Kidd v. New Hampshire Traction Co. ( 1907 )

The decree for the plaintiffs rests upon the legal proposition that the defendants are bound to account as trustees to the plaintiffs for the property of the Massachusetts Construction Company Incorporated received by them. The defendants' main contention, under their exceptions to the decree, is that they received the property in question under and in accordance with the terms of a valid contract with the corporation in which the plaintiffs are stockholders, and therefore cannot be compelled to account except as provided in that contract. This question lies at the foundation of the plaintiffs' case, and is, briefly stated, whether there is error of law in the ruling of the trial court, that upon the facts the defendants are bound to account as trustees for the property involved.

The plaintiffs are preferred stockholders without voting power in the Massachusetts Construction Company Incorporated, a corporation organized under the laws of Connecticut. The plaintiffs alleged in their bill that, through the fraudulent cooperation of all the defendants, all the assets of the plaintiffs' corporation were taken from it and the plaintiffs' interest therein rendered valueless. Upon these allegations the parties went to trial, and a decree was ordered for the plaintiffs against the Trust Company. Upon request of the defendants, the facts found upon which the decree was based are stated. It appears therefrom that the question of fraud in fact, which was, on the pleadings, the question tried and submitted to the trial court, has not yet been decided. The court adds to this statement, which would obviously, by itself, be fatal to the decree, other facts and rulings upon which the decree is based. In this situation the question is, whether the facts stated authorize the decree; and it cannot be assumed by the general decree that facts sufficient to authorize it were found. Noyes v. Patrick, 58 N.H. 618; Concord Coal Co. v. Ferrin, 71 N.H. 33; Allen v. Association, 73 N.H. 525, 527; Jaques v. Chandler, 73 N.H. 376.

The bill charged that the defendants' fraudulent purpose was effected by means of two contracts between the Connecticut Company and the Trust Company, dated November 12 and December 28, 1901. The findings made relate entirely to the contract of December 28. There is much evidence, and findings are made, as to transactions between the parties antedating the contract of December 28 and the formation of the Connecticut Company. But although these matters may be of great importance upon the question of actual fraud, in discussing the ground upon which, in the present posture of the case, the decree can be sustained, if at all, it is only necessary to consider the findings as to this contract. Although the bill alleged fraud in fact, it appears that at the trial the plaintiffs took a further position. They claimed "that the transfers by the Connecticut Company to the Trust Company, under the agreements dated November 12 and December 28, 1901, were fraudulent in fact; or, if not made with wrongful intent, were mere bargains of the Trust Company with itself, as represented by its agents, and therefore it must account." Upon the issue of fraud in fact, the character of the contract, whether fair or "grossly inequitable," would be material and important; but if the facts disclose a situation in which the law conclusively presumes fraud, the fairness of the contract would be no answer to the charge. As there is no finding on the issue of actual fraud made by the pleadings, no facts as to the character of the contract, whether inequitable or otherwise, are reported, and no question in relation thereto is involved in the case. The defendants deny the charge of fraud in fact; but the questions which might be presented upon this issue are not now before the court.

Upon the second claim, the defendants say that "all contracts were made between independent parties." They do not contend in argument that if the contract involved in the finding was a mere contract of the Trust Company with themselves, made by their agents on both sides, the plaintiffs would be bound. That the same person cannot at the same time be the buyer and the seller of property to which he holds a fiduciary relation, is elementary. See authorities cited in Pearson v. Railroad, 62 N.H. 537; Fisher v. Railroad, 50 N.H. 200, 205. The question, therefore, upon the primary issue of liability, is whether it is found that the contract of December 28 was a contract of the Trust Company with themselves. The formal execution of and subsequent action under this contract — an instrument under seal — by the parties thereto was alleged in the bill and admitted in the answers. By its terms, the interest of the Connecticut Company in certain securities and railways was sold and transferred to the Trust Company, and the parties entered into various engagements in relation to the securities and the construction and completion of the various railways. The plaintiffs do not claim anything under the contract; but the contention is, that because of the invalidity suggested no title to the property purported to be conveyed thereby passed to the Trust Company, and that therefore they must account therefor as trustees and cannot discharge themselves in accordance with the terms of the contract. The question, therefore, is merely whether the Trust Company acquired title to the property of the Connecticut Company by virtue of this contract.

