Hutchinson v. Simpson

The complaint states a single and indivisible cause of action. The disposition which this court made of the motion to strike out certain parts of the complaint and to make other averments more definite and certain has settled, as to form and materiality, the averment of matter contained therein. While no opinion was written in making disposition of such matter ( 77 App. Div. 642 , 79 N. Y. Supp. 1134 ), yet s.uch is the necessary effect of that determination. The cause of action averred in this complaint, stripped of all verbiage, is plain and simple. It charges that Moore & Schley, for the purpose of obtaining for themselves a secret profit, did certain things, and thereby obtained profits to which they were not entitled. The acts which Moore Sc Schley are charged with doing to effect this result consisted in procuring in the name of the defendant Eicks, who was their agent for the purpose, options for the purchase of about 25 malting plants, located in various states and cities of the United States. As no corporation was at this time in existence to take over these properties, Moore & Schley, for the purpose of procuring funds with which to make a purchase of the several plants upon which their agent held options, procured to be addressed to themselves a letter from proposed subscribers to the capital stock of a corporation thereafter to be formed by Moore & Schley. Among other things, this letter provided for subscriptions to the capital stock of a company to be organized with a capital of $30,000,000, one-half 7 per cent, accumulative preferred stock, and the remainder common stock. The condition of the subscription was that all of the stock issued upon the organization of the company was to be used for the purpose of acquiring from the vendors the malting properties upon which Eiclcs, as agent, held options, and to provide a working capital. The condition was expressed in these words:

“It is expected that of the capital aforesaid all but two and one-half million dollars of preferred and one and one-quarter million dollars of common stock to be reserved in the treasury for further corporate uses, will be issued in acquiring certain malting properties on which you and your associates control options * * * and for working capital and that a part of the stock so to be issued, to wit., ¡¡>9,000,000 of preferred and ¡¡>4,500,000 of common heretofore underwritten will be sold upon the terms above stated, deliverable, when and if issued.”

There were no associates of Moore & Schley. Eicks was not an associate, as he was their agent, acting for them, and entirely subject to their control. Pursuant to the agreement contained in the letter, subscriptions to the capital stock were made, and by their terms were payable to the Guaranty Trust Company, which was an agency selected by Moore & Schley. In addition to these subscriptions, the vendors of the malting plants subscribed to $3,000,000 of preferred and $1,500,000 of common stock. _ Having been assured of sufficient moneys b}^ the subscriptions to carry out the scheme, Moore Sc Schley proceeded to the organization of the corporation, selecting directors therefor entirely under their control. Simultaneously with the organization of the corporation, they directed the trust company

“A person who brings about the incorporation and organization of a corporation. He brings together the persons who are interested in the enterprise, aids in procuring subscriptions, generally is the representative of parties who wish to sell property to the corporation or to construct its works.” Section 651.

This definition is approved in Dickerman v. Northern Trust Co., 176 U. S. 181 , 203, 20 Sup. Ct. 311 , 44 L. Ed. 423 . In Brewster v. Hatch, 122 N. Y. 349 , 25 N. E. 505 , 19 Am. St. Rep. 498 , where the persons devising and carrying out the scheme were held to be promoters, it was said by Judge Follett:

“The end which Brown and his associates sought to and did accomplish, as stated in their testimony and as found by the court, was the acquisition of the mining property, by the corporation to be organized, wholly at the cost of such persons as should subscribe and pay for shares to be issued at the rate fixed, and to retain for themselves a majority of the stock without expense or risk.”

“A promoter is considered in law as occupying a fiduciary relation towards the_ corporation. He is an agent of the corporation, and his compensation is derived from it, or from the persons who are the principal stockholders of the corporation. The promoter is not allowed to receive and retain a secret profit given to him by the parties with whom the corporation contracts. Frequently the promoter himself owns or has an interest in the property which is sold to the corporation. In such cases, if he openly acknowledges such interest and deals with the company at arm’s length, the transaction is allowed to stand. But if the promoter conceals his interest in the property sold to the corporation, the sale may be set aside, the property returned, and the money recovered back.” Cook on Law of Stock and Stockholders, § 651, and cases cited.

This rule of law has received approval in Dickerman v. Northern Trust Co., supra, and in many other cases (Brewster v. Hatch, supra; New Sombrero Phosphate Co. v. Erlanger [1877] L. R. 3 App. Cas. p. 1218; Gluckstein v. Barnes [1900] L. R. App. Cas. p. 240; Colton Improvement Co. v. Richter, 26 Misc. Rep. 26 , 55 N. Y. Supp. 486 ; Hayward v. Leeson, 176 Mass. 310 , 57 N. E. 656 , 49 L. R. A. 725 ). If we are right in our conclusion that the averments of this complaint show that Moore & Schley were promoters of the corporation for the purpose of making this secret profit at the expense of the subscribers and the corporation, without making disclosure of the same, then it would seem to follow that they are liable to account for the property, or its proceeds, at the instance of the party who has suffered by the act.

