text:
    Thomas J. Arnold et al. v. Frederick F. Searing et al.
    [Submitted October 1st, 1910.
    Decided December 15th, 1910.]
    1. Persons who originated and executed a plan to transform the securities of one company into the stock and bonds of a new corporation formed by them involving a nearly complete change of the personnel of owners, and the organization of a syndicate to execute the plan, were promoters of t]je new company, as affecting their liability to stockholders thereof on account of undisclosed profits.
    2. A corporate promoter occupies a fiduciary relation to the company, 'though he is not, strictly speaking, its agent or trustee before incorporation.
    3. A corporation’s promoters are accountable to it for moneys secretly obtained by them from it.
    4. Corporate promoters must provide an independent and impartial board of directors.
    5. Corporate promoters were bound to' disclose to prospective shareholders any profit they were to make out of the transaction.
    6. “Secret profits,” which promoters are prohibited to make, are such profits as are made without disclosure to the real parties in interest, and obtaining their express or implied consent.
    7. A corporation cannot be held to have consented to profits derived by its promoters, where the promoters dominated the board of directors.
    8. Subscribers to a syndicate organized by promoters of a corporation to take over the stock of another corporation became, with the promoters, eguitable stockholders in the new corporation, and as such were entitled to be informed by the promoters of all details of the operation and of the amount of profit which they were making.

      9. Subscribers to a syndicate organized by promoters of a corporation to take over the stock of another corporation were not chargeable with notice that the promoters would derive twenty per cent, of a bond issue and sixty per cent, of the stock issue as compensation for their service, because a circular issued made it possible to deduce the fact that on satisfying the syndicate subscribers that amount of bonds and stock would remain.
    10. A bill lies by stockholders and the receivers of an insolvent corporation against its promoters, and the corporation to recover, in its name, secret profits made by the promoters.
    11. Promoters of a corporation held for secret profits made, should not be charged with stock profits where the subscribers considered the stock as without actual value and it was a bonus in which all the stockholders participated.
    12. Stockholders and receivers of a corporation, no creditors appearing, are estopped from asserting invalidity of stock issued to all subscribers as a bonus.
    13. Active promoters of a corporation organized to take over another corporation are jointly and severally liable for secret profits made by the promoters, consisting of bonds of the corporation, but one who was made a participant in the profits principally to reimburse him for extra effort by him as president of a trust company involved in the organization plan, is liable only for the profit received by him.
    14. A corporate promoter held for secret profits made in stock and bonds of the corporation is not entitled to credit for stock and bonds voluntarily surrendered to -save the corporation from insolvency; the securities not appearing to have been received otherwise than as a gift.
    On final bearing. On bill, answer, replication and proofs.
    The bill in this case is filed by stockholders of the Passaic Steel Company against Fairchild, Searing and Bell, who, it is claimed, were the promoters of that company, to recover in its name moneys which, it is alleged, were secret and undisclosed profits made by the defendants in the process of promoting the corporation. The facts are as follows:
    The Passaic Rolling Mill Company was organized in 1869 with a share capital of $200,000. It became the owner of a large plant at Paterson, and for many years conducted its business profitably. Some time in the early part of 1902 the stockholders gave to one Samuels options for the purchase of their holdings of the company’s stock, which options expired on June 23d of that year without having been exercised or accepted. By instruments dated June 26th and 27th, 1902, options were again given, by the stockholders to Albert C. Fairchild for all the stock of the company with the exception of a few shares which belonged to an estate of which he, Fairchild, was one of the executors, and his own stock; options for these blocks of stock were taken in the name of the defendant Searing. By the option agreements it was provided that the stockholders would sell their shares of stock in the rolling mill company at $750 per share, although some of the stockholders gave options at $700 per-share; the stock was to be deposited with the Citizens Trust Company on or before July 1st, 1902, properly endorsed for transfer, with directions to the trust company to deliver to Fair-child such certificates of stock upon payment therefor in cash. Fairchild agreed tó deposit with the trust company five dollars a share for each and eveiy share of the capital stock of the rolling mill company, the same to be paid to the shareholders when its entire capital stock should be deposited with the trust company under the option agreements, as part of the purchase price of' the shares, and to be forfeited by Fairchild upon his failure to pay to the shareholders the balance of the purchase price on or-before November 1st, 1902. There was also a provision for the extension of the time of performance for' a period of two months from' November 1st, 1902, upon payment by Fairchild of an additional sum of five dollars per share, such sums to be likewise forfeited upon failure .to pay to the shareholders the balance of the purchase price as therein set forth. Mr. Fairchild was formerly connected with the rolling mill company as a director and one of its employes. He states that he procured the options for the rolling mill company stock at the instance of one James D. Lazelle but for the Transit Finance Company, with which Lazelle was connected, and that although the options-were taken in his name he had at that time no interest in them, but that they were taken by him solely for the account of the-Transit Finance Company. The defendant Searing was inter-' ested in the project at that time because not only were at least two of the options taken in his name, but also on the day on which the earliest of the options was dated, namely, June 26th, 1902, an agreement was entered into between the Transit Finance-Company and Mr. Searing, by which it was recited that whereas. the finance company had acquired or was about to acquire the ownership of options on all the stock of the rolling mill company, and had formed or was about to form a corporation to be known as the Passaic Steel Company, with a capital of $5,-000,000 and an authorized issue of bonds of $2,500,000, which company, when organized, would purchase all the shares of stock of the rolling mill company and pay for the same by the issuance •and delivery to the finance company of all its capital stock and the total amount of its authorized issue of bonds, and that Searing had assisted in the procuring of those options, and was desirous of aiding the finance company in the organization of the new company and in the sale and disposal of a part of the said securities of the new company when issued, and that the finance •company proposed to dispose of $2,000,000 face value of the bonds at not less than ninety-five per cent, of their par value, with an equal amount of stock as bonus, it was agreed between the finance company and Searing, first, that Searing would assist the finance company in the organization of the steel company and in the purchase by it of the property and plant of the rolling mill company, by the acquisition of all the shares of the rolling mill company by the steel company, and in the sale by it of $2,000,000 face value of the steel company’s bonds, when issued, and by purchasing the whole or part of said bonds or causing the same to be purchased or marketed. In consideration of this assistance the finance company agreed to allow.or pay to Searing for his services rendered and to be rendered one-half of the profits realized by the finance company, whether the same should be in cash or in the stock of the steel company, which profit should be ascertained by deducting from the proceeds of the sale of $2,000,000 of bonds at ninety-five per cent, the amounts paid by the finance company on its options to purchase the stock of the rolling mill company, which amount was estimated to be no't less than $1,439,750, besides commissions allowed or payable, and any and all expenses and disbursements incurred in the purchase of the stock of the rolling mill company and the sale of the securities of the steel company. It thus appears that on June 26th, 1902, the plan of transforming the securities of the rolling mill company had been formulated, and the division of the anticipated profits provided for between the transit company and Searing, who, so far as the papers in the case show, were the only parties interested in the project up to that time.
    On July 10th, 1902, an agreement in writing was made between the three defendants, Searing, Fairchild and Bell, the recitals in which throw great light upon the transaction. It was recited that the three defendants were then engaged in'the formation of a syndicate for the purpose of acquiring the plant and business of the rolling mill company, which syndicate was'to be known as the Passaic Steel Syndicate, and was to be divided into two hundred shares of $9,500 dollars each; that it was contemplated that the cash profit arising from the formation of the syndicate would amount to the sum of $400,000 or thereabouts, and that the stock profit would amount to $3,000,000 face value of the capital stock of the new company; that by previous agreement this cash and stock profit was to be equally divided between the finance company and Searing; that Searing desired to share the profits that he might receive with Fairchild, Bell and Lazelle; it was agreed that if the entire two hundred shares of the syndicate should be sold, Searing should distribute the profits that he might receive as follows:
    (1) That he should pay and deliver to Lazelle $25,000 from the cash profits, and $100,000 face value of the stock profits.
    (2) That he should pay and deliver to the defendant Bell one-quarter of the cash and stock profits which might remain.
    (3) That one-half of the remainder should be paid to Fair-child; and
    (4) That Searing should retain what was left.
    It appears that this agreement was destroyed and an oral agreement substituted, having the same terms as the original agreement except that by the oral agreement Bell was to get one-third of the total profits after the payment to Lazelle, instead of one-quarter thereof.
    On July 15th, 1902, the finance company made an agreement with the Citizens Trust Company, which recited that Searing and Fairchild had acquired the ownership of options to purchase all the shares of the rolling mill company, and that they, in conjunction with the finance company and certain other persons, were about to form a corporation to be known as the Passaic Steel Company, with a capital stock of $5,000,000 and an authorized issue of bonds of $2,500,000, $2,000,000 of which bonds were to be exchanged in partial payment for the capital stock of the rolling mill company, and $500,000 of said bonds to bé reserved for improvements; said company, when organized, to purchase all the shares of the rolling mill company by exchanging its capital stock for the capital stock of the Passaic Rolling Mill Company on the basis thereinafter mentioned, and that in order to dispose of the bonds it was proposed to form a syndicate to be known as the Passaic Steel Syndicate, of which the trust company should be the sole manager; said syndicate to be divided into two hundred shares of $10,000 each, the holder of each syndicate share to be entitled to receive, when issued, upon the payment of $9,500 in cash, $10,000 in first mortgage five per cent, bonds of the Passaic Steel Company, and one hundred shares of the capital stock thereof as a bonus, and that the present stockholders of the rolling mill company had deposited their entire holdings with the said trust company in accordance with their options, and that Fairchild and Searing were bound to pay to the rolling mill company’s stockholders $1,439,750 in cash on or before November 1st, 1902, unless the time for the payment should be extended, and that the finance company had paid to the trust company the sum of $10,000, which sum had been paid by the trust company to the stockholders of the rolling mill company as part payment on the options, and that it was proposed to pay the said sum of $1,439,750 to the present stockholders of the rolling mill company from the proceeds of the sale of the syndicate shares of the steel syndicate; it was agreed:
    (1) That the trust company should be the sole recipient and custodian of the money derived from the sale of the shares of the syndicate.
    (2) That the shares of the syndicate should only be offered for sale through the trust company and the finance company.
    (3) That the trust company should pay to the stockholders of the rolling mill company, from the proceeds of the sale of the syndicate, the sum of $1,439,750, taking in exchange therefor the entire capital stock of the rolling mill company.

