Hayward v. Leeson
| Decision Date | 15 June 1900 |
| Citation | 176 Mass. 310,57 N.E. 656 |
| Parties | HAYWARD SAME v. LEESON. SAME v. HOPEWELL. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
G. W. Easley,
W. H. Russell, W. B. Winslow, and Lewis G. Farmer, for complainant.
Alfred Hemenway and I. R. Clark, for defendants.
These two cases were heard together in the superior court, certain findings on the material facts were made, which are set forth in a report, and the questions of law arising thereon were reserved for this court.
The suits were begun by the receiver of the East Tennessee Land Company, an insolvent corporation, to recover from the defendants secret profits made by them as promoters of that company. By a confidential circular dated March 25, 1889, the Phoenix Land Company proposed to the defendants and eight other persons that they should associate themselves together as the Syndicate of Ten, to advance to the Phoenix Land Company from $15,000 to $30,000, which should be used in obtaining options on some 225,000 to 300,000 acres of land in three specified counties in the state of Tennessee. These lands were stated in the circular to be underlaid in part with iron and in part with coal, to be well wooded, to have a soil of fair agricultural value, and to have the most healthful average climate of the South, and therefore appropriate for a health resort for the South in summer and for the North in winter that the price for which they could be obtained was about $800,000, to which should be added $100,000 for possible expenses, and that they were really worth $1,500,000, showing a profit of $600,000. It was proposed that options on these lands should be obtained in the name of the Phoenix Land Company, and when the options were obtained a thorough investigation should be made, and the opinion of an expert obtained as to their value; that the Phoenix Land Company and the Syndicate of Ten should then organize a corporation, and through subscriptions to its capital stock made by the public and secured by means of a prospectus, the corporation would be able to, and should, but the options at a price fixed by the two parties to the enterprise, the Phoenix Land Company and the Syndicate of Ten, and the net profits, after paying all actual expenses incurred, should be divided between the two. The Phoenix Land Company was a corporation organized under the laws of the state of Tennessee on March 15 1889,--just 10 days before the date of the circular mentioned above,--by Frederick Gates, his son, R. W. Gates, his two partners in the real-estate business at Chattanooga, A. W. Sidebottom and O. F. Jaynes, together with one Alphonso A. Hopkins, of Elmira, in the state of New York. These five men were all the incorporators, directors, or subscribers to stock in said corporation, and 'it does not appear that any stock of said Phoenix Land Company was actually issued, or that it had any paid-up capital stock at any time, or that it owned any land.' The defendants, together with eight other persons, accepted this proposal, and an agreement between the Syndicate of Ten and the Phoenix Land Company was completed May 6, 1889. This agreement is spocken of in the report as 'Paper No. 31,' and as the 'Agreement of March 25, 1889,' and it included a paper referred to in the report as the 'Plan More in Detail.' The plan laid out in this agreement was substantially carried into effect. It was departed from in this: that the parties organized the corporation, which was to purchase the options from them at an advance when they had obtained options on about one-third of the lands which they proposed the company should ultimately own, in place of waiting until options on all the lands had been secured. The certificate of incorporation of the new company was issued on May 25, 1889, and its name was the East Tennessee Land Company. The purchase price of the land on which the parties had then secured options was $322,694, of which Phoenix Land Company had paid $6,008, leaving $316,686 to be paid. On June 6th the incorporators of the Phoenix Land Company subscribed individually to shares in the East Tennessee Land Company to the amount of $250,000, par value. The members of the Syndicate of Ten also subscribed to shares to the same amount, and the Phoenix Land Company, in its corporate name, subscribed to shares to the amount of $200,000, par value. In addition, shares amounting to $10,000 were subscribed by one Mason, in whose name some of the options subsequently secured were taken. There were 13 incorporators of the East Tennessee Land Company. Gates and one of his associates were 2. Ten of the members of the Syndicate of Ten, together with the said Mason, made the 13. It appears that one of the original members of the Syndicate of Ten divided his interest in two, so that there were ultimately 11 members in the Syndicate of Ten; 2 of them having a half share each. On June 10, 1889, the first meeting of the stockholders of the East Tennessee Land Company was held, and all the incorporators and stockholders were present in person or by proxy. At this meeting it was voted that the corporation should make a contract with the Phoenix Land Company whereby, in consideration of the Phoenix Land Company's assigning all options then held or thereafter acquired by it, and of its agreeing to secure further options at the expense of the East Tennessee Land Company during the ensuing six months, the East Tennessee Land Company agreed (1) to pay all expenses of the Phoenix Land Company in procuring further options under the contract; (2) to pay all sums due as purchase money under the options assigned to it, whether then owned or thereafter acquired; and (3) to issue to the Phoenix Land Company paid-up shares in its capital stock to the amount of $700,000. This contract was executed on the next day, June 11, 1889. The stockholders also passed a resolution instructing the secretary, on this contract being executed by the Phoenix Land Company, to issue to it paid-up shares to the amount of $200,000, par value, and to issue such shares to the amount of $500,000, par value, to persons presenting orders therefor from the Phoenix Land Company, charging the same to the Phoenix Land Company. On or about July 3, 1889, Gates and his associates in the Phoenix Land Company presented orders from the Phoenix Land Company for shares to the amount of $250,000, and certificates therefor were issued to them. At the same time the defendants, with their associates in the Syndicate of Ten, presented orders for the issue to them of shares to the amount of $250,000, and certificates therefor were issued to them. The Phoenix Land Company did not originally take out certificates for the $200,000 of shares which were to be issued to it, but they were subsequently issued from time to time to persons to whom they were sold by it. In December, 1889, the East Tennessee Land Company issued a prospectus inviting subscriptions to the capital stock of the corporation. In this prospectus it is stated, among other things, that: And no other reference was made to the fact that the $700,000 of paid-up shares in question had been subscribed for, and no statement was made as to the way in which those $700,000 of shares had been paid for and issued. 'Large tracts of land were, in 1889, 1890, 1891, 1892, purchased by the East Tennessee Land Company, * * * and during said years it had laid out and made streets on such lands purchased by it, erected buildings, and started manufacturing industries; so that, where there was a population of less than one hundred, and three or four poor buildings, on June 1, 1889, there was on June 1, 1893, a population of about four thousand, and several hundred buildings.' 'The amount of stock issued by the East Tennessee Land Company, in all, to subscribers and purchasers, was approximately two million dollars, par value, including the $700,000 issued' under the contract of June 11th. The East Tennessee Land Company also issued its mortgage bonds, dated October 1, 1890, to the amount of $1,000,000. On November 18, 1893, one Schumacher filed a bill in equity in the circuit court of the United States for the Southern division of the Eastern district of Tennessee, in behalf of himself and all other unsecured creditors of the East Tennessee Land Company, alleging that the company was insolvent, and praying that its property might be realized, and the proceeds distributed among its creditors. In this suit receivers were appointed to take possession of all the property of the corporation. The Central Trust Company of New York, the trustee named in the mortgage given to secure the bonds of the East Tennessee Land Company, filed a bill to foreclose that mortgage on March 11, 1894, the two causes were consolidated, and the receivership was extended to the consolidated cause. The consolidated cause was referred to a master. Upon the coming in of the master's report a decree was entered on February 27, 1897, establishing the validity of the mortgage, ascertaining the debts thereby secured and the other debts of the corporation, directing the property of the corporation to be sold, and decreeing the order of distribution of the proceeds derived therefrom. By this decree it was found that the debt of the East Tennessee Land Company at that time was...
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