text:
    Clarence D. Costello, complainant, v. Thomas Cusack Company et al., defendants.
    [Submitted October 26th, 1922.
    Decided November 2d, 1922.]
    1. The method of exercising the power vested in a corporation must conform to strict legal principles unless it be otherwise distinctly authorized by legislative act.
    2. Where the laws of this state give stockholders power to remove directors for cause and after a hearing, but not arbitrarily, ambiguous language in the Corporation act cannot give power to the stockholders to amend their certificate of incorporation to arbitrarily create a disqualification and authorize the removal of a director.
    3. An arbitrary amendment to a certificate of incorporation is one that is unreasonable.
    4. The test -of the eligibility of a director of a corporation is that he is directly interested in a competing company so as to bring his service to his employer and his duties as director in conflict, and an amendment to articles of incorporation of a corporation that is broader than that in prescribing ineligibility, is void.

      On bill, &c. On motion for injunction.
    3Iessrs. Treacy & 31ilton (with whom were Mr. Lufkin, of the Illinois bar, and Mr. Hurd, of the New York bar), for the motion.

      3Iessrs. McDermott, Enright cO Carpenter and Robert H. McCarter (with whom was Mr. Hummer, of the Illinois bar), contra.

   Griffin, V. C.

After the memorandum of October 6th, instant, had been-forwarded to counsel, a re-argument was asked on two points, viz.: (1) Whether, under article 7 of section 8 of the Corporation act, the power to file an amended certificate in the-form therein set forth is in conflict with the Corporation act f (2) On the question of reasonableness, and the power of the court to determine what was reasonable or unreasonable.

1. The seventh article of section 8 is as follows:

“VII. The certificate -of incorporation may also contain any provision which the incorporators may choose to insert, for the regulation of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class or classes of stockholders; provided, such provision be not inconsistent with this act.”

This section was construed in the case of Audenried v. East Coast Milling Co., 68 N. J. Eq. 450. In that case it appeared that the certificate of incorporation provided that any resolution in writing, signed by all the members of the board of directors, should constitute the action of the board as fully as if the same was passed in opening meeting, and it was sought to sustain this grant of power under the seventh article of section 8 above set forth. Vice-Chancellor Bergen-(at p. 467) said: “If the power to legislate as these incorporators have legislated exists, it must be found in the expression ‘'any provision creating, defining, limiting and regulating the powers’ of directors.” After analyzing this paragraph, he said: “The method of exercising the power created must conform to settled legal principles, unless it be otherwise distinctly authorized by the legislative act. No such express authority is conferred by this act, and it ought not to be inferred from ambiguous expressions;” and he held the amendment invalid.

At the time our Corporation act was passed there resided in the stockholders the power to remove directors for cause, and after a hearing, but not arbitrarily, which power the stockholders might delegate to the directors. This being air important feature of the law at the time 'of the adoption of our Corporation act, to hold that the ambiguous language in the seventh paragraph gave power to the stockholders to amend the certificate to arbitrarily create a disqualification and authorize the removal of a director, would be doing violence to the legislative intent.

2. The next question to be considered is, Are the amendments arbitrary? And this question must be determined by their reasonableness. This has been dealt with in the first memorandum. On the re-argument, in view of the memorandum of the court, counsel called the attention of the court to the effect of the words “directly * * * interested in any business which competes,” &c., as tending to show the propriety of the disqualification, and pointed out that an employe or agent may be so connected with a rival concern that it becomes his duty to use his best endeavors to take to his own employer the business and trade of the corporation of which he is a director, as appears to be so in this case. The difficulty, as I see it, with this argument, is that the test of his ineligibility is that he is directly interested in the business of the competitor, without specifying that the character of the interest is such as to bring his services to his employer and his duties as director in conflict. In the other cases, where the exclusion was ■ held valid, the very nature of the office held in the rival company condemned the director occupying the dual relation.

The difference is clearly presented in this case. One might be an employe of a rival concern, directly interested in its prosperitjr, whose duties are not such as to take from him the power to properly serve the corporation of which he is a director. On the other hand, a situation may arise where a director, being an agent or employe of a rival concern, might do it infinitely more damage than if he were a director of the rival concern. The director of the rival concern might not possess the peculiar knowledge of the trade which would enable him to obtain information and use it against the corporation of-which he is a director. That situation seems, in a measure, to appear in this ease. Mr. Cusack, in his affidavit, charges that Mr. Costello is a man experienced in the trade; that for a long time he was in the service of the Cusack Company; that he left its employ and became manager of the 0. J. Gude Company; that the Cusack Company had been trading with the 0. J. Gude Company and other concerns allied with the Gude Company, and that, for the protection of the Cusack Company, 'it was deemed wise to give up trading with Gude and such other companies. And Mr. Costello, in his affidavit, says as -follows: “I state that the reason which has made it necessary for me to give some attention to establishing paint plants of the 0. J. Gude Company in competition with the Cusack Company has been for the reason that the Thomas Cusack Company refused to accept or carry out orders for paint display for the 0. J. Gude Company/-’ and he, as manager in charge of this particular line of competition, if he serves the Glide Company properly, must use his best endeavors to- take the trade of the Cusack Company of which he is a director.

There is a further feature: He charges in the bill that the corporation is insolvent and mismanaged, whereas the bill itself leads to the strong inference that Mr. Costello does not believe it to be insolvent, and a reading of the bill in connection with the affidavits of the defendants makes it appear quite plain that it is far from being insolvent. And it further appears that the attorney of Mr. Costello went to two banks in Chicago, about the 1st of February, 1921, and stated to the representatives of one of the banks that he represented certain minority stockholders of the company; that lie had valuable and confidential information regarding the 'Thomas Cusack Company; that the earnings of the company were grossly exaggerated; its financial condition was not as it was represented, and, in substance, stated that the business was badly managed and in an unsatisfactory condition, and if the company was indebted to the bank in any sum, he Would advise the bank to collect it as soon as possible while there was yet opportunity. And an officer of the ■other bank swore substantially to the same effect, stating that this attorney said he represented Costello, a minority stockholder; that the company was going broke, and that if the •company owed the bank any money he would advise the bank to “get the money while the getting was good.” These affidavits of the two bankers are not denied by the said attorney, and he is the only person who could deny the same; from all of which it plainly appears that the complainant, Costello, to say the least, was using his best endeavors to greatly injure the corporation of which he was a director. In such a case, I apprehend, there would be as much reason to remove him as there would be to remove a director of a rival concern. But, as before stated, the amendment to remove is too broad, in that it tends to disqualify every employe having a direct or indirect interest in the rival concern, regardless of the nature of his employment.

Since the filing of the bill an order was made admitting one H. H. Buchholtz, Jr., a stockholder, as a party complainant.

I regret that I had not more time to investigate this interesting question, but in view of the fact that an appeal will be taken, I deemed it wise to promptly decide the case so that it may be heard at the next term of our court of last resort.

I will advise an order in accordance with the foregoing views.


source: Caselaw Access Project

author: Griffin, V. C.

license: Public Domain

text:
    Clarence D. Costello et al., complainants, v. Thomas Cusack Company et al., defendants.
    [Submitted March 31st, 1924.
    Decided April 14th, 1924.]
    1. -Where a bill filed by a stockholder of a corporation alleges that C. dominated the corporation of which he was president and operated it for the benefit of himself and the majority stockholders; that he expanded its business for the purpose of increasing his compensation without regard to whether such expansion was made on a profitable basis; that the company increased the amount of its loans at banks; that it established an unprofitable branch; that for the purpose of obtaining control and monopoly of its 'business it formed a corporation which is being managed at a loss; that it refused to receive orders from other companies; that the profit stated on its books shows differently from its published audit, and that the business of the company is now being conducted at a great loss, and asks for an injunction and receiver, and an accounting and other relief on final hearing—Held, that the allegations of the bill were not proven, and that the affair’s of the company have been operated at a profit, and that its business has been wisely and honestly managed in the interest of its stockholders and creditors.
    2. Where the misconduct alleged in a bill in equity filed by a stockholder of a corporation displays a motive to injure the defendant company in its business for the benefit of a rival, but claims no relief, for himself as a stockholder with respect to the things condemned, simply asserting that the company is mismanaged and praying for an injunction and receiver, such bill does not show that the complainant does not come into equity with unclean hands.
    On bill, &C.

      Messrs. Treacy & Milton, Mr. Lindley M. Garrison and Mr. John J. Mulvaney (Mr. George F. I-Iurd, of tlie New It ork bar), of counsel, for the complainants.

      Messrs. McDermott, Enright & Carpenter, Mr. John Mulford Enright and Mr. Merritt Lane (Mr. J. 8. Summer, of the Illinois bar), of counsel, for the defendants.
   Griffin, V. C.

One phase of the bill in this cause was before this court, and was decided in a memorandum filed on October 9th, 1922, and in an additional memorandum, upon reargument, filed November 3d, 1922. From the order then made an appeal was taken to the court of errors and appeals, which order was affirmed. Costello v. Thomas Cusack Company et al., 1 N. J. Adv. R. 314; 94 N. J. Eq. 423.

The cause came on to be heard on the residue of the bill.

Defendant Cusack Company sought again to amend the certificate of incorporation at a meeting held on May 5, 1923, changing the character of the stock in some respects, and, on supplemental bill, this was also enjoined without filing a memorandum.

