MEEKER V. WINTHROP IRON CO.
49
advantages to the lessee; vo"ted one of the brothers a salary of $3',000 11 year as president; and in pursuance of said action such a lease was executed by two of the brothers, acting as president and se?retary of the oW. Iron Uo., a!1d by the other two acting as secretary and superIntendent of the 'V. Hematite Co. Upon a bill filed hv stockholders in behalf of themselves and all other stockholders, held, that such a lease was inequitable, and 11 fraud upon the rights of stockholders not concurring therein.
In Equity. Morris J: Uhl, for complainants. C. T. Walke?' and Mr. Crocker, for defendants. BAXTER, J. The defendants, the Winthrop Iron Company and the Winthrop Hematite Company, are corporations orgamzed under the laws of Michigan. The capital stock of the former consists of an iron ore mine rated at $500,000. In August, 1877, it made a lease thereof to the St. Clair Brothers, a partnership composed of the four defendants by that name sued herein. Soon after securing said lease they organized the Winthrop Hematite Company, for the purpose of working the mine thereunder. They continued thus to operate until the summer of 1881, when they made an effort to obtain a renewal thereof to the Winthrop Hematite Company. But failing to secure it, they pmceeded to purchase a majority of the capital stock of the Winthrop Iron Company, and assume control of its business. At their instance a stockholders' meeting was called for October, 1881. The meeting was accordingly held by one of the St. Clairs, (who acted for himself and brothers,) assisted by W. S. Hollert, their attorney, and one G.B. Breese. Neither Hollert nor Breese owned any stock in the company. Hollert was made president, and Breese secretary, of the meeting. Being thus organized they adopted certain resolutions, in which, among other things, they removed two directors of the company, and appointed three of the St. Clairs in their stead; authorized the sinking of a shaft at the mine, and appropriated $.,)0,of the company's money to complete and equip it; authorized and dIrected a lease of the company's mine for 18 years from and after December 1, 1882,-the time at which the former lease was to expire,to the Winthrop Hematite Company; and soon thereafter Eugene G. St. Clair as president, and J. N. St. Clair as secretary, of the Wmthrop Iron Company; and Eugene G. St. Clair as secretary, and A. St. Clair as superintendent, of the Winthrop Hematite Company, professing to act for and in behalf of their respective companies, entered into a contract wherein and whereby it was agreed that saicl first company should lease its mine, with all the improvements. machinery, etc., thereon, for 18 years to the Winthrop Hematite Company at a royalty of 25 cents per ton. The relief sought by complainants, who sue as well for all other in the Winthrop Iron Company as for themselves, is a les0IsslOn of said lease and an account of rents and profits; and to " v.17,no.l-4
50
FEDERAL REPORTER.
this end they have, through their solicitors, invoked thatwell-estab. lished principle so uniformly enforced by courts of equity, which forbids agents from dealing with themselves or with other persons for their private benefit, to the detriment of their principals. Is the principle applicable to the facts of this case? 'rhe lease sought to be rescinded is not to the St. Clairs, but to the Winthrop Hematite Company. But who is the Winthrop Hematite Company? A mere entity created by law, without body or soul, endowed with capacity to acquire, hold, and dispose of property, in trust for the use and benefit of the natural persons of whom it is composed, in proportion to their several interests therein. But its property belongs in equity to the corporators, and every contract that wrongfully deprives the corporation of any part thereof, or diminishes its value, is an inj ury to its beneficial owners. Hence, courts of equity look beyond the artificial" creature in whom the legal title is vested, to the real persons which it represents. The defendants :::;t. Clair were, at the. time the lease was executed, and are yet, the owners of all the capital stock of the Winthrop Hf>matite Company. If any profits or other advantage resulted therefrom, it inured to them, to the same extent as if the lease had been made directly to them. Hence, in executmg said lease for the Winthrop Iron Company to the Winthrop Hematite Company, they were, in a beneficial sense, dealing with themselves; and we can see no reason for withholding the application of the principle invoked and hereinbefore stated, unless its application is averted .by the stockholders' resolution hitherto mentioned, and under and by authority of which, as it is alleged, the lease was executed. . Does this resolution validate and make effectual a contract that would otherwise be declared void? The ownership of a majority of the capital stock of a corporation invests the holders thereof with many and valuable incidental rights. They may legally control the company's business, prescribe its general policy, make themselves its agents, and take reasonablp. compensation for their services. But, in thus assuming the control, they also take upon themselves the correlative duty of diligence and good faith. They cannot lawfully manipulate the company's business in their own interests to the injury of other corporators. Any contract made by them in behalf of their principal with themselves or with another for their personal gain would be voidable at the option of the com· pany. We may, therefore, admit that the stockholders' meeting of October, 1881, was legally called and regularly convened, (facts, however, denied by the complainants;) that it possessed the power to displace two of the existing directors and of electing three of defendants in their stead; to direct a lease of the company's mine, and dictate the company'sgeneral policy within the scope of its chartered priv· iliges; and yet defendants would be without the legaLright to appro-
MEEKER V. WlnHROP illUN CO.
