Brooker v. William H. Thompson Trust Company

• Citation: 162 S.W. 187,254 Mo. 125
• Parties: AUGUST E. BROOKER, Appellant, v. WILLIAM H. THOMPSON TRUST COMPANY et al
• Decision Date: 03 January 1914
• Court: United States State Supreme Court of Missouri

162 S.W. 187

254 Mo. 125

AUGUST E. BROOKER, Appellant, v. WILLIAM H. THOMPSON TRUST COMPANY et al

Supreme Court of Missouri, First Division

January 3, 1914

Appeal from St. Louis City Circuit Court. -- Hon. William M. Kinsey Judge.

Affirmed.

Eugene H. Angert and C. W. Wilson for appellant.

(1) A promoter of a corporation occupies a fiduciary relation to the corporation which he promotes and to its stockholders and like all fiduciaries, such as agents or trustees, cannot make any personal profit or gain out of any transactions for or with his principals, either by way of profit in dealings with the corporation or as remuneration for his services in promoting the corporation. Cook on Corp., sec. 651; Exter v. Sawyer, 146 Mo. 302; Land Co. v. Case, 104 Mo. 572; Land Co. v. Webster, 75 Mo.App. 457; Phosphate Co. v. Erlanger, L. R. 3 App. Cas. 1208; Gluckstein v. Barnes [1900], App. Cas. 240; Yeiser v. Paper Co., 107 F. 341; Chandler v Bacon, 30 F. 538; Hayward v. Leeson, 176 Mass 310; Fruit Co. v. Buck, 52 N.J.Eq. 219; Pietch v. Kronkel, 116 Wis. 344; Mining Co. v Spooner, 74 Wis. 307; Stove Co. v. Wilcox, 64 Conn. 10; Carbonating Co. v. Bank, 103 Wis. 26; Arnold v. Searing, 67 A. 852; Brewster v. Hatch, 10 Abb. N. C. 400, 122 N.Y. 350; Copper Co. v. Bigelow, 188 Mass. 315, 203 Mass. 259; Torrey v. Cement Co., 158 Mich. 348; Mason v. Carrothers, 105 Me. 405. (2) The directors of a corporation stand in a fiduciary relation to the corporation and to its stockholders, and are likewise precluded from making any personal profit or gain at the expense of the corporation. 2 Cook on Corp., secs. 650, 652; 3 Clark & Marsh. on Corps., sec. 758; Bent v. Priest, 86 Mo. 482; Ward v. Davidson, 89 Mo. 448; Hannerty v. Theater Co., 109 Mo. 304; Hill v. Mining Co., 119 Mo. 9, 22; Hill v. Mining Co., 124 Mo. 153. (3) On the promoter rests the affirmative duty to make full disclosure of his profits and obtain the stockholders' consent with full knowledge of the facts, and in the absence of such disclosure and consent the profit belongs to the corporation and can be recovered by it. Colton Co. v. Richter, 26 Misc. (N. Y.) 26; Erlanger v. Phosphate Co., L. R. 3 App. Cas. 1208; Gluckstein v. Barnes [1900], App. Cas. 240; Exter v. Sawyer, 146 Mo. 323; Land Co. v. Flash, 97 Cal. 612; 2 Cook on Corps., secs. 650, 652; 3 Clark & Marsh. on Corps., sec. 758; Thompson on Corps., secs. 4024, 4025; 1 Morawetz on Corps., secs. 517, 518; Land Co. v. Webster, 75 Mo.App. 457; Dickerman v. Trust Co., 176 U.S. 181; Fruit Co. v. Buck, 52 N.J.Eq. 219; Getty v. Devlin, 54 N.Y. 403, 70 N.Y. 504; Iron Co. v. Bird, 33 Chan. Div. 85. (4) Where a promoter wishes to sell property in which he is interested to the corporation, it is his duty to provide the corporation with an independent board of directors that will be able to form an independent and impartial judgment as to the wisdom of the purchase and the price to be paid, and where, as in the case at bar, the directory was composed of the promoters and their associates, all of whom were directly interested in the proposed purchase as sharers in the profit to be made at the expense of the corporation, this obligation is not met and the profit must be returned to the corporation. Phosphate Co. v. Erlanger, L. R. 3 App. Cas. 1208; Gluckstein v. Barnes (1900), App. Cas. 256; Fruit Co. v. Buck, 52 N.J.Eq. 219; See v. Heppenheiner, 61 A. 843; and cases under Point 1. (5) The parties to whom the promoter must make full disclosure of his profits and whose consent he must obtain are those who become interested as stockholders of the corporation as a part of the promoters' plan, and who furnish any part of the funds used to enable the promoter to carry out his scheme and to launch the corporation. The promoter's profit is not made valid by the consent of the subscribers or stockholders so long as there are others interested in the corporation or others who are to become interested in it as stockholders, in furtherance of the original plan of the promoters. So where all the stock of the corporation is subscribed in the articles of association by the promoters and his associates or nominees, but upon the understanding and with the intention that a part of said stock is to be paid for and issued to third parties, the third parties who pay for and to whom such stock is issued are the real bona-fide stockholders to whom disclosure must be made, and whose consent must be obtained to render the promoters' profit valid. Hayward v. Leeson, 176 Mass. 310; Pietsch v. Millbrath, 123 Wis. 647; Trust Co. v. Mackenzie, 62 Chan. Div. 870; Mining Co. v. Spooner, 74 Wis. 307; Arnold v. Searing, 67 A. 852, 74 A. 762; Brewster v. Hatch, 10 Abb. N. C. 400, 122 N.Y. 350; Phosphate Co. v. Erlanger, L. R. 3 App. Cas. 