Jenkins v. Bradley

80 N.W. 1025, 104 Wis. 540, 1899 Wisc. LEXIS 330

• Court: Wisconsin Supreme Court
• Decided: November 24, 1899
• Status: Published

Opinion

BardeeN, J.

The determination of this case has' been greatly delayed. , If any explanation is necessary it may be found in the fact of the inability of the members of the court earlier to meet on any common ground. From the outset, however, the court has been unanimous in the opinion that the judgment of the court below could not stand. The action is one by certain stockholders, suing on behalf of themselves and others similarly situated, to enforce a cause of action supposed to exist in favor of the defendant State Lumber Company and against the defendants Brad-leys, Kellys, and Lovejoy, which the corporation neglects or refuses to prosecute. As stated in Land, L. & L. Co. v. McIntyre, 100 Wis. 245: “ The purpose of the remedy in such cases is not to interfere with the exercise of legal discretion on the part of those charged with the primary duty of enforcing corporate rights, but to furnish relief where there is an unjustifiable neglect or refusal to exercise such discretion. Neither is the remedy confined to the one which the corporation may invoke, whether legal or equitable. The remedy afforded to the members of the corporation is necessarily in equity, for he has no direct interest to be protected by a personal action. He must proceed in equity or not at. all, joining the corporation as a party in the capacity of trustee for all its members. . . . The direct injury to-be remedied is to the corporation as a whole. The cause of action belongs to the coi’poration, but is enforceable, rather-than that justice shall utterly fail, by the remedy in equity at the suit of its members.” It is therefore the cause of action of the corporation, and not of its members, that may be enforced in this kind of an action. Any supposed agreement or understanding between James Jenkins and the other-owners of the land, made prior to the organization of the corporation, and as an inducement between the parties to convey property thereto, is a personal agreement, and cannot be enforced by the corporation. While it may directly affect the rights of the stockholder, such an agreement is not one to which the corporation succeeds, and therefore it has no right to enforce it. It is upon such an agreement that the findings and judgment in this action are based.

The only finding upon which any direct liability can be-predicated is the eighth, which is as follows: “ That at and prior to the date of the incorporation of said State Lumber-Company said Allen P. Lovejoy, William H. Bradley, James. W. Bradley, Edward Bradley, David Kelly, and Asa P. Kelly agreed with said James Jenkins to take care of and protect the title to said Swift one-fourth interest so conveyed by said Allen P. Loveyoy, William H. Bradley, James. W. Bradley, Edward Bradley, Dmid Kelly, and Asa P. Kelly, and in all respects to indemnify and hold said James. Jenkins harmless from any defect in the title to said Swift one-fourth interest; and this agreement was the consideration moving to said James Jenkins for his conveyance to-said State Lumber Company of his undivided one-fourth interest in the said ‘Jenkins lands.’ so called.” The other-findings are of facts supposed to be confirmatory of this-agreement. There is very grave doubt whether any such agreement is shown by the evidence as against the defendants concerned in this litigation; but, suppose it is admitted that such an agreement was made, in what possible way is. the corporation interested in it ? It was made prior to the incorporation of the company, made with an individual who represented no interest but his own, and was purely personal in-its character. Under no conceivable theory are we able to perceive how such an agreement, if made, inured to the-benefit of the corporation.