priate the corporate property to'themselves or to make any other disposition of it for their private benefit. If they could, they would be, in effect, the beneficial owners of. the entire corporate property. If they can make such a lease, they can, as selfishness or caprice shall dictate, modify its terms, expend t.he company's entire income in improvements to facilitate their indi vidual interests, or do anythinf{ else their selfishness or cupidity may snggest. The law does not thus vest majority stockholders with any such dangerous power, invite such peculations, or open the door to such abuses. If a majority of stockholders can, in any event and under any circumstances, thus vote away the corporate property to their individual uses,-u, question that need not be decided in this case,-they could only do so upon the clearest and most satisfactory evidence of good faith, and· for an adequate consideration; and the burden of proof is upon the parties thus acting and claiming the enforcement of such a contract. All doubts in relation to adequacy of consideration and good faith ought to be resolved in favor of the principal. Was the lease in question, therefore, fairly obtained, and is it supported by a just and adequate consideration? On these points the testimony is not susceptible of easy reconciliation. It consists mainly of the opinions of professed experts and interested witnesses; the witnesses for c.omplainants generally concurring in the opinion that the royalty contracted for in the second lease is grossly inadequate; while those for defendants unite in the opinion that the rent agreed on is a sufficient consideration for the leased premises. Each witness endeavors to fortify his opinion with . such extraneous facts as seemed to him to be material and pertinent to the issue. But fortunately the court is not entirely without other evidence bearing on these questions. It appears that the defendants St. Clair are experienced and successful business men. In 1877, with a full knowledge of its condition, resources, and capabilities, they applied for and obtained a five years' lease of said mine, and therein agreed to pay a royalty of 50 cents per ton. By it they obtained nothing but a lease of the mine. The lessor was under no obligation to make any improvements or furnish machinery. These facilities were to be provided by the lessees, the lessor 'covenanting to purchase the same upon the expiration of the lease, at such price as might, in case of a disagreement between the parties, be fixed by arbitration. This contract sufficiently filvinces the defendant's estimate of the mine at that time. Nothing has since been developed in connection therewith calling for any radical change of opinion in this regard; and yet, after more than three years of act· ual experience in working the mine under that lease, the defendants, for the purpose of securing another lease of the same property, resorted to the means hereinbefore detailed to obtain it; and, after having thus secured absolute control of the corporation to which it
52
FEDERAL REPORTER,
belonged, by their votes as stockholders, authorized and directed themselves, as the officers and agents of the company, to make and execute a lease of said premises to another aud distinct corporation, wholly owned by them and for their exclusive benefit, at one-half the royalty contracted for in the first lease, provided a sufficient quantity of ore could be found accessible without an unreasonable outlay of money. It seems that a reduction of one-half the royalty agreed to be paid under the first lease ought to have been accepted as a sutficient concession. But it did not satisfy the defendants. 'rhey demanded more, and being, as they supposed, in full possession of the requisite power, they dealt in a most generous spirit with themselves. The second lease, conforming to the requirements of the resolution passed by their votes, included, in addition to the mine, from $30,000 to $40,000 worth of machinery, (which the lessor company was, under the terms of the first lease, bound to purchasp.,) and the $50,000 of money appropriated for the purpose of sinking and equipping a shaft to put the mine in a more workable condition to facilitate their operations. Interest on these two sums, ordinary deterioration of the machinery, the $3,000 salary allowed to one of the defendants for acting as president of a corporation stripped of its property and left without any active business or responsibility, will about allso1"b all the rent payable nnder said second lease. Its effect, therefore, is to transfer the beneficial interest of all the company's property to defendants for 18 years. But if, perr-hance, it does not do this, another stockholders' meeting, to be called and controlled by defendants, can