Williamson v. Krohn

66 F. 655, 13 C.C.A. 668, 1895 U.S. App. LEXIS 2676

• Court: Court of Appeals for the Sixth Circuit
• Decided: February 25, 1895
• Docket: No. 227
• Status: Published

Opinions

SEVERENS, District Judge,

having stated the facts of the case as above, delivered the opinion of the court.

It is not important, as we think,, to determine with precision the question, somewhat discussed upon the argument of this case, whether the effect of the assignment of an interest of 8 per cent, in the Central Railway & Bridge Company by Williamson, Nelson, Kirk, and Hawthorn to Krohn on the 23d day of October, 1889, transferred the legal title to a proportionate number of the |1,500,-000 shares of stock which had been subscribed for by them, or only an equitable title therein; for the consequences would be the same upon either construction, so far as the purposes of the present suit are concerned. The assignment would be deemed to .cover that stock, for the reason, among others, that it was the only interest about which the assignors had the power to contract. If only an equitable interest therein was assigned, Krohn had the right to have the legal title transferred to. him by an issue of the proper certificates therefor. That being so, a court of equity would treat that as done which the complainant had the right to have accomplished. ‘What ought to be done, is considered in equity .as done;’ and the meaning of that is, that, whenever the holder of property is subject to an equity in respect of it, the court will, as between the parties to the equity, Treat the subject-matter as if the equity had been worked out, and as impressed with the character which it would then have borne.” Adams, Eq. 135.

The complainant, with the other shareholders, co-operating with the Central Railway & Bridge Company, whose purpose it was their object to promote, placed their shares of stock under the control of the defendants Williamson and Kelson, with power to dispose of them as a consideration, or in part consideration, for the construction of a bridge, that being the prime object to be attained. Those persons were thereupon charged with a (.rust, not only in behalf of the corporation, but of each stockholder, as well, who had placed his stock at their disposal for the purpose of effecting the common object. Their action in dealing with the stock must be regarded as subject to the rules and principles which apply to persons standing in that relation. The trustee must act in strict fidelity to his principal. He is not at liberty to exercise his power's irr such a way as to derive an advantage to himself to the prejudice of his principal, and, if he does so, the principal is entitled to call upon him to surrender all the fruits he has gathered. Ringo v. Binns, 10 Pet. 269; Fosbrooke v. Balguy, 1 Mylne & K. 226; Pooley v. Quilter, 2 De Gex & J. 327; In re Bloye’s Trust, 1 Macn. & G. 488; Kimber v. Barber, 8 Ch. App. 56; Charter v. Trevelyan, 11 Clark & F. 714; Tyrrell v. Bank, 10 H. L. Cas. 26; Powell v. Powell, 80 Ala. 11; Baugh’s Ex’r v. Walker, 77 Va. 99; Armstrong v. Elliot, 29 Mich. 485. Applying this well-established doctrine of courts of equity To the transaction of the appellants, in behalf of the corporation and the stockholders thereof, with the King Iron-Bridge & Manufacturing Company, it is impossible to sustain the right claimed by the appellants to appropriate to their own use that part of the §600,000 of stock which the complainant had intrusted to them for a particular purpose, if it was not bona fide used for that purpose. Admitting this, the appellants insist, nevertheless, that their conduct was not open to censure, and that they acquired the title to the stock in question by legitimate means, ft is necessary, therefore, to investigate the means by which the result was, as they claim, brought; about. The contract which they negotiated in behalf of their principals with the King Company was in terms to pay §1.000,000 in first-mortgage bonds and §1,500,000 of the paid-up capital stock of tin1 Central Railway & Bridge Company for the construction by the King Company of the bridge and its approaches, and the obtaining title to the land required for those constructions. To begin with, they inserted in that contract a stipulation for the return to them of §200,000 of tin1 stock which was by the terms of the contract to he deemed paid up, in compensation for their personal services in organizing and promoting the corporation. This §200,000 of stock was not in truth any part of the consideration to he paid to the King Company, hnt was returned to the agents of the other party for the personal benefit of the agents. The King Company did not owe the appellants for their services, and that part of the transaction was wholly foreign to the business and duties with which the appellants stood charged. Cotemporary with the construction contract was another contract, which was part of the same transaction, whereby the appellants personally undertook to secure the land for the approaches to the bridge for the sum of $300,000 in cash, or its equivalent, and $600,000 of the Central Railway & Bridge Company stock, which, by passing through the other contract, was to be treated as paid up. These contracts, being executed at the same time, and one being recited as in consideration of the other, are to be read and treated as one. The evidence leaves no room for doubt that the $300,000 in cash was regarded by all the parties as ample for the purpose of buying the land they agreed to secure, and in the sequel it turned out that the appellants made a good profit in the bargain which they secured for themselves in connection with and as part of the contract they made for their principals, even if the cash alone were to be treated, as we think it must be, as the whole of the actual consideration of their bargain. And it is incredible that they supposed that they were really being paid by the King Company this $600,000 of paid-up stock, in addition to the sum of $300,000, for the securing of land, which latter sum was supposed to be, and in reality was, its full cost and more. Having already received a sufficient sum to pay all their outlay, and ample consideration for their personal services in performing the contract, they could not demand a further sum for profit. The utmost they could require.was indemnity; and this, it is demonstrated, they have already received without any use of the stock. It was in fact not used by the appellants as a consideration in the contract they made in behalf of the principals with the King Company, and hence there is no foundation in that contract upon which they could build a title to it. It seems manifest to us that the result of the transaction cannot be reconciled with the principles upon which the court is required to act. We aré unable to understand upon what consistent theory the appellants reported to Krohn that they had saved the $200,000 of stock through the construction agreement, and thereupon divided it with him, when in fact it was claimed by them as having been received for a debt due to them personally, and in which Krohn had no interest whatever. It may be that this was right because they had no authority to use the stock for settling their claim against the corporation, if they had any; but there is nothing in the evidence from which we are permitted to find that the stock was surrendered to Krohn for any such reason. The unavoidable inference is, taking into account the withholding of the fact that $600,000 of the stock had been received by them through the other agreement, that they let him in to share the $200,000 of stock to pacify him, and divert him from further inquiry. Perhaps they justified this to themselves upon the facts — for it no doubt was the fact — that it was through their skill and persistent energy that the building of the bridge was secured without having a dollar in the treasury of the corporation available for the purpose. But it is too obvious to require further remark that the court cannot sanction such a method of settling one’s claims as was here adopted, if that was the view upon which the appellants proceeded.

