Opinion
04-30-1898
FREEMAN et al. v. SEA VIEW HOTEL CO. et al.
Herbert A. Drake and Henry B. Freeman, for complainants. Peter V. Voorhees, for defendants Sea View Land Co. and Mr. Fries. S. H. Grey and Joseph N. Gaskill, for defendants Sea View Hotel Co. and its individual directors.
Bill by S. Augusta Freeman, administratrix of Charles D. Freeman, and Wilson Fitzgerald, against the Sea View Hotel Company and others. Bill dismissed.
The cause was partly heard by the late Vice Chancellor GREEN in his lifetime, andmost of the testimony taken in his presence. After his death, additional testimony was taken before a master, and the case was then brought on for final hearing on the pleadings and proofs so taken.
Herbert A. Drake and Henry B. Freeman, for complainants.
Peter V. Voorhees, for defendants Sea View Land Co. and Mr. Fries.
S. H. Grey and Joseph N. Gaskill, for defendants Sea View Hotel Co. and its individual directors.
PITNEY, V. C. The bill was filed by Charles D. Freeman and Wilson Fitzgerald, two of the stockholders (holding 8 of the 120 shares of stock) of the Sea View Hotel Company. Pending the suit, Mr. Freeman died, and his widow and administratrix was substituted as complainant in his place. Besides the defendant the Sea View Hotel Company, which may hereafter conveniently be called the "Hotel Company," certain directors thereof are made parties defendant; also a corporation known as the Sea View Land Company, which may conveniently be called the "Land Company," together with one Fries, a director thereof, are defendants.
The bill (filed March 2, 1891), in the first place, attacks a conveyance of land made June 19, 1889, by the Hotel Company to the Land Company, on two grounds: First, for want of power to convey in the mode in which the conveyance was made; and, second, for fraud,—the specification of fraud being that the property was sold at a grossly inadequate price, and that the directors (defendants herein) of the Hotel Company were interested in the purchase by the Land Company, and that great profits were made by the Land Company, in which the directors of the Hotel Company participated; or, if there was no actual fraud, then that there was such gross negligence in the sale as to render the directors of the Hotel Company liable to make good the loss. The prayer, as to this branch of the bill, briefly stated, is that the defendants the Land Company and the directors of the Hotel Company, or some of them, may account for those profits to the Hotel Company, to the end that the complainants may have their share thereof, and to that end that the Hotel Company may have an account of the proceeds of so much of the lands as have been resold by the Land Company to bona fide purchasers, and as to that portion of the lands not so sold the same may be declared to be the property of the Hotel Company. In the second place, the bill charges that the Hotel Company, about the date of the sale to the Land Company, purchased other lands which it had no power to purchase, and in which certain of its directors were interested; and the prayer is that this sale may be set aside, and the directors of the Hotel Company be compelled to account for the actual cash invested therein, with the like view of giving the complainants their share thereof in money.
