Tilden v. Barber

• Decision Date: 08 October 1920
• Citation: 268 F. 587
• Parties: TILDEN et al. v. BARBER et al.
• Court: U.S. District Court — District of New Jersey

268 F. 587

TILDEN et al. v. BARBER et al.

United States District Court, D. New Jersey.

October 8, 1920

[Copyrighted Material Omitted]

Hartshorne Insley & Vreeland, of Jersey City, N.J., and Adams, Childs Bobb & Westcott, of Chicago, Ill. (Wm. E. Decker, of Jersey City, N.J., and Elmer H. Adams, of Chicago, Ill., of counsel), for plaintiffs.

Sims, Welch & Godman, of Chicago, Ill. (Gilbert Collins, of Jersey City, N.J., and Albert G. Welch, of Chicago, Ill., of counsel), for defendant Ohio C. Barber.

RELLSTAB District Judge.

This is a suit in equity, brought by the receivers of the Great Western Cereal Company, a corporation of New Jersey, decreed insolvent by the Court of Chancery of that state, against Ohio C. Barber and others, to recover undisclosed profits made by them in the promotion and organization of that company. Barber alone was served with process. The suit was originally brought in the Court of Chancery of New Jersey (bill filed November 17, 1913), and removed by Barber into this court on the grounds of diversity of citizenship and separable controversy between him and the plaintiffs. Since the argument Barber has deceased, the suit has been revived, and his personal representatives have been substituted in his stead as defendants.

Briefly stated, the bill alleged that Barber and his associates planned and consummated the organization of the Great Western Cereal Company (hereinafter called the company) and the acquisition by it of 10 certain oatmeal mills for the purpose of gaining secret profits; that he secured such profits by taking from the company, at a time when all its directors and officers were his agents, its stock and bonds as consideration for the conveyance to it of such mills, far in excess of the value of such properties; and that he so manipulated such transaction that the overvaluation was hid from the company until shortly before the filing of the bill.

The New Jersey Corporation Act (Rev. 1896; P.L. 1896, p. 277) prescribes that-- 'Nothing but money shall be considered as payment of any part of the capital stock, * * * except as hereinafter provided. * * * ' Section 48.

The proviso is that--

'Any corporation * * * may purchase * * * manufactories or other property necessary for its business, * * * and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full-paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this act; and in the absence of actual fraud in the transaction, the judgment of the directors as to the value of the property purchased shall be conclusive. * * * ' Section 49.

The New Jersey cases construing these sections all hold:

'That the stock must be paid for in money or money's worth, and that any conscious or intentional overvaluation is actual fraud, within the meaning of the sections quoted. ' Tooker v. Sugar Refining Co., 80 N.J.Eq. 305, 315, 84 A. 10, 15, and cases cited.

The pleaded defenses, generally stated, are that Barber but exchanged his own property for the stock and bonds of the company; that this exchange was approved by all the persons who held the company's stock at the time of such exchange; that he sustained no fiduciary relations to the purchasers of the company's stock and bonds; that the plaintiffs and the company are guilty of laches; and that the New Jersey statute, approved April 8, 1903 (P.L.N.J.p. 362), is a complete bar to the suit.

As this New Jersey statute is said to protect Barber from a suit of this character, regardless of the merits of the plaintiff's allegations of fact, that defense will be considered first. This act is a supplement to the New Jersey Corporation Act, approved April 8, 1903 (P.L.N.J. 1903, p. 362). It provides:

'1. Any director, officer, promoter or other agent of any corporation organized or existing under the laws of this state who shall have heretofore made or received, or who shall hereafter make or receive, while acting in such capacity, any bonus, profit or reward of any kind whatsoever out or on account of any transaction for or with such corporation, without disclosure of the fact of such bonus, profit or reward to the corporation and without obtaining its approval thereof, shall be liable to such corporation for the amount or value of such bonus, profit or reward for and during the period of four years from and after the making or receipt of the same and not afterward; and an action shall lie on behalf of such corporation, either at law or in equity, to recover such bonus, profit or reward, or the value thereof, or for an account with respect thereto, at any time before the expiration of said period of four years, but not afterwards.

