author: Pee Cueiam.

text:
    Frank V. Storrs et al., complainants, v. James Butler Grocery Company et al., appellants-respondents.
    [Decided April 25th, 1924.]
    On appeal of Prank V. Storrs.
    On appeal from a decree of the court of chancery advised b}r Advisory Master Stevenson, who filed the following opinion:

      “The original bill in this cause consisted of eighteen typewritten pages with twenty typewritten pages of schedules annexed thereto. Upon motion by counsel for the defendants, pursuant to rule 59, the complainants were directed to file an amended bill in which each cause of action contained in the original bill should be separately stated and numbered. An amended bill accordingly was filed setting forth five separate causes of action occupying twenty-six typewritten pages, with eighteen or nineteen pages of schedules attached.
    “On motion on behalf of the defendants the second, third and fifth specifications of causes of action set forth in the amended bill were stricken out. The first specification of a cause of action occupying sixteen typewritten pages, however, was sustained, and the fourth specification of a cause of action, which was not attacked, repeats, by reference, practically the whole of the first specification, and may be considered with it.
    “The complainants’ complaint, which is thus presented to the court, contains many charges of fraud and willful diversion or misappropriation by the defendants of the assets of the complainants’ corporation, which the defendants controlled. All the charges of fraud were withdrawn at the argument. The brief of counsel for the complainants and the draft of the final decree which they have submitted contain no trace of any charge of fraud; the relief which the complainants ask for on behalf of their corporation is based solely upon alleged illegal and ullra vires acts, without any charge that those acts were intentionally done in order to injure the complainants’ corporation.
    “The case which is to be decided can be, I think, readily dissected from the mass of pleadings and evidence, eliminating in particular the charges of fraud which permeate the bill of complaint. The following are the essential facts:
    “In 1907 the defendant James Butler was operating in his own name what is called chain’ of grocery stores in Uew York and Yew Jersey, for the most part, if not wholly, on premises which he leased. There were nineteen of these stores in New Jersey ancl one hundred and sixty-two in the State of New York, in which state then and ever since the greater number of stores have been maintained and the vastly greater volume of business has been carried on.
    “In 1919, about four months before this suit was commenced, there were four hundred and fifty-five stores in’New York and seventy-three in New Jersey.
    “In April, 1907, the defendant Butler caused the complainant’s corporation, the James Butler Grocery Company, to be incorporated in the State of New Jersey under the General Corporation act, with an authorized capital of $10,-000,000, of which $5,000,000 was in preferred stock and $5,000,000 was in common stock, with a par value of $100 per share. As stated in its certificate, there were five incorporators who> subscribed in all for fifty shares, the defendant James Butler'subscribing for’thirty shares, and his four associates subscribing for five shares each. The objects for which the company was formed are quite numerous. The scope of the prospective activities of the company was quite wide, including particularly the operation of grocery stores in any of the ‘states, territories, colonies, dependencies of the United States’ and the purchase, holding, leasing and renting real estate useful or necessary for the purpose of the corporate business.
    “The certificate of incorporation was signed by the incorporators on April 22d, 1907.
    “On the same day, April 22d, 1907, James Butler, with the same four associates, signed a certificate of incorporation under the laws of the State of New York, creating a corporation named ‘James Butler,’ Incorporated. The objects of this New York corporation specified in its certificate were substantially the same as the objects of the New Jersey corporation. It may conveniently be noted here that the defendant the James Butler Grocery Company will be hereinafter referred to as the New Jersey Corporation, and the ‘James Butler,’ Incorporated, will hereafter be referred to as the New York Corporation.’

      “The certificate of the New York Corporation fixed the amount of the capital stock at $50,000, consisting of common stock only, each share having a par value of $100, and the amount of capital with which the corporation would begin business being fixed at $5,000. The $5,000 called for by the certificate of the New York Corporation was subscribed for by James Butler and his four associates, Mr. Butler subscribing for thirty shares and his associates subscribing for five shares each.
    “The directors of the two1 corporations were precisely the same, Mr. Butler obviously having absolute control of both. The two1 corporations in fact were to be in a very large extent merely an instrument for placing the very extensive grocery business of Mr. Butler in New York and New Jersey under convenient corporate cover. As will appear hereinafter more distinctly, the separation of this great financial interest into two distinct corporations was to- most intents and purposes a pure fiction.
    “At the meeting of the incorporators for the organization of the James Butler Grocery Company, the New Jersey Corporation, the following resolution was adopted:
    " ‘Whereas, James Butler lias offered in writing to sell to this company property as follows: The grocery business conducted in his name, including all leases, stock, fixtures and personal property connected therewith, as shown by the books oí account thereof, moneys in bank and all accounts due thereto, and subject to all liabilities of every nature and kind existing against the same, to the date of this transfer, in consideration of the issue of stock of this company to the amount of nine million nine hundred and ninety-five thousand dollars ($9,095,000), par value five million dollars ($5,-000,000) preferred stock and four million nine hundred and ninety-five thousand dollars ($4,995,000) common stock;

    “ ‘Whereas,-. It appears to the stockholders that such property is necessary for the business of this company, and that the same is of the value of nine million nine hundred and ninety-five thousand dollars ($9,995,000).
    “ ‘Resolved, That the board of directors of this company be and they are hereby authorized and recommended to purchase the said property above mentioned for the said price, and to issue said stock in payment thereof.’

      “At the first meeting of the board of directors, held on April 25th, 1907, the following resolution was unanimously adopted:
    “ ‘Resolved, That this company accept the offer of James Butler to sell to this company the property in the resolution of the stockholders passed at the first meeting of the corporation authorizing the purchase, and the board of directors do hereby adjudge and declare that said property is of the fair value of nine million nine hundred and ninety-five thousand dollars ($9,995,000), and that the same is necessary for the business of this company.’
    “The resolution of the directors approved the form of agreement to carry out the above-mentioned purchase, and authorized the officers to execute the same and affix’the corporate seal.
    “Mr. Butler’s entire chain of grocery stores in Hew Jersey and Hew York, with all the property and good-will connected therewith, was thus transferred to the Hew Jersey Corporation.
    “At a special meeting of the directors of the Hew Jersey Corporation, held on April 29th, 1907, the following resolution was unanimousty adopted:
    “ ‘Whereas, The corporation, “James Butler,” Incorporated, is ready and willing to purchase from this company the personal property and leases, not including the good-will thereof, connected with the grocery business now conducted under the name of James Butler, and the whole thereof, except the stores in New Jersey, for the sum of seventeen hundred and fifty thousand dollars, to be paid by the issuance of its capital stock of the par value of forty-five thousand dollars and certificates of indebtedness for the balance; and
    “ ‘Whereas, Said corporation is ready and willing to pay to this company for the privilege of using the good-will of said business in the territory thereof which it is ready to acquire, a sum equal to ninety-five per cent, of the net profits thereon, to be paid at' least yearly. ,
    “ ‘Resolved. That this company sell the said personal property and leases upon the terms and conditions hereinbefore specified, and also permit the said corporation to enjoy the good-will of said business, upon the conditions above mentioned; and further
    “ ‘Resolved. That agreements to carry out the foregoing be prepared and signed by the parties thereto.’

