Marshall v. Lovell

• Decision Date: 10 May 1927
• Docket Number: No. 7592.,7592.
• Parties: MARSHALL v. LOVELL.
• Court: U.S. Court of Appeals — Eighth Circuit

19 F.2d 751 (1927)

MARSHALL v. LOVELL.^*

No. 7592.

Circuit Court of Appeals, Eighth Circuit.

May 10, 1927.

Franklin F. Phillips, Jr., of Boston, Mass. (Thomas McDermott and Denegre, McDermott & Stearns, all of St. Paul, Minn., on the brief), for appellant.

James D. Shearer, of Minneapolis, Minn. (L. B. Byard and Shearer, Byard & Trogner, all of Minneapolis, Minn., on the brief), for appellee.

Before STONE and KENYON, Circuit Judges, and POLLOCK, District Judge.

KENYON, Circuit Judge.

This is a peculiar case. Appellant, Marshall, seeks to recover certain property, or its value, which he delivered to appellee in performance of a contract conceded by him to be illegal, and so found by the trial court. Briefly the circumstances are these:

Appellee was heavily interested as a bondholder in the Wenatchee Valley Gas & Electric Company, a corporation of the state of Washington (hereinafter designated as the Wenatchee Company). The affairs of that company becoming critical, a bondholders' committee was formed, consisting of appellee, Lovell, one John B. Fassett, and W. S. Taylor. The title to all the bonds of the Wenatchee Company was placed in this committee in trust, with full power to do all necessary things to protect the interests of the bondholders. Lovell possessed some 233 bonds of the par value of $1,000 each, and controlled 86 others owned by relatives. He was the dominating personality of the bondholders' committee. Proceedings were commenced for the foreclosure of the trust deed securing the bonds, and it was deemed for the best interests of the bondholders that the property be disposed of if a reasonable price could be secured. The Washington Coast Utilities Company (hereinafter designated as the Washington Company) had been organized and promoted by appellant, Marshall. At the time of the transactions here in question, one Nims was president thereof. Its common stock was owned by Marshall & Co. of Boston, which company was dominated by appellant. Negotiations were entered into for the purchase of the properties of the Wenatchee Company by the Washington Company, resulting in a tentative arrangement between Mr. Nims, Mr. Marshall, and Mr. Lovell for the sale of the Wenatchee properties. The arrangement contemplated the issue of bonds by the Washington Company, and also preferred stock. Marshall was to buy the properties from the receiver of the Wenatchee Company and transfer them to the Washington Company. He was to receive as the purchase price thereof and as his compensation $225,000 of the common stock of the Washington Company, $350,000 of its preferred stock, and $760,000 of its bonds. The bondholders of the Wenatchee Company were to receive for each $1,000 bond held by them $500 of preferred stock and a $500 bond of the Washington Company. Marshall was to pay all the receiver's certificates and all prior liens in cash. The net result to Marshall of this transaction would be to leave him as his compensation $225,000 of common stock, $23,000 of preferred stock, and approximately $183,000 of bonds of the Washington Company, or a total of about $431,000 par value securities. While these securities were not worth par, they had a substantial value. The tentative arrangement contemplated that the bondholders' committee should bid in the properties at the foreclosure sale and transfer them to Marshall.

