Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co.

• Decision Date: 13 July 1860
• Parties: THE HOFFMAN STEAM COAL COMPANY, OF ALLEGANY COUNTY, v. THE CUMBERLAND COAL & IRON COMPANY.
• Court: Maryland Court of Appeals

16 Md. 456

THE HOFFMAN STEAM COAL COMPANY, OF ALLEGANY COUNTY, v. THE CUMBERLAND COAL & IRON COMPANY.

Court of Appeals of Maryland.

July 13, 1860

A director in a corporation at the time a sale of part of its property was contemplated and made, and who actively participated in all the measures tending to its completion and had full knowledge of all the circumstances attending its progress, is not competent to become a purchaser of such property, and the sale to him cannot be upheld if resisted by the corporation.

A party joining in a purchase from a corporation, with knowledge of the fact that his co-purchaser was a director in the corporation, is affected with whatever of legal disability belonged to the director by reason of that relation.

A director having purchased lands from a corporation, united with others in forming a new corporation, he subscribing for almost all of the stock therein, and becoming one of its officers and directors, and on the next day, in pursuance of one entire plan, conveyed the same lands to the new company in payment of his subscription for such stock. HELD:

That the new company is affected with notice of the circumstances impairing the title of the party so conveying the lands to it, and cannot claim to be a bona fide purchaser without notice.

Trustees cannot purchase at their own sales, either directly or indirectly, and if they do, such purchases will be set aside on the proper and reasonable application of the parties interested.

The same doctrine applies to purchases by persons acting in any fiduciary capacity, which imposes on them the obligation of obtaining the best terms for the vendor, or which has enabled them to acquire a knowledge of the property; a director in a corporation holds such a relation to its stockholders.

To render the ratification of such a sale effective and conclusive, the principal must, at the time of the ratification, be fully aware of every material fact, and his act of ratification be an independent substantive act founded on complete information, and he must not only be aware of the facts, but apprized of the law as to how these facts would be dealt with if brought before a court of equity.

Where a purchaser, with notice from a trustee, conveys, for a valuable consideration, to another person who has no notice of the trust, the estate will not be affected with the trust in the hands of the second purchaser.

APPEAL from the equity side of the Circuit Court for Allegany county.

This appeal is from two orders of the court below, refusing to dissolve and continuing till final hearing, an injunction granted upon a bill filed, on the 6th of December 1858, by the appellee against the appellant, and Allen M. Sherman and Wm. B. Dean, for the purpose of vacating a deed made by the complainant to Sherman and Dean, for certain coal lands in Allegany county, as well as to set aside a contract for transportation, which was executed at the same time, and in fact accompanied the deed.

By this deed, dated the 22nd of April 1856, the Cumberland Coal and Iron Company conveyed 1215 acres, part of its coal lands, to Sherman and Dean, five undivided eighths thereof to the former, and three undivided eighths thereof to the latter, in consideration of the sum of $28,000, in hand paid to the company by the grantees, and the further sum of $112,000 to be paid by the grantees, by paying and satisfying 112 bonds of the company for $1000 each, being part and parcel of 467 bonds, for the same amount each, issued by the company and payable on the 1st of January 1864, with six per cent interest, payable semi-annually, on the 1st of July and January in each year, the grantees assuming and undertaking to pay the principal and interest of said 112 bonds.

By the transportation contract, between the same parties and of the same date, and recited to have formed " a part of the inducement and consideration of said purchase," the company agrees and covenants with Sherman and Dean, and their heirs, lessees and assigns, to provide and maintain in good order, for the full term of twenty years from the 1st of May 1856, a good and sufficient railroad from the lands granted by the deed, to Cumberland, and to provide at all times during that period suitable and sufficient cars and engines and to receive and take all the coals and other freight which may be mined and produced upon and from said granted lands, and to carry at certain specified rates and deliver the same at the city of Cumberland, in and upon the cars of the Baltimore and Ohio Railroad, or into and upon the boats on the Chesapeake and Ohio Canal, and for a refusal on the part of the company to comply with their part of this contract a heavy penalty is provided.