One element of the case attempted to be made by the complainants may be disposed of quite briefly. Complainants charge, with detail, the particulars of fraud in the conveyance of land by the Hotel Company to the Land Company, and in the purchase by the Hotel Company of other land from third parties, and call on the individual defendants to answer under oath. All those who lived long enough to answer have answered, and deny fully and explicitly under oath all the allegations of fraud. This casts upon the complainants the burden of sustaining the charge by a decided weight of evidence. This they have failed to do. Not a single one of the directors or stockholders of the Hotel Company was in any wise interested in the purchase by the Land Company of the lands of the former, with the possible exception of a Mr. Zimmerman, who was the secretary and treasurer of the Hotel Company and also a small stockholder; and, after the property had been bargained for by two persons, to wit, the defendant Fries and a Mr. Kremer, and its purchase secured by written contract, which was May 28, 1889, they took in Mr. Zimmerman, in order to have the benefit of his knowledge and experience of the property for the purpose of managing it, and gave him an interest in the new purchase. He joined in the formation of the corporation June 11th, and the deed was made to it June 18th. But at the argument no relief was claimed against him or his estate, he having died without answering. The only circumstance shown in the case which tends in the slightest degree to indicate fraud in the sale of the premises is that the defendant Wood, who was a director in the Hotel Company, and one of the committee to sell, was a partner in business in Philadelphia of Mr. Kremer, who was active in inducing Mr. Fries and others to form a syndicate to purchase it. Mr. Kremer undoubtedly heard that the property was for sale from his partner, Mr. Wood, and was advised by Mr. Wood to look into it, and examine its value. Mr. Fries is a gentleman of independent means, who is engaged in railroading, and somewhat connected with the Pennsylvania Railroad. He had no interest in the Hotel Company, and I cannot see that these facts are sufficient, in view of all the other circumstances of the case, to raise even a serious suspicion that any of these defendants were directly or indirectly interested in the purchase. With regard to the new purchase of land, none of the defendants except Mr. John Lucas had any interest in the lands sold to the Hotel Company. The fact that the directors had decided to purchase the lands in question was properly kept a secret, and the purchase was made through agents, and those agents took an option for a small tract from Mr. Lucas, without disclosing to him the fact that it was being purchased for the Hotel Company, and Mr. Lucas swears that he did not know that it was so purchased.It constituted a small part of the whole tract purchased, and there is no proof or contention that it was not worth the price paid for it. After the completion of the purchase of the new site, some gentlemen organized a land company to purchase on speculation land in that neighborhood, and the defendant, Gen. Sewell, the president of the Hotel Company, took an interest in it; but it does not appear that he had such venture in contemplation at the time the purchase by the Hotel Company was decided upon, or that it did or could influence his action in the premises in the least degree. So much for the allegation of fraudulent practice.
With regard to the power of the directors of the Hotel Company to sell its lands, that (laying out of view the power at common law) depends in part upon the language of its charter, which was passed February 10, 1869 (P. L. p. 40). By the first section several gentlemen, therein named, and their successors, were incorporated by the name of "The Sea View Hotel Company," and it is declared that by that name they shall "have power to lease, purchase, and hold real estate at or near Atlantic City, in the county of Atlantic, and state of New Jersey, and to erect and maintain an hotel and other buildings and improvements thereon, or upon any part thereof, for the accommodation of the public, and to mortgage said real estate, with the appurtenances, or any part thereof, and to transact all such business as may be incident or appertaining to the managing, erecting, furnishing, conducting, leasing, holding, or mortgaging of said premises, or otherwise controlling or disposing of the same." That language seems to me to give them power to convey the land at any time that, in the judgment of the directors, it might be best for the company so to do. But, independent of the special power given by the statute, the general corporation act (Laws 1890, p. 277,— which is a re-enactment of an old statute) declares that every corporation as such shall have power "to hold, purchase and convey such real and personal estate as the purposes of the corporation shall require," not exceeding the amount limited by its charter. And this seems to be a mere declaration of the common law. Mor. Priv. Corp. § 152. The position of the counsel of complainants is that such power to convey must be confined to a conveyance for the purpose of winding up the affairs of the corporation, in which transaction the directors must necessarily act as trustees, and not as directors, under the power given to them by the fifth section of the corporation act of 1896 (P. L. p. 295); and that it follows that they could not sell except by advertising at public sale, as other trustees or public officers are required to do. But, in my opinion, that position is untenable—First, because I do not think that the power of sale given by the statute can be confined to a power of sale for the purpose of winding up; and, in the second place, the section of the statute relied upon seems to give them, while acting as trustees, power to sell at private sale. I think the sale and. conveyance were clearly within the power of the directors, as well by virtue of the statute as at common law.