      (4) That after the payment thereof the entire capital stock of the rolling mill company should be transferred to the trust company, excepting that one share should be transferred to Fair-child, one to Searing and one to Bell, who should be elected directors of the rolling mill company.
    It was further provided that these parties when so elected directors of the rolling mill company should proceed to organize the steel company, with its capital stock as above agreed; and that then the two companies should be merged into one corporation, to be known as the Passaic Steel Company; the new company should immediately authorize the execution of the bonds, with the mortgage to secure the same, and that the trust company should divide the stock of the steel company as follows: twenty thousand shares to the members of the syndicate, fourteen thousand nine hundred and twenty-five shares to the Transit Finance Company, and fourteen thousand nine hundred and twenty-five shares to Searing, in part compensation for their services in the transaction. It was likewise provided that the trust company should receive a commission, not to exceed $19,-000, for its services, and that it should return to the finance company the sum of $10,000 which that company had advanced to the stockholders of the rolling mill company, and after satisfying the legal expenses of the transaction should pay one-half of whatever sum might remain to the finance company, and the remaining half to Searing, as additional compensation for their services in assisting to place the shares of the syndicate.
    These agreements embody a specific and distinct plan for the transfer of the property and assets of the rolling mill company to the steel company, and a complete change of ownership of the shares therein. The profit thereon, in case the enterprise should succeed, was thus ascertained, and each man’s interest therein provided fox long before anyone was obligated to the extent of a dollar, excepting the agreement of the finance company to pay five dollars on each share of the rolling mill stock as a portion of the purchase price thereof. The parties who were interested in the profits of the transaction were the finance company, Lazelle, Fairchild, Searing and Bell.
    On August 2d, 1902, the steel syndicate prospectus was dated and issued. This was an invitation to the public to subscribe to the syndicate shares at ninety-five per cent, of their pax value. .Appended to it is an agreement dated August 2d, 1902, between the trust company, manager of the syndicate, of the one part, and the subscribers thereto, of the other part, which recited that the trust company itself, and in connection with other parties, for whoin.it acts as agent, had secured the right to the control of $2,000,000 of first mortgage five per cent, bonds, and $2,000,-000 of the capital stock of a company about to be formed, to be known as the Passaic Steel Company, to be capitalized as stated in the plan annexed; and that the parties desired to form a ■syndicate to purchase the said securities; it was agreed that .the syndicate should be divided into two hundred shares of $9,500 each, each sjmdicate share to entitle the holder thereof, on payment of $9,500 in cash to the manager, to receive, when issued, $10,000 face value of the first mortgage five per cent, bonds of the Passaic Steel Company, and one hundred shares of its capital stock. The subscribers covenanted to take the number of shares so subscribed for by them respectively, they paying ten per cent, down and agreeing to pay the remainder upon ten days’ call. The agreement contains a provision for the relief of the syndicate in case any subscriber should fail to perform his undertakings, reserving the right to reject or reduce the subscriptions and to cancel any or all in case they should for any reason decide to abandon the enterprise.
    It does not appear at what particular time sufficient subscriptions were obtained to justify the parties interested in proceeds ing with the enterprise, but on September 16th, 1902, the defendants Searing, Fairchild and Bell signed a certificate, under the General Corporation law, for the organization of the Passaic Steel Company. This certificate was recorded in the clerk’s ■office of the county of Passaic on the same day, and on September 18th, 1902, was filed with the secretary of state; it authorized the company to issue capital stock to the extent of $3,000, divided into thirty shares of the par value of $100 each, and each incorporator subscribed for ten shares. On October 9th, 1902, the same incorporators executed an amended certificate of incorporation, which was recorded in the office of the clerk of the county of Passaic on February 10th, 1903, and filed in the office of the secretary of state on February 16th, 1903; by it the total authorized capital stock was made $5,000,000, divided into fifty thousand shares of the par value of $100 each. The actual organization of the Passaic Steel Company took place on February 16th, 1903. At that time six directors were elected, consisting of the three defendants and George A. Lee,” Dudley Phelps and J. Barclay Cooke; a directors’ meeting was held on the same day, at which the defendant Fairchild was elected president, the defendant Searing vice-president, and J. Barclay Cooke secretary and treasurer.
    In the meantime, and early in November of 1902, the Citizens Trust Company, having in its possession properly endorsed for transfer all the certificates of stock of the rolling mill company, transferred qualification shares to the three defendants and Frederick W. Cooke and J. Barclay Cooke, all of whom were elected directors; the defendant Fairchild was elected president, and J. Barclay Cooke secretary, and thus the boards of directors of the two corporations remained until the execution of the merger agreement. Up to that time the directors of the two companies had not yet paid anything for their stock. The stockholders of the rolling mill company were the three defendants and Dudley Phelps, George A. Lee, J. Barclay Cooke, and the Citizens Trust Company as trustee for the syndicate subscribers; and the stockholders of the steel company were the three defendants and Dudley Phelps, George A. Lee and J. Barclay Cooke.
    The merger agreement, provided for in one of the preliminary contracts, was executed on February 16th, 1903; by its terms the two corporations were consolidated into a single corporation, under the name of the Passaic Steel Company. Its first board of directors consisted of the three defendants and George A. Lee, Dudley Phelps and J. Barclay Cooke. The merger agreement provided that the capital stock of the consolidated corporation should be $5,000,000, divided into fifty thousand shares of the par value of $100 each, and that these shares 'should be apportioned among and issued to the stockholders of the said merged ¡corporation, according to the shares held by the respective stockholders of the said two corporations, as the same appeared on their books respectively, that is to say, the stockholders of the Passaic Steel Company should retain the shares to which they were then entitled in the company, and the stockholders of the Passaic Rolling Mill Company should be entitled to forty-nine thousand nine hundred and seventy shares of the capital stock of the steel company, and that each of the Passaic rolling mill stockholders should also be entitled to $1,000 in first mortgage five per cent, bonds of the consolidated corporation for each share of the stock of the rolling mill company then held by him.
    The company then proceeded to issue its bonds to the amount of $2,500,000, and to execute a mortgage to the Citizens Trust Company upon all the consolidated corporation’s property to secure the payment of the same, and it was not until that time that there was or could have been any exchange of the securities; this exchange was made by the Citizens Trust Company; it gave to the syndicate subscribers their respective amounts of bonds, with an equal amount of stock as a bonus, and when the distribution was finished there remained about $400,000 in bonds and $3,000,000 in stock which was the profit on the transaction, and which went to the finance company, Lazelle and the three defendants, in the proportions which had been previously agreed upon.
    It must be said on behalf of the defendant Bell that he was more or less a passive member of the board of promoters. He was taken into the scheme principally on account of his standing as a financier and president of the trust company which was selected as the depository of the securities. He seems to have had nothing to do with obtaining the options for the rolling mill stock, and little, if anything, to do with procuring syndicate subscriptions, what he did being merely the duties that he would have been called upon to perform as president of the trust company if he had not belonged to the board of promoters. The active work was' done by Fairchild, Searing, Lazelle and the finance company.

      Messrs. Humphreys & Sumner and Mr. Robert H. McCarter, for the complainants.

      Mr. John W. Harding, for the defendants Fairchild and Searing.

      Mr. Francis Scott and Mr. Gilbert Collins, for the defendant Bell.

      Mr. Albert Comstock, for the Passaic Steel Company.

      Mr. William B. Gourley, for the receivers of the Passaic Steel Company.
   Howell, V. C.

In order to determine whether the defendants are or are not to be characterized as promoters, it is sufficient to carefully consider what they did in connection with the enterprise now under examination. They undertook to transform the securities of the rolling mill company from a stock issue to a stock and bond issue, to increase these securities from $200,000 to $1,500,000, without the addition of a dollar to the assets of the company, and to make a nearly complete change in the personnel of the real owners of the property. To effectuate this result they decided by agreement between 'themselves upon all of the details of the plan, and calculated the amount of profit which they would make out of the transaction, and ascertained and set down in writing each man’s share thereof long before they made any portion of the scheme public; they organized a sjmdicate which was to furnish all the funds necessary to carry out the scheme, the members of which were to be stockholders and bondholders of the new company, and practically made Mr. Bell sole manager by providing that the trust company, of which he was president, should be sole manager. They were the incorporators of the new company, which was provided for in their scheme, and they became the first stockholders and directors thereof, although they paid nothing for the stock which gave them control of its management, and they executed the amended certificate of incorporation to make the charter conform to the plan which they had settled upon weeks before. They caused themselves to be elected stockholders and directors of the rolling mill company, and as stockholders and directors oí the two companies they joined in the execution of the merger agreement which contained the final formulation of their plan. They, with the possible exception of Mr. Bell, busied themselves for a long period in procuring syndicate subscribers, and to some extent at least used their personal influence to procure subscriptions. By the fifth paragraph of the syndicate agreement they reserved to themselves the right to-abandon the whole enterprise if they saw fit. In short, they originated the plan and carried it out. Whatever was done was done by them with the aid of Lazelle and the finance company. Without the defendants the scheme would not have been conceived and could not have been carried through. These facts, in my opinion, put the defendants upon the footing of promoters of the. steel company and subjected them to all the liabilities and responsibilities which that important function casts upon them under the rules of law. Woodbury Heights Land Co. v. Loudenslager, 55 N. J. Eq. (10 Dick.) 78; affirmed, 58 N. J. Eq. (13 Dick.) 556; Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. (7 Dick.) 219; Dickerman v. Northern Trust Co., 176 U. S. 181; Pittsburgh Mining Co. v. Spooner, 74 Wis. 307.