The Cusack Company, on December 7th, 1922, filed an answer with a counter-claim, bringing in Mr. Logeman and others as defendants, whereupon, Mr. Logeman had himself added as a party complainant to the bill. In this testimony •he says he knew nothing of the preparation of the suit by Costello until the subpoena was served, and the reason why he had himself added as a party complainant was because he was attacked in the counter-claim.

During the trial of the cause, on the application of complainants, an order was made allowing the bill to be amended in such fashion that it would stand as a bill under the statute for mismanagement, and praying an injunction and receiver, a copy of which amended bill is contained in the order. Afterwards, counsel desired to treat the form of bill contained in the order as an independent bill, and, after some discussion, withdrew his application to amend, stating that complainants would stand on the original bill 'filed.

The charges against the defendant company, contained in said bill, are practically as follows:

1. That Cusack has dominated.and been able to maintain control of the policy of the company, and to maintain and operate the company for the benefit of himself and of the majority stockholders, to the detriment of the complainant and the minority stockholders, by the payment of large and unwarranted salaries, commissions and bonuses, or additional compensation to all the named majority stockholders, who arc directors; and it then proceeds to set out the salary paid to President Cusack. It also alleges that the company has been mismanaged and its earnings squandered, &e.

2. That it has been the policy of Mr. Cusack and the majority stockholders and directors to increase and expand the business for the purpose of increasing the volume, whereby they might increase their compensation without regard to whether the extension was made upon a profitable basis, and refers to the $1,800,000 bond issue in the year 1918.

3. That it increased the amount of its loans at banks.

4. That it established a branch in New York City which has been conducted at a great loss.

5. That, for the purpose of obtaining control and monopoly of the business, it has formed a corporation known as “The National Outdoor Advertising Bureau,” which is being managed at a loss.

6. That, for many years the Thomas Cusack Company had been receiving, in each year, a large volume of orders from Poster Advertising Compaq, Inc., George Enos Throop, Inc., Ivan B. Nordham Company and other solicitors, which, in the j'ear 1920, amounted to more than a million dollars, and that for the purpose of obtaining a monopoly or control of the business in the United States, Mr. Cusack, in the 3rear 1920, undertook to have the Cusack Company refuse to receive any further orders from said concerns, and refused to take such orders, amounting, in the year 1921, to about $1,500,000, the result of which created competition, to the great loss of the stockholders of the company.

7. - That the company’s books show a profit, for the year 1921, of about $500,000, while its published audit for the same year shows a profit of about $1,500,000, and that the difference arises from the auditors charging the cost of erecting .and maintaining poster-boards, &c., as a capital asset, which-method is erroneous. These auditors are Price, Waterhouse & Company.

It is then charged that the Thomas Cusack Company has been and is now being conducted at a great loss, and greatly prejudicial to the interest of its creditors and stockholders, so that the business cannot be conducted with safety to ■ the public and advantage to its stockholders. It then prays, among other things, for the ascertainment of the proper compensation of the defendants, and that they may be decreed to-restore the excess above that sum; that the actual surplus, for the purpose of declaring dividends, be determined, and that the proper dividends be declared; that it may be restrained from exercising its privileges and franchises, &c., and that a receiver be appointed.

Dealing with the first charge in the complainants’ bill— Mr. Logeman became secretary and a director, as I recall it, in 1917, and voted with the majority on all these items, and was in perfect accord with the majority down to and including the meeting of May 25th, 1920, at which latter meeting the salary, bonus and traveling expenses of Mr. Cusack were fixed at the identical sums that the bill now complains against, with Mr. Logeman and his brother-in-law, Bobbins, voting in the affirmative. This compensation was as follows: salary, $50,000; allowance for expenses, $10,000; bonus on net profits, ten per cent., the net profits to be determined on the company’s method of accounting.

At this meeting' of May 25th, 1920, the order of business was as follows: The compensation of the president was first fixed.as above for salary, expenses and bonus; nine directors were then unanimously elected, and on both these resolutions Messrs. Logeman and Bobbins voted in the affirmative. In the next resolution Mr. J. M. Loughlin was elected secretary. Mr. Bobbins placed in nomination Mr. Logeman; the result being that sixteen votes were cast for Mr. Loughlin and two for Mr. Logeman. The salary of the treasurer, with traveling expenses and bonus, was thereupon fixed, Mr. Logeman and Mr. Bobbins voting in the affirmative. Thereafter Mr. Logeman and Mr. Bobbins, for the first time, began to vote in the negative upon the resolutions offered.

-At an adjourned meeting of the board of directors, held March'15th, 1921, Mr. Costello appears as a director instead of Mr. Bobbins. At this meeting Mr. Cusack was elected president, Mr. Costello voting in the affirmative, Mr. Loge-man in the negative. On the vote for Mr. Bead as treasurer, Mr. Costello voted in the affirmative and Mr. Logeman in the negative. The same may be said of the vote for Mr. Loughlin as secretary. At this meeting the salary, bonus and traveling expenses of the president were fixed at the sums above stated in the bill, namely, $50,000 salary, $10,000 for traveling expenses, and a bonus of ten per cent, of the net profits, “to be determined in accordance with the system of accounting that has been and is now being followed by the company.” On this resolution Mr. Costello voted in the affirmative and Mr. Logeman in the negative. Mr. Cusack did not vote. Sixteen out of eighteen directors present voted in the affirmative. The salary of the treasurer was fixed at $0,000, $4,000 for traveling expenses, and a bonus of two per cent., being the same as the previous year. Sixteen voted in the affirmative, including Mr. Costello, and Mr. Logeman voted in the negative. The compensation of the secretary was fixed at the same figure as the preceding year, namely, salary $6,000, traveling expenses $2,500, and one per cent, bonus. Mr. Costello voted for this resolution, Mr. Logeman in the negative. In fixing the salary of Mr. Spriggs at $1,820 a year, in addition to a bonus of one per cent., Messrs. Costello and Logeman both voted for the resolution. The same may be said of the salary of Mr. O’Mara.

At the meeting of the board of directors, held March 28th, 1922, both Costello and Logeman voted against Mr. Cusack for president. The minutes of this meeting show the following statement by Mr. Logeman—

“1 voted ‘No,’ not on account of the personal villification and attacks that he has made on my character, but on account of his illegal acts and his continued actions that would tend to destroy the value of the interests that I, and the stockholders who have elected me a director, have in the company.”

Not only did Mr. Logeman vote for all these alleged extravagances in the payment of salaries, bonuses, &c., before the breach came, and Mr. Costello, in 1921, voted in the same fashion prior to his retaining Mr. Lutkin, but the great weight of the testimony is that the compensation fixed by the board of directors was reasonable and the method proper, and I do not recall any evidence on the part of the complainants to the contrary.

2. Turning to the second point made by the bill, as to the increasing and expanding of the business, and referring to the $1,800,000 bond issue in the year 1918: At a meeting of the board of directors, held on the 28th day of February, 1918, to consider this issue of $1,800,000 of bonds, there were present, among other directors, Messrs. Logeman and Eobbins, and the resolution to issue the bonds was adopted by the unanimous vote of the directors of the corporation present. Following this a stockholders’ meeting was held, on March 20th, 1918, upon due notice, stating the purposes of the meeting and referring to the $1,800,000 bond issue. Thus the stockholders were fully advised of the object of the meeting. At this meeting Mr. Read held the proxies of Messrs. Costello, Robbins and Logeman. Mr. Hopkins acted as secretary of the meeting, and the resolution to issue the bonds was unanimously adopted by the stockholders, casting sixty-six thousand and nine and one-half votes in favor of the resolution and none against. Thereafter, on the 22d of March, 1918, Mr. Logeman, as secretary of the company, made his certificate of the passage of said resolution, and that no part of the action taken at said meeting has been revoked or rescinded, and swore to the same. It is therefore apparent that this resolution was adopted unanimously by the directors and stockholders, with the full approval of Messrs. Logeman, Robbins and Costello. It seems rather strange, at this late date, when the complainants are now at swords points with the defendants, that the court would listen to the complainants’ charge that either Mr. Cusack or the company had ulterior motives in the issuance of these bonds after they had actually approved of the action.

Touching the question of expansion at the meeting of the directors, held February 25th, 1918, after action on the bond issue was taken, it was resolved to close with Brook, of Brooklyn, the Interborough Company and Solomon & Company, on the terms as read by Mr. Yerkes. (Purchase of plants.) Another resolution was passed that $100,000 be authorized for the expenditure in the construction of the new building to be located at Twenty-fifth street, Broadway and Fifth avenue, New York City, $50,000 -of this amount to be taken from the bond issue. These resolutions were unanimously adopted, Mr. Logeman and Mr. Kobbins both voting in the affirmative. Another resolution was unanimously adopted, after considerable discussion, that Mr. Yerkes and Mr. Kuch renew the negotiations with Mr. Buchholtz, of Hartford, Conn., and close with him as near the terms of the original agreement as possible. Other resolutions of a similar nature, to negotiate with Mr. Seymour, of Springfield, Mass., and with Messrs. Flynn and Kimball, of New England, were introduced, which were unanimously adopted, Messrs. Loge-man and Kobbins voting in the affirmative, and so far as I have been able to observe from the testimony, in no single instance, prior to the breach between Logeman and Cusack, did Mr. Logeman vote against expansion; nor did Mr. Costello, prior to retaining Mr. Lutkin, object to expansion whenever the question arose. And this expansion was in no manner objected to by anyone, so far as I recall the testimony, until the filing of the bill, and I am satisfied, from the evidence, that the business was conducted on a profitable basis, and that more profits would have been realized had it not been for the activities of Messrs. Logeman and Kobbins, while Mr. Logeman was in the board of directors, seeking to take from the American Poster Service the business of that company, which was a subsidiary of the Cusack Company.