It is averred in the complaint that the stock appropriated by Moore & Schley was the property of the corporation, and was required to be placed in its treasury, and that therefore, it being its property, a wrong has been done to it, and that it has been damaged to the extent of the value of the stock so appropriated. It seems clear that, after the corporation was formed, the stock which was issued was and continued to remain its stock until transferred for some purpose of corporate use, and that no one could appropriate it to himself without giving value therefor. Certainly the board of directors were not authorized to make a gift of it to any person. Moore & Schley had no more authority to appropriate the stock to their use, without giving value therefor, than would the board of directors be authorized to make a gift of it. Taking the stock from the corporation was an appropriation of its property, and, if no value was given therefor, it operated to deplete the property of the corporation or to create an obligation against it, and in law it constitutes a fraud upon the corporation and its stockholders. Under similar circumstances it has been held that an action would lie, either by the corporation or its representatives, to compel the persons who have misappropriated the stock to account for the same, or its value, within well-settled equi

It is claimed that such result does not necessarily follow, for the reason that, in every action brought by a stockholder to enforce a corporate right, two elements are presented which are essential to the cause of action. One, a cause of action in favor of the company against the party liable to it, and, secondly, a cause of action in the stockholder’s favor to compel the company to enforce such liability. The argument is that there is a variety of things out of which arises a right in favor of the corporation which may be enforced in an action, which fight, however, it is neither desirable nor beneficial to enforce, and that such determination must of necessity be left to the control of the directors, charged with the duty of management, and that, before a stockholder can enforce the right of the company, it becomes incumbent upon him to establish, as a part of his cause of action, that it is such right as would of necessity be of benefit to the

It is evident that, if Moore & Schley have misappropriated this very considerable amount of stock, the company is benefited by its cancellation or a return of its value to its treasury. It certainly will realize what such value is, if it succeed in the action; for, by so doing, it will retire to that extent obligations upon which it is required to pay dividends, or it will have funds in its hands with which to' discharge the obligations represented by the stock. Consequently, -it appears in the present case to be for the distinct advantage of the corporation to enforce the cause of action. As the retirement of the stock, or payment of its value, increases the property of the corporation or diminishes its obligations, it is of direct benefit to the stockholders. If,, therefore, we adopt the view contended for by the learned counsel for the appellant, the present situation answers his requirement, and shows a cause of action in favor of the plaintiffs to enforce the cause of action of the" corporation. It would seem, therefore, as if this action was properly brought, and, if the averments of the complaint be established by proof, Moore & Schley are bound to account to the corporation for the stock or its proceeds, and this upon principles of equity so plain that no further discussion of that subject is needed.

There can be no doubt of this rule, unless we have wholly misapplied the rules of law, and made construction of the acts of Moore & Sclile)' not justified' by the actual transaction. It is earnestly insisted by the learned counsel for the appellant that our conclusion can onfy be based upon such a result. His claim is that no wrong was done by Moore & Schley to the company which gives it the right to call upon them, or any of the defendants, to account. -He construes the complaint, reaching its simplest form, as averring:

“Moore & Schley caused properties and cash to be conveyed to a company organized at their expense, in which they and their representatives only were interested, receiving therefor a certain amount of stock. With less than the whole amount of stock received, they procured the properties and cash to be conveyed and paid, and had left some of the stock as profits. Might they retain such profits, or were they accountable therefor to the company?”

The argument then proceeds to show that the company procured all of the property under the Eiclcs agreement; that it knew what it was obtaining; that the only parties in interest issued all of the stock for a particular purpose; that the company was only interested in obtaining the properties for the stock which it issued, and in providing

It is said, however, that the subscription agreement did not constitute a contract between the subscribers thereto and the corporation; that, as it acquired no interest thereunder, it has no right upon which an action can be founded, and it is therefore entitled to no relief. By the terms of this instrument each subscriber agrees to take shares of preferred and common stock of the corporation when and if issued. There is no agreement to take anv shares from Moore & Schley at

In the recent case of Tompkins v. Sperry, Jones & Co. (Md.) 54 Atl. 254 , the Court of Appeals of Maryland determined that a bill in equity would not lie at the instance of a receiver of the company for purposes of liquidation for a claimed injury done to that company under similar circumstances. Therein the defendants Sperry, Jones & Co. were the promoters of a corporation for the consolidation of several breweries; one brewer made a conditional contract for the transfer of his brewery; its fulfillment was dependent upon the procurement of other contracts of a similar character for the transfer of other breweries. The conditions upon which the contract was made were not complied with, and it consequently never became a binding instrument, nor fixed the terms upon which Sperry, Jones & Co. became obligated to organize the company, or the brewer to convey

We do not find it necessary to examine in detail all of the cases cited by the learned counsel for the appellants in support of his proposition. The cases to which attention has been called are those which are mainly relied upon by him, and are as strong in support of his contention as any to be found. All of the cases which he cites and relies upon, save Colton Improvement Co. v. Richter, supra, which he criticises as being erroneously decided, fall into one of two classes: First, those cases where one or more persons own an entire property