But the complainants pushed their argument further, and claimed that the sale, if made with power, and free from fraud, was yet so carelessly made, and the directors manifested so little judgment and exercised such a small degree of business sagacity and good management in the sale, that they are liable on the score of negligence for a very heavy loss, which the complainants contend resulted. I am by no means sure that it is necessary, for the purposes of the present suit, to consider this position. But I have done so with care, and have examined the mass of evidence which has been given upon the question of the actual value of the property at the time it was sold, and the care which was bestowed for the purpose of obtaining a full price for the property, and have come to the conclusion that the complainants' case fails therein, as well as on the other parts just referred to. A statement of my reasons for this conclusion requires a statement of the history of the enterprise from the start. The property in question is situate at Atlantic City, county of Atlantic. That city is situate on a sandy island on the coast of New Jersey, separated from the mainland by a salt marsh varying in width from one to four miles or more, which is traversed by a narrow tortuous tidal stream called a "thoroughfare." On the mainland, opposite the island, and several miles away, are the towns of Absecon and Mays Landing. Many years ago some enterprising gentlemen of Atlantic county obtained a charter and built a railway from Camden, through Absecon, and across the marsh and thoroughfare, to the island upon which Atlantic City is situate. The corporation was known as the Camden & Atlantic Railroad Company. The island was a mere sand bank, and what is now a large city was then a small village, resorted to by a few persons for a short period in the summer season. Finally, a city was laid out, with avenues running at right angles to each other; one set parallel, or nearly so. with the line of the ocean (on a general course of about east by north and west by south), and the other running crosswise of the island. Those running parallel with the ocean were named after the oceans,—Pacific, Atlantic, Arctic, Baltic, etc.; those running across the island were named after the states and territories of the Union, and also numbered. What proved in the end to be the principal avenue was named Atlantic, and between that and the ocean was Pacific avenue. The hotels, boarding houses, and residences were principally between Atlantic avenue and the ocean. The railway of the Camden & Atlantic Company terminated atAtlantic avenue at or near Tennessee avenue (or Fourteenth avenue), and that was then, and is still, the center of the business of the city. In order to Increase the business of the company, and also to build up the town, certain directors and stockholders in the railway company (1869) organized the defendant Hotel Company under the charter above referred to, and, in its name, purchased a piece of land between Atlantic avenue and the ocean, and between Missouri avenue (Twenty-Second avenue), on the northeast and Mississippi avenue (Twenty-Third avenue) on the southwest, bounding on Missouri avenue, but not touching Mississippi avenue. It also bought a strip on the northeast side of Missouri avenue, 50 feet wide, extending from Pacific avenue to the ocean. Missouri avenue is eight blocks southwest from Tennessee avenue, the terminus of the railway. The Hotel Company established on a part of the purchase on the block between Pacific avenue and the ocean an hotel and grounds, and various other attractions for persons of small means who desired to visit the sea coast for a day, going down in the morning and returning at night, for the purpose of establishing what is called an "excursion" business. In order to deliver excursionists at that point, the railroad company connected a switch with its railway between two and three blocks northwest of Atlantic avenue, and brought a track around to Atlantic avenue at the corner of Ohio (Eighteenth) avenue, about half way between Tennessee avenue and Missouri avenue; then ran their track along the center of Atlantic avenue, a distance of two blocks, until they came to Arkansas (Twenty-First) avenue, and then turned in with a bend, and brought their track nearly to the ocean, alongside of the hotel property, upon Missouri (Twenty-Second) avenue. In that way the railroad company was enabled to deliver excursionists at the excursion house. The business proved to be profitable, and brought persons to Atlantic City who spent money there. In or about the year 1880, the West Jersey Railway Company, which had a line running from Camden to Cape May, ran a branch from Hewfield, on its main line, to Mays Landing, and from thence to Atlantic City, making an additional and competing line between Philadelphia and Atlantic City; and the directors of that company ran a railway track across the city near Georgia (Twenty-Fourth) avenue, which is two blocks southwest of the Hotel Company's excursion house, and purchased a piece of land on the west side of Georgia avenue, and erected thereon an hotel or excursion house, and competed with the Camden & Atlantic Railroad Company, both for general travel and excursion travel.