¥e have been greatly troubled to understand the exact position of the court below in its conclusions of law. In conclusion No. 5, he finds that the State Lumber Company did not have, and never had, any cause of action against the-defendants Bradleys, Kellys, and Lovegoy “ until after they assumed a hostile position towards the minority stockholders, about 1892.” We are not informed, nor are we able to-discover either in the evidence or the findings, just what conduct the defendants were guilty of in 1892, as against the minority stockholders, that created a cause of action in. favor of the corporation. There was nothing that we can find that occurred that would enable the company to reach out and lay hold of the agreement, said to have been made-ten years previous to make it into a cause of action in its-favor. The matter is further confused by another finding,, wherein it is said: “ That at the time of the commencement of this action a cause of action has accrued to the plaintiffs-as against David Kelly, Allen P. Lovejoy, and Edward Bradley; and that, the State Lumber Company having failed to prosecute such action, the plaintiffs were entitled to bring this suit.” Keeping in mind that it is only such rights as. the corporation itself could, enforce that can be enforced herein, we have this singular condition of things. In the eighth finding, as noted, the court finds that the Jenkins estate had a cause of action against the defendants. In the conclusion of law quoted it is said plaintiffs became entitled to prosecute this cause of action because the corporation has "failed to prosecute it. In view of the legal principles governing this class of actions, such a conclusion cannot be justified. Any breach of the agreement found in the eighth finding would have given the Jenkins estate a cause of action on contract, and would have raised no right of action in favor of the corporation. When we come to consult the facts, the conclusion of the court was as clear a non sequi-lar as could be imagined.

We will now turn to another branch of the case. In the twenty-fourth finding the court said: “That the paying of said Swift claim out of money of the said corporation, and the refusal on the part of the said Edward Bradley, David Kelly, and Allen P. Lovejoy to reimburse after'due demand made, was a fraud upon said corporation and upon said Jenkins estate.” The fifth conclusion is that it was a fraud as to the Jenkins estate to pay said Swift claim without indemnifying said estate. There is no pretense, claim, or suggestion of any fraud, in the course of the whole proceedings, except such as arises from the fact that, after it was determined that Swift’s interest was that of a mortgagor, the defendants, as directors, voted that the corporation should buy up his claim, which was done. All parties, including the plaintiff J. Howard Jenkins, knew the precise situation. There was nothing hidden or concealed. There was no star-chamber action by the board of directors; no attempt to overawe or intimidate the minority. All parties knew that the title to the Swift interest had failed. A proposition was submitted at a given price. As a business proposition, what was best to do? All agreed and all voted to purchase the Swift title. Independent of the personal relations of the stockholders in regard to this matter, it was certainly not fraudulent for the corporation to purchase something it did not own. It got value received for every dollar it expended to buy tbis title. No one claims it was not worth all that was given for it. When it was decided to make the purchase, the resolution for which Mr. Jenkins voted provided that the money should be paid out of the funds of the company, $10,000 cash, and the remainder in several notes of the company, to become due in the future. The court so finds, and yet in a subsequent finding says that Jenkins voted for the adoption of the resolution of purchase upon the assurance of W. H. Bradley and of the other directors that such notes would be taken care of by the defendants proportionately, and that the Jenkins estate should not be prejudiced thereby. Now, because such purchase was carried out according to the very terms of the resolution, and these defendants have refused to reimburse the Jenkins estate, the court finds that it was a fraud both on the estate and the corporation. On that principle, every time a man breaches a contract he is guilty of fraud. The corporation did not suffer by the deal. It had no title and got title. It paid out its money and got value received. It was no worse off after the transaction than before, as all the interested parties admit that the interest purchased was fully worth the amount paid for it. The fraud, if any, consisted in the fact that the defendants did not keep their agreement with Jenkins. We shall be somewhat slow to extend the doctrine of fraud to the extent sought in this proceeding. It is not sanctioned either by reason or precedent. Whatever was done in this line of the purchase of the Swift interest was directly within the terms of the resolution for which Jenkins voted, to which he gave his express consent. That he was induced to do so by personal assurances of the members of the board of directors gave the corporation no right of action. The corporation had a perfect right to buy in this outstanding title, and to use its -funds for that purpose, if such purchase was deemed a good business venture. The value of the stock held by the Jenkins estate was in no way affected thereby, any more than it would be affected by any other business “transaction of the kind. Whatever obligation the defendants sustained to the corporation arose when the title to the Swift interest failed, and not when it was decided to purchase it. The finding, therefore, that the purchase of the title and the failure of defendants to reimburse the Jenkins estate was a fraud which gave a right of action to the corporation, is. wholly unwarranted and without foundation.

