Davis v. Annex Corp.

• Decision Date: 10 June 1909
• Citation: 64 S.E. 1050,109 Va. 625
• Court: Virginia Supreme Court
• Parties: JORDAN & DAVIS et al. v. ANNEX CORPORATION et al.

64 S.E. 1050

(109 Va. 625)

JORDAN & DAVIS et al.

v.ANNEX CORPORATION et al.

Supreme Court of Appeals of Virginia.

June 10, 1909.

1. Corporations (§ 30^*)—Liability of Promoter.

A promoter of a corporation is accountable to it as if the relation of principal and agent or of trustee and beneficiary had actually existed; and he is precluded from taking a secret advantage of other stockholders.

[Ed. Note.—For other cases, see Corporations, Cent. Dig. § 98; Dec. Dig. § 30.*]

2. Contracts (§ 98*) — Effect of Fraud — Remedies.

Where a person has been induced by fraud to enter into a contract, he may elect to rescind the same if he can restore what he has received, and sue for the consideration he has paid, or, if he has not paid anything, repudiate the contract, and rely, when sued, on the fraud as a defense, or he may elect to retain what he has received, and bring an action for damages sustained by the deceit.

[Ed. Note.—For other cases, see Contracts, Dec. Dig. § 98.*]

3. Corporations (§ 80*) — Stock Subscription—Effect of Fraud by Promoter.

Where the parties cannot be placed in statu quo, a subscription for corporate stock cannot be rescinded for the fraud of the promoter in secretly taking the profit to himself in form of rent of property leased to the corporation, but the remedy of the stockholder is a recovery by the corporation of such profit from the promoter.

[Ed. Note.—For other cases, see Corporations, Dec. Dig. § 80.*]

4. Corporations (§ 565*) — Insolvency — Rights of Fraudulent Promoter.

Though the promoter through fraud secretly received a profit to which he was not entitled, on a recovery of such profit by the corporation, he is entitled as a creditor for money actually advanced to share in all the corporate assets.

[Ed. Note.—For other cases, see Corporations, Dec. Dig. § 565.*]

Appeal from Circuit Court of City of Norfolk.

Action by Jordan & Davis and others against the Annex Corporation and others.

From the decree rendered, plaintiffs appeal. Affirmed.

R. Randolph Hicks, for plaintiffs in error.

Loyall, Taylor & White and H. H. Rumble, for defendants in error.

BUCHANAN, J. Prior to March 14, 1907, W. G. Davis and R. E. Jordan, partners trading as Jordan & Davis, Garrett Smith, and Benjamin Lowenberg obtained a charter of incorporation under the name of the Annex Corporation, for the purpose of conducting a hotel business. The firm of Jordan & Davis, Smith, and Lowenberg each subscribed for $5,000 of its capital stock, which was fully paid up. Subsequently each of the said shareholders made advances for the purpose of carrying on the business.

On the 14th of March, 1907, the Annex Corporation entered into an agreement with the Pine Beach Hotel Corporation, by which it leased from the latter a certain parcel of land upon which it agreed to erect a hotel building of the dimensions named in the lease, and to have it ready for use not later than June 1st of that year, and to operate it in the manner provided therein to the end of the Jamestown Exposition, scheduled to close November 30, 1907. It was further provided, among other things, that the lessee was to pay the lessor as rent $5,000 and 10 per cent. of the gross receipts from all sources from the operation of the hotel, was to remove the building within 30 days from the expiration of the lease, and, in the event of nonpayment of the rent or any other breach of the agreement during the lease on the part of the lessee, the lessor had the right to cancel the lease and take possession of the building and all the assets of the lessee thereon, and to operate the same upon certain conditions.

The building provided for was erected and the business conducted until September of that year by the lessee corporation, when Jordan & Davis and Smith instituted this suit.

Briefly stated, and as far as is material to the questions involved in this appeal, in addition to what has already been stated, the complainants (appellants here) allege in their bill that B. Lowenberg, before the creation of the Annex Corporation, represented to them that he had an option from the Pine Beach Hotel Corporation to erect and operate a hotel upon lands adjoining it upon the terms and conditions above stated; that he proposed to organize a corporation to be known as the "Annex Corporation" with a minimum capital of $30,000, of which $15,-000 was to be preferred and paid for in cash; that he requested the appellants each to subscribe for $5,000 of the preferred stock, and stated that he would subscribe for the other $5,000; that they inquired of him whether or not there were any promoter's fees or secret profits coming to him, and upon his replying there were not, and that he and they would become stockholders upon the same terms, they, relying on those representations, subscribed for $5,000 each of the said preferred stock, applied for and obtained the charter under the name of the "Annex Corporation, " in which the appellants Jordan and Smith, respectively, were named as president and vice president, and said Lowenberg as secretary and treasurer, and all were named as directors, that, after the organization of the company, it made the agreement hereinbefore referred to with the Pine Beach Hotel Corporation, erected and equipped the hotel as required by the lease, and opened the same, expecting large profits to accrue from its operation by reason of the fact that the Jamestown Exposition would be in progress during the term of the lease, but that up to the time of filing their bill their expectations had not been realized and the hotel had been operated at a loss. It was further alleged In the bill that they had just discovered that the $5,000 which the lease provided to be paid to the lessor was a fiction, and that the real agreement between Lowenberg and the ...