3. The third point is that they made increased loans from the banks. This I regard as proper, and was made necessary by this very expansion which I have found to be legal and proper, and which met with the approval of all concerned, because the net profits, naturally, would be insufficient to take care of the expansion. To' illustrate: If a sign cost $9,000 to erect, and it was rented at $12,000, payable in monthly payments of $1,000 each, it would take nine months’ payments before the original outlay was paid. In the meantime, the company should have in hand the moneys to pay for the erection. The only other course to be resorted to would be to stop expanding, or borrow money for the purpose, which would permit the payment of cash dividends on the common stock.

4. The fourth point is that the Cusack Company established a branch in New York City, which has been conducted at a great loss. This is one of the things that created the friction between the Poster Advertising Company and others, whom I regard as being behind this bill—at least, as to- Mr. Costello. As I recall the evidence, the Gude Company, in New York City, had allowed its plant to run down and deteriorate, to the detriment of all outdoor advertisers. This being unattractive, it would injure outdoor advertising in all parts of the country, because it would not attract the great advertisers in New York City to use this medium of advertising. Mr. Cusack desired the Gude Company to improve its various plants and make them attractive for the general benefit of all outdoor advertisers, and this not being done, the Cusack Company came into the city and spent a great deal of money in putting up plants which were very attractive, and, the first few years, lost money on the new enterprise, which might be expected; but later on the plants were beginning to pay, and, as I understand it, in this so-called loss, following the Cusack plan of bookkeeping, a great deal of the construction is charged up to expense and maintenance. I am satisfied that this move of the company was honestly conceived and honestly executed, and that it represented the best judgment of the board of directors. Some men might think otherwise, but to them was not committed the management of this corporation by the stockholders—-it was committed to the directors; and if I should entertain a different, opinion on the subject, it is not' likely that I could, in law or in equity, substitute my judgment for that of the directors.

5. As to the fifth charge above mentioned, I understand counsel have abandoned all reference .to the National Outdoor Advertising Bureau.

‘o. The sixth charge will be dealt with hereafter.

7. The seventh point deals with the question of bookkeeping—the difference between what the balance sheets of the company showed and those of Price, Waterhouse & Company. The two methods are perfectly plain to me. Price, Water-house & Company pursued the scientific methods of bookkeeping and accountancy, whereas the Thomas Cusack Company used a different method upon which their bonuses were based. Under the Price-Waterhouse system, for the purpose of ascertaining the net income during the year, the expense of running the business was deducted from the gross receipts and the balance was regarded as net profits. Under the Cusack method practically all moneys expended during the year, whether on account of the ordinary expenses or the erection of the new structures, or otherwise, which should properly be charged to the capital account, were charged against the gross expenses, and the remainder was treated as net income. By this method it will be perceived that the amount of bonuses paid under the Cusack system was greatly reduced, and I may add that Mr. Cusack’s bonus was paid on the amount of net income after deducting all other bonuses.

8. Although not referred to specifically in the bill, the complainants attempted to prove that the plants were overvalued. The company, from time to time, had valuators examine the various plants and report their estimate to the company. The values thus returned were, in good faith, accepted by the company, and entered in their books as correct appraisals. There is no evidence in the case, in the slightest degree, which tends to impugn the honesty of the company and its directors in accepting these appraisals. To support this charge, complainants offered evidence which placed the cost of construction at considerably less than that paid by the Cusack Company for similar work. I think the testimony of Mr. Stauer, who was an expert in the line of billboard construction, and had knowledge of the costs, readily disposes of the charge that the Cusack Company was paying more than others for the same class of work. Mr. Stauer gave the figures of actual cost, and showed that where the cost was less it was a cheaper or inferior kind of construction. Apart from this evidence, the fact that the Cusack Company paid these prices speaks strongly against the charge. It is not contended that any member of the board of directors made any profit by such alleged excess payments, and I cannot conceive that the officers of the Cusack Company, with its splendid organization and field force attending to this work, would pay for the construction of a signboard more than what it should properly cost.

9. The ninth charge in the bill is that items were carried on the books of the company as assets, which, if properly-treated, would show that the liabilities of the company greatly exceed its assets. This related to the leaseholds on which the boards are erected. Mr. Donnelly, of Boston, who says he is practically the sole owner of several concerns engaged in bill-posting, said they do not carry the leases, as such, separate and distinct from the bulletins and boards, on their books at any value. Asked the question if he knew of any others in the business who did, he said he did not know their methods of bookkeeping, and he said, “Of course they are valuable, I suppose, at that; I don’t know, but I should think so.” Then he says, in answer to questions, that, in effect, if a billboard is not rented then, of course, the lease becomes a liability. But it is perfectly clear that a lease is an asset, for, without it, no billboard could be placed on the land, and, without the billboard, the company could not do business, and the fact that money is made in such a business indicates that the leasehold is of value.

In the case of the Cusack Compan}', it has about fifteen per cent, of its location in reserve, the purpose being this— having rented space to a customer, if the lease at any time should be determined and the billboard removed, the company then has other space upon which to place the advertisement. I am perfectly satisfied that this item is properly charged to assets, but, even if it were not, it would not show insolvency of the company by any means.

Having disposed of the direct charges made in the bill, I will now deal with the history and growth of the Cusack Company, and this is largely obtained from the testimony of Mr. Cusack, who was called as a witness on behalf of the complainants and examined by Mr. Lutkin. He testified that when seventeen years of age he entered into the business and is now sixty-five. He dealt on his own account until 1903, when the corporation was organized on the 1st of September of that year, under the laws of this state, with an authorized capital of $250,000. Increases were made in the capitalization, by certificates filed in the secretary of state’s office, as follows: On May 20th, 1912, from $250,000 to $1,000,000; on January 24th, 1913, from $1,000,000 to $2,500,000; on April 22d, 1914, from $2,500,000 to $5,000,-000; on November 17th, 1917, from $5,000,000 to $10,000,-000. Thus, in a period of fourteen years, the capital stock of this company was increased from $250,000 to $10,000,000.

Turning to the increase in business: prior to 1911 the property had been turned over to the American Tobacco Company. The business at that time amounted to $250,000 a year. I do not recall (and doubt if the evidence shows) when the American Tobacco Company took over the property, but it was prior to 1911. In 1917 the business had grown to upwards of $5,000,000, and increased year by year from two to four millions, until, in 1922, it exceeded $20,-000,000.

Healing with the assets: about 1912 the American Tobacco Company sold to Cusack for $250,000. The property might have been considerably more valuable, but how much more I do not think is stated; but in 1921 it was the opinion of Mr. Cusack that the physical plants were of the value of $15,000,000. He also says that the real estate purchased by the company from 1917 to 1922 had probably increased in value from two to four million dollars, and he estimated the profit at about ten per cent. He says, however, that in 1917 the total business in the United States in this line was $12,000,000, and he thinks it safe to say that in the last year it amounted to $40,000,000, and, with the great increase in the business, with competition, the profits were relatively decreased. The company paid six per cent, dividends on its preferred stock regularly, and paid some cash dividends on the common stock. I do not recall at present the number of these dividends and the amounts, but it is sufficient to say that Mr Costello^ who invested $8,000 in 1912, thereafter received cash dividends of upwards of $2,800, which would be equivalent to a five per cent, cash dividends on the original investment for seven years, or from 1912 to 1919. In addition to this he received one hundred and ninety-four per cent, in stock dividends from time to time. It will therefore be perceived that the company has assets of about $15,-000,000 on a $10,000,000 capitalization, and that the amount of business has been increasing at the rate of from two to four million dollars a year, and now exceed $20,000,000.

The complainants say that the books of the company do not reflect the profits and losses of the company. To illustrate : They say -that in 1922 the books show a profit of $384,504.4-3, while the Price-Waterhouse audit shows a profit of $1,359,535.77, the difference being $975,031.34. I think this is explained in Exhibit 12 of the Price-Waterhouse report, dated March 26th, 1923. I will not deal with all the items, but will point out one of $551,733.29, “cost of construction of bulletin-boards and signs, charged on books at cost of operations, reinstated on basis of inventory at December 31st, 1922.” This, I take it, was a charge that should go to the capital and not to the current expense account. Adding this sum to the $384,504.43, according to- the Cusack method, would malee the profit $983,155.38 without examining further. The difference between this' sum and the profit found by Price, Waterhouse & Company, $1,359,535.77, amounting to $376,380.39, is shown in the other items, which should be properly charged to the capital and not expense account.

