Klugh v. Seminole Securities Co.
| Decision Date | 05 January 1916 |
| Docket Number | 9253. |
| Citation | 87 S.E. 644,103 S.C. 120 |
| Parties | KLUGH ET AL. v. SEMINOLE SECURITIES CO. ET AL. |
| Court | South Carolina Supreme Court |
Appeal from Common Pleas Circuit Court of Richland County; R. W Memminger, Judge.
Action by J. S. Klugh and others against the Seminole Securities Company and others. From a judgment in favor of the defendant trustees, W. A. Clark and others, the plaintiffs appeal. Affirmed.
Grier Park & Nicholson, of Greenwood, W. F. Stevenson, of Cheraw, and Nelson, Nelson & Gettys, of Columbia, for appellants.
B. L. Abney and Weston & Aycock, all of Columbia, for respondents.
This is a cause in equity, and a single question is made by the appeal. Remotely it is: Are the defendants Clark, Jones, and Bryan personally liable to the stockholders of the Seminole Security Company for $30,000 for a breach of trust? The circuit court found that they were not, and we agree. It is not necessary now to write down the history of the defunct Seminole Company, and we shall not undertake it. It suffices to recite the cardinal features of the enterprise from its inception to its dissolution. The charter for the company was granted January 8, 1908. The authorized capital stock was $300,000. The subscribed capital was $270,000. The cash paid in capital stock was $97,928.87 or more. The trust agreement was executed January 31, 1908. The stock in Southern Life was bought October 3, 1908. Action for a receiver was begun December 16, 1908. A receiver was appointed December 29, 1908. A settlement with Southern Life was made February 2, 1909. That settlement was approved by the court February 16, 1909. The enterprise therefore ran its whole career within a twelvemonth. This action is sequel thereto.
A few other essential facts need to be stated. The plaintiff stockholders are amongst those who undertook to hoist this enterprise. They, the complaint alleges, paid to the solicitors of stock $1 per share, which was its par value, and a premium of fifty cents per share. It does not appear from the case how much stock was subscribed for before the trust agreement was made, and how much was subscribed for after that event. It is true Garlington and his immediate associates were the initiators of the scheme, but the plaintiffs and all the stockholders stood by like Saul consenting to the death; and they are those now complaining against Clark and Jones and Bryan because the scheme failed. There is no allegation and no evidence that Clark or Jones or Bryan held any stock, or took any hand in the suggestion or direction of the Seminole Company, or received any compensation thereabout. The only contention is they held the bag which had been filled by the stockholders. Amongst other things the Seminole Company was (1) to act as agent and manager for financial corporations and insurance companies of all kinds, and (2) to buy, sell, and own stocks, bonds, and other securities of other corporations, both foreign and domestic. That was to be the chief business of a company these stockholders got up. It was to manage the business of other corporations, which are required by law to manage their own business.
As the circuit court found, there may have been amongst the stockholders some persons who had no more wisdom than to put money into such an enterprise; but there were many who were not beguiled. The complainants suggest that:
"The real purpose of the appointment of the said trustees was to lend tone, standing, and credit to the scheme of the managing officers of the said defendant company, and influence the unsuspecting public to become subscribers to its capital stock." Italics are added.
That is to say, the president and directors of the Seminole Company, "the managing officers," put forward Clark, Jones, and Bryan to mislead the public. But the stockholders put forward the managing officers as their representatives, and the scheme of these managers was thus made possible by the act of the stockholders. The stockholders vouched for Garlington; may they now say Clark, Jones, and Bryan could not? If, therefore, these stockholders have been caught, it is in a trap of their own setting. So the question is: Ought the trustees, mere volunteers without pay, and with no interest in the Seminole Company, to be made to respond to such complainants for $30,000 alleged to have been lost by the conduct of the trustees?
