text:
    General Investment Company, complainant, v. American Hide and Leather Company, defendant. Jacob B. Joel et al., complainants, v. American Hide and Leather Company, defendant.
    [Submitted January 3d, 1925.
    Decided January 12th, 1925.]
    1. A trustee is bound to communicate to his beneficiary any knowledge or information he may have obtained affecting the beneficiary’s interests, so far as they are embraced in or depend upon the trust 'or confidential relations.
    2. Directors of a corporation cannot lawfully enter into a contract in the benefit of which even one of their number participates without the knowledge and consent of the stockholders.
    3. A contract between corporations having a common director is voidable by the stockholders by force of the statute if all material facts in relation thereto have not been given to each holder of stock, and any adverse interest in a proposed corporate proceeding by one of the directors of the corporation should be communicated to the stockholders where the latter are asked to ratify the same.
    On bills foT injunction.

      Messrs. Hudspeth & Demarest (by Mr. Elmer TF. Demurest), for the complainant, General Investment Company.

      Messi's. McCarter & English (by Mr. Arthur F. Egner), for the complainant Jacob B. Joel et al. *

      Messrs. Pitney, Hardin & Slcinner (by Mr. John R. Hardin and Mr. Waldron M. Ward), for the defendant.
   Bentley, Y. C.

Application for preliminary injunction heard on bills and affidavits, defendant’s affidavits and examination of officers of the defendant company by complainants’ counsel.

The bill was filed on behalf of the complainant, General Investment Company, and all other seven per cent, preferred stockholders of the defendant company. After an order to show cause had been allowed, the restraint therein was modified so as to permit the- stockholders’ meeting to proceed to that point where a vote could be taken and all other proceedings preliminary to the filing of a certified copy of the amendments in the office of the secretary of state. There appeared to be facts in this bill distinguishing the situation from those in Grausman v. Porto Rican-American Tobacco Co., 95 N. J. Eq. 223. But after the stockholders’ meeting-had been held, there was filed another bill- containing practically the same facts, and seeking the same relief on behalf of five other stockholders. The two suits have subsequently beeir consolidated and heard together.

The defendant is a corporation organized in 1899 under our General Corporation act of 1896. It is engaged in the business of manufacturing leather, leather products and similar commodities. Its total authorized capital stock is fixed at $35,000,000, divided into three hundred and fifty thousand shares, one-half thereof being preferred, with cumulative seven per cent, dividends, and the remaining half common. There are now one hundred and twenty-five thousand four hundred and eighty-three shares of preferred stock worth $12,548,300 at par, issued and outstanding, and four thousand five hundred and seventeen shares of such preferred stock held in the treasury of the defendant company. The total common stock outstanding is one hundred and fifteen thousand shares, with a par value of $11,500,000. The preferred stock has the usual qualities to be found in shares so designated, entitling the owners thereof to the dividend indicated, if and when, declared, .before the payment of any dividend upon the common stock, and it is then provided that accumulations of such dividends when deferred shall also> be paid in advance of any dividend on the common stock, and that the preferred shall take precedence in the usual manner upon liquidation or dissolution. The accumulated arrears of dividends on the preferred stock now 'amount to $140 per share, although the surplus reserved by the company amounts to approximately $5,000,000 In this connection it should be said that neither of the bills is framed to compel a declaring of dividends, and no facts are alleged to bring the case within the language of Mr. Justice Swayze in Murray v. Beattie Manufacturing Co., 79 N. J. Eq. 604, showing the right of the stockholders to such relief.

For the purpose, it is said, of reducing the capital debt of the defendant and make it more in reasonable proportion to the earning powers of the company, there was issued, on October 23d, 1924, a notice of a special meeting of the stockholders of the'defendant, for the purpose of passing upon a resolution of the board of directors designed to' accomplish the same. It was proposed, according to the tenor of this notice and resolution, to seek an amendment of the certificate of incorporation of the company so that a new issue be created by changing thirty-five thousand shares of unissued preferred into thirty five thousand shares of a new class of preferred stock, denominated “cumulative prior preference stock,” of a par value of $100 each, with an eight per cent, dividend, and to' have priority both as to dividend and liquidation value over the preferred stock, already described, and redeemable at one hundred and fifteen per cent, after three years ; also to reduce the authorized capital by canceling the remaining ten thousand shares of unissued preferred stock of the seven per cent, variety then remaining unissued. It was then proposed to cancel sixty thousand shares of the unissued common stock. Thus, the new capital would consist of $3,500,000 par value of eight per cent, cumulative prior preference stock, $10,-000,000 par value of the seven per cent, preferred stock and $11,500,000 par value of the common stock. And, finally, the stockholders were to be asked to permit the purchase of thirty thousand shares of the outstanding seven per dent, preferred stock for retirement, fifteen thousand shares thereof to be purchased from “a large banking corporation of New York City,” which it now develops was the Chase Securities Corporation, a subsidiary of the Chase National Bank. The remaining fifteen thousand shares of such preferred stock it was proposed to purchase from the remaining stockholders, pro rata, based upon their respective holdings, at a price of $70 a share, in which connection it should be said that, under an agreement of August 13th, 1921, the price to be paid the Chase Securities Corporation was to consist of a fee of $25,000, a premium of $5 for each share of stock so. secured, or $75,000, the administrative expenses of the Chase corporation in fulfilling its part of the contract, and such legal expenses as the last-named corporation should be put to in the premises. The average cost to the Chase corporation of accumulating such shares of stock amounts to $63.65, making the price due to the Chase corporation from the defendant $68.65, plus the pro rata portion of the other charges to each share of stock, or, roughly, $70 per share.

The effect of the proposed plan, in the matter of reduction of capital indebtedness, may be synoptically expressed thus:

Mode of payment.
To be extinguished for cash ............... $3,000,000 $2,100,000 in cash.
Accrued dividends thereon .................. 4,200,000
In exchange for new 8% stock ................ 3,500,000
Accrued dividends ..... 4,900,000 3,500,000 in new 8% stock.
Totals .........$15,600,000 $5,600',000 5,600,000
Reduction $10,000,000

The vote a.t the stockholders’ meeting showed a total of ninety-one thousand nine hundred and ninety shares of preferred and eighty-eight thousand six hundred and forty five shares of common stock in favor of the plan, or eight thousand three hundred and thirty-five shares of preferred and eleven thousand nine hundred and seventy-nine of common stock over the necessary amount. The value of the stock on the open market advanced from $29.75 pen sham in August, .1923, to $59 per share in August, 1924, when the contract between the defendant and the Chase corporation was executed, and,' subsequently, advanced to $62.50 on October 10th, 1924.

Many of the points made by the complainants were presented to this court for decision in General Investment Co. v. Bethlehem Steel Corporation, 88 N. J. Eq. 237, when Vice-Chancellor Lane commented on their novelty and importance. Becairse of the exigencies of the World War, he declined to pass upon them, but expressly based his determination upon a balancing of conveniences.

The complainants say that to permit preferred stock to be issued with an eight per cent, dividend, and redeemable at any time after three years at 115, exceeds the statutory maximum return upon such a class of stock, and converts it into preferred stock bearing a dividend at a rate of thirteen per cent, per annum. This, clearly, cannot be so, because the language of the very eighteenth section of the Corporation act, which limits the yield to eight per cent., contains the further provision that it may “be made subject to redemption at any time after three years from the issuing thereof at a price not less than par.” The twenty-ninth section, it is true, says that the company may decrease its capital stock “hj the purchase at not above par of certain shares for retirement.” As Vice-Chancellor Lane pointed out in General Investment Co. v. Bethlehem Steel Corporation, supra (at p. 241), the legislature had two different objects in mind in framing the two different sections. It must be clear that in the eighteenth section it was its purpose to permit the company to impress upon such shares an option in favor of itself to compel a shareholder to surrender up his stock at the end of three years, or such, further period as might suit its convenience, for a sum designated, while in the twenty-ninth section 'it conferred upon the company authority to bargain for the purchase of stock upon which no such option existed, but, for obvious reasons, fixed par as the maximum it should be permitted to pay. There is no repugnance.

It is also objected that, included in the stock voted in favor of the director’s plan, were the blocks acquired by the Chase Securities Corporation of fifteen thousand shares, and twenty thousand six hundred shares of preferred, and seven thousand seven hundred and thirty shares of common voted by a company named Livingston & Company. It is said as to the former holding that, while the stock voted by the Chase Securities Corporation must be counted in the gross stock outstanding, it should not be permitted to be counted in favor of the defendant, because it was stock owned by the defendant, and, therefore, under the act, without voting-power. The answer to this, as the defendant points out, is the opinion of the court of errors and appeals in U. S. Steel Corporation v. Hodge, 64 N. J. Eq. 807. But, the complainants say, in addition, if these shares be considered as the property of the Chase Securities Corporation, then they are not countable,-because that company was voting its stock in. favor of a contract for its own benefit. The answer to such objection is, that a stockholder is under no iiducia^r relation "R^her* to the ’ com]3an;f~TiT~-te--^^ to and he .vUtesHIis Addings Jñ~Xll7~w_ himselfr- Mr. Justice Yan Syckel dealt with a like objection in the Hodge Case (at p. 818 of the opinion). So far as the other holdings of stock axe concerned, Livingston & Company is a stock broker which had purchased, for various of its customers, the number of shares of stock mentioned for those customers’ accounts, but had taken the legal title in its own name and so registered the shares on the books of the company. Sections 33 and 40 of the Corporation act, and the many cases decided under it, gave to Livingston & Company the privilege of voting as it did. Section 20, providing for a notation on the books of the company in case of hypothecating of stock, has nothing to do> with the matter, that provision being intended to permit a transfer as collateral security without the owner parting with his right of franchise.