The sixth charge in the bill touches the refusal of the Cusack Company to further deal with the Poster Advertising Company, George Enos Throop, Inc., and Ivan B. Nordham Company. There may also he added the 0. J. Gude Company, which was controlled by Mr. Pulton. The Gude Company was in the paint sign business, like the Cusack Company. Above is pointed out the reason why the Cusack Company entered into the New York field in competition with the Gude Company. The other companies, above mentioned, were solicitors in the trade, and upon the receipt of orders for paint or posting, turned the same over to the Cusack Company (and, I presume, to others), receiving a certain percentage of profit upon the orders. The business thus turned over was in the poster and not the paint line. The amount of business received from the Pulton interests was quite large, amounting to about seven or eight hundred thousand dollars a year, and, naturally, the Cusack Company desired to retain this trade; and would not break with the Pulton interests unless for good and sufficient reasons. The reason given by Mr. Cusack for the breach is as follows : “In every instance where they solicited business and we executed it, they would go in with our card and with our authority, and then abuse and misrepresent us in every possible shape. We stood it for a long while, and finally concluded that we had to—for the protection of ourselves—that we would employ solicitors;” and he says that “in every way they misrepresented everything we had, so we concluded to stop.” He says, further, that “while, as far as business was concerned, it was profitable, but as far as the reputation of the Cusack Company, and as far as the general feeling of the people that they were doing business for, it was very injurious and very unprofitable to the Cusack Company.” He says, also; that this matter was discussed for some years before, and the attention of the officers of the Pulton interests was called to- the fact, and they were asked to' desist from their abuse of the Cusack Company, notwithstanding which the Pulton interests continued these practices; and the Cusack Company refused orders of the Pulton interests after December 31st, 1920; and the question of breaking with the Eulton interests was threshed out at a full meeting of the board of directors. None of the foregoing facts were denied.

The American Poster Service, which the Cusack Company acquired from Logeman and Robbins, had a card index system containing, among other things, the names of the owners and the location of the lands where billboards were constructed, the dates of the expiration of the leases, and the amount of rent paid. Mr. Cooley says he went with the American Poster Service in 1919; that Robbins was their president and general manager and Logeman secretary; that he (Cooley) left the company’s employ about a month after Cusack Company took it over; that he went to the J. R. Myers Company in the early part of 1922, at the request of Mr. Robbins, and was located in the lease department; that the Myers Company had two offices, one at 1312-14 South Wabash avenue, and the other the Washington street office, in the Andrews building, where Mr. Logeman and Mr. Robbins were. He says that in the Wabash avenue office the painting was done, and the lease men were stationed and the bookkeeping was attended to. At the Washington street office were Mr. Robbins, Mr. Logeman, Miss Gutshow and Miss Walsh. It seems that a card index system similar to that of the American Poster Service was kept at the Washington street office, and the witness went there to get instructions as to bulletin-hoards, also checking the locations and as to the lease department. When he found that there was a location that they did not have at the Wabash avenue office he would go to the Washington street office, and Miss Gutshow would give him all the information that he desired on that particular location. He says: “There were quite a few locations that the American Poster Service had, and Miss Gutshow could tell off-hand how much the Cusacks were paying for the location, and if she could not remember off-hand she would go to the files and tell me.” The testimony of this witness clearly indicates that, from some source, whether by a direct taking or otherwise, the J. R. Myers Company had knowledge of the contents of these cards of the American Poster Service and were using them in competition with the Cusack Company. To illustrate: Having knowledge of the location, the time when a lease expired and the rent paid therefor, solicitors of the Myers Company would apply to the owner for a lease, offering .a higher price, which resulted in competition which compelled the Cusack Company to pay a much higher rent for the renewal. This competition, in view of the manner in which the information was obtained by the Myers Company, was plainly'unfair, to say the least.

Mr. Logeman says that he owns no stock in the J. R. Myers Company: that he is receiving no compensation therefrom; that he is looking out for the interests of his wife in that concern, in which, as I recall it, she holds onethhdof the shares and Mrs. Robbins holds another one-third; that he is actively employed in the outside work of the Myers Company, supervising its construction and its locations. It seems quite clear that Mr. Logeman had knowledge of the fact that the Myers Company was using data taken from the American Poster Service cards against it; ne was present a number of times when these cards were taken out, and he was the outside man on locations for the Myers Company. If this charge were untrue, it would seem that Mr. Logeman would have little difficulty in disproving it; he could have denied it with not only his own oath hut with the oaths of Mr. Robbins, Miss Gutshow and Miss Walsh. Yel neither he nor the others named were called to testify to the untruth of the charge. His 'conduct in this respect is more reprehensible because of the fact that he was a director of the Cusack Company, occupying the position of a trustee. I am inclined to the view that Mr. Logeman’s silence on the subject of such a serious charge against his business integrity stamps the story of Cooley as absolutely true.

Before dealing with Mr. Costello, I deem it proper to discuss the efforts on the part of the Pulton interests prior to Mr. Costello meeting Mr. Lufkin. In 1918 the Pulton interests sought Mr. Clabbaugh, a division superintendent of the United States department of justice, with headquarters at Chicago, Illinois, to investigate the Cusack Company under the Sherman act. He met Mr. Lutkin in this same case. -Prior to this time the $1,800,000 loan had been made, but had not been fully paid. Mr. Clabbaugli got in touch with the S. W. Straus Company, the persons who- floated the loan, and informed them that the government was investigating the Cusack Company for a violation, he thought, of the trust laws, and suggesting that the balance unpaid be retained by the Straus Company. He says he so notified the Straus Company. Mr. Straus, an officer of the S. W. Straus Company, confirms this story, and says that they did hQ-ld up the payment, and that the Cusack Company kicked strenuously, stating “that they had obligated themselves to make certain payments, and that unless they received the money from us they knew of no other way to meet those obligations, and that they were facing, not alone a loss in not getting these companies, but also, maybe, a lawsuit, by not being able to comply with these contracts, and that Bead” (the treasurer) “got quite ugly, and at the end of two or three weeks, on the advice of counsel, we paid the balance.”

This was the first attempt of the Pulton interests to obstruct the Cusack Company in the carrying on of its business, so far as the record shows.

Dealing with the activities of Mr. Costello: He went into the employ of the O. J. Gude Company in 1919 as manager of the road department, or the national department, a position which brought him in direct opposition to the Cusack Company, of which he later became a director. Speaking of what led up to this suit, he said he had a talk with Mr. Pulton, who, at that time, was in the Gude Company, touching an offer to purchase his stock in the Cusack Company, and Pulton asked what it was worth, and Costello said he did not know. He was then asked by Pulton if he did not get statements of their business, and he said “no, he never thought of it;” then Mr. Pulton said, “Why don’t you hire a good lawyer and get this information ?” and he named Mr. Lutkin, of Chicago, whom he met two or three weeks afterward..

Touching the expense of the litigation, he said that when he first made arrangement with Mr. Lutkin—“I told him it would cost a lot of mony,” and he said, “We will take care- of that, and if we sell your stock at a good price I expect you to make it good.” Eight here I may pause to state that up to the time Mr. Costello testified he had not' contributed one dollar towards the expense of this litigation. The bill was filed July 17th, 1922, and has been actively litigated down to the present time. This is the third time the ease has been before me; first, on a motion to enjoin the changing of the certificate of incorporation, which case was removed to the court of errors and appeals and there decided as above stated; second, on a supplemental bill to restrain a change in the form of the stock issue, which was also enjoined, and third, the present trial, in which about two thousand five hundred pages of testimony have been taken, about one thousand four hundred pages of which were taken in Pittsburg, Chicago, Detroit, Boston and New York, and about one thousand one hundred pages before me. I think it is no exaggeration to say that with the great number of counsel retained, members of the bar of this state, New York and Chicago, and the amount of time devoted to this case, and considering the character of counsel engaged and the expenses incurred up to the present time, the charges for such services and expenses -would exceed the monetary value of the Costello stock, and that it is perfectly plain to my mind that Mr. Costello just loaned his name to the rivals of the Cusack Company to deal with as they saw fit in litigation to harass the Cusack Company. The first move made by Mr. Lutkin was to take advantage of the laws of the State of Illinois to procure an examination of the books and papers of the Cusack Company, not for the purpose of helping Mr. Costello, but for use by the Pulton interests in their effort to injure, or perhaps destroy, the Cusack Company.

Mr. Hummer, of the Illinois bar, who is counsel for the Cusack Company in this ease, testified as to the statute on corporations in Illinois, referring • to sections 38 and 84. Section 38 gives the right to' each stockholder at all reasonable times, by himself or by his attorney, to examine the records and books of account, and any officer or director who denies such access shall be liable to the stockholder denied in a penalty of ten per centum of the value of the stock owned by such stockholder. Section 84 deals with the restrictions and liabilities of foreign corporations. He said, under the decisions of their supreme court, particularly the appellate court of the first district, the right is held to be absolute, and that the motives and purposes of the stockholder demanding an examination are immaterial. He cites Furst v. Rawleigh Medical Co., 282 Ill. 366. He also states that, at the Illinois bar, the lawyers are divided as to whether the provisions subjecting the officers and directors to a fine, applied to foreign corporations.

