Burbank v. Dennis , 101 Cal. 90 ( 1894 )

Garoutte, J.

The plaintiff as a stockholder of the San Gabriel Valley Land and Water Company, a corporation, brought this action against L. W. Dennis, John P. Sanborn, Frederick D. Sanborn, and the San Gabriel Valley Land and Water Company to recover a large sum of money, claiming such moneys to be the property of the corporation defendant, unlawfully held by defendants John P. Sanborn and L. W. Dennis. Judgment was recovered for the sum of eighty-three thousand dollars and interest, and this appeal is prosecuted by defendant Dennis from the judgment and order denying his motion for a new trial.

The following allegations of the complaint give a general idea of the cause of action relied upon to support the recovery: “That during or about the month of March, 1887, the defendants, L. W. Dennis, John P. San-born and Frederick D. Sanborn, entered into an arrangement and agreement as promoters, for the purpose of organizing the said defendant corporation, with a view of purchasing certain lands in the said county of Los Angeles, which said lands were to be, after the organization of said corporation, conveyed to the same for the purpose of selling the same, and in which corporation the said defendants, Dennis and the Sanborns, were to become interested as stockholders; that the said defendant, Dennis, and the said Sanborns proceeded to procure contracts of purchase as aforesaid, of the said lands from the various owners of the same, and did so contract with Story, Stillson, and Hall for about 240 acres, with one Ames for about 200 acres, with one J. N. Clapp for about 70 acres, with L. L. Bradbury for about 200 acres, with one Gibbs for about 170 acres, with L. H. Titus for about 200 acres, with James Ford for about 50 acres; and according to the terms and conditions of the said various contracts, specified parts and portions of the purchase price of the same were to be paid in cash, and certain other parts and portions of such purchase price were to be deferred and were to be paid with certain specified rates of interest; that at all times while the said defendants were procuring the said contracts for the purchase of said lands, they represented to the plaintiff and other of the proposed stockholders of the proposed corporation that they were acting for and on behalf of all the parties interested or to become interested in the said venture, and who were to become stockholders of such proposed corporation, and at all times held themselves out as the agents of the said proposed stockholders, who were the parties furnishing the money necessary for the purchase of the said lands.”

The complaint further alleges that $200,000 was paid to Dennis and Sanborn by the prospective stockholders of the corporation defendant, and that contracts and deeds to these various parcels of land were taken in the name of John P. Sanborn, and partial payments made thereon from the aforesaid money. It is further alleged that after the incorporation the lands were conveyed to said corporation defendant, and Dennis, for himself and his associates the Sanborns, reported to said corporation that they had paid on account of the purchase price of said lands $193,666.62, when in truth they had paid but $97,666.62. Plaintiff asks judgment for the difference between the amount actually paid by said Dennis and the amount which he reported to the corporation that he had paid upon the purchase price.

As a salient point in the case, it must further be borne in mind that the contract price at which the syndicate of buyers, that was subsequently merged into the defendant corporation, was to take these various pieces of realty was the lump sum of $537,000, and the amount alleged to be retained by the defendants in no way affected the amount of the gross sum to be paid by the'corporation for the lands; for the entire sum of $193,666.62 was charged to Dennis upon the purchase price of $537,000. But it is claimed that the lands actually cost but $442,000, and consequently the defendants, as agents, retained of the corporation’s money the overplus amounting to $95,000. The fact that partial payments only were made upon the various tracts, and that the deferred payments were secured by mortgage upon the land, seems to be entirely foreign to the matter under consideration, and as to the principles of law here involved, the case as made by the complaint stands before us exactly as though it were a cash transaction throughout, the corporation, acting through its agents, buying lands and paying $537,000 therefor, when the actual cost was only $442,000, the agents absorbing the difference. There is no question but that the foregoing facts outline a sound cause of action, and if the findings of the court and the evidence are in line with such theory, then plaintiffs should recover.

