Opinion
04-12-1895
LANDIS v. SEA ISLE CITY HOTEL CO. et al.
Charles K. Landis, Jr., and Howard Carrow, for complainant. Samuel W. Beldon, for defendants.
Bill by Charles K. Landis against the Sea Isle City Hotel Company and others to hold certain directors of defendant corporation liable for the value of his capital stock, and also for certain moneys advanced to the corporation which it is unable to repay.
Charles K. Landis, Jr., and Howard Carrow, for complainant.
Samuel W. Beldon, for defendants.
PITNEY, V. C. The complainant is both a stockholder and a creditor of the defendant the Sea Isle City Hotel Company. The other defendants were directors of that company. The persons named as defendants by reason of their being directors or officers were Michael J. Kelly, Edward Foerderer, George H. Becker, Charles Class, and S. W. Goodman, all nonresidents, and were so returned by the sheriff. An order of publication was taken against them, with the result that Kelly, Class, and Goodman appeared and answered. Foerderer, by counsel, obtained leave for time to answer, but did not. The object of the bill is to hold the Individual defendants liable for the amount paid by the complainant for his capital stock, and also for certain moneys lent and advanced to the corporation which it is unable to pay. The facts are as follows: The corporation defendant was organized under the "Act to encourage the establishment of mutual loan, homestead and building associations," approved April 9, 1875 (Revision, p. 92). It was incorporated on the 30th day of August, 1887, by articles of association executed on that day by the defendants Kelly, Goodman, Class, together with Messrs. George H. Becker and Edward Foerderer, and filed in Cape May clerk's office, August 31, 1887. The object of the company therein stated was this: "For the purpose of assisting those who are now or may hereafter become members thereof in acquiring real estate, building an hotel thereon, and making other improvements thereon, and removing incumbrances therefrom by the payment of periodical installments." The certificate of organization further stated that the name of the association should be the "Sea Isle City Hotel Company," and that it was to be located and do business in Sea Isle City, N. J. The first meeting of the promoters of the enterprise was held on the 22d of August, 1887, and then it was declared that there should be 2,000 shares, at $25 a share, making $50,000. Another meeting was held on the 29th, the day before the legal organization, at which 40 persons were present, and a constitution previously prepared was then read and adopted. This was not produced and put in evidence. It was then stated that the Sea Isle City Lot Association No. 2, another corporation of Sea Isle City, organized the previous July, under the same act, had offered to sell the company block No. 88, comprising 21 lots (numbering from 21 to 41, Inclusive, on the association's plan), at $460 a "lot (not counting lots Nos. 25 and 26, for which no charge was made), making a total price of $8,740. It was then resolved to build an hotel, the cost of which, complete and furnished, with the cost of the lot, should not exceed $60,000, the building itself to cost not more than $35,000. At the same meeting it was resolved to procure plans and specifications for an hotel. It was then reported that 834 shares of stock were subscribed for, and some payments made. On the 6th of September, nearly a week after the legalorganization, ten directors were elected, among them being Kelly, Goodman, and Becker, three individual defendants herein. Besides these, Class was elected president, and Foerderer reasurer, who were not named as directors. At a meeting of the directors immediately after this election, at which all the defendants were present, Goodman was elected secretary, and the minutes state that his election as secretary vacated his office as director, and thereupon J. C. Hungerbuehler, who had received the next highest vote for director, was admitted to a seat as director in his place, and Goodman appears not to have acted as director. Immediately after this action, it was resolved that "block No. 88 on the land of the Sea Isle City Lot Association No. 2 be deeded [sic] and paid for in the same manner as other lot holders do in said association." The by-laws of Association No. 2 on this subject provided that the capital stock should not exceed $400,000, divided into shares of $460 each, one share to entitle the holder to one lot; subscription fee to be $20, and after-payments to be $10 per share, to be paid monthly thereafter. The minutes show no further record of the purchase of the land, but payments were made from time to time to Lot Association No. 2, apparently in regular monthly installments, commencing October 17, 1887, until they amounted (August 15, 1888) to $2,660. During the fall of 1887 contracts were entered into for the building of an hotel at a contract price of $37,000. In addition to that would be the furniture and apparatus for lighting, heating, water supply, elevator, and various other things not included in the contract. The complainant was a subscriber for 20 shares of stock, amounting to $500, which he paid in regular installments, commencing on the 6th of September, 1887, and ending on the 23d of May, 1888. On the 6th of July, 1888, he loaned the defendant corporation $1,536.87; on the 6th of August, $1,505.41; and on the 12th of September, $1,410.30,—total, $4,452.58, under circumstances to be stated hereafter. He also became a creditor for a further smaller sum, upon which he had obtained judgment against the company before bill filed. The total amount received by the officers of the company for subscriptions on account of capital stock was a little less than $27,000. All other receipts by the company were either borrowed money or rent of the hotel. The defendant corporation, in the year 1889, became hopelessly insolvent, and the whole of the complainant's investment in stock and also money loaned is lost. The situation of the company in tin's respect is thus stated in the answer: "(7) They admit that the said company is altogether insolvent; that it has forfeited its interest or estate in the real estate mentioned, by default in payment, and is only possessed of the said hotel building, which, in answer to the special interrogatory in said bill contained, these defendants aver is its only property of any kind of which they are informed or have knowledge, and upon which are liens, by way of mortgage, judgment, and mechanic's lien, greatly in excess of its present value."
The precise ground upon which complainant rests his case, so far as relates to the amount paid for stock, is that the directors and officers of the defendant corporation, including those who have been brought in, and either appeared or answered, were guilty of misappropriation of the funds of the corporation; that they made payments in cash to the extent of $2,660 to Syndicate No. 2, on account of the block of land purchased, without receiving the title or any written contract for it, or any reasonable assurance that they ever would ultimately acquire it; that the contract for the erection of the hotel was entered into before any proper provision was made for funds to pay for it; and that all the money actually invested in the building was a mere waste, for the reason that there was no reasonable expectation of getting title to the laud upon which it was placed; and, further, that the expenditure actually made was wasteful in itself, and that the funds were not applied in good faith to the actual building of the hotel, but were wasted with criminal negligence.