The criticisms upon the sixth conclusion of law are equally well justified. The first proposition is that defendants never paid for their stock. This is inconsistent with the eighth finding, before mentioned, and others, to the effect that the conveyance by defendants of the Swift quarter interest, together with the promise to Jenkins, was the consideration for the stock issued to them. It is inconsistent with the fourth conclusion of law, which holds that the corporation never had any cause of action until 1892. If the defendants subscribed and agreed to pay for certain shares of stock, and the attempted payment failed, a cause of action arose at once.

The second proposition is that the company never agreed to take the interest which the defendants had in the Swift quarter “ purely as a mortgage interest.” This interest had an admitted value of about $15,600, but all parties supposed that it was worth the face value of the stock issued for it. It was upon this basis that it was deeded to the corporation with full knowledge on the part of all concerned. While it may be true that the corporation did not agree to take it “ purely as a mortgage interest,” it is quite certain that the entire consideration for the stock did not fail. The company got only $15,600, when it supposed it was getting $55,000; and, knowing its precise status, it cannot be said that the title to the stock so issued failed entirely.

A further proposition in this finding is quite incompre-bensible. It is to the effect that when the company and the defendants elected and decided for themselves that the title had so failed, “ they had the right to return said stock to the company and account for all benefits that they had received for and on account of said holdings.” As remarked by the defendants’ counsel, this would be a comfortable doctrine if correct, and would relieve many a promoter from ■obligation on his stock subscriptions. No authority has been suggested to support this proposition, and we doubt if any could be found in the books.

The last proposition in this finding is that, having elected to hold the stock and pay the claim of Swift out of corporate property, as against the Jenkins estate the defendants were charged with a proportionate share. It is clear that they had no election as to holding the stock; therefore no •obligation could arise against them in that regard. If there was an election, then certainly they could only be chargeable with the difference between what they agreed to give for the stock — i. e. its face value — and the «amount they actually did give. The only election in the case was whether the company should buy the property or go without it. Suppose the company had adopted the latter alternative, no one could rightfully claim that the defendants would be responsible for the then value of the land. A promise to indemnify Mr. Jenkins for any failure in this title never inured to the benefit of the corporation so as to give it a right to enforce Jenkins’s claims against the promisors. Neither upon the facts found nor the conclusions reached by the trial court •are we able to support the judgment rendered.

The judgment requires the three defendants now proceeded against to pay into the company’s treasury the sum •of $170,012.88. This is on the theory that the corporation .should be made whole for all expenditures on account of the failure of title to the Swift interest. This money, if paid, would stand for the benefit of stockholders, and was re-quirecl on the theory that it was the corporation’s rights that were being enforced. But we find during the progress of the litigation that plaintiffs settled with two of the defendants upon payment to them of an amount supposed to represent the share that would go to the J enkins estate upon the basis of the recovery against the other defendants. We are not quite able to reconcile this proceeding. It looks like throwing a much greater obligation upon the men who did not settle than equity will permit. If the plaintiffs had a right to settle with W. H. and James Bradley, pending the suit, a cause of action in favor of the corporation, and accept the fruits of said settlement for themselves, all parties being before the court, it would have seemed more like exact justice to have required the defendants to pay such sum as would make the plaintiffs whole instead of the larger sum which would go to the credit of all shares alike.