The findings of fact are considerably broader than the allegations of the complaint, but there is no substantial variance between the theory upon which the complaint is formulated and the theory upon which the recovery is had, as evidenced by the findings of the court. Upon inspection, it is readily perceived that they rest upon the same general lines. Even conceding that the complaint relies for a judgment upon false representations as to the amounts of first payments made, and that the findings tend to indicate a recovery upon the theory of false representations as to the original cost price of the property, yet it is .practically the same thing. If the corporation was bound in law to pay $537,000 for the property, then it was bound in law to pay $193,666.62 when it did pay it. By both complaint and findings the fraud of Sanborn and Dennis practiced upon the prospective stockholders and the corporation is the keystone of the situation. Mot alone is the fraud practiced, the material element in both complaint and findings, but it is fraud practiced by the defendants as the confidential agents of the parties complaining. Both complaint- and findings assert a violation of confidential relations and a betrayal of the trust reposed in defendants by the parties dealing with them. The measure of damages relied upon in the complaint and recognized by the judgment is the same, and. we think that the presence of a substantial variance, as contended for by appellant’s counsel, is not apparent.

We now pass to a consideration of the evidence, the findings and the general principles of law bearing on a question of the character here presented. Frederick D. Sanborn was not served with summons, and the only appellant in this case is L. W. Dennis, with whom alone we are called upon to deal. Some embarrassment arises from the fact that these various tracts of land during the pendency of the negotiations which led up to the formation of the corporation were valued in entirety at the lump sum of $537,000, and no valuation was placed upon them in severalty. And it was not until after the formation of the corporation, and at the time when Dennis made his report to the corporation showing the application of the $193,666.62, that any definite idea was had by the stockholders as to the valuation of this realty by parcels, and those valuations, it appears, were arbitrarily placed by Sanborn or Dennis, or both, in that report. From the general conduct of the original negotiations by the investors of this large sum of money it is apparent that land speculation was rife in Los Angeles county in those days; and haste in the culmination of this transaction was exercised at the expense of future trouble and embarrassments, which a little care and a little less haste would readily have averted.

We will summarize some of the facts which are beyond dispute: Dennis was a real estate agent selling on commissions; Sanborn was a speculator in land, of moderate means. Upon March 11, 1887, Sanborn, for himself and various relatives and friends, purchased the Stillson and Hall tract of land for $26,000, and took the deed in the name of his nephew, Frederick D. Sanborn. Upon April 4th he entered into a contract of purchase of the Clapp tract for $20,000, $1,000 cash, the papers being placed in escrow to await the examination of title. Upon April 5th he entered into a contract to purchase the Ames tract for $60,000, paying thereon $5,000. Upon April 9th he entered into a contract of purchase of the Gibbs tract for $51,000, and paid thereon $5,000. At about the same time he procured either written or oral options for short periods upon the Ford and Bradbury tracts, but no contracts of purchase were entered into, no moneys paid, and the lands finally passed to the corporation at cost price, hence they are not involved here. Sanborn about this time also procured an oral option for thirty days upon the Titus tract for $187,000. As to the Stillson and Hall tract and the Clapp tract, Dennis was a stranger, but at least as to some of the other tracts he was an agent of the owners in these negotiations, and probably was also working in the interest of Sanborn. Sanborn was securing these lands for speculative purposes, with the intention of interesting eastern capitalists therein. But about the 20th of April Dennis suggested that home capitalists would interest themselves in the venture; the suggestion was acceptable, and thereupon negotiations with various parties began, which culminated on the thirtieth day of April in a written agreement. In this agreement, Dennis, Sanborn, and the other prospective stockholders of the corporation, in consideration of one dollar received each from the other, agreed to purchase these lands for $537,000, and to expeditiously organize a corporation to handle them. The interest of each party in the venture was specified thérein, Sanborn taking a one-fourth interest and Dennis a one-fifth. Dennis appears to have been the moving spirit in the negotiations during these times, although Sanborn was near at hand, the agreement itself being drawn up by him. Sanborn in his testimony claims that dating from the twentieth day of April, Dennis was acting for these home capitalists; while Dennis insists that he was act-ting for Sanborn. The testimony seems'to indicate that he was acting for all parties concerned, especially for himself. About the 5th of May it was determined that $200,000 would be required immediately to make first payments, and to keep alive Sanborn’s contracts, options, etc.; and soon thereafter that amount was raised and paid to Dennis to be applied to these purposes. The corporation was finally organized upon the twentieth day of May, and about June the 1st Dennis reported that he had paid $193,666.62 to Sanborn upon these lands; and in this report the particular amount that had been applied upon the purchase of each tract, and, also, the amount of the deferred payments upon each tract, and when due, were separately stated. The disposition by Dennis of this $193,666.62 caused the present litigation.