The main question raised and argued involves the matter of statutory authority to create a new class of preferred stock superior in its preference to the preferred stock now outstanding. The language of the resolutions refers to “reclassifying” thirty-five thousand shares of the unissued authorized stock, but, in effect, it would amount to inventing an entirely different creation than had been dreamed of when the certificate of incorporation was filed. It seems a most circuitous and awkward proceeding to go' to the pains of reconstructing these nebulous, unissued shares into something entirely new, and neglect the direct proceeding of canceling them and then creating the new ones in the way presently to be pointed out. Call them what you may, they are an entirely new class of stock. The Standard Dictionary defines “create,” in its secondary meaning, “to produce, as a new construction out of existing materials.” If a narrow contraction is to be given the word “create” in the twenty-seventh section, then that is exactly the action contemplated, namely, to produce the prior preference stock out of the existing unissued preferred stock. But I prefer to consider these as a new class.

It cannot be questioned that, in the absence of fraud, ultra, vires action, illegality, or immorality, our courts will not substitute their respective judgments for that of the directors and stockholders in matters of business, and that has been the policy pursued from the case of Elkins v. Camden and Atlantic Railroad Co., 36 N. J. Eq. 241, to date. Thus, the resolution of the difficuky depends upon a construction of the pertinent provisions of the Corporation act of 1896, as it stood before the amendment of 1901. The language of section 18 provided that every corporation should have power “to create two or more kinds of stock of such classes, with such designations, preferences and voting powers or restrictions or qualifications thereof as shall he stated cmd expressed in the certificate of incorporation.” Standing by itself, and considered as if there were no other provisions to be regarded, this would foreclose any corporation so circumstanced from subsequently creating any other class of stock after the organization of the corporate entity. But in the interpretation of statutes there is no rule better established than that the entire act, and every part thereof, shall, if possible, be given effect, and, so far as- practicable, every provision thereof reconciled. James v. Dubois, 16 N. J. Law 285; Morris and Essex Railroad Co. v. Commissioner of Railroad Taxation, 87 N. J. Law 228.

In 1899, when the defendant was incorporated, the twenty-seventh section of the same act read as follows, so far as germane to this case:

“Every corporation organized under this act may change the nature of its business * * * create one or more classes of preferred stock * * * and make such other amendments, change or alteration as may be desired in manner following * *

These were the things it might do even though the original certificate made no provision for them. As to these things the shareholders were at liberty to change their minds. It then provided the familiar machinery of amendment upon a vote of not less than two-thirds in interest of each class of stockholders. The amendment of 1901, referred to above, added to the language of the eighteenth section I have already quoted fixing the power of the incorporators to provide for the various classes of stock, the following words: “Or in any certificate of amendment thereof.” From this amendatory language the complainants draw the conclusion that such power of change was forbidden to- the stockholders of the company under the law as expressed when the company was formed, and, therefore, on constitutional grounds not subject to change, for the reasons dealt with in Allen v. Francisco Sugar Co., 92 N. J. Eq. 431, and.cases therein reviewed. As just intimated, if one were to- close his eyes to everything in the act except the eighteenth section, this position assumed by the complainants would be impregnable, but when read in light of the twenty-seventh section it becomes apparent that the legislature had no' such thought or purpose in mind. The history of the act as originally drawn, and the scope and purposes apparent from a consideration of the entire instrument, show that the intention was to confer upon corporations organized pursuant to its provisions the broadest grounds of self-government consistent with safety to the public and fairness to all the stockholders. This being so, the unqualified permission granted by the twenty-seventh section to amend its certificate of incorporation so as to “create one or more classes of preferred stock” is to be read without qualification, except 'as otherwise expressed in the act or required by established rules and principles of law. Of course, such stock could not be issued under the original certificate unless provided for therein. But, then, the twenty-seventh section pointed out the means of amendment to remedy the oversight in the original certificate or to confer a power not thought necessary at first. The complainants say that this is authority only for the creation of a new class of preferred stock, subordinate in preferences to preferred stock already outstanding. The act does not say so, nor do the rights of the existing preferred stockholders make such a. construction necessary. The twenty-seventh section in clear and unambiguous language provides for an amendment such as the one now under attack, and construing the eighteenth section amendment in light of this permission it can be nothing more than this, that as the language stood in 1899 every corporation should have the power to fix the qualities of its various classes of stock “as stated and expressed in the certificate of incorporation,” with the understanding, however, that the certificate meant was the certificate in its form at the time of the issuance of the new class of stock. In contemplation of law the original form of certificate of a corporation is no' longer the certificate of the company after an amendment has been made. When any amendment of a document is effected, whether that document be a pleading in a cause, a contract, a statute, or otherwise, the amendment becomes incorporated in, and a part of, the document from that time forth, just as if included in the terms of the original language, and it was in this sense that the legislature spoke when it used the phrase “certificate of incorporation” in the original language of the eighteenth section of the act. It is illustrated by what is said in Dan. PI. & Pr. {6th Am. ed.) § 40£.

“But, although it is the practice to call a bill thus altered an amended bill, the amendment is, in fact, esteemed, but as a continuation of the original bill, and' as forming a part of it, for both the original and amended bill constitutes but one record; so much so that, where an original bill is fully answered, and amendments ai'e afterwards made, to which the defendant does not answer, the whole record may be taken, pro oonfesso, generally, and an order to take the bill pro confesso as to the amendments only will be irregular.”

To the same effect is the opinion in Equitable Life Assurance Society v. Laird, 24 N. J. Eq. 319; affirmed, 26 N. J. Eq. 531. Why the amendment to the eighteenth section was adopted I do not know. Perhaps, as counsel for the defendant intimates, at the instance of some over-cautious attorney who wished to “take a bond of fate.” At any rate, it was unnecessary, and a surplus use of language. .Not a rare mistake.

Pronick v. Spirits Distributing Co., 58 N. J. Eq. 97, does not support the argument of the complainants, but, in fact, is direct authority against them, under my reading of the Corporation act. In Smith v. Eastwood Wire Manufacturing Co., 58 N. J. Eq. 331, Vice-Chancellor Emery (at p. 383), alter referring to the act becoming a part of every charter, says, in construing his own opinion in the Pronick Case:

“And in Pronick v. Spirits Distributing Co. * * * it was said that the same rule was to be applied to the general powers of amendment of certificates authorized at the time of organization.”

Allen v. Francisco Sugar Co., supra, and all cases cited therein, and in briefs for complainants, dealt with attempts to carry out schemes declared to be unconstitutional invasions of property rights, and to attempt to apply them to the one at bar would be to argue in a circle. I referred to Chicago City Railway v. Allerton, 18 Wall. 233, in the Grausman Case. But there, there was an attempt, without authority from the legislature, to increase the capital stock from $1,250,000 to $1,500,000 by the directors, without permission from the stockholders. Day v. U. S. Cast Iron Pipe and Foundry Co. dealt with the right of a preferred stockholder to prevent payment of dividends on the common stock until withheld, available and earned dividends for previous years on the preferred stock should have been paid. There was no consideration of the company’s right to amend for the purpose of creating a new kind of stock.

This being the state of the law, it became a part of the charter of the company, subject to which every one is presumed, to have purchased his stock. Meredith v. New Jersey Zinc and Iron Co., 55 N. J. Eq. 211; affirmed, 56 N. J. Eq. 454; Schwanwalder v. Tegen, 58 N. J. Eq. 319; Smith v. Eastwood Wire Manufacturing Co., supra.

Therefore, the complaint of the minority stockholders is overborne by tire statutory majority in favor of a change of the capital indebtedness sanctioned by law. For the reasons to which I have already adverted, I do^ not feel that I can give effect to the elaborate argument to show that the best methods have not been pursued to effect the desired result. It would be intolerable if this court should be charged with supervising the policies of every corporation as to their soundness, and, from the standpoint of the public, would be utterly subversive of the principle of majority rule. The complainants may suffer as they fear (only time can tell), but if, as I have decided, the law allows the change to be made, and did when the company was formed, then they should not expect assistance from this court, especially in view of their representing a rather small minority.

Much has been said of the abuse to which such a scheme as the one under consideration might be used to unfairly deprive preferred stockholders of their property by a continuance of 'the proceedings from time to time until individual stockholders would become “tired out,” so as to dispose of their individual holdings at great disadvantage. I have no apprehension of any such proceeding, and I am positive that there is no such motive now existing. If, in the future, the fears of the complainants in this respect are realized, any such attempt can be promptly and effectively suppressed. No extensive argument has been attempted here to show that the plan devised will be to the substantial benefit of all the stockholders of the company, for the reason that an examination of the condition of the company and the saving to be effected, as displayed in the statement of facts, must malee it apparent to any disinterested person.

