Davis v. Las Ovas Co.

*84 Memorandum opinion -by direction of the court. By

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 by Mr. Justice Gould of 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 $15.0,000, 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 con- - veyed to it.

d. The scheme was one originated and engineered by *85 the appellants, who at the time of this agreement hr t already secretly secured an option for themselves for ti ; purchase of this property at the price of $20,000. " n conceal the true consideration from their associates th ]/■ caused the property to be conveyed by the vendor to o jé Escalante, a stranger selected by them. The deed : c Escalante recited the true consideration. Later, in p j r - suance of the promoters’ agreement, they caused Escalr i to to convey to the member of the syndicate selected to ■ : ] i the title until organization, reciting a consideration < i $35,000.

The corporation was organized as planned. The promoters’ shares were duly issued and the remaining sLu res taken by the promoters upon the agreed terms, its offk; ers and directors being composed exclusively of the men! >*rs of the syndicate. Thereupon the property was transit:..? ed to the company and paid for, through appellants, mt of the proceeds of the subscribed stock.

The result of the transaction was that the cor por:, ,i ¡on was, required to pay to those who had assumed to m: t for and represent it, a secret profit of fifteen thousand dr Lars and also to compensate them for their services in b\; r ing the land and organizing the company by issuing to < ach of them fifteen thousand dollars in non-assessable 1 ares of its stock.

The decree below required the appellants to accr ;■ nt for the profits realized by them, in part traced to certab i 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 mem convenient receptacle for the property, erected for the convenience of the syndicate.” That the property wa,s 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 *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 n !o right to the relief sought, as the whole transaction was a mere form adopted by the parties for their own conven-io nee 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 syndi-ca to, 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 ¡'orne of the promoters of a corporation upon some of the ir associates was a matter wholly between them and the syndicate which gave rise to no corporate right of action in i .h"> absence of innocent incorporators or stockholders.

Bui that is not this case. Some of those, if not all, inl et -ested by appellants in the property and in its purchase for ;i 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 prof i I;. These innocent members of the syndicate became stock subscribers and directors of the company, as did appel lants. The buyers and sellers were not the same. Those i of the syndicate assuming to act for the corporation in acq uíring the property were under obligation to disclose the trudi and deal openly. In the absence of such disclosure' •! he corporate assent, was obtained on false grounds. The wr o ng was done when those members of the syndicate not in omnplicify with appellants subscribed to the stock of 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 Iby those who were to realize a secret profit. Thus, the original fraud practiced upon some of those associated with thorn in the promoters' arrangement, became operative a gainst the corporation itself. The standing of the *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, 5 Ch. Div. 73, and in the well considered opinion of Judge Severens in Yeiser v. U. S. Paper Co., 107 Fed. Rep. 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 he affirmed.