Cook on Stock and Stockholders, section 651, referring to the promoters of a corporation, says: “A promoter is one who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which looks to the formation of a corporation. A promoter is considered in law as occupying a fiduciary relationship towards the corporation.” This definition is approved in Ex-Mission Zand and Water Co. v. Flash, 97 Cal. 610. As to events transpiring subsequent to April 20th, there is no question but that these defendants, Dennis and Sanborn, stood in the position of promoters of the corporation that was subsequently organized. That they were promoters is well evidenced by the facts already stated and numerous other circumstances, which it is not necessary here to detail. Appellant especially fills the test demanded of a promoter in every respect, and he himself testifies that as to all the things done and said by him, looking towards the transfer of this land, he was the agent of his codefendant, Sanborn; and upon this appeal we must agree with him as to such agency.

It appears to be conceded that the law bearing upon the facts of this case is well put by Mr. Justice Sharswood in Densmore Oil Co. v. Densmore, 63 Pa.. St. 43; and the application of the principles of law there declared to the facts furnishes the legal solution to the present litigation. In that case it is said: “There are two principles applicable to all partnerships or associations for a common purpose of trade or business, which appear to be well settled on reason and authority. The first is that any man or number of men, who are the owners of any kind of property, real or personal, may form a partnership or association with others, and sell the property to the association at any price that may be agreed upon between them, no matter what it may have originally cost, provided there is no fraudulent misrepresentation made by the vendors to their associates. They are not bound to disclose the profit which they may realize by the transaction.....The second principle is that where persons form such an association, or begin or start the project of one, from that time they do stand in a confidential relation to each other and to all others who may subsequently become members or subscribers, and it is not competent for any of them to purchase property for the purpose of such a company, and then sell it at an advance without a full disclosure of the facts”

The first interrogatory that necessarily presents itself to our consideration is, Was Sanborn the owner of these various tracts of land upon April 20th? That being the date of the inception of the negotiations which terminated in the creation of the corporation, and the date from which the defendants occupied a position of trust and confidence towards those who subsequently became the stockholders of the corporation. As to the Titus tract, Sanborn was in no sense the owner of it. He had not paid a dollar towards its purchase, and had no word of writing to indicate any interest therein. It was bought with the corporation’s money, and all transactions pertaining to the sale of it occurred subsequent to the said twentieth day of April. The profit of $25,000, charged to the corporation upon this tract is not justified in the law, and the corporation has been injured to that extent. It must be conceded that the Hall and Stillson tract, for the purposes of this case, was owned by Sanborn; and we also think the Clapp,

Ames, and Gibbs tracts had been purchased by him, and were owned to such an extent, at least, as to establish his status as the owner thereof prior to his becoming a promoter within the rule declared in the Densmore Oil Company case. It may be fairly said that under his contract of purchase he was the owner of these three parcels of realty. (See Howell v. Budd, 91 Cal. 342.) Sanborn being the owner of these tracts prior to the commencement of confidential relations with the complainants, had the right to dispose of his property to the corporation at any price he saw fit to ask and the corporation saw fit to pay. As the vice-chancellor said in Foss v. Harbottle, 2 Hare, 490: “I begin the transaction at this time. I have purchased land, no matter how or from whom or at what price. I am willing to sell it at a certain price for a given purpose.” Of course the fraud and deceit of the vendor, practiced towards the parties contemplating the purchase, would afford grounds for relief under any circumstances; but the fixing of the amount of the purchase price by the vendor is a matter in which be is entitled to the widest latitude. The valuation upon the various tracts of land, as shown by Dennis’ report to the corporation, does not appear to be questioned, and by such valuation the lands of Sanborn were transferred to the corporation at a profit to him of $48,000, less $7,500, which he paid to perfect the title to the Clapp tract.

While Sanborn had the right to dispose of his land to the corporation at any figure upon which all parties concerned might agree, yet such sale must be made without any false representations upon his part. ( Getty v. Devlin, 54 N. Y. 403; Densmore Oil Go. v. Densmore, 64 Pa. St. 43.) As to false representations on the part of the defendants, the court found that, as a consideration and' inducement for the prospective stockholders to enter into the venture, “defendants John P. Sanborn and L. W. Dennis represented to, and promised and agreed with, each and all of the persons above mentioned, that all of such lands as they then had or might thereafter acquire should be put in and conveyed to such proposed corporation at the same price and consideration as the said L. W. Dennis and John P. San-born had paid or.agreed to pay therefor to the party or parties from whom they then had or might thereafter obtain the same.” The evidence is entirely sufficient to support this finding. While many of the interested parties only testify generally to the understanding that all this property should pass to the corporation at cost price, and that they would not have participated in the venture if the fact had been to the contrary, yet the witnesses, Sterling and Burbank, testify directly to the statements of appellant Dennis made to them to that effect.