The plaintiffs had no voting power in their corporation. The common stockholders having entire control of the corporation involving their own interests and those of the plaintiffs, the relation of trust between them and the preferred stockholders with an interest, but no voice, in the corporate management more clearly appears, than in the relation of the majority to the minority stockholders who have the right to take part in the meetings of the corporation. But in this respect it is said "the majority stand in much the same attitude toward the minority that the directors sustain toward all the stockholders." 2 Cook Stock Stockh., s. 662 1 Mor. Corp., s. 529; Farmers' etc. Co. v. Railway, 150 N.Y. 410, 430,431. The relation, therefore, between the two classes of stockholders in this corporation is plainly one of trust. Any transactions of the common stockholders in violation of the duty imposed upon them by the trust relation would be a fraud upon the preferred stockholders. The relation between the common stockholders and the other party to a contract attempted to be made by them in behalf of the corporation might be such that the law would conclusively presume the transaction to be a fraud upon the preferred stockholders, without any investigation of its fairness, as, for instance, if Lovell, owning all the common stock, had attempted, through directors chosen by him for the purpose, to transfer all of the corporate property to himself. Or such a transaction might be in fact a fraud upon the non-voting stock if the parties having control of the corporation, induced because of private advantage to themselves, attempted to contract on behalf of the corporation upon terms "grossly inequitable" to the corporation, as, for example, if Lovell, because of the $6,000 salary secured to himself, attempted to transfer or have transferred the corporate property to the Trust Company for less than it was worth. A transaction of this character might be avoided for fraud; but the fraud which would avoid it would be fraud in fact, such as the plaintiffs alleged in their bill, but which has not yet been found to exist. If the Trust Company, by their influence over Lovell, or by any means, induced him to fail in performance of his duty as trustee toward the plaintiffs, and to exercise his control over the corporation in the interests of the Trust Company instead of in behalf of the Connecticut Company, such a transaction would involve fraud in fact, which if it can be found on the evidence, has not been. Whether or not the evidence has any tendency to prove control in this way is not material to the present discussion.

The contract in question is set out in the record. It was drawn up on its date, but was executed "some days later." The precise date does not appear. It is not necessary to recite the contract in full. A brief reference to some of its provisions only will be sufficient. It provided, as already stated, for the sale of securities and railroad rights to the Trust Company. For these the Trust Company were to pay cash, and debentures of and stock in the New Hampshire Traction Company, a holding company organized and controlled by the Trust Company. The cash, debentures, and certificates were to be retained by the Trust Company. The cash was to be used to pay debts of the Construction Company which that company guaranteed did not exceed the amount of cash the Trust Company were to pay, and the debentures and certificates of stock were pledged to secure any excess indebtedness. The Trust Company were to furnish funds to complete the railways, and were authorized to carry on the construction in the name of the Construction Company, and were to have control of that company for that purpose. Such persons were to be chosen officers of the company as the Trust Company might desire, to remain in office at the pleasure of the Trust Company until the final completion and carrying out of all matters and things provided for in and by the contract, Lovell agreeing to furnish stock to qualify the directors and that he would, pending the carrying out of the terms and conditions of the agreement, deposit with parties named certificates for all the common stock of the company indorsed in blank, as security for the faithful performance of the terms of the contract by himself and the Construction Company. The contract also provided for the employment of Lovell in and about the construction of the railways for the term of two years at a salary of $6,000 a year. It was further provided that the contract should not bind the Trust Company until an examination then being made by engineers and accountants representing the Trust Company was completed, and not then unless their report was entirely satisfactory to the Trust Company. December 31, the draft of the contract was laid before the directors of the Connecticut Company, at a meeting regularly called and held. By formal vote, the officers of the company were authorized and directed to make, execute, and deliver the contract. The directors further voted that the execution of the said contract by the officers of the corporation in its name be and the same hereby is confirmed and adopted as the valid and binding act of the corporation. The officers were further directed by vote of the meeting to do whatever was necessary to give force and effect to the contract. None of the directors, or officers, or common stockholders of the Construction Company were, so far as the findings go, or so far as there is any evidence which has been pointed out, at this time stockholders, officers, or agents of the Trust Company. There is nothing in the findings or evidence establishing any fact which, in the absence of fraud in fact, invalidates as matter of law the assent of the plaintiffs' corporation given in this formal manner to the contract in question. The corporate assent, formally given without fraud, binds all the stockholders.

If the corporation in its entirety is not bound, it can only be because of something subsequent to the formal assent of the directors to a contract which, under the charter and by-laws of the corporation, they had power to make. It does not, as before stated, appear when the actual execution of the contract by the officers of the corporations took place. It appears to be conceded in argument that this was done January 3, 1902, when the result of the examination by the Trust Company's engineers and accountants was communicated to Lovell, as president of the Construction Companies. If it had not been understood that the formal execution would, or might, precede the completion of such examination, the provision of the contract that it should not be binding upon the Trust Company until then seems superfluous; but such provision may have been inserted out of abundant caution. Between the assent given by the directors and the passing of the letters of January 3, it appears that, December 31, three of the five directors of the Connecticut Company resigned, and Trust Company nominees were elected in their stead; and it is found that since, December 31, at least, the Connecticut Company was merely an agency controlled by the Trust Company.