It is evident that the transaction averred in this complaint falls within neither class of these cases, • for here this property was not transferred nor the corporation created as matter of convenience in holding and disposing of property in which those in interest were both owners and incorporators. Nor were Moore & Schley owners of the property purchased with their money. Nor was the corporation formed for the purpose of taking over the property and issuing all of the stock therein to the owners of it, so that both interests combined in ownership and were changed in form only. Such was not the condition which existed, nor do the facts correspond to make it such in relationship. Rather does it fall within a third class, where the promoter, for his own interest, and in order to make a profit, promotes a company and invites the public to subscribe for shares not yet issued, but thereafter to be issued, by which the property which is to become the assets of the corporation is to be purchased with money thus furnished, and the whole scheme is consummated without pecuniary aid on the part of the promoter, and without risk of any of his own money in the transaction. In the first and second classes named there is and can be no fiduciary relation between the owners of the property and the corporation or its creators. Both own all there is in property and in stock. They deal with themselves, and there is no obligation of good faith, because nothing, either person

“First, that the company never had an opportunity of exercising, through independent directors, a fair and independent judgment upon the subject of this purchase; and, secondly, that this result was'brought about by the conduct and contrivance of the vendors themselves. It was the vendors, in their character of promoters, who had the power and opportunity of creating and forming the company in such a manner that, with adequate disclosures of fact, an independent judgment on the company’s 'behalf might have been formed. But instead of so doing, they used that power and opportunity for the advancement of their own interests. Placed in this position of unfair advantage over the company which they were about to create, they were, as it seems to me, bound, according to the principles constantly acted upon in the courts of equity, if they wished to make a valid contract of sale to the company, to nominate independent directors and fully disclose the material . facts. The obligation rests upon them to show they have not made use of the position which they occupied to benefit themselves.”

In speaking of the opportunity which gives to persons unlimited power to create corporations, Lord O’Hagan says (s. c., p. 1255);

“It required in its exercise the utmost good faith, the completest truthfulness, and a careful regard to the protection of the future shareholders. The power to nominate a directorate is manifestly capable of great abuse, and may involve in the misuse of it very evil consequences to multitudes of people who have little capacity to guard themselves. Such a power may or may not have been wisely permitted to exist. I venture to have doubts upon the point. It tempts too must to fraudulent contrivance and mischievous deception, and, at least, it should be watched with jealousy, and restrained from employment in such a way as to mislead the ignorant and the. unwary. In all such cases the directorate nominated by the promoters should stand between them and the public with such independence and intelligence that they may be expected to deal fairly, impartially, and with adequate knowledge in the affairs submitted to their control.”

In that cas'e the property was purchased by a syndicate, who transferred it to the corporation at an excessive valuation, and it was held that the relation between the company and the persons transferring the property was fiduciary in character, and they owed to it the obligation.

In Gluckstein v. Barnes, supra, the syndicate was formed to purchase the property at" a judicial sale and make a resale to the company subsequently to be formed. The syndicate bought some of the debenture bonds at a discount, and also a mortgage, by which they made a profit of ¿20,000. They purchased the property at the sale

It is evident, therefore, that by the averments of this complaint Moore & Schley fall into the category of promoters, owing a fiduciary relation to the company which they created, and charged with the obligation of protecting its interests, and they could not make a profit out of the company in the transaction without fully disclosing the same, and dealing in respect thereto fairly and openly. Such open and fair dealing is not had, and proper protection is not given to the corporation which they control, when, without giving anything of value, they take the stock issued by the company and appropriate it to their own use. Under such circumstances, and well within the authorities which we have cited, a wrong is done to the company, and a case is created where equity will lay hold of the transaction and compel an accounting. Nor is the rescission of the contract of sale the remedy in such a case. There are no averments in this complaint showing or tending to show that there was any wrong done to the corporation in transferring to it the malting properties. From all that appears, the corporation received full value for the stock which it gave in exchange for the properties, and such transaction is not tainted in any respect with wrongdoing. There is therefore no ground upon which a rescission of the transfers of the malting properties could be based. There is a class of cases holding that rescission of the contract is the proper remedy of the company where it has been defrauded in making it, and, if no changes have taken place in the property or right accrued in connection with it, rescission may be proper. Where, however, there have been changes, a rescission will not be made, and an action lies for an accounting. Yale Gas Stove Co. v. Wilcox, 64 Conn. 101 , 29 Atl. 303 , 25 L. R.

