Eberhardt v. The Christiana Window Glass Company
| Decision Date | 23 November 1911 |
| Citation | 9 Del.Ch. 284,81 A. 774 |
| Parties | FREDERICK A. EBERHARDT. WILLIAM H. MYERS, JOSEPH H. DAWSON, JAMES A. EBERHARDT, BENJAMIN F. SHEPPARD, JOHN S. MURPHIN and ALEXANDER P. BYRNE, v. THE CHRISTIANA WINDOW GLASS COMPANY, JOHN L. BYRNE, PATRICK J. BYRNE, MICHAEL J. BYRNE, BYRNE GLASS COMPANY, ARTISANS' SAVINGS BANK, MARY E. BYRNE, EDWARD J. BYRNE, EDWARD H. BYRNE, JOHN E. FOX, BENNETT, BROWN AND BENNETT, INCORPORATED, and WILLIAM S. PRICKETT |
| Court | Court of Chancery of Delaware |
BILL BY STOCKHOLDERS AGAINST LIQUIDATING Directors for an account. The facts sufficiently appear in the opinion.
Prayers of the bill granted.
John P Nields and Christopher L. Ward, for the complainants, claimed that the facts showed:--
1. That between J. L. Byrne and P. J. Byrne on the one hand, and the other stockholders on the other hand, a fiduciary relation existed, the said Byrnes being trustees for liquidation and sale of the corporation's property for the benefit of all.
2. That a sale of the real estate was made by them to John L. Byrne and by John L. Byrne to a corporation composed of himself his wife and son, and by that corporation to Bennett, Brown and Bennett, Inc., with a resultant large profit which must be accounted for to the stockholders of The Christiana Window Glass Company.
An agent or trustee for sale cannot, directly or indirectly become the purchaser of the property which has been confided to him for sale. Directors of corporations, and all persons who stand in a fiduciary relation to others and are clothed with power of sale, come within this rule. If such agent or trustee purchase, his principal or beneficiaries may either disaffirm the sale and recover the money, or affirm the sale and hold him to his purchase. If, having so purchased, he sell again at a profit, his principals or beneficiaries may have an accounting of the profits. The rule holds good irrespective of the adequacy or inadequacy of the consideration paid by the trustee, evidence as to which is irrelevant. The right to disaffirm and to have an accounting of profits is independent of all considerations of adequacy of price. It is at the option of the principal or beneficiary, and is enforced as a matter of course. Purchase by the wife of the trustee or selling agent, or by a corporation formed by him for the purpose, or in which he is largely interested, or by the agent himself or his wife, is within the rule. The rule is "absolute and universal." It is subject "to no qualifications and to no exceptions." It is founded on rules of public policy and it is enforced with "unrelenting rigor."
The solicitors for the complainants also contended, that where the power of liquidation and sale of the entire corporate property has been conferred by the stockholders on two or more directors upon their undertaking to sell the corporate property and to account to the stockholders for the surplus, those directors are trustees for sale and subject to the above rule of equity; that the sale of the corporate property by such directors to a corporation organized by one of the directors, with his wife and son, for the purpose of buying the corporate property, is viodable at the election of the stockholders; and a fortiori, such a sale to such a corporation is voidable where, (a) no genuine consideration is paid; (b) the sale is secret and concealed from the stockholders; and (c) the pretended consideration in the opinion of credible expert witnesses is not half the value of the property at the time of the sale. Fox v. Mackreth, 2 Bro. C. C. 400 (1 White & Tudor's Leading Cases in Equity, pt. 1 *115); Davoue v. Fanning, 2 John. Ch. 252; Michoud v. Girod, 4 How. (U.S) 503; Keech v. Sandford, Cas. Temp. King 61; Whelpdale v. Cookson, 1 Ves. Sr. 9; Whichcote v. Lawrence, 3 Ves. Jr. 740; Ex parte Lacey, 6 Ves. Jr. 625; Ex parte James, 8 Ves. Jr. 337; Randall v. Errington, 10 Ves. Jr. 423; Ex parte Bennett, 10 Ves. Jr. 381; In re Bloye's Trust, 1 Mac. & G. 488; Martinson v. Clowes, L. R. 21 Ch. Div. 857; Church v. Marine Ins. Co., 1 Mason 341 (Fed. Cas. 2711); Wormley v. Wormley, 8 Wheat. 421; Wardell v. Railroad Co., 103 U.S. 651, 658; Robertson v. Chapman, 152 U.S. 673; In re Frazin & Oppenheim, 181 F. 307; Moore v. Moore, 5 N.Y. 256; Hawley v. Cramer, 4 Cowen 717; Gallatian v. Cunningham, 8 Cow. 361; De Canters v. De Chaumont, 3 Paige 178; Van Epps v. Van Epps, 9 Paige 237; Campbell v. Johnston, 1 Sand. Ch. 148; Conger v. Ring, 11 Barb. 356; Jewett v. Miller, 10 N.Y. 402; Gardner v. Ogden, 22 N.Y. 327; Carson v. Marshall, 37 N.J.Eq. 213; Deegan v. Capner, 14 N.J.Eq. 339 (15 A. 819); Freeman v. Harwood, 49 Me. 195; Pratt v. Thornton, 28 Me. 355; Page v. Naglee, 6 Cal. 241; Burke's Adm'r. v. Bours, 92 Cal. 108; Dwight v. Blackmar, 2 Mich. 330 (57 Am. Dec. 130); Sheldon v. Rice, 30 Mich. 296 (18 Am. Rep. 139); Faucett v. Faucett, 64 Ky. 511; Dorsey v. Dorsey, 3 Har. & J. 315 (6 Am. Dec. 506); Thorp v. McCullum, 6 Ill. 614; Scott v. Freeland, 7 Smedes & M. 409 (24 Am. Dec. 310).
