Spear v. H.V. Greene Co.

• Decision Date: 14 September 1923
• Citation: 140 N.E. 795,246 Mass. 259
• Parties: SPEAR et al. v. H. v. GREENE CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

246 Mass. 259

140 N.E. 795

SPEAR et al. v. H.

v.GREENE CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Sept. 14, 1923.

Case Reserved from Supreme Judicial Court, Suffolk County.

Suit by Theresa I. Spear and others, on behalf of themselves and all others similarly situated, against the H. V. Greene Company and others, for rescission of contracts and transactions procured by fraud, establishment of a constructive trust or equitable charge, and for a receivership and other relief. Reserved by a single justice on the bill and demurrers for determination by the full court. Bill dismissed.

Stewart & Chase, Joseph A. Locke, and Joseph D. Taylor (of Boston Legal Aid Society), all of Boston, for plaintiffs.

Killion, Dimento & Mitchell, of Boston, for respondents Henry V. Greene and H. V. Greene Co.

Fisher H. & Gardner W. Pearson, of Lowell, for Martha M. Fletcher and others.

Fletcher Ranney and William Harold Hitchcock, both of Boston, for First People's Trust.

G. L. & L. A. Mayberry, of Boston, for defendants Commercial Finance Corp. and Mutual Finance Corp.

Francis N. Balch, of Boston, for Edmund C. Campbell.

William J. Barry, of Boston, for Lillian Coleman Robinson, Ex'x.

RUGG, C. J.

This suit in equity has been reserved for determination on bill and demurrers. The plaintiffs, about forty in number, fall into seven separate groups: (1) Holders of stock and voting certificates in the Commercial Finance Corporation, (2) subscribers who have made partial payments for shares of stock and voting certificates in the Commercial Finance Corporation, (3) holders of stock and voting trust certificates in the Mutual Finance Corporation, (4) subscribers who have made partial payments for shares of stock and voting certificates in the Mutual Finance Corporation, (5) holders of certificates of beneficial interest in the First People's Trust, a voluntary association issuing certificates representing fractional ownership of property held by the trustees of that trust, (6) subscribers who have made partial payments toward certificates of beneficial interest in the First People's Trust, (7) holders of stock in the H. V. Greene Company. The plaintiffs bring the bill in behalf of themselves and of all others similarly situated.

The defendants are the three corporations already mentioned, certain persons as they are trustees of the First People's Trust, and other individuals, most if not all of whom have been connected in some capacity with one or more of the corporations or with the First People's Trust.

It is averred in the bill that certain of the defendants in December, 1917, contrived a conspiracy for the purpose of enriching themselves by swindling large numbers of people of slender means ignorant of business methods each out of a comparatively small sum of money, but aggregating very large amounts. The scheme in brief was to organize a series of corporations, to sell preferred and common stock therein by means of fraudulent contracts, the defendant H. V. Greene taking most if not all of the common stock for selling the preferred stock. Pursuant to this scheme the Commercial Finance Corporation was organized as a corporation under the laws of this commonwealth in December, 1917, with a capital of $2,000,000 divided in equal amounts of preferred and common stock, the latter alone having voting power. A contract was forthwith made by it with H. V. Greene whereby the latter agreed to sell the preferred stock at $47.50 per share, its par value being $50 per share, receiving for his agreement substantially the whole of the common stock. The price at which the stock should be sold was to be fixed by Greene, who was to retain all sums received from the purchaser in excess of the price fixed. The shares were to be sold on the installment plan upon agreements running for long terms. The first payment, which was larger than the subsequent payments and usually equal to the difference between the price fixed by Greene and the amount for which he had agreed to sell the stock of the company, was appropriated by Greene or his assignee. The installment contracts for stock subscriptions were turned over to the corporation with a promissory note of the purchaser for the balance of the purchase price, and subsequent collections were made by the corporation at its own expense. To induce purchasers to buy, the stock was sold in ‘blocks' consisting of two shares of preferred stock and one of common stock, or multiples thereof, the latter being contributed by Greene. Each block of three shares was sold for $130, being $20 less than the par value of the three shares, but $35 in excess of the price for which Greene had agreed to sell the two shares of preferred stock, that excess being kept by Greene, and a note of the purchaser for the balance being turned over to the corporation. The purchaser under a subscription contract was not entitled to receive any shares until the last installment of the purchase price was paid. Until then he had no right to receive any interest or dividends and his contract was subject to cancellation upon nonpayment of any installment with forfeiture of all sums theretofore paid. Elaborate and carefully planned misrepresentations and concealment of material facts were prepared, devised to stimulate the imagination, play upon the prejudices, warp the judgment and excite the cupidity of ignorant and susceptible persons with respect to a supposed investment of money. Many of the subscribers were and were designed to be illiterate or unacquainted with the English language and unable to read or understand the contracts signed by them.