As to this branch of the case the conditions are these: Sanborn was the owner of several tracts of land on April 20th; at that time he and Dennis became the promoters of the defendant corporation; sold this property to the corporation, and at such sale represented that it was being sold at its original cost to them. The representation was false, and was made at a time when these parties were not dealing with each other as strangers at arm’s length; but, on the contrary, at a time when they were closely allied in a joint venture and when all the duties and responsibilities resulting from confidential relations rested upon them; and a strict performance of those duties and responsibilities was inexorably demanded by the law. This principle is recognized in New Sombrero Phosphate Go. v. Erlanger, L. R. 5 Oh. Div. 73, and approved in Ewell’s Evans on Agency, *284, in the following language: “A promoter is in a fiduciary relation to the company which he causes to come into existence. If he has a property which he desires to sell to the company, it is quite open for him to do so, but upon him, as upon any other person in a fiduciary position, it is incumbent to make full and fair disclosure of his interest and position with respect to that property. There is no difference in this respect between a promoter and a trustee, steward, or other agent.” Morawetz on Corporations, section 545, intimates that the true doctrine hardly goes to the length here stated, but still says the “ promoters” are bound to exercise the highest degree of fairness in their dealings. The question of disclosure or concealment of information which should be communicated is not here involved. It is a question purely of false representations as to a substantial matter. And false representations upon the part of one party entering into the very inception of a joint business venture will nullify the entire transaction whenever the matter comes before a court of justice. At the time the sale was made these parties occupied fiduciary relations, and those relations prohibited the conduct practiced by the defendants as depicted by the finding of the court. In the eyes of the law the fact that these lands, at this time, were of the full value of the purchase price in no way relieved appellant of the duties and responsibilities resting upon him as a fiduciary. This principle is fully illustrated in Bentley v. Graven, 18 Beav. 75.

It is now claimed that all parties had knowledge of the cost price of these various tracts of land prior to the conveyance to the corporation, by virtue of a personal inspection of the original contracts given by the owners to Sanborn; that they acted with their eyes open, and that it is now too late to rely upon these false representations as the basis of an action. It is probably true that such knowledge came to the officers of the corporation as to some of the tracts, but that event occurred long after the $193,666.62 was collected and passed to the possession of Dennis and Sanborn. Again, such knowledge by the directors would not be knowledge to the stockholders. A fraud practiced upon the stockholders could not be ratified or even waived by the directors. This question was directly passed upon in Simon v. Vulcan Oil and Mining Go., 61 Pa. St. 221.

It is also insisted that if the defendants practiced fraud in the sale of the lands and thereby caused the corporation to pay more therefor than they in right should have paid, the remedy is not in the nature of the judgment here recovered, but the action should be for a rescission by reason of the fraud committed. We are not in harmony with such views. In the case of Getty v. Devlin, 54 1ST. Y. 403, a case very similar to the one at bar, in speaking as to the proper remedy, it is said: “ But I think under the complaint in this action the four defendants may be compelled to account for the profits they made on the real estate and which they fraudulently appropriated to the exclusion of their associates. The court can ascertain what the land actually cost the four defendants, and hold them to account for the balance. This balance equitably belongs to those who paid the money, and the plaintiffs can in this action recover their pro rata share thereof.” The principles declared in Ex-Mission Land and Water Co. v. Flash et al., 97 Cal. 610, also justify the remedy here sought and obtained. In an able and elaborate article found in the 16th American Law Review, at page 671, the status, duties, and responsibilities of promoters are considered and the true principle appertaining thereto is well stated as follows: “The substance of the law is that promoters are corporate fiduciaries. Transactions with their companies wherein they deal honorably, with full disclosure, and without seeking to influence the action of the corporation, will be upheld. But transactions in which they suppress or misrepresent material facts, or otherwise deceive the company, or corruptly control its action, are fraudulent, and the company may elect either wholly to set aside such transactions, or to recover the promoter’s secret profits.”