Subsequently, about 1885 or 1880, certain stockholders and directors in the West Jersey Railway Company purchased a controlling interest in the Camden & Atlantic Railroad Company, and also a controlling interest in the stock of the defendant Hotel Company, and from that time on the two railway companies were managed in the same interest; and as a part of the transaction the excursion house property on Georgia avenue was conveyed by the West Jersey Railroad Company to the defendant Hotel Company, and 25 shares of stock in the Hotel Company issued to the West Jersey Railroad Company at a valuation. The amount of stock originally issued was 101 shares at $500 a share, and after the conveyance of the West Jersey property to the Sea View Hotel Company the stock stood at 126 shares. At this time the shares were valued at $1,000 each, and the latest sales at or before the disputed land sale were at that price. In the meantime another railway was built from Philadelphia to Atlantic City, under the auspices of the Reading Railway Company, known as the Philadelphia & Atlantic City Railway Company, parallel to the original Camden & Atlantic Railroad, and running into Atlantic City between Arkansas and Missouri avenues, stopping at Atlantic avenue. This company also established an excursion house to the southwest of the West Jersey Company's house. In the meantime (1888) the city had grown and extended for nearly two miles along the beach, and a large, high-class hotel and boarding house business had been established, and numerous handsome private cottages and dwellings erected, and this class of business had extended southwesterly up to, or nearly up to, the excursion house of the defendant Hotel Company. The character of that business was such as to be a detriment to the more permanent business, and stopped the growth of the city in that direction, and the running of the excursion trains through Atlantic avenue (now the principal street of the city) from Ohio avenue to Arkansas avenue, a distance of more than an eighth of a mile, was well-nigh a nuisance, and the property owners and citizens objected strongly to the continuance of the use of Atlantic avenue for railroad purposes, and to the continuance of the excursion business at the house of the defendant Hotel Company at its then location. The result was that the West Jersey Railroad Company and the Camden & Atlantic Railroad Company resolved to discontinue the running of excursion trains along and across Atlantic avenue, and did so discontinue in the year 1888. This, of course, substantially destroyed the excursion business, and rendered it apparently necessary to devote the property to other uses. The defendant Hotel Company, after full consideration, determined to remove its business to another place. The matter was discussed among the directors of the Hotel Company, several of whom were also directors in the West Jersey and Atlantic Railway Companies, and it was determined to purchase a new and much larger tract of land for theexcursion business and for an excursion hotel, between Albany and Annapolis avenues, at a place southwest of a region called Chelsea, and about a mile southwest of the old location, but still within the limits of Atlantic City. The railway company undertook to build a branch from its line, switching off at the "thoroughfare," and running along the outskirts of the city to the new purchase. For that purpose the Hotel Company appointed a committee to purchase the land, which was held in parcels by several owners, and it was done secretly and quietly, through agents, who took options from the several owners without disclosing their principal. After the new land had been secured, it became necessary to deal with the disposition of the old tract, which was composed of three or four several tracts,—one on the east side of Missouri or Twenty-Second avenue, 50 feet in depth on Missouri avenue, and extending from Pacific avenue to the ocean; another wedge-shaped piece extending from Atlantic avenue to Pacific avenue; another, also somewhat wedge-shaped, from Pacific avenue to the ocean; and the fourth, a tract west of Georgia avenue, between Pacific avenue and the ocean, being the original West Jersey excursion lot. With this view the committee consulted two of the best and most experienced real-estate brokers and dealers in Atlantic City, to wit, Mr. John J. Gardner and Mr. Israel G. Adams, and got estimates from those gentlemen. Mr. Gardner, for that purpose, divided the property into several imaginary lots or plots for the purpose of sale, and by one mode of dealing with it he estimated it at $98,000, and by another mode $118,000. Both Messrs. Gardner and Adams were employed to make sale of it, with the result that an offer was obtained from a Philadelphia firm of $125,000, subject to a mortgage of $4,000 on the premises. This offer was accepted by the directors of the Hotel Company, provided that a down payment of $10,000 was made, subject to an examination of the title. This payment the proposed purchasers were unable to make, or declined to make, and the sale fell through. Then the defendant Fries and a Mr. Kremer heard that the property was for sale, and that $129,000 had been offered. They thought that some money could be made out of it, and they examined