author: Donahue, J.

text:
    Thomas v. Matthews.

      Breach of contract — Burden to show performance or tender — Stipulations for delay in performance■ — Facts necessary to maintain action — Contract controlling action of director of corporation — Against public policy and void, zvhen.

    1. Where a plaintiff seeks to recover damages for breach of contract, the burden is upon him to show either substantial performance ■ or tender of performance of the conditions on his part to be performed.
    2. Where a contract provides for delay in the performance of any part thereof for a specified time, and further provides that performance shall not be required until the reasons stated in the contract for the delay in performance have ceased to exist, no action can be maintained upon such contract at the end of the specified period, unless it further appears that the reasons for delay no longer exist or that they still exist through fault of the defendant.
    3. A contract made by a director of a corporation with reference to his official action as such, based upon a consideration personal to himself, is against public policy and void.

      4. A contract made by a director of a corporation that limits or restricts him in the free exercise of his judgment or discretion, or that places him under direct and powerful inducements to disregard his duties to the corporation, its creditors and other stockholders in the management of corporate affairs, is against public policy and void.
    (No. 14899 —
    Decided February 29, 1916.)
    Error to the Court of Appeals of Clark county.
    On the 31st day of December, 1912, Mabel T. Matthews filed a petition in the common pleas court of Clark county against William S. Thomas, to which the defendant filed a motion to make the same more definite and certain.
    This motion was sustained, and on March 1, 1913, an amended petition was filed, in which the plaintiff asked a judgment against the defendant in sums equal to an additional dividend which she claimed should have been declared on stock in The Thomas Manufacturing Company, a corporation organized under the laws of Ohio, for the year 1910, and for the whole amount of a dividend of seven per cent, which she claimed should have been declared by the directors of that company in the year Í911.
    The petition avers, among other things, that the company earned ten per cent, on its capital stock in the year 1910, and declared and paid a dividend of only eight per cent.; that in the year 1911 it earned seven per cent, on the capital stock of the company, but did not declare or pay any dividend in that year.

      The claim of the plaintiff against the defendant for dividends not déclared or paid in 1910 and 1911 is predicated upon a contract, which reads in words and figures following, to-wit:
    “Springfield, Ohio, April 29, 1905.

    “The heirs of John H. Thomas, deceased, having settled and adjusted various matters of controversy and agreed upon a division of the balance of said estate as indicated upon the sheets hereto attached, which are identified by the signatures of A. N. Summers and J. E. Bowman, as part of said adjustment, it is agreed as follows.:
    “First. Said heirs will give the executors of said estate receipts for their respective distributive shares as heretofore ordered distributed by the Probate Court of Clark county. Said heirs hereby ratify the action of said executors in handing over to Mabel Matthews, W. S. Thomas and Findlay B. Thomas, certain assets intended for them, viz.:
    “To Mabel Matthews the following notes:
    A. C. Black...;.............. $6,000.00
    Wm. A. and M. Buffembarger. . 1,500.00
    Moores & Co. and H. H. Moores 7,500.00
    Ed. and A. J. Ryán............ 5,000.00
    J. H. Thomas................ 1,817.00
    Thomas Mfg. Co. notes....... 36,635.98
    “To Findlay B. Thomas the following notes:
    J. S. Crowell................. $7,500.00
    R. F. and F. A. Hayward...... 300.00

      E. and M. Harshman......... 4,000.00
    Emma A. Reed et al.......... 3,000.00
    G. W. and K. Sheaff.......... 1,000.00
    J. H. Thomas................ 7,868.00
    Thomas Mfg. Co. notes........24,917.96
    “To W. S. Thomas the following notes:
    H. R. Geiger................. $3,100.00
    J. A. Hemphill............... 2,500.00
    “And they agree that no further accounting shall be had in the probate court, unless assets are discovered which are not covered or considered in said adjustment; and they further agree that, if new liabilities of said estate are discovered, they will each contribute one-fourth to the payment of same.
    “Second. It. is agreed that so long as either Mrs. Summers or Mrs. Matthews hold at least $10,000 par value of stock in The Thomas Manufacturing Company, the present salaries of W. S. Thomas and H. H. Bean shall not be increased without their consent, excepting for a year in which the company earns and pays a dividend of at least six per cent., and further that for each one per cent, of dividend above six per cent, earned and paid in any year there may be for such year an increase of not more than ten per cent, in one or both of said salaries; not to exceed, however, in any year, a salary of $10,000 for W. S. Thomas and $5,000 for H. H. Bean; also that whenever the net earnings of the company in any year will permit a dividend of at least four per cent., a dividend of the largest whole per cent, permitted by the entire net earnings shall be declared and paid, unless otherwise agreed; but that no such dividend need be paid in the present or in the next six years during which the company has unusual payments to make to the heirs of the J. H. Thomas estate, the payment of any such dividends being postponed until after said last mentioned payments are made.
    “It is further agreed that neither by additional salaries nor by any other means resorted to for such purpose shall the future net earnings of the company be absorbed so as to prevent dividends, 'without the consent of Mrs. Summers and Mrs. Matthews so long as they or either of them remain a stockholder of said company in at least the amount above named.
    “It is further agreed that Mrs. Summers and Mrs. Matthews so long as they remain stockholders in said company in any amount shall annually receive a statement of.the company’s condition and transactions in detail as full as the one given them February 1 of this year; and it is further agreed that no mortgage shall be placed upon the company’s property without their consent.
    “Third. Mrs. Summers and Mrs. Matthews shall each receive a complete detailed inventory of the estate held in trust for Findlay B. Thomas, the same to be delivered within a reasonable time after the execution hereof.
    “Fourth. The trust deed given W. S. Thomas for the Whiteley property shall not be acted upon without consent of all parties thereto, and upon demand of any party thereto at any time, W. S. Thomas, the trustee in said deed of trust, shall re-convey to such party a one-fourth interest in said property.
    “Fifth. No part of the fees that may be charged by J. E. Bowman for services in these adjustments shall be charged to The Thomas Manufacturing Company, or to the estate of J. H. Thomas.
    “Sixth. Clause 2 hereof shall be binding only on W. S. Thomas, and after the expiration of the six-year period above referred to the provisions of Section 2 hereof shall be binding on W. S. Thomas only so long as he remains in the management of the affairs of The Thomas Manufacturing Company, or through his ownership of stock therein is able, with the assistance of other parties hereto to control the management thereof.
    “Seventh. During the six-year period above referred to neither Mrs. Summers nor Mrs. Matthews shall institute any legal proceedings to dissolve The Thomas Manufacturing Company if in her opinion the letter and spirit of this agreement has been faithfully kept by W. S. Thomas.
    “Eighth. As to the dividends that may be declared during the next six years the same shall be payable in the year 1911, excepting as to the excess of any such dividend above 4 per cent, the company shall have the option either to pay the same in cash, or to issue therefor preferred stock at par, bearing 6 per cent., cumulative dividends, and redeemable by the company at par at the end of five (5) years after its issue; provided in case of such preferred stock being issued to any stockholder, the same shall be issued to all stockholders in the same proportion and on the same terms. Such option shall be exercised on or before the first day of November, 1911, and if preferred stock is to be issued the same shall be issued so soon as the necessary steps can reasonably be taken to issue the same.
    “Witness the signatures of the parties on the date above named.
    “William S. Thomas, “Nellie T. Summers, “Mabel T. Matthews, “William S. Thomas,

      “Trustee of Findlay B. Thomas.”