'2. This act shall take effect immediately, but shall not affect any action or proceeding pending in any court at the time it takes effect, or any right of any corporation, or of any stockholder, against any such director, officer, promoter, or other agent, under existing law, provided action thereon be commenced within six months after this act takes effect.'

This act was repealed in 1907 (P.L.N.J. 1907, p. 631), but as it is claimed that while it was in force Barber obtained certain vested rights which, under the Constitutions of New Jersey and the United States, were preserved to him, notwithstanding such repeal, its provisions as affecting the jurisdiction of the federal court will be considered.

As noted, it dealt with profits made by promoters of a New Jersey corporation, without disclosure to it, and without obtaining its approval thereof. It declared the promoter liable to the corporation for such profits during, but not after, four years from the making or receipt of such profits. It authorized the recovery thereof, either at law or in equity, at any time before, but not after, the expiration of said period. Before the passage of this act, only an action in equity could be brought for a return of such profits. The act created the right to sue at law, but was only declaratory of such a right in equity. As to the action at law, the four-year period within which such suit could be brought was probably a condition annexed to the right, and not a limitation affecting merely the remedy. Partee v. St. Louis & S.F.R. Co. (C.C.A. 8), 204 F. 970, 972, 123 C.C.A. 292, 51 L.R.A. (N.S.) 721. Not so, however, as to suits in equity. As to these, such period affected only the remedy, and in essence was a statute of limitation.

Whatever effect the repeal of this statute had upon the legal remedy, the equitable remedy still remained, and the time within which such remedy is enforceable is controlled by equitable principles alone. Do these require that a suit brought after the statute was repealed, but founded upon a fraudulent transaction covered by the statute when in force, be dismissed because more than four years elapses after the fraud was committed, regardless of when the fraud is actually discovered, or whether the suit is brought in a state or United States court?

Under general equity principles, not the time when the fraud is committed, but when it is discovered, or might have been discovered by the exercise of ordinary diligence, fixes the time when the cause of action accrues. Construed literally, the New Jersey act fixed the time when the profit was made or received, and not the discovery of the taking of it, as the beginning of the four-year period within which suit might be brought. Whatever might have been the effect of this legislation upon the powers of the New Jersey courts, it did not impair the jurisdiction of the United States courts in enforcing distinctively equitable rights. Kirby v. Lake Shore & Michigan Southern R.R., 120 U.S. 130, 7 Sup.Ct. 430, 30 L.Ed. 569; Taylor v. Louisville & N.R. Co. (C.C.A. 6) 88 F. 350, 357, 31 C.C.A. 537; James v. Gray (C.C.A. 1) 131 F. 401, 408, 65 C.C.A. 385, 1 L.R.A. (N.S.) 321; Stevens v. Grand Central Min. Co. (C.C.A. 8) 133 F. 28, 32, 67 C.C.A. 284; Humphreys v. Walsh (C.C.A. 3) 248 F. 414, 160 C.C.A. 424; Independent Harvester Co. v. Tinsman (C.C.A. 7) 253 F. 935, 166 C.C.A. 35.

In the Kirby Case the United States District Court held, upon what it supposed had been determined by a state court as the proper interpretation of a state statute, that the cause of action accrued on the commission, and not the discovery, of the fraud. The Supreme Court, after expressing doubt as to whether the cited state authorities justified such a conclusion, said that, be that as it may, a local statute could not 'impair the power of the courts of the United States to enforce the settled principles of equity in suits of which they have, by the Constitution and laws of the United States, full jurisdiction' (120 U.S. 137, 7 Sup.Ct. 434, 30 L.Ed. 569), and that it was the duty of the United States courts to follow the settled rules of equity, and 'adjudge that time did not run in favor of defendants, charged with actual concealed fraud, until after such fraud was or should, with due diligence, have been discovered. Upon any other theory the equity jurisdiction of the courts of the United States could not be exercised according to rules and principles applicable alike in every state.' 120 U.S. 138, 7 Sup.Ct. 434, 30 L.Ed. 569. This being the rule controlling the federal courts in suits of this character, the disputed contentions regarding the effect of the repeal of this statute are purely academic and need not be considered.

Whether there was laches in bringing this suit, and, if so, whether it is imputable to the receivers, may best be discussed after the merits of the plaintiffs' allegations of fact have been considered, to which I now turn. In his answer (paragraph IV) to the...