Krohn v. Williamson

62 F. 869, 1894 U.S. App. LEXIS 2928

• Court: U.S. Circuit Court for the District of Kentucky
• Decided: June 12, 1894
• Docket: No. 1,841
• Status: Published

Opinion

TAFT, Circuit Judge

(after stating the facts as above). Were this proceeding an attempt by Krohn. to obtain from Williamson and Nelson the profits received by them from the $300,000 in money or bonds, paid by the King Company for the right of way, or from the remnants of land bought, but not used, for the bridge approaches, the objection made by defendants’ counsel that Krohn is here seeking to assert the rights of the bridge .company, without showing a refusal of that company to act in its own behalf, would be well taken, and the bill would have to be dismissed on that ground; for it is undoubtedly the law that a stockholder cannot be permitted to institute litigation on behalf of the corporation until he has made every effort to induce the corporation to appear and maintain its rights in its own person, and unless its failure or refusal to do so is something like a fraud upon the complainant. Porter v. Sabin, 149 U. S. 473, 13 Sup. Ct. 1008; Dimpfell v. Railway Co., 110 U. S. 209, 3 Sup. Ct. 573; Hawes v. Oakland, 104 U. S. 450; Macdougall v. Gardiner, 1 Ch. Div. 13. But in the case at bar the stock which Krohn seeks to recover never was the property of the bridge company. It belonged to the original subscribers, who, as the construction contract shows, permitted the corporation to use the same as part consideration for the work of building the bridge. The real agreement between the four promoters and the corporation was that the bridge should be built for the bonds and as much less than the $1,500,000 of subscribed stock as possible, and whatever was left of the stock should be divided among the promoters and subscribers, in proportion to their interests in the enterprise. The original promoters gave Krolm an interest of 8 per cent. When Williamson and Kelson went to Cleveland to make the contract, they not only were acting for the company, but, in the disposition of the stock, they held the direct relation of agents to the stockholders, including Krohn, because it was the stockholders' property they were proposing to deliver; and they owed a duty, not to the company only, but directly to the stock subscribers, to save as much of the stock as possible for division among them. If it turns out that Williamson and Kelson have so arranged the contracts that they have secured for their individual benefit $(>00,000 of the stock, as a,n apparent profit of the right of way contract, when, in fairness, it should have been added to the §200,000 returned to the original stock subscribers in I be construction contract, 1 can see no difficulty at all in holding that there was such a direct, trust relation between Williamson and Kelson, on the one hand, and the stock subscribers, on the other, in the use of the stock to secure the erection of the bridge, that the former are directly accountable to the latter for the §600,000 stock thus improperly diverted to the individual benefit of the trustees.