There has been expressed a further fear that the preemptive right of the present stockholders may not be observed in the distribution of the new class of preferred stock. As I said, in answer to a like abjection in Gruasman v. Porto Rican-American Tobacco Co., supra, the stockholders will have their remedy in that event.

There has been shown, however, a fact that places an entirely different aspect on the matter, and must operate to render nugatory all that was done at the meeting of stockholders. In the notice calling the meeting of stockholders, the latter were acquainted with the fact that it was proposed, among other things, to reduce the capital liability, provide for the issuing of a new class of stock, and the authorization to the board of directors to purchase for retirement, at not above par, thirty thousand shares of the then outstanding preferred stock at a price not above par, in one of several different methods. There was nothing said—and “there’s the rub”'—or any intimation given about the source from which the block of fifteen thousand shares were to be procured. There was in the president’s letter to the stockholders information that the directors of the company had “made arrangement with a large banking corporation of New York City for the purchase from it by your company of fifteen thousand shares of preferred stock at a price of approximately $69 per share.” No further information was given at any time to the stockholders of the identity of the banking corporation referred to or any of the officers or directora thereof. Upon the return of the order to show cause there was filed, on behalf of the defendant, the affidavit of Claude Douthit, one of its directors, in which it was revealcd that the banking corporation in question was the Chase Securities Corporation, and at page 8 of his typewritten affidavit it is said:

“None of the directors of the American Hide and Leather Company have any connection whatever with Chase Securities Corporation or with the contract referred to, except Mr. Edward R. Tinker, who is president of Chase ‘Securities Corporation and a director of American Hide and Leather Company. Mr. Tinker, however, attended no meetings of the directors' of the American Hide and Leather Company at which said contract or the said plan were considered.”

Thus, it is made to appear by a part of the defendant’s own proofs that Edward R. Tinker, at the time the contract was made with the Chase Securities Corporation, occupied the dual capacities of a director in the defendant corporation, and an officer in the company that was the other party to the contract providing for the acquiring of one-half of the thirty thousand shares to be purchased and retired. Mr. Justice Van Syckel, in United States Steel Corporation v. Hodge, supra (at p. 813), said:

“The rule that directors cannot lawfully enter into a contract, in the benefit of which even one of their number participates without the knowledge and consent of the stockholders, is so firmly entrenched in our jurisprudence that it is not open to debate.” (The italics are mine.)

It is true that later, in showing that the illegal act had been ratified, and after demonstrating that such a contract is not void but merely voidable, he said:

"A fortiori, when the contract is entered into by the stockholders with tire directors, or when the stockholders expressly authorize the directors to enter into a contract, when the stockholders had notice of the directors’ interest, the agreement will be unassailable in the absence of actual fraud or want of power in the corporation.” (The italics are again mine.) ' /

In that case, however, it was pointed out that not only might it be fairly presumed that the stockholders knew that J. P. Morgan was a director of the steel company, but, in addition, that the circular letter which accompanied the call of the stockholders in that case expressly informed the latter, not only that the contract was with J. P. Morgan & Company, but that a syndicate had been formed, “including some directors, which will receive four-fifths” of the compensation to be paid the bankers. Then, applying the rule stated by Mr. Justice Dixon, in Gale v. Morris, 80 N. J. Eq. 285, it was pointed out that the stockholders were acquainted with all proper information long before they met, and were in a position to have made up their minds whether they would ratify the contract or denounce it by voting down the proposed resolutions. In the case at bar a very different situation is made to appear. It is disclosed that the plan under consideration was the fifth that had been devised, all previous ones having failed of approval, and, as Mr. Douthit says, this was the first one formulated “which proved to be satisfactory to the directors, counsel and bankers for the company.” Of course, it requires small experience to lmow that projects of this importance are never launched -without submission to counsel and his favorable opinion, yet, notwithstanding the rule of law “so firmly entrenched in our jurisprudence,” and the emphatic expressions used by Mr. Justice Yan Syekel in the leading ease of U. S. Steel Corporation v. Hodge, supra, there would appear to have been some reason for suppressing and withholding from the stockholders the information that one individual joined hands on the one side with the directors in their fiduciary relations to the stockholders (Marr v. Marr, 73 N. J. Eq. 643), and, on the other, with the syndicate which was dealing at arm’s length with the corporation in which the shareholders had invested their money. It is true that Clarence Yenner, the president of the complainant, General Investment Company, in his quest for particulars about the circumstances surrounding the scheme, met with many obstacles and some rebuffs at the hands of' the defendant’s officer. Some allowance must be made, however, for the weakness of human nature, and. I can conceive of no monster of the jungle, or the most vivid imagination, that could unsettle the nerves of a corporation director when engaged in rejuvenating an embarrassed company, as the appearance of Mr. Yenner in search of information (observation of vice-chancellor in Bethlehem, Steel Corporation- Case, supra). There is nothing to make it appear that any other stockholder was so treated. I do not believe the information about Tinker was withheld by any active fraud. Whether so or not, to permit such a violation of so salutary and necessary a rule of latv would be, if consistently followed, to throw open the savings of investors to practices that would destroy all public confidence in the value of corporate stock.

It is established in Stewart v. Lehigh Valley Railroad Co., 38 N. J. Law 505, that courts will not inquire whether a contract such as this seems a fair one. “Fraud is too cunning and evasive for courts to establish a rule that invites its presence.” The same case and the many authorities there cited are also an answer to the protestation that the director took no part in the negotiations under attack. Mr. Justice Dixon, in the last-named case, says:

“Nor is it proper for one of a board of directors to support his contract with his company upon the ground that he abstain from participating as director in the negotiations for the final adoption of the bargain by his co-directors, the very words in which he asserts his right declares his wrong; he ought to have participated, and in the interest of the stockholders, and if he did not, and they had thereby suffered loss, of which they shall be the judges, he must restore the right he has obtained—he must hold against them no advantage that he has got through neglect of his duty toward them.”

It is true that in that case the director in question dealt with himself as a member of a partnership, but the principle v'ould apply equally had he been an officer of a corporation with which he was contracting in his gwzsi-trust capacity. No one can read the opinion of Mr. Justice Dixon in the Stewart Case, or consider the reason for the rule, and not regard as puerile any such transparent effort as to attempt concealment behind the form of incorporation. The rule is one of a stern morality.

The rule is rigid and applies equally to cases of fair and of unfair dealing, and where the principal would have been no better off if the agent had strictly pursued his powers, and where the principal was not, in fact, injured by the agent’s act. Meach. Ag. § 1/.69.

As an officer of-the Chase Securities Corporation he would have profited, it is immaterial whether much or little, directly or indirectly, by a hard bargain with the defendant.

However, in face of the large majority in favor of the new plan of capitalization, the otherwise apparently hopeless condition of the company, the advantage to be obtained for the great mass of stockholders by bringing the finances of the company at least one step nearer to the resumption of dividends, and the fact that I do not believe there was any conscious attempt to suppress information from stockholders, I feel that an opportunity should be afforded the defendant to repair the neglect with which I have just dealt. Therefore, I will withhold action for a period of ten days from the mailing of this opinion, so that if the defendant shall desire, it may give notice to the stockholders of another special meeting, for the purpose of again passing upon the resolution of the board of directors which have given rise to this suit. With such notice, or incorporated therein, there shall be given the information already withheld, to wit, the name of the Chase Securities Corporation, and the fact that Mr. Tinker was a member of the defendant’s hoard of directors and the president of the Chase Securities Corporation at the time tire contract was executed, as ivas done in the Hodge Case (at pp. 81k, 815). Of course, new proxies must be obtained after this information shall have been conveyed to the stockholders, and no proxy executed prior thereto shall be voted. Should the stockholders again adopt the resolutions of the board, I shall refuse any preliminary injunction. It may be said that the defendant will be placed at some disadvantage in again securing proxies to adopt the resolution by the necessary majority. If that be so, it iras itself to blame for a failure to perform its diity, and it would perhaps be strong proof of the strength of the position of the complainants.

On the other hand, if the defendant shall not have availed itself of this opportunity within the time limited, I will advise a preliminary injunction in accordance with the prayers of the respective bills.


source: Caselaw Access Project

author: Bentley, V. C.

license: Public Domain

text:
    General Investment Company, complainant, v. American Hide and Leather Company, defendant. Jacob B. Joel et al., complainant, v. American Hide and Leather Company, defendant.
    [Submitted January 19th, 1925.
    Decided January 23d, 1925.]
    1. In the absence of fraud, ultra vires action, illegality or immorality, our courts will not substitute their respective judgments for that of directors and stockholders of a corporation in matters of business.
    2. The intention of the Corporation act is to confer upon corporations organized pursuant to its provisions the 'broadest grounds of self-government consistent with safety to the public and fairness to all its stockholders.
    3. The eighteenth section of the Corporation act, as it stood before the amendment of 1901, did not preclude the amendment of a certificate of incorporation pursuant to the authority contained in the twenty-seventh section, to permit the creation of a new class of stock with preferences superior to those of any existing class.
    4. Directors of a corporation cannot lawfully enter into a contract in the benefit of which even one of their number participates without the knowledge and consent of the stockholders, and where this situation exists, this court will interfere to prevent the carrying out of the contract.
    5. Where a large majority of the stockholders of a corporation are in favor of a plan of recapitalization, and the condition of the company is otherwise apparently hopeless, the advantage to be obtained for the great mass of stockholders, and the fact that the court does not believe that there was any conscious attempt to suppress information from the stockholders, is sufficient to cause the court to withhold action for a limited period so that the defendants may give notice of a special meeting of the stockholders for the purpose of again passing upon the resolution of the board of directors, which has given rise to this suit.