It will be observed that a promoter, when he shall have been,, found to be such as a matter of fact, is a sort of self-constituted agency for bringing a company into existence, and this fact alone-would go far toward charging him as a fiduciary. He has in his-hands the creation and molding of the company; he has the poAver of defining how and when and in what shape and under what .supervision it shall start into existence and begin to act as a trading corporation. It is he Avho selects the directors,-to whom he gives such poAArer as he chooses; it is he who settles the regulations of the company, regulations under which the company, as soon as it comes into existence, may find itself bound to anything not in itself illegal, which the promoter may have chosen. This control of the promoter OArer the company, so plenary and absolute, involves a correlative responsibility, and out of this responsibility arises the doctrine now well settled of the fiduciary relation of the promoter toward the company he creates. This fiduciary relationship of the promoter is an extension of the doctrine of agency, a sort of agency by anticipation, for the promoter is not, strictly speaking, an agent of or trustee for the company before incorjioration, but it is a salutary and necessary fiction of equity for the protection of the company. In virtue of this fiduciary relationship the promoter is accountable to the company for all moneys secretly obtained by him from it. Secrecy is the gist of the wrong. The law does not say a promoter may not make a profit out of a company he promotes, provided he makes a full and fair disclosure to the company of what he is getting, and the company assents to it.

As promoters it was their duty to provide an independent and impartial board of directors (Plaquemines Tropical Fruit Co. v. Buck, 52 N. J. Eq. (7 Dick.) 219), and to disclose to the persons who were about to become shareholders what profit, if any, they were to make out of the transaction. It is universally held that promoters of a corporation have no right to make secret profits. See v. Heppenheimer, 69 N. J. Eq. (3 Robb.) 72; Groel v. United Electric Company of New Jersey, 70 N. J. Eq. (4 Robb.) 622; Bigelow v. Old Dominion Copper Co., 74 N. J. Eq. (4 Buch.) 496; Old Dominion Copper Co. v. Bigelow, 203 Mass. 159. By secret profits is meant such profits as are made by the promoter without disclosing the same to the real parties in interest and obtaining their consent, either express or implied.

In this case the promoters did make a profit of about $100,000 in bonds and $3,000,000 in stock. That is to say, in the manipulation of the property, and the securities representing it, they were enabled to withdraw from the company twenty per cent, of its bond issue and sixty per cent, of its stock issue, for which they paid nothing, and for which they rendered no service, except such service-as was necessary to put through the operation by virtue of which they were enabled to make the profit. They claim that at the time this was done, to wit, on February 16th, 1903, everybody in interest consented thereto, and that therefore there can be no liability. To this, however, there are two answers. In the first place, the company cannot be held to have consented, for the reason that the promoters did not provide it with an independent board of directors who might look after its interests, but, on the contrary thereof, they placed themselves in the dual position of directors whose duty it was to watch over the affairs of the corporation, and promoters who had an interest only in obtaining the largest prossible profit from the operation.

Lord O’Hagan, in New Sombrero Phosphate Co. v. Erlanger, 3 A. C. 1218; 48 L. J. Ch. 73, speaking of directors so appointed and selected, says: “If the directors were nominated merely to ratify any terms the promoters might dictate, they discharged their functions. If it was their duty, as it certainly was, to protect the shareholders, they never seem to have thought of doing it; their conduct was precisely that which might have been anticipated from the character of their selection, and, taking that conduct and character together, I concur in, I believe, the unanimous opinion of your lordships, that such a transaction cannot be allowed to stand. The promoters who so forgot their duty to the company they formed as to give it a directorate without independence of position, or vigilance or caution in caring for its interests, which were accordingly subordinated to their own, misused their power and must take the consequences.” In the second place, the real parties in interest, as opposed to the interests of the promoters, were the syndicate shareholders who had furnished or had agreed to furnish the actual cash with which the promoters’ operation was carried on; they were not notified in any manner of the amount that the promoters were expecting to make. They severally became equitable stockholders in the new corporation, as soon as they had subscribed to the syndicate shares, and it had been determined that the operation would be carried on; they were, with the promoters, the equitable owners of the stock, and-as such were entitled to be informed by the promoters of all details of the operation and of the amount of profit which they were making. Vice-Chancellor Learning so held when this case was before him on demurrer to the bill that was originally filed. Arnold v. Searing, 73 N. J. Eq. (3 Buch.) 262.

On the same point the present chancellor says, in the Bigelow Case, 74 N. J. Eq. (4 Buch.) 457: “In many cases promoters in anticipation of the formation of the company themselves buy property in order to make it over to the company upon formation. Whether the company in such eases is entitled to claim the benefit of the bargain made by the promoter is often a question of nicety, and may depend upon whether the promoter buys the property •with, his own money or with money that is in effect subscribed for the share capital. It may be thus in effect subscribed before the formation of the company, as is the case with many syndicates, in which event the promoter may be a trustee with respect to the property for the company thereafter to be formed, on the theory that the property was bought for the company.”

This remark applies with peculiar force to the case in hand. When the promoters took the options for the purchase of the-rolling mill company’s stock they did it with the idea of investing' the new company with the title to the property which the stock represented, and at once made themselves to a certain extent trustees for the syndicate shareholders who furnished the funds-for carrying out the plan. It therefore becomes evident that it was the duty of the promoters to make full disclosure to the syndicate subscribers of all the profit which they intended to make.

It was said on behalf of the defendants that full disclosure of all the facts was made in the circular which accompanied the syndicate agreement of August 2d, 1902, because it was possible-for anyone to calculate from the data given that after the syndicate subscribers had been satisfied there would be left $400,000' in bonds and $3,000,000 worth of stock which must have been understood to belong to the promoters. It is quite true that such a calculation would show such a result, but it is not true that there-is anything in the circular or in the agreement which would indicate in the slightest degree that this surplus was intended as promotion fees or that the defendants had any interest whatever in-it. This point was touched upon in Re Olympia, Limited, L. R. 1898; 2 C. D. 153; 67 L. J. Ch. 433. Lindley, M. R., says:“The main question which has to be determined in this case is-whether the documents to which I have referred contain a sufficient disclosure of that which it was the duty of the promoters to disclose to the company, and to those who were invited to join it. In considering this question we must recollect that we are dealing-with matters of daily business and must have regard to the habits and practical necessities of ordinary business men. Refined equitable doctrines of constructive notice have little, if any, application to such matters as are now being dealt with. To inform a person of a fact is one thing; to give him the means of finding-it out, if he will take- trouble enough, is another thing. A promoter of a company whose duty it is to disclose what-profits he has made does not perform that duty by making a statement not disclosing the facts but containing something which, if followed tip by further investigation, will enable the inquirer to ascertain that profits have been made, and what they amounted to.”

I must therefore conclude that the profits made by the promoters in this case were not disclosed to either the corporation or to its real stockholders, and that they are liable to account for the same in an equity suit brought for the purpose.