      “An appropriate instrument was duly executed transferring the physical assets located in New York from the New Jersey Corporation to the New York Corporation.
    “The significant facts to be observed is that a separate instrument was executed by both corporations by which the privilege of using the good-will of the grocery business of the New Jersey Corporation, except in New Jersey, was transferred to' the New York Corporation. This instrument makes no mention of the physical assets, but transfers the good-will alone, and provides for the payment Tor such privilege a sum equal to ninety-five per cent, of the net profits’ of the New York business, ‘’said payment to be made at least yearly.’
    “It is also- to' be carefully noted that this transfer of the good-will concluded by a provision to the effect that the whole agreement might be annuled by either party on thirty days’ written notice to the other.
    “While there is no. satisfactory proof of the actual value of the assets turned over by Mr. Butler to the New Jersey Corporation as the price of the $9,995,000 of stock which he received, the indications are very distinct that this was a gross over-valuation. The subsequent sale of by far the greater part of the property for which this stock was issued to the New York Corporation, indicates that the over-valuation of the property which the New Jersey Corporation received from James Butler amounted to' at least six or eight, million dollars. It may be remarked here that the liability upon this stock to the creditors of the New Jersey Corporation, in case the corporation became insolvent, would be a very serious matter to- Mr. Birtler.
    “The original legal and business scheme is exhibited by the above-stated facts, and especially by the records of the transactions of the directors of the New Jersey Corporation above recited. Upon this state of facts is based one of the two' remaining claims for relief of the complainants, on behalf of the New Jersey Corporation.
    “In order, however, that the whole situation as it existed when this suit was commenced may be fully disclosed, and the facts may be stated which underlie the second claim for relief, for which counsel for the complainants argue, it may be well at this point to set forth another extraordinary corporate transaction which occurred three years after the New Jersey Corporation had turned over the greater part of its assets to the New York Corporation. What was turned over, as hereinbefore stated, constituted by far the greater part of the assets conveyed by James Butler to the New Jersey Corporation. The schedule of stores in each state from 1907 to 1921 shows that there was an enormous extension of the business and assets of the New York Corporation, while the increase of the grocery assets and business of the New Jersey Corporation was comparatively small. The growth of the New York business at the ratio indicated, it may be surmised, would be impossible or would be greatly impeded if the New York Corporation remained indebted to the New Jersey Corporation to the extent of $1,705,000, and was under contract to turn over to the New Jersey Corporation ninety-five per cent, of its net profits. Unless the New York Corporation borrowed money and thereby merely shifted 'its indebtedness or turned over assets which the New Jersey Corporation accepted instead of cash, it would be necessary for the New York Corporation, in order to avoid either a default in respect of its obligation to pay over ninety-five per cent, of its net profits yearly to the New Jersey Corporation, or a default in respect of its obligation to pay the indebtedness of $1,705,000 in five years from April, 1907, that the New York Corporation should earn within five years from April, 1907, the enormous, sum of $34,000,000.
    “The answer alleges, although I do not think that any evidence was taken in regard to the matter, that Mr. James Biutler loaned large sums of money to. the New York Corporation, and also endorsed large loans from various banks to the New York Corporation, upon which loans from banks Mr. Butler was an accommodation endorser, without any compensation whatever. Without this admission in the defendant’s answer it might be surmised, if not inferred, that the New York Corporation, financed as it was and loaded with indebtedness, could not have credit to the extent of a dollar in any New York financial institution.
    “Possibly, it was to meet in a measure the requirements of the situation that the directors of the New Jersey Corporation, James Butler and his associates, on June 6th, 1910, adopted the following resolution:
    “ ‘Whereas, An agreement was heretofore made whereby this company granted to “.Tames Butler,” Incorporated, the privilege of using the good-will of the grocery business purchased by it from James Butler, Esq., except in the State of New Jersey, upon payment by said “James .Butler,” Incorporated, of ninety-five per cent, of the net profits of the 'business at least yearly; and
    “ ‘Whereas, Said agreement has ever since been and now is in full force and effect; and
    “ ‘Whereas, This company holds ninety per cent, of the capital stock of “James Butler,” Incorporated; and ■
    “ ‘Wiíereas, The best interests of both companies have been and will be promoted by said “James Butler,” Incorporated, purchasing real estate for the purposes of its business with funds taken out of the net profits of the business.
    “ ‘Resolved, That this company hereby approves of past use by said “James Butler,” Incorporated, and hereby authorizes the further use by (lie latter of so much of its net profits in the purchase of real estate for the benefit of the business conducted thereby as has been or may, from time to time, in the judgment of its officers, be necessary or beneficial thereto; and that the amount so expended be charged to and against this company as payment under said agreement tc the extent of ninety per cent, thereof; and it is further
    “ 'Resolved, That the secretary of this company be and he is hereby authorized to execute an agreement between this company and said “James Bxxtlei’,” Incorporated, to modify the aforesaid agreement between said eoxnpanies in accordance herewith.’
    “Although in this case we have nothing to clo1 with the rights, or possible rights, of creditors of either of these corporations, the relations of the corporations with their stockholders only being involved in this suit, nevertheless it is important, I think, to consider briefly the features of this extraordinary corporate scheme. In ascertaining the rights of the complainants as stockholders, we cannot wholly ignore the somewhat puzzling question what was the object of this scheme of corporations in New Jersey and New York, when ordinarily one would suppose that what Mr. Butler, with his chain of grocery stores, wished to accomplish, was the incorporation of his entire business with the incidental protection from personal liability. The certificate of the Hew Jersey Corporation ga.ve it ample power to take Mr. Butler’s stores in Hew York, Hew Jersey and other states and operate them.
    “The evidence gives us no direct information in regard to the governing motive for the establishment of this complex of corporations, but it seems plain that for many purposes the separate corporate existence of these two companies in Hew York and Hew Jersey in equity would be ignored, and where the rights of creditors were involved might be treated as a transparent sham. The only suggestion which I recall indicating a reason for the creation of the Hew Jersey Corporation with James Butler and his four associates as directors, and the Hew York Corporation with James Butler and his four associates as directors, is found in the answer of the defendants, where the effort is made to meet the charge in the bill that the acquisition of Hew York real estate, pursuant to the resolution of the Hew Jersey Corporation, adopted on June 6th, 1910, was fraudulent or illegal and injurious to the complainants as stockholders of the Hew Jersey Corporation. The answer, after denying the charge of fraud and illegality, alleges That the original plan for the incorporation .[of the Hew York Corporation] was to have a company capitalized for a small amount in the State of Hew York, but with a large permanent indebtedness to1 remain unpaid indefinitely in order to save the defendant company [the Hew Jersey Corporation] large profits which otherwise might have to be paid for taxation; that this plan was outlined bjr competent legal and taxation experts, and is a usual and customary practice- of similar corporations of this state operating in other states of the United States.’
    ' “It may be briefly noted that the escape from taxation, the method of which is not disclosed, is evidently only one of the supposed advantages which the originators of this scheme expected to obtain from the fiction of corporate existence apart from personal liability. The Hew Jersey Corporation, as the evidence indicates, was enormously overcapitalized. Mr. Butler stood liable to contribute, perhaps, six or eight million dollars in case this vast chain of grocery stores in many states should, break asunder and insolvency ensue. The New York Corporation was, as the answer states, ‘capitalized for a small amount.’ All the assets of the New York Corporation were burdened with an indebtedness of $1,705,000. Furthermore, the New York Corporation was bound by contract to pay ninety-live per cent, of its net profits to the New Jersey Corporation. PE the New York Corporation should pay out of its net profits the indebtedness of $1,705,000, it would, as has been stated above, have to earn about $35,000,000 of net profits. The splitting of the property conveyed bv the New Jersey Corporation to the New York Corporation into two parts, the plrysical assets being one part and the good-will another, is one of the most striking', I might sajr amusing, illustrations of the way in which business projects and corporate fictions are juggled with in this singular scheme. No person of common sense would buy for $1,705,000 a chain of one hundred and sixty-two grocery stores in the State of New York, with the stock contained therein, without also buying the good-will. The day after such a sale the vendor, the New Jersey Corporation, could establish competing grocery stores adjacent, or very near, to each of the stores which had been sold. The fact is that the sale of the stores and their contents, and the sale of the good-will, were simply parts of a single transaction, and the result was that the New Jersey Corporation, on April 29th, 1907, transferred all its New York’property, its New York business and its New York good-will, to the New York Corporation, and the consideration was nine-tenths of the capital stock of the New York Corporation, $1,705,000 of debt which, however, was not to be paid, and ninety-five per cent, of the profits of the New York Corpora-' tion.
    “Whether the scheme which these ingenious legal gentlemen in New York evolved would stand any test applied by creditors is a question which we need not discuss at length in this case. The effort seems to have been to enable the New Jersey Corporation [Mr. James Butler] to get practically the entire profit from the exploitation of this immense business in the State of New York, if there was a profit, and in case of failure, to stand in as a creditor to the amount of $1,705,000. The clause in the contract relating to the transfer of the good-will of the business permitting either party to annul the contract on thirty days’ notice, would permit the New Jersey Corporation, in case the New York Corporation failed in business, not only to come in 'as a creditor, but to establish its own stores in competition with the New York stores. The situation of advantage which the New Jersey Corporation would occupy in case of the insolvency of the New York Corporation, and the appointment of a receiver thereof, is quite plain. The large indebtedness [$1,705,000] of the New York Corporation to the New Jersey Corporation; which fell due in 1912, would enable the New Jersey Corporation, after that date, to throw the New York Corporation into insolvency whenever it saw fit to do so, with the probable result that it, the New Jersey Corporation, would acquire the assets of the New York Corporation at a price which would subject the creditors of the New York Corporation to an enormous loss.
    “It is also worth while to note that it is altogether probable that the devisers of this ingenious scheme contemplated, not only that the New Jersey Corporation would get all the advantages of success in business by the New York Corporation without liability in case of failure, but that Mr. Butler, the holder of more than $9,000,000 of stock of the New Jersey Corporation, would be free from liability as a stockholder to the extent of the gross over-valuation of the property for which his stock was issued. Mr. Butler also might float a few millions of this stock on The curb.’ The New York Corporation, it will be observed, was capitalized at a very low figure, and the inference is that Mr. Butler and his associates paid $5,000 in cash for the stock for which they subscribed.
    “I shall not, however, further discuss the peculiar features of this corporate scheme which, so far as I know, has never been brought to the attention of the New Jersey courts, and no. case, in any other state has been cited in which this subject has been discussed. Whether if the rights of creditors were involved separate corporate existence between Mr. Butler’s two companies in New Jersey and New York would be •recognized; whether New York creditors of the New York Corporation could break through the fiction of corporate existence and make the New Jersey Corporation liable; whether after establishing the liability of the New Jersey Corporation Mr. James Butler could be compelled to contribute, to the extent of six or eight million dollars, sufficient money to pay the New York creditors—these and other questions are not any part of the case before this court.
    “We have to deal in this case with the rights of the complainants as stockholders of the New Jersey Corporation— their alleged right to compel derelict directors of their corporation to indemnify that corporation against loss on account of illegal and ultra vires acts which they have perpetrated or undertaken to. perpetrate.
    “In the argument of counsel for the complainants, and in the draft of (Inal decree which they submit, embodying the relief which they demand from this court, there are only two claims which are made and which must be considered. All the charges of Eraud, diversion of assets by the corporation to subsidiary corporations in New York and loans to favored individuals, have been adandoned. As stated by counsel in the argument, and as set forth in the draft of decree, two claims only remain, as follows:

      "First. The complainants claim that the defendant directors, James Butler and his associates, should be compelled by the decree of this court to collect the $1,705,000 which they have allowed to remain overdue and uncollected for eight years prior to. the commencement of this suit, and stand personally liable for this debt, with interest.

