Oliver v. Oliver ( 1903 )

Lamar, J.

Courts are created for the enforcement of civil contracts, and are powerless to relieve against hard bargains, unless authorized so to do by some rule of civil law. From the very nature of their constitution, they must accommodate themselves to the general transactions of mankind; they can not put parties upon an equality which does not in fact exist; they can not deprive one of the advantage which superior judgment, greater skill, or wider information may give; nor can they be expected to enter upon an inquiry as to how the parties would have traded if each had known the same facts as to the state of the crops, the conditions of trade,. a declaration of war, the signing of a treaty of peace, or any speculative matter or extrinsic fact of general or special knowledge. Hence, in Laidlaw v. Organ, 2 Wheat. 178, it was held that a purchaser of tobacco was not bound to disclose to the vendor that peace had been declared between this country and Great Britain, although that fact materially affected the value of the commodity sold; Chief Justice Marshall saying that “ It would be difficult to circumscribe the contrary doctrine within proper limits, where the means of intelligence are equally accessible to both parties.” Contra, Frazer v. Gervais, Walk. (Miss.) 72, Bowman v. Bates, 2 Bibb, 47. See Abbott v. Dermott, 34 Ga. 228; Ellis v. Hammond, 57 Ga. 179 (2). Without making the distinction between extrinsic and intrinsic facts apparently recognized by our Civil Code, § 3534, par. 4, and many American cases, Lord Thurlow said, in Fox v. Mackreth, 2 Bro. C. C. 420, that the court would not set aside a sale where the purchaser failed to divulge the fact, of which he knew the seller was ignorant, that the estate had upon it a valuable mine, unless the relation between the parties was such as to raise an obligation on the part of the vendee to make the discovery. See also Davies v. London Ins. Co., 8 Ch. Div. 469; Turner v. Harvey, Jac. 178; 2 Pom. Eq. Jur. (2d ed.) § 903; 2 Kent’s Com. 482, 490, 491 n.; Williams v. Spurr., 24 Mich. 335; Lapish v. Wells, 6 Maine, 183; Bowman v. Bates, 2 Bibb, 47.

And this brings us to a consideration of the relation which a director bears to an individual stockholder. . All the authorities agree that he is trustee for the company, and in his capacity as such he serves the interest of the entire body of stockholders, as well as those of the individual shareholder, who usually can not sue in his own name for wrongs done the company by the officer. Civil Code, §§ 1858, 1859, 1860. But the fact that he is trustee for all is not to be perverted into holding that he is under no obligation to each ; the fact that he must serve the company does not warrant him in becoming the active and successful opponent of an individual stockholder with reference to the latter’s undivided interest in the very property committed to the director’s care. That he is primarily trustee for the corporation is not intended to make the artificial entity a fetich to be worshipped in the sacrifice of those who, in the last analysis, are the real parties at -interest. No process of reasoning and no amount of argument can destroy the fact that the director is, in a most important and legitimate sense,' trustee for the stockholder. Jackson v Ludeling, 21 Wall. 616; 2 Pom. Eq. Jur. (2d ed.) § 1090. Not a strict trustee, since he does not hold title to the shares; not even a strict trustee who is practically prohibited from dealing with his cestui que trust; but a quasi t-ustee as to the shareholder’s interest in the shares. If the market or contract price of the stock should be different from the book value, he would be under no legal obligation to call special attention to that fact; for the stockholder is entitled to examine the boobs, and this source of information, at least theoretically, is equally accessible to both. It might be that the director is in possession of information which his duty to the company requires him to beep secret; and if so, he must not disclose the fact even to the-shareholder; for his obligation to the company overrides that to an individual holder of the stocb. But if tlie fact so bnown to the director can not be published, it does not follow that he may use it. to his own ■ advantage, and to the disadvantage of one whom he also represents. The very fact that he can not disclose prevents him from dealing with one who does not bnow, and to whom material information can not be made bnown. -If, however, the fact within the bnowledge of the director is of a character calculated to affect the selling price, and can, without detriment to the interest of the company, b'é imparted to the shareholder, the director, before he buys, is bound to mabe a full disclosure. In a certain sense the information is a quasi asset of the company, and the shareholder is as much entitled to the advantage of that sort of an asset as to any other regularly entered on the list of the company’s holdings. If the officer should purposely conceal from a stOcbholder information as to the existence of valuable property belong-_ ing to the company, and tabe advantage of this concealment, the sale would necessarily be set aside. The same result would logically follow where the fact giving value to the stocb was of a character which could not formally be entered on the records. Where the director obtains the information giving added value to the stocb by virtue of his official position, he holds the information in trust for the benefit of those who placed him where this bnowledge was obtained, in the well-founded expectation that the same should be used first for the company, and ultimately for those who were the real owners of the company. , The director can not deal on this information to the prejudice of the artificial being which is called the corporation, nor on any sound principle can he be permitted to act differently towards those who are not artificially, but actually interested.