Upon Mr. Lutkin being retained in September, 1921, he wrote a letter to Mr. Read, the treasurer of the Cusack Company, signing Mr. Costello’s name, saying: “This letter is authority for Eraser & Torbet to examine the books, records and papers of the Thomas Cusack Company, Eraser & Torbet representing me as a stockholder of the company. Will you please be good enough to assist Eraser & Torbet in obtaining the information for which they ask under my direction ?” On the same date a letter was addressed to Eraser & Torbet, signed by Mr. Costello, requesting them to make the examination, and enclosing the letter addressed to Mr. Read. Under this authorization Mr. Torbet proceeded to make the examination, and made his first report on January 15th, 1921. This report did not evidently give to Mr. Lutkin all the information he desired, accordingly, on January 22d, 1921, he wrote Fraser & Torbet, asking for ten items of information, the first of which is as follows: “1. Detail on outside bank loans, including names of banks, amounts of loans, maturities, &c., with special information on dealings with more important banks over a period of time.” The second report was furnished on January 28th, 1921, which evidently gave Mr. Lutkin the information he desired as to the banks. He thereupon called on the Harris Trust and Savings Bank, of Chicago, and saw Mr. Miche, the manager of the credit department of the bank'. They had relations with the Cusack Company beginning with the spring of 1920, and the company were both borrowers and depositors. Mr. Miche says: “Mr. Lutkin called to see me in the early part of February, 1921, and he said he had some information to give us regarding the Thomas Cusack Company, particularly with reference to its financial condition. He said he represented the interest of certain minority stockholders, and, as one, mentioned Costello. He said an audit had been made of the company’s books which showed a financial condition quite different from that shown in statements lodged with the bank.” In commenting on the audit he said: “The company was in poor condition—in fact, it was going to go broke, and that, as a friend, he would advise us if we had any money due us, that we had better arrange for a rather speedy liquidation of the obligation.” He used this expression, “You had better get out while the getting out is good.” He said the management was not good—extravagant—that they were spending an awful lot of money for improvements, expansion and competition, all of which was unwarranted.” When asked, in cross-examination, by complainants’ counsel, “You did not examine, then, to find out whether the statement in the papers that Mr. Lutkin submitted to you were true or not?” He answered, “I thought the thing was so preposterous—I did not feel the necessity of doing it.” He said further, “I had the statement of the auditors—the Price-Waterhouse statement—and I had gone over that whole thing very thoroughly. I was familiar with the contents of that statement both as to assets and liabilities, and particularly as to the earnings, and I felt confident our statement was a correct one.”

Mr. William T. Bruckner, vice-president of the Commercial National Bank (I presume of Chicago), testified that the Cusack Company had financial relations with that bank as a borrower as well as a depositor in large amounts. In the month of February, 1921, Mr. Lutkin interviewed him. Lutkin told him that he had information that the earnings of the Cusack Company had been greatly exaggerated and that the condition was not as represented; that he was representing some minority stockholders. He said, “The management was not satisfactory; they were not gétting results in business; that if they owed us any money we had better look well to it and get it if we could.” To' the ques-ion, “What did you say to him?” he said, “Well, I didn’t say anything. I was just listening. I suppose I expressed my confidence in the organization as I felt it.” The witness made no memoranda of the figures Mr. Lutkin gave him. Asked on redirect examination why he did not take notes, he said, “Well, because I didn’t consider it necessary. I carry the general import of the information. It was purely voluntary. I hadn’t asked for it, and I was satisfied with my credit.” He made no investigation to find out if what Mr. Lutkin said was true or not. He saj^s, “Later, when Mr. Read came in, perhaps thirty days after that, in the regular course of business, I talked to him about it then.”

Mr. E. Le Moyne Page, the secretary of the Pennsylvania Trust Company at Pittsburgh, said that Mr. Ebel (of the Eulton interests) called to see him on behalf of the Gude Company, seeking to get a contract for advertising, in competition with the Cusack Company. Mr. Ebel produced the Price-Waterhouse audit and made several comments on the statements of the Thomas Cusack Company, to the effect that they were improper for a statement upon which to apply for a basis of credit; that Mr. Ebel volunteered the opinion previously discussed to prevent the Pennsylvania Trust Company from getting tied up with the Thomas Cusack Company. He says, “The exact reason for the- inadvisability of this is not recalled, but the inference is that it was owing to the fact that the Thomas Cusack Company was not a safe risk for the bank.”

Mr. George E. Hurd, one of the counsel of the complainants, has been counsel for the Gude Company in some matters for about three years; has been attorney for Mr. Fulton in some matters. He was counsel for Eulton and the Gude Company in 1923 before the federal trade commission with respect to a complaint against the activities of Thomas Cusack Company, participated in preparing the complaint and prosecuting it with Lutkin. His clients in this litigation were the Poster Advertising Company and the O. J. Gude Company. Mr. Pulton is president of both companies and has been for about three years. He says that Pred Ebel was connected with the Gude • Company prior to December, 1923, for several years. He says that he had a talk with Harvey Gibson, president of the Liberty National Bank of New York, and Bower, one of the vice-presidents, with the idea of blocking the $6,000,000 bond issue; that lie represented no one professionally in what he did, but he felt that if the Cusack Company got. this money it would be poured into the Metropolitan district for the purpose of destroying the plants of Gude and Yan Bueren. He says, “I also felt that any issue of securities against which a business was in a competitive condition as .this Outdoor advertising was at that time, would not work out well for the investors. I knew Mr. Gibson pretty well, and I like him very much, and I thought it was a bad piece of financing for the Liberty Securities Company to take hold of, and I told him so.”

Mr. Joseph Bower, vice-president of the New York Trust Company, testified that in 1920 he was vice-president of the Liberty National Bank, which has since merged with the New York Trust Company: that in 1920 he had under consideration the ijnancing of the Cusack Company; that he had a visit from Mr. Hurd; he did not know him before; that Mr. Hurd came by appointment and desired to know the nature of the financing for the Cusack Company. Mr. Bower said he was not at liberty to discuss it; that Mr. Hurd said he was anxious to know because he was interested in it as counsel for a company that was a competitor of Cusack. The statements made by Hurd to the witness were detrimental to the Cusack Company.

At this point I may add that Mr. Cusack said that the object of making the $6,000,000 loan “was not for expansion, but to pay dividends and have the company continue to pay dividends and not to expand, in the condition of the business, but to hold its own.”

Mr. Hurd says that the bill in this cause was prepared by Mr. Lutkin.

Mr. Lutkin was called and testified on behalf of the defendants, and he says he has represented the Poster Advertising Company since its formation in 1917 in various matters. He testified that some time in 1918 he submitted a brief on the law and the facts on behalf of the Poster Advertising Company to the United States attorney for the district of Illinois, and also Mr. Clabbaugh of the federal service, looking toward the indictment and likewise the prosecution of the Thomas Cusack Company by civil proceedings under the Sherman act for violations of the Antitrust law. He said that he and his partner prepared a bill, the purpose being to enjoin the $6,000,000 financing of the Thomas Cusack Company when-the same was under discussion. Mr. Costello was to be the complainant in the action. He says he drew most of the present hill coming out on the train, and that there' was not much time to get the original injunction before the meeting was called. Annexed to this bill is the affidavit of .Mr. Costello verifying the same. This affidavit undoubtedly was prepared in accordance with the frame of the bill. Costello did not see the bill and affidavit until he was called upon to swear to the affidavit. The affidavit is not sworn to on information and belief, but in positive terms; and, being confronted with his affidavit, and asked what knowledge he had of the facts contained therein, in a great many instances which touched very important and vital matters, he admitted that he did not know the facts of his own knowledge, and, generally, said he got the information from Mr. Lutkin; and, in other cases, he said he did not know where he got the information from.

In the taking of the depositions out of court, the defendants undertook to take the testimony of Messrs. Pulton, Lutkin, Logeman and Robbins. On the advice of counsel they refused to testify, on the ground that there was no authority, under the commission, to take their depositions, and that they would he produced in court as witnesses on the trial of the cause. Whether they were produced (with the exception of Mx. Lutkin) I am not aware. Mr. Lutkin was called, as stated above, by the defendants, to testify, but did not deny any of the statements and conduct above ascribed to him. None of the others named were sworn on either side, excepting that Mr. Logeman’s testimony was taken in open court on the original order to show cause, which testimony, under stipulation of counsel, is to be considered in the ease.

A great deal of the testimony taken out of court was purely hearsay, and in considering this case it has been ignored.

(I omitted to state in the early part of this memorandum that Mr. Walker, who is the president of Walker & Company, outdoor advertisers, and has been actively engaged in the business for twenty-eight years, in his testimony, taken in Detroit, says that most of the plants throughout the United States are putting all earnings back into expansion.)

It is perfectly plain, on the whole ease, that Mr. Costello, in bringing this'suit, has loaned himself as a. tool to the rival interests, the purpose of which he must know (if he knows anything) is intended to injure, if not to destroy, the business of the Thomas Cusack Company.

Being of the opinion that the affairs of the Thomas Cusack Company have been operated at a profit, and that its business has been wisely and honestly managed in the interests of the stockholders and creditors, and that the complainants have not, in the slightest degree, shown aught to the contrary, I would advise a decree dismissing the bill, were it not for the fact that the complainants prevailed on another branch of the bill, namely, that which refers to the amendment of the certificate of incorporation; the decree, however, will be in favor of the defendants on all the issues litigated before me on final hearing; and as to what decree shall be made with respect to the attempt to change the certificate of incorporation, where the injunction issued and the decree of this court was affirmed by the court of errors and appeals, and also what decree shall be made with respect to the order making the order to show cause absolute, on the supplemental bill, which touched the change in the character of the stock, may be settled on the signing of the final decree, after the determination of the counter-claim filed by the defendants, which, by common consent, was to be argued after a decision on the main case.