The complainants charged the trustees with "reckless conduct," but acquitted them of "intentional wrongdoing." The circuit court found there was no proof of fraud on the part of the trustees, and the plaintiffs have not gainsaid that. The cardinal duties, and therefore liabilities, of trustees are these: (1) To carry out the trust; (2) to use due care thereabout; and (3) to act in good faith thereabout. Pomeroy's Eq. 1061.
These duties will be considered in an inverse order from that stated. It is conceded by the complaint and by the plaintiff's argument that, so far as the trustees are concerned, "this thing was not done in a corner"; so that the element of bad faith on their part is eliminated from the case.
It is true a trustee must exercise about the performance of his trust due care, and he must do that independently of the question of good faith. But the law does not exact of the trustee the exercise of extraordinary care. If he is a man of common prudence, and used that prudence about his own business, he is not required to use more than that about his neighbor's business, which means the business of his cestui que trust.
Whether or not the trustee did so exercise common prudence in a particular case is a question of fact, and the answer depends upon that measure which the chancellor may apply. In the instant case the only duty of the trustee was to be reasonably certain that the thing they were paying out the fund for was valuable. The testimony proves that the stock of the Southern Life was then thought to be worth much more than the trustees paid for it. There is none to the contrary.
There is no testimony to show that the trustee knew or had reason to believe that the price agreed upon for the Southern Life was too much, but the contrary. They looked into the transaction, and concluded upon the words of reputable men in North Carolina, about which there is no dispute, that the thing bought was worth more than the price paid for it. Notice in writing was given by the directors of the Seminole Company to the stockholders of the Seminole Company of the pendency of the transaction, and the stockholders did not oppose its consummation. It is true bad odor was lent to the transaction by the allowance and the payment of an exorbitant commission for the sale of the stock of the Southern Life to the Seminole Company. But the trustees had no intimation of such a feature of the sale; and the record does not reveal to whom that commission was paid, or out of what fund it was taken; it was not taken from the trust fund. There is nothing in the testimony to charge that transaction to the negligence of the trustees, and it cannot, therefore, affect the question of their due care. We are therefore of the opinion that the trustees were not so lacking in care about the payment of the fund as to make them personally responsible for any loss which may have resulted from their act.
The most complex issue has been reserved for the last, and that is, did the trustees unwarrantably depart from the terms of the trust? It is true the trust was express, and it is also true the trustees were bound by the law to conform to the terms of it, and for a failure to do so they are liable to the cestui que trust in the event of a loss of the fund . This inquiry is distinct from that of ordinary care by the trustee, and from that of good faith by the trustee. Manifestly a trust agreement, like any contract, may be modified by all the parties in interest. The agreement here is out of the ordinary; it is a contrary device, and its meaning and the purpose of the Seminole Company in its making are not manifest. One thing only is apparent, and that is, the now amazing gullibility of the three seasoned and reputable business men who consented to enter into such an agreement. Their action proves that like that noble animal, the horse, man is a "vain thing for safety." The parties to the contract are the Seminole Company and Clark, Jones, and Bryan.
The former was a corporation with an authorized capital stock of $300,000, and a subscribed capital stock of $270,672. And the Seminole Company was to organize an Accident Insurance Company, with a capital stock of $100,000, all of which was to be subscribed for, owned, and controlled by the Seminole Company. And the stockholders in the Seminole Company were, by virtue of their status as stockholders, to enjoy such profits as the Accident Company might make for the parent company. One of the expressed objects of the trust contract was to safeguard the subscribers to the capital stock of the Seminole Company. On that clause of the contract the chief argument of the plaintiffs is built.
Had the trustees been able to follow the words of the instrument, had they waited until the Seminole Company had organized an Accident Company and subscribed for all the $100,000 of stock in the Accident Company, then the trustees must by agreement have still paid into the hands of the Seminole Company the $97,928.87 which they held. What, then, would have been the improved plight of the subscribers who supplied the above sum of money? By the trust agreement it was provided:
"It is the purpose of the said Securities Company (the Seminole) to promote and finance the said * * * Accident Company, the capital stock of which said company shall be owned and controlled by the said...
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