      "Second. That the defendant directors should be held personally liable to pay to. the New Jersey Corporation the ninety-five per cent, of profits which, under the contract of April, 1907, was due to the New Jersey Corporation, a large part of which was applied under the arrangement of 1910. to the purchase of real estate in New York in the name of the New York Corporation.
    “I find no equitable claim in favor of the New Jersey Corporation in respect of the failure of the directors to collect the $1,705,000 from the New York Corporation.
    “All the stock, including every share held by the complainants, was originally issued to Mr. Butler or to his four associates, and all these holders of the entire stock of the corporation participated in, and approved of, the original scheme of April, 1907. All the directors whn constituted all the stockholders intentionally formed this scheme, which necessarily involved the indefinite existence of this indebtedness. The idea that any business man would suppose that the New York Corporation out of its ovni resources, or with the use of its credit, could repay $1,705,000 in five years to the New Jersey Corporation, is simply preposterous. The bill does not set up, nor does it appear in the evidence that the complainants, as holders of this stock, stand in any better situation than that which the original holders occupied.
    “If, however, upon any theorj"- a remedy in respect of this transaction could be granted to the New Jersey Corporation at the instance of guilty stockholders, it is sufficient to dispose of the matter, I think, to point out that the complainants do* not ask to have the transaction rescinded or declared ultra, vires and void. On the contrary, they come into1 court asking to have the bargain enforced. Their complaint is not that the sale was made for the price stated, but that the directors have negligently refrained from collecting the price.
    “This leaves the complainants’ case resting upon the proposition that the directors are personally liable because they have neglected their duty to collect this money. In my judgment, there is absolutely no- evidence to show that stockholders who embarked in the business and corporate scheme disclosed in tins case, have any right in equity to complain, because the directors of the New Jersey Corporation did not wreck the entire enterprise and throw the New York Corporation into insolvency by pressing for collection a claim of nearly two million dollars, which it is manifest that the New York Corporation would be unable to pay.
    “Assuming, always, that these stockholders, or rather the stock which they hold, is bouird by the participation of all the stockholders in the original scheme of 1907, it seems plain to me that Mr. Butler and his associates, the directors of the New Jersey Corporation, are not shown to have failed in any degree in the exercise of sound discretion in respect of the collection of this very large debt. Where directors of a corporation act in good faith, their discretion in regard to any corporate transaction as a general rule will not be controlled by a, court of equity. Courts of equity, in the absence of fraud or other distinct ground for interference, will not expel directors and sit in their seats and determine what should be done or should not be done on behalf of the corporation.
    “In considering the fact or fiction of corporate existence, Mr. Butler, the New Jersey Corporation and the Now York Corporation, were, to a large extent, practically one thing, viz., Mr. Butter. This fact, is illustrated by the disclosure made in the testimony that, after 1915, the New York Corporation, which seems to have been the buying agent for both corporations, charged the New Jersey Corporation the full retail price for all its groceries and other supplies. The accountant, who went on the stand to testify for the defendants, points out that it was a matter of no consequence at what price the goods bought by the New York Corporation were turned over to the New Jersey Corporation, because Mr. Butler owned nearly all of the stock of the New Jersey Corporation and the New Jersey Corporation owned nine-tenths of the stock of the New York Corporation.
    “In regard to the transaction of 1910, the case is very different from that which we have been considering, and is involved in difficulties. It is impossible for me to be absolutely certain that in regard to this transaction I have reached a correct conclusion. However, after giving the subject the most careful consideration and study of which I am capable, I have reached the conclusion that there is a liability from the defendants, or some of them, to the New Jersey Corporation, which is enforcible in this suit. It is easier to establish this liability than to define with accuracy the appropriate remedy.
    “The determination of the exact form of relief to which the complainants are entitled requires more care, because of the fact that the New York Corporation is not made a party to this suit. When the defendants applied for an order opening the proofs the court imposed as a condition that, if the complainants would amend their bill making the New York Corporation a party defendant, the defendants should cause the appearance of the New York Corporation to be entered. But the complainants refused to amend their bill so as to make the New York Corporation a defendant.
    “It is proved, I might say it is not disputed, that the complainants were without notice of the action of the directors in 1910, concerning which they now complain on behalf of the New Jersey Corporation. It also appears that some of the complainants, at least, acquired their1 stock prior to the transaction of June 6th, 1910. If I understand the exhibits eorreetty, the complainant Storrs acquired ninety shares'of his stock before the transaction of June 6th, 1910, and the other complainants acquired, at least, a portion of their holdings, if not all, prior to that transaction.
    “The effect of the supplemental deal of 1910 between these two fictitious embodiments of Mr. Butler, was that the New Jersey Corporation permitted the New York Corporation to use the ninety-five per cent, of its net profits, which were due to the New Jersey Corporation under the agreement of 1907, for the purchase of real estate in New York in the name of the New York Corporation, and, further, to1 permit the New York Corporation to charge the amount so expended for real. estate fto the extent of ninety per cent, thereof5 as payment of the ninety-five per cent, of net profits under the agreement of 1907. Of course, leaving out of view the small interest of Mr. Butler and his four associates by reason of the $5,000 of stock which they paid for in cash, upon the organization of the New York Corporation, this transaction of 1910 could hurt no one as long as the two corporations remained solvent and prosperous. Leaving out- of view the above-mentioned $5,000 of stock, the certificates of indebtedness for $1,705,000 might have been canceled and surrendered at any time. The full value of such surrender and cancellation would immediately be added to- the stock of'the New York Corporation, nine-tenths of which the New Jersey Corporation owned.
    “Nevertheless, these New Jersey stockholders, subjected, as I think, their rights are to- the whole transaction of 1907, in which all the stock of the New Jersey Corporation participated, had a right to have no- further transfer of assets from the New Jersey Corporation to- the New York Corporation without their consent. They had a right to- have the corporate property of the New Jersey Corporation remain subject to New Jersey law. The fiction of separate corporate existence in respect of this matter, I think, must be recognized and enforced. The original stockholders, as we have seen, all agreed that this New York Corporation shortld take the greater part of the assets of the New Jersey Corporation and exploit them in business in the State of New York, while the New Jersey Corporation would stand, nominally, at least, as a creditor of the New York Corporation to the extent of $1,705,000, and also- stand as the holder’ o-f nine-tenths of the total authorized capital stock of the New York Corporation, and have ninety-five per cent, of the profits of the New York business. The parties, however, who subsequently acquired portions of the stock of the New Jersey Corporation, never consented to any further transfer of assets from the New Jersey Corporation to- the New York Corporation. The New Jersey Corporation, although stripped o-f perhaps three-fo-urths or four-fifths of its assets by the transfer to- the New York Corporation, still remained the owner and operator of a chain of grocery stores in New Jersey, out of which various liabilities might arise directly affecting the stockholders. Before the transaction of June 6th, 1910, the New Jersey Corporation stood as holder of an indebtedness due to- it from the New York Corporation, amounting to $1,705,000, and it also had the obligation of the New York Corporation to pay to it, the New- Jersey Corporation, ninety-ñve per cent, of the net profits derived from the great chain of groceries operated by the New York Corporation. The directors of the New Jersey Corporation in this situation of affairs practically abandoned this great asset, this right to receive ninety-five per cent, of the profits of the New York business, and permitted the New York Corporation to use the profits which belonged to the New Jersey Corporation for the acquisition of real estate in New York in the name of the New York Corporation. But, further than that, according to this new arrangement of June 6th, 1910, ninety per cent, of the money, the net profits, Avhich in fact belonged to the New Jersey Corporation, but was invested or to be invested in New York real estate in the name of the New York Corporation, was to be credited upon the annual payments equal to ninety-five per cent, of its not profits which the New York Corporation was under contract to pay over to the New Jersey Corporation. The result of the carrying out of this new bargain or arrangement, if the New York Corporation prosecuted its business with success, and acquired hundreds of stores in the cities and towns of New York, would be the cancellation of a very large part- of the indebtedness of the New York Corporation to the New Jersey Corporation with respect to the payment of the ninety-five per cent, of profits. This is certainly a strange way to pay a debt—to permit the debtor to acquire property in his own name and have ninety per cent, of the ' cost of such property credited as a partial payment of the debt. Of course, a consideration o-f the enhancement by this ' transfer of assets of the value of the stock of the New Jersey' Corporation, which held nine-tenths of the stock of the New' York Corporation, and the probability or possibility of a large increase of dividends upon the stock of the New York Corporation, might lead to a practical approval of this plan as a sound business venture not injurious to any right of any-individual stockholder of either corporation, provided all the stockholders of the New Jersey Corporation were holders in' the same proportion as between themselves of the stock of the New York Corporation, which, as we have seen, was not the case. About half a million dollars par value of the stock of the New Jersey Corporation had passed from the hands of Mr. Butler and his associates prior to June 6th, 1910, and this amount of stock was, at the time this suit was brought, held by parties who were not stockholders in the New York Corporation. Besides, the stockholders of the New Jersey Corporation were not obliged, without their consent, to have a large part of the assets of their corporation transferred to a foreign corporation and made subject to foreign laws.
    “Not the slightest prevision is made for reimbursing or in •any way paying the New Jersey Corporation for this immense transfer of its assets from the jurisdiction and control of New Jersey to the jurisdiction and control of the State of New York.
    “Whatever the purpose of the transfer of assets in fact was, the effect was to enrich Mr. Butler and his associates as holders of one-tenth of the stock of the New York Corporation to the extent of one-tenth the value of the assets transferred, while the complainants, who held no stock in the New York Corporation, would, manifestly, be losers to the extent of about six per cent, of such value. Of course, to the extent that these corporations merely represented Mr. Butler, without any rights of other stockholders or creditors of the New Jersey Corporation being involved, it was a matter of no consequence which corporation held title to perhaps three or four million dollars of assets. But if Mr. Butler and his associates, the directors of the- New Jersey Corporation, saw fit to make this great transfer of property for no consideration from their control as directors of the New Jersey Corporation to tlieir control as directors of the New York Corporation, they should have brought in all the stockholders of the New Jersey Corporation, and accomplished their object with unanimous consent. I find nothing in the charter of the New Jersey Corporation which can possibly be construed to authorize this transaction of June 6th, 1910. It stands, it seems to me, very clearly as an ultra

