Pietsch v. Milbrath

The following opinion was filed November 15, 1904:

Maeshall, J.

As indicated in the statement, this court has twice held in this case that by rules in previous decisions made here the circumstances alleged to have occurred constitute a good cause of action in favor of the corporation against the defendants, enforcible at the suit of the plaintiffs as stockholders, to recover of the former the profits obtained in buying the land at one price and selling it to the corporation at another. The cases where the controlling principles -have been proclaimed and applied are numerous, the most significant being Pittsburg M. Co. v. Spooner, 74 Wis. 307, 42 N. W. 259; Fountain S. P. Co. v. Roberts, 92 Wis. 345, 66 N. W. 399; Franey v. Warner, 96 Wis. 222; Hebgen v. Koeffler, 97 Wis. 313, 72 N. W. 745; Milwaukee C. S. Co. v. Dexter, 99 Wis. 214, 74 N. W. 967; Zinc C. Co. v. First Nat. Bank, 103 Wis. 125, 79 N. W. 229; Spaulding v. North Milwaukee T. S. Co. 106 Wis. 481, 81 N. W. 1064; Forest Land Co. v. Bjorkquist, 110 Wis. 547, 86 N. W. 183. It follows that tbe sufficiency of tbe complaint to support a judgment is res judicata. Case v. Hoffman, 100 Wis. 314, 72 N. W. 390, 74 N. W. 220, 75 N. W. 945.

While, as counsel for appellants claim, the findings are indefinite, being so framed at some points that they might be taken one way or another, they follow the complaint in that regard. Why this indefiniteness, we need not go far to discover. A misunderstanding by counsel of language used in Spaulding v. North Milwaukee T. S. Co. supra, or inability of counsel to satisfactorily gather the purport thereof is very plainly portrayed in both complaint and findings. It is probable the learned trial court allowed counsel to phrase the decision as it appears in the records, and if it were not for that which, though sanctioned by practice, in the judgment of the writer, cannot be too strongly condemned) — if the court had-responded fully to the commands of the statute to state in writing its decision, instead of permitting the stating thereof' to be done by one viewing the case from a one-sided standpoint, — the uncertainty complained .of would not exist, and' we would not have before us a decision as to facts, under any circumstances requiring careful consideration to determine-its meaning in advance of pronouncing the legal effect thereof.

It is of course conceded that if the findings will reasonably admit of a construction harmonizing with and responding to the allegations of the complaint, as it was viewed here on the-former occasion, on their face they will support the judgment. The view that we take of this case renders unnecessary any examination in detail of the numerous criticisms of the findings made by appellants’ counsel, or deficiencies therein suggested.

It must be conceded that the following situation is well within the language of the complaint and the language of the-findings, as well as supported by the evidence: Those against: whom the judgment was rendered were parties to a plan to obtain control of certain real estate with a view of turning the same over to a corporation to be formed, at a large profit to themselves without the stockholders therein, other than themselves, having knowledge of their obtaining such advantage. The plan was executed by the formation of defendant corporation and conveyances of land to it for $116,000, when the expenditure to acquire such land was about one-half thereof, and takingT3-72“shares of the capital stockWFiElielidfpdratibn, of the par value of $141,200, ostensibly at $34 per share, to be contributed in cash to the corporation, without such contribution being made in fact; the setting asiflem£-fi62-shares of stock to_be sold by the corj3pration„io_outsidexa at .$34 per share cash, through the efforts of members^ of the combine, the purchasers understanding that a like sum had been, or was to bé,' contributed to the corporate treasury for each share of the corporate stock; the doing of all those things at a time when only members of the combine interested in making the profits aforesaid were members of the corporation; the com-jdetion of the plan thereafter by the sale of the 562 shares of stock at $34 per share, the plaintiffs being the victims and furnishing substantially all of the capital of the corporation. The legal effect of such facts, as we shall see, is sufficient to, support the judgment, unless defendants are entitled to recover on their plea of the statute of limitations.

Time, the complaint is so framed as to suggest that some, at least, of the plaintiffs were stockholders at the time the corporation was organized and the land conveyed to it, and were not then deceived as to the real nature of the transaction, true, the findings are so drawn as to suggest the same thing, and true, the evidence shows clearly that none of the plaintiffs were members of the corporation when the transaction occurred between it and the promoters whereby they obtained, substantially without consideration, 1,472 shares of its stock; that when the corporate proceedings were had respecting the land every one then a member of the corporation was fully advised as to the nature thereof; that the only deception practiced on defendants was by inducing them to take the stock of the corporation at $34 cash per share, believing all the subscribers or takers of stock were to contribute likewise therefor ; and if it be the law that if no one was literally, at the time the transaction between the promoters and the corporation occurred, deceived, then no complaint can be made by or in the name of the corporation against the defendants, no ■cause of action was established by the evidence unless that question is foreclosed by the decision made when the complaint was challenged on demurrer.