After continuing negotiations, a memorandum was drawn up on the 9th day of April, 1921, signed by Marshall, Nims, and two of the bondholders' committee, viz. Messrs. Taylor and Fassett, reciting that the arrangement was approved by the committee, and that it should be submitted to a meeting of the bondholders of the company for ratification. Lovell did not sign, and, after Nims, Fassett, and Taylor left the meeting place, Marshall and Lovell had a conversation in which it is claimed by Marshall that Lovell told him, in substance, that the deal would not go through unless he (Lovell) received substantially $200,000 of the securities Marshall was obtaining, that he had the power to defeat the ratification of the arrangement, and that he would do so unless this arrangement was made. Marshall expressed his surprise and indignation in rather emphatic language, but agreed "to think it over." Marshall left for Boston, which was his home, and apparently discussed the matter with Nims, and with his counsel. The agreement with the bondholders' committee was dated April 14, 1921, and was made in accordance with the arrangements previously discussed. At the same time, though dated later (May 16, 1921) the agreement which is the basis of this controversy between Lovell and Marshall was drawn up, which provided that Lovell should deliver to Marshall, after the sale was closed, $43,000 of the 6 per cent. cumulative preferred stock of the Washington Company, Marshall agreeing to deliver to Lovell $127,000 6 per cent. first mortgage bonds of the Washington Company, and $50,000 of its 6 per cent. notes, the notes to be dated the day the title to the Wenatchee property passed to Marshall; further, to pay Lovell $5,000 in cash on that day; also to purchase from him $100,000 face value of the Washington Company first mortgage 6 per cent. bonds within a year at a certain price. Under the terms of said written contract, Lovell was to use his efforts to bring about the ratification of the proposed bondholders' agreement. He was to give advice in engineering matters, and represent Marshall in negotiations with banks and others. Certain other things were provided by the written contract, which need not be referred to. Both contracts were guaranteed by the Washington Company. The agreement between Marshall and the bondholders' committee was ratified by the bondholders on August 4, 1921, at which meeting Lovell voted a majority of the bonds. Had he voted against the proposed agreement, it could not have been ratified. The properties were transferred to Marshall and by him to the Washington Company.

After the entire matter was completed, Marshall in December, 1921, carried out his agreement with Lovell, the making of which was unknown to the other members of the bondholders' committee, and delivered to him the securities and cash as provided in the contract, and Lovell delivered to Marshall $43,000 of preferred stock of the Washington Company. Subsequently there was correspondence between Marshall and Lovell without any question being raised as to the transaction until February, 1923, at which time Marshall demanded the return of what Lovell had received from him under the contract, or its equivalent in value, offering to offset the preferred stock which he had received from Lovell. This was refused; Lovell taking the position that the securities which he had received from Marshall under his private agreement belonged to the bondholders of the Wenatchee Company, and he delivered to a trust company to hold for the bondholders the amount of bonds representing their proportionate share, retaining the amount which represented his proportion as a bondholder. Lovell pleads that it was always his intention to turn over these securities to the bondholders. The trial court found that he had no such intention. The same were turned over to the trust company after Lovell had consulted his attorney and found he could not hold these securities as his own. Lovell had put in some time without compensation in his attempts to dispose of the property, and he claimed these securities were his compensation. The court found that Lovell did make the exaction from Marshall at the time and under the circumstances as asserted by Marshall. It also found that the rights of the bondholders to retain the bonds were superior to any right Marshall might have to recover them. The court's conclusion in effect was a holding that public policy did not require Lovell to give back to Marshall what he had received from him; nor that there was such disparity of dereliction as would permit Marshall to recover in equity the properties he had transferred to Lovell. The court found that the net result of the entire transaction was that Lovell made a much better bargain for the bondholders than either he or Marshall suspected or intended, and entered a decree dismissing plaintiff's bill of complaint.

The contract between Marshall and Lovell was illegal. Counsel for appellant in the trial court very frankly conceded this, and the same concession is made here. In the trial court he insisted that the only important question in the case was that of duress, and whether or not Marshall was coerced into making the contract, stating to the court at the close of appellant's evidence: "We admit that there was no physical duress whatever. We will admit that, when his mind was made up, Mr. Marshall signed freely, and always treated the contract as legal, and never questioned its legality until the year 1923, and that he has always treated Mr. Lovell pleasantly from the time he entered into the contract with him." Lovell was one of the trustees of the bondholders. Fidelity to his trust was the most important element of such trusteeship. The contract put him in a position where his personal interest conflicted with his duty to the bondholders. By trying to enrich himself he betrayed his trust, secretly securing a benefit in a transaction where he was supposed to be acting for the interest of the bondholders. He was guilty of unfaithful conduct as a trustee in profiting out of the transaction. Such a contract is illegal as contrary to sound public policy, because it tends to weaken a trustee's fidelity to duty. The court so found, and no other finding could stand under the law. United States v. Carter, 217 U. S. 286, 30 S. Ct. 515, 54 L. Ed. 769, 19 Ann. Cas. 594; Wardell v. Railroad Co., 103 U. S. 651, 26 L. Ed. 509; City of Findlay v. Pertz et al. (C. C. A.) 66 F. 427, 29 L. R. A. 188; Torpey v. Murray, 93 Minn. 482, 101 N. W. 609; Lum v. Clark et al., 56 Minn. 278, 57 N. W. 662;...