1218; Gluckstein v. Barnes [1900], App. Cas. 257; Copper Co. v. Bigelow, 188 Mass. 315, 203 Mass. 159; Copper Co. v. Lewisohn, 210 U.S. 206; Torrey v. Cement Co., 158 Mich. 348; Mason v. Carrothers, 105 Me. 405; Wills v. Coal Co., 96 P. 528; Oil Co. v. Morris, 108 Va. 288. (6) Under the facts of this case the Edwards Brokerage Company were parties who it was intended by the promoters should become interested, and who did become interested as stockholders of the corporation as a part of the plan of organization, and who occupied the position of persons to whom disclosure of the profit must be made within the rule established above. The promoters cannot retain any profit made by them unless they obtained the consent of the Edwards Brokerage Company. (7) There is no merit in the contention that because Richards subscribed in the articles of association for the stock which had been taken by and was afterwards paid for and issued to the Edwards Brokerage Company that the consent of Richards to the profit to himself rendered the consent of the Brokerage Company unnecessary. A corporation is not prevented in any state of facts from ignoring the dummy subscriber for stock and recognizing the bona-fide owner of such stock, and especially is this true in cases where the promoter makes the record of the subscribers for the purpose of enabling himself to make escape with his profit. Pittsburgh v. Spooner, 74 Wis. 307; Arnold v. Searing, 67 A. 852; Terwillinger v. Tel. Co., 59 Ill. 249; Hotel Co. v. Wright, 73 Mo.App. 240; Banking Co. v. Adams, 72 S.W. 1125; Bank v. Talbot, 131 Cal. 45; Bates v. Tel. Co., 134 Ill. 536; Brie v. Wilcox, 22 N.Y. 551; Shickle v. Watts, 94 Mo. 419. (8) When the promoter is shown to have made a personal profit out of the organization of the corporation, a prima-facie case is made against him and he must repay it to the corporation unless he shows as matter of defense that he made full and complete disclosure of the amount of his profit to all parties interested in the corporation and obtained their consent thereto. The burden of proof is upon the promoters, as upon all trustees, to show that he made the disclosure and obtained the consent of his cestui que trust. Evans v. Evans, 196 Mo. 18; Newman v. Newman, 152 Mo. 413; State ex rel. v. Jones, 131 Mo. 210; Gavin v. Williams, 44 Mo. 465; Colton Co. v. Richter, 26 Misc. (N. Y.) 26; In re Box Co., 17 Chan. Div. 476. (9) No disclosure of the fact that the promoters and their associates were making a profit of $ 500,000 or any amount was made to the Edwards Brokerage Company, and its consent to the making of such profit was not obtained. The consent of the Edwards Brokerage Company could only be obtained after imparting to it actual knowledge of the facts and it is uncontroverted that no actual knowledge was brought home to the Edwards Brokerage Company. Hinkley v. Pipe Line Co., 107 N.W. 632; Yeiser v. Paper Co., 107 F. 301; Whitechurch v. Whitechurch [1902], App. Cas. 117; Cook on Corps., sec. 717; Hardware Co. v. Grocer Co., 64 Mo.App. 681; The Famous Co. v. Eagle Co., 51 Mo.App. 71; Rogers v. Brice, 105 Ga. 432; Brick v. Dyer, 187 Pa. St. 470; Tyler v. Anglo-Am. Ass'n, 32 S.W. 602; Somerset v. Adams, 72 S.W. 1125; Cook on Corps., sec. 23; 23 Am. & Eng. Ency. Law, 786; Railroad v. Clark, 22 Hun, 359; Schollmeyer v. Patterson, 168 Pa. St. 30; Shickle v. Watts, 94 Mo. 419. (10) The Edwards Brokerage Company is not chargeable with constructive notice of the promoter's profit by reason of their signature to the stock subscription paper. The duty of the promoters is to impart to the stockholders all of the facts, and merely putting the stockholders upon inquiry does not satisfy that duty. Bound v. Railroad, 50 F. 853; Jamison v. Glasscock, 29 Mo. 196; Land Co. v. Case, 101 Mo. 579; Richards v. Pitts, 124 Mo. 615; Garvin v. Williams, 44 Mo. 465; Bent v. Priest, 10 Mo.App. 557; Newman v. Newman, 152 Mo. 413; Pomeroy v. Benton, 57 Mo. 548; State ex rel. v. Jones, 131 Mo. 210; In re Box Co., 17 Chan. Div. 476; Colton Co. v. Richter, 26 Misc. (N. Y.) 26; Gluckstein v. Barnes (1900), App. Cas. 255; In re Olympia (1898), 2 Chan. Div. 155; Chaffee v. Berkley, 118 N.W. 269; Arnold v. Searing, 78 A. 768; Wills v. Coal Co., 96 P. 535; Combs v. Scott, 12 Allen 498; Coal Co. v. Sherman, 20 Md. 117; Land Co. v. Lewis, 53 A. 533; State ex rel. v. Findley, 101 Mo. 377; Gray v. Gillilian, 63 Mo. 33; Newton v. Rebeneck, 90 Mo.App. 673; Pitts v. Mercantile Co., 75 Mo.App. 231; Clark & Marsh. on Corp., p. 1706; Green v. Hadenberg, 159 Ill. 489; Real Estate Co. v. Nash, 34 S. E. (Va.) 182; Coal Co. v. Sherman, 30 Barb. 575; Real Estate Co. v. Nash, 41 S. E. (Va.) 182; Greenwood v. Wheel Co. (1900), 1 Chan. Div. 421. (11) The issue of $ 500,000 of the stock of the company to the promoters and their associate directors as a bonus was in violation of the Constitution and laws of the State and was illegal and void. Furthermore, even if the Edwards Co. could be said to have assented to that transaction, such assent would...