Gilchrist v. Hatch

Spencer, J.

— Suit by appellee against appellants, Hector M. Gilchrist and Dewitt C. Griffith, to have annulled on the ground of fraud a certain deed wherein he had conveyed certain described real estate to Gilchrist, and to recover the possession of said real estate and to quiet title thereto.

1. The first assignment of error challenges the action of the trial court in overruling appellants’ demurrers to the complaint. From this pleading, which is in two paragraphs, it appears that on October 9, 1905, appellant Griffith was the treasurer and manager of the Mount Pleasant Oil Company and the holder of the majority of the stock in said company; that on said date he entered into the following written contract with appellee:

“This Agreement, made this 9th day of October, 1905, by and betAveen Dewitt C. Griffith of the first part, and Aretas W. Hatch of the second part, Witnesseth: Whereas, said first party has this day sold and transferred to the second party shares of the capital stock of Mount Pleasant Oil Company, a corporation under the laws of Indiana, aggregating Ten Thousand Dollars ($10,000) par value, and the second party has paid to the first party the sum of Ten Thousand Dollars ($10,000) for said shares; and it was, and is, part of the consideration for said transaction that said parties enter into and bind themselves by this agreement. Now therefore, in consideration of the premises and of the mutual agreements herein contained, it is agreed between the parties hereto as follows: First, Said first party shall retain the ownership of a majority of the shares of the capital stock of said company and the second party shall retain the shares so purchased by him as aforesaid, until this arrangement shall be terminated by the mutual consent of the parties hereto; and while they so hold said stock, said parties hereto shall vote the same for the election of such other 'director or directors as they |nay agree upon. Second, Said parties hereto shall cause said directors to elect said Hatch the secretary and attorney of said company and said Platch hereby agrees to accept such offices and perform the duties thereof;. and the salary of such offices shall amount to-, per annum. Said Hatch shall be elected and shall serve from year to year so long as this agreement shall continue in force and the parties hereto shall elect directors who will continue Hatch in said offices. Signed in duplicate the day and year first hereinabove written. D. O. Griffith, A. W. Hatch.”

It further appears that Griffith was then indebted to appellant Gilchrist and it was therefore agreed that appellee should pay for his stock by conveying to Gilchrist a certain piece of residence property and executing Ms note for $500; that Griffith was to receive credit in the amount of such consideration on his indebtedness to Gilchrist; that said agreement was carried out in full. The complaint then sets out in detail a state of facts showing that the purchase by appellee of the oil company stock was induced by the false and fraudulent representations of Griffith as to the value of the property owned by the corporation and as to the production of the various wells located thereon. No question is raised as to the sufficiency of the complaint in this regard and it is therefore unnecessary to set out the averments in detail.

The first paragraph alleges that Gilchrist had knowledge of the fraud practiced by Griffith and that he took the property in payment on an existing debt and for no other consideration. The second paragraph charges that Gilchrist conspired with Griffith to perpetrate the fraud and actually participated therein.

2. It is urged against this complaint that, on its face, it discloses that the contract under which the' conveyance was made is illegal and void. In support of this eontention, appellants rely on the general rule that a contract by a director or a majority stockholder of a corporation whereby he undertakes, in consideration of a private benefit or advantage accruing to Mmself, to secure the appointment of another to a lucrative office or a position of profit in the corporation is against common honesty and therefore against public policy. That when such a contract has been wholly or partially executed, the law will extend no relief, but will treat the parties as in pwri delicto and leave them'where they have placed themselves. Hutchins v. Welden (1888), 114 Ind. 80; Overshiner v. Wisehart (1877), 59 Ind. 135.

There are exceptions to this rule, however, and if we concede, without deciding, that the contract before us is against good morals, it does not necessarily follow that appellee, ■though a party to such contract, is without relief. The law relative to illegal contracts has its -basis in public policy and the rule here invoked has been adopted for the benefit, not of the parties, but of the public. Where it appears, therefore, that the public interests will be better promoted by granting relief to the plaintiff than by denying it, courts of equity, acting with proper caution, will intervene, even though the parties are equally guilty. This exception to the general rule is thus concisely stated and supported by authority in 9 Cyc. 550: “Although the parties are in pari delicto, yet the court may interfere and grant relief at the suit of one of them where public policy requires its intervention, even though the result may be that a benefit will be derived by a plaintiff who is in equal guilt with the defendant. . But here the guilt of the parties is not considered as equal to the higher right of the public; and the guilty party to whom the relief is granted is simply the instrument by which the public is served.”