easily find some pretext for appropriating any surplus that may remain. A lease thus attained, and capable of being perverted to such injustice, ought not to be sustained. It is inequitable, and a fraud upon the rights of the other stockholders. A decree will, therefore, be entered declaring it fraudulent, and ordering its rescission, and appointing a receiver to take charge of and superintend the company's business, until the accounts hereinafter ordered and the rights of the parties involved herein are ascertained and finally adjusted. The defendants St. Clair will also be required to account with the Winthrop Iron Company, pursuant to the terms of the first lease, until December 1, 18i)2, the date of its expiration, and from and after that time for the actual profits realized by them from said mine, or for a reasonable royalty, at complainants' election. Said defendants will also be decreed to pay the costs heretofore accrued. And as the complainants have prosecuted this case for the common benefit of all the parties interested, to protect and preserve a trust fund, they are entitled to be reimbursed therefrom for all proper expenditures made or liabilities necessarily incurred in and about the prosecution of the sa me. A master will, therefore, be appointed to hear proof, and take !lnd report in reference to the accounts hereinbefore ordered, and to assertain what will be a proper allowance to complainants for their
53
counsel fees aud other necessary expenditures made or to be made. by them in and about the prosecution of this suit. All other questions will be reserved until the coming in of the master's report. The main position in the case above given rests on the rule that a principal may, at his election, avoid a contract made by his agent when such contract reserves emoluments or bencfits to the agent which should have been given to the principal. The profit that an agent is permitted to make out of his agency is limited to salary and commissions fixed by law or by agreement of the parties. Hence, any contracts by an agent for the purchase of the principal's property, or the investment of the principal's assets, inures to the principal's benefit; or, if it be the result of a speCUlation by the agent fur his private gain, it llIay be repudiated by the principal, so far as concerns the agent and parties with notice, unless it should appear that the speculation was made with the principal's approval, on a full knowledge of the facts.(a) The reasuus for vacating such contracts increase in strength when the agent, from his peculiar position, is enabled to exercise peculiar influence over the principal, as is the case when a director or officer of a company makes a cuntract on behalf of the company for his own emolument;(b) or a trustee, relied on implicitly by the que trust, makes an unfair profit out of the latter's estate.(,:) Nor is this all. An agreement by an officer of a railroad company to use his influence to have the road take a particular course, is not only voidalJle as against the company, but void generally, as against puillic policy.(d) "All arrangements by directors of a railroad company to secure an undue advantage to themselves, at its expense, * * * are so many unlawful devices to secure an undue advantage to enrich themseives to the detriment of the stockholders and creditors of the company, and will be condemned Whenever properly brought before the courts for consideration."(e) And in a later case, still ulII'eportefl, (f) it was held that an agreelllent, for a consilleration, of a stockholder in a business corporation to votA for a particular person as manager, and to vote to increase the salaries of the ollieers, including that of the manager, is void, as against public policy, if not cured by the assent of all tile stockholders.(u) :FltANVIS WHARTON. (a) ve. v. NultoU. 2 lIIy\. & K. 819; Lowther v. Lowther, 13 Yes. 95; Dunne v. Engli5:h, L. R. Is Eq. 5:l-I; :Marsh v. \Vllilmore, 21 'Vall. Baker v. H·,mphrey·. 101 U. S. 491; lIIott v. Harrington, 12 Vt. Smith v. Townsend, 109 lIIa ··. 5UO; FLlton v. Whitney, 66 N. Y. 548; LorMlard v. Clyde, £6 N. Y. Everhart T. Searle, 71 Pa. St. (b) Imperia' lIIere. CO. T. Coleman, L. R. 6 11. Flanagan v. Railroad, t ·. R. 7 ICq. 116; New Soml"ero Phosphate Co. v. Erlan!':er, L. R. 5 C. D.73. (c) Coles T. Trecc.thick, 9 Ves. 234; Ellis v. L. R. 7 ell. 1M; Thompson v. L. R. 2 App.. Cas. 230; Parker v. Nickerson, 112 Hunt v. l\Ioore,2 Barb. 105; D lIerv. Dnlhaker, 52 Pa. St. 4t8; SlJonce!'s Apveal,80 Pa. St. 332. (If) Berryman v. Rnilrond, 14 Ens]l, 755. Co) Fn:LD, J., Wardell v. Railroad, I 3 citing Great Luxembourg R R. v ..Magney, 25 Deav. 5t6j Een!":on v. H llt:lw: ..... 17 S. C.326; Flint R. R. v. Dewey, U Milch. 477. (f) Woodrnff v. Wentworth, Sup. Ct. U. S.