      viras act, an act in gross violation of the property rights of the New Jersey Corporation, for which the defendants, who were directors at the time, should be held liable. It is alleged that two of the directors took office subsequently to this transaction, and if the evidence shows that snch is the case, no personal liability can be established against them.
    “While we are dealing with strict legal rights of the complainants as stockholders of the New Jersey Corporation, it is only fair to the complainants to point out that they do not stand before thfe court as ‘strikers.’ When Mr. Storrs was on the stand he was sharply cross-examined as to various offers-to sell his stock alleged to have been made in personal interviews with Mr. Butler, before or shortly after this suit was brought. * The time and place of these alleged tenders were specified by1 'the examining counsel. Mr. Storrs positively' denied that he had made such offers. Although there was abundant opportunity', Mr. Butler was not put on the stand by the defendants, nor was the slightest effort of any kind made to substantiate the implications which counsel for the defendant so distinctly made in his cross-examination of Mr. Storrs. The interest of the complainants is comparatively small, but, considered by' itself, it is certainly a substantial sum, amounting to four or five hundred thousand dollars in stock of the New Jersey Corporation at its par value. The rights of the complainants as stockholders are substantial property rights entitled to the protection of onr law.
    “So far as this court is concerned, this case now is narrowed down to the ascertainment of the nature and extent of the liability of some of these directors on account of the vMm vires transaction of 1910. In regard to this matter, I think that counsel should be heard fully' upon the settlement of the decree. Various views have been suggested to my mind, but the matter naturally' has never been the subject of consideration or argument by counsel.
    “The situation is unique, so far as my experience goes, in dealing with corporation law and corporate fictions, because we have here a scheme evidently contrived for the accomplishment of certain purposes with respect to the evasion of taxation and personal liability, and out of the complex so created spring these claims of stockholders in which creditors and the public seem to have no concern. There is no evidence in the case which indicates that Mr. Butler or his associates have done a single act with intent to defraud the New Jersey Corporation, or the complainants who hold about five or six per cent, of its capital stock. The idea that Mi. Butler and his associates holding at least ninety-four per cent. [$9,400,000] of the capital stock of the New Jersey Corporation, while the New Jersey Corporation holds nine-tenths of the stock of the New York Corporation, would seek to injure either corporation, would seem to, be quite visionary. In all this mass of evidence and these charges of fraud and negligence there appears no scintilla of proof that one dollar has been personally appropriated or misappropriated by Mr. Butler. Restitution to the New Jersey Corporation would, to the extent of about nine-tenths, mean restitution by Mr.- Butler to- Mr. Butler. Under these circumstances, I think, the decree should be framed with the utmost care. This is not a punitive proceeding. Whatever wrongs creditors might have suffered, or whatever evasion of taxation might have been accomplished, none of these things or possibilities are to be considered in this case.
    . “The decree in this case may be settled on five days5 notice, and thereupon I will give counsel ample opportunity to discuss the question as to the exact form of the decree and the character of the relief which should be granted. * * *
    “Upon settlement of the decree counsel for the defendants suggested that the complainant Roach, having voted for the resolution of June 6th, 1910, should be subjected by the decree to the same liability as the other directors. No objection was made to the alignment of Mr. Roach as a complainant at any prior stage of the suit. He is not a defendant and no relief is prayed for against him. The,' court cannot in this suit, which is brought for the benefit of the corporation, subject Mr. Roach to any decree fastening liability upon him. He has never had his day in court in regard to that matter. Several defenses can easily be supposed which would protect him, notwithstanding the fact that the minutes of the corporation show that he voted for the resolution of June 6th, 1910, and, as I recall the evidence, voted for the instrument which carried out the resolution.
    “Counsel for the defendants made no application to have the bill amended, or for leave to file a cross-pleading praying on behalf of the James Butler Grocery Company for the same relief against Mr. Roach that the original bill prays against the other directors who were made defendants-therein. I do not intimate that such an application made for the first time at the very last stage of the cause, the settlement of the decree after the announcement of the decision,, would have been granted. Such an application, if granted, would reopen the entire case and cause great delay, inasmuch as Mr. Roach would have a right to file an answer,, and also to have a rehearing of the cause so far as he would be concerned. It may also be borne in mind that this suit is brought, not on behalf of Mr. Roach, but on behalf of the defendant the James Butler Grocery Company. Moreover, it is, to say the least, questionable whether the cause of action on behalf of the Janies Butler Grocery Company, as presented to the court by the complainants’ bill, does not have a tortious rather than a contractual basis. This is a matter of great importance when the question for determination, relates to the non-joinder as a defendant of one of several joint tort-feasors. However, I do not pause to consider this point, because no' application to open the suit and have an amended or an additional pleading filed, praying for the first time for affirmative relief against Mr. Roach on behalf of the James Butler Grocery Company, was made.
    “In regard to the defendants, Patrick Mulcahy and James Butler, Jr., it appears that they are clearly innocent of participation , in the scheme inaugurated by the resolution of June 6th, 1910. Mr. Mulcahy did not become a director of the company until 1916, and Mr. Butler, Jr., did not become a director until 1919. Other persons became directors after June 6th, 1910, aiid they are not'made defendants. No- question of ratification of the original scheme bjr new directors and participation in the work of carrying it out has been suggested as a basis for liability. Why these two directors, who became such with others long after the scheme objected to was inaugurated, were made defendants is not explained, and no argument has been offered in regard to the matter. Under the circumstances as to them the bill will be dismissed.”
    White, J. (dissenting).
    James Butler and four associates in 1907 incorporated under the laws of Few Jersey a corporation called “James Butler Grocery Company,” of which they were the directors and sole stockholders, and in the State of Few York and under its laws, incorporated a corporation called “James Butler, Inc.,” of which they were likewise the sole stockholders and the directors. James Butler then having sold to the Few Jersey corporation his chain grocery store business in Few Jersey and Few York, the Few Jersey corporation sold the portion thereof in Few York to the Few York corporation, receiving in payment therefor $1,705,000 in obligations and ninety per cent, of the. capital stock of the Few York corporation, the remaining ten per cent, of such capital stock having been paid for in cash by and remaining the property of James Butler and his four associates. The Few Jersey corporation also received as consideration for the good-will of the business in the State of Few York so sold and transferred by it to the Few York corporation a contract that the Few York corporation would thereafter pay it yearly ninety-five per cent, of its, the Few York corporation’s, net profits.
    In 1910 the two corporations, by appropriate resolutions passed by their respective directors, modified this ninety-five per cent, of profit agreement so that ninety per cent, of such ninety-five per cent, of net profits instead of being paid to the Few Jersey corporation might be invested in the purchase of real estate in Few York in the name of the Few York corporation, in which corporation, as before stated, the Few Jersey corporation owned ninety per cent, of the capital stock, such purchases to be for the extension and enlargement of the New York corporation’s business in that state. This modified arrangement has continued for ten years with highly profitable results, but was, in 1920, objected to by complainants, who have acquired some stock in the New Jersey corporation, and the court of chancery held that in modifying in 1910 the 1907 agreement as to the disposition of profits so that instead of being paid over for distribution among stockholders as dividends they might be invested in the enlargement of the business of the subsidiary company in New York, of which the New Jersey corporation was owner to the extent of ninety per cent, of the whole, the directors of the New Jersey corporation had exceeded their legal authority as directors of that corporation and must now assume or be charged with a personal liability to pay into the treasury of the New Jersey corporation the amount which would have been paid in by the New York corporation if the latter had not, in pursuance of such modification of the 1907 agreement, invested the money in the extension of its business as above set forth.
    I think this is error. It will result in the New Jersey corporation receiving from Butler and his associates individually the ninety-five per cent, of the profits of the New York. corporation in cash, while at the same time getting the benefit through its ownership of ninety per cent, of the capital stock of the New York corporation of ninety per cent, of the value of the real estate in which such profits were invested, in pursuance of the modification agreed upon. The New York corporation is not a party to these proceedings, although it offered to come in if complainants amended their bill to bring it in, but complainants did not do so. It is impossible, therefore, to do complete justice in the way adopted in the court of chancery. Eor my own part I have difficulty in understanding how the directors, in providing for the» use of profits in enlarging the plant and extending the business of a subsidiary company, were committing an act ultra vires their authority. The fact that the subsidiary corporation was incorporated under the laws of another state is surely no legal reason for such a view. That would be a strange doctrine to be adopted in New Jersey. The learned vice-chancellor seemed burdened with the view that the cfi rectors were disposing of “assets” of tlie New Jersey corporation, which I think was not so. They were dealing with ^profits.”
    But assuming that complainants have some just ground of complaint because of the owmership by Butler and his four associates of the ten per cent, of the capital stock of the New York corporation, not owned by the New Jersey corporation, the remedy is to declare Butler et al., what they made of themselves in acting as they did as directors of the New Jersey corporation, viz., trustees for the New Jersey corporation of their ten per cent, of the stock of the New York corporation, and to require the transfer of this stock by Butler et al., to the New Jersey corporation, and an accounting by them for any dividends, if any, or other profits recéived therefrom since the 1910 modification of the profits agreement, in which these gentlemen participated as directors of the New Jersey corporation, and this remedy is now tendered by 'Butler et al. in their brief. Certainly, complainants have not, by their ten years of silence, earned the right to be paid their share of the ninetyffive per cent, of the profits throughout that period, twice.
    I am requested by Justice Campbell and by Judges Gardner and Van Buskirk to say that the3r join in the views herein expressed.