The next question relates to the form of the suit. The bill, as amended, is filed by three stockholders of the new company against the three defendants. The corporation itself is likewise a party defendant. The company became insolvent and its receivers were added to the suit as parties complainant. Therefore, as the bill now stands, it is a bill filed by stockholders and by the receivers of the insolvent corporation, in which they attempt to enforce a cause of action which they claim runs to the corporation. In other words, they are prosecuting in the right of the corporation. The defendants assert that the cause of action does not run in favor of the corporation, and that it, as a legal entity, has no interest in the transaction, and that taking the charge against the defendants at its utmost weight the corporation itself has no right or interest in the transaction to be protected. The complainants’ theory is that the defendants, while they were holding a fiduciary relationship toward the steel company, took and assisted others to take bonds of the corporation without consideration, whereby the indebtedness of the company was increased $400,000. and took $3,-000,000 of the stock of tire corporation, all without the knowledge of the company or the syndicate shareholders, and that the defendants should pay the value of the bonds and stock so taken, and that in this view the right of action accrues in favor of the corporation. The point appears to have been decided adversely to the complainants’ view by the supreme court of the United States in Old Dominion Copper Mining Co. v. Lewisohn, 210 U. S. 206. That was a bill in equity brought by the corporation to rescind a. sale to it of certain mining rights and lands conveyed to the corporation by the defendants’ testator, or in the alternative to recover damages for the sale, and it was held that inasmuch as at the time of the sale the promoters and the promotion syndicate were on both sides of the bargain, everybody who then had an interest must be held to have consented to what was done, therefore the corporation consented, and therefore it could not after-wards complain; and that as to those stockholders who purchased stock directly from the company later on, their cause of action for the fraud which was committed upon them was a personal one in which the corporation had no interest. The cases which approve of this ruling are collected in the opinion of Mr. Justice Cornish, of the Maine supreme court, in Mason v. Carrothers, 74 Atl. Rep. 1030. If, however, the defendants are promoters, and by means of their machinations the corporation has been fraudulently deprived of a portion of its property, it would seem as if the cause of action for the recovery of the property is a cause of action in favor of the corporation. In Plaquemines Tropical Fruit Co. v. Buck, supra, the bill was filed in favor of the corporation, praying that its promoters might be compelled to surrender for cancellation some shares of its capital stock alleged to have been improperly issued to and’ held by them as such promoters, and to restrain them from voting thereon. It does not appear that any question was raised as to the right of the complainant corporation to sue; that seems to have been taken for granted. At any rate, the form of the action was acquiesced in and the decree on the motion was in the company’s favor. The same course was pursued in Woodbury Heights Land Co. v. Loudenslager, supra. There the bill was filed by the corporation against the defendant, who was held to be a promoter, for an account and recovery of profits realized by him in the promotion. The decree required him to account to the corporation for the amount of profits that was actually received by him. I take it the doctrine contended for by the complainants on this branch of the case is settled in this state in favor of the corporation. The point is expressly held in Massachusetts in favor of the complainants’ view in Hayward v. Lesson, 176 Mass. 310. There a bill was filed by the receiver of the East Tennessee Land Company to recover alleged secret profits made by the defendants as promoters of that corporation. Mr. Justice Loring says “that the corporation may sue for the secret profits made by a promoter who secures a sale of lands from-a third person to the corporation without returning the lands obtained by means thereof, is well settled. Emery v. Parrott, 107 Mass. 95; Lydney and Wigpool Iron Ore Co. v. Bird, 33 C. D. 85; Emma Silver Mining Co. v. Lewis, 4 C. P. D. 396,” and the proceedings were amended by substituting the corporation in the place of the receiver as party complainant. This practice was followed in the same court in Old Dominion Copper Mining and Smelting Co. v. Bigelow, 188 Mass. 315, and in England in New Sombrero Phosphate Co. v. Erlanger, 5 C. D. 73; 46 L. J. Ch. 425; affirmed in house of lords, 3 A. C. 1218; 48 L. J. Ch. 73 and in Re Leeds and Hanley Theatres (1902), 2 Ch. 809; 72 L. J. Ch. 1.

The lord-chancellor, in the house of lords, in the Erlanger Case, calls special attention to the fact that the suit is in favor of the corporation. The decree eventually was in its favor. It was indeed admitted by one of the defendants in this case that the rule that the corporation might recover had been adopted in New Jersey. I must therefore say that the suit in its present shape is properly brought. It may be that when the moneys are recovered equities will arise on the distribution which will require solution, but we need' not concern ourselves with that question at the present time.

The last question involves the principles upon which recovery may be had. It would not be just or reasonable to charge any of the defendants with the par value of the share capital taken by them, for the reason that all the syndicate subscribers who became shareholders in the new company considered the stock to have no actual value, and that it was purely and simply a bonus in which all the stockholders participated. The shareholders who are complainants in this suit received their shares upon this basis. As syndicate subscribers they were entitled to bonds- at ninety-five per cent. 'This amount they put in in cash and the stock was a mere gratuity. All the stock stands on this footing. The complainants and the company are thus estopped from asserting the invalidity of the stock, and inasmuch as there do not appear to be any creditors, the receivers are estopped also. 2 Cl. & M. Corp. § 398; Knoop v. Bohmrich, 49 N. J. Eq. (4 Dick.) 82; 50 N. J. Eq. (5 Dick.) 485; Breslin v. Fries-Breslin Co., 70 N. J. Law (41 Vr.) 274. I therefore think that there should be no accounting for any of the stock profits which were made by the promoters.

The defendants Fairchild and Searing are undoubtedly liable, jointly and severally, for all the profits made by the promoters, in so far as that profit consisted of bonds of the corporation, and were it not for the view which the court of errors and appeals took of the defendant's liability in the Loudenslager Case, I would think that Mr. Bell might, on principles of equity, be charged equally with them. I must adopt Chancellor Pitney's interpretation of the Loudenslager Case in his opinion in the Bigelow Gase, supra, and charge Mr. Bell only with the amount of profit that was received by him. There is some justice in the application of the rule in the Loudenslager Case to the case of Mr. Bell, for the reason that he stands somewhat apart from the other two defendants in his attitude toward the promotion scheme and in his-, relation to the transaction. As I have elsewhere said, he seems to-have done little, if anything, more than he would have been required to do as president of the trust company; he was made a participant in the profits'principally to reimburse him for extra, labor and effort to which he would be put in that capacity.

It appears that many months after this transaction was entirely completed the company came into financial difficulties, and that in order to save it from insolvency, Mr. Bell and other stockholders and bondholders surrendered to the company a large amount, of stock and bonds to aid it in its financial distress. It was claimed on the part of Mr. Bell that in any accounting to which he might be subjected, he should be credited with the amount of stock and bonds which he so surrendered. My view of the relation of the stock to the whole enterprise hereinabove stated would preclude any credit to Mr. Bell on this account. I reach the same conclusion as to the bonds surrendered by him, but for an entirely different reason. He is called upon to account for what he received at the time he received it, and he is chargeable as of the-time when the bonds were issued to him. If he saw fit afterwards to give the bonds back or to employ them in some other manner-for the advantage of a sinking company, he cannot have credit therefor without the consent of the parties interested. There is-. no claim that at the time the bonds were donated by him to the company or used by him for its bénefit the company released him from liability or accepted the bonds on account of his indebtedness or did otherwise than to take them as his free gift. Hence there can be no set oif, either legal or equitable. This is made still more manifest when we consider the intervention of the receivers. Williams v. Traphagen, 38 N. J. Eq. (11 Stew.) 57; McManus-Kelly Co. v. Pope Manufacturing Co., 70 Atl. Rep. 297.

I will therefore advise a decree against Mr. Fairchild and Mr. Searing, jointly and severally, for the full amount of the promoters’ profits, and against Mr. Bell in the same manner, but only to the extent to which he profited by the transaction. If the amounts cannot be agreed upon by counsel there will be a reference to ascertain the same.


source: Caselaw Access Project

author: Howell, V. C.

license: Public Domain

text:
    Robert Williams & Company v. Auto Express Company.
    [Decided December 29th, 1910.]
    1. Where a policy of insurance is procured by a bailee for the benefit of a bailor, there is a direct insurance on the goods of the bailor, giving him an interest in the policy from the time of its issuance, subject to any interest which the bailee may have under the policy.
    2. An express company procured insurance against loss by fire on merchandise in transit between certain points, for which they were liable as common carriers. While such policy was in force the express company received goods of a shipper which, while in the possession of the express company, were destroyed by fire, after which the express company assigned to the shipper its rights in the insurance money represented by the policy, to the extent of the value of the merchandise, and thereafter recovered the sum for which the policy had been adjusted, which was claimed by the shipper and by its own receiver, the express company claiming no interest in the policy. — Held, that the money derived from the policy belonged to the shipper, the only interest of the carrier being in the freight money.
    3. An express company procured fire insurance on merchandise in transit and for which it was liable as a common carrier, and after a loss of merchandise in transit, and just before it was declared insolvent, it assigned to the shipper of the merchandise the insurance money represented by the policy to the value of the merchandise. The Corporation act (P. L. 1896 p. 298 §61/) makes it unlawful for a company, in contemplation of insolvency, to sell, convey, or assign its property. — Held, that, as the shipper’s right to the insurance money arose out of the policy of insurance and became efficient for its protection as soon as the insurance was effected, it was not affected by the express company’s insolvency.
    On petition for instructions to a receiver.

      Mr. Ernest G. Lum and Mr. Carl A. Hansmann (of the New York bar), for tbe petitioner.

      Mr. David H. Bilder, for the receiver.
   Howell, V. C.

The petitioner is a New Jersey corporation engaged in the manufacture of silk goods at Paterson. In May of 1910, it entrusted to the Auto Express Company ten trunks containing silk ribbons of the value of upwards of two thousand eight hundred dollars, to be carried to the city of New York; while the property was in the possession of the express company it was destroyed by fire. The express company had previously procured insurance against loss or damage by fire

“on merchandise consisting principally of silk and silk goods in transit between all points to and from in Passaic, Bergen and Hudson counties, New Jersey and the Borough of Manhattan, N. X., and for which they are liable as common carriers.”

A short time after the fire, and just before the express company was declared insolvent, it made an assignment to the petitioner oE its rights in the insurance money represented by the policy to the extent of $2,878.55, after which the insurance company adjusted the loss sustained by the petitioner at $2,253.63; this money it holds for whom it may concern; both the petitioner and the receiver claim it. The prayer is that the receiver may be authorized and required to withdraw his demand for it, and that he may bo directed to consent to the payment thereof to the petitioner. The petitioner’s position is that the express company never had any beneficial interest in these moneys, but was at most entitled to receive them for the benefit of the owners of the merchandise.

