Duane v. Merchants' Legal Stamp Co.

• Citation: 231 Mass. 113,120 N.E. 370
• Parties: DUANE et al. v. MERCHANTS' LEGAL STAMP CO. et al. (two cases).
• Decision Date: 23 September 1918
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

231 Mass. 113

120 N.E. 370

DUANE et al.

v.MERCHANTS' LEGAL STAMP CO. et al. (two cases).

Supreme Judicial Court of Massachusetts, Suffolk.

Sept. 23, 1918.

Report from Supreme Judicial Court, Suffolk County.

Two bills by Harry B. Duane and others against the Merchants' Legal Stamp Company and others, resulting in dismissal of both bills on demurrers. On report to the full bench of the Supreme Judicial Court. Bills dismissed.

The first bill was by a minority stockholder in a corporation against directors to recover damages for loss of lawful profits by reason of unlawful management of the company's affairs by said directors, and to restrain them from continuing its business as ultra vires and in an illegal manner. The second was a bill by plaintiff, as beneficial owner of shares held by him, to recover his proportion of profits divided among shareholders, which profits plaintiff alleged he was entitled to receive.

Boyd B. Jones and Hurlburt, Jones & Hall, all of Boston, for plaintiffs.

Anson M. Lyman, of Boston, for defendants.

RUGG, C. J.

[1] For convenience the individual and corporate plaintiffs will be referred to in this opinion as the plaintiff, the defendant corporation as the Stamp Company, and the other defendants as the directors. The plaintiff alleges that he was a stockholder in the Stamp Company when it was incorporated, and still continues to be a stockholder. A suit between the same parties was considered in 227 Mass. 466, 116 N. E. 873. The kind of business of the Stamp Company and the means by which it was conducted there are narrated at length and need not here be repeated. It is enough to say that, according to the allegations of the bill in that suit, the business of the Stamp Company was that of supplying trading stamps; that it employed methods expressly designed to drive competitors from the field and to create a monopoly in that branch of trade, and that a monopoly had been established so that within this commonwealth effectual rivalry practically had been eliminated; that the methods used in the promotion of the business and the establishment of the monopoly were in direct defiance of the prohibitions against monopolistic practices contained in St. 1908, c. 454, and therefore were unlawful, as was held in Merchants Legal Stamp Co. v. Murphy, 220 Mass. 281, 107 N. E. 968, L. R. A. 1915D, 520, and Merchants Legal Stamp Co. v. Scott, 220 Mass. 389, 107 N. E. 969. Instrumentalities adopted for the accomplishment of these ends were contracts referred to as ‘A,’ ‘B,’ and ‘C.’ The plaintiff, on the allegations of the bill there under consideration, as a stockholder and by contracts belonging to the most favored class of users of trading stamps, was an active participant in the unlawful methods and illegal practices of the Stamp Company. The purpose of that suit was stated in the decision of that case at 227 Mass. 468, 116 N. E. 874, in these words:

‘Although there is a prayer that the defendant corporation be restrained from continuing to manage its affairs and from conducting its business in violation of the anti-monopoly act, St. 1908, c. 454, the frame of the bill and the burden of the complaint is for relief against discrimination toward the plaintiff in the distribution of the profits thus alleged to have been made illegally. As matter of construction it seems plain that the main purpose of the bill is to obtain for the plaintiff this money benefit by direct payment and by recognition as a shareholder, and the other allegations are incidental to that chief aim. Stripped of all subsidiary and ancillary matters, the real purpose of this bill is to procure through the aid of a court of equity a share in the profits of an illegal enterprise.’

That having been the construction of the allegations of that bill, and the foundation upon which the plaintiff then rested his contentions, the result was inevitable that the bill must de dismissed for the reason that courts do not supervise the distribution among wrongdoers of spoils derived from unlawful conduct. Parties to such affairs are left where their own acts put them. The law affords no help to any of them. In the light of the arguments then addressed to us, it did not seem necessary to elaborate further the reasons for that construction.

