Tyler v. Savage - 143 U.S. 79 (1892)
U.S. Supreme Court
Tyler v. Savage, 143 U.S. 79 (1892)
Tyler v. Savage
Argued January 18, 1892
Decided February 1, 1892
143 U.S. 79
A decree in a suit in equity found that T., an individual defendant, and the remaining assets of a corporation defendant, were liable to the plaintiff for the sum of $10,000 paid by him into the treasury of the company at the instance of T., for a certificate of stock therein, which company was represented to him by T., who was its president, to be in a flourishing condition, when in fact it was insolvent, and distributed $176.24 as the remaining assets of the company, of which $13.24 went to the plaintiff as a credit on his claim for $10,000, and decreed that T. pay to the plaintiff $10,000, subject to a credit of the $13.24. There was no demurrer
to the bill for multifariousness, and no objection taken in the court below for want of equity. The bill set out fraud in T., and that the $10,000 was due to the plaintiff by T. and the company, and required answers to interrogatories, which answers referred to the books of the company for information.
(1) To support jurisdiction in equity, there were in the case discovery, account, fraud, misrepresentation and concealment; the objection to the jurisdiction was not taken in the court below, and the case was not one of a plain defect of equity jurisdiction, under § 723 of the Revised Statutes.
(2) The decree was not outside of the case made by the bill, but gave relief agreeable to it, under the prayer for general relief.
(3) The evidence sustained the decree, and the report of a master, finding in favor of the plaintiff the facts on which the decree was based, was not excepted to by T.
The Court stated the case as follows:
This is a suit in equity, brought in the Circuit Court of the United States for the Eastern District of Virginia by Sarah C. Savage, a citizen of Pennsylvania who sues for herself "and all others, creditors of the Virginia Oil Company, who will make themselves parties to this suit on the usual terms," against the Virginia Oil Company, a Virginia corporation; John Tyler, president of said company, and in his own right; John W. Otley, C. W. Tanner, Isaac Davenport, Jr., J. H. Montague, C. E. Belvin, late directors in said company, and citizens of Virginia, and Joseph D. Evans and J. F. Crane, citizens of New York.
The bill, which was filed December 11, 1885, so far as it is material to give its contents, set forth that the plaintiff, being anxious to secure a business position for her son, H. C. Savage, was referred by William E. Tanner, of Richmond, Virginia, with whom she had business transactions, to John Tyler, president of the Virginia Oil Company, of which company C. W. Tanner, a son of William E. Tanner, was a member; that through William E. Tanner, she opened negotiations with Tyler and was informed that she could secure for her son a position equivalent to that of assistant secretary in the company, by the investment of $10,000; that she was willing to make that investment in the shape of a loan well secured, but
Tyler declined to take the sum as a loan, and required that she should purchase of the company that amount of its capital stock at its par value; that, to induce her to purchase the stock, Tyler, as president of the company, sent to her the following letter:
"Virginia Oil Company"
"Richmond, Va. April 10th, 1884"
"Mrs. S.C. Savage:"
"My Dear Madam: Your favor of the 9th is rec'd. During the short interview I had with your son, I concluded that he could easily undertake the duties that would be required of him in the employ of this company. With regard to the nature of the investment conveyed in the proposition thro' Col. Tanner, I would say that we have no trouble in borrowing all the money necessary for the conduct of the business upon its present basis, but the proposition to you embraced the idea (which we had been considering) of permanently enlarging the scope of our business by increasing our capital stock and getting additional office help. You will readily appreciate the difference to a man'f'g business between borrowing money, which may be called for at the pleasure of the lender, and having the same am't in the shape of a permanent investment; so we concluded that whatever arrangement was made in this direction must be upon a stock basis."
"As to the condition of our Co., the capital stock is at present $18,300 with authority from the stockholders to increase it to $30,000. The last dividend that was declared was a 7% semiannual. The fiscal year ends on the first of June."
"The prospects of our Co. I consider flattering. We have in the past few months decreased our expenses, and the outlook for business is better than ever before. Our products are sold north, south & west, and the field we are working is so wide that we could without much risk double our business by adding moderately to our capital. Our manufactures pay a large profit, and are favorably known throughout the territory we have traveled. As to your chances of selling your stock at par whenever you might wish, I can only say that a gentleman of New York has bought 30
shares at par within the last ten days, but a sale of stock in any m'f'g Co. would depend on its profitableness at the time the sale was made. Should our negotiations result in your son's coming with us, I shall personally try to make his position a pleasant one."