It will he observed that the net result to the King Company of the construction and .right of way contract was that it should build the bridge for the proceeds of §1,000,000 of bonds and §700,000 of stock, less §300,000 in cash. — live fixed cost of the right of way. It was entirely immaterial to the King Company how the remaining §800,000 of bridge stock was disposed of. It was of no concern to that company whether it was all returned to the stock subscribers in the construction contract, or that some of it was made to constitute part of the consideration for the right of way contract. Nor had Eels any interest in the mode of distributing this $800,000 of stock between the two contracts. In other words, Williamson and Nelson, as trustees, undertook to decide that, of the §800,000 of stock which the King Bridge Company was willing to give hack, out of the total issue, the subscribing stockholders should receive but §200,000; and they, in their individual capacity, as additional compensation for entering into the right of way contract, should receive the remaining §600.000. The equity and fairness of this arrangement and division they never submitted to those for whom they were acting, but they regarded the right of way contract as “a private matter” (to use Nelson’s language), with which the other stockholders had no concern. Under these circumstances, there is a heavy burden upon Nelson and Williamson to clearly establish that it was fair and entirely just for them to make the $600,000 of stock part of the consideration for the right of way contract, instead of returning it to the stockholders in the construction contract. The writing by which Eels agrees that he has no interest in the $600,000 of stock imports that he relinquished his interest to Williamson and Nelson in consideration of their giving their personal attention to the purchase of the right of way. But I cannot give this recital any weight. When Eels, Williamson, and Nelson came to divide the profit of the right of way contract, Williamson took $5,000 for his personal attention to the purchase of the right of way, and Nelson’s services had. been fully paid for by a counsel fee of $6,250. When the three men made the right of way contract, they believed they could secure the necessary land for less than $300,000. Eels expressly so states. Their judgment was vindicated, and they made a handsome profit out of it. Whether Nelson and Williamson can be called to account for that profit by the bridge company need not be here considered. Suffice it to say that, with the burden on them to show that the $600,000 of stock was a reasonable addition to the consideration for the right of way contract, they have not sustained it. If it had been, why should Eels not share it? The explanation that it was used as a consideration for personal services of Nelson and Williamson is shown to be unfounded by the subsequent settlement between the parties. The stock of the bridge company had no determined value. It was wholly speculative. The division of the $800,000 between the two contracts was, in effect, a decision by Nelson and Williamson that, in consideration of the right of way contract, they were entitled to three shares in the profits of the enterprise, while all the stockholders, including themselves, should have but one; and this, without consulting those most interested. Now, was the agreement to furnish the right of way contract for $300,000 burdensome? The circumstances show that it was not. Williamson and Nelson may be presumed to have been quite familiar with the land to be bought and its probable cost, and they do not show any reason whatever for thinking that the contract was a hazardous one. Eels went into it on their assurance, without any indemnity from them, because he and they thought it a profitable speculation. They were right. They cannot complain, now that they are called to account by their principal, who was given no option to approve or disapprove the arrangement before it was executed, if the fairness of it is judged somewhat by its results. On the whole, I" am convinced that the $600,000 of stock was no part of the real consideration in the right of way contract, but that it should have been included in the construction' contract. It is probable that Nelson and Williamson considered that Krohn’s contribution of money and labor to the enterprise-was so small, as compared with their own, that they were justified in thus reducing the value of his interest. But they had given him an 8 per cent, interest in the whole enterprise, and no such plan as this was, to deprive him of the full benefit of it, can stand for a minute when challenged in a tribunal administering equity. This is not the first time that men of good repute and character have deceived themselves into regarding as shrewd business strategy that which, in a court of equity, is wholly -indefensible. The conclusion I reach is not based on the comparative credibility of the parties and their witnesses. It rests on the admitted circumstances, from which the inferences I have drawn seem to me to be necessary. Finding, as I do, that the $600,000 was really a profit of the construction contract, and not of the right of way contract. I must hold that Krolm is entitled, as against Kelson and Williamson, to 8 per cent thereof. Kimber v. Barber, 8 Ch. App. 56; Tyrrell v. Bank, 10 H. L. Cas. 26; Barker v. Mckerson, 112 Mass. 195.

We come next to the objection, urged on behalf of defendants, that, if this $600,000 is to be treated as belonging to the original stock subscribers, then nothing has been paid in on it by them, and its issue as paid-up stock is a fraud upon the company, which a court of equity will not countenance, by compelling i1s transfer from one subscriber to another. It might be difficult to support such a, defense, even if the original issue of the stock were fraudulent' as against the company; but it is entirely unnecessary to consider it in this light, for there was no fraud upon (lie company in rite issue of the stock. It was mi express agreement between the King Bridge Company and the Central Bridge Company, acting for itself and its other stockholders, that the completion of the bridge, the acquisition of the right of way, and the possession and enjoyment of the franchises and privileges, should be considered a full payment of the $1,500,000 of the ca'pital stock, justifying its issue as full paid-up stock'. Such an agreement, as between the company and its stockholders, was entirely valid, however subject to attack by creditors it might be. Scovill v. Thayer, 105 U. S. 143, 153.

The next defense is that Krohn is prevented from recovering herein by the settlement made between him and Kelson, March 16, 1892, when Krohn, in consideration of $10,000 of the stock and $1,050, gave a receipt in full of all claims. It is manifest from what has been already said that the relation between Kelson and Williamson, on the one hand, and Krolm, on the other, was that of trustees and cestui qui trust, or of agents and principal. Before any binding settlement could be machí between them, it was necessary for Kelson and Williamson to make a full disclosure of what had been done by them as trustees. Farnam v. Brooks, 9 Pick. 212, 232; 1 Story, Eq. Jur. §§ 315, 316, 316a; Kimber v. Barber, 8 Ch. App. 56; Tyrrell v. Bank, 10 H. L. Cas. 26; Parker v. Mckerson, 112 Mass. 195. It is not claimed that they did this. Kelson says that he told Krohn that he and Williamson would receive nothing except their share of the $200,000 of stock and what they might make out of the right of way proceedings. Simrall and Krohn deny that Kelson alluded to the right of way matter. But it is not important, for, even if Kelson’s account is accurate, this was by no means a full disclosure of the facts. Krohn might fairly have inferred that Kelson was alluding only to reasonable and ordinary compensation for his services as attorney in the condemnation proceedings, and for. Williamson’s . services in securing evidence, etc., for the same purpose. We can be very certain that, if Krohn had known the full truth (which it was Kelson’s duty to tell him), Krohn would never have made the settlement. It is quite true that Krohn suspected that he was not being fairly dealt with, and that he therefore insisted that he should be paid an additional amount in cash over and above that which under Kelson’s statement of the facts he was entitled to; but I do not see that Krohn’s suspicions of Kelson’s fair dealing, and a settlement based on them, at all relieved Kelson of the duty to disclose everything. It did not put the parties at arm’s length. The trust relation continued in existence so long as the proceeds of the transaction in which it had its inception remained undistributed. Por these reasons, Krohn is entitled to have the contract of settlement rescinded, he having tendered back that which he received under it.