January 3, 1902, the Trust Company addressed to Lovell, as president of the Construction Companies, a letter stating that the examinations made under the contract have been completed, "that the results of said examinations are satisfactory to us, and that we are prepared to accept said contract upon the express understanding and agreement on the part of the" Construction Companies that they will pay the entire expense of the completion of the high tension service upon all of the roads now constituting the New Hampshire Traction Company. Lovell replied on the same day, as president of both companies, agreeing in behalf of the companies to bear all the expense necessary for the high tension service. It was argued that none of the agreements entered into, or attempted to be entered into, between the corporations could become binding until January 3; that, as it is found that at that date the Connecticut corporation was merely an agency controlled by the Trust Company, any contract consummated after December 31 is invalid as matter of law. But the finding must be construed in the light of the evidentiary facts upon which it is based, the use made of it, and the other findings in the case. It is clear it was not intended to find such control existed at the time the directors gave the corporate assent to the instrument dated December 28, for no attempt is made to support the decree by any ruling that such votes were not effective in law as corporate acts. The finding "since December 31, 1901, at least" implies that if there was evidence tending to establish such relation at an earlier date, it was considered insufficient to establish the fact. The only fact reported as occurring subsequent to the vote of the directors and before January 1, at which date the agency relation is found to exist, is the substitution of nominees of the Trust Company for a majority of the existing board of directors. The finding is a statement of the legal result of this act, as understood by the trial court. But assuming that the three directors then chosen were so related to the Trust Company as to be incapacitated legally to represent the Construction Company in any dealings between the two corporations, there is no finding or evidence that these directors acted in any way as representatives of either party in the matter. If the corporation could not act through them, their dual relation did not prevent the corporations from acting. The remedy awarded in Pearson v. Railroad,62 N.H. 537, was not an injunction restraining the corporations from contracting with each other while the same persons remained as directors of both corporations, but was the appointment of a trustee to manage so much of the business of the plaintiff's corporation as the existing directors were disabled to conduct. The incapacity in such cases relates not to the corporations, but to the officers. That this was the understanding of the finding by the trial court is clear from the subsequent ruling. It was not ruled that the agreements entered into January 3 were void because of the control then had by the Trust Company over the Construction Company; but after setting forth the action of the directors, December 31, and the letters, the court says "there was no other acceptance of the modified contract, except by implication from action subsequently taken under it" and the rule upon which the liability of the defendants is made to depend is further stated as follows: "The so-called contract of December 28, as modified by the Trust Company January 3, if ever agreed to by the Connecticut Company, was so ratified after the Connecticut Company was controlled by the Trust Company. Taking the property in this way, the Trust Company is chargeable as a trustee." The only use made of the control found is to prevent acquiescence and action in carrying out the terms of the contract, by the persons then in control of the Construction Company, operating as a corporate estoppel against that company. It is further found that "by the contract of December 28, the control of the Connecticut Company was turned over to the Trust Company?"

It seems clear that the agency of the Connecticut Company for the Trust Company is found to result from the provisions of the Contract of December 28, and that it was not intended to find that the contract of December 28 or January 3 resulted from, or was tainted by, such control. The corporate assent to that contract was given by a board of directors legally capable of representing the corporation. The officers who performed the manual execution and delivery, whenever that was done, — Lovell, president, and Pride, secretary, — were not incapacitated by any relation to the Trust Company. Their act in so doing was purely ministerial, and in so acting they represented the corporation; and having been legally authorized to perform the act, their power to do as representatives of the corporation was not affected by any vacancy or change in the board of directors. 1 Mor. Corp., s. 534. Taken by itself, it is clear that the agreement of December 28, executed with, due formality by both parties, is valid and binding Upon the plaintiffs' corporation.