It is further claimed that the plaintiff has been guilty of such laches as defeats the right to maintain this action. Laches is ordinarily to be presented by answer, and not by demurrer. Sage v. Culver, 147 N. Y. 241 , 41 N. E. 513 ; Zebley v. F. L. & T. Co., 139 N. Y. 461 , 34 N. E. 1067 . The complaint avers th.e time when the misappropriation was discovered, and, if there has been any laches in prosecuting the claims, it can be made to appear upon the trial; the court will not dispose of such question upon demurrer. The complaint is sufficient to show that of the secret profit no one had notice, save Moore & Schley, and the directors of the company, whom they controlled, and the averments in this respect are sufficiently broad to permit showing that there was no ratification or knowledge by the plaintiffs or by their predecessors in title. Under such circumstances there is no basis upon which to predicate an estoppel. Estoppel, like laches, usually constitutes matter of defense. Estoppel in this case cannot be enforced, based upon the acquiescence" of the directors of the company and Eicks, the holder of the stock, and this for the reason that Eicks’ holding was fiduciary for the company and those legally entitled to the stock, and no transfer of it could be justified under the facts averred, except to those who subscribed for it, and who were entitled to the respective" allotments, either for property or cash. The acts leading up to the appropriation by Moore & Schley of the stock were a breach of the relation which existed between them and the company, which they were bound to protect, and out of such circumstances there could arise no estoppel as against subsequent holders of the stock who took the same without knowledge of the facts. Promoters are held to liability, even though all of the stock is issued in the first instance to them, and they have control of the company. Brewster v. Hatch, supra; Pittsburg Mining Co. v. Spooner, supra.

We conclude, therefore, that upon the main questions this complaint states a good cause of action, and the demurrer thereto was properly overruled. As to the demurrer of the defendant Eicks, the allegations are that he acted as the agent of Moore & Schley, and it is not shown that he is liable to respond in any wise for.any of his acts. While he may not be a necessary party to the action, yet inasmuch as the transactions were largely through him, he is a proper party, and, the action being in equity, he is properly made a party . within section 447 of the Code of Civil Procedure, as he may have some interest in the controversy.

In support of the demurrer of the executors of John G. Moore, deceased, it is claimed that it must be sustained, for the reason that no facts are alleged showing that complete satisfaction cannot be pro

“As, therefore, the present action must be regarded as one of a purely legal nature, brought against the surviving partners upon their legal liability, it follows that the executors of the deceased partner, who is liable only in equity, were improperly made parties.”

In Potts v. Dounce, 173 N. Y. 335 , 66 N. E. 4 , the action was also one at law to enforce a debt, and Judge Gray, in writing for the court, therein said:

“But, while the legal rule of liability has been changed, the rule of procedure is not. When the personal representatives of the deceased joint debtor are directly proceeded against at law, the plaintiff should still allege and prove the insolvency, or inability to pay, of the survivors.”

Hotopp v. Huber, 160 N. Y. 524 , 55 N. E. 206 , was likewise an action at law, and the same rule was applied. It must therefore be now regarded as settled that in an action at law the personal representatives of a deceased copartner are not proper parties, unless it be averred and proved that the survivors are insolvent and unable to meet the demand sought to be established. In an equitable action the rule is otherwise, and the personal representatives are proper parties, without averring or proving the insolvency of the survivors. The rule, however, that the representatives of deceased copartners could not be joined in the first instance, or proceeded against in equity, was never extended to that class of equitable actions which involved a breach of trust. Where the relations out of which arise the cause of action are predicated upon an obligation involving a wrong,

It follows from these views that the interlocutory judgment should be affirmed, with costs, with leave to the defendants to withdraw the demurrer and serve an answer within 20 days, upon the payment of costs in this court and in the court below.

EAUGHEIN, J., concurs.

This action was brought by certain stockholders of the defendant company, in the interest of the company, to recover from the firm of Moore & Sfchley what is termed in the complaint “a secret profit made at the expense of the defendant company, its stockholders and creditors.”

It seems to me that the fundamental error which underlies the whole of this complaint is the assumption that the defendant company had any interest in, or acquired any rights by, the contract, Exhibit A annexed to the complaint, and which is erroneously styled a “stock subscription,” which reads as follows:

Messrs. Moore & Schley—Gentlemen: Each of the undersigned agrees to take the number of shares set opposite his signature hereto of the preferred stock, and one-half that number of shares of the common stock of a company to be organized to manufacture and deal in malt with a capital of $30,000,000 one-half thereof 7% cumulative preferred stock and the remainder common stock, and to pay therefor the amount likewise set opposite his signature to the Guaranty Trust Company of New York, at its office in New York City, as and when called for by said trust company.

It is expected that of the capital aforesaid all but two and one-half millions of preferred and one and one-quarter million dollars of common stock to be reserved in the treasury for further corporate uses, will be issued in acquiring certain malt properties on which you and your associates control options (or other value as you may determine in lieu of any thereof that may not be acquired) and for working capital and that a part of the stock so to be issued, to wit: nine million dollars of preferred'and four and one-half

Dated, New York September 27th, 1897.

This paper was simply a contract between the signers thereof and Moore & Schley, whereby the signers agreed to buy from Moore & Schley the number of shares set opposite their respective names, at a price specified, of a company to be organized upon the basis therein provided; and Moore & Schley agreed to sell certain of said shares to the signers at the price named, deliverable when and if issued. It seems to me reasonably clear that, if the signers had failed to receive the stock subscribed for when issued, they would have had no cause of action against the defendant company, their only recourse being against Moore & Schley; and, if any of the signers had failed to make payments as agreed in the contract, the defendant company would have had no cause of action, Moore & Schley being the only parties aggrieved. In other words, there was no contract between the signers of that paper and the defendant company.