It being determined that the judgment entered cannot stand, we turn now to the question of what judgment should be entered under the facts proven. It is upon this question that the court has been in travail. It is a question not free from difficulty. It is clear from what has been said that the alleged agreement between Oapt. J enkins and the defendants cannot be enforced in this action. It is also quite as certain that the officers and directors of the company have not been guilty of any fraud or breach of trust which prejudicially affects the corporate interests of the plaintiffs. In order to better understand the situation, it is well to review briefly the history of the transactions involved in this litigation. Capt. Jenkins was the owner of a three-fourths interest and the mortgagee of the other one-fourth of a tract of 1 7,000 acres of land, holding the legal title to the quarter interest as security for $10,000 due from Elijah Swift. Under proper conveyances a part of the title reached the defendants, as shown in the statement. A corporation was decided upon and organized. This tract, witH other lands, was conveyed to it, each grantor executing quitclaim deeds. The price was agreed upon, and full-paid stock issued to each grantor. All parties knew of the exact condition of the title to the Swift quarter. He was many years in default in payment of taxes and interest. It was then supposed that his interest was of little or no value, and it was upon that supposition that it was agreed to give quitclaim deeds to the company. Accórding to the testimony of W. H. Bradley, Capt. Jenkins objected somewhat to the quitclaim deed on account of the Swift claim, but it was arranged that the Bradleys/Kellys, and Lovejoy were to take care of it. No more definite statement of this alleged agreement appears anywhere in the evidence. Bradley, it appears, understood this to mean that the parties named were to buy in this interest, if asserted, whatever it might cost, This has been denied by the other defendants, who have asserted that, if liable at all, it was only on the basis of the face value of the stock issued therefor; that-the value so fixed was about the true value of the land, and that they never in any manner agreed to become responsible for the increased value, or for any profits the company might realize in after years by such increase in value. This was the mooted question at the various meetings of the directors and-stockholders, and the result was always the same.

Thus, from the very beginning to the end of their discussions about the Swift claim, there was a dispute as to the basis on which defendants should settle it. The Jenkins estate and W. H. Bradley claimed they should buy it in and pay all the expenses. These defendants asserted that, if liable at all, it was upon the basis of making good to the company the difference between the par value of their stock and the amount the company received thereon. It is a fact of absolute certainty that the defendants supposed they were conveying a good title to the Swift interest under the power of sale in his agreement. This appears not only from th© testimony of Bradley, but is set out in distinct terms in tbe answer made by them in the Swift suit. In that suit they ■set out that they had made such conveyance, and had in their hands about $40,000, which Swift was equitably entitled to. It was an admission of a distinct liability for the difference between the price they received for the land and the amount due from Swift. The amount due from Swift was over $15,500. The amount received for the land in stock of the company was over $55,000. It being determined in the Swift litigation that only a mortgage interest was conveyed to the company, the $40,000 still in their hands became equitably due to it upon the stock it had issued.