In the case of Porter v. Jones (1869), 46 Tenn. 313, 321, the reason for the exception and the test thereof are thus well stated: “while the rules of law which courts are bound to enforce in civil cases, have reference primarily, to the protection and -enforcement of private rights, they are also subservient to the governing principle, that the safety and best interests of the community are paramount to any private interest. Therefore it is, that there are many cases in which, were the rights or interests of the parties only concerned, courts would absolutely refuse them aid; yet, as the public good demands a decision upon their claims, the courts will entertain the cause and* make the decision. The decree is made upon the facts ánd the law of the private’right; but the community is a quasi party to the cause; and for the protection of the community, courts may overlook the individual turpitude which has forfeited the private right, and make such decision, consistent with the public interests, as they would have made had +he party been innocent. Prom these principles, it follows, and thus it has been held, that the active interposition of equity to set aside and cancel an illegal contract, is matter of sound'discretion in the court, and not of absolute right in the party. The inquiry is, has the complainant made such a -case as would, were he innocent, entitle him to relief ? And if so, does the best interest of society require that relief shall be afforded, notwithstanding the guilt of the party ? If not, then the court will refuse its aid, and will leave the parties in whatever difficulties their conduct may have involved them.”

3. 4. The complaint before us proceeds on the theory that appellee was induced through fraud to enter into the contract with Griffith and to purchase the stock of him. For the purposes of the ruling on the demurrer, at least, it must be assumed that such theory is based on fact. It is not the policy of the law to place restrictions on legitimate business dealings or to relieve a party from his own mistakes of judgment but it is a matter of common knowledge that fraudulent stock-selling schemes are a favorite resort with unscrupulous promoters who prey on the ignorant and credulous, and form a parasitic element within society, against which the latter is entitled to protection. As is said in one authority, “public policy requires that their purposes should be thwarted and their nefarious schemes rendered less surely profitable, rather than that the continuance of that profit should be guaranteed by denying relief to the plaintiff and to others who should subsequently be placed in the same position as he.”

5. 1. The eases which discuss the doctrine of illegal contracts are not without conflict and some of them seek to draw a distinction between offenses involving moral turpitude and acts which are in violation of statute law only. In cases which fall within the former class, it may not always be as clear that the public need demands that relief be given to a guilty plaintiff but the rule applicable remains the same. The weight and trend of modern authority seems to be that, although the parties to a transaction have concurred in an illegal act, whatever it may be, they are regarded as not equally guilty where one party has been induced into the contract through fraud, oppression or imposition on the part of the other, and under such circumstances equity will intervene whenever the public good requires it. Green v. Corrigan (1885), 87 Mo. 359; Turley v. Edwards (1885), 18 Mo. App. 676; Wright v. Stewart (1904), 130 Fed. 905; Hinsdill v. White (1861), 34 Vt. 558; Donnelly v. Rees (1903), 141 Cal. 56, 74 Pac. 433; Boyd v. De La Montagnie (1878), 73 N. Y. 498, 29 Am. Rep. 197; Herrick v. Lynch (1894), 150 Ill. 283, 37 N. E. 221; Anderson’s Admr. v. Merideth (1885), 82 Ky. 564; Melbye v. Melbye (1896), 15 Wash. 648, 47 Pac. 16; Porter v. Jones supra; Hobbs v. Boatright (1906), 195 Mo. 693, 93 S. W. 934, 113 Am. St. 709, 5 L. R. A. (N. S.) 906; Johnson v. Cooper (1831), 2 Yerg. (Tenn.) *524, 24 Am. Dec. 502; Harper v. Harper (1887), 85 Ky. 160, 3 S. W. 5, 7 Am. St. 583; 9 Cyc. 551, and cases cited. We believe that the averments of appellee’s complaint disclose such a situation and hold that the demurrers to each paragraph were properly overruled.

Our attention is called to the case of Swain v. Bussell (1858), 10 Ind. 438, as decisive of this case but we do not so construe it. The plaintiff, Swain, alleged in his complaint that he deeded his property to the defendant in consideration of 1,533 shares in the Shelby ville Real Estate Company”; that the scheme of said company was to distribute its lands among the shareholders by lot; that the defendant represented to plaintiff that such scheme was not a lottery but an honest transaction. The trial court sustained a demurrer to the complaint and, on appeal, its action was affirmed, this court holding, in effect, that the particular description of the “Real Estate Company” and its purposes showed clearly that the scheme was a lottery and negatived the plaintiff’s general allegation of fraud; that Swain was himself a party to the fraud in the case and not merely a victim of it.