it, and offered $133,000, including the incumbrance, or $129,000 subject to the incumbrance; and it was contracted to be sold to them. At the time they bought, several other gentlemen in Atlantic City of experience and good judgment in the value of real estate were offered by them a share in the enterprise, and they declined, because they thought the price was too high; that is to say, the risk of carrying it and retailing it out so as to make a fair profit was too great. I have considered all the evidence concerning this sale, and I am satisfied that the price obtained was a fair one, and that proper and prudent means were taken to get a full price, and that the directors were guilty of no negligence in their conduct of the sale. The situation was peculiar. The railroads had withdrawn their track, and ceased to deliver excursionists at that point. The property and all its surroundings were adapted for the excursion business, which is of a character peculiar to itself. There were, and must necessarily be, appliances for amusing and entertaining the kind of people that come down on excursions, not in keeping with the higher-class building improvements of the city, and, in order to bring the property into the market to advantage, all these must be cleared away, and an entirely new class of purchasers induced to buy. This required individual business management, which the directors, after consideration, declined to undertake.
The real foundation of the present suit is that within a few months after the conveyance in question what is known as a "real-estate boom" struck Atlantic City, and the Land Company was enabled to sell out a portion of the property at a very large advance. That boom was due to several causes, one of which was the fact that it became generally known about that time that a permanent board walk along the ocean could be established and maintained. Previous to that time a board walk had been established, in pieces, by private owners, along the shore, within a foot or two of the sand, and just at high-water mark, and every time a heavy storm came it was washed away, and the line of the shore was disturbed. Various contrivances had been resorted to to prevent those periodical disturbances, with but partial success. It had, however, just about that time been found by experience that by the use of hydraulic processes piles could be sunk so deep in the sand that the tide would not wash them out, and then, by elevating the board walk on those piles several feet above high-water mark, the desired permanency of structure could be maintained. Then the municipal corporation, as such, intervened, and by an ordinance of November, 1889, assumed control of the board walk so erected, with the result that from that time on the board walk became a reliable fixture, and added greatly to the value of the water fronts. Shortly after anothei element intervened. The Philadelphia & Atlantic Railroad Company, or what is known as the Reading Railroad Company, succeeded in building a railway from their line near the "thoroughfare" the whole length of what is known as Mississippi or Twenty-Third avenue to the ocean front, half a block distant from the former excursion house of the defendant Hotel Company, and then, by having a short street cut through from Mississippi avenue to the property formerly of the Hotel Company, then of the Land Company, that railway company was enabled to carry excursion passengers within a few feet of the old excursion house, and thereby the excursion business wasre-established at its old place. But the evidence tends to show that, notwithstanding the boom and the improvements which I have mentioned, the lands conveyed by the Hotel Company to the defendant Land Company have again depreciated in value, so that at the time of the hearing they were worth little, if anything, more than the price which was paid for them. It is to be observed, also, in regard to the price, that the Hotel Company reserved the right to move all its furniture from its hotel, and some of the fixtures there situate, and did remove them, and that left it a net amount in cash of $129,000, besides the furniture. The number of shares of its capital stock was 126, and at $1,000 a share would be $120,000. The highest sale that had ever been made of the shares was at $1,000 a share. So that the price obtained for the land, if divided up, would have produced to the stockholders more than the highest price at which the stock had ever sold. A mass of evidence was given by residents of Atlantic City, of more or less experience in real-estate matters, placing a higher valuation on these premises at the time they were sold than they brought. But it is impossible to read the evidence in detail without perceiving that the opinion of these gentlemen so testifying was influenced largely by the circumstance that the property was actually sold, within a year or two after its purchase, for a great advance. They were unable to distinguish in their own minds between the situation and values immediately before the boom and the official establishment of the board walk on a permanent basis, and the prices which prevailed shortly after. For these reasons I think this part of complainants' case also fails, and with it the whole case as against the Land Company and Fries.
