Old Dominion Copper Mining & Smelting Co. v. Bigelow

• Decision Date: 14 September 1909
• Citation: 89 N.E. 193,203 Mass. 159
• Parties: OLD DOMINION COPPER MINING & SMELTING CO. v. BIGELOW.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

203 Mass. 159

89 N.E. 193

OLD DOMINION COPPER MINING & SMELTING CO. v. BIGELOW.

Supreme Judicial Court of Massachusetts, Suffolk.

September 14, 1909

COUNSEL

Brandeis Dunbar & Nutter, for plaintiff.

Alfd. Hemenway and John Wells Farley, for defendant.

OPINION

RUGG J.

These are suits in equity, by which the plaintiff seeks to recover secret profits made by the defendant as one of its organizers, in selling to it while under the absolute control and management of himself and his associate one Lewisohn, certain mining properties belonging to him and Lewisohn. The allegations of the bill are set out at length in 188 Mass. 315, 74 N.E. 653, 108 Am. St. Rep. 479, where the case was considered upon demurrer. After the overruling of the demurrer the defendant answered, and the case was heard before a single justice, who entered decrees in favor of the plaintiff in both cases and filed a report of the facts found by him. Except as to matters immaterial so far as the questions of law are involved, he found that the allegations were sustained. Briefly recapitulated, the facts appearing in the report upon which the plaintiff rests its claim are that in April, 1895, the defendant and Lewisohn formed a device to secure the control of the stock (the par value of which was $500,000) of the Old Dominion Copper Company of Baltimore City, called the 'Baltimore Company,' and the title to certain othr neighboring mining properties, called the outside properties, and to cause these properties and the real estate of the Baltimore Company to be transferred to a new corporation (which they should procure to be organized with a much larger capital), for an increased price. Options were secured upon these properties, and the price agreed to be paid by the defendant and Lewisohn to the owners was $1,000,000, divided in the proportion of 547/1000 to the defendant, and 453/1000 to Lewisohn. The outside properties were regarded by all parties as of little or no value and were thrown in as a makeweight in the purchase of the stock of the Baltimore Company. The single justice, while finding that they could not be said to be of no value, was satisfied that their value did not exceed $50,000. No examination to ascertain their value was made by the defendant or Lewisohn, or by any one in behalf of the plaintiff. For the purpose of providing himself with funds to meet in part his financial obligations for the purchase of the properties, the defendant, before taking up the options, organized an underwriting syndicate and another syndicate called the 'Old Dominion Syndicate.' It is not necessary to state the details of these arrangements, further than to say that it is found as a fact that the defendant did not deal fairly with the members of the syndicate in the division of his profits, and did not disclose to the great majority of them the fact of the secret profit. The obligation of purchase was assumed wholly by the defendant and Lewisohn, and the device for the organization of the new corporation was entirely theirs.

Although as first conceived, it was the avowed intention of the defendant and Lewisohn (which the defendant expressed to various members of the syndicate) to form a new corporation with a capital stock of $2,500,000, which should take the property of the Baltimore Company and the outside properties for $2,000,000 of its capital stock and procure a working capital of $500,000 by the sale of the rest of the capital stock to the public for cash at par, they proceeded to organize the plaintiff corporation under the laws of New Jersey, with a capital stock of $3,750,000, divided into 150,000 shares of the par value $25 each. But it was the intention of the defendant and Lewisohn (as found by the single justice) that '20,000 shares of the capital stock of the plaintiff should be issued to new subscribers at par; and this was done in the summer and fall of 1895.' This organization was conducted and controlled wholly by the defendant and Lewisohn through themselves and their agents and representatives. Without providing the plaintiff with in independent board of officers or representative they, as the responsible and only managers of the plaintiff, acting in its name, contracted with themselves as mineowners to sell to it the rea, estate of the Baltimore Company for $2,500,000 of the capital stock of the plaintiff and the outside properties, of trifling value at best, for $750,000 of such capital stock, and to sell to the general public for working capital the remaining $500,000 of capital stock of the plaintiff at par, without disclosing that they had sold property costing them only $1,000,000 for three and a quarter times its cost.

