OLD DOMINION COPPER MINING AND SMELTING COMPANY vs. ALBERT S. BIGELOW.

LORING, J. [After the foregoing statement of the case.] The only question now before us is whether the plaintiff is entitled to any relief on these facts. If it is, it is not necessary to determine what that relief is. An attempt has been made to force a decision on the nature of the relief at this time by demurring "to so much of said bill as seeks to have the sale of certain par. cels of real estate conveyed to the plaintiff by Leonard Lewisohn rescinded, and to have the defendant ordered to return to the plaintiff the consideration paid by the plaintiff for said conveyance." But there is no part of the bill which seeks rescission. This demurrer is not a demurrer to a part of the bill; it is to the whole bill so far as it seeks rescission. This so called demurrer to a part is in fact an assignment of causes of demurrer to the whole bill, and will be so treated.

The defendant has contended that on the facts stated in the bill no case is made out for relief in respect of thirty thousand shares issued for the four mining claims and the mill site.

It will be useful to get a clear conception of what is and what is not alleged in the bill, and of the rights of the parties in such a transaction as that here set forth.

It was settled by the recent case of Hayward v. Leeson, 176 Mass. 310, that a promoter of a corporation stands in a fiduciary relation to the corporation of which he is a promoter.

It is clear that on the facts stated the defendant was a promoter of the plaintiff corporation.

It is not alleged here that the defendant made any misrepresentation as to the price paid by himself and Lewisohn for the property resold to the plaintiff at an advance, as was the case in Gluckstein v. Barnes, [1900] A. C. 240; S. C. below, sub nomine In re Olympia, [1898] 2 Ch. 153; Hichen: v. Congreve, 4 Sim. 420. Where one standing in a fiduciary relation makes such a misrepresentation it may well be that the purchaser can keep

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the property and force the vendor to make good the representation by paying to him, the purchaser, the difference between what was in fact paid by the vendor and what he represented that he paid for it.

Further, the defendant is not liable here on the ground that the plaintiff corporation is entitled to the benefit of the original purchase of the real estate here in question, as a beneficiary is entitled where a person standing to him in a fiduciary capacity buys for himself and resells to him, the beneficiary, at a profit when he ought originally to have bought for the beneficiary. In such a case the purchaser can keep the property and charge the defendant with the difference in price, Parker v. Nickerson, 137 Mass. 487, 497.

When the defendant and Lewisohn bought this real estate they were under no obligation to make the purchase of it for the plaintiff corporation, which was not then in existence. Having bought the property at that time and paid for it with what as between them and the plaintiff corporation was their own money, they could have kept it or resold it to the plaintiff corporation or to anybody else, as they saw fit. The fact that the property was bought with a view to reselling it to a corporation to be organized for the purpose, and that that purpose was ultimately carried into effect, does not give to the corporation subsequently organized in execution of the original purpose a right to the benefit of the purchase. That was considered in New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 118, 119; and at still greater length in that case on appeal, Erlanger v. New Sombrero Phosphate Co. 3 App. Cas. 1218, by Lord Hatherley, at p. 1242, Lord O'Hagan, at p. 1255, and Lord Blackburn, at pp. 1267 and 1268. It is enough to say that we agree with what is there said. For a case where no relief was given because it was not made out that the company was entitled to the benefit of the original purchase, see Ladywell Mining Co. v. Brookes, 35 Ch. D. 400.