6. 7. The next assignment of error challenges the action of the lower court in granting to appellee a new trial as of right, the first trial of the cause having resulted in a finding and judgment in favor of appellants. Prior to the act of Í913 (Acts 1913 p. 673, §1110 Burns 1914), there were three classes of cases in which a'new trial as of right might be demanded under §1110 Burns 1908, §1064 R. S. 1881: (1) in a suit to recover possession of real estate; (2) in an action to quiet title to real estate, and (3) in a partition proceeding wherein the title to the property was in question. It had been held, however, that where two or more substantive causes of action proceeded to judgment in the same cause, one entitling the losing party to a new trial as of right and the other not, the statute would not apply and a motion for a new trial without cause should be denied. Bennett v. Closson (1894), 138 Ind. 542; Wilson v. Brookshire (1890), 126 Ind. 497, 9 L. R. A. 792. Appellants take the position that appellee’s complaint does not proceed on the theory of an action to recover possession, or to quiet title or to have land partitioned and the title determined. In fact, it is urged that the essential thing sought by the complaint and made the basic and primal cause of action, was the rescission and avoidance of the written contract entered into by appellee and appellant Griffith. In this connection, we are not unmindful of those cases which hold that in actions brought merely to enforce or cancel a lien on realty or a contract in relation thereto, no new trial as of right was permitted by the statute. Studabaker v. Alexander (1913), 179 Ind. 189, 100 N. E. 10, and cases there cited.

But in this case, however, although the transaction between appellee and Griffith, and the contract itself, are set out in detail for the purpose of showing the deception which, it is alleged, was practiced on appellee, yet none of the parties sought to establish' any rights under the contract or ashed to be relieved from performing any of its covenants. The whole theory of the pleading is that of a suit to annul a deed which was obtained by fraud and to reinvest and quiet title in the grantor. In such an action the losing party was entitled to a new trial as of right. Tomlinson v. Tomlinson (1904), 162 Ind. 530, 534; Warburton v. Crouch (1886), 108 Ind. 83; Physio-Medical College v. Wilkinson (1883), 89 Ind. 23. The reasoning used in Krise v. Wilson (1903), 31 Ind. App. 590, 592, is applicable here. The court there said: “The first paragraph of complaint is a proceeding in equity to have the conveyances canceled because of the unsoundness of mind of the grantor. * * * The second paragraph is also a proceeding in equity to have the deeds canceled and declared ineffective because not delivered. But in each paragraph the title to the land, which is particularly described, is directly in issue. The only question the court was authorized to try, under the facts pleaded, was the title to the land. If the facts averred were found to be true, the appellees are not the owners of the land by virtue of the deeds, but under the averments the title is in both appellants and appellees as heirs at law of the grantor. The deeds carried the legal title to the appellees, and manifestly the disposition of these deeds will determine where the title should finally rest. If the deeds stand, the title is in appellees. If they are declared ineffective, the title is in appellants and appellees as heirs at law of the grantor. ’ ’

The facts pleaded in the case at bar are sufficient to show the existence in each party to the controversy of a claim adverse to that of the other side and there can be no doubt that the ultimate issue was that of title. That this was the construction placed on the complaint by the trial court is clearly manifest in its conclusions of law stated on the facts as found specially and in its judgment rendered on such conclusions. No reference is there made to the contract or to the respective rights of the parties to it, but the judgment was that the title to the real estate in controversy should be quieted in appellant Gilchrist, that appellee had no right, title or interest in said real estate, and that Gilchrist should recover from appellee certain incidental relief due from the latter as tenant.

8. Even if it is conceded, for the purposes of argument, that the complaint is fairly open to a different construction, an appellate tribunal is disposed to adhere to that eonstruction, if reasonable, which has been adopted by the trial court. The case of Comegys v. Emerick (1893), 134 Ind. 148, 39 Am. Rep. 245, presented a situation somewhat similar to the present case and this court there followed the rule above stated. In Muncie Pulp Co. v. Martin (1904), 164 Ind. 30, 32, this language was used: “When the trial court has placed a reasonable construction upon a pleading" which is open to two interpretations, and has proceeded to a determination of the cause upon such an understanding of its scope, this court will not be forward to adopt a different construction and reverse the case.”

