Gilchrist v. Hatch

• Decision Date: 10 November 1914
• Docket Number: 22,724
• Citation: 106 N.E. 694,183 Ind. 371
• Parties: Gilchrist et al. v. Hatch
• Court: Indiana Supreme Court

106 N.E. 694

183 Ind. 371

Gilchrist et al. v. Hatch

No. 22,724

Supreme Court of Indiana

November 10, 1914

Rehearing Denied June 17, 1915.

From Superior Court of Marion County (70,878); Clarence E. Weir Judge.

Action by Aretas W. Hatch against Hector M. Gilchrist and another. From a judgment for plaintiff, the defendants appeal. (Transferred from the Appellate Court under subd. 2, § 1394 Burns 1914, Acts 1901 p. 565.)

Affirmed.

Pickens Moores, Davidson & Pickens and Gavin, Gavin & Davis, for appellants.

Lew Wallace, Wm. N. Harding, Alfred R. Hovey, Leander J. Monks, John F. Robbins, James P. Goodrich and Henry C. Starr, for appellee.

Spencer J. Cox, C. J., and Morris, J., dissent. Myers, J.

OPINION

Spencer, J.

Suit by appellee against appellants, Hector M. Gilchrist and Dewitt C. Griffith, to have annulled on the ground of fraud a certain deed wherein he had conveyed certain described real estate to Gilchrist, and to recover the possession of said real estate and to quiet title thereto.

The first assignment of error challenges the action of the trial court in overruling appellants' demurrers to the complaint. From this pleading, which is in two paragraphs, it appears that on October 9, 1905, appellant Griffith was the treasurer and manager of the Mount Pleasant Oil Company and the holder of the majority of the stock in said company; that on said date he entered into the following written contract with appellee:

"This Agreement, made this 9th day of October, 1905, by and between Dewitt C. Griffith of the first part, and Aretas W. Hatch of the second part, Witnesseth: Whereas, said first party has this day sold and transferred to the second party shares of the capital stock of Mount Pleasant Oil Company, a corporation under the laws of Indiana, aggregating Ten Thousand Dollars ($ 10,000) par value, and the second party has paid to the first party the sum of Ten Thousand Dollars ($ 10,000) for said shares; and it was, and is, part of the consideration for said transaction that said parties enter into and bind themselves by this agreement. Now therefore, in consideration of the premises and of the mutual agreements herein contained, it is agreed between the parties hereto as follows: First, Said first party shall retain the ownership of a majority of the shares of the capital stock of said company and the second party shall retain the shares so purchased by him as aforesaid, until this arrangement shall be terminated by the mutual consent of the parties hereto; and while they so hold said stock, said parties hereto shall vote the same for the election of such other director or directors as they may agree upon. Second, Said parties hereto shall cause said directors to elect said Hatch the secretary and attorney of said company and said Hatch hereby agrees to accept such offices and perform the duties thereof; and the salary of such offices shall amount to -----, per annum. Said Hatch shall be elected and shall serve from year to year so long as this agreement shall continue in force and the parties hereto shall elect directors who will continue Hatch in said offices. Signed in duplicate the day and year first hereinabove written. D. C. Griffith, A. W. Hatch."

It further appears that Griffith was then indebted to appellant Gilchrist and it was therefore agreed that appellee should pay for his stock by conveying to Gilchrist a certain piece of residence property and executing his note for $ 500; that Griffith was to receive credit in the amount of such consideration on his indebtedness to Gilchrist; that said agreement was carried out in full. The complaint then sets out in detail a state of facts showing that the purchase by appellee of the oil company stock was induced by the false and fraudulent representations of Griffith as to the value of the property owned by the corporation and as to the production of the various wells located thereon. No question is raised as to the sufficiency of the complaint in this regard and it is therefore unnecessary to set out the averments in detail.

The first paragraph alleges that Gilchrist had knowledge of the fraud practiced by Griffith and that he took the property in payment on an existing debt and for no other consideration. The second paragraph charges that Gilchrist conspired with Griffith to perpetrate the fraud and actually participated therein.