The situation then was this. The defendant and Lewisohn were, so far as this case goes, the absolute owners of the four mining claims and the mill site. We say the absolute owners so far as this case is concerned, because the rights of the Dominion Syndicate in this real estate, if any, are not here in question, and

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therefore so far as this case is concerned their rights, if any, may be disregarded. Being the absolute owners of it, the defendant and Lewisohn could do with that property as they pleased, - let it lie idle, work it, or sell it, as they thought best, and if they determined to sell it they could sell it to any one they might choose. If they chose to sell it to a stranger they could make the sale at arm's length, they could ask any price they pleased, and were under no legal obligation to state what it had cost them. On the other hand, if they elected to make a sale of it to one standing to them in a fiduciary relation, they were under an obligation to make a full disclosure to the beneficiary of all the facts known to them material to the property and the purchase, or see to it that the fiduciary had adequate independent advice. That is an obligation resting upon every fiduciary who makes a sale of his own property to his beneficiary, no matter whether it is a case of trustee and cestui que trust, guardian and ward, solicitor and client, or promoter of a corporation and the corporation itself.

There is no pretence that in the transaction in question the plaintiff corporation was represented by an independent board.

The defendant has sought in the first place to distinguish the case at bar from Hayward v. Leeson, 176 Mass. 310, on the ground that in the prospectus in that case there was the false statement that the capital stock represented actual value, without inflation, while a substantial part of it had been issued to the defendants and their associates for nominal services. But that fact was not spoken of in the opinion as the ground of the decision. The opinion went on the broad ground mentioned above. This false representation was spoken of in connection with a contention on the part of those defendants that they were not liable because of a finding made by the Superior Court that the defendants did not conceal the transaction from the knowledge of future stockholders. The case of New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73; S.C. on appeal, Erlanger v. New Sombrero Phosphate Co. 3 App. Cas. 1218, is on all fours with the case at bar in this respect. In that case there was no misrepresentation.

In the second place the defendant contends that the corporation cannot complain because the facts were known to the four directors who took part in the purchase and to the holders of all

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shares of capital stock of the corporation outstanding when the contract of purchase here in question was made, and because the purchase was acquiesced in by them. Their contention is that this result follows because one buying shares from a shareholder who acquiesces is bound by the acquiescence of his vendor. The four directors present at the directors' meeting when the real estate in question was sold by the defendant and Lewisohn to the plaintiff corporation for thirty thousand shares, were the defendant and Lewisohn, their attorney, and one Buffam, "a person selected by them and employed by them to act as director and assist them in carrying out said plan and conspiracy." On the allegations of the bill the defendant and Lewisohn are to be treated as the owners of all the shares then outstanding, and therefore the transaction is to be taken to have been known to and acquiesced in by all the then stockholders.

It is proper to pause here and see just what this contention means. When this contract was made on July 11, 1895, the authorized capital stock had just been increased from forty shares to one hundred and fifty thousand shares of $25 each, that is to say, from $1,000 to $3,750,000. Of the authorized capital stock, only forty shares, or $1,000 had then been issued. As we have said, these forty shares are to be treated on the allegations of the bill as the property of the defendant and Lewisohn. The scheme of the defendant and Lewisohn as to this capital stock of $3,750,000, divided into one hundred and fifty thousand shares, was to issue eighty thousand shares (or $2,000,000) to the syndicate, or sell them to the public for cash to provide $2,000,000 to be paid to the syndicate ; twenty thousand shares (or $500,000) to themselves for their services and expenses as promoters; twenty thousand shares (or $500,000) to the public for cash for working capital; and the balance, thirty thousand shares (or $750,000) to themselves for the real estate here in question. And this scheme was carried out. In carrying it out no disclosure was made to the persons who took the syndicate's eighty thousand shares (except those of the eighty thousand issued to the defendant and Lewisohn as members of the syndicate), nor to those who took the twenty thousand shares sold to the public for cash for working capital. Of the eighty thousand issued to or for the syndicate it is alleged that

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the defendant received four thousand. It is not alleged that any of this eighty thousand were issued to Lewisohn. The contention is that inasmuch as the defendant and Lewisobn owned all the forty shares of the corporation, amounting to $1,000, outstanding when the sale here in question was made by them to the corporation, the corporation is barred from complaining that a full disclosure of the material facts was not made by them to it.

