Babcock v. Farwell

• Decision Date: 21 April 1910
• Citation: 91 N.E. 683,245 Ill. 14
• Parties: BABCOCK v. FARWELL et al.
• Court: Illinois Supreme Court

245 Ill. 14

91 N.E. 683

BABCOCK

v.FARWELL et al.

Supreme Court of Illinois.

April 21, 1910.

Appeal from Appellate Court, First District, on Appeal from Superior Court, Cook County; George A. Dupuy, Judge.

Bill by Margaret Ann Babcock against John B. Farwell, Jr., and others. From a judgment of the Appellate Court (146 Ill. App. 307) affirming a decree for defendants, complainant appeals. Affirmed.Kraus, Alschuler & Holden, for appellant.

Horace Kent Tenney, M. Lester Coffeen, Roger Sherman, and James E. Munroe, for appellees.

DUNN, J.

This was a stockholder's suit begun in the circuit court of Cook county by the appellant, as the owner of 15,196 shares of the stock of the Capitol Freehold Land & Investment Company, Limited, a corporation organized under the laws of Great Britain and Ireland, for and on behalf of all other stockholders in that corporation as well as on her own behalf, against the corporation, John V. Farwell, and the executors of the will of Charles B. Farwell, deceased, whereby it is sought to have various contracts between the corporation and John V. Farwell and Charles B. Farwell declared unconscionable and void, to charge John V. Farwell and Charles B. Farwell as trustees for the corporation, and compel them to account for, pay over, and deliver to the corporation all property received, held, or claimed by them under any of the contracts sought to be set aside and all profits made thereon, and to compel an accounting of various other transactions arising out of the relations and contracts between the corporation and the Farwells, whereby it is alleged that the assets of the corporation have been fraudulently reduced. The Appellate Court affirmed the decree of the circuit court, subtaining a demurrer to the amended bill, and dismissing it for want of equity.

The transactions set out in the bill extend over a period of many years, and are numerous and complicated. In 1882 Matthias Schnell entered into a contract with the state of Texas for the erection of a state capitol building in consideration of a land grant of 3,000,000 acres. This contract was assigned to John V. Farwell, Charles B. Farwell, Abner Taylor, and Amos C. Babcock, the husband of appellant, who later assigned it to Taylor alone, but without any change of interest, their equal interest in and obligation upon the contract being evidenced by a written agreement signed by all of them, dated December 4, 1882. Babcock was unable to advance any money toward the carrying out of the contract, and on November 12, 1884, being indebted to Charles B. Farwell, he assigned his one-fourth interest in the contract to Farwell as security for his indebtedness. On September 19, 1885, Babcock, in consideration of the release of his indebtedness to the Farwells and of the additional sum of $25,000 paid him, the total consideration not exceeding $40,000, transferred one-half of his interest in the contract to them absolutely, and they executed an acknowledgment that they held an eighth interest in the contract in trust for him, and agreed to account to him for one-eighth of the net profits, including the cattle business proposed to be carried on upon the lands received from the state, it being understood that Babcock should not be required to furnish any money.