      Mr. George 0. Tennant, for the complainants.

      Messrs. Hey man .& Ileyman, for the appellants-respondents.
   Pee Cueiam.

The decree appealed from wall be affirmed, for the reasons stated in the opinion filed in the court below by Advisory Master Stevenson.

For affirmance—The Chiee-Justice, Teeuchakd, Miutueh, Kalisch, Black, Katzenbach, Lloyd, Claek, Mc-Gleunon—9.

For reversal—Campbell, White, Gardner, VanBuskikk—4.


source: Caselaw Access Project

author: Per Curiam.

license: Public Domain

text:
    George H. Englehard, receiver, &c., complainant, v. George J. Schroeder et al., defendants.
    [Decided April 25th, 1924.]
    On appeal from an order of the court of chancery advised by Vice-Chancellor Church, whose opinion is reported in 95 N. J. Fq. 491.

      Messrs. Goult & Smith, for the appellant.

      Mr. Harry Lane, for the respondents.
   Per Curiam.

The order appealed from will be affirmed, for the reasons stated in the opinion filed in the cqjjirt below by ViceTChancellor Church.

For affirmance—The Chief-Justice, Trenchard, Min-turn, Kalisch, Black, Katzenbach, Campbell, Lloyd, White, Gardner, Van Buskirk, Clark, McGlennon—13.

For reversal—Hone.


text:
    Frances E. Roberts-Horsfield et al., respondents, v. Cecelia Grace Gedicks, appellant.
    [Filed April 25th, 1924.]
    On appeal from a decree of the court of chancery, advised by Vice-Chancellor Baches, whose opinion is reported in 91¡. N. J. Fq. 82.

      Mr. William New corn, for the appellant.

      Mr. Joseph T. Hague, for the respondents.
   Per Curiam.

The decree appealed from will be affirmed, for the reasons stated in the opinion filed in the court below by Vice-Chancellor Ba<jkes.

For affirmance ■— Ti-ie Chief - Justice, .Teehchard, Parker, Minturh, Kalisci-i, Black, Katzehbach, Campbell, Lloyd, White, Vah Buskirk, Clark, McGlenhon —13.

For reversal—None.


text:
    Carmela Capasso, alias Carmela Colonna, petitioner-appellant, v. Nicola Colonna, defendant-respondent.
    [Submitted March 24th, 1924.
    Decided May 19th, 1924.]
    On appeal from a decree of the court of chancery, made by the chancellor, whose opinion is reported in 95 N. J. JSq. 85.

      Mr. Richard StocMon, for the appellant.
   Per Curiam.

The decree will be affirmed, and except as presently noted, for the reasons given in the opinion of the chancellor.

The opinion contains the following paragraph:

“No statute, whether relating to marriage or anything else, if in the ordinary general form of words, will be given any effect outside of the local jurisdiction of the government enacting it. To bind even citizens abroad, it must either specifically in terms, or by necessary implication, include them.”

Without passing on the correctness or otherwise of the broad and sweeping proposition just quoted, it is sufficient to say that our courts will not undertake to enforce by decree of nullity the New York statute relied on.

As to the matter of duress, it is argued that the evidence of the lapse of time between the alleged threat and the marriage ceremony was misinterpreted by the chancellor, and also not reported in full by the special master. If he failed to report it fully, such failure cannot be rectified here; application should have been made to the court below. Viewing it as it stands, we cannot say that the chancellor placed an erroneous construction upon it.

The decree will be affirmed.

For affirmance — The Chibe - Justice, Trenciiard, Parker, Minturn, Kaliscit, Black, Katzbnbach, Campbell, White, Gardner, Van Buskirk, MoGlennon, Kays —13

For reversal—Lloyd, Clark—2.


text:
    Niart Rogers and Arthur G. Rogers, executors of the last will and testament of John Rogers, deceased, complainants-respondents, v. Sadie O’R. McKenna, impleaded with others, defendant-appellant.
    [Decided May 19th, 1924.]
    On appeal from a decree of the court of chancery advised by Vice-Chancellor Foster, who delivered the following opinion orally:
    “This is an action to foreclose a bond and mortgage dated the 19th day of April, 1905, made by Sadie O’R. McKenna and Thomas P. McKenna, her husband, to John Rogers, to secure the payment of $5,500 in one year from the date thereof, with interest thereon at the rate of five per cent, per annum, payable semi-annually.
    “Both the bond and mortgage were executed by Mrs. Mc-Kenna and by Mr. McKenna. The only defense now offered to the foreclosure is that some time in April, 1921, Mr. McKenna, acting for Mrs. McKenna, .as he claims to have done for a number of years, with her authoritjr, made an oral arrangement or agreement with Mr. Rogers, the mortgagee, to have the rate of interest increased from five to five and one-half per cent, per annum, which was to continue until the current or prevailing rate of interest warranted a reduction to the five per cent, rate, upon the condition that the time of the payment of the principal money secured by the bond and mortgage should be and was extended, so that the same should not be due or payable until the lapse of one year after notice or demand, calling for the payment thereof, should have been given by the holder of the mortgage to the defendants, or any subsequent owner of the fee of the mortgaged premises.
    “It appears that Mr. Eogers died some time in February, 1922; that the complainants are the executors under his last will, duly qualified and acting as such. It also appears that they have not given any notice other than the ordinary demand on the defendants for the payment of the principal and interest now claimed to be due on this mortgage.
    “Defendants have offered in evidence two letters, one from Mr. Eogers, under date of May 17th, 1921, in which he called the attention of Mr. McKenna to the fact that the prevailing rate of interest is more than five per cent., that even the government itself was paying five and one-half, and asks if Mr. McKenna desired the mortgage to continue, and further asks if he would be willing to pay the additional one-half of one per cent, interest.
    “Under date of May 21st, 1921, Mr. McKenna replied to the letter, and stated that he would be willing to make the arrangement suggested.
    “This is the only agreement in legal form that I find before me in airy way changing or modifying the terms of the bond and mortgage. There is no other defense interposed. The mortgage is past due. I have overruled the offer of testimony from the defendant Mr. McKenna to show conversations and transactions with the decedent respecting an oral agreement alleged to have been made by Mr. Eogers with Mr. McKenna, in April, 1921, in connection with this increase of interest, and which defendants claim will show they were to.receive one year’s notice or demand for the payment of the amount due on the bond and mortgage. This offer is overruled because it is in violation of the provisions of section 4 of the Evidence act, and further because the parties by their correspondence, in May, 1921, definitely reduced to writing whatever negotiations they orally had in the preceding April, if they had any.
    “I will therefore advise a decree in favor of complainants for the full amount of the principal and interest thereon from October 19th, 1922, amounting to $221.83, at the rate of five and one-half per cent, per annum, together with the search fees.
    “Mr. Winans—I am about to ask leave to answer over, on the ground that our plea has been denied.
    “Court—The application will be denied. This is a final hearing. There was a reference to me by the chancellor, and there was a designation by me some time ago fixing this date for the final hearing. There is no indication, no statement in the answer that it is an answer in lieu of a plea. It is an answer.
    “Mr. Winans—The form indicates it.
    “Court—That may be a question of construction.' I do not so regard it. I think the defendants have had ample opportunity to answer, and they have done so ineffectively, and the application will be denied.
    “I will make the allowance of $100 counsel fee asked for in lieu of the statutorjr fee.”