"Very resp'y, JOHN TYLER, Pres't"
That the plaintiff relied upon the statements made in the letter, and had a right to rely on them, as a basis for the investment of her money, and that the important statements made therein were as follows: (1) the then capital stock of the company was $18,300, with authority from the stockholders to increase it to $30,000; (2) the last dividend declared was seven percent semiannual, and the current fiscal year would end June 1; (3) the manufactures of the company were paying a large profit, and were favorably known throughout a wide territory, north, south, and west; (4) there had been a late decrease of expenses, and the outlook for business was better than ever before; (5) by adding moderately to their capital, they could, without much risk, double their business, and (6) a gentleman of New York had bought thirty shares of the stock at par within the last ten days.
The bill further averred that, with those statements from the president of the company, she concluded that its stock was a safe investment, and consented to take the stock instead of loaning the money, which was her preference, but which the letter assured her would not suit the company; that thereupon, on May 19, 1884, she paid into the treasury of the company $10,000, and received a certificate for one hundred shares of stock, which she still holds; that in accordance with her understanding with Tyler, her son was given a position at a salary of $800 per annum, and performed the duties assigned to him until the suspension of the office work; that when the 1st of December, 1884, arrived, she was not informed of the declaration of the semiannual dividend she had been led to expect, and on the 5th of that month she wrote to Tyler a letter of inquiry concerning it; that in reply she received a letter from him, as follows:
"Virginia Oil Company"
"Richmond, Va., Dec. 8th, 1884"
"Mrs. S.C. Savage:"
"Dear Madam: Your favor of the 5th is rec'd. Our company have tho't it wise -- as many other m'f'g Co.'s who have not a large surplus of capital have also -- in view of the depression in business which causes payments to come in very slowly, to omit a semiannual declaration of dividend. You are mistaken in supposing that the general condition of the finances of the country does not affect our business. It has caused R. R'ds to be months behind in their payments as well as slack in their orders, on whom the business is largely dependent; but in spite of this, the business of the last six months shows a profit over and above expenses. You will see, therefore, it is in the interest of all the stockholders that we have prudently determined to avoid weakening our treasury by withdrawing a dividend at this season. Hoping this explanation will be satisfactory, I remain --"
"Very resp'y, JOHN TYLER, Pres't"
That when the 1st of June, 1885, arrived, she received no notice of dividend, and some weeks later received a statement of the business of the company for the fiscal year from June 1, 1884, to June 1, 1885, showing a loss of $3,602.47 for the year, and a circular, signed by Tyler, as president, making suggestions in regard to reducing expenses, and giving reasons for the depression of business, the reduction of expenses to involve the striking from the payroll of a son of Tyler, whose salary was $480 a year, and of the plaintiff's son, whose salary was $800, and that she also received from Tyler a letter dated August 4, 1885, stating that the company owed him between $5,000 and $6,000, borrowed money, and proposing that if the plaintiff would assume that debt to Tyler, he would resign his position as president and allow her son to remain in the employment of the company.