With regard to the title to the land on which the hotel was built, the facts, which are complicated, are as follows: There existed, prior to the creation of either of the corporations just named, a corporation known as the "Sea Isle City Improvement Company," of which the complainant was the president. That company owned a large tract of land in and near Sea Isle City, a certain portion of which was oblong in shape, and was laid out in building lots, so that one side of it fronted on Marine Place, which appears to be an ocean beach drive, and the other side fronted on Landis avenue, abutting on one end on Devon street, and on the other end on Ohio avenue, and being crossed by divers other avenues. It comprises, as laid out on Mr. Landis' map, 224 lots, divided into 11 blocks; and each block is intersected lengthwise by a street which is marked on the map as "Pleasure Railroad." One of these is block No. 88, referred to in the minutes of the defendant corporation. By deed dated June 4, 1887, proved on that day, and recorded on the 6th of July, 1887, the Sea Isle City Improvement Company, for an expressed consideration of $42,400, conveyed the 224 lots of land, comprised in the 11 blocks of land just mentioned, to Otto G. Kuehne, who was a mere man of straw, and had no interest in the transaction. Kuehne gave back a mortgage to the Sea Isle City Improvement Company to secure $30,400 of the consideration mentioned, payable at any time within five years, with interest at 5 per cent. per annum. This mortgage left an apparent cash payment.of $12,000; but, in point of fact, only $3,520 was paid in cash, the balance, of $8,480, representing a commission or rebate of 20 per cent. on the price named, given by the grantor either to Mr. Kelly, defendant herein, who acted as a broker in the sale, or to the parties hereafter mentioned whom Kuehne represented, of whom Kelly was one. The sum of $42,400 was made up by fixing a price of $200 a lot on 212 lots out of the 224 sold, the other 12 being misshapen and thrown in without charge. This made the actual price paid for the lots $33,920, composed of mortgage $30,400, and cash $3,520, or precisely $100 per lot, instead of $200. The cash payment of $3,520 was furnished by a syndicate of 14 gentlemen, called, in the evidence, "Syndicate No. 2," who shortly afterwards formed themselves into a corporation called the "Sea Isle City Lot Association No. 2." In the evidence this corporation is sometimes called "Syndicate No. 2"; but that name properly belongs to the 14 original promoters of the corporation proper, who became its officers and directors. This corporation was formed by articles of association entered into on the 6th of July, 1887, by the defendants Kelly, Goodman, and three others, who at that time executed articles of association, under the statute above referred to, by which they adopted the name of the Sea Isle City Lot & Building Association No. 2, which certificate was filed in the Cape May county clerk's office on the 11th of July, 1887. On the same day (July 11, 1887), Kuehne executed a declaration of trust, dated and recorded on that clay, in which he declared that the cash payment made on the conveyance from the Sea Isle City Improvement Company to himself, which is therein stated at $12,000, was made by George H. Becker and his associates, known as "Sea Isle City Lot Association No. 2"; and that he held the property in trust for the use and benefit of said Becker and his associates, known as "Sea Isle City Lot Association No. 2." This declaration undoubtedly vested the equitable title in the corporation proper just created, as distinguished from the 14 gentlemen who were its promoters, and were known as "Syndicate No. 2." By deed dated July 11, 1887 (but, in fact, executed in November, 1887), Kuehne, together with 14 others, for whom it was declared Kuehne held the title in trust, among whom are Kelly, Class, and Goodman, three Individual defendants in this suit, conveyed all the premises so previously conveyed to Kuehne to one Jacob Weil (also a man of straw), in consideration of $54,400, subject to the mortgage of $30,400, previously given by Kuehne to the Sea Isle City Improvement Company. By deed of mortgage of the same date (July 11, 1887), but actually executed in November, 1887, Weil mortgaged the premises to Owen J. McCaferty, another man of straw, to secure the payment of $54,400 in five years from the date, with interest at the rate of 6 per cent. per annum, "and all sums which might be assessed under the laws of Pennsylvania for taxes upon the principal sum or upon the interest, whenever and as often as the said taxes shall be payable." By deed of conveyance of the same date (July 11, 1887), but executed in November, 1887, Jacob Weil conveyed the premises, less 10 lots (none of which are those here in question), to James P. McGuigan, also a man of straw, subject, to the two mortgages of $30,400 and $54,400, in trust for the stockholders of Sea Isle City Lot Association No. 2, the corporation organized as aforesaid on July 6, 1887, with provisions for the conveyance of individual lots to the individual subscribers to the stock of said association. These three conveyances purport to have been executed and acknowledged before a notary public of the city of Philadelphia on the 11th of July, 1887. The notary so certifies. That certificate is false. It appears, clearly, that they were not prepared or executed until just before they were recorded, November 15, 1887.
It will be remembered that Kuehne executed a declaration of trust dated July 11, 1887, which was recorded on that day declaring that he held the property in trust for George H. Becker and his associates, known as "Sea Isle City Lot Association No. 2." This instrument was prepared by the complainant, presumably by request of Becker and the other parties paying the money. Becker was one of the 14 persons called "Syndicate No. 2." Another of the 14 persons originally interested in the enterprise was Mr. Gorman, of the Philadelphia bar, who, however, happened to be absent in Europe at the time Kuehne executed the first declaration of trust (July 11, 1887). Upon his return from Europe, he, for the purpose of overriding the original declaration of trust prepared by the complainant, and actually executed by Kuehne, July 11, 1887, prepared a new declaration of trust to be executed by Kuehne (the man of straw) in favor of the 14 gentlemen named, and also the deed above mentioned from Kuehne to Weil (another man of straw), and the mortgage of $54,400, to be executed by Weil to McCafferty (another man of straw), and kept possession of the bond and mortgage, with a declaration executed by McCafferty that it was held by him for the benefit of the same 14 persons; also the deed from Weil to McGuigan (another man of straw). He procured all these instruments to be executed, and induced a notary of Philadelphia to falsely certify that they were so executed and acknowledged before him on the 11th day of July, 1887. The object of this false certificate was, manifestly, to prevent the shareholders in Association No. 2 from having the benefit of the purchase of the 224 lots from the Sea Isle City Improvement Company (complainant's corporation), which they would undoubtedly have under the declaration of trust which was actually executed on July 11, 1887, and to give the profits of that purchaseto the 14 gentlemen composing Syndicate No. 2.