There is no claim but that the company was organized as required by the contract, nor that the expectations referred to therein were not carried out to the letter. All the malt properties referred to therein were acquired by the defendant company, and ample working capital was provided. Moore & Schley made no secret of their interest in the properties which were to be acquired by the company. The contract expressly declared that Moore & Schley and their associates controlled the properties which were to be acquired by th'e company, and the only inference to be drawn from its language is that all the stock of the company, except the amount reserved in the treasury for further corporate uses, was to be issued to Moore & Schley and their associates in payment for the properties acquired and to provide working capital. All the stock referred to in the contract as to be issued for acquiring property and working capital was issued to Moore & Schley, as contemplated, for the properties therein referred to and for working capital. I say issued to Moore & Schley, because I treat Moore & Schley and Eicks as one, for the purposes of this opinion. There is no claim but that Moore & Schley caused every piece of property contemplated to be conveyed to the company, and provided an ample working capital.

It is said that Moore & Schley did not themselves convey the prop-, erties to the company, but that they were conveyed by the respective owners. The contract states that Moore & Schley and their associates held options upon this property. They therefore controlled it; and the fact that they caused the owners of the property to convey directly to the company, in fulfillment of their contract with the company to convey or procure to be conveyed this property to the com

•The demurrer should be sustained.

INGRAHAM, J., concurs.

The cause of action sought to be enforced is one in favor of the corporation the American Malting Company to compel the individual defendants to account to that corporation for 5,000 shares of the preferred stock and 77,400 shares of the common stock received by them, and any other stock or money retained by them as a profit. There is no wrong done to the plaintiffs, either individually or as stockholders, by any of the defendants, for which redress is asked, and the action must be treated as if the corporation were the plaintiff, and to sustain it the complaint must allege facts which give the corporation a right to call the defendants to account.

The complaint contains many allegations as to the intent of the defendants, and the purposes and objects that they had in view; but I suppose that the liability of the defendants must depend upon what they did, not upon what they proposed or intended to do; and, if what it is alleged they did gives to the corporation no right of action, this judgment cannot be sustained. The fact that the defendants, or some of them, endeavored to make it appear to the public, to the stockholders of the defendant company, and to the defendant company that the defendant company was dealing with an independent party is not at all material, unless the endeavor was successful, and neither the public nor the stockholders are before the court asking for rélief.

The complaint alleges that the American Malting Company was incorporated under the laws of the state of New Jersey on September 27, 1897, with an authorized capital of 300,000 shares, of. the par value of $100 each, of which 150,000 shares were preferred stock and 159,999 shares were common stock, for the purpose, as alleged in the complaint, of making for the defendants composing the copartnership of Moore & Schley “a credit profit from the purchase at or about the time of the incorporation of said defendant corporation of certain options or the malting plants called for by said options,” for the purchase out of the sale of defendant’s capital stock of other plants and property needed in the business of the defendant company, as the necessity for the purchase

The defendant corporation having been incorporated on the 27th of September, 1897, the incorporators met on September 28th and elected five directors, who were employés of the attorneys for Moore 81 Schley, or representatives of Moore & Schley, and said directors elected officers, one of whom was one of the attorneys of Moore & Schley, and the others employés of such attorneys. On the said 28th of September, at the instigation and request of Moore &■ Schle), the officers and directors caused the defendant corporation to enter into a contract with the defendant Eicks, by which Eicks agreed to convey or cause to be conveyed to the defendant corporation the said malting plants and to furnish a working capital of $2,070,000, and the defendant corporation agreed to issue to Eicks or to his order preferred stock of the par value of $12,500,000 and common stock of the par value of $13,740,000. A copy of this contract is annexed to the complaint. The complaint further alleges that said trust company, on the joint order of the defendant Chapman, the president of the defendant corporation, and Eicks, paid for the malting plants purchased from Eicks under his contract with the corporation, and paid to the corporation $2,070,000 working capital out of the $9,000,000 paid to Moore & Schley on the purchase of the stock; that there remained in the hands of the trust company 5,000 shares of preferred stock and 77,000 shares of the common stock of said corporation, which should have been returned to the treasury of the defendant corporation, and that this said stock, instead of being delivered to the company, was delivered to the individual defendants, who appropriated it to their own use, and have not accounted for it to the corporation.