The defendants were promoters and directors of the corporation, and occupied toward it a fiduciary relation. As ■against the other stockholders, they were under the highest moral obligations to make good to the company the difference between what they received and what they in fact paid. All parties had acted under a mistake. While it is probably true that the parties understood the legal scope of their transaction when the conveyances to the company were made, yet they were ignorant of or mistaken as to the antecedent legal rights of the stockholders who conveyed the Swift interest. It is in such cases, if the accompanying circumstances warrant, a court of equity may be appealed to for relief. S Pomeroy, Eq. Jur. § 849. This rule is referred to as an .answer to the argument that the stock became fully paid by a conveyance of the Swift interest. If, as we shall see, the attendant circumstances are such as not to preclude the ■company from asking the defendants to make good the payment on their stock, the attempt to claim it as full-paid stock must fail. The rule is general that a purchaser of real property takes it at his own risk, and in absence of proper covenants has no remedy in case of failure of title. 6 Am. & Eng. Ency. of Law (2d ed.), 781; Union P. R. Co. v. Barnes, 64 Fed. Rep. 80. But when the grantors occupy a fiduciary relation to the grantee, and the parties have acted in ignorance of, or under mistake as to, their antecedent legal rights, a court of equity may look into the transaction and grant relief. Here the parties conveyed under a misapprehension of their relative rights. They supposed the power of sale in the Swift contract gave them full right to convey. This,' we believe, is such a mistake as, brings the case within the authorities, and will prevent the defendants from claiming their stock as full paid. Beach, Mod. Eq. Jur. §§ 37, 38; 2 Pomeroy, Eq. Jur. § 849; Blakeman v. Blakeman, 39 Conn. 320. No one pretends to say that, had the true value of the Swift interest been known, it would have been accepted as payment for the stock issued. At no time during the controversy has any one of the defendants made any such claim. What is more significant is the fact that the defendants never denied their liability to respond to the corporation on the basis admitted ih the Swift suit. They joined in the indorsement of the notes to Swift. At the annual meeting in September, 1890, the Kellys advocated a settlement on the basis of the price at which the land was deeded to the company. They took advice from their attorney and were advised that this was the measure of their liability. They settled with Sweet on a basis approximating this standard. At the meetings of the board of directors and stockholders from time to time these matters were under discussion, the one side claiming the redemption of the alleged promise to Capt. Jenkins, the other virtually admitting liability on the lesser basis, but denying the greater liability. The-Jenkins estate was demanding money and insisting upon a settlement. At one time the company, by the express consent of some and tacit consent of the other directors, advanced $3,000 to the Jenkins estate, and at later periods two other advances of $5,000 each were made. When we come to read the testimony as to what was said at these meetings, and to consider all the circumstances and surroundings, the conclusion is irresistible that these advances were made upon the understanding that the company was to be reimbursed by the defendants on one or the other of the bases stated. It was- not until a short time before the commencement of this action that any different understanding was suggested. When. Edward Bradley succeeded to the presidency of the corporation, he directed the deduction of these advances from dividends declared on the Jenkins stock, and, as we understand the facts, this was done.

Now, considering all these circumstances, there is but one-conclusion that a court of equity can arrive at, and that is that the defendants are both legally and equitably bound to make good their stock on the basis of the difference between what they paid and what they received. While it may be true that the cause of action arose to the corporation as s,ooxs as the deed was made, yet the conduct of the defendants, and their subsequent recognition of their obligation, in connection with all the surrounding facts, and circumstances, are deemed sufficient to show an agreement on their part to pay, and to take the case out of the statute of limitations. So cogent and persuasive are these circumstances that any other conclusion -is impossible. As already noted, this action is one on behalf of-the corporation, and under technical rules each defendant should be directed to pay into; the treasury of the company such proportionate sum as his; holding of stock issued for the Swift interest bears to the entire shortage. But it appears that the stockholder Sweet, has been settled with, and has no claim in this regard. During the progress of this litigation the Jenkins estate has. settled with W. II. and James Bradley, so that they are out of the case. It would be quite unjust to require these defendants to pay in a large sum of money for general distribution to the stockholders. Inasmuch as all interested parties are before the court, and to prevent circumlocution and injustice, the court below may enter a judgment in favor of the plaintiffs, the money to go to them directly npon the basis now to be stated. The difference between the face of the stock issued for the Swift interest and the value of the interest conveyed is as follows:

Stock issued.$55,631 81

Value of Swift interest.-.. 15,627 60

Difference...$40,004 21

Upon this sum interest should be computed from October 4, Í882, to April 1, 1893, at seven per cent., and thence to date of judgment at six per cent. The defendants would be liable for this amount as follows: A. P. Lovejoy, three fifteenths ; David Kelly, three fifteenths; and Edward Bradley,, two fifteenths. The total stock of the company outstanding is á,571 shares, of which the plaintiffs had 860. The Jenkins estate would therefore be entitled to of the sum found due from each of the defendants. Should it appear, however, that the advances to the estate by the company have not been satisfied, the judgment may be varied so as to work out the true equities of the case. On the basis above suggested, the judgment for plaintiffs at this date would be approximately as follows:

Against A. P. Lovejoy.$3,213

Against David Kelly. 3,212

Against Edward Bradley. 2,146

Total. $8, 570

By the Court.— The judgment of the circuit court is reversed, and the cause is remanded with directions to enter judgment for plaintiffs in accordance with this opinion.