Scanlan v. Snow

2 App. D.C. 137, 1894 U.S. App. LEXIS 3215

• Court: District of Columbia Court of Appeals
• Decided: January 2, 1894
• Docket: No. 151
• Status: Published

Opinion

Mr. Justice Morris

delivered the opinion'of the Court:

Three questions are presented to us for determination in this case: 1st. Whether the complainants and the petitioner White are entitled to maintain this bill; 2d. Whether there was fraudulent collusion or conspiracy to cheat the corporation, as charged in the bill; 3d. Whether the assignment from the Base Ball Company to the defendant Snow was not void in consequence of want of authority in the parties who claimed to act for the Base Ball Company.

1. It is very clear to us that the petitioner White has no standing in this case. He was, it is true, one of the original incorporators of the company, who executed the certificate of incorporation and had been connected with the previous organization; but it does not appear that he ever actually became a stockholder in the new company. He claimed to be entitled to stock in consequence of his interest in the first company; but this seems to have been refused to him; and when he and others filed a bill in equity to enforce their alleged rights in that regard, and to be recognized as stockholders of the new company, their effort was unsuccessful and their bill was dismissed. In his petition filed in this cause, Mr. White alleged that he was a stockholder of the present company; but in the stipulation entered into with reference to the petition and which served for an answer to it, this allegation was explicitly denied, as- well as the other allegations of the petition, and no proof whatever was taken to overcome this denial. On the contrary, the proof adduced on behalf of complainants showed conclusively that he was not a stockholder in fact, whether he was entitled so to be or not. And the dismissal of his bill, as already stated, would seem to indicate that he was not entitled to any interest whatever in the new organization. His petition, therefore, in this cause was very properly dismissed.

It is equally clear that the complainant Scanlan has no standing in the case. On December 28, 1888, several months before the initiation of the proceedings here in controversy, he had sold his stock to Hewett, had assigned his certificate to him, and had ceased to be a stockholder in the company. More than six months after the proceedings had been consummated he again became a stockholder by the failure of Hewett to pay for the stock and the reassignment of the certificate on May 17, 1890. The sale of his interest by Scanlan to Hewett was an absolute and unconditional sale, taking immediate effect, although Hewett had twelve months in which to pay for the stock, and had the option to reassign and surrender it at the end of that time, if he then preferred not to pay for it. Hewett field the stock for over sixteen months, during which Scanlan frequently importuned him for payment of the money. Hewett, however, finally resolved to return it, and did so on the 17th of May, 1890, as before stated.

It is argued that Scanlan never ceased legally to be a stockholder, because his certificate had never been formally surrendered to the company for cancellation, and had not in fact been cancelled, and no new certificate had been issued to Hewett in place of it. There was no transfer on the books of the company, and the certificate reassigned by Hewett to Scanlan was the same identical certificate that had been transferred in the first instance by Scanlan to Hewett. On the back of the certificate was printed the blank power of attorney usual in such cases, which had been filled up and signed by Scanlan, authorizing Hewett to have the proper transfer on the books of the company, but the power had never been executed. But while for several purposes the transfer of the stock of an incorporated company is not complete without the surrender of the certificate and the entry of the transfer on the books of the company, and the vendor is still for such purposes to be regarded as the holder and owner of the stock, yet he is only the legal and not the equitable owner; and not being the equitable owner, he can have no standing in a court of equity to enforce equitable rights appurtenant only to the beneficial ownership of the stock. Hawes v. Oakland, 104 U. S., 450; Dimpfell v. Ohio & Miss. R. R. Co., 110 U. S., 209; Taylor v. Holmes, 127 U. S. 489; Morawetz on Priv. Corp., Secs. 175, 219, and cases cited in notes.

The complainant Cronin, however, stands in a very different position from either Scanlan or White. The deceased, Richard A. Cronin, at the time of the transactions here drawn into question was a stockholder of the company, entitled to all the rights of stockholders. It does not appear that he was consulted with reference to these transactions, and there is testimony that tends to show that he had no notice of the meetings that were held for the purpose of giving effect to the negotiations with Snow. It appears that he was not present at any of those meetings. Hewett states in his testimony that on one occasion he met Cronin on the street and told him of the result of the negotiations, and that he (Cronin) expressed his gratification at this result. But a casual circumstance like this cannot operate as an estoppel to preclude a stockholder from maintaining a bill in equity to enforce his rights as a stockholder. The circumstance itself would seem to indicate that Cronin had no opportunity to express his opinion in the way and at the time at which he was entitled to express it — in the corporate meetings of the company. Cronin being dead, his administratrix is entitled to maintain this bill, unless she is debarred from so doing on the ground of laches or for some other default.

2. We proceed in the next place to the consideration of the main issue made by the bill of complaint, the question of fraud.