These are the substantial allegations of the complaint as to the organization of the defendant corporation and the issue of the stock. The allegations of the motives and intent of the defendants (which are not alleged to have been carried out), and of other transactions of the corporation, do not appear to me to be material in determining the legal relation that existed between Moore Sr Schley and the corporation. It

Moore & Schley did not purport to be acting for the corporation to-be organized, nor for those who were to become the purchasers of the stock; nor was it anywhere alleged that the agreement to- purchase the stock was with the corporation.' The promise to purchase was based upon the statement that the stock was to be issued in acquiring the malt properties upon which Moore & Schley controlled options, and the subscribers agreed to purchase that stock from Moore & Schley. The stock which was to be purchased was stock that was to be issued for the purchase of the malt properties, and the subscribers obtained just what the letter to Moore & Schley stated they would receive—a portion of the stock that had been issued to acquire these malt properties. When the purchasers of the stock had received the stock that they had purchased they became stockholders in a corporation that had been organized to acquire certain malt properties for which the corporation had issued its capital stock of the par value of $26,240,000, and this is just what the agreement said they were to receive. Certainly the purchase from Moore & Schley of a portion of this stock issued by the corporation to acquire the malt properties could give the corporation no-cause of action against Moore & Schley or their associates or representatives. But Moore & Schley are called “promoters,” and-it is-

I have not, in expressing my views upon this- question, referred to the many cases which were cited on the argument before us. They were all based upon a relation of trust that-was shown to exist between the promoter and the corporation or those who subscribed to the capital stock of the corporation. Brewster v. Hatch, 122 N. Y. 349 , 25 N. E. 505 , 19 Am. St. Rep. 498 , is an illustration of the cases in which the relation was established; but in that case it was the subscribers to or purchasers of the stock that sought to hold the persons from whom the stock was purchased as their trustees, not as trustees for the corporation. The plaintiffs were subscribers to the stock of a corporation, and asked for the damages sustained by them on the purchase of the stock. The court, in sustaining a judgment in favor of the plaintiffs, said:

“The end which Brown and his associates sought to and did accomplish, as stated in their testimony, and as found by the court, was the acquisition of the mining property by the corporation to he organized wholly at the cost of such persons as should'subscribe and pay for shares to be issued at the rate fixed, and to retain for themselves a majority of the stock without expense or risk. They testified, and the court found, that the purpose was not disclosed to the plaintiffs. The question is, was the relation between these litigants (the purchasers and sellers of the stock) simply vendor and vendees of shares tó be issued, or was it one of trust and confidence, binding the defendants to the exercise of good faith and to disclose such information as they possessed affecting the value of the property in which plaintiffs were induced to purchase an interest?”

The prospectus upon which the subscriptions were based stated that the defendants were the trustees who would manage its affairs and receive the subscriptions for stock, and clearly indicated that the defendants, as trustees, were to control and direct such proceedings as should be taken anterior to the formation of the corporation as well' as after it; and it was held that the plaintiffs were led to believe, and had a

If the purchasers of the stock of the defendant company had suffered damage by reason of a breach of a trust obligation which existed as between them and the individual defendants, that they would have a cause of action against the defendants cannot be doubted; but that is not this case. The plaintiffs were not subscribers to the stock of the corporation, but purchased it long after it had been issued for property purchased by the corporation. It does not even appear that the stock that they held was a portion of the stock sold by Moore & Schley under the agreement before mentioned. Nor is the cause of action based on a relation of trust between the plaintiffs and the individual defendants. It is the right of the corporation that is sought to be enforced, and the plaintiffs must establish that there was such a relation between the corporation and the individual defendants, and that the defendants violated their düty to the corporation, to entitle the plaintiffs to succeed in this action. No subscriber to this stock has complained of any deception or violation of confidence. The corporation got what it bargained for. All connected with it know of all the facts alleged in the complaint, and neither the corporation nor the subscribers have sought to rescind the transaction.

It is, however, thought that, if what is known as the “English rule” is to be adopted in this state, there is imposed some liability on the defendant. But an examination of the cases in which that rule has been applied discloses that they are but an application of familiar principles, always a part of the common law. , Thus, the case of Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1219, was brought to rescind a contract of sale made by the promoters to the corporation. The facts undoubtedly justified the rescission, and it was held, in affirming a judgment rescinding the sale to the corporation, that the application to make the promoters account for the profits that they had made by the sale to the company could not be granted; that all the relief that a court of equity could grant was a rescission of the sale. The corporation in that case was organized by the owner of the property which was to be sold to the corporation. The public subscribed to the corporation for its stock, and the proceeds of such subscription were paid to the company, its stock was issued, and such proceeds were paid by the company to the promoters for the property transferred to it. The relations between the corporation and the promoters were entirely different in that case from what they are in this. In this case the stock was actually issued by the company to Eicks for the property, and the stock was sold by him to others.