Another fact may as well be again mentioned just here. As has been stated, the conveyance from the complainant's company to Kuehne was in consideration of $42,400, which was $200 a lot for 212 lots. The mortgage back from Kiehne to the complainant's company was for $30,400; and the deed from Kuehne and his 14 cestuis que trustent to Weil recites that $12,000 cash of the purchase money was paid by the 14 gentlemen named to the complainant's company on account of the lots. One of the 14 was Michael J. Kelly, one of the defendants herein. The sum of $12,000, however, was not paid in cash. Only $3,520 was actually paid, 20 per cent. of the whole sum ($42,400) being allowed by the complainant, as president of his land company, to Mr. Kelly, for negotiating the sale. Kelly was not the agent of the complainant's company, but negotiated the purchase on behalf of his 13 associates, and, so far as there is any evidence on the subject, it tends to show that they all got the benefit of it; so that the actual cost of the lots to the syndicate of 14, including the mortgage, was $33,920, or $100 a lot, instead of $200, and in that are not counted several misshapen lots.
At the time of the so-called "contract" of purchase by the hotel company, the matter stood thus: The whole number of lots purchased by Syndicate No. 2 from the Sea Isle City Improvement Company, of which complainant was president (not counting the 12 misshapen and comparatively worthless lots), amounted, at $460 a lot, to about $96,800. Of this amount, $30,400 was represented by the mortgage held by Mr. Landis' company, and the other $54,400 mortgage represented the cash paid by the 14 original associates, and a part of the $300 profit on each lot which they proposed to make upon their sale, and at that price ($460 a lot) they were sold—if it may be called a "sale"—to the hotel company. The mortgage given by Weil to McCafferty for $54,400 was held in trust for the benefit of the 14 original projectors, and the plan was that, as soon as the whole $8,740 (the consideration money for the 21 lots to be sold to the hotel company) should be paid to Association No. 2, the lots would be released, not only from the McCafferty mortgage, but also from Kuehne's mortgage to the original grantor, the land company, of which Mr. Landis is president. The officers and directors of the defendants' company consisted of a president, vice president, treasurer, and ten directors, of whom the president, Class, vice president, Weil, and six out of ten of the directors—Kelly, Goodman (immediately superseded), Becker, Mayer, Wolters, and Knapp,—that is, eight in all-were cestuis que trustent named in the Kuehne deed, and formed a majority of the 14 persons known as "Syndicate No. 2," and were also directors of the Sea Isle City Lot & Building Association No. 2, and formed a majority of its board of directors, and also formed a majority of and controlled the board of directors of the hotel company. These eight persons, officers and directors of the hotel company, were all present when the resolution of September 6, 1886, was adopted to purchase the 21 lots, at $460 a lot, from Association No. 2. Mr. Landis swears that his understanding when he subscribed to the 25 shares of stock in the hotel company was that it should be let into the Sea Isle City Lot & Building Association No. 2 to buy its lots at their actual cost, viz. $160 each, which would have made the price of the 21 lots, less two misshapen ones, $3,040, on the payment of which amount his company would have released the lots to them. His statement in this behalf is attempted to be denied and contradicted, but I have no reason to disbelieve it The 14 promoters of the land scheme involved in Association No. 2 were very anxious to have the hotel built as soon as possible, for the reason that they believed that its establishment would promote the sale of their remaining lots, and hasten the realization of their profits, and herein is found an explanation of their conduct.
The complainant's complaint is not only that there was, as above stated, a general mismanagement of the affairs of the company, and wastefulness of its funds, but that it was a fraud upon the stockholders at large for the officers and directors of the hotel company to purchase these lots of Association No. 2 at the price of $460 a lot (which price would have gone into their own pockets); and, further, that it was a gross neglect for them to enter into a contract to build a hotel without seeing to it that they had enough funds provided to finish and furnish it, and without having such control of the title of the land upon which it' stood as that they could raise money by mortgage upon their property, and thus save themselves from being driven Into insolvency. No written contract inter partes for the purchase of the hotel site was ever entered Into between the hotel company and Association No. 2. The hotel company had nothing in writing to show for its purchase, except a resolution said to be entered on the minutes of Association No. 2, which, however, was not produced. Such was the condition of affairs when the contract for the erection of the hotel was entered into, about December 1, 1887. At that time subscriptions to capital stock amounted to less than $25,000, of which about $5,000 had been paid in. Of this less than $3,500 was on hand. The result was that, before the hotel was finished, the company became seriously embarrassed for lack of funds. Of the $38,000 due the contractor, $30,000 was paid, leaving a balance due of $8,000. A variety of extras were contracted for, amounting, in the aggregate, to a considerablesum. It is said by counsel and admitted that, had the obligations incurred on these several accounts been paid in full, the whole would have amounted, including the cost of the land, to about $90,000. And this obligation was entered into with less than $25,000 of stock subscribed, and without control of the title of the land upon which the money was spent. Loans were made, including those from the complainant, to the amount of $28,371.28, of which there was repaid $4,920, leaving due, for borrowed money, $23,451.28, besides large amounts to contractors and material men. The defendant company retained possession of the hotel for two summers, viz. 1888 and 1889, and received for rents and from some other miscellaneous sources a trifle over $5,000; making the total receipts, including borrowed money not repaid, about $55,000. As stated in the quotation above taken from defendants' answer, the company stopped payment and abandoned possession of the property to its creditors, and entirely ceased to do business. The last meeting of the directors took place September 20, 1889, and of the stockholders October 2, 1889. Complainant knew nothing of the financial condition of the company until early in the summer of 1888. At that time he was asked and consented to overlook the finishing of the hotel structure, and the completion of some necessary appendages in the way of drains, a driven well, and salt-water main, etc. He was also applied to for pecuniary aid, and granted it in three payments.