The first meeting of the stockholders was held on July 7, 1895, at which $1,000--the lowest amount of capital with which a corporation organized under the laws of New Jersey could begin business--was paid in by Lewisohn. This money, although deposited to the credit of the plaintiff company upon its organization, was afterwards returned by it to Lewisohn in an accounting with him. A meeting of the directors was held in New York on July 11, 1895, at which the defendant became a director and the president of the plaintiff and Lewisohn a director. Votes were passed to increase the capital stock and two separate votes for the purchase of the mining properties for the prices in stock before indicated. The stock, the market value of which was fully as great as its par value, was issued to the defendant and Lewisohn and one Dumaresq, their nominee, by votes of September 18, 1895, on that or the following day. At the same time a certificate for the remaining 20,000 shares of stock of the par value of $500,000 was made out in the name of 'Thomas Nelson, treasurer,' but this stock is found to have belonged to the corporation, and Nelson had no right to act respecting it, as it was taken up by direct subscriptions of the public. The conveyances of the mines by the Baltimore Company and of the outside properties by Lewisohn were not made until December, 1895, or January, 1896. The intrinsic value of the property conveyed by the Baltimore Company is found to have been not more than $1,000,000, although its market value, largely due to the skillful manipulation of the defendant and Lewisohn, and 'the ingenious manner in which they created a desire on the part of men interested in mines as investors or speculators to be allowed to join in the transaction they were carrying out,' was something less than $2,000,000. The report proceeds:

'But taking the most favorable view of the situation possible for the defendant, he and Lewisohn did by reason of their failure to disclose the real facts as aforesaid, make out of their sale to the plaintiff company a secret profit of 50,000 shares of its capital stock, of which the defendant's portion was 27,350 shares, and Lewisohn's portion 22,650 shares. If he had fully disclosed the facts to the plaintiff company, and secured for it independent advice, it would not have given to him this secret profit. * * * Lewisohn and he were acting in the formation and execution of the scheme together and in concert. Each of them was doing his part to carry out a joint scheme which was intended to inure to the advantage of both. The control exercised by them over the plaintiff company was a joint control, and was exercised by them for the benefit of both. A proper disclosure of the real facts by either would have frustrated the schemes of both. They both acted together in pursuance of a common design, and for the profit of both. * * * During all these transactions the full control of the plaintiff company was in the hands of and was exercised by the defendant and Lewisohn, who were its promoters and who themselves determined upon and dictated, under the advice of their counsel, everything that was done by the plaintiff company or in its behalf. It had no directors, representatives, or advisers other than themselves or their agents, and they did not disclose to it any of the facts which have been stated. This continued to be the case until April, 1902. * * * The result of his and Lewisohn's transactions with the plaintiff company was that for the $1,000,000 of their own and their associates' money which they invested, they received subject to the payment of legitimate expenses of not over $20,000, stock to the par value of $3,250,000 and of the actual value of at least that amount; that is, at the rate of more than three for one. He gave to the members of his syndicate $2 for one, either wholly in stock or half in cash and half in stock, as they elected. With a few individual exceptions he did not disclose the facts to them. The very great majority of the members of his syndicate did not become aware of the details of what he and Lewisohn had done.'

The capital stock issued to defendant and Lewisohn, was stamped 'issued for property purchased.' The law of New Jersey required that such stock could be issued only 'to the amount of the value' of the property so purchased. P L. N. J. 1889, P. 414, § 4; P. L. N. J. 1893, p. 444, § 2. The vote of July 11, 1895, to purchase the mining properties was in fact passed by a majority only of the board of directors, for three do not appear to have been present at that time. At the directors' meeting of September 18, 1895, when the votes to issue 30,000 full-paid shares to defendant and Lewisohn and 100,000 like shares to their nominee, Dumaresq, were passed, seven directors were present, the five aside from Bigelow and Lewisohn being their tools, and at the end of the record of that meeting all the directors signed an assent to the acts done; and Bigelow and Lewisohn, signing for 30,000 shares of capital stock, Dumaresq, signing for 100,000 shares of the...