    The amended petition further avers that The Thomas Manufacturing Company was, at the date of the contract, indebted to W. S. Thomas and C. E. Thomas, as executors of the John H. Thomas estate, in the sum of $100,000, and to plaintiff and other legatees under the will of John H. Thomas, in a sum in excess of $70,000, which indebtedness was then past due. It is further averred that the indebtedness of the company to the executors had arisen through their unlawfully loaning the assets of John H. Thomas to The Thomas Manufacturing Company. The amended petition further avers that this plaintiff and Nellie T. Summers, her sister, were demanding payment by The Thomas Manufacturing Company of all the money due and owing by it to these executors, and that the corporation should be dissolved; that W. S. Thomas, who was the president of the company and the owner of a large number of shares of its corporate stock, objected to the corporation making immediate payment, for which reason the plaintiff and her sister consented to an extension of the time for the payment of said sums, released the executors, as executors, from the payment of the same and agreed to take in lieu thereof the notes of The Thomas Manufacturing Company, whereby the said indebtedness was distributed over a period of five years.
    To this amended petition the defendant filed a general demurrer, which was overruled by the court. Thereupon the defendant filed an answer, admitting the execution of the written agreement dated April 29, 1905, admitting that the net earnings of The Thomas Manufacturing Company in the year 1910 were ecpial in amount to ten per cent, of its capital stock and that the earnings in the year 1911 were equal in amount to seven per cent, of its stock, but denying that such earnings permitted a dividend of four per cent, or any other per cent, in excess of eight per cent, in the year 1910, for the reason that said net earnings were not of a character' that could be distributed by way of dividends, but consisted of accounts due the company and accretions to its assets made necessary for the successful conduct of its business; averring further that the company was largely indebted, that the indebtedness mentioned in the petition and contract, which was paid as required to the plaintiff and her sister, was in large part borrowed from other persons and banks in order to make such payments, and that said company has large indebtedness in addition thereto; that all of the income of the company that could be spared from the conduct of its business was applied to the reduction of its indebtedness; and that no dividend could have been declared or paid without an injustice to creditors and injury to its stockholders. Defendant further avers that the money which plaintiff would have received had dividends been declared and paid, had all been used for her benefit in the preservation of the business and prosperity of the company by reduction of its debts, and for this reason she had sustained no damage by reason of the failure of the company to declare and pay dividends.
    For a second defense the defendant avers that at the time of the execution of the contract, and for some years prior thereto, he was one of a board of five directors of said company; that he had no control over the other directors of the company; thaf he could not at any time have procured the declaration of dividends by the company beyond those dividends that were declared; that by reason of the large indebtedness of the company and the state of its business no dividends such as claimed by the plaintiff ought to have been declared, having due regard for the rights of creditors and stockholders, and that neither he nor any other member of the board of directors could have voted in favor of declaring further dividends without a wilful violation of his duty as such director; and that the plaintiff and her sister, during the years in question, failed and refused to participate in the election of directors of said company or to assist the defendant in any way to control the action of its board of directors in the premises, and that the management and control of the affairs of said company ever since the date of said contract has resided in its board of directors and not in this defendant.
    For a third defense the defendant avers that notwithstanding the provisions of the contract, and during the six-year period covered thereby, the plaintiff, in conjunction with her sister, in March, 1909, wrongfully began legal proceedings to dissolve The Thomas Manufacturing Company, and prosecuted such suit to final judgment in the circuit court of Clark county, Ohio; that said suit was pending at the time of the commencement of this suit and had only been finally adjudicated against the plaintiff and her associates, as plaintiffs in that suit, within a few days preceding the filing of this answer; and that at the time of the filing of the answer no entry of the judgment of the circuit court had yet been made on the journal of that court.
    Defendant avers that these proceedings to dissolve said company greatly embarrassed the company in the conduct of its business and the expense of defending said proceedings greatly increased the cost of carrying on the business of the company, that its credit was greatly impaired and its earnings reduced from what they otherwise would have been, and that for these reasons it was impossible for the company to declare and pay dividends.
    The plaintiff for reply denied specifically the allegations in the several defenses of the answer, except such as were admissions of the averments in the petition, and averred that the defendant refused to act with her or her sister or their representatives on the board of directors in the management of said corporation, and that they then were and at all times had been willing to unite with the defendant in the control of said corporation and the declaring and paying of the dividends provided for in said contract.
    Upon the issue joined by the pleadings the jury returned a verdict in favor of the defendant, and judgment was rendered thereon. Error was prosecuted to this judgment in the court of appeals of Clark county, which court reversed the judgment of the common pleas' court, for error in the charge to the jury with reference to the validity of this contract and with reference to the question of cooperation of the plaintiff and her sister with the defendant in the control of the company’s business, in that the trial court did not charge the jury, “in respect to the readiness and willingness of W. S. Thomas to declare dividends, that the same was communicated to the plaintiff and that she declined to cooperate.”
    This proceeding in error is prosecuted in this court to reverse the judgment of the court of appeals reversing the judgment of the common pleas court.

      Mr. Paul C. Martin and Mr. J. E. Bowman, for plaintiff in error.

      Mr. Lawi'ence Maxzvell and Mr. A. N. Summers, for defendant in error.
   Donahue, J.

If it be true, as pleaded in the petition, that W. S. Thomas entered into this agreement for the declaration and payment of dividends by The Thomas Manufacturing Company in consideration that he be released from personal liability as executor of the estate of John H. Thomas, for money unlawfully loaned by him as executor to The Thomas Manufacturing Company, or for any other consideration personal to himself, then this agreement is against public policy and void.

It is the settled law of this state that directors must manage the corporate business with a view solely to the common interest, and cannot directly or indirectly derive personal profit or advantage from their position which is not shared by all the stockholders.

The maxim, uberrima fides,- of the civil law applies without limitation or restriction to their relation to the corporate property and business. They occupy a strictly fiduciary relation to the stockholders and are accountable to them on principles governing that relationship. Rouse, Trustee, v. Merchants’ National Bank, 46 Ohio St., 493, 502; Larwill v. Burke et al., 66 Ohio St., 683, affirming Larwill v. Burke et al., 19 O. C. C., 449; Peter v. The Union Mfg. Co. et al., 56 Ohio St., 181; Greenville Gas Co. v. Reis et al., 54 Ohio St., 549, 558; Elliott on Private Corporations (4 ed.), Sections 502, 503; 8 Thompson on Corporations (2 ed.), Sections 1215, 1216; Warren v. Para Rubber Shoe Co., 166 Mass., 97, 104, and 1 Morawetz on Private Corporations (2 ed.), Section 517.

This contract does not in terms release W. S. Thomas from liability for any funds loaned by-him as executor to The Thomas Manufacturing-Company. It does provide that the heirs of the John H. Thomas estate will give the executors of that estate receipts for their respective distributive shares as theretofore ordered distributed by the probate court of Clark county. That is the ordinary and natural thing to do where distribution is made to heirs under the order and directions of the court. The agreement to give such receipt is directly referable to the agreement to distribute.

The agreement on the part of 'the heirs to ratify the action of the executors in delivering to certain of the heirs assets intended for them, is also a natural and proper thing to do, and that would seem to have no application other than to that part of the contract relating to the distribution of this estate. The agreement that no further accounting-should be had in the probate court is an agreement of mutual value to all of the heirs as well as to the executors. The consideration for such a contract is the mutual agreement of the parties thereto.

In the absence of an action to reform this contract, it is the duty of the court to construe it in the terms in which it is written. An agreement will not be adjudged to be illegal when it is capable of a construction that will make it valid. Lorillard v. Clyde, 86 N. Y., 384.

This contract is dual i'n its nature. One part of it relates to the settlement of a controversy among the heirs of John H. Thomas, deceased, relative to the settlement and distribution of his estate; the other part relates to the management of the affairs of The Thomas Manufacturing Company, a corporation organized under the laws of Ohio, of which corporation the parties to this contract are stockholders in various amounts. Upon the face of the contract these different subject-matters have no necessary relation to each other.- If they can be separated, then this would relieve this part of the contract from the infirmity of a consideration personal to W. S. Thomas. (Ohio, ex rel. Laskey et al., v. Board of Education of Perrysburg, 35 Ohio St., 519; Doty et al. v. The Knox County Bank, 16 Ohio St., 133; Widoe v. Webb, 20 Ohio St., 431, 435; Pollock on Contracts, 8 ed., 390.) On the other hand, if these considerations and agreements in relation to the settlement and distribution of the John H. Thomas estate are part of the considerations for the agreement of the parties in reference to the business of The Thomas Manufacturing Company, then this contract must fall, for The Thomas Manufacturing Company cannot be made the shuttlecock of the dissensions of the Thomas heirs.

If this part of the contract may be construed •separately, then the only consideration for the promise of W. S. Thomas in relation to dividends is found in clause seven thereof, which provides that during the six-year period, neither Mrs. Summers nor Mrs. Matthews shall institute any legal proceedings to dissolve The Thomas Manufacturing Company if in her- opinion the letter and spirit of this agreement has been faithfully kept by W. S. Thomas. This consideration is one moving directly to The Thomas Manufacturing Company and indirectly to W. S. Thomas as a large stockholder therein. There can be no objection to this because of the fact that he will profit, or expects to profit, as a stockholder in this corporation by reason of the forbearance of the other contracting' parties to bring this suit. The same benefits would accrue to all the stockholders alike. True, there is nothing definite as to the time of forbearance. That is a matter to be determined by this plaintiff or her sister; it is an agreement to delay bringing this suit for an indefinite time, and a sufficient consideration for a valid agreement on the part of W. S. Thomas, who was largely interested as a stockholder in the continuation and prosperity of the business of this corporation.

It is averred in the answer, and admitted by the plaintiff, that during the six-year period named in the contract, to-wit, in March, 1909, this plaintiff and her sister began an action in the common pleas court of Clark county to dissolve The Thomas Manufacturing Company and prosecuted that suit to final judgment. That suit was pending at the time of the commencement of this suit in December, 1912.