The law is settled for the federal jurisdiction in favor of the contention of the petitioner by the case of Home Insurance Company v. Baltimore Warehouse Co., 93 U. S. 527. In that ease the warehouse company took out insurance “on merchandise; their own or held by them in trust or in which they have an interest or liability.” The action was between the warehouse company and the insurance company; the property, for the value of which the suit was brought, was, at the time of the loss, in the possession of the warehouse company as bailee. One of the questions in the case was whether the warehouse company could recover from the insurance company for the value of the property which was in its possession, but to which it did not have title. There was a verdict for the warehouse company and a writ of error. Mr. Justice Strong says: “Turning, then, to the policy issued to the plaintiff below, and construing it by the language used, the intention of the parties is plainly exhibited. * * * There is nothing ambiguous in the description of the subject insured. It is as broad as possible. The subject was merchandise stored or contained in a warehouse. It was not merely an interest in that merchandise. The merchandise of the warehouse company owned by them was covered, if any they had; so was any merchandise in the warehouse in which they had an interest or liability; and so was any merchandise which they held in trust.” * * * “It was undoubtedly the law that wharfingers, warehousemen and commission merchants, having goods in their possession, may insure them in their own names, and in case of loss may recover the full amount of insurance, for the satisfaction of their own claims first, and hold the residue for the owners,” citing cases.

On this opinion the judgment was affirmed.

The case was followed and the position strengthened by the opinion of Mr. Justice Blatchford in the case of California Insur anee Co. v. Union Compress Co., 133 U. S. 387. There the insurance was “on cotton in bales, their own, or held by them in trust or on commission while contained,” &c. This was held to cbver cotton which was in the possession of the compress company at the time of the fire, as bailees, and that the words “held by them in trust” were used and must be construed in their general, commercial and business sense. The opinion states: “The policy covered all the cotton which was placed in the hands of the plaintiff by those companies. It was lawful for the plaintiff to insure in- its own name goods held in trust by it, and it can recover for their entire value, holding the excess over its own interest in them for the benefit of those who have entrusted the goods to it.”

To the same effect is the English law. Waters v. Monarch Insurance Co., 5 El. & B. 870; 25 L. J. Q. B. 102. There Lord Chief-Justice Campbell says, in a similar case in which there was a verdict in favor of a bailee Cor the value of goods insured by it and in its possession, although belonging to other persons, “the property specified in the policy has been entirely destroyed. The whole of it is therefore to be made good, and not merely the particular interest of the plaintiffs in it. They will be entitled to keep for their own indemnity as much as will cover their interest in the goods, and they will be trustees of the residue of the money for the absolute owners. There are authorities showing most distinctly that although no previous order to insure is given, the owner of the goods may ratify an insurance effected on them for his benefit, and may recover from the parties insuring the money received by them for his use.” Such recovery could only be had upon the theory that the original insurance was upon.the goods themselves, and that the insurance policy was a contract made by an agent for the benefit of his principal of which the principal might avail himself at any time.

The same rule was made the basis of decision in Stillwell v. Staples, 19 N. Y. 401. There the goods were held by the’bailee “in trust or on commission,” and in Waring v. Indemnity Fire Insurance Co., 45 N. Y. 606, where the policy was issued to commission merchants and it covered property “their own or held in trust on commission or sold, but not removed.” The bailee was held entitled to collect the total amount of the loss.

The same rule is adopted in Tennessee, Lancaster Mills v. Merchants Cotton Press Co., 89 Tenn. 1, in which Judge Lurton, now of the Uuited States supreme court, made a collection of a large number of authorities on the subject, and in Maryland, in Fire Insurance Association v. Merchants Company, 66 Md. 339, likewise in Pennsylvania, Roberts v. Firemen’s Insurance Co., 165 Pa. St. 55.

The phraseology' of the insurance policy in this case is not substantially different from that contained in the policies adjudicated upon in the cases above cited. In each and all of the ■cases the policy was procured by a bailee and was for the benefit of a bailor, and in every case was held to be direct insurance on the goods of the bailor, thus giving the bailor an interest in the policy from the time of its issuance. This interest is, however, subject to any interest which the bailor may have under the policies. It appears in this case that the bailee has no interest to protect, and that therefore whatever moneys are derived from the policies belong to the bailor.-

It was argued that the assignment made by the express company to the petitioner of an interest in this fund was invalid, for -the reason that the assignment was made of assets of the corporation in contemplation of insolvency, and that there was thus a violation of the terms of section 64 of our Corporation act. If the petitioner’s right stood on the assignment, there might be •some reason for this contention, but it does not so stand. Whatever right the petitioner has arose out of the policies of insurance nnd became efficient for the petitioner’s protection as soon as the insurance was effected.

My conclusion, therefore, is that the petitioner’s right to the money accrued when the policy was issued and is not affected by' “the insolvency.

I will advise an order directing the receiver to act in accordance with these views.


author: Walker, V. C.

text:
    William M. Radley and Alice Radley, his wife, v. Pauline K. Radley et al.
    [Decided November 14th, 1910.]
    1. The widow's seizin of land assigned as dower is a continuation of her husband’s seizin, and an heir cannot obtain seizin in deed by entry, even before assignment; a subsequent assignment defeating his seizin acquired by entry.
    2. Dower, when assigned, becomes the paramount estate, and hence is preferred over encumbrances created after the marriage.
    3. Neither P. L. 1898 p. G53 § 26, permitting lands held by tenants in common to be partitioned, though they may be limited over after an estate for life or any estate therein, nor Gen. Stat. p. 2988 § 18, of the act concerning the sale of land providing for a sale free from dower, authorize the partitioning of a dower estate without the widow’s consent for the benefit of the tenants in common by a sale thereof, in lieu of actual partition.
    4. A life estate may be sold without the consent of the life tenant only when it exists as an interest in land the remainder of which is in others who are entitled to possession with the life tenant or exclusive of his possession.
    On bill, &c. On exception to master’s report.

      Mr. Francis V. Dobbins, for the exceptant.

      Mr. John A. Coan, for the complainants.
   Walker, V. C.

This is a case for partition. The special master reported in favor of a sale in lieu of partition. The defendant Dobbins excepts to the report on behalf of Pauline K. Eadley, an insane tenant in dower of a certain portion of the premises, and which have been duly assigned to her, upon the ground that her estate cannot be partitioned for the benefit of the tenants in common and she be compelled to accept recompense out of the proceeds. The complainant urges that the interest of the doweress is a life estate, and that under section 26 of the act concerning partition (P. L. 1898 p. 653), which expressly provides that lands held by tenants in common may be partitioned, notwithstanding they may be limited over after an estate for life or any estate therein, applies, and that the exception should be overruled and the master’s report confirmed and a decree made for the sale of the premises, including the portion assigned to the tenant in dower and set off to her by metes and bounds, and he contends that Campbell v. Cole, 64 Atl. Rep. 461; 29 N. J. L. J. 283, wherein Chancellor Magie held that partition of land should be made, notwithstanding the existence of a life estate therein, controls. It is to be observed, however, that section 26 of the Partition act is to be-read in connection with section 27 of the same act, and in section 27 it is provided that where there is an estate for life and the remainder in fee is owned by tenants in common, and the particular tenant shall consent thereto, partition may be made, &c. It is to be observed further that in Campbell v. Cole the life estate was in an undivided half of the premises sought to be partitioned, and did not comprise a tract in the exclusive possession of the life tenant. It appears, therefore, that Chancellor Magie did not have before him in Campbell v. Cole such a situation as is here presented, and it is obvious that he did not decide that an estate in dower assigned to a widow and set off by metes and bounds could be sold at the instance of tenants in common of the reversion or remainder without the consent of the doweress. The decisions in this state upon the question involved are against the view that lands assigned to a tenant in dower may be sold in partition at the suit of tenants in common without her consent.

In Smith v. Gaines, 39 N. J. Eq. (12 Stew.) 545, the court of errors and appeals, construing exactly similar provisions of the former Partition act, held that the statutory power applied only to cases where the estate of the tenants in common was in possession. Certainly the tenants in common in this case are not in possession of the tract which has been assigned and set off to the doweress.

In Haulenbeck v. Cronkright, 23 N. J. Eq. (8 C. E. Gr.) 407, a partition ease, Chancellor Zabrislrie was concerned with the act authorizing the court to determine whether any existing estate of dower or courtesy in premises ordered sold should be excepted from the sale or should be sold, and, with the broad language of that act before him, he held that the estate or interest of a widow in lands is the right to have one-third set off to her by metes and bounds and to enjoy the same for her natural life, and that when partition is made the doweress retains her estate in the premises as it was before; if dower has not been assigned she retains the right to have it assigned; if an assignment has been made she retains the part set off to her unaffected by the partition.

The seizin of a widow to whom land has been assigned as dower is a .continuation of the seizin of her husband and the heir can'not, by entry, obtain seizin in deed; not even if he had entered upon all the lands before assignment, because the assignment, when made, defeats his seizin acquired by entry. Chall. Real Prop. *187.

When dower is assigned the estate of the doweress becomes paramount, and it is upon this that encumbrancers, whose liens were created subsequent to the marriage, are postponed to the estate and interest of the tenant in dower.

Neither the Partition act authorizing the sale of a life estate nor the provision for the sale free from dower in the act concerning the sale of land (Gen. Stat. p. 2983 § 18) empowers the court to order the sale of a life estate, which, in severalty, is in the actual use and enjoyment of the life tenant, without that tenant’s consent. See Bouvier v. Baltimore and New York Railway Co., 67 N. J. Law (33 Vr.) 281 (at p. 295).

A life estate may be involuntarily sold away from the life tenant only when it exists as an interest in lands, the remainder of which is in others who are entitled to possession in some form, either with the life tenant or exclusive of him or in conjunction with him.

