January 5, 1916. The opinion of the Court was delivered by This is a cause in equity and a single question is made by the appeal. Remotely it is, are the defendants, Clark, Jones and Bryan, personally liable to the stockholders of the Seminoles Security Company for $30,000.00 for a breach of trust?
The Circuit Court found that they were not, and we agree.
It is not necessary now to write down the history of the defunct Seminole Company, and we shall not undertake it.
It suffices to recite the cardinal features of the enterprise from its inception to its dissolution.
The charter of the company was granted 8th January, 1908.
The authorized capital stock was $300,000.00. The subscribed capital was $270,000.00. The cash paid in capital stock was $97,928.87 or more. The trust agreement was executed 31st January, 1908. The stock in Southern Life was bought 3d October, 1908. Action for a receiver was begun 16th December, 1908. A receiver was appointed 29th December, 1908. A settlement with Southern Life was made 2d February, 1909. That settlement was approved by the Court 16th February, 1909.
The enterprise, therefore, ran its whole career within a twelve month.
This action is sequel thereto.
A few other essential facts need to be stated.
The plaintiff stockholders are amongst those who undertook to hoist this enterprise. They, the complaint alleges, paid to the solicitors of stock one dollar per share which was its par value, and a premium of fifty cents per share. It does not appear from the case how much stock was subscribed for before the trust agreement was made and how much was subscribed for after that event. *Page 152
It is true Garlington and his immediate associates were the initiators of the scheme, but the plaintiffs and all the stockholders stood by like Saul consenting to the death. And they are those now complaining against Clark and Jones and Bryan because the scheme failed.
There is no allegation and no evidence that Clark or Jones or Bryan held any stock, or took any hand in the suggestion or direction of the Seminole Company or received any compensation thereabout. The only contention is they held the bag which had been filled by the stockholders. Amongst other things the Seminole Company was: (1) "To act as agent and manager for financial corporations and insurance companies of all kinds: and (2) to buy, sell and own stocks, bonds and other securities of other corporations, both foreign and domestic." That was to be the chief business of a company these stockholders got up. It was to manage the business of other corporations, which are required by law to manage their own business.
As the Circuit Court found, there may have been amongst the stockholders some persons who had no more wisdom than to put money into such an enterprise; but there were many who were not beguiled.
The complainants suggest that "the real purpose of the appointment of the said trustees was to lend tone, standing and credit to the scheme of the managing officers of the said defendant company, and influence the unsuspecting public to become subscribers to its capital stock." (Italics are added.)
That is to say, the president and directors of the Seminole Company, "the managing officers," put forward Clark, Jones and Bryan to mislead the public. But the stockholders put forward the managing officers as their representatives, and the scheme of these managers was thus made possible by the act of the stockholders. The stockholders vouched for Garlington; may they now say Clark, Jones *Page 153 and Bryan could not? If, therefore, these stockholders have been caught, it is in a trap of their own setting.
So, the question is, ought the trustees, mere volunteers without pay, and with no interest in the Seminole Company, to be made to respond to such complainants for $30,000.00 alleged to have been lost by the conduct of the trustees?
The complainants charged the trustees with "reckless conduct," but acquitted them of "intentional wrongdoing."
The Circuit Court found there was no proof of fraud on the part of the trustees; and the plaintiffs have not gainsaid that.
The cardinal duties, and, therefore, liabilities of trustees are these: (1) To carry out the trust; (2) to use due care thereabout; (3) and to act in good faith thereabout. Pomeroy's Eq., sec. 1061. These duties will be considered in an inverse order from that stated.
It is conceded by the complaint and by the plaintiffs' argument, that so far as the trustees are concerned, "this thing was not done in a corner;" so that the element of bad faith on their part is eliminated from the case.
It is true, a trustee must exercise about the performance of his trust due care, and he must do that independently of the question of good faith. But the law does not exact of the trustee the exercise of extraordinary care. If he is a man of common prudence, and used that prudence about his own business, he is not required to use more than that about his neighbor's business, which means the business of his cestui que trust.
Whether or not the trustee did so exercise common prudence in a particular case is a question of fact, and the answer depends upon that measure which the Chancellor may apply.
In the instant case the only duty of the trustees was to be reasonably certain that the thing they were paying out the fund for was valuable. *Page 154
The testimony proves that the stock of the Southern Life was then thought to be worth much more than the trustees paid for it. There is none to the contrary.
There is no testimony to show that the trustees knew or had reason to believe that the price agreed upon for the Southern Life was too much, but the contrary. They looked into the transaction, and concluded upon the words of reputable men in North Carolina, about which there is no dispute, that the thing bought was worth more than the price paid for it.
Notice in writing was given by the directors of the Seminole Company to the stockholders of the Seminole Company of the pendency of the transaction, and the stockholders did not oppose its consummation.
It is true odor was lent to the transaction by the allowance and the payment of an exorbitant commission for the sale of the stock of the Southern Life to the Seminole Company.
But the trustees had no intimation of such a feature of the sale; and the record does not reveal to whom that commission was paid, or out of what fund it was taken; it was not taken from the trust fund. There is nothing in the testimony to charge that transaction to the negligence of the trustees, and it cannot, therefore, affect the question of their due care.
We are, therefore, of the opinion that the trustees were not so lacking in care about the payment of the fund as to make them personally responsible for any loss which may have resulted from their act.