Conceding for the present that this arrangement for the declaration and payment of dividends is a valid one, based upon the consideration that plaintiff and her sister would forbear to bring this suit for the dissolution of the company — and this is the only consideration mentioned in the contract that is not personal to W. S. Thomas — then the fact that this plaintiff elected to withdraw from the contract and bring the action undoubtedly released W. S. Thomas from the performance of the covenants and conditions in the contract on his part thereafter to be performed. The plaintiff cannot claim the benefits of the contract and reject its burdens. She could not have a dissolution of the corporation in 1909 and dividends declared according to the provisions of this contract in 1911. It could not possibly have been within the contemplation of the parties to this contract that this agreement on the part of W. S. Thomas with reference to dividends should survive the bringing of a suit for the dissolution of the corporation that was to declare and pay these dividends. The fact that such a suit was pending would necessarily affect the judgment of the board of directors in determining not only the amount available for the payment of dividends, but also as to the advisability of declaring and paying any dividends. The directors of a corporation not only stand in the relation of trustees to the stockholders, but where a corporation is insolvent or threatened with insolvency, or where a suit for dissolution is pending, they stand in the relation of trustees to the creditors, and they are not permitted to divert assets from the payment of its debts by distributing these assets to the stockholders as dividends; neither can they be permitted to anticipate the action of the court. It is their duty to conserve these assets until the final judgment of the court in the dissolution proceedings, and deliver the same to the receiver appointed by the court, if one should be appointed. Any distribution of its assets in dividends or anjr application of its funds to other than corporate business pending such an action, would be at their peril. Goodin v. The Cincinnati & Whitewater Canal Co. et al., 18 Ohio St., 169; Elliott on Private Corporations (4 ed.), Section 401; Thompson on Corporations (2 ed.), Sections 1305, 5324, and 2 Morawetz on Private Corporations (2 ed.), Section 787.

Under such circumstances the directors cannot safely rely upon the values shown by the company’s invoices. The value of a manufacturing plant as a going concern is always in excess of its value as an abandoned enterprise. Had this action of the plaintiff resulted in an order dissolving this corporation and appointing a receiver, its assets would necessarily have shrunken in value far below the value carried on its books, and possibly below the amount of its indebtedness. As shown by the report published by this court of that case, the petition filed for the dissolution of this corporation averred that in the fifteen years preceding- the corporation had paid but three dividends — one of six per cent, and two of five per cent, each — and that during- the eight years since the death of John PI. Thomas the business had been carried on by the owners of a majority of the stock at a loss of more than $43,000; that there had been a great depreciation in the value of the property, and that in the preceding seven years nothing had been charged off for depreciation. It further appears- from the uncontradicted evidence in this case that on October 1, 1910, the debts were $426,961.56, that there was then cash on hand available for the payment of these debts $55.06, and that on October 1, 1911, the indebtedness of the company was $417,998.54, with cash on hand $145.37.

With such a petition confronting the board of directors and with the knowledge of the enormous indebtedness of this corporation, the declaration and payment of dividends would not only have authorized but would have been an invitation to creditors to intervene to protect their rights by the immediate appointment of a receiver.

The averments of this petition to dissolve this corporation, if true — and undoubtedly the plaintiff believed them to be true, not only when she filed the petition but during the time she prosecuted this suit — show beyond question that she had abandoned all hope of dividends from this corporation and had reached the conclusion that it was for the best interest of the stockholders to dissolve the corporation, pay its debts and distribute the surplus of its assets, if any, to the stockholders. Whether she was right or wrong in this conclusion is unimportant. Her actions none the less evidence her mental attitude in reference to these matters. One of the best aids to a court in construing a contract is the construction the parties themselves have given it as shown by their conduct in relation to the subject-matter thereof. Therefore, if there were any doubt as to the proper construction of this contract, the action of the plaintiff would resolve that doubt in favor of the construction that, having brought suit for the dissolution of the corporation in March of 1909, she cannot now rely upon the provisions of the contract for the declaration and payment of dividends in 1910 and 1911 with that suit pending at the same time in the courts of this state; or, for that matter, after the final disposition of that case, whether it resulted in an order dissolving this corporation or not.

It further appears from the sixth clause of this contract that the parties thereto contemplated that the plaintiff and her sister would join with W. S. Thomas in the control and management of this corporation, in order to make it possible for W. S. Thomas to perform the conditions on his part to be performed. At the time the contract was written the plaintiff and her sister were represented on the board of directors of this corporation. The provision of the contract that this condition should obtain after the six-year period necessarily implies that it was expected and intended by all the parties to the contract that it should also obtain during those six years. When this contract was written the parties thereto must have known and .understood that W. S. Thomas, as one of the directors of this corporation, could not declare and pay any dividends, no matter how willing he might be to do so. If this provision of the contract means anything it means that he agreed to join with the directors representing the plaintiff and her sister in voting to declare such dividends. The further provisions of this contract fully justify this construction, yet in 1907 or 1908 this plaintiff and her sister withdrew their representatives from this board of directors, refused to have anything further to do with the corporation’s affairs and brought an action for its dissolution. This placed it beyond their power to furnish him any assistance whatever in carrying out this provision of the contract.

The court of appeals held that the trial judge erred in failing to charge the jury that it was the duty of W. S. Thomas to notify the plaintiff of his readiness and willingness to vote as a director to declare dividends and to show by further evidence that she declined to cooperate. It is the settled law of this state that before recovery can be had upon a contract the plaintiff must show either that he substantially performed or tendered performance of the conditions on .his part to be performed. Raudabaugh v. Hart, 61 Ohio St., 73, and Mowry v. Kirk & Cheever, 19 Ohio St., 375.

It is not the duty of the defendant in a suit for damages for breach of contract to demand performance on the part of the plaintiff or to notify him of his readiness and willingness to perform. That duty is upon the party to the contract who seeks to recover for its breach. However, in this particular case, a notice on the part of W. S. Thomas to this plaintiff that he was ready and willing to comply with the terms of the contract would have been wholly useless, for she had already placed herself in a position that made it impossible for her to render him any assistance whatever in the declaration of these dividends. It would have been an indicia of fraud on his part to make a formal demand upon this plaintiff to do something that he knew she had not the power to do. She was not then a director, nor had she any representative on the board of directors; on the contrary, she was' then in court demanding the dissolution of this corporation for the reasons stated in her petition that the company was not only not earning any dividends, but was operating at a loss. A notice to her would necessarily have meant nothing except a palpable attempt on the part of W. S. Thomas to manufacture a defense to a possible suit upon this contract.

The second clause of this contract provides that “no such dividend need be paid in the present or in the next six years during which the company has unusual payments to make to the heirs of the J.'H. Thomas estate, the payment of any such dividends being postponed until after said last mentioned payments are made.”

It is averred in the first defense of the answer that while the debts to this plaintiff and her sister were paid, yet they were paid largely with money borrowed for that purpose. The evidence is undisputed that nothing has been paid to W. S. Thomas or Findlay B. Thomas. Undoubtedly the parties to the contract expected that the earnings of this company would pay and discharge these debts within the six years next succeeding, but in this expectation they have been disappointed. The fact that money was borrowed to pay the plaintiff and her sister does not relieve the corporation from this debt. To the extent of the money borrowed it is still the same debt, although owing to a different creditor. The debt to the other heirs has not been paid even in part, either with earnings of the company or with borrowed money, and therefore the provision of the contract that the payment of dividends shall be postponed until after these debts to the Thomas heirs have been fully paid necessarily defeats the plaintiff’s right of action, for although the contract provided that dividends shall be paid in 1911, yet it further just as specifically provided that the payment of any such dividends shall be postponed until after payment to the John H. Thomas heirs has been made.

It is contended on the part of the plaintiff in error that the trial court erred in its charge to the jury as to the damages that might be recovered in this case. The court charged the jury that the plaintiff could recover from the defendant a sum equal to her share of the full amount of a dividend that would equal the net earnings of the company in these years. If this contract were a guarantee on the part of W. S. Thomas, made upon sufficient consideration, that the company would earn these dividends, then the charge of the court would be right. Moorehouse v. Crangle, 36 Ohio St., 130, and Lorillard v. Clyde et al., 86 N. Y., 384.

But this contract is not a guarantee that these earnings would be made by the company. It is merely a promise that if the earnings are made they will be distributed in dividends. Where net earnings are not distributed in dividends no such rule obtains. These earnings must ultimately be distributed in dividends or expended in betterments to the property, and in either case they inure to the benefit of the stockholders. It is doubtful if any rule can be formulated by which the damages to a stockholder for failure to declare and pay dividends from net earnings could be estimated in dollars and cents. It is certain, however, that the rule given to the jury by the trial court is not a correct one and not applicable to the facts in this case. A judgment against this defendant for the full amount of the plaintiff’s share of the net earnings of this corporation that is still in its treasury or represented in betterments, merchandise or credits, leaving her the full right to participate as a stockholder either in the increased value of her stock or in future dividends that would necessarily be based in part upon these earnings, would be grossly inequitable and wholly unfair to the defendant.

If it were conceded, however, that the consideration for this contract is valid and that the defendant in error had fully performed all the conditions on her part to be performed, yet the record presents the further question of her right to recover damages for a breach of this provision of the contract in reference to the declaration and payment of dividends. This right to recover depends upon the legality of the promise or agreement on the part of a director and general manager of a corporation to declare and pay dividends for the six years next succeeding the date of the contract, and thereafter so long as he remains in the management of the’ affairs of the corporation, or through his, ownership of stock therein, is able, with the assistance of the other parties to the contract, to control the management.