      Mr. Philip PL. Moslcovitz, for the appellant.

      Mr. Walter Taylor, for the respondent.
   Per Curiam.

The decree will be affirmed, for the reasons stated in the opinion delivered by Vice-Chancellor Foster in the court of chancerj'.

For affirmance ■— Ti-ie Chibe • Justice, Trenchard, Parker, Minturn, Kalisci-i, Black, Katzenbaoi-i, Campbell, Lloyd, White, Gardner, Van Busktrk, Clark, Mc-Glennon, Kays—15.

For reversal—None.


author: Pee Curiam.

text:
    Neil H. Boyle and Patrick Gartlan, complainants-respondents, v. Max Sattler and Anna Fenchel et al., defendants-appellants.
    [Decided May 19th, 1924.]
    On appeal from a decree of the court of chancery advised by Vice-Chancellor Fielder, who delivered the following opinion orally:
    “There should be a decree for complainants that defendants specifically perform the contract.
    “From the testimony I doubt that the defendants were at Mr. Ryan’s office February 3d, 1922, prepared to carry out the terms of the contract. It would appear, too, that the defendants doubted their ability to prove the complainants were in default on that occasion, because after this suit was brought, the defendants served notice on the complainants that they would be ready to deliver a deed to complainants May 26th, 1922, and they fixed the hour and place for the purpose. The testimony of the complainants is that they were present at the time and place designated, ready to carry out the contract, and that the defendants did not appear, and the defendants admit that they did not attend at the time and place named by them and tender a deed or offer to straighten out whatever objection to title there might be. Following that occasion, another date was fixed by notice served by the complainants on the defendants to the effect that complainants would be ready to accept a deed November 24th, 1922. That notice was given because in the answer filed by the defendants herein, the defendants stated that they were ready and willing at all times, and were still ready and willing to perforin the contract. The complainants were present, ready and willing to close title November 24th, 1922, though their counsel, Mr. Feinberg, who at that time was the attorney representing the defendant, testified that he did not attend at the time and place fixed by the notice, and that neither did the defendants, and he gives as his reason for not being present and for not having his clients there, that Mr. Ryan had said that an adjustment would be required of some matters connected with the transaction before the complainants would take title. This Mr. Ryan denies, and even had he made such a statement the complainants had made no reservation in their notice by which they said they would be ready to comjolete the contract, and it was therefore the duty of the defendants, who by their answer had expressed their willingness to close title, to attend at the time and place appointed, tender their deed and ascertain whether the complainants were really willing to accept it or not. I feel that the case shows that the defendants were in default under their contract, and that the decree should be for the complainants.

      “1 will allow complainants their costs of suit, but no counsel fee.”

      Mr. Aaron A. Melnik er, for the appellants.

      Mr. Eugene T. Sliarhey, for the respondents.
   Pee Curiam.

The decree will be affirmed, for the reasons stated in the opinion delivered by Vice-Chancellor Fielder in the court of chancery.

For affirmance — The Chiee - Justice, Teenohard, Parker, Minturn, Kalis ci-i, Black, Katzenbaci-t, Campbell, Lloyd, White, Gardner, Van Buskirk, McGlennon —13.

For reversal—Clark, Kays—2.


text:
    Gustav Dettsloff et ux., respondents, v. Elwood Hockstetter et ux., appellants.
    [Decided May 19th, 1924.]
    On appeal from a decree in chancery.

      Mr. Upward L. Miller, for the appellants.

      Mr. Joseph Beclo Tyler, for the respondents.
   Per Curiam.

The bill in this case was filed by the complainants, who are the owners of a house and lot in the ‘village of Eairview, to restrain the appellants from violating a restrictive covenant prohibiting the use of their property for any purpose other than that of a dwelling. The situation disclosed by the pleadings and proofs was as follows: The Eairview Realty Company, an agency of the United States Emergency Fleet Corporation, purchased a tract of land (comprising the present village) in the neighborhood of Camden at the beginning of the world war; laid this tract out in streets and lots, and erected thereon some thirteen hundred houses, largely fox the purpose of providing homes for the employes of the fleet corporation. After the close of the war this governmental agency arranged to make a public sale of all the houses, buildings and real estate, comprising the village of Eairview, and this purpose was carried out, practically all of the property having been sold to different parties at that sale. When it was held, public announcement was made that each piece of property would be sold subject to certain building restrictions, and these restrictions were inserted in each deed executed and delivered to a purchaser. One of the restrictions prohibited the use of any of the buildings in that part of the 'village in ■which the respective properties purchased by the appellants and the respondents were located for any purpose except that of residences. Notwithstanding the restriction, the appellants undertook to carry on in the premises purchased by them a store and place of business, in violation of the restrictive covenant, and thereupon the present bill was filed.

The hearing resulted in a decree in favor of the respondents, restraining the appellants from further using the property purchased by them as a store and business place, and it is from this decree that the appeal has been taken.

Prior to the filing of the bill in the present case another suit had been instituted by the present respondents against one Banes, to restrain him from continuing a similar violation of this restrictive covenant. The case came on to be heard before Vice-Chancellor Learning, and at its conclusion a decree was advised, granting similar relief to that provided in the decree now before us. The opinion of the vice-chancellor, in that case, expressly adopted by Vice-Chancellor Ingersoll in the present case, and, so far as it is applicable to the present case, is as follows:

“I am unable to believe that there can be any doubt touching the duty of the court to prevent these properties being used for business purposes.

■"It seems to me that if any case of this nature can properly call for equitable interposition upon the part of the court of chancery this case is one of them. The broad aspect of the entire situation may be stated in the general terms that this entire community, that is, the owners of every property within this restricted area in this entire community have agreed as they have purchased these properties that they will not use any of the properties for business purposes, and the properties were all bought at a public sale at which, the announcement was made that no properties within the restricted territory could be used for business purposes. Under these conditions all of them were purchased; in all, some one thousand three hundred and fifty improved properties were sold with the understanding upon the part of everybody that no one of those properties should be used for business, excepting two or three where outstanding leases existed, and the agreements were, they could not be so used after those leases expired.

“The theory upon which those community agreements are enforced is that there has accrued to everj'body the rights as are defined in these uniform restrictive covenants, and that it is inequitable upon the part of any person after entering into a general scheme of that kind to repudiate their agreement and violate the covenants in a manner that they had agreed not to do. A suit of this nature is not a suit for the enforcement of a covenant, strictly speaking. The written covenants are all made with the vendor who sold these properties; they do not run in terms to grantees of the vendor, they are in form personal to the vendor, and this is not a suit by the vendor for the enforcement of these covenants as such, it is a suit by one of the purchasers against other purchasers to compel them to observe good faith in this general scheme, and it is the uniform covenants, to which all have agreed, which we turn to to ascertain the scope and tenor and character of that general scheme, and it is from the general scheme defined by these covenants that the equity arises as distinguished from a suit to enforce speeifiealfy a covenant by a person to -whom the covenant has been made.

“The point has been made that the Eairview Realty Company has waived the observance of these covenants; has lost the right to enforce them bjr acquiescence in their violation since the sales were made. The Eairview Realty Company has disposed of all of its property save two or three vacant lots, I think, which have not yet been disposed of; the interest of the Eairview Realty Company has gone, essentially gone. It may be said to be entirely immaterial to the Eairview Realty Company what happens in these properties in the future so far as any interest is concerned on the part of that company. Therefore, it is unreasonáble to suppose that the Eairview Realty Company would be active or take any part in enforcing these covenants. Why should they? The covenants were in fact adopted and inserted in all deeds for the benefit of the community.