Counsel for appellants contend that the contingency above suggested as to the law is ruled in their favor by Spaulding v. North Milwaukee T. S. Co. 106 Wis. 481, 81 N. W. 1604;— that every member of the corporation, as matters stood when the land was transferred to it and the promoters came into possession of the profits sought to be regained, was fully advised in respect thereto; that no one was then deceived, so the prime essential of a cause of action in favor of the corporation is wanting; that if, after the consummation of the deal between the promoters and- the corporation, deception was practiced by any defendant, inducing any plaintiff to take stock, supposing he was obtaining it on the same terms as the promoters, it is personal to himself. Those views are based on this language used in that case:

“The liability of promoters of a corporation is predicated -on fraud, the essential element of which is deceit. It does not matter that the corporation received property at a higher price than it cost the promoter, to give the corporation. .a right to rescind or recover bacFprdfits made. It must have been deceived info paying such price or the corporation cannot be ■deceived, save as some of the individuals composing it are.’7

No serious fault can be found with that. Generally speaking, it is correct. It was used as regards a situation where all the stock of a corporation had been taken. Certainly the court did not intend to bold that a corporation bas not capacity to acquire a cause of action to recover profits made by its agents, acting in tbe double role of such agents and at tbe same time for themselves and to their own advantage, no one' standing by to protect it; that they can perfect tbe corporate organization, keep control thereof for their own gain while-ostensibly promoting its interests; that they can restrict subscriptions to stock to a part taken by themselves in order that their ulterior purpose may be accomplished; that while so in control for such purpose, ostensibly acting for the corporation but really for themselves, they may make the organization a mere secret conduit through which to convert the money paid by future subscribers to stock to their own gain and then use-the corporate organization to aid in luring such subscribers into the trap, the corporation being powerless to prevent it— and yet the law furnish it no remedy for the wrong. To establish such a doctrine would be to open a most inviting, avenue for the commission of fraud. Then the well-settled doctrine that promoters cannot secretly obtain profits from the corporation they cause to be organized and launched into the business world without being responsible to it therefor can be easily evaded by their organizing the corporation, taking part of the stock ostensibly at the full par value thereof in cash, but really paying little or nothing therefor, and then inducing others to take the balance of the stock in ignorance-of the facts, paying the full par value therefor into the corporate treasury.

The law does not permit any such transaction as -the one-above suggested to go necessarily unredressed. Persons who act as promoters of a corporation do not necessarily cease to he such when the corporation is organized to do business. They may retain their fiduciary relation thereto till its shai’o capital shall have been taken and the corporation provided' with a board, or some reasonably efficient means of protecting its interests. So long as there are prospective original subscribers for stock and tbe promoters and those concerting with them remain in control of the corporation, it is in a situation to be deceived, within the rule of the Spaulding Case. It is deceived in a legal sense when it is rendered helpless by its managers as to protecting tho'se invited to subscribe for its stock, and is then used to aid in defrauding them. It is deceived thereby just as effectually as regards necessity for, and means of, redress as in a case where promoters by control of a corporation cause it to deal with them to their special advantage over then existing and unsuspecting members thereof.

The foregoing will be found well supported in authorities. If a corporation has been organized and persons promoting it up to that time continue to act for it by inducing persons to come in and subscribe for its capital stock, their relations as promoters continue. Alger, Law of Promoters, § 20. In the leading English case of Erlanger v. New Sombrero P. Co. L. R. 3 App. Cas. 1236, Lord Cairws said in substance: — ■

Promoters have in their hands the creation and molding of the company; they have power to define how and when and in what shape and under what supervision it shall start into existence and begin business. If they are doing all this in order that the company may, at the outset become, through its managing directors, a purchaser of property from themselves it is incumbent upon them to provide it with a board of directors, who will meet them at arm’s length in arranging the business transaction.

The circumstances in that ease were quite similar to those in this one. There was an attempt to .bind the corporation by a contract purporting to have been made between the vendor and directors before the shares were offered for subscription, whereas the directors were only the associates of the vendor, who exercised no judgment of their own in behalf of the corporation.

The rule stated by Lord CaieNS is said not to apply when the promoters are subscribers of all of the capital stock (Salo-mon v. Salomon & Co. 75 L. T. Rep. 437), or all tbe stock has been taken and the holders thereof assent to the transaction (Parsons v. Hayes, 14 Abb. N. C. 419). Then if a person acquiring stock otherwise than at first hands, is deceived into doing so by fraudulent representations that the full amount of. the share capital has been paid into the corporation and that all the stock was taken on a common basis, his right of action for damages is personal, not for enforcement of the rights of the corporation. Morawetz, Corp. § 290. In harmony therewith is Stewart v. St. L., Ft. S. & W. R. Co. 41 Fed. 736, where it was held in effect that Lord OairNs’ rule did not apply because at the time of the occurrence complained of the owners of all outstanding stock consented, the transaction was fully exposed on the corporation records, and it was not then, intended to solicit further subscriptions to stock. There are other circumstances where Lord Cairns’ rule has been said not to apply, but in no ease has it been rejected in circumstances such as, or similar, to those where it was framed and declared.