It is insisted upon the part of the defendant in error that this is a contract fixing the policy of the company with reference to the distribution of profits not needed in the company’s business, instead of creating and carrying a large and unnecessary surplus in the treasury, and that such a contract is valid. Yet counsel for the defendant in error, while contending that this is the proper construction of this contract, nevertheless insist that this contract requires that a dividend shall be declared each year equal to the entire net earnings of the company for that particular year. The language of the contract in that respect is as follows:

“Whenever the net earnings of the company in any year will permit a dividend of at least four per cent., a dividend of the largest whole per cent, permitted by the entire net earnings shall be declared and paid, unless otherwise agreed.”

The authorities are uniform that the term “net earnings which will permit the payment of a dividend” are the surplus earnings that remain after defraying every expense, including loans falling due as well as the interest on such loans. Mobile & Ohio Rd. Co. v. Tennessee, 153 U. S., 486; Hubbard v. Weare, 79 Ia., 678; Scott v. Eagle Fire Co., 7 Paige (N. Y.), 198; Stevens v. U. S. Steel Corp., 68 N. J. Eq., 373; Cratty v. Peoria Law Library Assn., 219 Ill., 516; Elliott on Corporations, Sections 400, 401; 5 Thompson on Corporations (2 ed.), Sections 5311, 5312.

Authorities are also uniform in holding that it is the duty of the directors, in determining the amount of net earnings available for the payment of dividends, to take into account the needs of the company in its business and sums necessary in the operation of its business until the income from further operations is available, the amount of its debts, the necessity or advisability of paying its debts or at least reducing them within the limits of the company’s credit, the preservation of its capital stock as represented in the assets of the company'as a fund for the protection of its creditors and the character of its surplus assets, whether cash, credits or merchandise.

It is true that the law permits a corporation to borrow money to pay dividends when the earnings are represented in credits or merchandise readily reducible to cash, but if the company is then so largely indebted that it cannot borrow the money necessary for the payment of dividends upon its own credit, then the net earnings represented in credits and merchandise do not permit the payment of dividends, for it would hardly be contended that under any construction of this contract W. S. Thomas would be required to secure or furnish security for the repayment of money borrowed to pay dividends.

This provision in the contract, that net earnings less than four per cent, need not be distributed, contemplates the necessity of the corporation using some of its net earnings each year for betterments, for the reduction of its indebtedness and the further development of its business.

The provision in this contract as to net earnings, that would permit the payment of dividends, must necessarily be given the same construction as uniformly given it by the courts in defining these terms. It may be said that if this construction obtains, then the contract might as well not have been written, at least so far as this provision of it is concerned, for equity would afford the same protection to the stockholders. That thought undoubtedly was in the mind of the judge of this court writing the opinion in the case of Summers et al. v. The Thomas Mfg. Co., 82 Ohio St., 338, when he said that “It will be easier to assume than to demonstrate that the agreement of the sisters is supported by any consideration whatever.” However, if such an agreement were made and assented to by all the stockholders and directors, it would amount to a contract fixing the policy of the company as to the amount of surplus it would retain in its treasury and would aid largely in a proper suit in determining whether the directors were guilty of an abuse of discretion in refusing to declare a dividend.

On the other hand, if this provision of the contract requires W. S. Thomas, as director, to vote for the declaration and payment of dividends in a sum equal to the net earnings of the company each year, after deducting operating expenses only, without regard to the losses, if any, in the preceding years, the debts, need of betterments and requirements of the company in the operation of its business, and deprives or limits him in the exercise of a fair and honest discretion in the discharge of his official duty to the corporation and its stockholders, then such contract is against public policy and void. Bliss v. Matteson, 45 N. Y., 22; Woodruff v. Wentworth, 133 Mass., 309; Guernsey v. Cook, 120 Mass., 501; Woodstock Iron Co. v. Richmond & Danville Extension Co., 129 U. S., 643, and Wardell v. Railroad Co., 103 U. S., 651.

“A director has no right to sell his influence in the management of the company, or to enter into any agreement by which his official action would be influenced or controlled. Such an agreement would be dishonest and illegal; it would be an agreement to commit a breach of trust.” 1 Morawetz on Private Corporations (2 ed.), Section 519.

In the case of West v. Camden, 135 U. S., 507, the trial court charged the jury that a contract the purpose and effect of which was to influence the defendant as a stockholder and officer of the company in the decision of a question affecting the private rights of others, and by which contract he was placed under direct and very powerful inducements to disregard his duties to other members of the corporation who had a right to demand his disinterested action, was against, public policy and void. This charge was sustained by the supreme court of the United States.

In the case of Singers-Bigger v. Young, 166 Fed. Rep., 82, it was held that a contract by which a stockholder employed a director to look after his interest in a corporation was against public policy and void, in so far as it obligated the director to assist the plaintiff to control the corporate action of the company, regardless of his duty as a director to represent and act for all the stockholders alike.

A contract written in 1905 requiring a director of a corporation to declare and pay in dividends the entire net earnings of the company in the years 1910 and 1911, regardless of the financial condition of the company, its losses in previous years and its maturing debts and interest, could not be sustained upon any theory. In human affairs there is no such thing as certainty. No stockholder or director can know in 1905 what the financial condition of a corporation will be in 1911, or for that matter in any of the intervening years. Such a contract would prevent him from exercising a fair and unbiased judgment upon the facts and conditions presented for his consideration in 1911 and is necessarily void. Any other conclusion would be destructive of corporate interests, and would deprive the minority holders of stock of the protection afforded to them by the judgment of a board of directors, uninfluenced by personal consideration or private contract.

Counsel for defendant in error rely upon the case of Moorehouse v. Crangle, 36 Ohio St., 130. That was a contract, guaranteeing that profits would be earned and paid by the corporation, made with the plaintiff as an inducement for him to subscribe for stock in the corporation. There was no agreement that dividends would be declared regardless of the needs of the company. The sole agreement relied upon was that profits would be earned and paid in the regular, ordinary, proper way. The court held that this was a personal contract of guaranty on the part of the defendant, and not a contract to answer for the debt, default or miscarriage of another. Clearly that case has no application to the questions involved here.

The case of Lorillard v. Clyde et al., 83 N. Y., 384, involves the same principle decided in the case of Moorehouse v. Crangle, supra.,

Neither has the case of Doan v. Rogan, 79 Ohio St., 372, any application to the questions presented by this contract. That was a contract among all the promoters of a proposed corporation, by the terms of which Rogan was to furnish all of the capital and Doan, Mahon and Roth to give their personal services and attention to the business of the then existing partnership and of the proposed corporation, for a period of three years. As an inducement to Rogan to furnish this capital it was agreed that if either Doan, Mahon or Roth should sever his connection with the temporary partnership or proposed corporation, without the consent of Rogan, the person so offending was to pay to Rogan the sum of $1,000 as liquidated damages. The action was brought against Doan under this clause of the contract, and the court held that there was nothing invalid or unlawful in this provision of the contract of the promoters for the protection of Rogan, who furnished all the capital, it appearing that the contract was made and entered into by all the persons interested or to become interested as stockholders in the proposed corporation.

On the other hand, the authorities are uniform that a director of a corporation cannot barter and sell his official discretion, nor enter into any contract whatever as to his actions in his official capacity that will in any way restrict or limit the free exercise of his judgment and discretion, or place him under any direct and powerful inducement to disregard his duty to the corporation and the stockholders in the management of the corporate affairs. Such a contract is against public policy and void.

Judgment of the court of appeals reversed, and judgment of the common pleas court affirmed.

Nichols, C. J., Johnson and Wanamaker, JJ., concur.


source: Caselaw Access Project

author: Johnson, J.

license: Public Domain

text:
    The State of Ohio v. The Cleveland & Pittsburgh Railroad Co. et al.

      Navigable waters — Control and power of federal government — Title to and rights in subaqueous soil under Lake Brie — Title in state as trustee — Control by state of harbor within harbor lines — Littoral owner may wharf out, when — Rights of state, public and littoral owners.

    1. Under the constitutional grant of authority to regulate interstate and foreign commerce, the United States government has paramount control of navigable waters and power to establish therein harbor lines and regulations.
    2. The title and rights of littoral and riparian proprietors in the subaqueous soil of navigable waters, within the limits of a state, are governed by the laws of the state, subject to the superior authority of the federal government.
    3. The title of the land under the waters of Lake Erie within the limits of the state of Ohio, is in the state as trustee for the benefit of the people, for the public uses to which it may be adapted.
    4. The state has control of a harbor within a harbor line and may enact legislation prescribing regulations in connection therewith and to secure the rights of the public, provided it does not conflict with the regulations of the federal government.
    5. The littoral owner is entitled to access to navigable water on the front of which his land lies, and, subject to regulation and control by the federal and state governments, has, for purposes of navigation, the right to wharf out to navigable water.