The exception must be sustained.


text:
    Winfield S. Ashby, by Jessie B. Ashby, next friend, v. Frederick P. Yetter.
    [Decided January 10th, 1911.]
    1. Pending an appeal from an order or decree of the court of chancery, application may be made either to the court of errors and appeals- or to the court of chancery for leave to execute the order or decree of the chancery court so far forth '■ , may be necessary for the protection, and preservation of the subject of the appeal, and such an order, will be made when the exigencies of the situation call for it; but no order will be made that would destroy or impair the subject of the appeal.
    2. If the procedure in the court of chancery sought to be had after-the cause has been appealed is one calling for a new step or proceeding in that court in aid of the order or decree appealed from (for the-protection and preservation of the subject of the appeal), application for leave to so proceed must be made to that court as it invokes original jurisdiction, and the court of errors and appeals, which is a court of appellate jurisdiction only, has no power to put such proceedings in motion in that court; nevertheless, application for leave to so proceed in the court of chancery may be made in the first instance to the court of errors and appeals, at the election of the moving party, but such leave is not required; the advantage of such leave from the court of errors and appeals would be to forestall an appeal from the order made in chancery, although such appeal would not of itself operate to-stay the order of the chancery court; but, if an order to proceed in chancery should be obtained from that court without leave first had from the court above, application to the appellate court to stay the order of the court below would be open to the appellant.
    On application for appointment of receiver in aid of decree pending appeal.

      Messrs. Garrison & Voorhees, for the motion.

      Messrs. Wescott & Wescott, contra.

   Walker, V. C.

At the time the decree for accounting in this cause was presented to me to be advised, a motion was made for the appointment of a receiver of the rents and profits of the premises described in the bill, and which I had decided to be the property of the complainant and to be held in trust for him by the defendant. The decree, embodying the findings contained in the memorandum opinion recently filed, was advised, and the motion for appointment of receiver was continued. It is because the decree had not been signed at the time the notice was given of the application for the appointment of a receiver that the court is asked to make the appointment on the results reached in the opinion instead of the matters adjudicated in the decree. The complainant might better have waited until the decree was signed, which has since been done, or, anticipating the signing of the decree, have pleaded a situation created by the decree rather than by the opinion. However, no criticism is made upon this informality, and the application will be considered on its merits.

The petition for the appointment of the receiver, in substance, avers that the complainant is entitled to an accounting by the defendant for the transactions between the parties from the date of the conveyance of his properties by the complainant to the defendant on March 18th, 1902; that the premises consist of various buildings occupied by tenants who pay rent to the defendant; that there are mortgages on some of the property; that no taxes have been paid on the property for the past two years (this has been conceded to be a mistake); that there is due to the complainant from the defendant a large sum of money, and that he is a man of no means and is financially irresponsible, and that if he be permitted to collect further rents the complainant will be irreparably figured. It is conceded, I believe, that the defendant has practically no other property except that which came to him by and through the complainant, save the properties which he conveyed to the complainant and which have been held to be merely security for the faithful performance of his duties as trustee for the complainant, his property being inconsiderable in value compared to the complainant’s — that is, less than one thousand dolíais as against over twelve thousand dollars. These facts are not controverted on this motion.

The defendant resists the application for the appointment of a receiver for the reason, principally, that he has appealed from the decree of this court, and he claims that the decision of the court of errors and appeals in Pennsylvania Railroad Co. v. National Docks Railway Co. (Court of Errors and Appeals, 1896), 54 N. J. Eq. (9 Dick.) 647, operates to prevent this court from making any order in the cause until it shall have been remitted from the court above.

The question of the power of this court to make the order prayed for necessitates a determination of its power to act in a cause removed from it by appeal into the court of errors and appeals, and my justification for the somewhat extended examination of this subject which I have made, and the exploitation of views which I will now make, is a desire to group the decisions and make some observations that may be of service to the bar on this question so often arising, generally perplexing and always important.

An examination of the question presented leads me to the conclusion that the decision in the National Docks Case has not the broad and unqualified effect ascribed to it by the defendant’s counsel.

It is true that it was held in the National Docks Case (at p. 653) that “The entire purpose and object of the appeal is to preserve such rights and property from the ill effects of the decision that is challenged. Unless it produces such a result, the procedure is a mere form, and, in many cases, absolutely a useless form. The suitor in carrying his case up asks for protection against an erroneous decree; such protection is obviously refused to him if the decree can be enforced before its legality has been tested by the superior .court. In fine, the very essence of the remedy by appeal is to prevent, for the time being, the appellant from this execution of the existing decree; and this being so, it is indisputable that when the statute grants the right of appeal, it grants such protection. A decree cannot be used detrimentally to the appellant, pending the appeal, for the plain reason chat sncli a use will, for every practical purpose, defeat the appellate procedure.”

Furthermore, the learned chief-justice, in concluding the opinion in the National Docks Case (at p. 655), uses this still broader and stronger language:

“It is likewise the opinion of this court that an appeal in all cases will have that effect given to it which shall be necessary to preserve the subject to which the appellate procedure relates, in such a condition as will enable this court to render an efficacious decree in the premises. That for this purpose an injunction decree will be suspended or continued, or a previous injunction revived, by the act 'of filing an appeal whenever such construction shall be necessary for the end just stated.”

It will be seen that this last observation applies particularly to injunctions, and it has, I think, been regarded, as to all other matters, obiter dictum. As to injunctions, the legislature has since intervened, and by statute established the practice. Chancery act, P. L. 1902 p. 546 §§ 112, 113. See, also, Johnson v. Seabury & Johnson, 69 N. J. Eq. (3 Robb.) 696.

A perusal of the cases decided both in the court of errors and appeals and in this court since the National Docks Case will, I think, tend to show that its apparently unlimited scope has been curtailed and modified.

Following the National Docks Case came that of Delaware, Lackawanna and Western Railroad Co. v. Breckenridge (Court of Chancery, 1896), 55 N. J. Eq. (10 Dick.) 159. It was an application for a stay of proceedings pending appeal from an injunction decree and for a continuance of the ad interim stay which was granted ex parte on filing the bill and which was discharged by the injunction decree made on the hearing. The decree was more limited .than the ad interim stay, and the difference complainant claimed was vital to the relief sought by the bill and on appeal. The opinion was by Vice-Chancellor Emery, and he denied the application on grounds other than those enunciated in the National Docks Case, and said (at p. 162) :

“Counsel for the complainant urge, however, that the recent decision -of the court of errors and appeals in Pennsylvania Railroad Co. v. National Docks, &c., Co. (September, 1896), 54 N. J. Eq. (9 Dick.) 647, lias established a different rule and entitles the complainant to an order of this court continuing the ad interim or preliminary stay pending appeal. In this case it was lic-ld that b37 the mere act of filing the notice of appeal, the final decree rendered in the cause lost all its force pending an appeal, and that an appellant could not fall into contempt by resisting the execution of the decree pending appeal. The final decree here appealed from was an injunction decree, restraining the defendant from opposing the complainant in making a causeway or tunnel under the defendant’s caryard, and requiring the defendant to assist this construction by removing certain of its trains in the caiyard. The court was of opinion that if this decree were carried out pending appeal, it would deprive the appellate court of the ability to render anything more than a merely nominal decree on appeal in favor of the appellant. In support of the present application, counsel for the complainant relies upon the express declaration in the opinion filed in the cause as to the effect of an appeal from an injunction decree. The language is as follows: . ‘It is likewise the opinion of this court that an appeal in all cases will have that effect given to it which shall be necessary to preserve the subject to which the appellate procedure relates in such a condition as will enable this court to render an efficacious decree in the premises, and that for this purpose an injunction decree will be suspended or continued, or a previous injunction revived, by the act of filing an appeal, whenever such construction shall be necessary for the end just stated.’ ”

And at p. IBS:

“Without deciding upon the construction of the rule laid down in the opinion, it seems to me that even if the complainant’s construction be the correct one, a stay by this court to cari’3’ out this construction should not now be granted for several reasons — first, the precise point now involved is the effect of the appeal upon an injunction previous^ granted and which has been discharged or modified by the decree appealed from, and so far as relates to this point, 1 am not clear that tire opinion is not obiter, if tested by the usual rules applicable to decisions, because this point does not seem to have been neeessaiily involved in-the decision of tlie case. The decision, as I understand it, establishes the rule that an appeal from an injunction decree ipso facto stays proceedings upon the decree appealed from to a .certain extent and for a certain purpose, and it applied this rule to tlie case in hand, which was that of a decree granting an injunction, and settled the effect of an appeal from such decree. But the question as to the effect of this rule, when applied to decrees., discharging or modifying injunctions, seems to be a different one and to:.present special and different considerations, which should be made the subject of direct adjudication -when the point -is distinctly involved.”

The next case is that of Morton v. Beach (Court of Errors and Appeals, 1898), 56 N. J. Eq. (11 Dick.) 791. One ground of 'appeal was: thaf the' court of chancery was -without power to make the decree; 'because the accounting upon- which it .was based was iaad';pending ¡an appeal from the interlocutory decree that directed the-itaking-:of 'tlie account. • Said Mr. Justice Garrison, speaking for the court (at 792):

"The contention of-the appellant is.that her appeal.from-tlie intdrloeutqry ¡decree suspended the.-order for an-accounting. It i? ¡said that the case of Pennsylvania Railroad Co. v. National Docks Railway Co. 54 N. J. Eq. (9 Dick.) 647, is a precedent M- this 'position.-' 'That -case'indubitably decided that.the mere kt 'of the' appellant;--in! placing'before' this court the,question jyhetbeu thq 'threatened 'destruction of its property was justifiable, : preserved' the property from destruction while the question was under consideration by this court. The opinion further intimated in no uncertain terms that this must be the effect of teverybappeal- if the preservation of the subject of litigation be necessary ba the remedy sought in this court. Neither this case nor the principle that-'it illustrates have any application to an appeal from' a decree directing the taking of an account where there is ho property to be preserved and no destruction to be averted. Apart from the supposed authority of this decision, 'there is nothing in equity practice 'to countenance the contorition.”