At the same time another syndicate of gentlemen was formed, called "Syndicate No. 3," for the purpose of aiding the hotel company to raise money. This syndicate was composed in part of several of the 14 persons composing Syndicate No. 2, and in part of new men, but was under the control and management of Mr. Gorman, who was acting at the same time as counsel for the hotel company, for both syndicates, and also for Association No. 2. The entries on the minutes as to the arrangements with this last syndicate, No. 3, are meager. At a meeting of the directors of the hotel company held June 15, 1888, a committee of three (Messrs. Class, Herold, and Kelly) was appointed "to make arrangements to raise the necessary funds for the purpose of liquidating pressing liabilities." This committee negotiated with both the complainant and Syndicate No. 3. On June 11th, Syndicate No. 3 is credited on the hotel company's books with cash $4,000 (how this was secured does not appear); and, again, on July 6th, with a like sum; and on the same day complainant is credited with $1,536.87, and to him was given a receipt dated July 3d, as follows: "Office of Sea Isle City Hotel Company, 116 North Third Street, Philadelphia. July 3, 1888. Received of Mr. Charles K. Landis $1,536.87, being part of amount for stock subscribed to the Sea Isle Hotel Company, to be secured by mortgage upon same terms as Third Syndicate. S. W. Goodman, Secretary." Just what is meant by "stock subscribed" does not appear, nor why those words were introduced into the receipt. In point of fact, no stock was subscribed or issued. I infer from the circumstances that the cash so advanced by complainant, as well in this as in the subsequent instances, was in fact paid by him to parties whom he had employed at the company's request to put hi the extra items of the plant under his supervision. On August 8th, Syndicate No. 3 is credited with $6,200, and complainant with $1,505.41; and to him was given a receipt dated July 31, 1888, for that sum, in precisely the same language as the former one. In the minutes of a meeting of directors of August 9th appears this entry: "Sea Isle City Lot Association No. 3 having expressed their intention not to pay in any more money unless said association receives a mortgage for the amount without interest for two years, it was decided to comply with said request." On September 12th complainant is credited with $1,410.30, and for that he has a receipt dated August 31, 1888, in precisely the same language as the one above recited. At the same time, Syndicate No. 3 is credited with $5,000. There are no debits against either of these credits, so that Syndicate No. 3 stands credited with $19,200, and complainant with $4,452.58.
In order to secure Syndicate No. 3, Mr. Gorman, who, as before remarked, was a member of that syndicate, and also one of the 14 who composed Syndicate No. 2, and at this time counsel for those syndicates, and also for the hotel company, and for Association No. 2, contrived the following plan: He procured McGuigan, in whom the legal title to the premises at that time rested, to convey to one John H. Williams (a man of straw, in Philadelphia) by deed dated September 6, 1888, and acknowledged on the same day, the 21 lots comprising block No. 88, and covered by the contract between Syndicate No. 2 and the hotel company. Tins deed was recorded September 15, 1888, the very day on which Syndicate No. 3 was credited with its last advance of $5,000. The consideration expressed in this deed from McGuigan to Williams is $2,000, and the execution and delivery of a purchase money mortgage of $8,740. It recites a resolution of the directors of Association No. 2 of August 22, 1888, authorizing the conveyance. Simultaneously with this conveyance, Williams executed to McGuigan a mortgage to secure $8,740, in monthly payments of $190 each. This mortgage represented the agreed consideration for the 21 lots. The previous payments made by the hotel company, amounting to $2,660, were wholly ignored. At the same time, Williams executed another and second mortgage upon the same premises to John J. O'Neil and GeorgeH. Becker (Becker being a member of Syndicate No. 2, an officer in Association No. 2, and a director in the hotel company), to secure $35,000 in five years, with interest. This mortgage was made to secure Syndicate No. 3 for their advances of $10,200, and for such further advances as they might make. The language of the receipts given to the complainant shows that this mortgage ought in equity to stand as security for the amounts advanced by him. But, so far as the evidence shows, he has never been recognized as interested in it, or had any notice that he had any interest in it. On the other hand, it does not appear that he ever asked to be treated as entitled to such an Interest, and was refused. It does not appear that the Individual defendants are responsible for the fact that he was not mentioned in the declaration of trust just mentioned. There is neither allegation nor proof on the subject. The mortgagees, O'Neil and Becker, executed a declaration of trust in favor of Syndicate No. 3. The circumstances attending the origin of the further indebtedness to complainant do not appear.
With regard to the moneys loaned by the complainant, he puts himself in his evidence on the ground that, when the loan was applied for, he was told by some of the officers or directors of the hotel company that the company had a valid contract for the block on which the hotel was built, and that it was paid for, and the company would be entitled to deed in a month or two; that about 2,500 shares of stock had been subscribed for by reliable parties, which, when all paid up, would amount, at $25 per share, to $02,500, and would liquidate all indebtedness; that he did not know the actual condition of the title, except that his company held the $30,400 mortgage on the whole tract, upon which was then paid $S,500; that he knew nothing of the $54,400 mortgage or the entanglement of title resulting from the network of conveyances, declarations of trust, and mortgages contrived by Mr. Gorman in November, 1887, and dated back to July, 1887, and that he advanced his money in reliance upon the representations so made to him by the directors. The complainant, however, fails to connect either of the defendants with these representations. They were, however, all cognizant of the making of the contract to build the hotel, and all except Goodman and Poerderer (who had no vote) voted for and took part in making it.
Upon these facts, the complainant's rights seem to me to be plain, quite independent of any question of misconduct on the part of the officers of the company, or of any rights he may have in equity against them as individuals. Those rights are as follows: First. To have the price to be paid for the 21 lots taken by the hotel company, or rather the 19 lots for which they agreed to pay, reduced from $400 a lot, at which the parol contract was made, to the price actually paid by Syndicate No. 2 to the complain ant's company, which was $200 per lot, if the commission of $40 a lot allowed by complainant's company to Becker for negotiating the sale was retained by him personally, or to $160 a lot if, as the evidence indicates, that commission was divided among the members of Syndicate No 2; and to have the sum of $2,660, which was actually paid by the hotel company to Lot Association No. 2, applied upon the price thus ascertained, and the mortgage from Williams to McGuigan for $8,740 reduced accordingly; and to have the $54,400 mortgage satisfied and discharged as to these lots. Second. To have the consideration money mortgage given by Kuehne to the Sea Isle City Improvement Company to secure $30,400 canceled and discharged, so far as the hotel company is concerned. (This was actually done in December, 1891.) Third. To be let in as a cestui que trust to the extent of his money advances in the mortgage for $35,000, executed by Williams to O'Neil and Becker.