      6. The ownership of the waters of Lake Erie and of the land under them within the state is a matter of public concern. The .trust with which they are held is governmental, and the state, as trustee for the people, cannot by acquiescence or otherwise abandon the trust property or permit a diversion of it to private uses different from the object for which the trust was created. The littoral owner is charged with knowledge that nothing can be done by him that will destroy the rights of the public in the trust estate.
    (No. 14825
    —Decided February 29, 1916.)
    Error to the Court of Appeals of Cuyahoga county.
    This was a proceeding brought in the court of common pleas of Cuyahoga county by the state against The Cleveland & Pittsburgh Railroad Co., The Lake Shore & Michigan Southern Railway Co., The Pennsylvania Co. and The New York Central Railroad Co.
    The petition alleges that the defendants are the owners of certain lands, forming a contiguous tract, having a frontage of about 1,415 feet on the south shore of Lake Erie, just west of the mouth of the Cuyahoga river 'where it enters the artificial harbor created by the United States government breakwater.
    It is averred that all of the land covered by the waters of Lake Erie within the boundaries of the state of Ohio, and especially that part of such land co'nstituting the bed of said waters contiguous to the above-described tracts of land, is owned by the state of Ohio as proprietor thereof, subject to the common-law rights of the defendants and the general public to the use of the waters over said land for the purposes of navigation and fishery.
    It is averred that within a period of about six months previous to the filing of the petition the defendants had been filling in the waters of the harbor in front of their land and had proceeded with the fill along said frontage out from the shore for a distance of from 15 to 165 feet; that the territory so filled had been in the past and was still being used as the anchorage for considerable of the water craft using said harbor of the city of Cleveland and that the effect of the fill and threatened filling will be to prevent or limit such use thereof in the future and to limit the space available in said harbor as a refuge harbor for the water craft of the lake and an anchorage for all craft using said harbor, including log rafts, as it has been used, is now being used and will be more extensively used in the future.
    The petition alleges that the submerged territory in front of the defendants’ lands is owned by the state of Ohio as proprietor thereof and that defendants are filling up the waters of Lake Erie without any grant of right to do so from the government of the United States, or the state of Ohio or from any person, officer or corporation vested with any right or authority to grant Such privilege.
    The prayer of the petition is for an injunction to stop further filling and that the defendants be ordered to restore the waters to their original condition.
    The defendants in their answer for a first defense admit their ownership of the uplands, the filling in as alleged in the petition and deny the other allegations in the petition.
    For a second defense they allege the establishment by the United States government of a harbor line, previous to September, 1910, about 1,000 feet out in the harbor in front of the uplands of defendants, and that the territory between the shore line and the harbor line was shallow and nonnavigable.
    They further aver that in order to avail themselves of the riparian rights vested in them by reason of the ownership of the tracts of land above mentioned, abutting on the shore of said lake, it is necessary to fill in upon the bed of said lake in order to wharf out to said harbor line and thereby reach navigable water; that the distance between the present shore line and said harbor line is so great that it is impracticable, as well as impossible, for said defendants to place themselves in a position where they may be able to avail themselves of and enjoy the use of said riparian rights in connection with the navigable waters of said lake without so wharfing out by filling in upon the bed of the lake.
    For a third defense they aver that, with the knowledge and acquiescence of the state, adjoining owners of property had made fills which had caused the water in front of defendants’ uplands to become more shallow and had caused deposits of sand in bars upon the bed of said lake in front of defendants’ property, thereby making it impossible to use the waters of said lake immediately in front of said defendants’ tracts, or at any point inside of the established harbor line, for the purpose of navigation.

      For a fourth defense it is alleged that since a very early period in the history of the city of Cleveland, to-wit, 1845, there had existed a custom for property owners and the city to make fills along the shore of the harbor of the city of Cleveland to the knowledge and with the acquiescence of the authorities of the state of Ohio; that under favor of said custom certain railroad companies created what is known as the “Bath Street Tract,” lying immediately east of the easterly pier of the Cuyahoga river at said harbor, consisting of an area of upwards of eighty acres of land; that said property has been extended to the harbor line established by the United States government; that millions of dollars have been expended in the construction thereon of slips, docks, loading and unloading plants for coal and iron ore, warehouses, depots and track facilities; that the city of Cleveland, acting under favor of riparian rights, has filled in upon the bed of said lake until it has reclaimed from said lake upwards of fifty to sixty acres of land; that said custom was well known to the authorities of the state of Ohio and that they never raised any objection or made any claim that the bed of the lake was owned by the state or that any filling in thereon was a trespass.
    For a fifth defense it is alleged that transportation facilities in and out of said city of Cleveland are inadequate to properly handle the traffic, for the reason that the tonnage of raw material and merchandise has increased with such rapid strides during recent years as to make it impossible for railroads to keep pace with the same, and that the city of Cleveland and the corporations whose lines of railroad center there have in contemplation joint improvements involving extensive changes in the handling of traffic in and out of the city, both by rail and boat; that the contemplated improvements will require a change in the present bridge over the Cuyahoga river and the construction of a second bridge across said river and the filling in of the bed of the lake from the shore to the harbor line. They allege that the filling now being prosecuted is to meet the present needs of the defendants and in view of the more extensive changes contemplated. They allege that in the filling in upon the bed of the lake they are only doing that which the great needs of the public demand at the Cleveland harbor and improving their property through the exercise of their riparian rights so as to enable them to meet the demands of the public and discharge their duties as common carriers.
    The state in its reply admits the establishment of the harbor line by the United States government along a part of the water frontage of Cleveland, including the particular upland in question, and that certain littoral owners, including the city of Cleveland, had made certain fills, but alleges that all of said fills had been made without notice to or consent of the state, and further alleges that the filling done by the city of Cleveland was not with any intention of claiming any interest adverse to the pláintiff, but was for the protection and benefit of the rights of the public generally.

      The plaintiff further admits that there is a demand at the port of Cleveland for increased dock-age and other transportation facilities and that such demand has been the subject of much discussion between the defendants and the representatives of the city of Cleveland and civic organizations of said city involving numerous plans, but that no general or particular plans have yet been decided upon and at no time has the interest of the city or public sought by this suit to be protected been overlooked, nor has any plan contemplated by the city involved the surrender of the control of the territory here in question.
    At the close of the state’s case the trial court sustained a motion of the defendants that the petition of the plaintiff be dismissed and judgment be rendered for the defendants. The court of appeals affirmed this judgment, and this proceeding is brought to reverse the judgments of the courts below.

      Mr. Edward C. Turner, attorney general; Mr. Clarence D. Laylin and Mr. Robert M. Morgan, for plaintiff in error.

      Messrs. Squire, Sanders & Dempsey; Mr. Samuel H. West; Mr. William C. Boyle; Mr. William L. Day and Mr. W. L. Fleming, for defendants in error.
   Johnson, J.

The federal government, under the constitutional grant of authority to regulate interstate and foreign commerce, has power to establish harbor lines in navigable waters. In the exercise of that power it did establish a harbor line in Lake Erie- about 900 feet out from the shore in front of defendants’ land. The defendant companies and other littoral proprietors have made extensive fills and wharves between the shore and the harbor line.

The contention of the plaintiff is that the state is the absolute owner of the subaqueous land between the shore and the harbor line, and that the littoral owner has no right to wharf out, either by filling in or otherwise, to reach navigable water. It is contended that this is the rule fixed by the English common law, which it is claimed prevails in Ohio.

The defendants concede that the title to the submerged land is in the state, not as absolute proprietor but as trustee for the public in the protection of navigation and fisheries, subject to the paramount right of the federal government in the regulation of navigation.

They claim that incident to the ownership of the upland the littoral owner has a right to wharf out to navigable water, and that this is a property right which cannot be taken from him under the constitution- without compensation. They insist that where the United States government establishes a harbor line it fixes at that point navigable water, and the right exists in the owner of the foreshore to wharf out, by filling in or otherwise, over the shallow waters between the shore and the harbor line in order to reach the point of navigability thus established.

It is well settled that the title and rights of riparian and littoral owners in the subaqueous soil of navigable waters within the limits of a state are governed by the laws of the state, subject to the paramount rights of the government of the United States. There has been no general legislation by the state of Ohio regulating the construction of wharves.

Impressed with the importance of the subject, counsel have submitted able and exhaustive briefs on the question. They disclose a wide diversity of view as to public and private rights in subaqueous land below the high-water mark of. navigable waters. It may be safely said that there is scarcely any question which has caused greater conflict of opinion or produced more diverse results than that relating to the title of land under water. In many instances different conclusions have been arrived at in the same jurisdiction under various circumstances. Courts have differed in the method of reasoning as well as the grounds upon which they have arrived at their conclusions.

Counsel for the state insist that by the common law of England the littoral owner has no right to wharf out under such circumstances as áre found in this case, and that in the absence of statutory or constitutional provisions to the contrary that law applies in Ohio. We think that the latter proposition, as stated, is too broad. There has been full recognition of our indebtedness to the English common law as the fundamental source of our system of jurisprudence, but our courts have realized that it is not in all cases suitable to our institutions and our circumstances.