About the fifth day of May, John P. Sanborn returned to his home in Michigan, but prior to his departure he gave his nephew, Frederick D. Sanborn, a power of attorney to act for him in the collection of moneys, making of contracts, deeds, etc., in furtherance probably of the merger of the venture then on hand, into the corporation about to be formed. At about this time the $193,666.62 was paid to Dennis, and portions of it passed to the original vendors through the medium of himself and Frederick D. Sanborn; and thereupon contracts of purchase were taken in the name of John P. Sanborn to the Ford, Bradley, and Titus tracts, and possibly new contracts as to some of the others. The prospective stockholders becoming alarmed over the fact that they had expended such a large amount of money and possessed no written evidence as to their interest in these various properties, upon May the 18th secured from Frederick D. Sanborn, as attorney in fact of John P., a statement in writing to the following effect: “ Know all men by these presents: That, whereas, I, John P. Sanborn, have purchased (naming the various tracts of land here involved), and whereas a corporation is about to be formed, known as the San Gabriel Valley Land and Water Company, and whereas, the subscribers of stock of said corporation are the real purchasers of said lands, although the contracts thereof are made to me now, therefore, I agree that as soon as the organization is completed I will transfer all my right, title, and interest, etc., to the corporation.” This writing was offered in evidence as the declaration or admission of John P. Sanborn that he had purchased this property for the corporation, and under objection it was admitted for such purpose. We shall not review the legal soundness of the ruling of the court in this regard, for, if error was committed, we think it harmless. If we look into the opinion of the court, as appellant suggests, this evidence appeared to have some weight as tending to show an original purchase for the corporation; yet, in the next succeeding clause of the opinion, the judge says that there is ample evidence to support that allegation of the complaint aside from the writing. Neither does there appear to be any finding of fact that Sanborn actually purchased these lands for the corporation or the prospective stockholders, and for this reason the ruling of the court against appellant becomes immaterial; but, in addition, and as conclusive of the entire matter, we do not think any finding of fact that Sanborn purchased these lands for the contemplated corporation, or that he subsequently represented to the parties that he had so purchased them, is material to the recovery or necessary to support the judgment. As we have heretofore fully indicated, the acts of San-born and Dennis, subsequent to the 20th of April, justify the recovery had, and hence their conduct prior thereto is not an essential element of the case.

An attempt was made to take the deposition of the appellant, Dennis, prior to the trial; but after the examination was had, his testimony being taken down and transcribed by a phonographic reporter, he either-neglected or declined to subscribe to the same. At the trial the reporter was placed on the witness-stand, and,, after refreshing his recollection from his transcription of the notes, under objection, testified to the statements, of Dennis made at that time. Dennis being an active party to the litigation, there can be no question but that, his statements pertaining to the subject matter of the-action, wherever and whenever made, would be competent evidence against him. But the question here presented is whether the reporter, not having a definite and well-defined recollection of the statements so made-after he had refreshed his recollection as far as possible from the writing, will be allowed to read the contents of the memoranda to the court. There appears to be some difference of opinion among courts and law-writers as to-the proper practice at common law. But under our statute (Code Civ. Proc., sec. 2047) the course here adopted is expressly allowed. In the case of People v. Lem Your 97 Cal. 224, the practice was approved as justified by the foregoing provision of the code. And in the case of People v. Gardner, 98 Cal. 127, the identical question was presented, and this court said: “ The remaining objection to the admission of the evidence of the witness, Briar, does not seem to be well founded, in view of the last provision of section 2047 of the Code of Civil Procedure.” Appellant’s contention that the reporter’s original notes are the basis from which he should have been required to refresh his recollection will not be considered, as such objection was not brought to the attention of the trial court. However, we do not intimate there is any merit in the point.

This action is brought by a dissatisfied stockholder, and a previous demand upon the corporation to commence, the suit, and a refusal upon its part so to do, is made sufficiently plain from the record. There are several allegations of the complaint which have no support in the evidence, but they are immaterial, and, as a consequence, findings thereon against appellant become harmless.

Appellant should be allowed a credit of $7,500 paid to perfect the title to the Clapp tract, and should only be charged with a profit of $25,000 upon the Titus tract.

For those reasons we think the judgment should be for the sum of $65,500, with legal interest thereon from the fourth day of June, 1887. The cause is remanded, with directions to the trial court to modify the judgment to that effect.

Paterson, J., and Harrison, J., concurred.

Hearing in bank denied.