Previous to this sale of one-half of Babcock's interest the Capitol Freehold Land & Investment Company had been incorporated in the summer of 1885, and in anticipation of such incorporation a contract had been entered into on June 1, 1885, between Taylor, the Farwells, and William Chase Prescott, as manager for and trustee on behalf of the company, wherein it was represented by Taylor and the Farwells that they were the only persons having any interest in the contract for the erection of the state capitol, and the profits thereof or the lands to be acquired thereunder, and in particular that Babcock had no longer any interest therein. It was agreed that Taylor should sell to the company the entire tract of land, containing not less than 3,000,000 acres, appropriated for the purpose of erecting the new capitol, in exchange for 199,993 shares, of the par value of £10 each, of the company's stock, and £>>600,000 in cash or first mortgage debentures of the company, being part of a proposed issue of £ 1,000,000, all having an equal lien and bearing 5 per cent. interest; that when the remaining £>>400,000 had been subscribed or issued for the purpose of stocking the property, or as soon as the property was sufficiently stocked and the requisite improvements completed, even though the full £ 400,000 might not have been issued, the directors should take steps for the issue of the £600,000 and pay the proceeds to Taylor and the Farwells; that Taylor and the Farwells might at any time demand and receive any portion of the £600,000 of debentures then unissued, and that they would apply for and have allotted to them 149,993 shares of the stock, leaving 50,000 shares, which were to be used as a bonus in selling debentures of the company, subject to conditions mentioned in the contract. The Farwells agreed to transfer to the company all live stock on hand, and the company agreed to apply the proceeds of debentures not intended for payment to vendors of land to the improvement and stocking of the property. The net profits of the company were to be applied to the payment of the interest on debentures issued, and until such net profits were sufficient for that purpose Taylor and the Farwells agreed to make good the deficiency. John V. Farwell was to be the first managing director in the United States, with the general management of the lands and property of the company and the conduct of its business in America, subject to the approval and control of the directors. The board of directors,and such agents in the United States as they might appoint, should alone act for the company, and not the American directors or managing director. Any differences or disputes arising between the parties touching the agreement or its construction, or any clause or thing therein or matter relating thereto, should be left to and be absolutely decided in England by arbitration, and for the purpose of such arbitration the agreement might be made a rule of Her Majesty's High Court of Justice in England. Babcock, though he then owned a fourth interest in the capitol contract, had no knowledge of the contents of this agreement until after the sale of half of his interest to the Farwells, on September 19, 1885. The incorporation of the Capitol Freehold Land & Investment Company was in accordance with this agreement. Its purposes were very broad, and included the acquisition, development, and improvement of the Texas land, the stocking of it, and raising and dealing in all kinds of live stock. Both the Farwells were directors, and John V. Farwell was made first managing director in the United States.

The bill alleges that the Farwells received for the contract of June 1, 1885, and the sale thereby of said 3,000,000 acres of land, £ 1,999,930 of the capital stock of the company and £ 600,000 of debentures, altogether amounting to $12,884,000; that the total cost of the erection of the capitol building did not exceed $3,200,000, of which not over $500,000 had then been paid; that one-eighth interest in the capitol building contract belonged to Babcock and was worth $1,456,500; that after deducting certain proper charges against this interest there remained a net profit thereon of $742,333, yet the Farwells bought it for themselves, of Babcock, for $40,000; that they occupied a fiduciary relation to the company, and had no right to purchase said interest without giving the company the benefit thereof; that they did not for many years afterward disclose to the company, or its officers, directors, or stockholders,the fact of making said contract with Babcock and should be held to have purchased and to hold said interest for the company.

By the agreement of June 1, 1885, Taylor and the Farwells agreed to advance to the company such amount of money as might be necessary to pay any deficiency of interest on the debentures not covered by the net cash profits of the company, to be repaid to them only out of net cash profits. It is alleged that there were no net profits before January 1, 1889, but an actual loss, and that the Farwells made false statements to the company as to the net profits, and the debenture interest was actually paid out of the capital of the company. Various modifications of the agreement of June 1, 1885, were made at different times, and on February 1, 1888, a supplementary agreement was made in regard to the payment of debenture interest, whereby Taylor and the Farwells were to pay such interest only in case of a deficiency for that purpose in the gross receipts of the company from the sale of cattle instead of in the net cash profits. It is averred that Babcock never knew of this agreement, nor did the complainant, until 1906.

On February 15, 1888, an agreement was executed by Taylor, the Farwells, Babcock, John T. Chumasero, and the firm of John V. Farwell & Co., wherein, after reciting, among other things, that the signers had formed a syndicate for the erection of a state house at Austin, Tex., and that the money expected from the sale of debentures had not been received, and John V. Farwell & Co. had advanced, and were still advancing, large sums, it was agreed that, in consideration of the advances so made and to be made until the sum requisite for the completion of the State House was raised, the syndicate should give to John V. Farwell & Co. 25 per cent. of the total issue of stock of the Capitol Freehold Land & Investment Company as a bonus for such advances, all expenses incident to placing the total amount of the debentures to be a charge upon the stock so given as a bonus, and the debentures to be carried or bought by John V. Farwell & Co. without expense to the syndicate. On January...