In State Mutual Building and Loan Association v. O'Callaghan (Court of Chancery, 1904), 67 N. J. Eq. (1 Robb.) 103, after the entry of a decree of reversal of an interlocutory order, the defendant, O’Callaghan, moved to set aside the sheriff’s sale under the execution issued in the cause and for such relief as might be proper or incidental to the reversal of the chancery order which discharged an order to show cause with stay theretofore made. The motion was resisted for two reasons, one, upon the strength of the National Docks Case. Said Vice-Chancellor Pitney (at p. 113) :

“The remaining point upon which the petitioner rested his motion was that the appeal taken from the order discharging the order of May 22d, 1902, had the effect, under the decision in the National Docks Case, of rendering invalid further proceedings under the decree.

“Here, again, I feel justified in saying that the supposition prevails with the bar that the members of the court, ,as then constituted, cannot be held to have approved all that was said by the late chief-justice in that ease. I also feel justified in saying that the general sentiment of the bar of the state is that the doctrine there laid down must be limited in its application to cases strictly analogous to the case then before the court. Such seems to have been the view of Vice-Chancellor Emery in Delaware,, Lackawanna and Western Railroad Co. v. Breckenridge, 55 N. J. Eq. (10 Dick.) 159 (at pp. 162, 163). In the same direction is the language of Mr. Justice Garrison, speaking for the court of errors and appeals, in the case of Morton v. Beach, 56 N. J. Eq. (11 Dick.) 791 (at p. 792).”

And, again (at p. 115) :

“In short, the sentiment of the bar seems to be that the doctrine of the learned chief-justice, carried to its logical conclusions, results in this; that the complainant who has been refused an injunction by this court may obtain that injunction by simply appealing from the order of the chancellor refusing it, and may obtain and enjoy the benefit of the extraordinary power of restraint of this court without the judicial approval of any court or judge. This, it is claimed, amounts to a reductio ad absurdum. * * *

“I shall add that, immediately after the promulgation of the opinion in question, the court of chancery, in order to guard against the injurious results which would arise almost certainly from the practical application of the doctrine that a restraint contained in a simple order might be continued by a mere appeal from the order discharging that restraint, adopted the practice of limiting the interim restraint to a particular day and hour, so that it came to an end without any order to that effect.”

Strong v. Smith (Court of Chancery, 1905), 68 N. J. Eq. (2 Robb.) 686, ivas a case in which a tenant in possession of mortgaged premises from a time prior to the commencement of the-foreclosure suit resisted an application for a writ of assistance-upon the ground that he was not made a defendant, and appealed from an order for possession made against him. Said Vice-Chancellor Stevenson (at p. 702) :

“I think that Mr. Lamar’s possession should not be disturbed* at present, provided he promptly takes and diligently prosecutes'an appeal. This stay is made without attempting to discuss the-force of the peculiar views in regard to the essential nature and effect of an appeal from this court, expressed in the opinion of' the late Chief-Justice Beasley in the case of Pennsylvania Railroad Co. v. National Docks, &c., Railway Co. (1896), 54 N. J. Eq. (9 Dick.) 647.

“I understand that that opinion in fact expressed merely the-views of the learned judge who wrote it. See State Mutual Building and Loan Association v. O’Callaghan, 67 N. J. Eq. (1 Robb.) 103; Delaware, Lackawanna and Western Railroad Co. v. Breckenridge, 55 N. J. Eq. (10 Dick.) 159; Morton v. Beach, 56 N. J. Eq. (11 Dick.) 791. The force of the National Docks Railway Case as a precedent in the future will, I think, be confined to cases presenting parallel facts. There seems to be still room to argue in New Jersey that appellate proceedings for the-review of a judgment, decree or order at law or in equity oftentimes are in effect proceedings for restitution, for compensation on account of erroneous action of the inferior court, for restitution of a status which has been in fact changed, rather than for the prevention of such change of status. I think that a. stay, by order of this court, is necessary to arrest the dispossession proceedings under the writ of assistance until the court of errors and' appeals can take action upon the case, and therefore such stay will be granted.”

Then follows the opinion of the court of errors and appeals (2 Robb. 708), in which the decision of Vice-Chancellor Stevenson is affirmed upon the ground-that when a person in possession of mortgaged premises upon which there has been foreclosure is made a party to the possessory proceeding instituted on the basis of the decree, and it is clearly shown that he claims under one who is a party to the suit, and that his right of possession is undoubtedly subordinate to the right for the enforcement of which the writ of assistance is prayed, it may be issued against him, even though he be not technically’' bound by the decree. And this without any reference to the observations of Vice-Chancellor Stevenson in regard to the National Docks Case. His criticism of that case is passed sub silentio, and, I take it, is not overruled, or else it would have been disapproved, as were certain expressions of this court in Dickinson v. Updike, 49 Atl. Rep. 712 (at p. 714), on an affirmance for the reasons given in Vice-Chancellor Reed’s opinion. See, also, Van Horn v. Demarest, 77 N. J. Eq. (7 Buch.) 264.

In Laird v. Atlantic Coast Sanitary Co. (Court of Chancery, 1907), 73 N. J. Eq. (3 Buch.) 5, an injunction case, Chancellor Magie said (at p. 7) :

“Counsel for defendant insists that the power of the chancellor to direct the issue of process of injunction upon a decree for that purpose, after the filing of an appeal, has been declared to be improper by the court of errors and appeals in Pennsylvania Railroad Co. v. National Docks Railway Co., 54 N. J. Eq. (9 Dick.) 647. Such a view of the decision in that case frequently has been indicated by the bar. It has been conceived that the decision indicated that the filing of an appeal deprived this court of the power of proceeding with the case before it, and even where the appeal has been taken from some interlocutory order or decree.”

And at p. 9:

“But it was never intended to extend the action in that case bey-ond the class of cases then presented, viz., where the decree of this court, or the process issued thereon, would, if not affected by the appeal, absolutely destroy the subject-matter of the litigation and leave nothing except an abstraction to be passed upon by the reviewing court. This, I am sure, was the view of the judges, who took part in the decision, and if there are expressions in the opinion of the learned chief-justice which can be properly deemed of broader import, I think they would not have met the views of the majority taking part in the decision. At all events, they were not called for by the case presented or the determination arrived at.

“Since that time, I apprehend that this court is limited in its issuing of process upon a decree appealed from to this extent. It ought not to direct the issuing of such process if it appears to it that the effect would be to substantially destroy the subject-matter of the litigation and prevent the effectiveness of an appeal, and if it should issue the writ, where such clearly appears to be the effect, it would be reversible error, and an attempt to enforce the process so issued and having such effect, by proceedings for contempt, would also be reversible error.”

In Van Houten v. Hall, 66 All. Rep. 1085, Vice-Chancellor Bergen refused to order the partial performance of a decree because he said he could find no precedent permitting a partial execution of a decree in a cause removed to the jurisdiction of the appellate court by the act of the party asking its partial performance in this court; for, if the right to enforce the decree were not affected by the appeal, it would apply to the whole decree as well as to part of it, and to execute the entire decree would destroy the subject of the appeal, citing the National Docks Case, and saying that the application should be made to the court of errors and appeals, which then had jurisdiction of the subject-matter, for any order that the court of chancery might make would itself be subject to appeal, thus creating a confusion that ought to be avoided. Now, manifestly, here is no criticism; either expressed or implied, of the cases explaining and limiting the effect of the National Docks Case. It was in the Van Houten Case distinctly held by the vice-chancellor, that a full performance of the particular decree would destroy the subject of the appeal, and that a partial performance pending the appeal was without precedent and would or might result in confusion.

Now it is to be observed that the decree in that case (Van Houten v. Hall) was one for the distribution of a legacy under a will, and, pending appeal, some of the distributees asked the court to permit the enforcement of the decree in their favor to a substantial extent, consenting that their adversary might participate in the distribution, but only to the extent that she would be entitled should the appellant succeed in the court above. That was the state of facts upon which the decision of Vice-Chancellor Bergen rested, and it is here mentioned to show that the vice^ chancellor’s decision that a partial performance of the decree would not be granted pending appeal, did not extend to a case, and. consequently, did not cover a class of cases in which an adjudication of this court decreed the performance or execution of several affirmative acts. To illustrate: Take the case at bar, the decree adjudges that there shall be a reconveyance of property, real atid personal, from the defendant to the complainant, and that the defendant shall account to the complainant for his occupation and use of the property. Now, as we have seen, an appeal from a decree directing an accounting will not stay the accounting pending the appeal (Morton v. Beach, ubi supra), and therefore the accounting may be proceeded with pending this appeal; but, of course, the reconveyance of the property, real and personal, ordered, may not be made, because if it were, the avails of the litigation would be at once placed in the possession of the complainant, and could be disposed of or consumed by him, and thus would that particular subject of the litigation be destroyed, pending the appeal, and leave nothing except an abstract question to be passed upon by the court of last resort. The question before the court in the case at bar is not an application to put the complainant in possession of any of the avails of the litigation, pending the appeal, but is one looking to the protection and preservation of part of the property which has been adjudged to the complainant, so that the defendant shall not have an opportunity to consume it during the litigation in the court above. It is an application not to destroy but to preserve.