      On bills for injunction.

      Messrs. Hudspeth & Hemarest (by Mr. Elmer W. Bemarest), for the complainant General Investment Company.

      Messrs. McCarter & English (by Mr. Arthur F. Egner), for the complainant Jacob B. Joel et al.

      Messrs. Pitney, Hardin & Skinner (by Mr. John B. Hardin and Mr. Waldron M. Ward), for the defendant.
   Bentley, V. C.

After receipt of the opinion originally filed in these cases, a further argument was presented on behalf of the defendant, to change my mind on so much thereof as dealt with the invalidity of the attempted ratification -of the contract with the Chase Securities Corporation. It was said on behalf of the defendant that there is a distinction between a contract made by a director with himself individually, as in the case of Gardner v. Butler, 30 N. J. Eq. 702, and a contract betweerTfwo corporations ha.vinYaY5mm.on director or directors, and such seems to be the case, as would appear from the opinion of Vice-Chancellor Stevenson in Robotham v. Prudential Insurance Co., 64 N. J. Eq. 673 (at pp. 709 et sag.)ft I was in error in deciding~asa matter of law that any eon-1 tract between corporations having a common director was || voidable as a matter of right at thn-insta.nc.e...Q£-aJxv-S.tock- t holder. That, however, was not the vice I had in mind or intended to cover. The vulnerableness of the defendant’s position is that, while such a contract is not void; it is voidable by the stockholders by force.of statute before amendment of the certificate of incorporation. Consequently, it became the duty of the compány to give notice of all material facts affecting the contract to each holder of stock, so that he might be informed of everything of which he had a right to know. The defendant maintains that a contract such as the j one under discussion is good if found to be fair by the court,! and then unassailable by any stockholder, while, for example. ^ on the contrary, it would be enjoined on the objection oí a stockholder if ultra vires. But my difficulty with the situation is not that at all, but that the requisite notice of the objectionable feature, to wit, Tinker’s adverse interest therein, was never communicated to any of the stockholders, before their meeting was held.

In Robotham, v. Prudential Insurance Co., supra; Metropolitan Telegraph and Telephone Co. v. Domestic Telegraph Co., 44 N. J. Eq. 568; United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, there was either actual notice extended to the stockholders or ratification after knowledge had been obtained. In the last-mentioned case Mr. Justice Magie, speaking for the court of. errors and appeals, indicates some doubt as to the validity of a contract such as the one found in this ease. But I think that there is nothing in it irreconcilable with tire opinion in the Boboiham Case—that is to say, that it is not adverse to the rule that such a contract is good if ratified after its execution. But it is said in the telephone case that the common director is disqualified because of his interest in the contract, the terms of which he undertook to fix. Of course, his action could be ratified by the stockholders. “To sustain his capacity to do this would be like permitting one to be a judge in his own case. Had the contract been executed or entered into without objection, it would no doubt have not been void, but, at the most, only voidable.” In Marr v. Marr, 73 N. J. Eq. 643, the defendant, William A. Marr, reduced to judgment claims he held against the corporation of which he was a director, and, upon the execution sale thereunder, bid in property of the corporation for himself. From this opinion I am unable to see any such limitation upon the rationale of the cases such as Gardner v. Butler, 30 N. J. Eq. 702, as is perceived by defendant’s counsel. Marr was decreed by the court of errors and appeals to be a trustee for his company and to hold its property as such. Chancellor Pitney points out for the court of errors and appeals that a director is not obliged to forego a just debt against the company he represents, but makes it very clear that before assuming an antagonistie attitude he must openly and unequivocally "relinquish his trust pro lute vice, not covertly, but openly and with fair notice to his company.” This requires something more than mere abstention from voting, if Mr. Justice Dixon’s language meant anything, in Stewart v. Lehigh Valley Railroad Co., 38 N. J. Law 505.

It would seem but necessary without argument to declare that any adverse interest in a proposed corporate proceeding by one of the directors should be communicated to the stockholders, where the latter are asked to ratify the same. Any other rule would permit the most ruthless destruction of the rights of the stockholders. Adroit management could frequently prepare a scheme in such innocent guise that ordinary stockholders would not be put upon their guard unless the full discharge of their duties by directors or officers presented the objectionable information which might cause individual stockholders to more carefully scan the proposed plan and seek competent advice thereon. Euthermore, if the law is to remain a scientific co-ordinated body of principles, doctrines and rules, there is no reason that fiduciary agents, such as directors, should not be subjected to the underlying directions of the law pertaining to trustees, which they are sub modo, as pointed out in the cases already mentioned. There is no rule better established than that “a trustee is bound to communicate to his beneficiary any knowledge or information he may have obtained affecting the beneficiaos interests, so far as they are embraced in or depend upon the trust or confidential relations. Pom. Eg. Jur. § 1077. In the previous opinion it would seem that the position herein assumed was made clear from the citations taken from Mr. Justice Van Syekel’s opinion in the Hodge Case. He was not given to ruminating, in his opinions, on academic questions, and it would seem impossible to read what he there said as to contracts made by a trustee without the knowledge or consent of the ceslui que trust and its subsequent ratification without concluding that individual stockholders may defeat a plan submitted for confirmation, as the one under consideration. Katifieation is impossible in the absence of notice or knowledge. Western National Bank v. Armstrong, 152 U. S. 346. Mr. Justice Yan Syckel, in the Hodge Case, meant something 'when he said:

“The rule that directors cannot lawfully enter into a contract, in the benefit of which even one of their number participates, without the knowledge and consent of the stockholders, is so firmly entrenched in our jurisprudence that it is not open to debate.” (The italics are mine.)

While the language does not indicate that a contract between corporations having a common director is void, it certainly must mean exactly what the clear intent of the language indicates. ' He says that the presence of a single common director who participates . in"~the benefit of the contract makes necessary the acquaintance of the stockholders with that fact wnen ratification of the latter bnffe is sought and required. This was not a voluntary expression of the judge's individual opinion; the language was written in deciding one of the questions presented to the court for decision. It must follow, clearly, from his language that “the rule that directors cannot lawfully enter into' a contract” renders the same unenforceable over the objection of the stockholders, and the subsequent language makes it just as certain that no pretended or attempted confirmation of the irregular action is effectual where the knowledge with, which he is dealing is withheld from the stockholders. Such withholding amounts to constructive fraud where the parties stand in a relation of confidence and trust, the one to the other, irrespective of actual fraud or any conscious effort at suppression. Pom. Eq. Jur., supra. Returning to the opinion in the Ilodge Case, it was- shown that the fullest and most honest expression of the personal interest of some of the directors was made to the stockholders prior to the meeting. Why? Certainly, not because it was an unnecessary act upon the part of the officers gratuitously made. Men do not go outside of their legal duties to raise obstacles in the way of their own plans. The giving of the notice was commented upon to show that without it the rules of law previously adduced would have defeated the desires of the company. Again. I say, that, while the presence of the common director does not render the contract with the Chase Securities Corporation void, nevertheless, the concealing ...oí that fact from the stockholders, whether honestly or not,^renders ineffectual as against a single protesting shareholder any vote that might be taken upon a certification to a stockholders’ meeting. No one can say in advance what the effect would have been upon the sentiment of any stockholder had he known all that he was entitled to know. It may be that if a second meeting is held, under the terms that will be proposed, the result may be even more gratifying to the managers of the corporation. But, on the other hand, many of those entitled to vote may change their mind, and this they are entitled to do, and no one is legally authorized to take this discretionary power from them.

It was further urged that sufficient notice of Mr. Tinker’s dual interest was exhibited to the stockholders at the time of the meeting, and that it was their duty to be present. But it appears to me self-evident that such notice, considered by the company of sufficient importance to be communicated at the meeting, comes then too late. The shareholder has a right at the time his proxy is sought by the corporate officers to rely upon their fairness and the discharge of their confidential duties, and that the unwary public should not be held to the consequences of an act secured by constructive fraud. Neither am I impressed with the argument that constructive notice was contained in the president’s letter, to the effect that arrangements had been made with a large banking corporation for securing one-half of the preferred stock to be retired. Gardner v. Butler, supra, and Knoop v. Bohmrich, 49 N. J. Eq. 82, are not authorities for any such position as the defendant assumes, and it would be a strange proceeding if the legislature; by the seventeenth section of tbe General Corporation act were to extend to the stockholders the opportunity to vote by proxy with one hand and with the other behind its back clothe their trustees with the opportunity to betray their trust, without judicial redress for the former. A more inequitable action could not be conceived, and will not be assumed to exist, by one branch of the government against another.

Finally, it is said that bills such as those under consideration are for the benefit of the corporation 'and will not lie at the suit of a stockholder. Counsel, however, very frankly and fairly admitted that it would have been a futile thing for the complainants or any other stockholders to- have sought permission from the directors to have filed these bills in the corporation’s name. Appleton v. American Malting Co., 65 N. J. Eq. 375.