There are several authorities directly on the point. Some are at law, others in equity; the decisions were based on a finding of a want of actual fraud, and not on demurrer, as here. But it must be conceded that they are opposed to the conclusions we have reached. Krumbhaar v. Griffiths, 25 Atl. R. 64; Haarstick v. Fox, 9 Utah, 110; Crowell v. Jackson, 53 N. J. L. 656, adopting the ruling in Board of Comm’rs v. Reynolds, 44 Ind. 509, 15 Am. Rep. 245, where it was held .that there was no relation of trust between a director and an individual stockholder; and. that therefore the director was not bound, when purchasing the stock, to disclose to the shareholder facts, knowledge of which was acquired through his official position, although they were of a character which materially and largely affected the value of the stock. There, however, the Chief Justice dissented on the ground that a director does occupy a relation of trust, which makes him guilty of constructive fraud in acquiring the stock without disclosing facts which enhanced its value. The case has been doubted by Judge Thompson, who prefers the dissenting opinion, saying that the decision of the majority “ proceeds upon a conception which, if extended, would sanction nearly all of the fraud and injustice which the managers of corporations have committed against the stockholders.” 3 Thomp. Corp. 4034; Corbin’s Benj. Sales § 624. And in 2 Pomeroy’s Eq. Jur. (2d ed.) § 1090, it is shown that directors are not only trustees of the corporation, but also “quasi or sub modo trustees for the stockholders with respect to their shares of stock. If, then, any sort of trustees, they are necessarily subject to the obligations and restrictions which inhere in that relation, as to property entrusted to them. . The shares are but the paper evidence of the interest which the stockholder has in the property under the control of the director. In their sale the stockholder disposes, not only of the lithographed or engraved scrip, but of his.holdings in property. ; And when the director deals with a stockholder for the purchase of shares, he is not buying paper, but in effect is buying an undivided and ■ substantial interest in property which has been committed to the director’s care, custody, and control. ' Equity abhors mere names, and looks to the substance. Whether the corporation be treated as an enlarged and amplified form of partnership and the director as managing partner, or whether he is called an agent or trustee elected by the stockholders to represent them in the management of the concern, he occupies a fiduciary position, and is essentially within the rule which requires agents, attorneys, bailees, partners, trustees, or other fiduciaries to exercise the highest degree of good faith as to all matters connected with the property committed to their care. 2 Pom. Eq. Jur, (2ded.) § 963; Stubinger v. Frey, 116 Ga. 396.

It is matter of common knowledge that the market value of shares rises and falls, not only because of an increase or decrease in tangible property, but by reason of real or contemplated action on the part of managing officers; declaring or passing dividends; the making of fortunate or unfortunate contracts; the loss or gain of property in dispute; profitable or disadvantageous sales or leases. And to say that'a director who has been placed where he himself may raise or depress the value of the stock, or in a position where he first knows of facts which may produce that result, may take advantage thereof, and buy from or sell to one whom he is directly representing, without making a full disclosure and putting the stockholder on an equality of knowledge as to these facts, would offer a premium for faithless silence, and give a reward for the suppression of truth. It would sanction concealment by one who is bound to speak, and permit him to take advantage of his own wrong — a thing abhorrent to a court of conscience. It is conceded that the position which the director occupies prevents him from making personal gains at the expense of the company or of the whole body of stockholders. But a rule that he is not trustee for the individual shareholders leads inevitably to the conclusion that while a director is bound to serve stockholders en masse, he may antagonize them one by one; that he is an officer of the company, but may be the foe of each private in the ranks. When it is admitted, as it must be; both from the very nature of his duty and from the rulings of nearly all the cases, that he is trustee for the shareholder, how is it possible in principle to draw the line and say that while trustee for some purposes, he is not for others immediately connected therewith ? that the incidents of the trust relation stop short at the very point where it is vitally important to the shareholders that they should become active ?, For it must not be forgotten that the right to good faith in dealings concerning the stock is one of the very few which the individual shareholder is in a position to assert in his own name. Except in a few other instances, the company itself is the only proper party to enforce the obligation arising from the trust relation of the director. In contracts with reference to the shares the stockholder himself can enforce the rights arising from the quasi trust. Civil Code, §§ 1858, 1859, 1860.

While not decided, it is in one case suggested that a stockholder in dealing with a director should recognize his superior opportunities for knowledge, and be warned thereby to exercise special caution. But the fiduciary relation fully warrants exactly the opposite course, Here, at least, the beneficiary may be off guard, and may rely implicitly, not only on what is said, but also on the supposition that nothing important will be left unsaid by the officer. Having previously -trusted the director in the management of the company, he is not required, when selling his shares, suddenly to exhibit entire want of confidence. And directors generally recognize the obligations imposed, and act accordingly. But the peculiar powers and special opportunities of these fiduciaries, call for an enlargement rather -than a restriction of the rule requiring disclosures. Civil Code, §§4027, 3534. The obligations of his office bring him peculiarly within the general doctrine which declares that concealment of material facts may of itself amount to a fraud, where from any reason one has the right to expect full information from another, or where one knows that the other is laboring under a delusion in respect to the property sold, arid yet keeps silence. Civil Code, §§3534,4030,4031. “A suppression of the truth may amount to a suggestion of falsehood; and if, with intent to deceive, either party to a contract of sale conceals or suppresses a material fact which he is in good faith bound to disclose, this is evidence of and equivalent to a false representation.” Stewart v. Wyoming Ranch Co., 128 U. S. 388. See also Fisher v. Budlong, 10 R. I. 525; Bowman v. Patrick, 36 Fed. Rep. 138 (2); Colton v. Stanford, 82 Cal. 351; Walsham v. Stainton, 1 DeGex, J. & S. 678; Porter v. Woodruff, 9 N. J. Eq. 174; Laidlaw v. Organ, 2 Wheat. 178; Kintzing v. McElrath, 5 Pa. St. 467; 2 Pom. Eq. Jur. (2ded.) §§902, 903, 963, 1090.

We base our decision on the obligation raised by the relation of director and stockholder, having purposely refrained from considering the effect of the fact that the defendant is .the brother of the petitioners, which, though .apparent in the record, was not pressed in the briefs or arguments here.

Judgment affirmed.

By five Justices.