The H. V. Greene Company was organized in January, 1918, as a Massachusetts corporation at first as a sales medium, though later its shares were used by way of exchange to allay the suspicions of subscribers or shareholders in the Commercial Finance Corporation who had become distrustful. The scheme was fruitful in procuring subscriptions to large amounts.

In substance and effect the contract for the sale of stock by Greene was grossly unfair to the corporation and without sufficient consideration paid by Greene, and resulted inevitablyfrom the outset in impairment of the capital stock of the corporation and in the fraudulent enrichment of Greene and his associates and the corporation bearing his name.

As a part of the general scheme as alleged large loans without adequate security have been made to the defendants, their friends and associates, and to corporations owned by them, and large sums have been divided fraudulently among the defendants and their associates in the form of commissions, salaries, dividends and otherwise out of the subscriptions thus fraudulently procured. The defendants as officers of the corporation have been faithless to their duties to it. All these acts have caused great impairment of the capital of the corporation.

On September 23, 1918, as a part of the same general plan, the Mutual Finance Corporation was organized under the laws of this commonwealth with preferred and common stock. The frauds used with reference to the sales of stock in the Commercial Finance Corporation were repeated in substance in selling its stock. That also was successful in reaping a large harvest of subscriptions, partial payments and payments in full.

In October, 1919, the First People's Trust was formed by the execution of a declaration of trust under which preferred and common shares were issued. These shares were sold in general by the same fraudulent methods pursued as to the two finance corporations. The several corporations and the trust were fraudulently and collusively managed and their several treasuries depleted, all for the benefit of some or all of the individual defendants. Finally the H. V. Greene Company, which as the sales company had received a large income, though without substantial assets and the stock in which had been closely held by Greene, was used as a medium, through increase of its capitalization and exchange of its stock, for the acquisition of stock in the other companies.

It is said that sums aggregating about $14,000,000 have been collected, of which about $5,500,000 has been retained by the defendants as secret and fraudulent gains, and the balance turned over to the finance corporations and the trust; that in all there are about sixty thousand subscribers to the shares of these ventures, and that of this number about twenty-five thousand have not paid their subscriptions in full and under the terms of their contracts have no rights as stockholders or to the return of money, aggregating more than $2,000,000, already turned over as partial payments which if the contracts are valid is to be forfeited.

By virtue of the common stock Greene and his associates held absolute control of the management of all corporations and of the trust.

There are ample allegations as to the participation of the defendants in the frauds, either as original parties or by ratification with knowledge.

The numbers of persons interested as stockholders, shareholders and holders of contracts are so great that to require them to act separately would entail multiplicity of suits and it is imperative for their protection that the assets be marshalled.

This is only a skeleton of the allegations of the bill, which is of considerable length and contains in great detail averments of the general fraudulent scheme and the acts performed in execution of it.

The prayers of the bill are for rescission of all contracts, notes and transactions thus procured by fraud, for the establishment of a constructive trust or equitable charge upon the proceeds of the frauds for the benefit of all stockholders and subscribers, for an accounting, for damages against the conspirations, for receivership of the corporations and the trust, for equitable and pro rata distribution of assets and monies to be recovered among all the victims of the fraud who participate in these proceedings, and for...