The same rule applies in case of a sale to another and reconveyance to the trustee. Downes v. Grazebrook, 3 Mer. 200; Price v. Morris, 5 McLean 4 (Fed. Cas. 11414); Johnson v. Bennett, 39 Barb. 237; Obert v. Hammel, 18 N. J. L. 73; Blauvelt v. Ackerman, 20 N.J.Eq. 141; Romaine v. Hendrickson's Exr's., 27 N.J.Eq. 162; Rosenberger's Appeal, 26 Pa. St. 67; Shuman's Appeal, 27 Pa. St. 64; Davis v. Simpson, 5 Harr. & J. 114; Richardson v. Jones, 3 Gill & J. 104; Boynton v. Brastow, 53 Me. 362; Litchfield v. Cudworth, 15 Pick. 23; Dyer v. Shurtleff, 112 Mass. 165; Hunt v. Bass, 2 Dev. Eq. 292; Saltmarsh v. Beene, 4 Porter (Ala.) 283; Armstrong v. Campbell, 11 Tenn. 201; McClanahan v. Chambers, 17 Ky. 43; Gibson v. Herriot, 55 Ark. 85 Sypher v. McHenry, 18 Ia. 232; Gilbert v. Hewetson, 79 Minn. 326 (82 N.W. 655); O'Connor v. Flynn, 57 Cal. 293; Walker v. Walker, 101 Mass. 169. Also to a sale by trustees or directors of a corporation to themselves. Wing v. Hartupee, 122 F. 897; Cleveland v. La Crosse & M. R. Co., Fed. Cas. 2887. Also to a sale by the trustee to wife or husband. Scott v. Gamble and wife, 9 N.J.Eq. 218; Bassett v. Shoemaker, 46 N.J.Eq. 538 (20 A. 52); Dundas' Appeal, 64 Pa. St. 325; Tyler v. Sanborn, 128 Ill. 136. Also to a sale to a corporation in which the trustee is interested. Abbott v. Am. Hard. Rubber Co., 33 Barb. 578; Hoyle v. Plattsburg, etc., R. R. Co., 54 N.Y. 314; Hoffman, etc., v. Cumberland, etc., Co., 16 Md. 456; s. c. 20 Md. 117; Robbins v. Butler, 24 Ill. 387; Bowes v. Toronto, 11 Moore P. C. 463.
L. Irving Handy, for the defendants, Byrne Glass Company and John L. Byrne, claims that there was no trust between the corporation and the retiring stockholders, nor between such retiring stockholders and Patrick J. Byrne and John L. Byrne. Assuming for the sake of the argument, that the complainants assigned their stock to The Christiana Window Glass Company with the understanding that they were to be paid for it whatever the stock might be found to be worth, first deducting from each stockholder's share his personal indebtedness to the corporation, and that the complainants are therefore to be considered and treated in equity as stockholders; the defendants claim that the testimony shows that John L. Byrne, Patrick J. Byrne and Michael J. Byrne, as directors of the corporation, performed their full duty with fidelity, disposed of the assets of the corporation to the best possible advantage, and paid the debts of the corporation with the proceeds so far as the money realized would go; and that nothing is due to the complainants because there was no surplus, not quite enough money having been realized to pay all of the corporation's debts.
A director may purchase from the corporation under a rule which casts upon the director the burden of sustaining the transaction, by showing that it was proper, fair, made in good faith and for an adequate consideration. Hancock v. Holbbrook, et al., 3 So. Rep. 351; 3 Thomp. on Corp. § 4059; Skinner v. Smith, et al., 134 N.Y. 240; Pneumatic Gas Co. v. Be ry, et al., 113 U.S. 322; Ryan v. Williams, 100 F. 172; Union Trust Co. of Md. v. Carter, 139 F. 717; Wyman v. Bowman, 127 F. 257; Barr v. Pittsburg Plate Glass Co., 57 F. 86; Strobel v. Brownell, 40 N.Y.S. 702; Ashurst's Appeal, 60 Pa. St. 290.
A contract between two corporations is not rendered void by the fact that some of the persons making the contract were officers of both corporations and represented both corporations to the extent of their respective powers. 3 Thomp. on Corp., §§ 4079, 4080; Rolling Stock Co. v. R. R. Co., 34 O. St. 450; Booth, et al., v. Robinson, et al., 55 Md. 419; Langan v. Francklyn, 20 N.Y.S. 404; Leavenworth v. Chicago, etc., R. R. Co., 134 U.S. 688; Pauly v. Pauly, 107 Cal. 8; Griffln v. Inman, etc. , Co., 57 Ga. 370; Public Hall Co. v. Bank of Commerce, 144 Ind. 34 (42 N.E. 1097); Library Hall Co. v. Pittsburg Asso., 173 Pa. St. 30; Shaw v. Davis, 78 Md. 308; Manufacturers' Sav. Bank v. O'Reilly, et al., 97 Mo. 38; Genesee, etc., Co. v. Retsof Mining Co., 36 N.Y.S. 896; Burden v. Burden, 159 N.Y. 287 (54 N.E. 17).
In conclusion, the trend of modern decisions in this country is against the contention of the complainants' solicitors that the rule against a trustee buying trust property applies in all of its rigor to a director of a corporation buying the property of the corporation. No advantage can be gained from consulting modern English decisions on the point, because they are all based on a British statute passed under Victoria. The trend and weight of modern American decisions is that no constructive fraud vitiates or taints the sale of the real estate of The Christiana Window Glass Company to the Byrne Glass Company. If there is any fraud in that sale at...
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