The most complex issue has been reserved for the last, and that is, did the trustees unwarrantably depart from the terms of the trust?
It is true the trust was express, and it is also true the trustees were bound by the law to conform to the terms of it, and for a failure to do so they are liable to the cestui que trust in the event of a loss of the fund. *Page 155
This enquiry is distinct from that of ordinary care by the trustee, and from that of good faith by the trustee. Manifestly a trust agreement, like any contract, may be modified by all the parties in interest.
The agreement here is out of the ordinary; it is a contrary device; and its meaning and the purpose of the Seminole Company in its making are not manifest.
One thing only is apparent, and that is, the now amazing gullibility of the three seasoned and reputable business men who consented to enter into such an agreement.
Their action proves that like that noble animal, the horse, man is a "vain thing for safety."
The parties to the contract are the Seminole Company and Clark, Jones and Bryan.
The former was a corporation with an authorized capital stock of $300,000 and a subscribed capital stock of $270,672. And the Seminole Company was to organize an Accident Insurance Company with a capital stock of $100,000, all of which was to be subscribed for, owned and controlled by the Seminole Company. And the stockholders in the Seminole Company were, by virtue of their status as stockholders, to enjoy such profits as the Accident Company might make for the parent company.
One of the expressed objects of the trust contract was to safeguard the subscribers to the capital stock of the Seminole Company.
On that clause of the contract the chief argument of the plaintiffs is built.
Had the trustees been able to follow the words of the instrument; had they waited until the Seminole Company had organized an Accident Company and subscribed for all the $100,000 of stock in the Accident Company, then the trustees must by agreement have still paid into the hands of the Seminole Company the $97,928.87 which they held. What, then, would have been the improved plight of the subscribers who supplied the above sum of money? *Page 156
By the trust agreement it was provided: "It is the purpose of the said Securities Company (the Seminole) to promote and finance the said * * * Accident Company, the capitalstock of which said company shall be owned and controlled by the said Securities Company."
The real owners, then, of the $97,928.87 would have been not those who supplied it, but the Seminole Company. The subscribers to and payers of capital stock in the Seminole became entitled to share in whatever profits the Accident Company might make, only because they were stockholders in the Seminole Company. The very agreement expressly so provides, in the next clause after that above quoted.
If, therefore, the Seminole Company was to own the Accident Company, and if the trust fund was to constitute the corpus of the Accident Company, then the real beneficiary of the trust was the Seminole Company, and it was within the clear power of the Seminole Company to modify the trust agreement, and direct the trustees to pay the fund to a company other than that named in the agreement.
It was not of the essence of the trust agreement that the Accident Company to be organized should be called the "Sterling Accident Company;" nor we think was it of essence of the trust agreement that the Seminole Company should "organize" an accident company instead of buying one. The power to do one implies the power to do the other. More than this, the Seminole Company was authorized by its charter to buy stocks of other corporations. And its action in buying the Southern Life may be referred to such power; but it is not necessary to resort to that view to sustain the transaction.
But it is argued by the plaintiffs, that the trust agreement stipulated that the Seminole Company should own the entire issue of the capital stock of an accident company, and that the transaction it entered into with the Southern Life did not make it sole owner of the Southern Life. *Page 157
That is true; but such a provision is no more unchangeable than the other which bound the Seminole Company to organize the Sterling Accident Company. The appellants' whole argument amounts to this, that the trustees were by the contract representatives of the individuals who paid the $97,928.87.
As before stated that is not true. The Seminole Company owned the stock of the proposed Accident Company, and was in law and fact the real beneficiary under the deed; and if the trustees had undertaken to vote the stock of an accident company, they would have done so as trustees for Seminole Company, the owners of it.
It was beyond the power of the Seminole Company to organize, own and direct an Accident Company as a separate corporate entity from the Seminole Company. Nobody denies that. The subscription of the plaintiffs was to the capital stock of the Seminole Company, and the money they paid was a payment on that subscription.
The trust contract made by the Seminole Company to dedicate $100,000 of the so subscribed money to the stipulated end, was a vain thing. The money paid became stock in the Seminole Company, and was subject to control of the directors of the Seminole Company.
When the trustees found themselves in this predicament, it surely would have been a wiser thing for them to have gone into a Court of equity and craved its direction in the premises. But if the other party to the trust contract was unable to execute its provisions to the letter, and was able to modify the terms of the contract, the trustees ought not to be held personally liable, under the circumstances of the case.
We conclude, the stockholders of the Seminole, the plaintiffs amongst them, got up the corporation, set it agoing and named the directors. It was on its face a balloon floated by hot air. *Page 158
These directors, who made the contract with the trustees, had the power to modify it; to buy stock in an existing company instead of organizing a company; and to permit the trustees to take a part, and not all, of the stock of an accident company.
If the stockholders in the Seminole have been deceived, it has been by the action of men they put forward to represent them, to wit, Garlington and his confederates.
The event proves that those hitherto unknown and untried men hoisted a scheme which neither their stockholders nor trustees understood; and which, but for the timely initiative of the plaintiffs themselves, and the bold action of the Court to which they went, might have wrought serious damage.
This conclusion renders it unnecessary to consider the effect of the compromise agreement which the receivers made with the Southern Life, and which the Court approved.
The judgment of the Circuit Court is affirmed.
MR. JUSTICE WATTS concurs in the opinion of the Court, announced by MR. JUSTICE GAGE.