Since the argument was made in the case now before us it has been decided by the Circuit Court of the United States for the Second Circuit in Old Dominion Copper Mining Co. v. Lewisohn, 136 Fed. Rep. 915, that this contention is correct. In that case a demurrer was sustained to a bill against the executors of Lewisohn, which is the counterpart of the bill now before us, on the ground that the point was concluded by two earlier cases, one in that court, Foster v. Seymour, 23 Fed. Rep. 65, and the other in the Court of Appeals in that Circuit. McCracken v. Robison, 57 Fed. Rep. 375.

Foster v. Seymour, 23 Fed. Rep. 65, was a case where the owners of a mine conveyed it to a corporation organized by themselves in payment for all its capital stock, to the par value of $10,000,000. The owners of the mine were the trustees of the corporation when the exchange was made. Afterwards this stock was sold on the market. The thing complained of in Foster v. Seymour was that the mine was in fact worth only $100,000. A stockholders' bill was brought in behalf of the corporation to make the trustees "account to the corporation for a fraudulent disposition of its capital stock." The statute under which the corporation was organized provided that stock could be paid for in property. It is to be observed of this case that the bill did not seek to set aside the purchase for a failure to disclose a material fact in selling the property of the company. The thing complained of was not that the property had been bought for $100,000 and sold for $10,000,000. It was that the mine in payment for which the whole capital stock of the corporation was issued was in fact worth only $100,000.

The other case on the authority of which Old Dominion Copper Mining Co. v. Lewisohn was decided (McCracken v. Robison, 57 Fed. Rep. 375) is a case where four men, including the defendant in error, Robison, by the expenditure of their own

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moneys organized a corporation to build a specified railroad, subscribing for the proportion of stock required as a preliminary by the laws of Michigan, procured the right of way and local aid in the form of donations of land and money to the enterprise, and with such assistance and with their own moneys undertook to furnish the roadbed and cross ties for the whole road ready for laying the track and completing the superstructure. They then caused the corporation to agree with the plaintiffs in error in consideration of their (the plaintiffs in error) agreeing to complete the road, to issue to them (the plaintiffs in error) all the capital stock and bonds of the corporation, the plaintiffs in error agreeing to pay the defendant in error individually one half the profit afterwards commuted by agreement to $150,000. For this $150,000 this action was brought, and the plaintiffs in error set up in defence that the contract sued on was an illegal contract on which no action could be maintained in a court of law. Here the capital stock and bonds were issued to the plaintiffs in error for laying the track and completing the superstructure of a road of which the right of way, the roadbed, grading and cross ties had been paid for by the defendants in error and by the donations and not by the corporation or the plaintiffs in error. So long as the corporation did not complain of the transaction, there would seem to be no reason why an agreement by which the incorporators were to be reimbursed for money expended by them in building the road was not valid.

In both Foster v. Seymour and McCracken v. Robison (in addition to what has been pointed out above) all the capital stock was issued to the directors and promoters who made the sale to the corporation complained of in payment for the property so sold. In such a case the transaction complained of is acquiesced in not only by all those interested but by all who it is contemplated shall be interested in the corporation except as third per. sons should acquire the interest of some one or more of those persons. Such third persons are bound by the acquiescence of their vendors, and such a corporation is bound by the acquiescence of all its stockholders. See In re Ambrose Lake Tin & Copper Mining Co. 14 Ch. D. 390. See also In re Postage Stamp Automatic Delivery Co. [1892] 3 Ch. 566.

It is hardly necessary to point out the difference between such

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a case, where the scheme of the corporate organization does not contemplate there being any stockholders other than those who buy the stock issued in the transaction complained of, and a case like that now before us, where ninety-six thousand out of one hundred and fifty thousand shares are to be issued to persons to whom no disclosure was made.

Again, the case stated in the bill now before us does not come within the decision in In re British Seamless Paper Box Co. 17 Ch. D. 467, where all persons acquiesced who were to have an interest so far as the scheme went which the parties then had, and where there was a subsequent change made in the scheme in good faith by which other persons were brought in.