If there was fraud or fraudulent combination, or conspiracy to cheat, or collusion or confederation of any kind against the interests of this Base Ball Company as alleged by the complainants, the proof has utterly failed to substantiate the charge. Of course, it is generally difficult to prove fraud; it is in most cases impossible to prove it by direct evidence. Circumstantial evidence from which fraud can be implied' is usually all that is in the power of complainants to give. But circumstantial evidence indicative of a condition of things inconsistent with honesty and fair dealing is often as potent as the most direct testimony. Still the rule remains that deeds of conveyance and other solemn acts of parties on which the well-being and good order of society depend, should not be lightly overthrown or disturbed without testimony reasonably sufficient to show that in, good conscience they ought not to be permitted to stand.

In the present,, case we do not find any evidence whatever to sustain the charge. The defendants, or most of them, were examined severally as witnesses, on behalf of the complainants, but. their examination failed to develop the fraud or collusion charged in the bill of complaint. With the exception of the defendants Hewett and Snow, there -is not even a scintilla of evidence that any of the defendants profited in the slightest degree by the transaction in controversy, at the expense of the Base Ball Company, and as to Hewett and Snow, there is nothing to show that the transaction was not entirely legitimate. It is undoubtedly true that Hewett’s management of the affairs of the Base Ball Company was loose and irregular; and that he virtually carried on this transaction as though the company belonged to him. But it is not shown that he made any profit by the transaction different from that of the other stockholders. He had or represented a largely greater interest in the company than any other stockholders; and besides that he was by far its largest creditor. It is only natural, therefore, that he should have been solicitous to consummate a bargain that gave him hopes of reimbursement both as a creditor and as a stockholder. But this does not imply fraud or fraudulent combination. It may be that there has been no proper accounting by him to his company for the money received by him; but no such accounting is sought in this bill; and such failure to account, if any there was, is not proof of fraud or of fraudulent combination in the transaction from which the money was realized.

The defendant Snow appears to have made a good bargain for himself, and there is undoubted evidence of sharp dealing in the connection of Marr and Smith with the transaction. But that sharp dealing was between themselves; and it does not appear that any of them took undue advantage of the Base Ball Company. So far as we are advised by the testimony in the case, the transaction was engineered by Marr, who had in some way become cognizant of the condition of things, and who, in behalf of Snow and as his agent, made an offer to Hewett as president of the company, to purchase from the company for $12,200 the leasehold interest and option held by the company in the land mentioned in the proceedings. His offer was accepted, and the sale was made. In this there was no fraud.

There is only one circumstance that tends at all to indicate fraud in the transaction, and that is the alleged gross inadequacy of price. Snow purchased for $12,200 the privilege of purchasing the land at the rate of fifty cents a foot. It is said that the land could lia^e been sold at the time for seventy-five cents or one dollar a foot; and that, therefore, the price paid by Snow was grossly inadequate. And it is argued that this assumption is corroborated by the fact that about a year afterwards Snow offered the property to the Government as the site of a printing office for one dollar and a half a foot. But the answer to this argument is very plain. Snow has not sold the property to the Government or to any one. He has asked, but he has not received, one dollar and a half a foot for it. Even if he should receive it, it is a matter of public notoriety that since the conveyance to' him there has been a sharp rise in the values of property in that neighborhood. And it is also a matter of public notoriety that the Government of the United States whenever it needs to purchase real estate is, with or without reason, expected to pay more for it than private individuals would pay. Moreover, although there is some loose talk in the record to the effect that the property was worth much more than Snow paid for it, there is no proof that any genuine offer was ever made larger than that paid by Snow, or indeed any other genuine offer of any kind. And it is a potential fact in this connection that' Smith, the owner of the fee simple, had made unsuccessful efforts to procure such offers for the purpose of defeating the option given to the Base Ball Company. Nor is it to be forgotten that what Snow purchased from the company was a somewhat precarious option which it was in the power of Smith to defeat at any time. We do not find in the record any sufficient proof of such inadequacy of price as is charged.

3. There remains the question whether the transaction complained of was not a nullity on the ground that the persons professing to act for the Base Ball Company had no authority so to act. It is argued that there was at the time of the transaction no legally constituted board of directors which could give authority for the conveyance; and that the defendant Snow had knowledge of this invalidity through the knowledge acquired by his attorney, Irving Williamson, who prepared not only the deed of conveyance by the company, but also the resolutions authorizing the conveyance, which purport to have been passed by the board of directors. It is assumed that Williamson investigated the books and papers of the company, and knew, or might have known, that the annual meeting, assigned by the- by-laws to be held in September, and at which the board of directors and other officers were to be chosen, had not in fact been held in the September of 1888, but in the November of that year; that at this meeting in November, r888, the by-laws had been illegally changed so as to provide for a board of five, instead of seven, directors; that there had been voting by proxy at that meeting and that all the proceedings thereat were irregular, and that the board of directors then elected was an illegal board, without authority to bind the company in any manner.