It has been repeatedly determined by the courts of this state that they will adopt the principles of the common law as the rules of decision so far only as those principles are adapted to our circumstances, state of society, and form of government. Lessee of Lindsley v. Coats, 1 Ohio, 243.

In Bloom v. Richards, 2 Ohio St., 387, Judge Thurman spoke for the court: “The English common law, so far as it is reasonable in itself, suitable to the condition and business of our people, and consistent with the letter and spirit of our federal and state constitutions and statutes, has been and is followed by our courts, and may be said to constitute a part of the common law of Ohio. But wherever it has been found wanting in either of these requisites, our courts have not hesitated to modify it to suit our circumstances, or, if necessary, wholly to depart from it.”

In The C., C. & C. Rd. Co. v. Keary, 3 Ohio St., 201, Judge Ranney declared: “We profess to ad-, minister the common law of England, in so far as its principles are not inconsistent with the genius and spirit of our own institutions, or opposed to the settled habits, customs, and policy of the people of this state, thereby rendering it inapplicable to our situation and circumstances.”

The strict rule of the common law of England which deprived the littoral and riparian owner of the right to wharf out and which originated in the time of the Stuarts has been much relaxed in Great Britain.

In Buccleuch v. Metrop. Bd. of Works, L. R., 5 H. L., 418, decided in 1872, there was a material modification of the original rule, made in favor of the riparian owner. In that case the right of access was held to belong to the riparian owner, as also in Lyon v. Fishmongers’ Co., L. R., 1 App., 662 decided in 1876.

In this country many courts have pointed out the differences in our situation from that in England which prevent the application of the strict rule of the common law.

For example, in Bell v. Gough, 23 N. J. Law (3 Zab.), 624, it is said, at page 669: “Indeed it is doubtful if any of the states recognize the doctrines of the common law of England on the subject of rivers and other waters precisely as they are held there. Those doctrines grew out of a state of things and of usages different from ours, and cannot be literally applied to circumstances so materially different as those found to exist in the United States.”

In Shively v. Bowlby, 152 U. S., 1, Mr. Justice Gray instructively develops the learning on the subject. He sets out a very complete history of the growth of the law in England and in the United States. He begins with a review of the treatise “De Jure Maris,” written by Lord Chief Justice Hale, who is conceded to be the great authority in the law of England on this subject. The English common-law rule, as above stated, is set out in the opinion, as well as the modification made in Buccleuch v. Board of Works, supra. Mr. Justice Gray also reviews at great length decisions in the different courts of the United States. It is wholly unnecessary to here refer to those cases in detail. The court concluded that at common law the title and the dominion in lands flowed by the tide were in the king for the benefit of the nation; that upon the settlement of the colonies like rights passed to the grantee in the royal charters, in trust for the communities to be established; that upon the American Revolution these rights, charged with a like trust, were vested in the original states within their respective borders, subject to the rights surrendered by the constitution to the United States; that the new states admitted into the Union since the adoption of the constitution have the same rights as the original states in the tide waters, and in the lands under them, within their respective jurisdictions, and that the title and rights -of riparian or littoral proprietors in the soil below high-water mark, therefore, are governed by the laws of the several states, subject to the rights granted to the United States by the constitution.

The court held that the question of the use of the shores by the owners of uplands was left to the sovereign control of each state, subject only to the rights vested by the constitution in the United States.' The right to wharf out was denied in that case, because of the law of Oregon, where the case arose.

In Illinois Central Rd. Co. v. Illinois, 146 U. S., 387, in which there is also a very interesting discussion of the same questions, it was held that the ownership of the soil in Lake Michigan is in the state, and that the riparian proprietor is entitled to access to the navigable part of the water on the front on which lies his land and for that purpose to make a landing, wharf or pier for his own use or for the use of the public. Such right terminates at the point of navigability.

The courts of Illinois, however, have finally declared that the common-law rule controls there. They hold that ownership on the shore of Lake Michigan extends only to the water’s edge; that the only right the owner has is the right of access to the waters of the lake, and that he has no right to build piers or to wharf out. Revell v. People, 177. Ill., 468, and Commrs. v. Fahrney, 250 Ill., 256.

The ground upon which the right to wharf out is put, in the cases sustaining the right, is that it is an aid to navigation and to the advancement of commerce.

In 1 Farnham on Water and Water Rights, 521, the author says: “Although the primary purpose of a water way is for navigation, yet that is merely one element of the combined whole which is necessary to constitute commerce, and must be held subordinate to it. If navigation is held supreme, the very purpose for which it exists may be defeated by its own demands. Therefore, since commerce is the thing which is . supreme, and navigation merely an aid to it, navigation must accord to commerce the right to satisfy its own needs, and must permit the erection of such wharves and piers in the spaces which are naturally available for navigation as are necessary to facilitate the interchange of commerce. These rights must, however, be exercised so as not to interfere needlessly with the right of navigation. Both rights exist, and each is necessary to the other. * * * When it is said that the water ways are held in trust for the benefit of the people, and must be kept open for the benefit of navigation, it is not meant that the erection therein of structures which are absolutely necessary to navigation is to be prohibited, because by such interpretation the execution of the trust would defeat the very purpose for which it was established. As said in Atlee v. Northwestern Union Packet Co. [21 Wall., 389], wharves and piers are almost'as necessary to the successful use of the stream in navigation as the vessels themselves, and are to be considered as an important part of the instrumentalities of this branch of commerce.”

In Sloan v. Biemiller, 34 Ohio St., 492, the court considered the rights of littoral owners on Lake Erie and its bays and held that there was no exclusive right of fishery vested in the littoral proprietors, but that such waters were as open to the public for fishing purposes as though they were subject to the ebb and flow of the tides. The court expressly state in the opinion that it was not required to consider any question in regard to the right of a riparian owner to build out beyond his strict boundary line, for the purpose of affording such convenient wharves and landing places in aid of commerce as do not obstruct navigation; but Judge White remarks, at page 513: “It was held in Dutton v. Strong, that these rights of the riparian owner apply to the lakes as well as to tide waters. 1 Black, 23. See also Austin v. Rutland R. R. Co., supra, 25 Vt. 215.”

With reference to the nature of the title of the state to the subaqueous land of Lake Erie, this is said: “And although the dominion over and the right of property in the waters of the sea and its inland waters were, at common law, in the crown, yet they were of common public right for every subject to navigate upon and to fish in, without interruption. Id. [Angelí on Tide Waters], 21. They were r'egarded as the inherent privileges of the subject, and 'classed among those public rights denominated jura publica, or jura communia, and thus contradistinguished from jura coronae, or private rights of the crown.’ Id. 22, 80; Harg. Law Tracts, 11. The sovereign was the proprietor of these waters, as the representative or trustee of the public. In this country the title is vested in the states upon a like trust, subject to the power vested in congress to regulate commerce. Martin v. Waddell, 16 Peters, 367, 412; McCready v. Virginia, 94 U. S. (4 Otto), 391.”

In Dutton et al. v. Strong et al., 1 Black, 23, supra, it is said, at page 32: “Our ancestors, when they immigrated here, undoubtedly brought the common law with them, as part of their inheritance; but they soon found it indispensable, in order to secure these conveniences, to sanction the appropriation of the soil between high and low-water mark to the accomplishment of these objects.”

In New York a rule seems to have been finally determined in the case of Brookhaven v. Smith, 188 N. Y., 74. In this case it was held that a riparian owner whose land is bounded by navigable waters has the right of access thereto from the front of his lot, and such right includes the construction of a pier on the land under water, beyond high-water mark, for his own use or for the use of the public, subject to such general rules and regulations as congress or the state legislature may prescribe for the protection of the rights of the public, although under the common law of England such structure is regarded as a purpresture or an unlawful encroachment upon the rights of the sovereign, and subject to removal at his pleasure. It is also held that an owner of upland adjoining Great South Bay has a right of access to the waters thereof from the front of his lot, and such right includes the construction of a pier on the land under water beyond high-water mark, for his own use or the use of the public, without the consent of the town of Brookhaven, which acquired the title in fee to such land under royal grant in 1666, 1686 and 1693, although at that time, under the common law of England, riparian owners had no such right, and such structure, in the absence of license therefor, was a purpresture and subject to removal at pleasure.

In the opinion the court say, at page 79:

“The adoption by the people of this state of such parts of the common law, as were in force on the 20th day of April, 1777, does not compel us to incorporate into our system of jurisprudence principles, which are inapplicable to our circumstances and which are inconsistent with our notions of what a just consideration of those circumstances demands. The common law of England, upon the subject of the rights of riparian owners, has but an imperfect application to the situation in a state like this, with its numerous large navigable bodies of waters, in bays, rivers and inland lakes.”

However, since the decision in the Brookhaven case the New York court of appeals in Barnes v. Midland Rd. Term. Co., 193 N. Y., 378, has distinctly held that the riparian owner must exercise his right reasonably and so as not to unnecessarily interfere with public passage. It is held that to this extent “defendant’s rights are superior to all others save those reserved to 'congress and the state legislature.”

