts as above). [1] The questions here presented are well considered in the opinion of Judge Learned Hand. We agree with him that the agreement between the parties is of a fiduciary nature, which obligated defendant to account to plaintiff. We think, also, that the agreement, displayed in the contract dated March 10, 1922, was not one which could be made by the president of plaintiff without authority of the directors or the corporation, and there is no -evidence that such authority was given or that there was any acquiescence by the directors or the corporation in any of the arrangements which, on this record, were made by plaintiff’s president, Blankenship, and/or the secretary treasurer, Martin. The selling of the stock, as in this case, is not one of the acts within the scope of the authority of an officer of a corporation, in the absence of appropriate authority conferred by the directors or the corporation, as the case may be, acting in accordance with the provisions of any applicable statute and of by-laws or resolutions properly adopted. Hence, these transactions could not prevent the stockholders of plaintiff either from bringing such suit in their individual capacity as-they might be advised or of seeking recovfery against defendant through plaintiff in its corporate capacity. But we are not content to dispose of the case on one ground only; for an important principle is involved, and it may well be that this is not the 'only case of its kind. It is difficult to be temperate in characterizing the fraud here practiced. Defendant itself proclaims the fraud and adopts the special master’s well justified denunciation when he stated that the facts as established by the testimony of the president treasurer of defendant “reveal a course of fraud, bad faith, and dishonesty on its part that seldom finds its way into the records of this court.” [352] But defendant argues that plaintiff does not come into a court of equity with clean hands, and therefore, under Primeau v. Granfield, 193 Fed. 911, 114 C. C. A. 549, defendant may hold the proceeds of the fraud as against plaintiff. But, as pointed out by the district judge: “If the suit were between individuals, it would indeed be hard to resist the authority of Primeau v. Granfield, 193 Fed. 911, 114 C. C. A. 549 (C. C. A. 2). Then it would be a suit by a beneficiary against his fiduciary for moneys which the fiduciary had collected from third persons, by means of a fraud in which both had joined. A court of equity would scarcely meddle in their quarrels. “I think the distinction suggested by the master is, however, good. The ,real sufferers from the fraud, so far as it was successful, were the stockholders themselves. They were defrauded first by the letter, and will again be if this suit should fail. Of course, it is true, that the whole body of stockholders were not victims, because only a few subscribed to the shares. * * * It is certainly better, even though the fraud go unrescinded, that the money should be in the corporate treasury, where it will at least feed the shares foisted on the victims, than that it should remain with the defendant. _ It would be an absurd paradox, which, in the ñame of equity, should deprive the victims of such relief as a decree would give them, on the theory that they belonged to a group which was represented by agents, faithless to themselves.” Valuable as are the great maxims of equity, they must not be applied so as to forsake substance for form. In the Primeau Case, the court left two wrongdoers where they were, although Stewart v. Wright, 147 Fed. 321, 77 C. C. A. 499, is an illustration of the efforts of courts to find just solution in each case upon its own facts. Here, however, the wrong has been done only in form to the corporate plaintiff. The real sufferers are the innocent stockholders, and equity will break down artificial barriers so as to award relief to them. Indeed, where the wrong goes beyond the parties themselves, and particularly where the plaintiff seeking recovery .is in some relation to others whereby his participation in the wrong injures them, the courts reach below the surface in the desire to- protect the injured. Wetmore v. Porter, 92 N. Y. 76; 21 C. J., 189; Saylor v. Crooker, 97 Kan. 624, 156 Pac. 737, Ann. Cas. 1918D, 473. There may, of course, be cases where a plaintiff corporation is in no different position from an individual plaintiff, but such is not this case. Finally, it may he observed that a decree will not be denied because, as disclosed in this record, two officers of this plaintiff participated in the transactions and, if stockholders, may incidentally benefit by the decree. In a case involving a different type of facts but, on this point, much the same in principle with that at bar, the Supreme Court said: “Neither is the corporate right of action defeated by the fact that the recovery will inure to the guilty as well as to the innocent. ® * * ” Davis v. Las Ovas Co., 227 U. S. 80, 87, 33 Sup. Ct. 197, 199 (57 L. Ed. 426). Decree affirmed, with costs.