The result would be that the hotel company will hold the lots subject only, so far as the mortgages are concerned, to a small balance due on the mortgage for $8,740, and to the amount due upon the mortgage for $35,000, given to O'Neil and Becker, trustees. I put his right to the first item of relief above stated, not alone on the ground that representations were made to him, as an inducement to subscribe to stock, to the effect that the price of the lots to the hotel company was to be the same as that paid to complainant's company therefor, but also upon the ground that all the officers and a majority of the directors of the hotel company were members of Syndicate No. 2, and composed a majority thereof, and that the contract of purchase of the 21 lots was in substance and effect made with themselves. Hence, upon familiar principles, they cannot be permitted to make a profit out of the transaction. Cook, Stocks & S. § 692, and cases; Redmond v. Dickerson, 9 N. J. Eq. 507. There was no serious attempt to show that the block of lots contracted to the hotel company was more valuable than the 212 conveyed by the complainant's company to Kuehne. The giving and holding the $54,400 mortgage for the benefit of Syndicate No. 2 was attempted to be justified upon the ground that the syndicate agreed to make some general Improvements in the way of sea wall, etc., and that some were actually made by them at a considerable expense. If any valid contract of that kind was entered into by Syndicate No. 2, and they have actually expended money under it, it may be that this court may find in the circumstances some equitable consideration, as against the hotel company, for this large mortgage, and may sustain it accordingly.
It remains to inquire what measure of relief complainant is entitled to in this cause, upon the pleadings and facts as they stand. It is manifest that he cannot, in the present shape of the pleadings, and against the parties before the court, have any part of the relief to which I have just intimated he is entitled. He must be confined to such relief as the pleadings and proofs show that he is entitled to against the defendants hereto. It is also plain that the present defendants cannot complain that complainant did not pursue the holders of the several mortgages above set forth for the relief against them to which I think he is entitled. The fact that he had these rights does not deprive him of his right to call these defendants to account for such equitable injuries as they have inflicted upon him. He is before the court in two distinct and independent attitudes, viz.: (1) As an original stockholder; and (2) as a creditor. As a stockholder, the individual defendants occupied towards him the position of trustees and cestuis que trustent (Ackerman v. Halsey, 37 N. J. Eq. 350, 38 N. J. Eq. 509), and are answerable to him for any misconduct or actual negligence which has resulted in a loss to him as a stockholder.
With regard to the claim on the part of the complainant that the directors of the hotel company were guilty of misconduct in a willful and wasteful use of the funds of the company, I do not find it sustained by the proofs. I cannot say that I am satisfied that the company did not receive a fair equivalent for its payments. There is nothing in the case upon which to found a belief that any of the directors or officers—certainly not those here made defendants—were guilty of any corruption in those disbursements, had any interest in the various contracts, or received any commission or personal advantage from them. The business transactions of the company, however, were, in my judgment, decidedly ill-advised and improvident, in that contracts were entered into involving obligations for the payment of large sums of money, without a proper provision to meet them. The subscriptions of stock were entirely insufficient for that purpose, and the title of the land of which the company thought it was the equitable owner was so entangled and involved with mortgages, conveyances, and declarations of trust, recorded and unrecorded, as to render it unavailable for the purpose of raising a loan by mortgage, which, under ordinary circumstances, might have been resorted to for that purpose. In fact, the fortunes of the company were at all times practically at the mercy of the party of gentlemen known as "Syndicate No. 2," and they were interested, as holders of a large mortgage upon other lands, in having the hotel built and occupied, and were comparatively indifferent to the fortunes of those contributing to its erection. This is manifest from the beginning to the end of the case, and is the real cause of the pecuniary misfortunes which have occurred. I think the conduct of the defendant directors, as developed in this case, has been of a character to render them liable to complainant for the depreciation in value, or entire loss, as the case may be, of his stock. It is unnecessary to rehearse the facts as above set out. The purchase of the lots, by parol merely, from themselves, at a profit of nearly 200 per cent., when they were subject to a mortgage for nearly the whole of the consideration money; the subsequent manipulations of the title; the entering into a contract of building requiring a large outlay of money, without any adequate provision for its payment, whereby the company was finally thrown into insolvency by common-law and lien judgments against it, while they all the while held in their own hands, as members of another association, the power of wrecking it after the hotel was built; then, finally, becoming themselves the virtual owners of it, leaving the stockholders practically with nothing to show for their investment seems to me to be conduct amounting to a breach of trust of a character to render the defendants Kelly and Class liable to make good to complainant the amount he invested in the stock of the company, with interest after bill filed.
It was suggested that the complainant had, by acquiescence, cured this equitable wrong, but I think the case fails to make out any such acquiescence. The wrong was done without his knowledge, and everything like acquiescence on his part occurred after the defendants had managed to put the corporation in the hopeless condition indicated. He then came in and assisted them in actually finishing the hotel, and loaned them money; but there is not the least proof that he knew anything about the manipulations of the title or the other facts making out the breach of trust. He was elected a director in September, 1888, after all the mischief was done, and after he had advanced the money above mentioned; and he is credited with taking part in several meetings of directors, when he seems to have done all he could to retrieve the fortunes of the company. He denies that he ever knew that he was so elected, or that he ever consciously acted as director. The effect of his evidence on this point is that, if he did attend any meetings of directors, it was as an interested stockholder and creditor, anxious to retrieve the fortunes of the company. But, admitting that he did act for a time as director, I am unable to see how such action, at the time and under the circumstances, can operate as a release and condonation of the previous equitable wrong done to him.
It was not seriously argued that the complainant was premature in bringing his suit, and should first have asked the directors to bring it. As he was suing all the directors he could find in this state, and as it is perfectly manifest that it would have been a waste of time to attempt to procure the company to sue these directors, 1 see no reasonwhy he was not justified in doing as he did,— commencing a suit in his own name, for his own benefit, and for that of such stockholders as chose to come in.