The bill also alleged that, for some time before 1881, Tyler and Otley, under the firm name of John Tyler & Co., conducted at Richmond a business in oils, railroad grease, etc.,
and with Tanner, Montague, Davenport, and Belvin formed a corporation under the laws of Virginia, known as the "Virginia Oil Company," with a capital of not less than $15,000 and not more than $30,000, the stock to be divided into shares of the value of $100 each, to pursue the business of refining and wholesale and retail dealing in petroleum oils, the manufacture and sale of illuminating and lubricating oils and compounds, including animal, mineral, and vegetable oils, the right of prospecting and boring for oils, and the privilege of buying and selling on commission or otherwise crude petroleum and other materials used either separately or in combination for illuminating and lubricating purposes, of which company Tyler was named as president and the other five corporators as directors; that certificates of paid-up stock in the company were issued May 21, 1881, to Tyler, Otley, and Tanner, respectively, for 50 shares each, and to Davenport, Montague, and Belvin, respectively, for one share each, aggregating 153 shares, or $15,300; that on November 12, 1881, 30 shares were issued to Evans making in all 183 shares; that the books show that no money was paid by Tyler and Otley for their shares, but that the $10,000 of their shares and $1,647.15 due by John Tyler & Co. to Tyler, making in all $11,647.15, was balanced by the following items, namely: amount of inventory turned over, $2,450.51; merchandise, balances, $267.55, and cash, $46.50; machinery and fixtures, $395.75; amount of stock allowed Tyler and Otley in consideration of goodwill, formulas, etc., of John Tyler & Co., $8,486.84; total, $11,647.15; that Tyler, as president, Otley, as superintendent, and Tanner, as secretary and treasurer, were each paid a salary, believed to be as much as $1,500 per annum apiece, and on June 1, 1882 at the end of the first year, dividends of 20 percent upon the original capital stock and seven percent on the shares of Evans were declared and paid, amounting to $3,270; that since that date, no dividend had been paid, and now the company was admitted to be insolvent; that on April 3, 1884, Otley's stock was surrendered to the company, and he was paid therefor $2,500, being at the rate of fifty cents on the dollar, and his duties and salary as superintendent ceased;
that if that purchase of stock, and the original payments of Tyler and Otley for their stock, were permitted to stand, the company was insolvent on April 10, 1884, when Tyler represented it to be in a prosperous condition; that Tyler's letter of April 10, 1884, both by its statements and its omissions, was false and deceitful, and operated as a fraud upon the plaintiff, and would cause her to lose the money so obtained from her unless the proper relief should be granted to her; that the mode of settlement for their stock adopted by Tyler and Otley was illegal and fraudulent, and ought to be set aside, and they be made to pay for their stock in money; that the pretended sale of goodwill, formulas, etc., by John Tyler & Co. was in fact a purchase by Tyler from himself, which could not be allowed when he was using the assets of the corporation in the transaction; that the price placed upon that intangible property was fictitious and fraudulent; that now, when the corporation was admitted to be insolvent, not one dollar was estimated as the value of such goodwill and formulas in the inventory of the assets made by Tyler; that the taking out of the assets of $2,500 by Otley on account of his stock was illegal, and he was a debtor for that sum, with interest, and that any dividend paid to directors and stockholders out of the capital stock of the company made such directors and stockholders liable to the creditors of the company for such dividend.
The bill further alleged that the sum of $10,000 having been unlawfully obtained from the plaintiff
"by the misrepresentations of the affairs of the said company by John Tyler, its president and duly authorized agent, and the same having gone into the treasury of, and been expended by, the said company, the said sum, with interest thereon from the 1st day of June, 1884, is justly due her by the said Tyler and Virginia Oil Company, and she has a right to require all the proper assets of the company to be gotten in, and to have them applied to the liquidation of the debts due her and others;"
that if any money was due to the company for any part of the subscription of Evans to its stock, both Evans and Crane (the assignee of his stock) were debtors to the company therefor; that the
company was insolvent, and that it was necessary that a receiver of its assets should be appointed.
The bill prayed for answers by the defendants to the following interrogatories:
"1. What amount of stock has been issued by the Virginia Oil Company, to whom, and when issued? 2. What was the consideration paid for said stock by the several stockholders, and when and how has it been paid? 3. What sums have been paid to the said stockholders as dividends, and when were they so paid, and by what authority? 4. What sums have been paid to the several defendants who claim to have been officers of the company, and by what authority? 5. Whether any stockholder has surrendered his stock to the company, and, if so, when and what was paid him for the same? 6. What was the statement made to the stockholders at the end of each fiscal year, of the condition of the company and its business, by the president and directors, or any of them? 7. What meetings of the stockholders have been held, and what were their proceedings at such meetings? 8. How was the money paid in by your oratrix for her stock expended by the company? 9. How and when was the capital lost?"
The bill further prayed for an account of the assets and debts of the company; that the assets be realized as quickly as possible, and the funds arising therefrom be paid to its creditors; that the plaintiff's claim to be repaid the money she was induced to pay for the stock issued to her, with interest thereon, be established, and be made a debt of the company, and payment of the same be decreed to her; that an injunction be granted restraining the company and its officers and agents from managing or interfering in its affairs; that a receiver be appointed to take charge of its property and effects, and administer them under the direction of the court; all orders made that the nature of and all orders made that the nature of the case might require and to the court might seem meet.