The consideration of the suits at bar must be approached with reference to that background. The historical allegations of the earlier suit touching the kind of business of the Stamp Company, the illegal methods by which it was prosecuted, and its monopolistic aim and accomplishments are repeated in substance on the present records. Succinctly stated, the facts averred in the bills in the present suits are that the plaintiff in 1904 became one of several incorporators of the Stamp Company, a corporation organized for the purpose of carrying on the business of dealing in trading stamps. That was a legitimate enterprise. Its business was conducted in a lawful manner until 1907, when an illegal method was adopted by the Stamp Company whereby its stockholders as ‘insiders' were given a preference over those who were not stockholders or outsiders,’ and a monopoly was established. These illegal methods, which were designed to give to the Stamp Company a monopoly of the trading stamp business and which actually produced that result, consisted chiefly of contracts ‘A,’ ‘B,’ and ‘C,’ the first two being executed between the Stamp Company and its stockholders and the third between the Stamp Company and its other customers. The plaintiff himself executed contracts in the forms ‘A’ and ‘B’ with the Stamp Company, each dated May 17, 1907, for a term ending on April 11, 1924. In 1915 the essential provision of these contracts, whereby the Stamp Company carried on its business, were declared to be unlawful because tending to establish a monopoly and contrary to the statute. Thereupon the plaintiff notified the Stamp Company and the directors that he would no longer be bound by his contracts ‘A’ and ‘B’ with the Stamp Company and demanded that the use of the monopolistic contracts be discontinued and the business of the Stamp Company conducted according to law. Allegations to the effect that the monopoly will cease to exist with the cessation of the use of contracts ‘A,’ ‘B,’ and ‘C,’ and that it is not already so firmly entrenched that it will continue to be a monopoly even by the use of contracts normally lawful for a stamp dealer, are not clear or free from ambiguity, but without discussing or deciding that point we assume in favor of the plaintiff that they are sufficient. There is a further allegation to the effect that the defendants refuse to declare dividends in the Stamp Company to the plaintiff such as other stockholders receive, or to distribute to him his share of profits, on the ground of a pretended cancellation of the plaintiff's shares of stock in accordance with the terms of contract ‘A,’ because of his refusal to use the trading stamps of the Stamp Company as required by contracts ‘A’ and ‘B.’ The plaintiff for a period of seven or eight years having been a party to illegal contracts and unlawful methods of business and having shared in the profits of that business, now asks the aid of a court of equity to compel the other party to the contract to cease to try to hold him to the terms of his contracts, which according to their terms are to run for several years more, and to abandon the use of illegal methods, to conduct the business according to law, and to recognize the plaintiff as a stockholder.

[4] The controlling principle of law is well settled. The only difficulty lies in its application. Courts will not lend their aid to relieve parties from the unfortunate results of their own illegal adventures. The governing rule of law was stated by Chief Justice Knowlton with his usual comprehensive clearness and exact accuracy in Eastern Expanded Metal Co. v. Webb Granite and Construction Co., 195 Mass. 356, 362, 81 N. E. 251, 252 (11 Ann. Cas. 631), in these words:

‘It has been held in many cases that, where the matters called for in the contract that render it illegal do not involve moral turpitude, but are merely mala prohibita, either party, while it remains executory, may disaffirm it on account of its illegality and recover back money or property that he has advanced under it. If the contract has been executed the court will not relieve either party from the consequences of his own violation of law. But so long as it is entirely unexecuted in that part which the law forbids, there is a locus poenitentiae.’

That statement is supported by affluent citation of authorities there collected from the decisions of this court and from many other jurisdictions. It was that principel which was followed and applied when the parties were here in 227 Mass. 466, 116 N. E. 873. The same principle is equally applicable to the facts now alleged. The plaintiff and the Stamp Company and the directors have co-operated in rearing, promoting and making secure the monopolistic domination of the Stamp Company in its line of business and in eliminating and excluding all effective competition. Their joint efforts through a series of years have produced the very mischief meant to be restrained and prevented by the statute. The contract to which the plaintiff was a party purported to devote his property as a stockholder, together with that of his fellow shareholders, to the perpetration of this prohibited project for a definite term of years, and these contracts in the part forbidden by law have been executed for several of those years. The plaintiff has shared during those years in the profits of the scheme which have accrued through the operation of these illegal elements in the carrying on of the business, and he has shared in accordance with unlawful provisions of his contracts. In no right sense can it be said that the contracts of which the plaintiff complains remain ‘entirely unexecuted in that part which...