I consider the contract with the Chase Securities Corpoation to be such an integral part of the entire scheme proposed by the directors as to be inseparable, and, for reasons I have attempted to explain, the entire matter should remain as it stands. To accede to the request that the defendant or is agents should be permitted to still vote the original proxies unless withdrawn by the stockholders after notice, would permit the defendant to profit by its own wrong. • Equitably, it should be compelled to retrace its steps, to the point where the wrong was committed, and, after proceeding to right the same by giving the necessary notice and again securing proxies wherever possible, proceed to the meeting upon fair terms with the investors. However, in order that the matter may be brought to a head, I will direct that, if it so pleases, the company may proceed in accordance with the option expressed in the previous opinion, provided notice be mailed to the stockholders on or before January 28th, 1925, or else apply, upon two days’ notice, to> be heard on the fixing of ’ terms, when I will hear arguments. Otherwise, I will advise temporary injunctions, in accordance with my previous opinion, upon amendment, if necessary, of the bill filed by Joel and others, which may be done upon like notice or upon the hearing under any such notice given by the defendant as above provided for.

Application for any order or decree must be upon notice, when appropriate action will be taken with regard to preserving the suliject-matter pending appeal.


author: Bentley, Y. C.

text:
    Paula Swerak Hill, petitioner, v. Charles Hill, defendant.
    [Filed January 26th, 1925.]
    In a divorce suit by a wife as petitioner where the evidence shows no violence by the husband and no reasonable fear thereof, but only a systematic and persistent course of the vilest accusations of adultery against her by her husband, who not only presents no evidence thereof, but in his denial of her testimony concedes her to he a virtuous woman, and, in fact, says that there was never any doubt of her virtue in his mind, such conduct amounts to extreme cruelty, and entitles the wife to a divorce from bed and board.
    On petition for divorce.

      Mr. George W. Babcoclc, for the petitioner.

      Messrs. Hart & Yanderiua/rt, for the defendant.
   Bentley, Y. C.

This is a suit for divorce from bed and board on the ground of extreme cruelty.

. The parties were married in 1912, and resided together until the early part of 1918, when the wife withdrew from the defendant’s home for a short time, returning to him, however, and remaining with him until December, 1922. She alleges that the hiatus in their cohabitation was due to> attempts upon his part for sexual intercourse in perverted form. Although this is strenuously denied by him, I am inclined to believe that what she says is true, both because of corroborating circumstances proved in the cause and the man’s undoubted salacious mind. His entire appearance and manner would tend to classify him as of a rather undeveloped mind, and of habits that would account for his possession of an exceedingly revolting picture under the circumstances detailed by his wife rather than in the innocent manner alleged by him. In addition, there was the testimony of several witnesses, such as Mrs. Bey and Mrs. Spath, to indicate an unrestrained and unrestrainable sexual appetite.

The main ground is an unwarranted accusation of sexual infidelity against the petitioner. She swears that the defendant constantly accused her of adultery, in which she is- corroborated by her daughter and the postmaster at Hackensack, in an incident where the husband discontinued the delivery of mail at his home, and called for it in person at the general post office, in the hope, unquestionably, of thus securing some incriminatory letters from her suspected paramours. It should be said that there was not a scintilla of evidence of adultery produced. The petitioner says that on one occasion, in the lobby of a theatre, her husband said to her: “Turn around; it looks as though you were lying on the fiat of your back in the grass some place.” He says that he said no such thing, but did say to her: “Look at your coat; it looks terrible; looks as though you were laying in the grass.” I also believe the wife rather than the husband in this respect, and look upon his testimony as the customary effort of one who cannot deny a conversation, garbling it so as to- give an entirely different impression from the true state of fact. In addition, he was guilty of the most atrocious remarks to his wife, sometimes alone and sometimes in the hearing of their own daughter, such as when reading a newspaper, and saying: “Loo-k here; here's another woman who got children from another guy.” “No man knows if the children are his.” “How do I know what guy comes in here at night.”

The only act of threatened violence to which the petitioner testifies took place in December, 1922, just prior to the final separation of the parties; but I must confess that I do not consider it of any importance in this case because it was an isolated instance, never repeated, and because from her future conduct I do not believe that the petitioner was really placed in fear for her personal safety. I believe that it was the occasion of her leaving her husband, but not the cause.

Thus, there is presented a case wherein there has been no violence exhibited against the wife and no reasonable fear thereof, but only a systematic and persistent course of the vilest accusations of adultery against a woman by her husband, who not only presents no evidence thereof, but, in his denial of her testimony, concedes her to be a virtuous woman, and, in fact, says that there never was any doubt of her virtue in his mind. I have been considerably puzzled as to the decision that ought to be reached in this case. In the language of the bar, it is a very close one. At the close of the hearing, it was my first impression that extreme cruelty had not been proved. It appeared to be a case similar to Linnekogel v. Linnekogel, 122 Atl. Rep. 372. But in that proceeding there was no persistent charge of adultery, or any at all, in fact, and comment thereon was made, and such accusations were characterized, as “the most grevious insult that can be put upon a woman.” But, taking into consideration all the circumstances, I have determined that this woman is entitled to the decree she seeks. For many years it was seriously mooted by members of the bar as to whether or not there should be a finding of extreme cruelty in the absence violence exhibited against the wife and no reasonable fear of some specific act of violence. As early in the annals of this court as Graecen v. Graecen, 2 N. J. Eq. 459, Chancellor Pennington was in some doubt and expressed difficulty in defining “extreme cruelty.” In reply to the objection that there had been no actual violence, he said: “What are the limits to which the court are confined under this act, it may not be easy to define, and it is not necessary so to do in the present case.” He then found, as might have been expected, that an attack upon the wife by the husband, armed with an axe, did not constitute actual violence.

In the case of Close v. Close, 24 N. J. Eq. 338, Chancellor Eunyon said that what he called “indefensible” language on the part of the husband did not constitute extreme cruelty in the absence of physical violence. On appeal, the decree of the chancellor was reversed, but the opinion in 25 N. J. Eq. 526, shows that the appellate court found, as a fact, that physical violence had been proved. In the leading case of Smith v. Smith, 40 N. J. Eq. 566, where the opinion of this court and the court of errors and appeals will be found together, there was proof of physical violence on the part of the husband, and on the last page of the opinion of the appellate court it is made to appear that there was reasonable ground for the wife to fear bodily injury in addition to the horrible accusations of incest that had been made against her. And, so, with all the cases with which I am familiar, prior to the one presently to be mentioned, there was some violence proved, greater or less in different cases, wherever a decree has been entered on the ground of extreme cruelty. In fact, Mr. Biddle*, in his work on Divorce Practice, written in 1912 at p. 96 (2d ed.), saj^s:

“The court has not found as a fact, in any reported case, that mere words, however coarse, abusive or threatening, have impaired the wife’s health or endangered her future safety * * * . Tet the court does not exclude the possibility of a case where words only will suffice. Some regard must be paid to the refinement and circumstances in life of the parties, where actual violence is absent.”

Quoting Close v. Close, supra. The first and, so far as I know, only reported case where a successful wife, in a suit on the ground of extreme cruelty, proved no violence upon the part of her husband, and the ease to which I have just referred, is Doty v. Doty, 92 N. J. Eq. 660. In that case, the husband was frequently intoxicated and out of work, with the consequent deprivation of the necessaries of life to his family, called his wife vile names, and, as in the case at bar, charged her with adultery, introduced dissolute men and women into his house until late hours of the night, with indecent language, so that the petitioner was unable to secure her proper rest. In that case, the familiar language of Vice-Chancellor Van Fleet was quoted, as expressed by him in Black v. Black, 30 N. J. Eq. 215, to be found on page 221. The Blade Case, it will be recalled, was a property suit, not involving the subject of divorce, so that the language of the vice-chancellor, adopted by the court of errors and appeals, is no exception to the presence of violence prior to the Doty Case. It is true that in Spence v. Spence, 74 N. J. Eq. 786, Chancellor Walker (then a vice-chancellor) said it would appear, “there must be some form of violence coupled with a false charge of adultery," but that was before the court of errors and appeals had spoken in the Doty Case. But, however, the state of the law may have existed before Doty v. Doty, supra, I take it to be established now by the court of last resort that no physical assault is necessary where the conduct of the husband, if -(in the language of Vice-Chancellor Van Fleet) he is allowed to retain 'his power over his wife, her life or health will be endangered, or he will render her life one of such extreme discomfort and wretchedness as to incapacitate her to discharge the duties of a wife. And why should this not be the rule? The attitude of the courts has been revolutionized in the last one hundred years with regard to the reciprocal rights and duties of baron and feme. To a refined and virtuous woman, an accusation of adultery would be far more cruel than a blow. It is common knowledge that, in defense of her honor, she will sacrifice her life. Hence, to be charged with the crime that makes her a social outcast by the man who should of all the world believe in her, is the most torturing treatment to which she can be subjected. And when, as in the case sub judice, there is added to this enormity the further facts of spying upon her, charging her publicly with alleged iniquities of which she is innocent, and, especially, in the presence of the daughter that she has brought into the world, it seems to me clear that to compel her to reside with, and under the roof of, her husband, to eat of his bread and sleep in his bed, would destroy the health of any sensitive and well-bred woman. The petitioner gave proof on the witness-stand by her manner, even stronger than her testimony, of the ravages of her past life with her husband upon her health. She is of much more refinement and finer sensibilities than he.