The defendants, as a further defense, ask that the bill be dismissed because the complainants do not come into equity with clean hands, and cite Prindiville v. Johnson et al., 93 N. J. Eq. 425, to sustain their position. In that case Chief-Justice Gummere, speaking for the court of errors and appeals, said:

“We are unwilling to consider the meritorious questions decided by the vice-chancellor. The complainant, according to the averments of his bill and the undisputed facts set out in the 'answer and developed by the proofs, came into the court of chancery for the purpose of having it there declared that a scheme, in the execution of which he was an active participant and the recipient of very large sums of money, was a fraud upon our statute, a violation of our public policy, and, therefore, null and void, and sought to have an adjudication in his favor, based upon these facts, in order that he may now enjoy benefits which can only come to him as a result of such an adjudication. Stated shortly, his position is this: Having for some eight years participated in the carrying out of this fraudulent scheme and reaped the benefits thereof, he now seeks, either for his own personal benefit or as the self-constituted representative of the state, to have this fraudulent scheme ended and our state laws and policies vindicated.”

In that case it will be perceived that the bill was filed attacking the very scheme to which the complainant was a party, and seeking to have it declared null and void, the complainant expecting to benefit thereform.

In the case of Howe v. Chmielinski et al., 237 Mass. 532; 130 N. E. Rep. 56, Mr. Justice Braley, in the supreme judicial court of Massachusetts, said:

“A plaintiff' who' has engaged in inequitable conduqt, having an immediate and necessary relation to the matter for which he seeks relief, will not be aided by a court of equity, and it is wholly immaterial in the case at bar that the defendant, also an undisclosed participant, has not been harmed, but generally benefited.”

In Woodward v. Woodward, 41 N. J. Eq. 224, citing Pomeroy, Vice-Chancellor Van Fleet said:

“The iniquity which deprives a suitor of’ a right to justice in a court of equity is not general iniquitous conduct unconnected with the act of the defendant, which the complaining party states as his ground or cause of action, but it must be evil practice or wrongful conduct in the particular matter or transaction in respect to which judicial protection or redress is sought.”

The doctrine of this latter case was approved in the court of errors and appeals in Munn v. Americana Co., 83 N. J. Eq. 309, where Mr. Justice Swayze said:

“We think, therefore, that the decree must be reversed, but it does not follow that the complainant is not entitled to some of the relief granted. The disqualification applies only to the particular matter or transaction with which the wrongful conduct had to do.”

Applying these principles to the instant case, the first question to be determined is, What relation the misconduct above set forth bears to the relief sought by this bill? The misconduct above set forth displays a motive to injure the defendant company in its business for the benefit of a rival. The relief sought by the bill, among other things, is to have it adjudicated that the defendant company has been mismanaged, with a prayer for an injunction and receiver. This bill is filed by stockholders. In the case of Bull v. International Power Co., 84 N. J. Eq. 6, Chancellor Walker said (at p. 10) :

“It is quite universally held that when a suitor is entitled to relief in respect to the matters concerning which he sues, his motives are immaterial (citing cases).” He said, further, “The complainant’s motives here are quite immaterial. They have an absolute statutory right to maintain their -bill, and if they make a case under the statute they are entitled to the relief they seek.”

This case was affirmed unanimously by the court of errors and appeals in 85 N. J. Eq. 206.

There are numerous other cases in this state to the same effect which are unnecessary to cite, as the principle is quite clear. The only question is the application of the principle to the present case, and, as I see it, the conduct of the complainants has no relation to their rights as stockholders. They are not claiming relief with respect to the things condemned ; they are simply asserting that the company is mismanaged, and praying for an injunction and receiver, and this right they may assert, notwithstanding the above misconduct, the same as any other stockholder. My opinion, therefore, is that the doctrine of unclean hands is not applicable in the present case, and a decree will be advised accordingly.


author: Griffin V. C.

text:
    Alice R. Taft, executrix, &c., of Margaretha E. Krech, deceased, complainant, v. Mary Bely and Paul Bely, defendants.
    [Submitted and decided January 8th, 1924.]
    1. Where a woman, Mrs. K., executed a deed, and the grantees executed a bond and mortgage to Mrs. K. for $10,000, the entire consideration, which deed, bond and mortgage were drawn by the grantees’ attorney, who retained possession of the three instruments, immediately recording the deed, but retaining the bond and mortgage in ■his possession, and the mortgage has never been recorded.
    2. That two months after their execution Mrs. K. took them to show to a friend, and shortly thereafter returned the same to the mortgagors, who retained them until shortly before the death of Mrs. IÍ., when they delivered the same to their attorney, who retained the same until the trial, when they were produced sub duces tecum.

    3. That after the death of Mrs. K. the defendants heard of her death and the probate of the will, but never called the attention of the executor to or tendered the bond and mortgage to her.

      1. That the defendants sought to borrow from a building and loan association, which loan was refused because of an outstanding estate by the curtesy.
    5. The defendants knew the facts which in law created the estate by the curtesy, but neither they nor Mrs. K. knew that in law such estate was outstanding.
    (i. When complainant filed her bill, praying, among other things, that the deed be deeiared null and void, defendants filed a counterclaim asking an abatement of the purchase price, by reason of this outstanding estate.
    7. The transaction having assumed such form as put it in the defendants’ power to strip Mrs. K. of her property without compensation, demanded that she should be properly advised, and, not having such protection or advice, stamps the transaction as unconscionable and a constructive fraud. Held, that defendants should reconvey and the counter-claim be dismissed.
    On bill, &c.

      Messrs Benny & Graden, for the complainant.

      Mr. Eugene T. Sharkey, for the defendant?.
   Griffin V. C.

This ease presents a most unusual situation. Mrs. Krech, in her lifetime, being the owner of the premises in question, subject to an estate by the curtesy in Clement Sees, surviving husband of Mary Sees, deceased, a daughter of Mrs. Krecli, met the defendants at their residence in the city of Bayonne, on May 9th, 1921, and without a contract, executed a deed, in which the consideration named was “one dollar and other valuable considerations.” There was also executed to her by the defendants a bond and mortgage, in the sum of $10,000, payable November 9th, 1921. Not one dollar of consideration was otherwise paid. It seems that at the time the deed was signed the defendants were not in funds to pay the purchase price, and they thereafter applied to a building and loan association for a mortgage of $7,000 on the property. It was then discovered that this estate by the curtesy was outstanding. When these instruments were made Mrs. Krech was not represented by counsel. Mr. Kyan, of the New Jersey bar, represented the defendants, and attended to the drawing of the deed, bond and mortgage. Mr. Ryan recorded the deed on the date of its execution, and retained the bond and mortgage in his possession for about two- months, wlien he handed tire same to Mrs. Ivrech at her request. He says that she asked for the bond and mortgage in order to submit them to a friend in New York, and that afterwards she told him that this friend said that she still owned the place. Mrs. Krech returned the bond and mortgage to Mrs. Bely about two months before the death of Mrs. Krech (which occurred on October 31st, 1921), and Mrs. Bely then delivered them to Mr. Ryan .who held the same until the trial of this case, when the defendants produced them in court in answer to a subpoena duces iecum. During all the time, after the recording of the deed down to the present time, this mortgage has not been recorded. In such a situation Mrs. Krech was absolutely unprotected. The defendants might have sold to an innocent purchaser, mortgaged the premises, or other encumbrances might have been placed on the property by the defendants.

After the death of Mrs. Krech and the probate of her will, the defendants and their counsel knew that the complainant was the executrix under the will of Mrs. Krech, yet they never disclosed to her the existence of the bond and mortgage' until they put in their answer in this suit; and she never saw the bond and 'mortgage until they produced them in court at the hearing. What their purpose was in all this is difficult to comprehend; nor does the uncertain and conflicting testimony of the defendants afford any aid in its ascertainment. Mrs. Krech is dead, and therefore cannot cast any light on the transaction. The executrix knew nothing about it, and therefore the only evidence in the case is that of the defendants and their solicitor*, Mr.. Ryan. ' The court is, therefore, at a loss to definitely determine the nature of the transaction. The most natural inference to draw is that both deed and bond and mortgage were to be left in escrow until the title was passed, which would result in the consideration being paid in cash: But why this? The simple and ordinary method' would have been to prepare a contract fixing the terms. No sane person in the exercise of ordinary common sense, would give a deed of property and allow it to be recorded, without paymeut of a dollar on account, and accept back a bond and mortgage for the whole purchase price and keep the mortgage off record.

Another view that might be taken is that the execution of the deed and bond and mortgage was intended to take the form of a' contract. Yet this view cannot be adopted with any degree of certainty. But this fact is reasonably certain—■ that Mrs. Ivrech did not comprehend the nature of her acts and the risks she ran, and they were not explained to her. To uphold a situation thus created seems to me to be unconscionable.

Another thought occurs: Why did the mortgagors and their counsel retain the bond and mortgage ? What was the intent of the parties when Mrs. Ivrech returned them to Mrs. Bely and she retained them? Mrs. Ivrech, apparently, did not know that the deed was recorded. Did the parties then and there consider the whole thing at an end ? The only testimony in the case upon the subject comes from the lips of interested witnesses who speak with the knowledge that, death having sealed the lips of the only other person who could be a witness to the transaction, they could speak without fear of contradiction. Mrs. Bely says that when the bond and mortgage were returned to her, her husband placed them in the safe, and she says that two or three days before the old lady died she handed the papers to Mr. Byan, “because we were ready to settle it with the old lady, so I wanted all the papers included together.” She said, further, that they had $3,000 in cash, and that Mr. Cruden had $7,000 in hand—that he had the check for $7,000 from the building loan. This, of course, is untrue, because the application for the loan fell through because of the discovery of the estate by the curtesy.