A question was suggested at the hearing whether the Central Railway & Bridge Company was not a necessary party to the suit, and the case of Crump v. Thurber, 115 U. S. 56, 5 Sup. Ct. 1154, was referred to. But we are satisfied that while the corporation was a proper party, in order to completely realize all the objects of the bill by securing a transfer of the stock upon its books, it was not a necessary party. It is not a case of dealing with the unissued stock of the corporation. The stock to which the controversy relates was, at the time of the transaction involved, not the property of the corporation, but of the stockholders to whom it had been issued, who in turn were indebted to the corporation for the par value thereof. The fact that the appellants were also acting in these transactions as the agents and trustees of the corporation does not alter fh,e fact that the stockholders had each contributed a separate property, to be used, if need be, for the common purpose upon a trust, clearly implied, to return it if it should not be required for such purpose. The trust which the bill is brought to enforce would then be completely executed. “When the trust is ended, and the authority of the trustee as such ceases, it is his duty to restore the property to the persons who are then entitled to it either by the terms of the instrument or by operation of legal rules; to accomplish this object, he is bound to make such conveyances as the parties may require in order to vest the title In them.” 2 Pom. Eq. Jur. § 1065. The corporation and the appellants may settle their affairs without the presence of the present complainant, and the corporation has no concern with the question who is the owner of the stock in controversy. The case of King v. Barnes, 109 N. Y. 267, 16 N. E. 332. was a case involving similar quest ions, and the reasoning of the court clearly supports the view we adopt. The case of Crump v. Thurber, above cited, is not applicable. The observation there made by the court, that the corporation was a necessary party to the suit, had reference to the particular status of that case. The suit was brought in a state court against a corporation of the same state and a stockholder therein who was a nonresident, beyond the reach of process. The nonresident stockholder was proceeded against by publication of notice as being one who asserted a claim to the stock in controversy. Since, in that state of the case, the court had no power to render a personal decree requiring the stockholder to transfer the stock, the only relief obtainable was a decree against the 'corporation to compel it to transfer the stock on its hooks, and for such relief it is obviously quite true that the corporation was an indispensable party. The case is not an authority for the general proposition that the corporation is a necessary party to a suit between parties contending for the ownership of its issued stock.

At the hearing in the court below the hill was dismissed as to the defendant corporation. This was done apparently upon the ground that, as assumed, it was the original Kentucky corporation, and not the consolidated company, whose stock was the subject of the controversy. We think this was a misapprehension. It is true the corporation is alleged to be one organized under the laws of Kentucky. But this is an apt and proper description of the consolidated company. It was also organized under the laws of Ohio. For the purposes of the present suit, however, it was rightly Sued by its corporate name as a Kentucky corporation. The subpoena for the defendant corporation was served upon the president of the consolidated corporation, and the bill alleged a controversy about its stock. It is clear from the record that this corporation was the one sued, and not the original Kentucky corporation which, had been merged therein. Nor did the fact that the consolidated corporation was a defendant oust the jurisdiction of the court. It was competent for the complainant to sue it as a citizen of Kentucky, notwithstanding the fact that it was also consolidated under the laws of Ohio. Muller v. Dows, 94 U. S. 444; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U. S. 290, 6 Sup. Ct. 1094; Nashua & L. R. Corp. v. Boston & L. R. Corp., 136 U. S. 356, 10 Sup. Ct. 1004. But the complainant has not appealed from the decree, and it is difficult to find any ground upon which the appellants can be heard to complain of the dismissal of the bill as to the corporation. They assign it as erroneous. But no injury to them is apparent. If occasion should ever arise to determine any question between the corporation and the holders of this $600,000 of stock, nothing here adjudged will affect such question, the only question here determined being one of the ownership of the 8 per cent, of $600,000 of stock as between the complainant and the appellants.

The defense that a settlement has taken place, and a receipt in full of all claims been given by Krohn, requires but little to be said. It is manifest that when the settlement took place he had no knowledge of the wrong of which he complains, and supposed that all the rest of the stock had gone into the consideration paid for ^construction. Not only was this so, but the truth was actually concealed from him by the parties who then had his stock, and were settling with him for a smaller block of the stock, which they professed was the amount saved from the execution of their trust. It is not pretended that any mention of the $600,000 of stock was made, or that any settlement for Krohn’s share of it was actually made. The substance of the contention is that the receipt must be construed to cover it. It is no doubt broad enough in its terms, but is very obnoxious to the rule that such an instrument, when given under a mistake of fact, and especially when the mistake is induced by the other party, does not preclude the party making it from recovering according to the fact. Farnam v. Brooks, 9 Pick. 212; Parker v. Nickerson, 112 Mass. 195; Kimber v. Barber, ubi supra; Pom. Eq. Jur. § 959. It is further to be observed that the fact that fiduciary relations existed between the parties imposed an active duty upon the appellants to disclose the whole truth. We are of opinion that the decree below should be affirmed,, with costs, and it is so ordered.