Besides mentioning the National Docks Case, I have now noticed every reported case in this state in which that case has been adverted to and commented upon with reference to the subject under discussion. I will now notice two cases in which the court of errors and appeals, on application, lias ordered a partial performance of the decree of the court of chancery, pending appeal, and in which cases no opinions were filed. This partial performance which was ordered, extended to particular features of the decrees and particular subjects, among others, of the litigations.

Tn the case of Lawton v. Beddell, in which there was a decree for the complainant in chancery and an appeal taken, motion was made before the court of errors and appeals for permission to enforce the decree in the court below, pending the appeal, up to but not including the turning over to the complainant the avails of the litigation. After hearing argument upon the motion, the court went into conference, and on arising announced that the motion would be granted, whereupon the following order was entered (December 5th, 1908) :

“Ordered, that notwithstanding the appeal so taken, and notwithstanding anything in the rules of the court of chancery, or in the rules of this court contained, the complainant and respondent shall be and is at liberty to take such steps in the court of chancery as he may be advised to procure the execution and enforcement of the said decree (except as to the collection of costs), and to apply to the court of chancery for the punishment of the defendants for contempt of that court for their failure or refusal to perform the said decree, aird for an order requiring the defendants to restore to the State of New Jersey any and all assets and property of the defendant company that have been removed from the State of New Jersey, and for the custody and control of such assets when so restored, to the end that said company may be held answerable for such dividends as may be declared, pursuant to the said decree; and that the complainant and respondent shall further be at liberty to apply to the court of chancery, after the declaration of the dividend provided for by said decree, for further relief in the premises according to the leave for that purpose reserved to the respondent in said decree; and that in the above respects, and any other respects necessary for the proper preservation of the subject-matter of the controversy pending the said appeal, the court of chancery shall be at liberty to proceed in the matter pending the said appeal, the same as if the said appeal had not been taken. ■

“Provided, that if any dividend or dividends shall be declared by the defendant company pursuant to the said decree, or pursuant to any further order or decree of the court of chancery in the premises, and the complainant shall bring action at law or in •equity, for the recovery of the amount declared to be due to him, he shall not proceed to the actual collection of such dividend under process of execution, or otherwise, without the further order of this court.

“And it is further ordered that the respondent shall be at liberty to move this court hereafter to dismiss the said appeal, or for such other relief as he may be advised, if the defendants, or any of them, shall, in the absence of an order of the court of chancery, or in disobedience of such order, do anything to jeopardize the interest of the respondent in the subject-matter of the litigation.”

In the later case of Forman v. Hinkle, in which the court of chancery had decreed that the defendant should pay a certain sum of money into court pending an accounting, the defendant appealed, and the complainant moved in the court of errors and appeals for leave to enforce the payment into court pendente lite of the fund so decreed to be deposited by the court of chancery After hearing argument, the motion was granted, and the following order was entered (March 22d, 1909) :

“Ordered, that notwithstanding the appeal so taken, and notwithstanding anything in the rules of the court of chancery, jr in the rules of this court contained, the complainant and respond•ent shall be and is at liberty to proceed in the court of chancery to require the appellant to make payment into court of the moneys in said order mentioned without deduction in accordance with the terms of the order so appealed from, and to apply to and proceed in the court of chancery for the punishment of the defendant for contempt of that court for his failure or refusal to perform the command, directions and requirements of said order, ■and the court of chancery shall be at liberty to proceed to the extent aforesaid pending the said appeal, the same as if the said .-appeal had not been taken.”

• If the court of chancery rightly ordered the payment into court •of the moneys clearly shown to be due, pending an accounting, why may it not appoint a receiver of rents and profits in this case pending an accounting and pending an appeal from the decree for the accounting? I Jmow of no reason why it may not, and believe the exigencies of the situation call for such action.

The significance of the reference to the rules of the court of errors and appeals and of this court in the orders above recited, appears to be this: Rule 21 of the appellate court provides that in default of serving a cop}' of the petition of appeal and making deposit to answer the costs of appeal, proceedings may be had on the order or decree appealed from, as if appeal had not been made, the rule being a tacit intimation or recognition of the stay of proceedings pending a perfected appeal; and rule 149 of the court of chancery provides .that an appeal from an interlocutory order shall not stay proceedings without an order of that court or of the court of errors and appeals for that purpose; and rule 150, that if the party appealing from a final decree shall within ten days after filing the decree file his (notice of) appeal in this court, process shall not issue on the decree without the order of this court or the court of errors and appeals. Now, it must be obvious that under these rules the decree of the court of chancery, interlocutory or final, cannot be proceeded upon, if promptly taken and perfected without the order of the court of errors and appeals, or of this court, in cases in which this court may, notwithstanding the appeal, permit of further proceedings under its order or decree.

The fact that the court of errors and appeals was appealed to for leave to proceed in this court in the. cases of Lawton v. Beddell and Gorman v. Hinkle, shows an election by counsel for the respondents in those cases to resort to and invoke the powers of the appellate court, rather than those of this court, for authority to proceed in chancery pending the appeal, not only because the court above had the power to grant the orders applied for, but because there could be no question about any appeal from those orders when made in that court, and, consequently, no confusion with reference to the proceedings in the court below under the leave granted, for, had the leave been applied for and granted in this court, without the sanction of the court above, and the appellants had at their peril resisted the execution of the decrees appealed from to the extent of the leave given for proceeding, resort would doubtless have liad to be had in this court to proceedings, for contempt, which the appellants could have reviewed ultimately in the court of errors and appeals and thus would have secured considerable delay, which might have been that for which they were really contending.

The jurisdiction of the court of errors and appeals is altogether appellate, and not at all original.

In New Jersey Franklinite Co. v. Ames, 12 N. J. Eq. (1 Beas.) 507, application was made to that court to then and there admit parties to the controversy to defend their rights. Said Chief-Justice Green (at p. 510) :

“If the court think that the applicants should be made parties, how is the bill to be amended, the parties to be brought before us, the pleadings to be filed, and the rights of parties to be settled in this court ? How many questions are we to settle that the chancellor has never heard of in the cause ? What will the proceeding be but a bold and lawless usurpation of original jurisdiction?”

In Black v. Delaware and Raritan Canal Co., 24. N. J. Eq. (9 C. E. Gr.) 455, Mr. Justice Van Syckel, speaking for the court of errors and appeals, said (at p. 477) :

“In this court of purely appellate jurisdiction, the struggle must be decided upon the case that was made before the chancellor; no new facts can be introduced here by testimony. This question was most ably discussed on the motion to dismiss this appeal, and it was so held by a very decided majority of a full court. That decision is authoritative until reversed.”

The application now made, namely, to appoint a receiver, is an appeal to the original jurisdiction of the court of chancery, and it could not be made to the court of errors and appeals, although application could be made to that court for leave to make the application in this court, but, equally can such application be made to this court, notwithstanding the' appeal, for it is perfectly clear that the appointment of a receiver would not destroy the subject of the appeal, but, on the contrary, would protect and conserve it.

From the above decisions and orders I deduce the following rules of law and practice concerning proceedings in the court of chancery pending an appeal to the court of errors and appeals— first, pending an appeal from an order or decree of the court of chancery, application may be made either to the court of errors and appeals or to the court of chancery for leave to execute the order or decree of the chancery court so far forth as may be necessary for the protection and preservation of the subject of the appeal, and such an order will be made when the exigencies of the situation call for it; but no order will be made that would destroy or impair the subject of the appeal; second, if the procedure in the court of chancery sought to be had after the cause has been appealed is one calling for a new step or proceeding in that court in aid of the order or decree appealed from (for the protection and preservation of the subject of the appeal), application for leave to so proceed must be made to that court as it invokes original jurisdiction, and the court of errors and appeals, which is a court of appellate jurisdiction only, has no power to put such proceedings in motion in that court; nevertheless, application for leave to so proceed in the court of chancery may be made in the first instance to the court of errors and appeals, at the election of the moving party, but such leave is not required; the advantage of such leave from the court of errors and appeals would be to forestall an appeal from the order made in chancery, although such appeal would not of itself operate to stay the order of the chancery court; but, if an order to proceed in chancery should be obtained from that court without leave first had from the court above, application to the appellate court to staj'' the order of the court below would be open to the appellant. It must be obvious that an order to proceed in the court below, made on leave from the court above, could no more be appealed than could a final decree made on a remittitur from the court of last resort. That court’s decision on any matter being of course an absolute finality.

Disposition will now be made of the application before the court. It has the power to make the order asked for. The facts so far as this present issue is concerned are not disputed, and the respondent is, under the circumstances, entitled to have the subject of the appeal secured pendente lite. An order will be advised that a receiver be appointed, unless the defendant shall, within ten days after service upon him of a copy of such order, enter into bond to the complainant in the sum of $2,000, conditioned that he will well and truly account for the rents, issues and profits of the properly mentioned in the pleadings and decree, which have come to his hands since the date of the decree in that cause,, or that shall be received by him after such date,-and shall pay the same to the complainant under the order of this court, if the decree of this court shall be affirmed, but not otherwise; such bond to be approved by a special master, to be named in the order, and to be filed with the clerk of this court within the time mentioned. In default of the giving of such bond, the respondent shall be at liberty to apply to this court for the appointment of a receiver ex parte and without notice.