“But it has been held in this state by a long series of cases that there is all the difference in the world between a land company, the original land company, a town-site proprietor, undertaking to enforce a covenant of this nature and an individual lot owner, undertaking to enforce the same covenant as a part of a general scheme. . The ordinary land company is in most cases interested in the entire tract, and laches would be charged against it or acquiescence would be charged against it by reason of violation on any part of the tract, whereas it is held that the single- lot owner is really interested only in violations that affect his particular interest, violations on lots near him, where if the covenant is violated the individual lot owner will suffer; therefore, a violation of the covenant on a distant part of the tract is not held to be a matter of material concern to the individual lot' owner, and is not a matter of laches and not a matter that can be urged as acquiescence or abandonment on his part. So, the inactivity of the Fairview Realty Company in enforcing these covenants, after selling all but two or three lots at this public sale, is a matter which it seems to me is immaterial at this time. •

“The claim is also made, however, that the complainants in this case were not vigilant in enforcing these covenants against nearby violations of the covenants where the violations seriously affected the complainants'’ enjoyment of their property. A claim of that nature can always be made in either of two situations. One is where an estoppel has arisen, that is, where a person who has the right to enforce a covenant has stood by and allowed others to make improvements without protesting, so that it would be inequitable to enforce the covenant after allowing the improvements to be made and expenditures incurred. Changes in property might be made to such an extent that an injunction against conducting a business in the property would be a source of pecuniary loss— loss of money which had been expended by reason of, and wholly by reason of, the failure of the complainant to interfere. That is an estoppel. There is no estoppel in this-case, in fact, no estoppel is pleaded, and the proofs do not show any losses that will be sustained by either of the defendants by reason of-inactivity upon the part of complainants, by reason of the complainants’ delay in bringing this-suit as promptly as might have been.

“The other basis for such a claim is where want of a-promptness or activity may be successfully urged as laches or abandonment. Acquiescence cannot be established in this case under the evidence.

“Ho rights had arisen which had not existed before; no defenses had arisen that could not be interposed by reason of the delay. Acquiescence amounting to a waiver or to an abandonment of one’s rights is a matter of substance and not mere form of delay enforced by justifiable circumstance.

“Hor would anyone seriously claim that the complainants at any time abandoned the idea of enforcing these covenants or entertained the idea of doing it, nor have other property owners abandoned these covenants excepting those who are-violating them. The very few violations of these covenants indicate respect of the general scheme more nearly than it-does a disregard of the covenants; the community as a wholelias observed these covenants and has respected them, the very small percentage that have violated them accentuates that fact. If a community were disregarding covenants of this nature, out of one thousand three hundred improved properties there would be more violations than appear in this-case; but all the violations that have arisen have been recent, and a considerable percentage of those that have been named have arisen since the suit was brought. There seems to have-been a recent tendency to turn these properties into stores, and my conclusion is that it is peculiarly inequitable for the-owners of these properties to do so, that the equitable rights of those who purchased must be enforced, and that there has-been at no time any such acquiescence, laches or abandonment of this scheme, or other acts upon the part of the complainants or others in this community, that should deny this court the right to enforce these covenants, or rather, to enforce the general scheme.”

For the reasons stated in this opinion, the decree now under review will be affirmed.

For affirmance —■ The Chief - Justice, Tren chare, Parker, Minturn, Kalisch, Black, Katzenbach, Campbell, Lloyd, White, Gardner, Van Buskirk, Clark, Mc-Glennon, Kays-—15.

For reversal—None.


text:
    Flockhart Foundry Company, respondent, v. Cox Automatic Pipe Bending Company, appellant.
    [Decided May 19th, 1924.]
    On appeal from a decree of the court of chancery, advised by Vice-Chancellor Backes, whose opinion is reported in 95 N. J. Eq. 382.

      Mr. Elmer W. Demaresl, for the appellant.

      Messrs. McOarler .& English, for the respondent.
   Per Curiam.

The decree appealed from will be affirmed, for the reasons stated in the opinion filed in the court below by Vice-Chancellor Backes.

For affirmance—The Chief-Justice, Trenoi-iard, Parker, Minturn, Kalisch, Black, Katzenbaci-i, Campbell, Lloyd, White, Gardner, Van Buskirk, Clark, McGlennon, Kays—15.

For reversal—None.


author: Per Coriam.

text:
    In the matter of the application of Silas Panmore (Paramore) and Serai Panmore, for writ of habeas corpus, discharging them from custody.
    [Decided May 19th, 1924.]
    On appeal from an order of the court of chancery advised by Vice-Chancellor Baches, whose opinion is reported in 95 N. J. Eq. 386.

      Mr. Klemmer Xalteissen, for the appellant.

      Mr. Joseph E. Strieker, for the respondent.
   Per Coriam.

The order appealed from will be affirmed, for the reasons stated in the opinion filed in the court below by Vice-Chancellor Baches.

For affirmance—The Chief-Justice, Trenohard, Parker, Minturn, Kalisci-i, Black, Katzenbaci-i, Campbell, Lloyd, White, Gardner, Van Buskirk, Clark, McGlennon, Kays—15.

For reversal—None.


text:
    George W. Campbell, appellant, v. Annie L. Campbell, respondent.
    [Decided April 17th, 1924.]
    On appeal for an order of the court of chancery advised by Vice-Chancellor Eielder, who filed the following opinion:
    ‘T shall have to deny the motion. I think the welfare of the child, which is the determining factor with the court, requires no modification of the order.
    “I do not think this child ought to> be taken away from the ■constant care of her mother. A seven-vear-old child ought not be harrassed by shifting her from one parent to the other for any considerable length of time, and I think the conditions under which the child has been living, as disclosed by the affidavits and argument of counsel, on this as well as previous hearings of this matter, show that it is for the best interest of the child that her home should be with her mother, with the right of visitation to the father, as fixed ¡by the order now in force.”

      Mr. J. Harry Hull, for the appellant.

      Mr. Marshall W. Van Winkle, for the respondent.
   Per Curiam.

The order appealed from will be affirmed,, for the reasons stated in the opinion filed in the court below by Vice-Chancellor Eielder.

For affirmance—The Chief-Justice, Tree chard, Parker, Mihturk, Black, Katzbebach, Campbell, Lloyd, White, Gardner, Van Buskirk, Clark—12.

For reversal—None.


text:
    Frank Dennis, respondent, v. Glenwood Cemetery, appellant.
    [Decided May 19th, 1924.]
    On appeal from a decree in the court of chancery advised by Vice-Chancellor Foster, who filed the following opinion:
    ■ “The bill was filed to compel the payment of six bonds of $500 each of the cemetery association, and as an incident thereto for an accounting, and also for the benefit of a vendor’s lien. Complainant1 died after the commencement of the action, and his executors have been duly substituted as complainants.
    “The cemetery assiciation has filed its. answer and also a counter-claim, under which it has. brought in all of the incorporators of the association and those claiming under them as bondholders.
    . “The controversy arises out of the following circumstances: Between 1892 and 1894 George W. Brown and six of his friends decided to convert about, thirty-five acres- of Brown’s farm at Long- Branch into a cemetery. Each of the six paid Brown $1,000 for a one-seventh interest in the property which Brown conveyed to them.
    “The seven then incorporated the Glenwood Cemetery Association on November 4th, 1894, under the Cemetery act of 1875, and elected themselves its trustees. Between the date of the conveyances from Brown and November 29th, 1895, when twenty-nine and twenty-five hundredths acres were conveyed by the incorporators to the association; some work was done and money expended in the development of the cemetery. By a resolution adopted in April, 1895, by the incorporators, they agreed to sell the property to the assoelation for $21,000, and also reserved to- each of them, without cost, a burial plot in the cemetery. Out of the original tract of thirty-five acres the incorporators retained about five and seventy-five hundredths acres in their individual names, because they understood the law would not allow the association to hold title to more than thirty acres, and these five and seventy-five hundredths acres are admitted to be the property of the association, subject only to the rights of the incorporators to have paid them the purchase price for the entire property.
    “To provide for the payment of this purchase price the association issued to the incorporators or to their assigns forty-two debenture bonds for $500 each, of like tenure, purport and effect, and aggregating $21,000. The principal of the bonds was made payable on May 1st, 1922, with interest at six per cent., payable semi-anually.
    “Complainant was neither an organizer nor incorporator of the association. Two of the six bonds owned by him he bought on June 17th, 1902, from William Ii. Morris, Jr., one of the seven, and an incorporal or; for $1,000; the re maining four bonds he bought for $2,060, on the same date,, from one Warwick, to1 whom they had been sold and assigned by Morris; the bonds had not been issued at this time, and, in the instruments transferring or assigning them, they arc referred to as ‘stock or bonds.’
    “The incorporators continued in control of the associa tion until about 1907, and during this period the association received from the sale of lots over $18,000, and it paid interest on most, if not all, of the bonds, and it also expended money in the development of the cemetery, but did not create any particular fund for the care of the lots, nor for the payment of the bonds at maturity.
    “Payment of the principal and interest of the bonds is resisted by the association on the’ following grounds: That the bonds were fraudulently issued to pay the incorporators, as promoters, an excessive secret profit of two hundred percent. on their investment of $7,000; that the bonds, are' nonnegotiable, and that complainant’s’bonds are therefore snbject to all the equities against the entire issue, and that the incorporators and those claiming under them, as bondholders, are estopped from collecting the amount, if an)', due them until a fund for the perpetual care of all lots in the cemetery has been created.
    “'There is no proof of any fraudulent conduct on the part of any of the incorporators in issuing these bonds, or in any other transaction relating to the cemetery. It is true that they sold the land for which they paid $7,000 to the association for $21,000, and it is also true that by accepting these bonds therefor they postponed the reimbursement of their original investment and also their prospective profits for a period of twenty years, or, if taken from the date of their investment in 1894, for a, period of twenty-seven years.
    “The proofs also fail to show these incorporators to have been promoters in the legal.meaning of that term; they were, and continued to be, the only parties financially interested in the undertaking; they took and continued to keep all the risks incident to the enterprise; the extent or the return on their investment, or their profit, is definite and liquidated, and they cannot therefore be considered as promoters taking a secret profit, under the opinion of the court of errors and appeals in Attorney-General v. Linden Asso., 85 N. J. Eq. 501, reversing the opinion of this court in Bliss v. Linden Asso., 83 N. J. Eq. 495. This opinion of our appellate court is in line with the opinion of Vice-Chancellor Stevens in East Ridgelawn Cemetery v. Frank, 77 N. J. Eq. 36, and of the United States supreme court in Old Dominion Copper Co. v. Lewishon, 210 U. S. 206, as well as the supreme court of Massachusetts, in Old Dominion Copper Co. v. Bigelow, 208 Mass. 159, and also of the case of Seymour v. Spring Forest Cemetery Co., 144 N. Y. 333.