Of course, no decree would be advised unless I was absolutely assured and completely convinced that the petitioner had suffered the insults alleged. But she has succeeded by such clear and convincing proofs in substantiating her charge that there remains no doubt in my mind of her truthfulness. And, further, this systematic and continued torture was not an occasional word of innuendo thrown out in the heat of anger under strong provocation, but an advised and coldblooded effort to hurt and humiliate the wife.

I will advise a decree of divorce from bed and board for life.


text:
    National Manufacturers Company, a corporation, complainant, v. James Philip Bird et al., defendants.
    [Decided February 18th, 1925.]
    Equity looks at the substance and not the form, and holds that the purchase of trust property at a sale held by a gaasi-trustee is voidable at the option of the beneficiary when purchased by the wife of the fiduciary equally as if purchased by him.
    On bill, &c.

      Mr. Carlyle Garrison (Mr. Lindley M. Garrison, of counsel), for the complainant.

      Mr. Merrill Lane, for the defendant Bird.
    Mr. Frederick Snow Kellogg, pro se (Mr. R. Robinson Chance, of counsel), for the defendant Kellogg.
   Bentley, V. C.

The complainant -is a subsidiary corporation of the National Association of Manufacturers, and was the proprietor oE two periodical publications having to do with export Hade. In 1911 it leased the periodicals to a corporation known as Steven DeScesznak, Inc. (the. principal spirit oí which was a man named Steven DeScesznak), with an option to purchase lor the sum of $100,000 cash on or before August 1st, 1916, which was extended to endure until January 1st, 1921. These periodicals did not prosper financially, and, in or about the year 1914, the defendant J. Philip Bird was placed in charge of the financial transactions of Steven De-Scesznak, Inc., for the purpose of safeguarding the interests of the complainant and the National Association of Manufacturers. This defendant was the general manager of the National Association of Manufacturers and vice-president and a director of the National Manufacturers Company. Finally, in the summer or fall of 1916, the financial condition of the DeScesznak company became so alarming that the governing members of the complainant determined that they must get rid of the magazines, and for that purpose appointed a committee of the directors of the complainant to negotiate their sale. Bird was a member of that committee, as were also the president (Pope) and two others named Boudinot and Abbott. Tt appears that negotiations were carried on with Pope, who exercised a potent influence, to authorize the DeScesznak company to pay the option price in the form of $100,000 of thirty-year coupon, seven per cent, bonds instead of cash. This Pope refused to consider.

By some method the option price was subsequently reduced to the sum of $10,000, and the payment by the lessee of a demand note or notes amounting to $12,500 held by the complainant, and furnishing $2,500 to DeScesznak for working capital. A new option to that effect was given by the complainant. Both before and after the giving of this latter option Bird undertook to find someone who would advance the necessary cash to take advantage thereof, and, in fact, considered purchasing the papers himself. In this connection it should be pointed out that he gives highly contradictory explanations of the reason he gave up the latter idea. In one place he says that it was because he intended committing his resources to another venture called “The International Engineering Works,” whereby he would be left without means to acquire the publications. In another, he says it was because Pope, his superior, frowned on it. In the course of his search for an investor he attempted to enlist the services of another defendant, Mr. Kellogg, a member of the bar of this state. The latter, after some investigations, declined to advise any of his clients or acquaintances to risk any money in the business, because, as he expressed it, the governing spirits of the National Association of Manufacturers were men of wide business experience, and if they felt that the business was not remunerative he felt a natural reluctance to advise anyone to invest therein. Subsequently, however, he did appear’ with an assignment of the option executed by DeScesznak, Inc., and, upon paying the necessary '$10,000 to the complainant, and providing the additional $15,000 capital for the DeScesznak company, secured a bill of sale of the periodicals, taking title in his own name. Within a very short time thereafter he transferred the business to the DeScesznak company, and, in consideration thereof, took from it $100,000 of debenture bonds, maturing in thirty years, bearing interest at the rate of seven per cent., and in coupon form. It is conceded by the defendants that in this transaction he acted as Mrs. Bird’s agent, and has continued in that capacity to collect the interest thereon and the return of the $15,000 in cash, advanced to the DeScesznak company. The complainant maintains that the defendants Mr. and Mrs. Bird should be decreed to hold the bonds as trustee for it, and should be compelled to account to it for all interest collected upon coupons upon the grounds—(a) that Bird, in his fiduciary capacity, has fraudulently purchased the complainant’s neriodicals, and realized a large profit thereon, although talcing title in his wife’s name, and (b) that a purchase of trust property at a sale held by a quasi-trustee is voidable at the option of the beneficiary when purchased by the wife of the fiduciary, equally as if purchased by him.

It is conceded that there should be no decree as against Mr. Kellogg.

I think there can be no abiding doubt that the proofs indicate that Bird has profited by the position of trust in which he stood to the complainant. It will be recalled that not only was he an officer of the complainant company, but he was the officer selected by it to represent it in the councils of the DeScesznak company whereby he, of course, became more familiar with the latter and its condition than any other officer or director of the complainant. In the beginning of 1917, when its affairs reached a condition such that the directors of the complainant became alarmed, he appears to have exercised himself more actively than anyone else to save to the lessee company its business, and even went to> the length of conferring with Pope about making the purchase for himself. This, I confidently believe to be true. But when told by the latter that he must not do so, he then abandoned the scheme. He then talked with one of his employes named Dingwall, and arranged with the latter to purchase the publications for him (Bird), and thereafter a resolution was adopted by DeScesznak, Inc., with Bird present, actually authorizing the issuing to the said Dingwall of $100,000 of bonds of the same description as mentioned above. This was not consummated, but the bonds were after-wards actually issued to Mrs. Bird.

Bird says that one night in the early winter of 1917, after he had returned home, he said to Mrs. Bird that he was being pressed to go through with the International Engineering Works investment, and continued:

“I went home one night and told her that I had made up my mind to take up the option on the International Engineering Works of Framingham, and ihat, so far as I was concerned, I was disgusted with the whole Industrial American situation, and we chatted awhile about it, and I said to her then that I hadn’t lost faith in it; I thought it was a good thing, but I had decided to take up the option of the International Engineering Works at Framingham, and she turned to' me and said:

“‘Well, do you think it is a good thing?’ and I said, T do.’

“And she said, ‘Why can’t I buy it?’ and I said, ‘I don’t know; I will ask Colonel Pope and see.’

“And she said, ‘Well, what would 1 do ?’ I said, ‘The first thing you would do- would be to- go- and consult some lawyer.’

“And she said, ‘'Whom would I go- to ?’ and I said, T don’t kno-w.’

“And sire said, ‘Well, I know Mr. Kellogg.’ I said, ‘He would be a good one, because he has been familiar with the situation and he can advise- yo-u abo-ut it.’ ”

He says that he had just sold three hundred shares of stock, one hundred of which he had presented to- her when he purchased it in 1911, and that her share of the proceeds of the sale, amounting to- $10,000, he had deposited along with his own funds in the Irving National Bank, New York City, and that this was the money with which she intended to- finance the purchase of the publications. In this he is corroborated by his wife, and the circumstantial story told about the withdrawal of the funds from the bank and the turning of them over to- Mr. Kellogg is corroborated by that gentleman, Mrs. Bird and one of his daughters. While I have no- doubt, especially from the testimony of Mr. Kellogg, that Pope was acquainted with the purchase by Mrs. Bird, it is an especially significant fact that he never communicated her appearance in the transaction to either of the o-cher two- members of the committee charged by the complainant with ridding it of the magazines. Co-lonel Po-pe, it is fair to- assume from the testimony, was a very elderly man, who- died in April of the year following this transaction. There was the darkest secrecy maintained otherwise from all the wo-rld about the interest of Mrs. Bird. Up to the time of the final hearing Mrs. Bird had received about $35,000 in interest and $15,000 in return for her advance for working capital of DeScesznak, Inc. Out of the latter sum she had repaid her husband some $3,000 of the fifteen he had lo-aned her, and he said that the rest was gone, and he- had no great hope that he would ever be repaid. At an}f rate, according to her own showing, she has received and disbursed, approximately, $47,000, fo which she is unable to account in any rational way.

Assuming all the evidence presented by the defendants to be true, nevertheless, it is impossible to refuse granting the prayer of the bill as to Mr. and Mrs. Bird. While, under this assumption, no actual fraud would be present, there has been abundant proof of constructive fraud. Falsehood is an ingredient, whether at law or in equity, and whether, by false representations or suppression of the truth, in fraud of the first class. It does not necessarily enter into the proof of the second class at all. One example of constructive fraud arises from the relation of the parties to each other which will frequently render a transaction, good as between strangers, voidable at the option of one of the parties where the other has occupied towards him the relation of a fiduciary. This phase of the law is most strikingly illustrated by a transaction between a trustee and the beneficiary of the trust concerning the subject-matter thereof, but it has been applied in a great many instances where no technical trust exists, such as dealings between a corporation and one or more of the directors, as well as between principal and agent. While Bird was not a director of the National Association of Manufacturers, he was an officer of that company, as well as a director of the complainant, and had been in the most solemn manner designated as the complainant’s agent to keep it informed as to the condition of the DeSeesznak company. As such agent he was precluded from dealing with the subject-matter of the confidence reposed in him to his own advantage.