On notice, a receiver was appointed, and all the defendants, except Evans and Crane, were served with a subpoena. Otley answered the bill and the interrogatories and alleged that he
was not liable to the plaintiff. Tyler entered his appearance as president of the company and in his own right. The bill was taken as confessed against Tanner, Montague, and Belvin. Tyler answered the bill, admitting that he wrote the letter of April 10, 1884, averring that everything stated therein as facts was then true; admitting also that he wrote the letters of December 8, 1884, and August 4, 1885; averring that their statements were true, and made in good faith; answering the interrogatories, and denying his liability to the plaintiff. Tyler did not challenge the equitable jurisdiction of the court nor demur to the bill for multifariousness.
The plaintiff replied generally to the answers of Otley and Tyler, and the bill was taken as confessed against the corporation and Davenport.
The receiver reported to the court, on April 15, 1886, that he had not been able to sell the machinery of the corporation, but had disposed of the remnant stock of soaps and oils, and had found that the accounts due the company were almost all uncollectible. He made a statement of receipts and expenditures, accompanied by vouchers, showing no money on hand, and asked to be relieved from his receivership.
On May 14, 1886, an order was made that the suit proceed without service on Evans and Crane, confirming the receiver's report, accepting his resignation and discharging him, appointing another receiver in his place, and referring it to a master to inquire and report, on the testimony of witnesses to be taken and returned by him to the court:
"1. What amount of capital stock has been issued by the defendant the Virginia Oil Company, to whom, and when issued. 2. What was the consideration paid by each holder for the stock issued to him, and when and how paid and whether full consideration was paid therefor. 3. What sums have been paid to the several stockholders as dividends, and when, and by what authority, were the payments made, and if by order of the board of directors or of the stockholders, whether the orders were made at lawful meetings at which there was present a proper quorum. 4. What was the true condition of the company when such dividends were declared, and whether they were paid out
of the profits earned or out of capital or money borrowed. 5. Whether any stockholder has surrendered his stock, or any part of it, to the company, and if so, when and what was paid him therefor and what was the condition of the company at the time as to solvency, and whether the said purchase of stock by the company reduced its capital to less than the minimum allowed by the charter. 6. What sums have been paid to the several defendants, or any of them, who have acted as officers of the company, and by what authority; and, if by orders of the directors or stockholders, whether at lawfully constituted meetings. 7. An account of the assets and liabilities of the Virginia Oil Company, showing any priorities which exist among the said liabilities. 8. A correct statement of the condition of the affairs of the company on or about the 1st June, 1884, when the plaintiff was induced to subscribe for stock therein, showing whether the said company was solvent and in a prosperous condition as represented in the letter of John Tyler to the plaintiff dated 10 April, 1884, and filed as Exhibit A with the bill. 9. Any other matter deemed pertinent by the master or required by either party."
The new receiver reported in January, 1887, that in June, 1886, he had sold all the property of the corporation; that the proceeds of the sale amounted to $367.65, and that he had received in cash $123.89, and disbursed the whole thereof, and deposited in the bank to the credit of the court notes for $248.41. The court made an order confirming his report and discharging him.
In July, 1887, the master filed his report as to the nine items of inquiry referred to him. He reported that the shares of capital stock issued by the corporation were, as stated in the bill, 283 in number, including the 100 issued to the plaintiff; that the plaintiff paid for her stock on May 19, 1884, although the certificate issued to her was dated May 31, 1884; that the consideration paid by Tyler and Otley for their stock was the goodwill of the business of John Tyler & Co., "and a number of valuable recipes and formulas for the manufacture of oils and grease, together with the stock and fixtures of that business," the former valued at $8,486.84, and the latter at $1,513.16, net;
that the only dividend ever declared by the corporation was made June 1, 1882, of 13 percent on the capital stock of the company owned by stockholders the first six months of the year, and 7 percent on that owned by stockholders the last six months of the year; that the corporation was solvent and prosperous when that dividend was declared, and it was paid out of earnings; that no stock was surrendered by Otley to the corporation; that the salaries of Tyler as president, Otley as superintendent, and Tanner as secretary and treasurer, were $100 a month each for the year ending June 1, 1882, and afterwards were $1,500 a year each until the business was closed, excepting that Otley's salary ceased on October 16, 1883, when he sold his stock to Tyler; that there was in bank to the credit of the court in the cause, $166.61, and that there were claims against the corporation, which had been presented to the receiver, amounting to $715.83.
