Where the true consideration of a syndicate purchase is
concealed, and the property is conveyed at a higher figure in
shares of stock to a corporation whose stock is held partly by the
members of the syndicate and partly by others and the necessary
increase of shares to pay for the property goes to some of the
syndicate promoters as a secret profit, the corporation may
maintain an action to require those obtaining the shares to
surrender them for cancellation.
Fraud in the purchase of property which is to be conveyed to a
corporation composed partly of those purchasing the property and
partly by others may become operative against the corporation
itself and give it a right to maintain an action against some or
all of those guilty of the fraud to protect the innocent
stockholders who bought in ignorance thereof.
Page 227 U. S. 81
A recovery in such an action is not defeated because the
benefits would inure to some of the guilty as well a to the
innocent stockholders.
The corporation may sue one or all of those participating in
such a fraud, and there is no fatal omission of parties if all are
not joined.
Where the fraud on a corporation resulted in the issuing of more
stock than would otherwise have been necessary, the proper decree
is to compel those who fraudulently obtained the additional stock
to surrender it for cancellation.
35 App.D.C. 372 affirmed.
The facts are stated in the opinion.
Page 227 U. S. 84
Memorandum opinion by direction of the Court, by MR. JUSTICE
LURTON.
This is a bill by the appellee to recover from appellants secret
profits made by them as promoters of the Las Ovas Company in the
purchase of a part of a tract of land known as Las Ovas, in the
Republic of Cuba, and also for the cancellation of certain shares
of stock issued to them as promoters.
The facts essential to judgment are not in serious dispute. They
are found clearly and fully stated in the opinion of Mr. Justice
Gould for the Supreme Court of the District of Columbia, and again
in the opinion of the court of appeals of the District by Mr.
Justice Robb.
From the facts found by both courts it appears:
a. That the appellants and certain other persons, not parties to
this suit, signed an agreement on March 19, 1904, by which they
agreed to purchase for a corporation which they were to organize a
specified part of a tract of land in Cuba called the Las Ovas
plantation, for the price of $34,000, to which it was later agreed
to add another small parcel at an additional price of $1,000.
b. It was further agreed that they should organize a
corporation, of which they should be the incorporators, with a
capital stock of $150,000, and that 40% of the shares should be
issued to them for service as promoters, and that the remaining
stock should be subscribed for by them. For this subscribed stock
they were to pay an amount sufficient to cover the purchase money
of $35,000 and to create an expense fund of $5,000.
c. It was agreed that the property should, when acquired, be
placed in the hands of one of the group of promoters until the
formation of the company, and then conveyed to it.
d. The scheme was one originated and engineered by
Page 227 U. S. 85
the appellants, who, at the time of this agreement, had already
secretly secured an option for themselves for the purchase of this
property at the price of $20,000. To conceal the true consideration
from their associates, they caused the property to be conveyed by
the vendor to one Escalante, a stranger selected by them. The deed
to Escalante recited the true consideration. Later, in pursuance of
the promoters' agreement, they caused Escalante to convey to the
member of the syndicate selected to hold the title until
organization, reciting a consideration of $35,000.
The corporation was organized as planned. The promoters' shares
were duly issued, and the remaining shares taken by the promoters
upon the agreed terms, its officers and directors being composed
exclusively of the members of the syndicate. Thereupon the property
was transferred to the company and paid for, through appellants,
out of the proceeds of the subscribed stock.
The result of the transaction was that the corporation was
required to pay to those who had assumed to act for and represent
it a secret profit of $15,000, and also to compensate them for
their services in buying the land and organizing the company by
issuing to each of them $15,000 in nonassessable shares of its
stock.
The decree below required the appellants to account for the
profits realized by them, in part traced to certain shares in their
hands, and to surrender for cancellation the shares issued to them
as promoters.
It is now said that the corporation was "a mere convenient
receptacle for the property, erected for the convenience of the
syndicate." That the property was bought by the syndicate for their
own advantage, and that the corporation included only the members
of the syndicate. That the stock of the company was all taken by
the syndicate, who, for property which was their own, agreed
Page 227 U. S. 86
to pay enough to cover the purchase price and create a small
expense fund.
Upon this contention, it is urged that the corporation has no
right to the relief sought, as the whole transaction was a mere
form adopted by the parties for their own convenience as owners of
the property and owners of the corporation. It is then said: "If we
admit, for the purposes of this point, that appellants did deceive
some of the syndicate, what has the company to do with it?" For
this they cite
Old Dominion Copper Company v. Lewisohn,
210 U. S. 206,
where it was held that a subordinate fraud practiced by some of the
promoters of a corporation upon some of their associates was a
matter wholly between them and the syndicate which gave rise to no
corporate right of action in the absence of innocent incorporators
or stockholders.
But that is not this case. Some of those, if not all, interested
by appellants in the property and in its purchase for a proposed
consideration were ignorant of the real price which they were to
pay for it, and were not, therefore, in complicity with their
scheme to make a secret profit. These innocent members of the
syndicate became stock subscribers and directors of the company, as
did appellants. The buyers and sellers were not the same. Those of
the syndicate assuming to act for the corporation in acquiring the
property were under obligation to disclose the truth and deal
openly. In the absence of such disclosure, the corporate assent was
obtained on false grounds. The wrong was done when those members of
the syndicate not in complicity with appellants subscribed to the
stock to the company and aided their guilty associate managers in
the corporate action necessary to the corporate acquisition of the
property at the exaggerated price placed upon it by those who were
to realize a secret profit. Thus, the original fraud practiced upon
some of those associated with them in the promoters' arrangement
became operative against the corporation itself. The standing of
the
Page 227 U. S. 87
corporation results from the fact that there were innocent and
deceived members of the corporation when the property was taken
over by it.
Neither is the corporate right of action defeated by the fact
that the recovery will inure to the guilty as well as to the
innocent, nor is the fact that all of the parties who may have
shared in the secret profits are not sued fatal to the case. The
corporation may well sue either one or all of those who received
secret profits. There is no want of necessary parties, because all
are not here sued.
The distinction between a case in which all of the owners of the
property and all of the members of the buying corporation are the
same persons, and participate in the profit realized, and the case
here presented is fully recognized in
Old Dominion Copper
Company v. Lewisohn, supra, as well as in
Phosphate
Company v. Erlanger, L.R. 5 Ch.Div. 73, and in the well
considered opinion of Judge Severens in
Yeiser v. U.S. Paper
Co., 107 F. 340.
There was no error in cancelling the shares issued to the
plaintiffs in error for promotion of the corporation. They and the
other members of the syndicate received these shares upon the
assumption that they had in good faith served the corporation in
the procurement of the property. Obviously appellants were serving
themselves to the detriment of the corporation and innocent
subscribers to its stock. In such a situation, the corporation may
recover the shares.
The decree will be affirmed.