It is urged against this complaint that, on its face, it discloses that the contract under which the conveyance was made is illegal and void. In support of this contention, appellants rely on the general rule that a contract by a director or a majority stockholder of a corporation whereby he undertakes, in consideration of a private benefit or advantage accruing to himself, to secure the appointment of another to a lucrative office or a position of profit in the corporation is against common honesty and therefore against public policy. That when such a contract has been wholly or partially executed, the law will extend no relief, but will treat the parties as in pari delicto and leave them where they have placed themselves. Hutchins v. Weldin (1888), 114 Ind. 80, 15 N.E. 804; Overshiner v. Wisehart (1877), 59 Ind. 135.

There are exceptions to this rule, however, and if we concede, without deciding, that the contract before us is against good morals, it does not necessarily follow that appellee, though a party to such contract, is without relief. The law relative to illegal contracts has its basis in public policy and the rule here invoked has been adopted for the benefit, not of the parties, but of the public. Where it appears, therefore, that the public interests will be better promoted by granting relief to the plaintiff than by denying it, courts of equity, acting with proper caution, will intervene, even though the parties are equally guilty. This exception to the general rule is thus concisely stated and supported by authority in 9 Cyc. 550: "Although the parties are in pari delicto, yet the court may interfere and grant relief at the suit of one of them where public policy requires its intervention, even though the result may be that a benefit will be derived by a plaintiff who is in equal guilt with the defendant. But here the guilt of the parties is not considered as equal to the higher right of the public; and the guilty party to whom the relief is granted is simply the instrument by which the public is served."

In the case of Porter v. Jones (1869), 46 Tenn. 313, 321, the reason for the exception and the test thereof are thus well stated: "while the rules of law which courts are bound to enforce in civil cases, have reference primarily, to the protection and enforcement of private rights, they are also subservient to the governing principle, that the safety and best interests of the community are paramount to any private interest. Therefore it is, that there are many cases in which, were the rights or interests of the parties only concerned, courts would absolutely refuse them aid; yet, as the public good demands a decision upon their claims, the courts will entertain the cause and make the decision. The decree is made upon the facts and the law of the private right; but the community is a quasi party to the cause; and for the protection of the community, courts may overlook the individual turpitude which has forfeited the private right, and make such decision, consistent with the public interests, as they would have made had the party been innocent. From these principles, it follows, and thus it has been held, that the active interposition of equity to set aside and cancel an illegal contract, is matter of sound discretion in the court, and not of absolute right in the party. The inquiry is, has the complainant made such a case as would, were he innocent, entitle him to relief? And if so, does the best interest of society require that relief shall be afforded, notwithstanding the guilt of the party? If not, then the court will refuse its aid, and will leave the parties in whatever difficulties their conduct may have involved them."

The complaint before us proceeds on the theory that appellee was induced through fraud to enter into the contract with Griffith and to purchase the stock of him. For the purposes of the ruling on the demurrer, at least, it must be assumed that such theory is based on fact. It is not the policy of the law to place restrictions on legitimate business dealings or to relieve a party from his own mistakes of judgment but it is a matter of common knowledge that fraudulent stock-selling schemes are a favorite resort with unscrupulous promoters who prey on the ignorant and credulous, and form a parasitic element within society, against which the latter is entitled to protection. As is said in one authority, "public policy requires that their purposes should be thwarted and their nefarious schemes rendered less surely profitable, rather than that the continuance of that profit should be guaranteed by denying relief to the plaintiff and to others who should subsequently be placed in the same position as he."

The cases which discuss the doctrine of illegal contracts are not without conflict and some of them seek to draw a distinction between offenses involving moral turpitude and acts which are in violation of statute law only. In cases which fall within the former class, it may not always be as clear that the public need demands that relief be given to a guilty plaintiff but the rule applicable remains the same. The weight and trend of modern authority seems to be that, although the parties to a transaction have concurred in an illegal act, whatever it may be, they are regarded as not equally guilty where one party has been induced into the contract through fraud, oppression or...