All of these difficulties could have been obviated had the transaction been carried out in the ordinary form. If it had assumed the form of a contract, fair in all of its parts, there would be no difficulty, even though Mrs. Ivrech did not have the advice of counsel. But when it assumed a form which put it into tlie power of the defendants to strip this old lady of her property without the slightest compensation, it, to my mind, was clearly a transaction which demanded that she be properly advised, and its seems to me that the failure to be so advised stamps the transaction as not only unconscionable, but, at least, a constructive fraud upon the rights of Mrs. Ivrech.

But it may be that friendship between the parties accounted for her trusting the Belys. Mr. Bely was acquainted with Mrs. Krech and knew Mr. Sees, and probably she trusted the Belys to see that the transaction assumed the proper form.

The complainant prays that the deed may be declared null and void, or, in the alternative, that the $10,000 purchase price be declared a lien on the lands. The prayer in the alternative of course cannot be allowed because of this outstanding estate by the curtesy.

The defendants, in their counter-claim, pray, in substance, that they be allowed an abatement in the purchase price between the value of a fee-simple and a fee subject to the estate by the curtesy. Here, again, if Mrs. Krech had had the benefit of advice of counsel, she would have known before she signed a contract, the nature of her holding. The tenant in curtesy was not in possession—Mrs. Krech was. If her counsel discovered that there was such an estate outstanding, the contract either would not have been entered into, or some adjustment would have been made touching the estate by the curtesy.

I am satisfied that the Belys knew of the facts which in law, created the estate by the curtesjq but that neither they nor Mrs. Ivrech were aware that, in law, there was an outstanding estate by the curtesy.

I will advise a decree that the counter-claim be dismissed, and that the defendants convey the premises to the complainant, upon the payment of such moneys as may be found due to them upon an accounting.


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    Union Trust and Hudson County National Bank, complainant, v. Elizabeth Gibson Kyle and William McCue Kyle, defendants.
    [Submitted February 14th, 1924.
    Decided March 10th, 1924.]
    1. Where a man deposited a hand bag said to contain silverware with a trust company for storage, at a stipulated rate per month, and the company issued its receipt therefor, and, subsequently, the wife of the depositor claimed the bag and its contents, and the company made delivery of it to her without her surrendering the receipt, and the depositor afterwards commenced suit against the company because of hi« deposit and the refusal to deliver to him the bag and contents on demand, and tender of the receipt, and the handbag and contents were afterwards returned to the company by the wife, who filed with the company a claim of .ownership thereto, except six tablespoons and six teaspoons, which she admits belong to tlie depositor, on bill of interpleader filed by the company—Eelcl, that the company was clearly in the wrong and is not entitled to ask that the defendants interplead.
    2. In a proceeding in rem it is not fatal to the jurisdiction of this court that one of the defendants was a non-resident and was brought into court by publication.
    3. Sections S, 9, 10, 17 and 18 of the Warehousemen’s act (Comp. Cl at. pi). 5778, 5780) construed.
    On bill, &c. On order to show canse.

      Messrs. McDermott, Enright & Carpenter, for the complainant.

      Mr. Theodore Rurode, for the defendants.
   Griffin, V. C.

The. complainant filed its hill of interpleader against the defendants, husband and wife, under the following circumstances: On April 18th, 1916, the husband, William, deposited1 with the Union Trust Company, for storage, a handbag, said to contain silverware valued at $500. The contents were not exhibited to the company. The deposit was accepted at the rate of twenty-five cents per month, and a receipt was given, a copy of which is annexed to the bill. The bill alleges that, subsequently (without stating the date), Elizabeth, the wife of William, and known by the trust company to be such, called on the safe deposit department of the company and claimed the handbag and contents so deposited, ana represented that it contained silverware which belonged to her, and complainant made delivery to her without her surrendering the receipt.

The bill also alleges that William commenced a suit on June 12th, 1922, against the trust company in an action on contract for $500, because of the deposit and the refusal to deliver the said bag and contents on demand, and tender of receipt. The bill also states that Elizabeth has returned the handbag and contents to the complainant (without stating when) with a claim of property.

After setting forth that it is unable to determine to wnwa the property belongs, it says that the said Elizabeth claims said bag contains certain pieces of silver which are her property, admitting, however, that six teaspoons and six tablespoons are the property of William.

The bill was filed April 12th, 1923.

On filing the bill, an order to show cause, with restraint, was issued.

On the argument, the first point made by the complainant is that it is protected by. sections 17 and 18 of the Ware-housemen’s act, and has properly filed its bill. I think, however, the right is controlled by sections S, 9 and 10 of the Warehousemen’s act. Comp. Stat. p. 5778.

In this case a receipt was given to William, and, upon his tendering the receipt and payment of the necessary charges, the warehouseman (complainant) was unable to deliver or refused to deliver the satchel. It does not .appear from the bill that at that time there was any claim asserted against the property other than that of William. It appears that after the deposit the wife of William called on the complainant and claimed the handbag and contents, representing that the same contained articles of silverware which belonged to her; and complainant thereupon delivered the same to her, knowing her to be the wife of the said William. The bill conceals the date when the delivery was made. It says that suit was begun on June 12th, 1922, by William against the complainant, and, later, says that Elizabeth has returned said handbag and contents, and has filed with the complainant a claim of ownership of said handbag and contents. The bill also conceals the date when the said Elizabeth returned the said handbag and contents; and sets forth that Elizabeth claims all of the contents of said handbag, excepting six teaspoons and six tablespoons, which she admits are the property of William, and expresses a willingness to deliver the same to William.

The whole bill is drafted in a manner which does not place before the court the pertinent facts and circumstances which were within the knowledge of the complainant.

The defendant William, in his affidavit, says that shortly prior to June 12th, 1922, he presented the receipt to the complainant for the purpose of obtaining the satchel and contents, and was informed by an employe of the Union Trust Company that the satchel and its contents were no longer in its possession, the same having been delivered by it to Elizabeth G-ibson Kyle. Just when this delivery was made it did not inform him, although it must have been made prior to October, 1919, because since that time Elizabeth has been away from Jersey City.

In the face of this affidavit there is no denial of its contents, nor is there any additional affidavit explaining, when the satchel was delivered to Elizabeth, when she returned it, and when she made her claim of property. It is therefore plain that when the demand for possession was made by William upon the complainant it did not have in its possession the satchel and contents, nor did it deliver the same upon the surrender of the receipt; nor does it appear that. at that time, any claim of property was asserted by anyone else; and the first time when this claim was asserted was when Elizabeth returned the satchel, which date is not mentioned in the bill.

I take it, therefore, that if the complainant had in its possession the satchel and its contents at the time that William demanded its possession and tendered the receipt, the complainant would have made the delivery, or, at least, would have had absolutely no justification for refusing. It was, therefore, its own wrongful act in making the delivery to the wife that necessitated the filing of this bill almost a year after suit was brought.

I think that sections 8, 9 and 10 aforesaid, control and justify the court in refusing to permit the bill to be filed under sections 17 and 18. Here, not only was the delivery unlawfully made, but the person to whom the goods were delivered does not claim a part of the contents of said bag, and, as to that, clearly the complainant is a wrong-doer and cannot maintain its bill. But, on the whole case, by making delivery without the receipt, in accordance with the act, in my judgment the complainant was a wrong-doer. Mt. Holly, &c., Turnpike Co. v. Ferree, 17 N. J. Eq. 117, 122, and cases cited. See, also; Rauch v. Ft. Dearborn National Bank of Chicago, 79 N E. Rep. 273.

Counsel for the defendant William refers to National Bank of New Jersey v. White, 93 N. J. Eq. 109, to support the doctrine that this court has no jurisdiction on the ground that it can make no decree which will bind Elizabeth, because she is a non-resident. I think in this he is in error, because this is a proceeding in rem and not in personam.

I will advise an order that the order to show' cause be discharged.


text:
    Frederick J. Verney et al., defendants, v. Annie Dodd et al., complainants.
    [Submitted May 31st, 1924.
    Decided July 7th, 1924.]
    1. Evidence held to show contract for sale of land was executed in triplicate.
    2. Assuming that a contract for sale of land lacked mutuality, in that defendant purchaser could not enforce it against vendor’s wife, mutuality was created when the vendor and his wife subsequently executed a full warranty deed, and vendor’s wife came in as party complainant in the bill for specific performance.
    3. Where defendant alleges that a contract for sale of land and bond and mortgage representing part of purchase price were to remain in escrow until an additional ten-foot strip of land could be procured by the vendor for the purchaser, assuming this allegation to be true, her refusal to take the strip justified the delivery of the contract, bond and mortgage to the vendor.
    On bill, Sc.

      Iiiessrs. Ziegener & Lane, for the complainants.

      Mr. Douglass D. T. Story and Mr. Louis G. Morlen, for the defendants.
   Griffin, V. C.