In Cavendish-Bentinck v. Fenn (1877) 12 App. Cas. 652, the defendant, a director of the Cape Breton Company, was sought to be held liable for a breach of trust as a director of the company. Upon appeal to the House of Lords from a judgment for the defendant, it was held that, as the defendant was interested in the property sold to the cor

“Now, I am by no means prepared to say that the argument of the appellant is well founded that such a case as this is a parallel case to the class of cases to which I have alluded, where an agent employed to go into the market and buy at the market price sells his own goods to the company at something above the market price. But I do not think it necessary to come to any absolute determination upon that point, because it is of the very essence of such a case as this to show that the price at which the property was sold to the-company was in excess of what has been called the ‘real price’ or the ‘true value.’ ”

And it was held that, in the absence of evidence to show that the price at which the property was sold to the company was in excess of its true value, there was no such cause of action. And the opinion, continues:

“I think it is impossible to arrive at any such conclusion, and to say that, therefore, there has been misfeasance on the part of Mr. ÍTenn, the present respondent, which would warrant your Lordships coming to the conclusion that he should be compelled to return a part of the money received in respect of this purchase, on the ground that he was making, improperly, a considerable profit. * * * There is no misfeasance in a person who has an interest in the property, by being a shareholder in the company which is selling it, nevertheless acting as a director in the purchase of that property for another company. The misfeasance, if it exists at all, must be in this: that he enters-into such a transaction without communicating to his co-directors the fact that he has such an interest. It seems to me that it must rest with those who allege the misfeasance to prove that element, which is an essential element to make out misfeasance at all.’’

Gluckstein v. Barnes (1900) App. Cas. p. 240, was a case of fraudulent misrepresentation by the defendants as to the price that they had paid for the property which he was about to sell to the company of which he was a director, and the Lord .Chancellor, in stating the question, says:

“The simple question is whether four persons, of whom the appellant is one, can be permitted to retain the sums which they have obtained from the company, of which they were directors, by the fraudulent pretense that they had paid £20,000 more than in truth they had paid for the property which they, as a syndicate, had bought by subscription among themselves as directors of the company.”

It was determined that fraud was proved, and that the defendants were liable to the company for the damage sustained by the company by reason of the fraud. In that case it was said:

“Indeed, the case is so clear that I do not. think it a case of inadequate disclosure, but a direct misrepresentation.”

In Burland v. Earle (1902) L. R. App. Cas. p. 83, a case before the Privy Council, in speaking of an action brought by one stockholder to

“The cases in which the minority can maintain such an action are therefore confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company.”

In that case it appeared that at a public sale Burland, one of the directors of the company, had purchased property for'$21,000; that he shortly afterwards sold the property to the company for $60,000; that under these circumstances he had been ordered to pay to the company the difference between the purchase price and the price at which he sold it to the company; and, in discussing that question, Lord Davey said:

“Both courts have held that the resale was by Burland’s advice and influence, and was made without disclosing to the company the price at which he had purchased. It was also held in the Court of Appeal that Burland had bought the property with the intention and for the purpose of reselling it to the company. * * * But their Lordships do not think it necessary to pursue these topics, because they are of opinion that the relief prayed by the amended statement of claim, and granted in the courts below, is altogether misconceived. There is no evidence whatever of any commission or mandate to Burland to purchase on behalf of the company, or that he was in any sense a trustee for the company, of the purchased property. It may be that he had an intention in his own mind to resell it to the company; but it was an intention which he was at liberty to carry out or abandon at his own will. It may be also that a person of a more refined self-respect and a more generous regard for the company of which he was president would have been disposed to give the company the benefit of his purchase. But their Lordships have not to decide questions of that character. The sole question is whether he was under any legal obligation to do so. Let it be assumed that the company or the dissentient shareholders might by appropriate proceedings have at one time obtained a decree for rescission of the contract. But that is not the relief which they ask, or could in the circumstances obtain, in this suit The ease seems to their Lordships to be exactly that put by Lord Cairns in Erlanger v. New Sombrero Phosphate Co. (1).”

And Lord Cairns is quoted as follows:

“It may well be that the prevailing idea in their mind was not to retain or work the island, but to sell it again at an increase of price, and very possibly to promote or get up a company to purchase the island for them; but they were, as it seems to me, after their purchase was made, perfectly free to do with the island whatever they liked, or use it as they liked, and to sell it how and to whom and for what price they liked. The part of the case of the respondents which, as an alternative, sought to make the appellants account for the profit which they made on the resale of the property to the respond- - ents, on an allegation that the appellants acted in a fiduciary position at the time they made the contract of August 30, 1871, is not, as I think, capable of being supported.”

The principle laid down in these cases does not, it seems to me, support this action. There were no representations in the Moore & Schley letter that the persons who agreed to take this stock were purchasing it from the company. What they agreed to do was to purchase the stock from Moore & Schley, and to pay to the trust company, as agents of Moo-re & Schley, the price which they agreed to pay for the stock. The further provisions of this agreement clearly show the nature of the undertaking and the obligations assumed by the subscribers. The corporation was to have a capital of $30,000,000, and the agreement stated that “it is expected that of the capital aforesaid all