It is urged that Krohn cannot have a rescission because he was guilty of laches in not filing his bill earlier. The settlement was made in March, 1892, and this bill was filed a year later. There is no evidence at all to show that Krohn knew of the right of way contract until just before he filed his bill. It is said that he might have learned the facts by. inquiry. His inquiries of Kelson, who owed him the duty to tell him, were not productive of much information. Kelson says that he considered the right of way contract a private matter, and so did not think it necessary to tell, even to O. B. Simrall, his fellow attorney in the condemnation proceedings, the particulars of it. It does not lie in the mouth of either Kelson or Williamson, with the obligation on them to tell Krohn everything without inquiry, to complain that he did not go to the King Bridge Company or Eels to learn the facts. Certainly, Krohn has. not been supine or slow to assert his rights since he did learn the facts. It is not in evidence that between March, 1892, and a year later, there was such a change in the circumstances, in the market value of the stock or otherwise, that a year’s delay in asking rescission, even with full knowledge, would work any inequity to defendants. Mining Co. v. Watrous, 9 C. C. A. 415, 61 Fed. 163, 186.

We have thus far in the case proceeded on the theory that by the paper of October 23, 1889, signed by Kelson, Williamson, Hawthorn, and Kirk, Krohn took a present interest in the enterprise. The language of the paper seems to be, at first sight, that of an executory contract, not giving Krohn any present interest in the enterprise, but only a right to the conveyance, of an interest at some time in the future. Taking the whole instrument together, in the light of the surrounding circumstances, however, 1 think it- may be fairly construed to convey a present interest. Under it, Krohn could be compelled to contribute his proportionate share to any expenses thereafter to be incurred when “the other stockholders” should do so. This certainly implies that, as between the parties to the instrument, Krohn was then a stockholder. Of course, the stock subscriptions were in' the names of the four signers of the writing of October 23,1889, and the legal title to the stock, if it could be properly said to have any existence at all, remained in the four subscribers; but an equitable interest in the enterprise certainly vested in Krohn from the delivery of that writing. The fact is that these projectors were like partners, and, by this writing, they let Krohn in as a partner to share to the extent of 8 per cent, in any stock which after the construction of the bridge might remain for distribution among them. When, therefore, the four stock subscrib-* ers received the paid-up stock under the construction contract from the King Bridge Company, they held 8 per cent, of it as trastees for Krohn. This equitable ownership of the stock entitles him to the form of relief he here asks.

It is true that the relief asked is in the nature of a decree for the specific performance of an obligation to transfer personal property, and that, ordinarily, conrts of equity will not afford such a remedy. The modern tendency of courts, however, is towards a much more liberal rale in this regard; and, if any good reason appears why damages for conversion will not be adequate remedy for the injury, a decree will be granted. Here the stock has no market value. The damage from conversion would be wholly speculative and uncertain. Bui the controlling reason why, in this case, the delivery of the stock in specie should be decreed, is that the defendants hold it in trust for the complainant. The confidential relation, in violation of which defendants seek to retain its jjossession, gives the complainant the option either to have the stock or its value. The court, as a court of equity, acquires jurisdiction of the action, not because damages at law would be inadequate, but because it is an action to enforce a trust, and, having jurisdiction on this ground, may give such full relief as the nature of the case requires. Johnson v. Brooks, 93 N. Y. 337; Stanton v. Percival, 5 H. L. Cas. 257; Cowles v. Whitman, 10 Conn. 121; Kimball v. Morton, 6 N. J. Law, 26; Pom. Eq. Jur. § 14.

The result is that Krolm is entitled to a decree against Kelson and Williamson, finding the ownership of $48,000 of the stock standing in their name to be in Krohn, and ordering them to assign the same to him. The defendant company, the Central Railway & Bridge Company, is a Kentucky corporation, because the bill so avers. If it were the consolidated company, it would be a citizen of both Kentucky and Ohio; and then. The plaintiff being a citizen of Ohio, and one of the defendants being a citizen of the same state, the jurisdiction of this court would be ousted. The stock which Krohn seeks here to recover is stock in the consolidated company, for it was with that company that the King Company contracted. The Kentucky corporation has no authority to transfer or register transfers of such stock. I cannot therefore make a decree against the defendant the Kentucky company to register the transfer which Nelson and Williamson are required to execute. The bill, as against that company, will be dismissed. As against Nelson and Williamson, however, the decree will be as already stated, and for costs.