The case submitted to us for decision here by the defendant's demurrer to this bill is a case where (disregarding the forty shares subscribed for to organize the corporation) the whole capital stock was one hundred and fifty thousand shares, of which fifty-four thousand shares were to be issued to the promoters for services and for the sale of the land here in question, and the remaining ninety-six thousand were to be issued to persons to whom the facts of this sale were not disclosed.

The question arises whether in such a case the rule enforced in Hayward v. Leeson, 176 Mass. 310, applies.

In Hayward v. Leeson it was held by this court that a corporation was not barred in the recovery of secret profits made by promoters by the fact that the promoters owned all the stock of the corporation when the agreement was made to pay them the profits recovered in that case. The secret profits agreed upon, paid and recovered in that case were paid up shares of capital stock of the par value of $700,000 for services as promoters out of a capital of $3,000,000, the rest of which was subscribed to and paid for by the public in cash. To the cases cited in Hayward v. Leeson on this point, 176 Mass. at p. 320, should be added Gluckstein v. Barnes, [1900] A. C. 240, the decision of the House of Lords on appeal from In re Olympia, [1898] 2 Ch. 153, made after the opinion in Hayward v. Leeson was written.

The question which we have to decide here is whether the difference in the way in which this transaction was carried through leads to the opposite result. If in the case at bar the ninety-six thousand shares not issued to the promoters had been

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offered to the public for cash to be used in buying the property of the old Baltimore company and for working capital, and had been taken by them, the case at bar would have come directly within the decision in Hayward v. Leeson.

We see no reason why the rule enforced in Hayward v. Leeson does not apply to the case stated in the bill now before us.

The defendant has insisted that the corporation is barred in this case because if it (the corporation) is allowed to recover in such a suit the purchasers of the fifty-four thousand shares issued to the defendant and Lewisohn would get their share of the sum recovered and to that extent the purchasers of these shares would not be bound by the acquiescence of their vendors. That is true. That was true in Hayward v. Leeson. In that case the purchasers of the seven hundred and fifty thousand shares would have got their share of the sums recovered by the receiver in behalf of the corporation if there was any part of those sums left after the debts were paid. The argument is an old one and was disposed of by Lord Justice James in New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 118, 119. A corporation is not precluded from recovering for a fraud on it (the corporation) because the party committing the fraud is a stockholder.

Again, the corporation is not barred because when the agreement was made it acquiesced in the trade and it was then, from a legal point of view, fully born. That was equally true in Hayward v. Leeson and the cases cited in that case. The answer to that suggestion is that from a business point of view the agreement was not made to bind the corporation with a capital of $1,000 which was the corporation then in fact in existence, but to bind the corporation with a capital of $3,750,000. It was to that corporation with a capital of $3,750,000 that a full disclosure ought to have been made, and to that corporation no disclosure ever was made.

On the case stated in this bill the defendant was a promoter of the plaintiff corporation; being a promoter he stood in a fiduciary relation to it; on selling to the plaintiff the real estate here in question he was bound to disclose all facts known to him material in the sale since it was not independently represented; the price at which the property recently had been bought with a view to reselling it to the plaintiff corporation was at any rate a

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material fact which he was bound to disclose; the knowledge of the defendant and Lewisohn was not equivalent to a disclosure to the plaintiff corporation, although they owned all the stock of the plaintiff corporation outstanding at the time the sale was made; and although fifty-six thousand out of one hundred and fifty thousand shares of the capital stock ultimately issued were issued to them; the defendant violated the duty which he owed the plaintiff in not disclosing that fact; and for this reason the contract here in question was not binding on the plaintiff.

On the facts stated the property sold having remained unchanged, the contract came to an end on the plaintiff's electing to rescind and tendering a reconveyance of it back to the defendant.

The only question of importance left is whether this bill can be maintained in the absence of the executors of the will of Lewisohn, who has since died.