The complainant Frederick J. Verney filed his bill to compel the specific performance of a contract entered into with the defendant Annie Dodd for the sale of certain lands in Jersey City. This land was owned by Frederick J. Verney and Irma A. Verne]’, husband and wife. The sale was negotiated by the Stoeckel Realty Corporation as agents for Verney, on the 15th of April, 1921, for the sum of $14,500, payable one dollar on the execution of the agreement, and by the assignment of a mortgage of $3,000, and, on the delivery of the deed, cash $1,999, and the assumption of the mortgages then on the property amounting to $9,500. Mr. Stoeckel, the president of the corporation, drew the contract embodying the above terms of payment (which provided for a full covenant, warranty deed, free and clear of encumbrances, excepting the mortgages.), and signed the same in the name of the corporation as agent for Frederick J. Yerney. This agreement was prepared on the day of its date, 'and Mr. Stoeckel says the agreement was drawn in triplicate, and he signed one and left it with defendant, and the defendant signed three; that he informed her that he would take the other copies to Mr. Yerney to sign, and, within a few days thereafter, he did go to the Yerneys and had the contracts signed by Yerney and his wife, although the contract, in its terms, ran between Frederick J. Yerney alone and the defendant. Stoeckel saj^s that after it was signed by Yerney and wife he mailed the original to Mrs. Dodd, expecting her to return her copy to him for his files. Mrs. Dodd says she never received the copy of the contract, signed by the Yerneys, and she never returned her copy to Stoeckel. In her original answer she says that she signed the contract in triplicate; in her amended answer she says that she signed in duplicate. It is a significant fact, however, that the two copies produced in court are carbon copies, and the original was not produced. I -am satisfied that this contract was signed in triplicate.

At the time of the signing of the contract the defendant paid to Stoeckel one dollar, and assigned the $3,000 mortgage, leaving to be paid $1,999 in cash and the assumption of the mortgages, aggregating $9,500, as the balance of the purchase price. Within a few days after the making of the contract the defendant entered into- possession and continued therein until December of 1922, a period of about a year and eight months.

A claim is made that the complainant Yerney could not file the bill because his vafe was not a party to the suit, and thus would not he hound by the decree. By an amendment to the bill, filed May 26th, 1924, Mrs. Yerney was brought in as a co-complainant, and alleges therein that she has always been and is now ready and willing to carry out the agreement and execute the deed, &c.

The hill charges that, on the execution of the contract, the defendant went into possession of the lands and has enjoyed the benefits and emoluments therefrom, with the exception of about two months’ rental of the top floor, which was collected by the complainants or their agent. The possession of the lower floor is admitted by the answer, in which the defendant says that the agent said, as an additional inducement, that she could go into immediate possession of the lower floor of said premises until such time as title was to be passed, rent free, the rent from the top floor to be retained by the owner of the premises; and that, in case the agent could not secure the ten-foot strip hereinafter referred to, the said contracts were to be canceled, and the defendant was to surrender possession of the lower floor unless she could make arrangements with the owner thereof to remain therein thereafter.

Defendant, in both answers, sets forth the understanding of the parties to have been that the defendant signed the contract and assigned the bond and mortgage with the distinct understanding that the contract and bond and mortgage should not be considered delivered until Mr. Stoeekel could procure a deed for the ten-foot strip adjoining (which will be dealt with hereafter). Thus it will appear that, according to defendant’s version, upon' procuring the ten-foot strip, the contract in question was to be carried into effect.

The title was not passed on the 13th day of May, the date fixed for the pnxpose. The failure to close on that day was not the fault of the complainants. Afterwards, on July 5th, 1921, Frederick J. Verney and Irma A. Verney, his wife, made their full covenant warranty deed to the defendant in accordance with the terms of the agreement. Frederick, with his counsel and Mr. Stoeekel, thereafter called on the defendant to make arrangements for closing the title, and they say an arrangement was made to pass the title the next day, and the defendant was to have her counsel in attendance. The defendant, however, while admitting the meeting and tender of the deed, says that she made no such appointment for the purpose above stated, but stated that she would have to see her counsel, Mr. Colgan, who1 was then out of town. Matters drifted until the 28th of October, 1921, when her attorney, Mr. Story, wrote a letter to the Stoeckel corporation, which, in effect, gave notice of a rescission of the contract. Notwithstanding this letter, she continued in possession of the premises for upwards of a year, namely, from October, 1921, until December, 1922, during which time she paid rent from June, 1922, to November, 1922, under an order of the court; and I find that, until the letter of Mr. Story was written in October, 1921, she regarded the contract as valid and subsisting.

Laying out of consideration at present this collateral agreement, defendant asserts that the contract, as drawn, was not enforcible by the defendant against the complainants on two grounds, namely, that Mrs. Yerney’s name was not in the body of the contract, and it was therefore not her contract, although signed by her; and second, that she did not acknowledge it, and, considering the character of the estate, a suit by Mrs. Dodd against Frederick J. Yemey wpuld avail her little, because Frederick might not survive his wife; thus the contract lacked mutuality.

Assuming that at the time the contract was signed it lacked mutuality, in that the defendant could not enforce the contract against Mrs. Yemey, yet, when the complainants, husband and wife, executed a'full covenant warranty deed on July 5th, 1921, which satisfied the terms of the contract, and were thus prepared to completely perform the same, which performance was refused by the defendant, and when Mrs. Yerney came in as a party complainant in the cause, asking for specific performance, mutuality of contract was then created from which Mrs. Yerney could not withdraw, and she was bound thereby.

In the ease of Rittenhouse v. Swiecicki, 94. N. J. Eq. 36, an application was made to open a default decree. Yice-Chancellor Learning, finding that the defendants were not guilty of negligence, said: “The decree entered against the defendants should be opened and defendants should be permitted to defend if a meritorious defense is disclosed.” He then considered the defense, and said: “But the evidence discloses that the complainants have at all times, not only desired to convey to defendants, but have now acknowledged the contract of sale, and have also executed and acknowledged a deed of conveyance to defendants which they tender. Assuming that there may not have been mutuality of remedy in the first instance, such mutuality clearly exists at this time. Will this court open the decree to permit defendants to file an answer which will avail them nothing? Can the defense be said to be a defense going to the merits of the case when the defense which is now sought to be made cannot be successfully made?” In that case the defense attempted to be set up was that the agreement of sale which was signed by the complainants was not acknowledged, and the title to the land to be conveyed was in the complainant Clara Rittenhouse, wife of the co-complainant. This case, it seems to me, is identical with the one under consideration.

In Gerba v. Metruske, 84 N. J. Eq. 141, Chief-Justice Gummere, speaking for the court of errors and appeals, said: “The prevailing rule with relation to cases of this kind is that where time of performance is not of the essence of the contract the complainant is entitled to a decree if a clear title can be given by him at the time of the making thereof.” Richards v. Green, 23 N. J. Eq. 536; Woodruff v. Woodruff, 44 N. J. Eq. 349, 355; TenEyck v. Manning, 52 N. J. Eq. 47; Oakey v. Cook, 41 N. J. Eq. 350, 364; Moore v. Galupo, 65 N. J. Eq. 194; Agens v. Koch, 74 N. J. Eq. 528.

Here time was not only not of the essence of the contract, but the complainants were always ready and willing to pass the. title, and I am satisfied that the refusal to perform by the defendant was not in any manner due to the alleged defect in the contract.

Another point made by the defendant, outside of the terms of the written contract, which aims at the destruction of the contract, is that it was induced by fraud and misrepresentation, consisting in this—a day or two before the contract was signed Mr. Stoeckel, with the defendant and Mr. and Mrs. Anderson, viewed the premises at night. After examining the house on the inside with a flashlight they walked outside on the lawn in front, and Mrs. Dodd stepped on what was said to be a rhubarb patch, and Mr. Stoeekel said that belonged to the adjoining owner. The defendant says that she then remarked that she would not buy the property where a building might be erected on the lot adjoining right up to the house on the premises in question. Mr. Stoeekel said, "Why, you can buy a ten-foot strip on the side here for $100 a foot front, or $1,000.” There is some difference- in the testimony of Mr. Stoeekel and the others as to the precise language used, and the time, but, in the main, both parties agree that Mr. Stoeekel said he could procure this strip for the defendant for a thousand dollars. Whether this was such an agreement as would tend to void the contract in toio if the strip were not procured is. immaterial in this case. The plain facts are that a Mr. Lynch, who was the owner of the property on the corner bounded by Ocean avenue and Wegman parkway, was willing to- sell the strip for a thousand dollars and so. informed Mr. Stoeekel, and he held up the sale of his property for four or five weeks in order to- soil the ten-foot strip to the defendant. Mr. Stoeekel took up the matter with Mrs. Dodd, and she said she did not have the funds to purchase it. Stoeekel then agreed to- let her make the mortgage $15,500, or he would procure for her the addition thousand dollars. It is plain from; the whole testimony that this matter was thoroughly threshed out between Mr. Stoeekel and Mrs. Dodd, and that she declined to advance or aid in procuring the necessary funds for the purpose. Therefore, even accepting the defendant’s own version of the agreement, namely, that the contract, bond and mortgage- should remain in escrow until the ten-foot strip was procured, she must fail, because prior to. the date set for the passing of title the ten-foot strip could have been procured if the defendant desired it, and her virtual refusal to take the ten-foot strip then justified the delivery of the contract, bond and mortgage.

A decree- will be advised for the complainant, and the counter-claim filed by defendant against Stoeekel will be dismissed.