That the attorney for the grantee in a conveyance from a corporation should prepare the resolution to authorize such conveyance, is not an unusual or, unnatural precaution. It implies no knowledge of any previous irregularity in the conduct of the affairs of the organization. It was no part of the business of the attorney to examine into such conduct; and if he did in fact discover such irregularity, it would not follow that his principal would be bound by it, unless information of the alleged irregularity was communicated to him. When in dealing with a corporation we find its affairs in the hands of a de facto board of directors, with a de facto president and a de facto secretary, we are not bound to inquire into the legality of the election of such officers, when there are no others claiming to have a different or a better right; and we are entitled to deal with them, when there are no others, even though we should know that there were grave irregularities attending their election. Mining Co. v. Anglo-Californian Bank, 104 U. S., 192; Ralls County v. Douglass, 105 U. S., 728.

But the testimony does not show any such invalidity as is claimed. It is very true as already stated, that there was great looseness and even great irregularity in the management of the affairs of this company, although there is nothing to show fraudulent design in this mismanagement; but while there was irregularity, there was no illegality.

It was neither illegal nor irregular for Hewett to represent by proxy the estate of his father, of which he was one of three administrators. In general, voting by proxy cannot be allowed, unless authorized by the charter or by-laws of the corporation. But a well recognized exception to this rule prevails in the case of stock held jointly by executors, administrators, trustees, or other persons acting in a fiduciary capacity, who have the right to designate one of their number to represent the interest held by them at corporate meetings, inasmuch as the corporation is entitled to refuse recognition of more than one person to represent any one interest. Indeed, the only way in which stock held jointly can be voted, is by authority from all of them to one of their number.

Again, the fact that an annual meeting, required by the by-laws to be held in September, was not then held, and was omitted to be held through neglect, forgetfulness or- otherwise, does not preclude the holding of such meeting at a later time. It is the right and duty of stockholders to maintain the corporate organization; and if that right is not exercised at the precise time specified for its exercise, the omission may be afterwards supplied, and the action of the corporators in supplying it is valid. It seems that in this instance a meeting of corporators of the company was held on November 7, 1888, at which thirteen shares of the corporate stock were represented; and that this meeting was adjourned to November 13, 1888, when fourteen shares were represented; that at this adjourned meeting an amendment of the by-laws was made, by which it was provided that the board of directors should thereafter consist of five persons, instead of seven, as we infer from this action was the number that had previously constituted it; and that a board of directors was then elected, composed of five persons, which was the same board that in the subsequent July (of 1889) authorized and ratified the transaction with Snow. It is objected that all this was illegal and in violation of the charter and bylaws of the company. We do not so regard it.

The by-laws, so far as we have them in the record, provide, it is true, for the holding of the annual meeting, which is the meeting at which officers were to be elected, in September. But, as we have already stated, the right to hold the meeting- and to elect officers was not thereby lost; and the omission was duly repaired in November. These bylaws make no provision for their own alteration or amendment; and, therefore, they might be altered or amended at any meeting of the stockholders where there is a quorum, by a majority vote of those present. It is usual to make it more difficult to alter or amend by-laws, and to provide that it should not be done except at some specified time, after special notice, and by a vote of two-thirds or three-fourths concurring in the change. But in the absence of any such provision, the right of the majority to make the change at any corporate meeting is undoubted. Morawetz on Corporations, 487.

The only provision in the by-laws of this Base Ball Company that is assumed to have any bearing on this point is the eleventh by-law, which reads as follows: “The constitution of this association may be altered or amended by a two-thirds vote of the association at any annual meeting.” This provision is meaningless and absurd as it stands. The statute law of the District of Columbia and the certificate of incorporation constituted the “constitution” of the company; and these could not be altered or amended even by the unanimous vote of all the stockholders of the company. It is probable that the expression “ by-laws,” and not “ constitution,” was intended to be used here; but we are not justified in inserting it. We can interpret the meaning of bylaws, or decree them to be invalid, but we cannot make bylaws for a corporation. But even if we could indulge in the conjecture that the word “ by-laws,” and not the word “ constitution,” was intended to be used, there were the necessary two-thirds present at this November meeting, and concurring unanimously in the proposed alteration; and we have seen that, in contemplation of law, it was an annual meeting.

It is a peculiar circumstance in this connection that the certificate of incorporation provides only for five, and not for seven directors; and the irregularity, therefore, in the action of the company was in the adoption of a by-law antagonistic to the certificate. The by-law repealed by ,the meeting of November 13 was itself apparently a nullity; and that meeting did no more than to conform to the certificate instead of an illegal by-law. It might very properly have disregarded that by-law entirely.

Our conclusion from the whole record of this cause is that the transaction which the bill of complaint seeks to annul has been sanctioned and either authorized or ratified by the holders of nineteen-twentieths of the stock of the company; and that if the proceedings had been entirely regular in every respect, from the beginning to the end, the result would not have been different. The deed in this case was duly and properly executed; it was authorized by the unanimous action of the board of directors; it has been sanctioned, approved and ratified by the holders of nineteen of the twenty shares into which the capital stock was divided. The act itself was one competent to be performed by the company in the ordinary way, by the vote of the majority of the members, or the majority of the board of directors; and there is no ground now for disturbing it. .

We regard the decree of the court below as right and proper; and zue affirm that decree zsoith costs.