I come now to his position as a creditor. Here it must be observed that the equitable wrongs I have mentioned committed against him as a stockholder and cestui que trust of these defendants were all done before he became a creditor. And, first, I remark that there is here found no element of an unlawful or inequitable abstraction and disposition of the assets of the corporation by the directors after it had incurred an indebtedness. The defendants herein are not shown to have taken for their own use, at any time, any of the company's assets by any act done after complainant advanced his money, unless the act of their counsel (Mr. Gorman), in procuring to be executed the conveyance of their 21 lots by McGuigan to Williams, the mortgage by Williams to McGuigan for consideration money $8,740, and to O'Neil and Becker for $35,000, may be considered such an abstraction. Williams took the title in trust for the hotel company, and executed a declaration of trust accordingly, which, however, has never been recorded. The mortgage to McGuigan for $8,740 not only, as before stated, ignored the actual payment of $2,660 on account of consideration money, but was, besides, given for too great a sum, if I am right in my conclusion that the directors of the hotel company cannot be permitted, under the circumstances, to purchase from themselves at a greater sum than they paid. But here, again, comes in the question of the amount expended by Syndicate No. 2 for the sea wall, etc. That mortgage was given and held in trust for the benefit, among others, of these defendants, as members of Syndicate No. 2; and if it were shown to have been enforced against the hotel company, and the amount collected paid and distributed among the members of that syndicate, it may be that whatever sum the defendants herein had thereby received more than they ought to receive would be so much funds abstracted by them from the company, which should go to its creditors. In point of fact, however, nothing of that kind has been done. The company still has its defense to that mortgage, and it may be that no use of it will ever be made prejudicial to the interests of creditors situated as is this complainant. Moreover, it is not shown that these defendants took any part, either as directors of the hotel company or otherwise, in the various manipulations of the title above set forth. Those all seem to have been the device and work of Mr. Gorman, acting as counsel for all parties.
If, then, it be competent for the complainant, as a creditor of the company, to proceed in this court against these defendants, on the ground that they either have received assets of the company to which they are not entitled as against creditors, or have helped others to do so, I think his case would fail for want of proof, as well as of allegation. I make this observation in view of the state of authorities on this branch of the case. If complainant relies upon misrepresentations made to him by these defendants in the matter of his advances to the company, then it seems to me clear enough that his remedy is in a court of law. If he comes into this court, he must base his right, as I understand the authorities, upon the ground either —First, that these defendants have received moneys belonging to this company which of right should go to its creditors; or, second, that they were his trustees in such a sense that they owe him a duty as a cestui que trust which they have failed to perform, or have been guilty of some act of misfeasance as trustees, resulting in his loss, and which was of a character remediable in this court. Upon this second ground counsel put himself in argument, relying upon Halsey v. Ackerman, 38 N. J. Eq. 509, and Williams v. McKay, 40 N. J. Eq. 189. The well-settled rule in England is that directors of an ordinary trading corporation do not occupy towards its creditors the relation of trustees and cestuis que trustent in such a sense as to make them liable to be called to account by the creditor in equity. Poole's Case (1878) 9 Ch. Div. 322, at page 328; Thomp. Liab. Off. (Lead. Cas.) p. 351, §§ 1, 2; Id. p. 397, § 24; Thomp. Liab. Stockh. § 10. And I confess I am unable to perceive upon what principle the relations between the officers and directors of such a corporation, on the one hand, and its ordinary creditors, on the other, can be held to resemble those between a trustee and cestui que trust. Those relations contain in them no element of personal trust and confidence, such as give rise to and lie at the foundation of the relation of trustee and cestui que trust. A somewhat different doctrine is supposed to prevail in this country, and the present inquiry is as to its extent and true limits.
In Ackerman v. Halsey, supra, which was heard on demurrer, the complainant was both a creditor and stockholder of an ordinary national bank, whose funds had been dissipated through the neglect and mismanagement of the defendant directors. It is plain from a reading of the statement of the bill and printed arguments of counsel, as reported, that reliance was mainly, if not entirely, placed upon the complainant's right as a stockholder to treat the directors as trustees. The complainant's counsel there did, indeed, refer to Williams v. Halliard, 38 N. J. Eq. 373, reported on appeal as Williams v. McKay, 40 N. J. Eq. 189, for the position that the assets of a bank are a trust fund for its creditors, and I shall refer to that case hereafter. The attention of the court, however, in Halsey v. Ackerman, does not appear to have been called to the distinction, in respect to the relation of trustee and cestui que trust, between a stockholder and a creditor atlarge, and the question was as to the sufficiency of the allegation of the bill to hold the defendants in either capacity, though the learned chief justice does speak of the complainant as being both a stockholder and creditor. In Williams v. McKay the suit was by a receiver of a savings bank, which had no capital stock or stockholders as such, and in which each depositor was entitled to a share of all the earnings, and of necessity must share the losses, and thus became to all intents and purposes a stockholder to the extent of his deposit. See the fifth and seventh sections of the charter of this bank (P. L. 1869, pp. 177, 179); Stockton v. Bank, 32 N. J. Eq. 163, and cases cited. The least reflection will show that this is the true position of a depositor in an ordinary savings bank in this state, whether organized under a special charter or under the general law; since any depositor, by continuing his deposit until the institution is wound up, will be entitled to share ratably with all other depositors in like position in all the assets of the bank, precisely as stockholders do in the winding up of an ordinary bank owned by stockholders. If, however, a depositor in a savings institution withdraws his deposit while the institution is a living one, it is a voluntary abandonment by him of all interest in the surplus. If at any time there be no actual surplus, but an actual deficiency, so that, upon the winding up of the institution, there will not be assets enough to pay each depositor in full, then, clearly, no depositor has a right to withdraw his deposit in full, and it would be a fraud in the directors of such an institution in such a condition of affairs to pay any depositor in full. Nothing can be clearer than that it is the duty of the officers of an ordinary savings bank, if at any time they discover that the assets are not sufficient to pay the depositors in full, to decline to pay any depositor. So that, I repeat, the depositor in an ordinary savings bank stands precisely in the position of a stockholder in an ordinary bank owned by stockholders. The payments made to such depositors at stated periods are properly called "dividends," and the statute provides that all the earnings, above a certain amount reserved for safety, shall be divided among the depositors for the time being. Revision, p. 