After a careful examination we are convinced that in most of the states of the United States the conclusion has been arrived at, either by judicial reasoning or by statutory provision which has been upheld, that, subject to regulation and control by the federal and state governments, the littoral owner has the right to wharf out to navigable waters, provided he does not interfere with the public rights of navigation or fishery, and that the state holds the title to the subaqueous land of navigable waters as the trustee for the protection of the public rights therein. Piers and wharves are a necessary aid to navigation, as much so as the harbor itself, and the right to construct them' is as important and essential. Without them the operations of commerce would be seriously weakened. If they are to be useful these piers must extend into water of sufficient depth to float loaded vessels. The littoral owner has an undoubted right 'Of access to the water, and if this right is to be of value it must be such access as will enable him to reach navigable water and to do the things necessary to that end. Courts in ascertaining and declaring these rights must regard the object for which they are conferred. In this case that object is to aid the commerce of the lake and develop the business of the country.

It is matter of common knowledge that vast quantities of iron ore are brought from ore beds in northern Michigan and Minnesota to ports in Ohio on Lake Erie, and that this ore is an essential element in making that general neighborhood one of the great iron-producing sections of the country. These conditions, in connection with the other great manufacturing and commercial enterprises of that section, create a situation which invokes the exercise of every legitimate energy in aid of commerce.

But it is contended on the other hand, with much earnestness and, it must be conceded, with much force, that piers and wharves may be extended into the harbor in such a manner and may be constructed and used in such a way as to occupy all the space and to. practically destroy the harbor. It is pointed out that wharves and piers having been made by fills or otherwise may then be diverted to private uses, wholly disconnected from navigation, and thereby hinder and interfere with navigation itself.

It is manifest that there must be some governmental power to exercise such control and make such regulations as will secure the rights of the public and prevent interference with navigation.

As shown, the state holds the title to the sub-aqueous land as trustee for the protection of public rights.- The power to prescribe such regulations resides in the legislature of the state.

. When, as in this case, the United States government has fixed a harbor line, the state has power to regulate navigation and fishing between that line and the shore, provided its regulations do not conflict with those of the general government. Our general assembly has enacted no legislation providing such regulations.

Until the enactment of appropriate legislation the littoral owner, for the purposes of navigation, should be held to have the right to wharf out to the line of navigability, as fixed by the general government, provided he does not interfere with public rights. Otherwise, through the mere absence of legislation by the state, the supreme utility and value of navigable waters — navigation and commerce,— would be defeated. Whatever he does in that behalf is done with knowledge on his part that the title to the subaqueous soil is held by the state as trustee for the public, and that nothing can be done by him that will destroy or weaken the rights of the beneficiaries of the trust estate. His right must yield to the paramount right of the state as such trustee to enact regulatory legislation. It must be remembered that his right, pending appropriate legislation, is one that can be exercised only in aid of navigation and commerce, and for no other purpose. What he does is, therefore, in furtherance of the object of the trust and is permitted solely on that account.

The state as trustee for the public cannot by acquiescence abandon the trust property or enable a diversion of it to private ends different from the object for which the trust was created.

If it is once fully realized that the state is merely the custodian of the legal title, charged with the specific duty of protecting the trust estate and regulating its use, a clearer view can be had.

An individual may abandon his private property, but a public trustee cannot abandon public property. Mere nonuser of the trust property by the public cannot authorize the appropriation of it by'' private persons to private uses and thus thwart the purposes of the trust.

In The L. & N. Rd. Co. v. City of Cincinnati, 76 Ohio St., 481, it is held that public streets, squares, landings and grounds are held in trust for the public, and that it is not in the power of the legislature, unless in the exercise of the power of eminent domain, to authorize property, dedicated to the public for a specific purpose, to be used for a purpose inconsistent with the purpose for which it was dedicated. Estoppel was pleaded in that case, but was not sustained. On page 507 it is said: “There being an entire absence of power to make the grant, there is no room for an estoppel.And it was said that delay on the part of the officials should not prejudice the public.

In The L. S. & M. S. Ry. Co. v. City of Elyria, 69 Ohio St., 415, it was held that the city was not authorized to agree to the exclusive occupation of a street and- that the company could be compelled to restore the street to its former condition without compensation.

Concerning a wharf dedicated to public use it is held in Pittsburg v. Epping-Carpenter Co., 194 Pa. St., 318, that when the public right has been acquired it cannot be lost by nonuser or by municipal action not expressly authorized by law. Any occupation of the property inconsistent with the public right is a nuisance, and no length of time will legalize a public nuisance.

In Sloan v. Biemiller, supra, at page 512, it is said: “We are not called on in this case to review the doctrine laid down in Gavit v. Chambers [3 Ohio, 496]. The question before us is, whether the rule there laid down, as applicable to navigable rivers, applies to the owners of land bounding on Lake Erie and Sandusky Bay. In our opinion, it clearly does not. In The Canal Commissioners v. The People, 5 Wend. 423, Chancellor Walworth said: ‘Our large fresh-water lakes or inland seas are wholly unprovided for by the law of England. As to these, there is neither flow of the tide nor thread of the stream; and our local law appears to have assigned the shores down to ordinary low-water mark to the riparian owners, and the beds of the lakes, with the islands therein, to the public.’ And in Kent’s Commentaries it is laid down that, ‘in this country our great navigable lakes are properly regarded as public property, and not susceptible of private property any more than the sea.’ 3 Kent’s Com. 429, note a. The doctrine thus stated is fully supported by the adjudged cases.” Citing a number of cases.

In Illinois Central Rd. Co. v. Illinois, supra, it is held by the United States supreme court that the trust devolving upon the state for the public, and which can only be discharged by the management and control of property in which the public has an interest, cannot-be relinquished by a transfer of the property. There can be no irrepealable contract in a conveyance of property by a grantor in disregard of a public trust, under which he was bound to hold and manage it.

In the opinion Mr. Justice Field says, at page 453: “The State can no more abdicate its trust over property in which the whole people are interested, like navigable waters and soils under them, so as to leave them entirely under the use and control of private parties, except in the instance of parcels mentioned for the improvement of the navigation and use of the waters, or when parcels can be disposed of without impairment of the public interest in what remains, than it can abdicate its police powers in the administration of government and the preservation of the peace. * * * So with trusts connected with public property, or property of a special character, like lands under navigable waters, they cannot be placed entirely beyond the direction and control of the State.”

It is further said, at page 455: “The ownership of the navigable waters of the harbor and of the lands under them is a subject of public concern to the whole people of the State. The trust with which they are held, therefore, is governmental and cannot be alienated, except in those instances mentioned of parcels .used in the improvement of the interest thus held, or when parcels can be disposed of without detriment to the public interest in the lands and waters remaining.”

The defendants in error contend that the right of the littoral owner to wharf out is a property right which cannot be taken without compensation under the federal and state constitutions. A similar contention was made in Greenleaf Johnson Lumber Co. v. Garrison, 237 U. S., 251, where the wharves had been erected in keeping with federal and state lines. The claim was not sustained. The proposition announced was: “The power of the sovereign State or Nation is perpetual — not exhausted by one exercise — and all privileges granted in public waters are subject to that power; the exercise of which is not a taking of private property for public use but the lawful exercise of a governmental power for the common good.”

In Scranton v. Wheeler, 179 U. S., 141, it is said, at page 164: “The riparian owner acquired the right of access to navigability subject to the contingency that such right might become valueless in consequence of the erection under competent authority of structures on the submerged lands in front of his property for the purpose of improving navigation.'”

The authorities show that the right of a riparian or littoral owner is always subject to the paramount authority of the state and federal governments for the ends set forth.

In this case the defendants aver in their answer that the work complained of was and is for the purpose of enabling them to reach navigation and to perform their duties as common carriers. They insist they have no other object. No other purpose and no other result is allowable. In the ab-' sence of legislation by the state touching the subject and until the enactment of such legislation, this was their right.

The record does not disclose any different purpose nor that defendants appropriated any part of the public property with the ulterior motive of diverting it to private ends. Therefore, the judgments below must be affirmed.

It is to be presumed that the legislature, in the enactment of legislation on the subject, will appropriately provide for the performance by the state of its duty as trustee for the purposes stated; that it will determine and define what constitutes an interference with public rights and that it will likewise, in a spirit of justice and equity, provide-for the protection and exercise of the rights of the shore owners.

Judgment affirmed.

Nichols, C. J., Donahue and Jones, JJ., concur.


author: By the Court.

text:
    Manning v. The Village of Lakewood et al.

      Courts of appeals — Jurisdiction on appeal — Injunction — Collection of street assessments — Section 1207$, General Code — Section 6, Article IV, Constitution, 1912.

    (No. 15012 —
    Decided February 29, 1916.)
    Error to the Court of Appeals of Cuyahoga county.
    The facts are stated in the opinion.

      Messrs. Howells & Grossman and Messrs. Howell, Roberts & Duncan, for plaintiff in error.

      Mr. R. G. Curren, for defendants in error.
   By the Court.