be issued, to wit: nine million dollars of preferred and four and one-half million dollars of common heretofore underwritten, will be sold upon the terms above stated, deliverable when and if issued.” The whole agreement shows that this was a sale of stock by Moore & Schley, which was to be acquired by them after its issue by the corporation for the purchase of these malting properties iipon which Moore & Schley had options. It clearly contemplated that before the stock was to be delivered under this agreement the company should be organized, the stock issued and acquired by Moore & Schley, and delivered by them to the signers of this agreement. The signers of the agreement made no contract with the company, and there is here nothing that gives to the corporation the right to compel Moore & Schley to accept less for their options, and the property that they secured for the corporation under the options, than the corporation had agreed to pay for the properties. Nor have the corporation, or its stockholders, or the purchasers of the stock asked to- rescind the purchase. This suit is, in effect, one to compel the vendors (Moore & Schley) ho re- . turn a part of the consideration that the corporation had paid for these properties which it had purchased, upon the ground that the vendors made-a profit out of their contract with the corporation—a claim which, in all the English cases to whjch I have called attention, it had been held could not be enforced. If we assume that the persons purchasing stock of Moore & Schley under this agreement would have had a right of rescission or a right of action against Moore & Schley to recover the damages sustained by them because of any false representation as to their relations to the property or to the company, that would give no cause of action to the company, nor would a settlement with the company by Moore & Schley have satisfied any cause of action which had existed, in the subscribers to 'this' agreement, either to rescind their purchase of the stock, or to claim from Moore & Schley any damage that they had sustained by-its purchase. It is the subscribers to this agreement who' would be injured by any misrepresentations or suppressions contained in the instrument. They would have their cause of action against Moore & Schley; and to hold Moore '& Schley also liable to the company would be to impose an obligation upon them for statements made, not to the company, or for the purpose of inducing or which did induce any corporate action, but made to subscribers to an agreement to purchase stock of the company. The liability to the corporation must depend upon the violation of a trust relation in which Moore & Schley stood to it. As was said by the Court of Appeals in Seymour v. S. F. C. Ass’n, 144 N. Y. 333 , 39 N. E. 365 , 26 L. R. A. 859 :

“But in every class of cases the rule is founded upon the unwillingness of the law to uphold contracts which bring into collision the trust duty and the personal interest. * * * The entire basis of the rule consists in this collision between trust duty and personal interest, and the equitable prohibition has no application when there is no possible inconsistency.”

It follows, therefore, that the judgment must be reversed, with costs, and the demurrer sustained, with costs, with leave to the plaintiff to amend on payment of costs in this court and in the court below.

I am unable to concur in the opinion of Mr. Justice HATCH, and my judgment in this case inclines me to concur in the result reached by Mr. Justice INGRAHAM.

It seems to me that the radical defect in the plaintiffs’ case is that they do not show themselves to be entitled, either originally or derivatively, to the relief they demand. Taking the allegations of the complaint reciting facts, and separating them from mere characterizations and conclusions, it seems to me to be apparent that there can be no cause of action inhering in the plaintiffs, unless one inhered in the corporation. I do not see how a right to maintain this action resided in the corporation. Suggestions, charges, epithets, and imputations in the complaint must all yield, as I view the case, to the contents of Exhibit A (annexed to the complaint), which only constitutes, between the signatories to that paper and Moore & Schley,, a private contract that the former would take the number of shares set opposite to their several signatures of preferred stock and of common stock in a corporation to be organized to manufacture and deal in malt, with a capital of thirty millions of dollars, out of which .capital all but two and a half millions of preferred and one and a quarter millions of common stock, to be reserved for future corporate uses, would be applied to acquiring malt properties of which Moore & Schley controlled options (or their value, as Moore & Schley might determine, in lieu of any thereof that might not be acquired), and that the stock so to be issued, namely, nine millions of dollars of preferred and four and a quarter of common stock, would be sold upon the terms above stated, deliverable when issued. Wha.t would be understood by this private contract entered into between Moore Sr Schley and those who signed it? As soon as it was put out by Moore & Schley and they invited responses, those who signed the paper knew precisely what they undertook in the way of an obligation. When they signed, they did not agree with a corporation, but they agreed to take from Moore Sr Schley, when a corporation should be formed, the number of shares set opposite their names respectively, and they agreed as to what and how much stock should be issued for the options. It seems to me that this is a simple contract by which Moore Sr Schley agreed to furnish" shares of stock in respect of which those agreeing to take knew fully what the capitaliza

I fully concur with Judge HATCH in the abstract rules of law which he has stated, and in the very admirable and learned classification and array he has made of the cases bearing upon the subject ■of the liability of a promoter of a corporation. I see no reason to dissent from anything he has said on that general matter, and I regard his opinion in that respect as a very useful and valuable contribution to the literature of that subject. But I cannot bring this case within any one of his classifications. My view is that the corporation which was organized had no right of action against Moore & 'Schley, and that hence these plaintiffs, as stockholders, derive no right of action from that company. If a wrong has been done, it is •one to be remedied in favor of those who signed Exhibit A, or those ■claiming directly under them, and there is no complaint emanating from them.

For-these reasons, I think the demurrer should have been sustained, and, as a consequence, I concur in the conclusion reached by Mr. Justice INGRAHAM.