1064, par. 32; Supp. Revision, p. 916, par. 18. These considerations lead to the result that it by no means follows that, because the directors or managers of an ordinary savings bank hold towards the depositors therein the position of strict trustees, they hold the same relation towards the creditors of an ordinary banking or trading corporation. It is to be observed that an ordinary savings institution usually has no creditors other than its depositors. This consideration must be borne in mind in considering the effect of the language of the learned chief justice In Williams v. McKay, 40 N. J. Eq., at page 196, where he says: "It is a mistake, sure to mislead, to regard this suit as one solely in right of the insolvent corporation. It does not rest upon that narrow footing, for the receiver represents not only the corporate body, but likewise the depositors and creditors; and the question which presents itself, therefore, is as to the status of the managers with reference to the latter two classes of persons, and as to them I entertain no doubt whatever that those officers must respond to them in the character of their trustees." Now, here, again, the distinction in this behalf between stockholders and creditors does not appear to have been in the learned chief justice's mind, and there were, in fact, in that case, no creditors other than depositors. Manifestly, it was this sort of creditor that was in his mind, viz. a depositor in a savings bank who is to all intents and purposes a stockholder, and who, with all the other stockholders, compose, in fact, the corporate body. And, indeed, there was in that case no corporate body, strictly speaking, outside of the depositors, or, rather, the corporate body was composed of the depositors. The same is true of a certain class of life insurance companies and fire insurance companies, which are conducted entirely on the mutual plan, and have no capital stock, and whose assets consist entirely of the accumulated contributions of the persons assured. The assured, in such cases, constitute the only stockholders, and are usually entitled to vote for the directors. They receive dividends of the surplus profits as they accrue, and hold the same relation to the directors that stockholders in an ordinary corporation do. Such a case was Richards v. Insurance Co., 43 N. H. 263, reported in full in Thomp. Liab. Off. p. 288. The directors of a mutual fire insurance company had there made an assessment on the members to meet certain losses by fire to certain of the insured, of whom the plaintiff was one, and it was held that they were bound to divide the proceeds ratably among the several loser's without preference. The court incidentally remarked that, in making, collecting, and distributing the assessment, they were acting as agents and trustees of the policy holders.
The notion that the directors of trading corporations occupy the position of trustees towards the creditors thereof in such a sense that they may be called upon to account as such in a court of equity for misconduct had its origin in the opinion of Judge Story in Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944. There the legislature had authorized a bank, whose charter authorized the issue of bank notes, to continue its corporate existence for four years after the expiration of its chartered existence, for the sole purpose of enabling the directors to gradually settle and close its business, and to divide its capital stock (meaning its assets) among the stockholders. The manifest effect of this legislation was to make the directors statutory trustees or receiversfor the creditors in the winding up of the affairs of the bank. Under this legislative authority, the stockholders and directors divided the assets among the stockholders, without providing for the payment of the outstanding bank-note circulation. Complainants were holders of a large amount of these notes, and the defendants were stockholders of the bank, who had received dividends on their stock in the final winding up, and the relief prayed and granted was that they should answer for what they had so received. It is thus seen that the case presented was a plain one of following assets of a corporation into the hands of persons not entitled to hold them, as against creditors; and it was by no means necessary to resort to the notion of a "trust fund" and the relation of trustees and cestuis que trustent to sustain the complainants' claim. That rested upon the simple and time-honored ground that it was a fraud upon the creditors for the stockholders to pay money to themselves and leave the creditors unpaid. The holding of Judge Story is that the assets of a corporation in course of winding up constitute a trust fund for its creditors, and that such assets may be followed in the hands of any one not entitled to hold them as against creditors. The case goes no further. It is true that the learned judge uses this language (page 311, 3 Mason, Fed. Cas. No. 17,944): "The capital stock of banks is to be deemed a pledge or trust fund for the payment of the debts of the bank." But it is manifest that by this he means that the "assets" constitute such fund; for he uses this language on page 312, 3 Mason, Fed. Cas. No. 17,914: "On a dissolution of the corporation, the bill holders and stockholders each have equitable claims, but those of the bill holders possess a prior exclusive equity." Sawyer v. Hoag, 17 Wall. 610, also relied upon in support of the doctrine in question, was a suit by the assignee of a bankrupt corporation against a stockholder to recover an unpaid subscription to its capital stock. The stockholder attempted to set off a counterclaim which he held against the company. In holding that the set-off could not be allowed, Justice Miller (page 620) says: "We think it now well established that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the benefit of the general creditors of the corporation." Here, again, the general expression "capital stock" must mean the "assets" of the corporation, unless it be confined to the unpaid subscriptions to the capital stock, as, indeed, it was in that case; since all actual payments on account of capital stock do at once mingle with the other moneys of the company, and lose all earmarks and distinction in the mass of general assets; and the dictum that the unpaid subscriptions constitute a trust fund must De construed in connection with the question under consideration, viz. could a stockholder of a corporation who owed a balance upon his subscription for stock buy up a debt against the corporation while insolvent, and set it off against his subscription? Another case supposed to support the general proposition in question is Hodges v. Screw Co., 1 R I. 312, 3 R. I. 9. That was a suit by a stockholder against directors, and so not in point. A later case in Rhode Island is Olney v. Land Co., 16 R. I. 567, 18 Atl. 181, decided in 1889. There the directors of the defendant corporation, after complainants had brought suit at law upon a large claim, and when the corporation was pecuniarily unable to pay all its debts in full, executed mortgages to themselves to secure their Individual indebtedness against the company. Plaintiffs, having recovered judgment at law and levied execution, filed a bill in equity to set aside the mortgages, on the ground that the directors had no right to prefer themselves when the company was in an insolvent condition. The court held that such preference was invalid, upon grounds of public policy; but they expressly confined it to cases of corporations having become insolvent, using this language: "Where the corporation becomes insolvent, and the stockholders have no longer a substantial interest in the property of the corporation, directors should be regarded as trustees of the creditors to whom the property of the corporation must go." The opinion is elaborate, and contains a collection of the decided cases upon the topic tinder consideration to that date.