From the foregoing we deduce this: If one or more persons acquire property, intending to promote the organization of a corporation to purchase it from them at a profit to themselves and effect such purpose, limiting the membership to interested'parties till the transaction is completed between them and the corporation, intending thereafter to cause the balance of the capital stock to be sold to outsiders, they being kept in ignorance of the true natum.o£.sncL..tr.ansfl.c.tÍQn. and effecting such intent, they are guilty of actionable fraud upon the corporation and responsible to it for the gains made. In such circumstances, in the making of the contract between the corporation and its agents, it is mere fiction as to its prospective members by original subscription. Since it has no one to stand for it as an adverse party in the transaction no meeting of adverse minds, essential to__a_.binding_contract, occurs. The corporation is deceived, in that advantage is taken of its incapacity to protect itself, as to tbe interests of prospective memberships by tbe original taking of its stock.

Applying tlie foregoing tcTtEe situation founcTto exist all who were concerned in tbe transaction of buying the land at one price to turn it over to tbe corporation to be formed at a much greater one, and to induce others to come into tbe corporation in ignorance of tbe facts, contributing tbe actual ■capital necessary to enable them to fully accomplish their purpose, became liable to refund their profits to tbe corporation, which liability was enforcihlem this action, unless prior to its commencement it was éxtínguished By the six-year statute ^f limitations.

The action was commenced May 20, 1899, long after the ■expiration of six years from the time the cause of action in favor of the corporation accrued, unless the date thereof was postponed, as regards the remedy for the wrong, by subd. 7, ■see. 4222, Stats. 1898. It is conceded that the life of the cause of action expired before such commencement, unless such subdivision applies. That provides that a cause of action for relief on the ground of fraud in a case which was on or before the 28th day of February, 1859, cognizable in a court of ■chancery shall not be deemed to have accrued until the discovery by the aggrieved parties of the perpetration of the ■fraud. Counsel for respondent argue that this action falls within that because the sole remedy afforded plaintiffs to enforce the right of the corporation was in equity and was so at the time mentioned in such section. That overlooks the fact that the real test is, what remedy was afforded the corporation to enforce its rights in the circumstances set forth in the ■complaint before the adoption of the Code. We need spend no time to demonstrate that it had then, as it has now, a remedy at law in such cases. It follows that before this action was commenced a cause of action of the corporation was extinguished and that with it necessarily the right of the plaintiffs to enforce such cause of action was lost. That is distinctly ruled in Boyd v. Mut. Fire Asso. 116 Wis. 155, 94 N. W. 171. We are unable to discover anything in that case, or in Buttles v. De Baun, 116 Wis. 323, 93 N. W. 5, or Merton v. O'Brien, 117 Wis. 437, 94 N. W. 340, referred to by counsel, that can save this case. Tbe effect thereof is that the' statute of limitations does not run in favor of a trustee of an expressed interest of that continuing nature cognizable only-in a court of equity. There is nothing of that sort involved' in this case as is plainly ruled in Boyd v. Mut. Fire Asso. supra.

It is suggested by counsel for respondents that the corporation was powerless to assert its rights within the life of its-cause of action because those who were solely in charge of its-affairs were the guilty persons, and by their position prevented any one during such period from obtaining knowledge' of the facts so that they might act in its behalf. While counsel earnestly insist that under such circumstances the statutes-of limitation ought not to apply, no authority is cited to our attention varying the unqualified language of such statutes. So far as we are advised, there is no exception to the rule of' the statute to fit a case of this sort. Views elsewhere are well portrayed in Bank of Hartford Co. v. Waterman, 26 Conn. 324-330, thus:—

“Ignorance of his rights on the part of the person against whom the statute has begun to run, will not suspend its operation. He may discover his injury too late to take advantage of the appropxdate remedy. Such is one of the occasional hardships necessarily incident to a law arbitrarily making legal remedies contingent on mere lapse of time. Strong-equitable considerations in favor of the present plaintiffs seem, however, to grow out of the fact, that they were actually-betrayed into ignorance of their rights by the wrongful acts-of the defendant himself. . . . It is palpably unjust for the defendant to set up the statute as a defense under such circumstances; to do so is in one sense taking advantage of his own wrong. Yet it is difficult to see that he is not, by the clear provisions of the statute itself, protected in so doing. . . . Lord Casipbell properly suggests, relative to a controversy not unlike to tbe present, tbat ‘bard cases must not make bad law.’ ... If tbe dictum of Lord MaNS-pield tbat ‘there may be cases wbicb fraud will take out of tbe statute of limitations,’ were confirmed by direct adjudications, we should be reluctant to withhold tbe application of tbe doctrine in tbe present instance.”

We cannot escape tbe conclusion tbat tbe statute of limitations pleaded bad fully run in favor of tbe defendants before tbe commencement of this action and extinguished their liability.

By the Court. — The judgment is reversed and tbe cause remanded with instructions to enter judgment dismissing tbe complaint with costs in favor of tbe defendants.