There remains, then, for consideration but a single topic, and that is the power of the directors of the Hotel Company to purchase the new site, and invest the moneys of the corporation therein. The prayer in that regard is that they shall be held personally responsible to account to the Hotel Company, for the benefit of its stockholders, for all the cash so invested. The argument of the counsel for complainants in support of the position that the company had no power to make the new purchase may be summarized as follows: That the company, being authorized by its charter to purchase and hold real estate and erect and maintain an hotel and other buildings and improvements thereon, was thereby limited to a single purchase, and the erection and maintenance of one establishment; and, having once exercised the power, its power in that behalf is expended, and it was unable to exchange those grounds and that hotel for other and different grounds and a different hotel; and that this limitation of power formed a contract between the stockholders which the majority had no right to break without the affirmative consent of each individual stockholder. Two phases of the Hotel Company's charter are to be kept in mind in considering this question: First, no particular quantity or parcel of land is mentioned in the charter, and no limitation in location except that it is to be at or near Atlantic City; and there is not a shred of evidence in the case to show that there was even an implied or verbal understanding among the stockholders, when they subscribed to the stock, that any particular site was in contemplation. This at once distinguishes it from a line of cases relied upon by the counsel where railroads are authorized, either by special charter or by their statutory organization, to build a railroad from a particular point to a particular point, which case was dealt with in Morris & Essex R. R. v. Central R. R., 31 N. J. Law, 305, and the other familiar line of cases, of which Kane v. Johnson, 9 N. J. Eq. 401, is the leader in New Jersey, in which railroads have already been built and operated in accordance with the strict terms of chartered rights.
Another phase is that the only franchise which is granted by the charter is that of being a corporation. No public franchise for the condemnation of land for public purposes, or even for engaging in the public business of carrying passengers, is granted, and no grant of eminent domain is made. Hence the question is not, as in the case in 31 N. J. Law, whether the company had the power to acquire by condemnation proceedings the new purchase. There is, then, no question of ultra vires between the corporation and any individual member of the public, nor between the corporation and the state, as to an abuse of its corporate power. It is a simple question between the stockholders whether or not there is anything in the original written contract between them which prevents the directors, in the exercise of their discretion and with the approval, as appears in this case, of a large majority of the stockholders, from exchanging one hotel property for another hotel property. Now, as already remarked, there was nothing in the original charter, or in the facts accompanying the organization of the company, which can amount to a contract between the stockholders that the particular premises first purchased by it and the particular hotel first erected thereon were all that the company expected to use or own, or could use or own. And we have in this case an example of the exercise by the directors of the supposed right to buy additional property in the purchase by them of the West Jersey excursion house in 1886. This was done because there was really a consolidation in interest of the West Jersey Railroad excursion business and that of the defendant Hotel Company. Now, the charter authorizes the company to purchase land and maintain an hotel. The circumstances showed that in the latter part of 1888 the business for which the company was organized could not be carried on to advantage upon the property then owned by it. The removal from its premises of the terminus of the railway worked a substantial destruction of its business, and it became no longer profitablefor it to maintain that hotel and keep those grounds for the purposes of the corporation. It seems to me that it would be a very narrow construction to put upon the contractual aspect of the charter to say that the stockholders had agreed that in such a posture of affairs the company could not exchange that property for another property in a more eligible situation, and where it could have the advantage of a railway terminus, and thus pursue the business provided for in its charter. I think the complainants' case fails throughout, and I will advise a decree that the bill be dismissed, with costs.