Turning to our own state, we find that the doctrine held in that case that the directors of an insolvent corporation, who were also its creditors, cannot prefer themselves, was directly repudiated by the court of errors and appeals in Wilkinson v. Bauerle, 41 N. J. Eq. 635, 7 Atl. 514. That was a suit by a creditor against the stockholders and officers of an insolvent corporation who, after it became insolvent, had assigned all its assets to one of its members for the benefit of himself and some other members, in payment of a debt to him. The preference was held to be valid; but the favored creditor, and those who with him received the assets, were required to account for the actual value of the property assigned, so far as it should be found to exceed, if at all, the actual indebtedness which it was assigned to pay. This result was put on familiar ground. At page 643, 41 N. J. Eq., and page 514, 7 Atl., the learned judge says: "The sale was not in open market or to a stranger bargaining with the company, whose offer might be presumed to afford some indication of the value of the property. It was a private sale made by directors to a director who took an active part in the transaction. He fixed the price offered as buyer, and united with the others in accepting the offer as seller. Although others were interested in the purchase, this was' the plain effect of thetransaction." And further on, at page 644, 41 N. J. Eq., and page 514, 7 Atl., he discusses the relations between creditors and stockholders thus: "As between creditors and stockholders, the corporate property has always been held to be a fund for the payment of debts, to which creditors have a right in preference to stockholders. So the assets of a corporation cannot be divided among its stockholders, nor diverted to uses not contemplated by its charter, for the benefit of stockholders to the detriment of creditors. Nor can directors, by fictitious credits or by accepting overvalued property in payment for stock subscriptions, deprive creditors of the fund out of which their debts should, be paid. These doctrines do not at all depend, as 1 conceive, on the existence of a corporation bankrupt law or other like legislation, nor on the prohibitions of the statutes respecting transactions in fraud of creditors, but rather on principles inherent in the mature of corporations as artificial persons, whose creditors can only enforce their debts by a resort to the property the corporation lias acquired. So, upon like principles, I apprehend that the property of an incorporated company is devoted to the payment of the creditors thereof, at least to this extent: that it may not be diverted to other purposes. The corporation and its officers owe to their creditors this duty: not to divert the corporate property from the' general purpose of paying the creditors. While they may dispose of the corporate property, and even prefer one creditor to another, they may neither give away the corporate property by a direct gift, nor by a sale at less than its full and fair value, to the detriment of creditors. A violation of this duty will entitle the creditors who suffer thereby to relief. If the diversion of the corporate property from the payment of debts is effected by a mere gift, it is not necessary to discuss what relief could be afforded to creditors. If the diversion is effected under the guise of a sale, and the sale is not objectionable, as being made with intent to defraud creditors, then it is plain that relief cannot be afforded to creditors by setting aside the sale, for that, as we have seen, is not now prohibited. But in such a case it is equally plain that the directors who have effected such a diversion of corporate property from the payment of debts have violated a duty, and will be personally liable to make up to creditors what has by their acts been thus diverted. * * * But, when directors make sale of corporate property to one of their number, who takes part in the transaction as both buyer and seller, and creditors are thereby deprived of the opportunity to enforce their debts, then it results, from the relation above mentioned as existing between them and the creditors, that it devolves on the directors to show that the transaction was made in good faith, and that the sale produced the full value of the property. If they fail to show these facts, creditors are entitled to compel them to account for the full value of the property." It is hardly necessary to say that I must accept this as the latest expression of our courts upon this subject; and, as I understand the language used, in connection with the result arrived at, it fails to hold that directors, before actual insolvency, are responsible as trustees to creditors, and liable as such for mismanagement or neglect in the performance of their ordinary duties in the management of the ordinary business of the corporation, whereby a loss has occurred to the corporation, and it has become unable to pay its debts in full.
One other case deserves notice,—Delano v. Case, 121 Ill. 247, 12 N. E. 676. That was a suit at law in trespass on the case by a depositor in a bank (whether it was in the nature of a savings bank or not is not stated) against the directors for negligence in permitting it to be held out to the public as solvent when it was insolvent. In rendering judgment, the court of intermediate appeal had held; First, that the directors of a bank are trustees for depositors as well as for stockholders; second, that they are bound to the observance of ordinary care and diligence, and are, hence, liable for injuries resulting from its nonobservance. The supreme court of Illinois approved of the doctrine of this court. The authorities cited are a case from Louisiana, one from Kentucky, and one from Tennessee; also, Thomp. Liab. Off. 395. Of the authorities cited, we have seen that neither Mr. Thompson in his book nor the case in Rhode Island sustains the doctrine stated; and, with great respect to the court of Illinois, I am unable to perceive how the doctrine of trustee and cestui que trust can be brought in question in an action at law against directors for misrepresenting the standing of the bank, whereby people were led to deal with it. The Kentucky case cited —Society v. Underwood, 9 Bush, 609—is also reported in 13 Am. Law Reg. (N. S.) 211 (1874), and is severely criticised by Judge Redfield in a note. It was, in fact, a suit by a special depositor of bonds (like Foster v. Bank, 17 Mass. 479) to recover from the directors of the bank the value of certain of them which were unlawfully abstracted by the officers of the bank, and appropriated to the use of the bank, with the knowledge and implied approval of the defendant directors. Some of the language used tends to support the general proposition stated in Delano v. Case, but the circumstances forbid its application here. Of the numerous cases cited by Mr. Beach in his treatise on Private Corporations upon this topic (sections 240, 241, 255, 257), those above noticed are the only ones that seem to support the doctrine in question. And upon the general subject see Hollins v. Iron Co., 150 U. S. 371, 14 Sup. Ct. 127, especially page 381 et seq., 150 U. S., and page 127, 14 Sup. Ct., where the subject is discussed and adjudged cases examined.
My conclusion is that complainant's case as a creditor completely fails—First, becausethe misconduct complained of occurred before the complainant's debt was incurred; second, because it related to the conduct of the ordinary business of the corporation in furthering the purposes for which it was organized, and not to the winding up of the institution and the distribution of its assets; third, because the proofs fail to show that these individual defendants are responsible for any diversion of the corporate property from the general purpose of paying the debts of the corporation, in the sense stated in the opinion in Wilkinson v. Bauerle, as above quoted. The complainant should be confined to relief as above stated as to his capital stock, and as to his debts against the company his bill should be dismissed, without prejudice to any other remedy he may have; no costs to be allowed to either party. I will advise a decree as above.