Equity regards and treats this, relation in the same general manner, and with nearly the same strictness as that of trustee and beneficiary. The underlying thought is, that an agent should not unite his personal and his representative characters in the same transaction, and equity will not permit him to be exposed to the temptation, or brought into a situation where his own personal interests conflict with the interest of his principal, and with the duties which he owes, to his principal. Pom. Eq. Jur. § 969. This, author in the same paragraph also refers to the right of the principal to avoid the transaction, and supports both propositions with a wealth of authorities, including Dodd v. Wakeman, 26 N. J. Eq. 484. That was a case where the defendant had purchased at an execution sale under a parol contract to hold it for the benefit of the complainant. Vice-Chancellor Van Fleet states the general rule applicable in all instances, as follows:

“An agent or trustee undertaking a special business for another cannot, on the subject of that trust, act for his own benefit to the injury of his principal.”

Applying the opposite rule to the case at bar, it is apparent that Bird has not in his own defense shown that he fully discharged the obligations that equity imposed upon him. He did not report, either to the directors of the complainant or the members of the special committee appointed by them for the sale of the publications, the fact of bis intention to purchase, or permit his wife to purchase, the same from the company. His reason for not doing so is of no moment. No matter what he may have told Pope, it is clear and undisputed that he did nothing more than express his surprise, at most, to Boudinot that Pope had decided to sell the magazines for $10,000 instead of the price of $100,000 expressed in the original option. Counsel quarrels with this statement, but fails to point to a word in the evidence beyond it. It seems to me clear that, unless the vigilance is to be relaxed with which this court has always watched transactions between individuals so' related as this defendant was to the complainant, he must be made to give up the benefits he has acquired. That this strict morality is not to be expected of one in a confidential relation, except where a transaction involving land is under examination, is not consonant with reason or the determination of this court in Porter v. Woodruff, 36 N. J. Eq. 174 (constructive fraud in the purchase of railroad stock).

While Mr. Bird has been spoken of as the actual purchaser of the magazines (although the legaL title to them, as well as the bonds for which that title was subsequently transferred to DeScesznak, Inc., were in the name of his wife), I agree with counsel for the complainant that, for the prarposes of this argument, Mr. and Mrs. Bird were, in contemplation of equity, one and the same individual, and that the sale by a guosi-trustee of the trust property to his wife is equally vicious as if made to himself. It is impossible to avoid an application of the rule clearly expressed in the opinion delivered by Mr. Justice Van Syckel in Bassett v. Shoemaker, 46 N. J. Eq. 538. In that case an executor, pursuant to authority contained in his decedent’s will, sold real estate to his wife at public auction. One of the beneficiaries under the will filed his bill to set aside the sale and conveyance, and was successful on that question in this court and the court of errors and appeals. In the latter court it was said:

“The exclusion of the wife as a purchaser, where the husband sells as a trustee, is not so much for the reason that he may, subsequently, become entitled to some interest in her lands, as on account of the unity which exists between them in the marriage relation. The case falls clearly within the spirit of the principle, which excludes the husband himself.” Equity looks to the substance and not the form, and it seems to me impossible for anyone to consider the relationship of husband and wife, and disagree with Mr. Justice Van Syckel’s conclusion that the spirit of the rule could, in almost every instance, be subverted where the married parties were living in the state of amity that exists between the principal defendants in the case at bar. With this clear exposition of the law by the court of errors and appeals, this court is precluded from establishing a different rule, even if it seemed more advisable, which to me it emphatically does not. The rule is clearly not disturbed by the Married Woman’s act. which was enacted before Bassett v. Shoemaker, supra.

It is said on behalf of the defendants that fraud without injury is not actionable. This is true. But Bird did injure the complainant when he failed to properly discharge his duty and permitted his wife to take the fruits of his own wrong. The case of Marsh v. Cook, 32 N. J. Eq. 262, involved a charge by a complainant that he had induced her to execute a mortgage by falsely representing to her that it was not a mortgage but a mere acknowledgment of indebtedness, which indebtedness was legally and equitably extant. The vice-chancellor held that the mortgage only secured the amount of money that the complainant justly owed to the defendant, and refused to give effect to a transparent attempt on the part of a debtor to deprive a creditor of his honest due. That is an entirely different situation from the one sub judice, where these defendants, upon their own showing, are revealed as having secured an inequitable advantage over one toward whom one of them owed a duty that was not discharged. They have already enjoyed an income of, at least, $35,000, on an investment of $10,000. It would seem that the loss of this enormous return, besides the bonds secured by a sinking fund, is a grave injury. Who can say that if Bird had openly, frankly and completely disclosed to the other members of his committee his reasons for thinking that an acceptance of the DeScesznak company bonds would be advantageous to- the complainant, that the determination to have nothing to do with them would not have been changed ? In the absence of proof to the contrary, it is fair to assume that Colonel Pope was a reasonable man, open to fair argument. If this was so-, then the other members of the committee joining with Mr. Bird might well have overcome Pope’s disincliriation to accept the bonds in payment for the magazines. There has been evidence to indicate that Pope had a considerable influence in the counsel of the complainant, but there is nothing to indicate that this great and powerful business, as it was shown to' be by the proofs, was a one-man .affair. Not only would it have been the duty of Bird to- have gone to this extent in safeguarding the interest of his company as a single member of this committee, but, doubly so, iu view of his having been selected out of all its officers and directors to- be the agent of the complainant in the affairs of the DeScesznak company. At any rate, it was his duty, and, having failed to perform the same', the complainant is entitled to demand the benefit of the transaction.

The remaining point requiring any attention is the allegation of laches. The transaction out of whicli this suit arises was consummated in March, 1917, and the bill of complaint was filed in December, 1922. DeScesznak testified that he had first notified the officers of the complainant of Mrs. Bird’s purchase in the month last named, and in that he is corrobo'rater by Boudinot and Abbott, two- of the members of the committee appointed to represent the complainant in the sale of its publications. Prior to that time, however, in the summer of 1921, a committee of the National Association of Manufacturers held a meeting at which Mr. Bird was examined concerning the sale of these periodicals. At that time he gave conflicting testimony. In one part of his story he said that Mr. Kellogg was the purchaser, although he knew that this was not so. In another place he said that he did not know whom Mr. Kellogg represented, although, of course, his testimony on the stand in this case clearly and completely contradicts that statement. And, still latei, he declined to answer any questions as to the beneficial purchaser, upon the ground that it was a matter involving the private affairs of DeScesznak, Inc., but offered to make a revelation to the committee privately all he knew. The last reason for his reticence was given on the witness-stand in the final hearing of this suit, and was to the effect that Mrs. Bird disliked De-Scesznak, and did not wish him to' know of her ownership of the bonds. From this it is argued that the complainant was put upon notice as to the facts Bird could have related to- it, and, having negligently refused to' pursue the investigation, should not now be heard to complain for having slept upon its rights.

While it is true that the complainant appears to' have become suspicious as early as 1921 that all the dealings surrounding the sale of its periodicals had not been fair and above board, there is, of course, nothing to indicate that it was in possession of facts and the proof thereof upon which it could have safely initiated this suit and gone to> final hearing. It requires neither argument nor authorities to prove that suspicion does not amount to knowledge or notice. A further difficulty is, that the complainant would have been justified in viewing with great suspicion any offer made by Bird to present it with information under the circumstances of his testimony before its committee^ and, especially, in view of the belief that appears to have entered the minds of its governing officers that he had much to conceal. There can be no doubt that Bird could have furnished the committee with abundance of information, but there is room for much doubt that he would have done so.

Furthermore, even if it were apparent that as early as the summer of 1921, or less than a year and a half before the filing of the bill, facts had come to the information of the complainant putting it upon inquiry, there is still no proof that should invoke the application of the doctrine of laches. While it has been said that probably no other principle of equity has resulted in more conflicting statements by the judiciary than laches (Pom. Eq. Jur. 1440), still it is clear that the doctrine has a double aspect. Courts of equity have followed the law in those cases where there has been a lapse of time, that in the legal tribunals would result in the statute of limitations being a bar. That is not the case here. The other aspect is the one referred to by Vice-Chancellor Green in Hall v. Otterson, 52 N. J. Eq. 522, where, although the statutory period may not have expired, the application of equitable principles operate to prevent relief being given. In the case at bar no new titles or equities have arisen, nor have the defendants by reason thereof changed their position, and neither have witnesses died or evidence been dissipated, or any other fact proved that would make a decree for the complainant inequitable. If the defendants, or either of them, have spent the proceeds of the gains which should have been the complainant’s and enjoyed the benefits thereof, that is no reason they should have their own acts converted into a shield to protect them from any just demand that the complainant makes.