lSSJ. (g) See Guern.er T. Cook, l2U lIIas·. 501.
54
HUTRSING V. BOSQUET
and others.
(Oircttit Uourt, D. Iowa.
February, 1882.
PUBI.JC OFFICER-CONTRACT WITH NON-RESIDENT-KNOWI,EDGE OF LAW PRE. . .
'''here a party in on3 state makes a C03\ract with direct reference to the law of another state,he must be held to know the law of that state. lluthsing v. lJousquet, 7 FED. REP. 833, reaffirmed.
This case was submitted on the following agreed statement of facts after the filing of the opinion, reported in 7 FED. REP. 833: "It is hereby stipulated and agreed,by and between the parties to the aboveentitled action. that said c,ause be submitted for determination and jUdgment to the court. and that in the determination of said cause the following agreed statement of facts shall be taken and considered as true, without further pro']f. thereof. but subject to any legal objection that may be urged in argument by either party on the ground of incompetency, irrelevancy, or immateriality. . "1. That the plaintiff and said Lawler are now, and have continuously been. citizens and residents of the state of Missouri, since prior to the year A. D. 1876. and that the defendants are, and for many years have been, residents and citizens of the state of Iowa.. "2; That in the year A. D.1876 the board of supervisors of :Marion county, in the state of Iowa, was composed of three members only. and that the defendants, Herman F. Bosquet, A. A. Welsher. and one H. D. Lucas. being the chairman of said board. That the term of oflice of said Lucas expired on the' thirty-first day of December; 1876; and he was succeeded by the defendant. John B. Ely, who serve<l as such supervisor for three ;years next succeeding thereafter. ' . .. 3. That on the tenth day of October, 1876, the' office of the treasurer of said Marion county was robbed of about ten thousand and five hundred dollars (810,500) of money, belonging to sai<l county, by two men, who entered the said office and by threats compelled the treasurer of sai<l county to open the safe and deliver said money to them, and that John R. Barcus and Harry '''illiams are the persons who committed said robbery. "4. That on the morning of the eleventh day of October, 1876, said Bosquet, 'Velsher, and Lucas met at Knoxville, the COUllty seat of said county, without notice or request therefor having been given, and without any of the , steps haVing been taken as pruvided in section 301 of the Code of Iowa for the holding of special meetings of boards of supervisors, but having convened, with other citizens. solely on account of said robbery, for the purpose of taking such action in relation thereto as might be deemed best, they, the said Bosquet, 'Velsher, and Lucas, then and there, while thus convened, issued and caused to be published and circulated the offer of reward referred to and set out in the original and substituted petition herein, and sent a cupy thereof to the chief of police of the city of St. Louis, ",Iissouri, which was seen and reall by the plaintiff and by said Patrick Lawler on or before the sixteenth day of 1876. It is agreed that the said Bosquet, 'Velsher, and Lucas, at the time they issued the said circular, did not meet or organize as a board, nor pass any resolution in any formal or informal manner adopting said offer of reward, nor make any record of their proceedings, but were individuall)' present in the treasurer's office, and merely consulted together as to the propriety of making said offer, and agreed thereto. whereupon the said offer was out and signed b)' sai<l H. D. Lucas. cllairmun, in the