The fact that the legal title to the real estate here in question stood in Lewisohn's name is not fatal to the plaintiff's maintaining this bill. Had the defendant been the sole owner, the fact that the title stood in the name of a man of straw and the contract had been made with the man of straw would not have made any difference in the result that the contract was ended. The fact that Lewisohn, also a promoter, bad about a half interest in the contract does not affect the result unless his death and the fact that his executors reside in New York and that no legal representatives of his estate have been appointed or can be appointed in Massachusetts make a difference.

We are of opinion that these facts do not make a difference in the right of the plaintiff to maintain this bill.

On the contract thus coming to an end by the offer to restore the property which had remained unchanged, the defendant and Lewisohn were bound as matter of contract to return the consideration received by them under this contract. But in our opinion that is not the only remedy open to the plaintiff. The thirty thousand shares were obtained from the plaintiff by the defendant and Lewisohn in violation of the duty owed to it by them by reason of the fiduciary relation in which they stood to the plaintiff. The fact that on the rescission of the contract the plaintiff corporation could have sued to recover back from the

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parties to the contract the consideration received by them under it does not preclude the plaintiff from charging the defendant directly with the violation of this fiduciary duty and compelling him to make restitution of wbat was so acquired by them. The plaintiff can waive its remedy founded on the implied contract to return the consideration on the contract's being rescinded, and sue for the tortious violation of the duty owed by them to it because they stood to it in a fiduciary relation. In a suit founded on such an equitable tort Lewisohn's executors are not necessary parties. Such a bill may be brought against either.

Although the allegation made in the bill as to the real estate here in question remaining undeveloped and unchanged makes a decision on the point unnecessary, it is proper to point out that it has been laid down in this Commonwealth that in some cases a party to a contract who has a right to rescind is entitled to some remedy where the article sold has been consumed or altered before he has become aware of the facts which give him that right. Parker v. Nickerson, 137 Mass. 487. As to what the law is in England on this point, see Ladywell Mining Co. v. Brookes, 35 Ch. D. 400; In re Cape Breton Co. 29 Ch. D. 795; S. C. on appeal, sub nom. Bentinck v. Fenn, 12 App. Cas. 652. See also In re Ambrose Lake Tin & Copper Mining Co. 14 Ch. D. 390, 394.

It is hard to see why the defendant is not liable in solido for the whole thirty thousand shares, including those received by Lewisohn. See Hayward v. Leeson, 176 Mass. 310, 324, and cases there cited, to which should be added Gluckstein v. Barnes, [1900] A. C. 240; Trull v. Trull, 13 Allen 407. But it is not necessary to express a final opinion on this point.

If the defendant does in fact restore the whole consideration, he will be subrogated to the real estate here in question, on the same principle on which a trustee making restitution of money improperly invested is subrogated to the improper investment.

A few technical objections remain to be disposed of, namely:

1. That the plaintiff has a complete and adequate remedy at law. There is a remedy in equity to compel restitution of money taken in violation of the duty owed by a fiduciary. Hayward v. Leeson, 176 Mass. 310, is an example. See also Warren v. Para Rubber Shoe Co. 166 Mass. 97, 104. This court now has full equity jurisdiction. Niles v. Graham, 181 Mass. 41.

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2. The defendant contends that the allegations as to the purchase of the property of the Baltimore company either are surplusage and are to be disregarded, or they make the bill multifarious. As no relief in respect to those allegations is sought here, the bill is not made multifarious by them. So far as necessary to tell the story of the sale here complained of, it was proper to describe the sale of the Baltimore company's property, and those allegations, to that extent, are not surplusage.

3. We see nothing inconsistent in the prayer for a rescission of the contract and in the prayer for damages by which (although inaptly put) we suppose the plaintiff intended what we have held it is entitled to.

The entry must be that

The so called demurrer as to part of the bill shall stand as an assignment of a cause of a demurrer; demurrer overruled.