I will advise a decree declaring that Mrs. Bird took title to the DeScesznak bonds as trustee for the complainant; that she and her husband account to it for all profits realized thereupon, and dismissing the bill as to Mr. Kellogg.


text:
    Rhoda Booth Woodward, falsely called Rhoda Booth Heichelbech, petitioner, v. Emil Heichelbech, defendant.
    [Submitted February 7th, 1925.
    Decided February 19th, 1925.]
    1. In a suit to annul a marriage where it is alleged that the marriage was never consummated, the wife’s testimony to that effect is not sufficient to establish the fact without corroboration.
    2. Before consummation of a marriage a decree of nullity will be allowed for fraud of a less serious nature than is the case after consummation, but a mere misrepresentation by the husband as to his worldly possessions, prior to his marriage, even if untrue, is not sufficient to justify a decree of annulment.
    On petition, &c.

      Messrs. Lazarus, Brenner .& Vickers, for the petitioner.
   Bentley, Y. C.

On exceptions to a master’s report in a suit to annul a marriage:

The petition is not based on any of the causes enumerated in the statute, but seeks to invoke the original jurisdiction of the chancellor to annul an unconsummated marriage on the ground of fraud. The parties went through a ceremony of marriage on May 20th, 1922, before a civil officer in the State of New York authorized to perform the same. At that time the petitioner was a woman twenty-two^ years of age. No children resulted from the marriage, and the master reports that he is convinced that the ceremony was never consummated by marital cohabitation.

The petitioner rests her suit upon false statements made to her by the defendant prior to their marriage as to his financial condition. She says that he told her he was possessed of two automobiles, one .of which he would present to her after their marriage; that he had savings in cash in a bank amounting to over $2,000, and in proof thereof exhibited to her a bank book which, after the marriage, she learned was not his and the deposit was not in his name. He also assured her that he had an important position in a large company for which he was in receipt of wages of $75 per week. All of these statements were untrue.

After the ceremony the parties took dinner in New York, and later he left her for a short time at the home of one of her friends, to which he returned about five o’clock in the evening, where he met her and took her and her mother riding, after which the petitioner returned to her mother’s home, and the defendant did not remain there. While the proofs a.re not entirely clear, it appears that the petitioner and her mother learned of the falsity of the defendant’s representations as to his position and wealth two days after the performance of the marriage ceremony.

My difficulty with the petitioner’s case is twofold: In the first place, the testimony as to non-consummation is woefully weak. It is true that she has said most emphatically, in reply to questions by the master after examination by counsel, that no sexual intercourse has ever taken place between her and the defendant since the marriage. Standing alone, this is, of course, insufficient proof. Garcin v. Garcin, 62 N. J. Eq. 189. The single corroboration of this statement comes from the lips of the only other witness sworn in the petitioner’s behalf, namely, her mother. The latter swears:

“He never stayed at my home. * * * My daughter has never lived away from home since the marriage. I can vouch that she has. never lived with him.”

This is the entire testimony on the direct examination of this witness by the petitioner’s counsel, and the only additional testimony of non-consummation was the following in reply to questions asked by the master. Referring to the day of the ceremony she says:

“She came home about quarter to five on Saturday afternoon and she went out with me on Saturday afternoon, and she was out with me on Saturday night. She was home all day Sunday, and on Monday she went to work, as usual. She was home Sunday night.”

A more flimsy attempt to establish non-access of husband and wife would be difficult to conceive. So long as human nature remains as it is, and always has been, no court should be asked to find that there has been no sexual congress between a man and his wife except upon proof of the most satisfactory and convincing kind. The probabilities against such a fact overwhelm the testimony of the petitioner and her mother. At most, the testimony of the petitioner's mother tends to prove that the parties did not pass the night together and that no sexual intercourse took place at any time while the witness was present. Such meager and inconsequential testimony is insufficient corroboration of so important and startling a fact when given by a witness so interested as this one must have been by reason of her relationship to the petitioner and as shown by the extreme partisan attitude disclosed by the transcript of her testimony.

But even if it was proved beyond peradventure that no consummation had followed the marriage ceremony, a decree should not go for the petitioner, as that is not ground for annulment, but for divorce for desertion after the lapse of two years (Wood v. Wood, 3 N. J. Adv. R. 757), except where denial of sexual intercourse was determined upon prior to marriage and persisted in afterwards. Bolmer v. Edsall, 90 N. J. Eq. 299. Petitioner relies upon the case of Ysern v. Horter, 91 N. J. Eq. 189, and a number of others following that, such as Dooley v. Dooley, 93 N. J. Eq. 22, and Rinaldi v. Rinaldi, 94 N. J. Eq. 14. The pertinent portion of the Ysern Case upon which she relies may be roughly expressed for the present purpose b} saying, that before consummation of marriage a decree of nullity will be allowed for fraud of a less serious nature than is the case after consummation, when the public interest becomes much more aroused and the rights of third parties intervene. In the historical and very illuminating opinion of Vice-Chancellor Stevenson in that case, he has expressed his individual view upon matters that were not necessary for a proper decision of the case, and has, among other things, said that an unconsummated marriage, infected by fraud of any kind, which would render a contract of any other sort voidable, is voidable at the option of the injured party. That such a statement was merely made arguendo is' clearly apparent, and that this was consciously within the mind of the vice-chancellor is apparent from the language almost immediately following, when he dealt with the probability of the adoption of a more accurate definition of the rule in the then future, which he apprehended might he developed as the subject became more and more investigated, following his case of first impression in the State-'of New Jersey. And then he says:

“However this may be, I do- not think that any definition of the principle will be formulated which will not include within its beneficient application the gross and scandalous instance of fraud upon a girl eighteen years of age, which is presented in this case.” (Italics are mine.) In the Ysern Case a very different character of fraud was present. The defendant, after representing himself as a person- of good moral character, took his wife, a school girl, to a hotel, where he commenced drinking heavily, and almost immediately told his wife of his “gross immoralities with women, stating that he had seduced other girls.” She, of course, refused to consummate the marriage. In the Dooley Case the defendant, after holding himself out as a captain in the army of the United States, with a license to practice medicine, of honest and good character, and sprung from a famliv of wealth and prominence, turned out, in fact, to be a deserter from the army in which he was an enlisted man, • and a fugitive from justice, rendering him, of course, unable to conform to the various essentials of marriage in the event of capture by the authorities. In the Rinaldi Case the court was not dealing with the question invovled in the case at bar, but with a petition for divorce on the ground of cruelty, resulting in constructive desertion. In Steerman v. Snow, 94 N. J. Eq. 9, there was a fraudulent misrepresentation of virility by the husband, when, in .fact, he was hopelessly impotent. This fraud strikes at the very essential of marriage that distinguishes that contract from any other legal and proper relation into which a man and woman may enter. Contrasting these cases of moral turpitude and complete inability upon the part of the man to perform his duty as a husband, with the case sub judice, it is found that this man, dealing with a mature business woman -of normal education, experience and intelligence, overstepped the boundary that ordinarily limits the activities of a suitor in the winning of a bride. It is fair to say that, under such circumstances, a man always puts his best foot forward to impress the woman of his choice with his desirability as a mate. It was the duty of this petitioner to have investigated the financial condition of the defendant, and especially if her only purpose in marriage, as she indicates, was the securing of support. Lord Stowell, dealing with a suit for nullity by a husband (and the same rule would apply to a woman), said:

“The law presumes that he uses due caution in a matter in which his happiness for life is so materially involved, and it makes no provision for the relief of a blind credulity, however it may have been produced.” Wakefield v. Mackay, cited in 1 Hagg. Con. 394.

If this man had not painted the lily in his courtship, and the woman had not been deceived, disease, accident or other misfortune might have rendered his and the petitioner’s position even worse within twenty-four hours of their marriage, when she had taken him to cling to him through any and all the vicissitudes of life. Who can say that common experience would have been reversed if she had been willing to do her part, and that this man would not have settled down to perform the serious duties of a husband when he found himself in the atmosphere created by a dutiful and loving wife ?

ITis fraud did not strike at any of the great essentials of marriage for which that solemn contract should be vitiated. 1 Frees. Bom. Bel. 280.

“In that contract of marriage which forms the gateway to the marriage status, the parties take each other for better, for Avo-rse, for richer, for poorer, to cherish each other in sickness and in health; consequently, a mistake, Avhethe-r resulting from accident, or, in general, from fraudulent practices in resj>ect to the- character, fortune, health or the like, dose not render void Avhat is done. So- are all the authorities.”

(Citing many.) 1 Bish. Mar. & D. § 459. The author, also-, is dealing with an unconsummatecl marriage.

Of course, one may contract a Adalid marriage solely for the material benefits to- be so acquired. But, in that event, all possible avenues of investigation must be explored, and the marriage must be entered upon largely at the risk of him AAho does so. It has never been the policy of the law to regard marriage as other contracts are regarded. It is true that it is a civil contract as distinguished .from the sacramental aspect given to it by the church. But it is a contract with peculiar consequences and effects, to be fo-und in no other, and cannot be tested by the same means as ordinary contracts are. Courts are not designed to assist those, sui juris, who make stupid contracts. If the petitioner married for money (and she certainly did not marry for love) she made a bad bargain. Unfortunately, that in itself is no ground fox relief under the circumstances of this case. A so-und policy requires a far greater wrong than has been shown, to dissolve a contract so peculiar as that of marriage, whether consummated or not.

The exceptions to the master’s report should be overruled.