    “The record also fails to support the contention that the. bonds are non-negotiable.
    “The terms of the bonds do not limit the payment of principal out of an}' particular fund; the promise to. pay the principal is unqualified as required by the Negotiable Instrument act [Comp. Stat. p. 3755], and while the interest is promised to be paid out of the proceeds of the sale of lots and the profits of the association, there is nothing'to- indicate that it may not be paid out of other assets of the asso.ciation. This, in effect, is unqualified, because such payment of interest is not to lie made from any particular fund, but is to be paid from all the income, profits and assets of the association.
    “The circumstances under which these bonds were issued, the parties who issued them and the purpose for which they were issued, all negative the claim that they were intended to he qualified promises to pay, for they wore issued to reimburse the men who- authorized their issue, the amount of their original investment,’ and also their prospective profits, and it is inconceivable that these incorporators, having power to do otherwise, intended by this bond issue to pay themselves with an uncertain promise, and were willing to- limit such reimbursement and payment to a particular and uncertain source, particularly in view of the fact that they knew the law authorized them to set aside fifty per cent, of the proceeds of the sale of lots for the payment to- them of tho purchase price of the- property. This contention is -further answered by the fact that the incorporators and the assoeia tion at and before the issuance of the bonds considered and treated them as negotiable, for Morris sold and assigned his right to bonds to Warwick and Dennis, and the association confirmed and ratified these- assignments by issuing the bonds to Dennis.
    “The claim of estoppel presents the- real difficulty in the case due to this situation.
    “Section 10 of the Cemetery act [1 Comp. Stat. p. 375] provides that, after setting aside at least fifty per cent, of the proceeds of the sale of lots to- the payment of the purchase-money, the residue shall be used for preserving, improving and embellishing the cemetery grounds-, &c.
    “In 1895 and 1896 the association, while the incorporatoiH-bondholders, with the exception of Dennis, were in control, issued circulars in which it ivas represented the association would set aside forty per cent, of the proceeds of the sale of lots for their perpetual care, and the form of deed the association adopted contains the endorsement ‘Open Lawn ‘Plan with Perpetual Care.’
    “The association has failed to create a. fund for this purpose, and, after all the years that have elapsed since these representations were made, the only assets the association has at this time for this and all other cemetery purposes are about $11,000 in cash 'and unsold lots, including the five and seventy-five hundredths acres mentioned, from which it is estimated it may, in the course of time, realize from $118,-000 to $235,000, from which must be deducted the cost of the development and sale of these lands and the incidental expenses of the association.
    “It is estimated that there is now due on this bond issue for principal and interest about $40,000; it is further estimated that a fund of at least $70,000 will be required to furnish the income for the perpetual care of the lots in the cemetery, in which over one thousand six hundred interments have been made.
    “While there is nothing in the record impairing the validity of the bonds, the right of their owners to compel their payment must be considered in connection with the paramount rights of the owners of lots in the cemetery, who presumably purchased in reliance upon the representations made respecting the perpetual care of their property and without knowledge of the existence of this issue of bonds.
    “The courts have described the management of a cemetery association as a charitable, or a pious, or a sacred trust, and the fact that it is all of these must not be lost sight of in determining the relative rights of all the parties to this controversy. The solution of the difficult}'' is further complicated by the death of five of the incorporators and the incapacity of another, as well as by the death of the complainant, who lived for years in the immediate vicinity of the cemetery, and whn purchased his bonds years after the representations about perpetual care were made and circulated in the neighborhood and after lote in the cemetery had been sold.

      “In view of the conclusion I have reached that it is the primary dutjr of the court to protect the rights of the loc owners and to insure them, so far as. possible, the care of their plots for which thej^ have paid, and as it is necessary for the accomplishment of this purpose that a sufficient fund should be created from the proceeds of the sale of lots* and as it is also necessary to obtain from the association’s assets the fund necessary to pay the amount due on this bond issue, I should like to hear from counsel in settling the terms of the decree how these various objects can be accomplished without impairing the rights of any of the parties in interest.”
    SUPPLEMENTAL OPINION.
    “Tn the memorandum filed by me in the above matter on February 24th, 1923, I requested counsel to. give me their views on the method to- be embodied in the decree which would provide for the care_ of the lots heretofore sold for burial purposes, and also for the care of lots hereafter sold, and including the care of the cemetery as a whole and its general management and development, and which would als<?> provide for the payment of the principal and interest of the bonds owned by complainant and others.
    “As a result of this request I have had several conferences and quite some correspondence with counsel, with the result that my suggestion that the initial investment of $1,000, made by each of the seven bondholders, should be repaid them from the funds, amounting to about $18,000. now in the treasury of the cemetery association, seemed to be acceptable to all parties, with this qualification, viz.,-that the $7,000 thus to be paid should be divided among the seven bondholders on account of both principal and interest, so that all would have interest paid therefrom on their respective claims of $3,000 each up to the common date ol November 1st, 1907.
    “This payment of $7,000 would leave a balance due the bondholders of unpaid principal of $14,000, and accrued interest for fifteen years, from November 1st, 1907, to- November 1st, 1922, on the original debt- of $21,000, amounting to about, $18,000.
    ‘"’At the conferences mentioned, and after consideration of the arguments of counsel, I held the representation made by the cemetery association to give perpetual care to the lots it had sold, imposed no greater duty than that imposed by section 10 of the Cemetery act, which directs that fifty per cent, of the proceeds of the sale of lots shall be first applied to the paym'ent of the purchase price of the property, and the remaining fifty per cent, to the care, improvement and embellishment of the cemetery.
    “1 further held that as the original bondholders, who were also the inco-rpo-rators and who were for many years the sole trustees of the cemetery, had ignored their statutory duty and had neglected to pay themselves the amount due them for the price of the property, and had likewise neglected to create from the proceeds of lots sold the- fund required by the statute for the care of the- cemetery; that the eqeaities of the situation required that the care of the cemetery should receive the- first consideration, and to accomplish this purpose I have reached the conclusion that the balance of the funds now in the cemetery’s treasury [after the payment of the $7,000], and all additions thereto', should be kept intact and invested, and that from the- annual income received therefrom, and from the gross receipts of the sale of lots and from any and all other annual income and receipts [except gifts, bequests and devises], there should be created annually a fund not exceeding $3,000 for the care. management and development, of the cemetery; that from the balance of such gross annual receipts and income seventy-five per cent, thereof shall be paid annually on account o-f the $14,000 balance of principal due the bondholders, until such, balance has been paid in full, with legal interest thereon from November 1st, 1922, and that thereafter said seventy-five per cent, shall be paid annually on account of the interest owing to the bondholders on the original debt of $21,-000, to November 1st, 1922. The remaining twenty-five per cent, of the annual income and receipts is to he invested and used by the trustees as they determine for the care, improvement and embellishment of the cemetery.e
    “This litigation is the direct result of the neglect of all parties to it, and, therefore, iio> costs can be allowed to either' party against the other, and any party has leave to apply at any time for such further relief as the circumstances may require.”

      Mr. Wilbur A. Ileisley, for the appellant.

      Messrs. Wilson c(? Smock and Mr. John W. Slocum, for the respondent.
   Per Curiam.

Our examination of the pleadings and proofs sent up with the present appeal satisfies us that the conclusions of the learned vice-chancellor are sound, and that the decree appealed from should be affirmed. It will be so ordered.

For affirmance—The Chief-Justice, Trbhchard, Parker, Mikturh, Kaliscii, Black, Katzenbach, Campbell, Lloyd, White, Gardher, Yah Buskirk, Clark—13.

For reversal—None.