On the 19th of August 1858, Sherman and four other parties formed themselves, under the provisions of the Act of 1852, ch. 322, entitled: " An Act to authorize the formation of corporations for mining purposes," into a company under the corporate name of " The Hoffman Steam Coal Company of Allegany county," for the purpose of carrying on the business of mining coal in Allegany county, with a capital stock of $500,000, to be divided into 5000 shares of the par value of $100 per share, and on the next day (20th of August 1858) Sherman and Dean conveyed, by deed, to the company the land which had been previously conveyed to them by the Cumberland Coal and Iron Company. This deed recites that Sherman and Dean became subscribers for and took, 4990 shares of the capital stock of the Hoffman Steam Coal Company, on the express agreement and understanding, that the price of such shares should be paid for by the conveyance of these lands, and all rights and easements thereto belonging, and they are conveyed subject to the lien thereon reserved by the Cumberland Coal and Iron Company for the payment of the interest and principal of the 112 bonds of that company, referred to in the deed to Sherman and Dean; and the Hoffman Steam Coal Company accepted this conveyance with the express understanding and agreement that it should pay, or provide in the hands of Sherman and Dean the means to pay, the interest and principal of these bonds as they became due, in exoneration of all liability on the part of Sherman and Dean to the Cumberland Coal and Iron Company.

The gravamen of the bill is, that Sherman, one of the grantees in the deed from the complainant to him and Dean, was one of the directors of the complainant, and it is insisted, therefore, that by reason of his being a director he was under a legal disability to become a purchaser from the complainant; and that Sherman was either in fact the sole purchaser, and the use of Dean's name merely colorable, or else that Sherman was the agent of his co-grantee in making the purchase. The bill also charges fraud in fact, in obtaining said deed and transportation contract. It also charges that the Hoffman Steam Coal Company was formed and is conducted, controlled and directed by Sherman; that he and Dean became subscribers for 4990 out of the 5000 shares of its capital stock, and the other ten shares were nominally taken by other parties, to enable them to participate in the formation of the company and become directors; that Sherman is an officer as well as director of the company, and has and exercises entire practical control over it, and that the change or conversion of his ownership in the said lands into an interest in the stock in said company, by the deed of the 19th of August 1858, and the said subscription for stock was a fraudulent device, for the purpose, and with the design, of evading the jurisdiction and process of this court; and that said company, before the execution and delivery of said deed, and said Dean before he entered into the purchase of said lands, had full notice of the frauds in said sale, and in the procurement, origin, formation, execution and delivery, of the deed and transportation contract from the complainant to Sherman and Dean. It also charges that the lands so sold are of great and peculiar value, and possess important advantages for economy of mining and transportation; that they were sold at a grossly inadequate price, and that Sherman and Dean have already mined and taken therefrom large quantities of coal, and are continually removing coals from said lands and converting the same to their own benefit.

The prayer of the bill is, that all the defendants may be enjoined from conveying or encumbering these lands, and from mining and taking away coal therefrom, or assigning the said transportation contract, or instituting any action for any alleged breach thereof; and that Sherman and Dean may be enjoined from transferring or encumbering any shares of stock in the Hoffman Steam Coal Company, or from parting with the possession and control of the said deed and contract of transportation; and that the said contract of transportation and the deed of the 22nd of April 1586, and the conveyance of said lands to the Hoffman Steam Coal Company may be declared void, and a re-conveyance thereof be decreed to the complainant, and that Sherman and Dean should convey to the complainant all the shares of stock in the Hoffman Steam Coal Company which they had received, and that the defendants may be decreed to account for the coal removed from the lands, and the proceeds thereof, which they have received, and for general relief.

The injunction was granted as prayed, and the defendants filed separate answers. The answer of Sherman denies positively the various allegations of fraud contained in the bill, denies that Dean was a mere nominal party, or that he acted for Dean in making the purchase, and denies that the Hoffman Steam Coal company and himself, or himself and Dean, are the same or that he has...