9. Before this cause was tried, however, appellant Gilchrist filed a cross-complaint against appellee, of which one paragraph sought to quiet the cross-complainant’s title to the land in controversy and the other was an ordinary suit for possession and damages brought by a landlord against a tenant wrongfully holding over. Appellants contend that as to the latter cause of action no new trial as of right was allowable and that this fact is "sufficient to bring the case within the rule expressed in Bennett v. Closson, supra, and Wilson v. Brookshire, supra. We cannot so hold. While it is true, to quote from Chandler v. Citizens Nat. Bank (1898), 149 Ind. 601, 605, that “As a general practice, the original complaint and cross-complaint are heard together, and a judgment is rendered embodying all the points adjudicated, and all the relief awarded under both complaints”, yet it is also true that the cross-complainant and cross-defendant are in legal effect the plaintiff and defendant in a separate action wherein the issues are formed independently of those in the original suit and the dismissal of one action does not affect the other. State, ex rel. v. Winter (1906), 166 Ind. 530, 536; State v. Hindman (1903), 159 Ind. 586, 592; Judd v. Gray (1901), 156 Ind. 278, 285; Chandler v. Citizens Nat. Bank, supra, 605; Moore-Mansfield, etc., Co. v. Marion, etc., Traction Co. (1913), 52 Ind. App. 548. Where the only purpose of an action was to quiet title to real estate, the right of the losing party to a new trial without cause was not abridged by the form which the issues took and was not barred by a cross-complaint setting up a cause of action as to which no such right existed. Moor v. Seaton (1869), 31 Ind. 11; Hammann v. Mink (1885), 99 Ind. 279, 282; Bisel v. Tucker (1889), 121 Ind. 249, 252; 29 Cyc. 1037. Furthermore, in the case at bar the ultimate issue under both the complaint and the cross-complaint was that of title. The original action and one paragraph of the cross-complaint presented no other question, while the relief sought by the other paragraph of cross-complaint, under the averments of that pleading, depended on the cross-complainant’s success in quieting his title to the real estate in controversy. For the reasons above stated, we hold that appellee’s motion for a new trial as of right was properly sustained.

10. Finally, it is claimed that the evidence does not sustain the finding that appellant Gilchrist had any knowledge of the fraud perpetrated on appellee by Griffith or that he participated therein in any way. There is no contention that he had any active part in the negotiations between Griffith and appellee but there is evidence which tends to show that at and before the time of the Griffith-Hatch transaction Gilchrist knew of the condition of the Mount Pleasant Oil Company and its property; that he had been pressing Griffith for money which the latter owed him and had threatened to file a lien against the property of the oil company hut refrained from so doing on advice from Griffith; that he was instrumental in preventing a suit against the oil company at a time when such action would have been disastrous for that concern; that Griffith and he were often together; that he knew Griffith had sold some of the oil company stock and was endeavoring to dispose of more of it to obtain money with which to pay him, Gilchrist; that he knew said stock was of little value. There is also some evidence that Gilchrist knew Hatch was to become interested in the oil company and it is clear that he gave no-consideration for the property in question except a credit in favor of Griffith on the amount owed by the latter.

Prom these and other circumstances which it is not necessary to enumerate here, the trial court drew the inference that Gilchrist had such knowledge of the transaction between Griffith and Hatch as will now prevent him from assuming the role of innocent purchaser. It is not the province of this court to weigh the evidence as it appears in the transcript but only to determine whether there is any evidence from which the trial court might properly draw its conclusion. Ye think the circumstances of this case present a situation in which the following language from the opinion in Elliott v. Baker (1907), 194 Mass. 518, 520, 80 N. E. 450, is applicable: “This is peculiarly a case for the application of the rule that the justice who hears the witnesses has opportunities for testing their reliability and veracity which no appellate tribunal can acquire. It is stated in the memorandum of the justice that he ‘ cannot believe, though it is denied by all of them, that there was not some secret understanding or arrangement between Lamson, Poster and Nickerson in regard to the situation.’ This finding must have been based not alone upon what was said, but upon a scrutiny of the witnesses, inferences drawn from their appearance, and the atmosphere they created in testifying, which cannot be reproduced in a printed report.”

The record contains no reversible error, and the judgment of the trial court is therefore affirmed.'

Cox, C. J., and Morris, J., dissent.