This was a proceeding brought by Thomas Manning in the common pleas of Cuyahoga to enjoin the collection of certain special assessments described in the petition and alleged to have been levied by the village of Lakewood.

The petition averred that the assessments were in excess of benefits conferred and were illegal in specific respects set forth in the petition.

Issue was joined and on the trial in the common pleas court a decree was entered in favor of the defendants and the plaintiff appealed to the court of appeals. That court on motion of the defendants dismissed the appeal for want of jurisdiction. This proceeding is brought t© reverse the judgment of the court of appeals.

The judgment of the court of appeals rests on the proposition that under Section 6, Article IV of the Constitution, as amended in 1912, the cause was not appealable. That section provides that courts of appeals shall have original jurisdiction in quo warranto, mandamus, habeas corpus, prohibition and procedendo, and appellate jurisdiction in the trial of chancery cases.

It is contended that the remedy sought in this case is a statutory one, that it is completely provided for by Section 12075, General Code, and .therefore not included in the class of cases now appealable to the court of appeals from the common pleas court.

Section 12075, General Code, provides: “Common pleas and superior courts may enjoin the illegal levy or collection of taxes and assessments, and entertain actions to recover them back when collected, without regard to the amount thereof, but no recovery shall be had unless the action be brought within one year after the taxes or. assessments are collected.”

The original act from which the' section just quoted was taken was passed in 1856 (53 O. L., 178).

It was held in Steese et al. v. Oviatt, Treas., 24 Ohio St., 248, 253, that the jurisdiction conferred upon the courts of common pleas by the act referred to “to restrain the collection of taxes illegally assessed, * * * is an equitable jurisdiction, and is to be exercised upon equitable principles.”

The-same proposition was reaffirmed in Stephan, Treas., v. Daniels et al., 27 Ohio St., 527, 536.

The statute referred to was examined by the supreme court of the United States in Cummings v. National Bank, 101 U. S., 153, in which the court say, at page 157: “Here there can be no doubt that the remedy by injunction against an illegal tax, expressly granted by the statute, is to be enforced, and can only be appropriately enforced, on the equity side of the court.”

The jurisdiction conferred by the statute to restrain the collection of illegally assessed taxes and assessments being an equitable jurisdiction, to be exercised by the chancellor upon equitable principles, it follows that courts of appeals have appellate jurisdiction in the trial of such cases.

The judgment will be reversed and the cause remanded to the court of appeals with instructions to overrule the motion to dismiss the appeal.

Judgment reversed.

Nichols, C. J., Johnson, Donahue, Wanamaker, Newman, Jones and Matthias, JJ., concur.


author: Newman, J.

text:
    Crowley v. The State of Ohio.

      Criminal law — Former jeopardy — Acquittal of lesser offense — Not bar to prosecution for greater offense, when — Assault and battery charge before mayor — Indictment for assault with intent to commit rape.

    1. An acquittal or conviction for a minor offense included in a greater will not bar a prosecution for the greater if the court in which the acquittal or conviction was had was without jurisdiction to try the accused for the greater offense.
    2. Where a person has been in jeopardy on the charge of assault and battery upon an affidavit filed with the mayor of a city, the plea of such jeopardy is insufficient as a bar to a prosecution by indictment for assault with intent to commit rape, although the facts alleged in the 'indictment if proven to be true would have warranted a conviction on the charge made in the affidavit.
    (No. 15039 —
    Decided February 29, 1916.)
    Error to the Court of Appeals of Fairfield county.
    Plaintiff in error, Frank Crowley, at the January, 1915, term of the court of common pleas of Fairfield county, was indicted for assault with intent to commit rape on one N. F., on the 4th day of November, 1914. To this indictment was filed a plea in bar in which it was alleged in substance that the state of Ohio had theretofore procured and_ had a judgment of conviction and sentence pronounced against plaintiff in error for the same act, the same assault and the same offense mentioned in said indictment, in this, to-wit: That on the 5th day of November, 1914, the state of Ohio prosecuted him on the complaint by the affidavit of the said N. F., she being the same person charged in the indictment to have been so assaulted by him, duly made and verified by her before the mayor of the city of Lancaster, for the offense of unlawfully committing an assault and battery upon her person and unlawfully striking and wounding her, on the said 4th day of November, 1914; that upon the filing of said affidavit plaintiff in error was arrested, taken before the mayor, arraigned on the charge made against him in said affidavit, pleaded guilty, and was sentenced to imprisonment in the Zanesville workhouse for the period of one hundred and twenty days and that he pay the costs of prosecution, and that in pursuance of said judgment he was imprisoned and confined in the workhouse for the period of one hundred and thirty-one days, when he was lawfully discharged therefrom; that the offense charged and alleged against him in the indictment was the same act, the same assault and the -same offense so charged against him in said complaint.
    The state challenged the sufficiency of the plea in bar by a demurrer, which was sustained. The case was thereupon tried to a jury, resulting in a verdict of guilty as charged in the indictment. A motion for new trial was overruled and the plaintiff in error was sentenced to imprisonment in the Ohio penitentiary for not less than one year nor more than fifteen years. Error was prosecuted to- the court of appeals and the judgment of the court of common pleas was affirmed. On leave first had, plaintiff in error filed a petition in error in this court in which he asks for a reversal of the judgment of the court of appeals affirming the judgment of the court of common pleas and that he be discharged from further prosecution under said indictment.

      Mr. M. A. Daugherty and Mr. M. A. Daugherty, Jr., for plaintiff in error.

      Mr. James A. Tobin and Mr. T. T. Courtright, for defendant in error.
   Newman, J.

Counsel base their right to a reversal of the judgment of the court of appeals upon the sole ground that there was error in holding that the demurrer to the plea in bar was properly sustained. There is therefore but one question for our consideration: Could plaintiff in error avail himself of the constitutional guaranty in Section 10, Article I of the Constitution, providing “No person shall be twice put in jeopardy for the same offense”?

It is conceded that the offense of assault and battery, to which he entered a plea of guilty before the mayor, is an offense included in the one charged in the indictment and of which he was subsequently found guilty by the jury. Counsel in support of their contention invoke the rule announced in Price v. The State, 19 Ohio, 423, and followed and approved in Mitchell v. The State, 42 Ohio St., 383: “On a plea of autrefois acquit, the true test to determine whether the accused has been put in jeopardy for the same offense, is whether the facts alleged in the second indictment,' if proven to be true, would have warranted a conviction on the first indictment.” This test has been applied in cases where the accused had been convicted or acquitted of an offense lesser than and included in the offense subsequently charged, but in practically every case the court in which the conviction or acquittal was had was a court having jurisdiction to try the accused on a charge for the greater offense had the same been made. We do not think this test should be applied here.

In this case, the mayor, concededly limited in his jurisdiction in criminal matters, was wholly without jurisdiction to try one charged with a felony, and consequently could not have tried plaintiff in error on the charge of assault with intent to commit rape. In The State v. Rose, 89 Ohio St., 383, this court held that the offense charged in the information was not the same offense and did not include the offense charged in the indictment, and that therefore the defense of jeopardy must fail. While the case under consideration here differs from that case, in that the offense charged in the indictment here does include the offense charged in the affidavit filed with the mayor, yet the following language from page 386 of the opinion in the Rose case is pertinent here: “The probate court was wholly without jurisdiction to try the charge of rape, hence the defendant could never have been in jeopardy on the charge of rape in the probate court; for to be in jeopardy there must not only be a sufficient legal charge, but a sufficient jurisdiction to try the charge.” So, in the instant case, before plaintiff in error could be in jeopardy on the charge of assault with intent to commit rape, it must have been in a court with jurisdiction to try the charge.

It is claimed by counsel that there is only one exception to the rule contended for by them, and that is in those cases of assault where the injuries result in death after., conviction for the assault. The case of Dias v. United States, 223 U. S., 442, is one of that kind, where it was held that a person convicted in the Philippine Islands of assault, before the death of the injured person, was not put in second jeopardy within the meaning of Section 5 of the Philippine Act of 1902 by being placed on trial for homicide after the death of the person assaulted, as a consequence of the assault. But it is to be observed that in that case it is also laid down as a proposition of law in the syllabus that jeopardy cannot extend to an offense beyond the jurisdiction of the court in which the accused is tried, and Mr. Justice Van Devanter in the opinion, at page 449, uses this language which is in point here: “Besides, under the Philippine Law, the justice of the peace, although possessed of jurisdiction to try the accused for assault and battery, was without jurisdiction to try him for homicide; and, of course, the jeopardy incident to the trial before the justice did not extend to an offense beyond his jurisdiction.”

We subscribe to this doctrine and adopt it as the law applicable to the present case, and hold that jeopardy incident to the proceedings before the mayor did not extend to an offense beyond his jurisdiction. Plaintiff in error, therefore, when he was indicted for assault with intent to commit rape, could not successfully make the claim that he had been in jeopardy for that offense.

Judgment affirmed.

Wanamaker, Jones and Matthias, JJ., concur.