As to the inquiry what was the condition of the affairs of the corporation on or about June 1, 1884, and as to whether it was solvent and in a prosperous condition on April 10, 1884, the date of Tyler's letter to the plaintiff, the master reported that, according to a statement made by Tyler, the assets then exceeded the liabilities by $3,261.45, but the items of assets in that statement included $5,000 for the stock purchased from Otley; that such $5,000 ought to be stricken out entirely, or, if the stock was paid for out of the company's money, ought to be reduced to the $2,500 actually paid, leaving an excess of assets of $761.45 to represent the whole of the cash-paid stock; but that as Otley's stock was purchased without authority from the corporation, and the purchase never was approved by it, that item of $2,500 also ought to be stricken out, and thus Tyler's statement presented the corporation as having lost its entire cash-paid stock and being largely in debt besides; that the formulas and recipes purchased for $8,486.84 were then and ever since had been without value, or at least, unsalable, and that, in a word, the corporation was bankrupt.
The master reported further that on May 19, 1884, the day the plaintiff's stock was paid for, there was paid to a bank in Richmond by the company $5,900, of which $4,900 went to take
up notes of the company endorsed by Tyler and Tanner, and $1,000 to take up a note of Tyler's secured by stock of the company; that on May 20, 1884, $300 was paid to Tyler by the company for loans made to it by him in the previous part of that month; that on May 18, 1884, the cash receipts and payments were very nearly balanced; that after that date to the close of that month, the receipts were about $320, and, according to Tyler's statement, the amount on hand June 1, 1884, was $246.32, and that it was obvious, therefore, that the large payments above mentioned were made from the money received from the plaintiff.
The master with his report returned the depositions he had taken. The plaintiff filed exceptions to the report, but none of the defendants excepted. The case was heard, and on the 20th of February, 1888, a decree was made which stated that
"the court, being of opinion that the defendant John Tyler individually, and the remaining assets of the Virginia Oil Company, are liable to the plaintiff, Sarah C. Savage, for the sum of ten thousand dollars paid by her into the treasury of the company at the instance of the said John Tyler, on the 19th day of May, 1884, for a certificate of one hundred shares of stock in said company, which said company was represented to her by the said Tyler, its president, to be in a flourishing condition, when, in fact it was insolvent, doth so decide, and having caused a statement to be made and filed, marked 'R. T.,' showing how the fund of $176.24 in the Merchants' National Bank of Richmond to the credit of this cause should be distributed, doth adjudge, order, and decree that M. F. Pleasants, the clerk of this Court, do draw a check upon the said fund to the credit of the court in this cause in the Merchants' National Bank of Richmond, in his own favor for the sum of $88 in full of his fees and charges in this cause, and a check upon the said fund in favor of W. W. Henry, attorney for Sarah C. Savage, for $50, the amount of cost paid by the plaintiff in this case, and that he do check upon the said fund for the balance thereof, to-with, $33.24, in favor of the said W. W. Henry, attorney for Sarah C. Savage, of which $20 is the docket fee taxed for plaintiff's attorney, and $13.24 shall be a credit on the said
claim of the plaintiff for ten thousand dollars, and the court doth further adjudge, order, and decree that the defendant John Tyler do pay to the plaintiff, Sarah C. Savage, ten thousand dollars, with interest thereon at the rate of six percentum per annum, from the 19th day of May, 1884, till paid, subject to a credit of $13.24 as of this day, and that the plaintiff be at liberty to sue out execution for the same, and the report of the master is confirmed in all other respects."
The court thus distributed a fund of $176.24 [171.24?] in its hands, the proceeds of the property of the corporation, by paying to the clerk $88 for fees, and to the plaintiff's attorney $50 for costs, and $20 as a docket fee, and the remainder, $13.24, as a credit on the claim of the plaintiff for $10,000, and then it ordered the defendant Tyler to pay to the plaintiff $10,000, with interest at six percent, from May 19, 1884, subject to a credit of the $13.24, as of the date of the decree. From this decree Tyler appealed to this Court.