The sole remaining question on this branch of the case is whether the letters of January 3 rendered the agreements of either or both of the parties contained in the sealed instrument nugatory and void. By that instrument the Connecticut Company sold and the Trust Company bought the property for which the plaintiffs seek to charge the Trust Company as trustees. The defendants' title is valid under that instrument, and they cannot be compelled to account except according to its terms, in the absence of fraud in fact, only because of the legal effect of the letters exchanged January 3 between the vice-president of the company on one side and the president of the companies on the other. The theory of the trial court appears to have been that these letters, with the agreements previously reduced to writing and some time adopted under seal, constituted a new contract which Lovell, as president, had no power to make, and because of Lovell's want of power to bind the corporation as to the stipulation in reference to the high tension service, no contract was in fact made and no title passed; and that the only legal principle by which the Connecticut corporation could be held to be bound was that of ratification by subsequent action or acquiescence. It may be conceded that the control found prevents, as matter of law, such corporate ratification as would otherwise result from the facts found, and that Lovell, as president, did not have power to bind the corporation to pay for the high tension service, as his letter of January 3 purported to do. The defendants do not assent to the latter proposition. In the view that has been taken, it is not necessary to decide the question of Lovell's authority in the matter, but it may be remarked that such authority does not attach to the office of president Wait v. Association, 66 N.H. 581. If there is evidence tending to show that the entire management of the corporation and of all its business had been entrusted to Lovell (Jones v. Williams, 139 Mo. 1, — 37 L.R.A. 682), there is no finding to that effect, and the evidence does not establish the fact as matter of law. Whatever authority Lovell might have had under the general vote of the directors of November 11, 1901, to which attention has been called, in the absence of the specific authorization of December 31, the latter vote prescribed the terms upon which the officers were authorized to convey the property specified in the contract, constituting all the remaining assets of the corporation, and abrogated any authority to convey them upon other or different terms, if such authority could be found in earlier votes or other prior action. But conceding that Lovell had no authority to bind the corporation by his promise that it should pay for the high tension service, and that he did not do so by his letter of January 3, the conclusion of the trial court, that for that reason there was no contract between the corporation and the Trust Company, and that the Trust Company took the property without any title, is nevertheless erroneous. Upon the whole transaction, giving full effect to the stipulations of the letters, it is clear the Construction Company agreed to sell and the Trust Company agreed to buy the property. In the negotiations the Trust Company attempted to secure an agreement from the Connecticut Company that that company would pay for the high tension service. The discussion is hampered by the paucity of the facts reported as to the execution and delivery of the sealed instrument dated December 28. If this paper was executed and delivered, as might be inferred from its terms, in advance of the completion of the examination of the Trust Company's engineers and accountants, it became binding at once upon the Connecticut Company, and binding upon the Trust Company upon the completion of such examination, if the reports of such examination were entirely satisfactory to the Trust Company. In such situation, the contract became binding upon the Trust Company by force of the acknowledgment contained in the Trust Company's letter of January 8, that the examinations provided for by the contract had been completed and that the results of such examination were satisfactory to them. Upon such a state of facts, the attempt of the Trust Company to add an additional stipulation to a contract already completely executed and binding upon them would have been entirely ineffectual, and Lovell's assent thereto, if otherwise effective as the set of the corporation, would be invalid for want of consideration. But if the expression of satisfaction contained in the Trust Company's letter, because of the stipulation as to a further agreement by the Construction Companies, must be interpreted as a limited or qualified satisfaction which would not of itself render the contract binding upon the Trust Company, it nevertheless appears from the pleadings and admitted facts that the Trust Company did accept the contract, took the property thereunder, and proceeded to deal therewith in accordance with its terms.

It is to be noticed that the parties executing the sealed instruments in behalf of the several corporations — Bright, second vice-president, and Root, secretary, for the Trust Company, and Lovell, president, and Pride, secretary, for the Construction Companies — are not the same individuals who represented the parties in the transactions of January 3 — Hyatt, vice-president, for the Trust Company, and Lovell alone, for the Construction Company. This evidence would have a tendency to establish that the formal execution of the different papers was not contemporaneous. There is other evidence reported which, with the terms of the paper itself, tends to show that the formal execution of the sealed instrument was earlier than January 3. If this were so, the contract became binding upon the Trust Company when they proceeded to act. under it, whether their satisfaction with the reports of their engineers and accountants resulted entirely from the reports themselves, or from the additional fact that Lovell, as president of the Construction Companies, had agreed for them that they should pay the high tension expense. If the contract was executed and passed before the completion of the examinations, the Connecticut Company, upon proof of the completion of such examinations and that their results were "entirely satisfactory" to the Trust Company, could have required the Trust Company to take the property and proceed with the execution of the contract, or pay damages for the breach. But the Trust Company having taken the property and proceeded to execute the contract, the question of satisfaction by which it was to become binding upon them is entirely immaterial.

But since it may have been found that the execution of the sealed instrument was contemporaneous with or subsequent to the letters, it must be concluded the fact was so found if such finding will tend to support the conclusion of the trial court. Jaques v. Chandler, 73 N.H. 376; and authorities supra. It is therefore necessary to consider the transactions upon the supposition that the contract dated December 28 was not executed by the Trust Company and exchanged between the parties until the time of, or after, the exchange of the letters of January 3. The letter of the Trust Company expressed their willingness to accept the contract already drawn up and assented to by the Connecticut Company, "upon the express understanding and agreement" that the Construction Companies would pay for the high tension service. The argument appears to be that the Connecticut Company has never entered into a valid agreement to pay for the high tension service; hence the Trust Company has never accepted the contract, and therefore there was no contract and no sale. But even if the Trust Company proposed as a condition of its entering into the contract that the Construction Companies should by a valid agreement bind themselves to pay the cost of the high tension service, such a proposition did not necessarily prevent the Trust Company from accepting, becoming a party to, and attempting to carry out the contract without such agreement on the part of the other companies.

If the Connecticut Company never bound itself to meet the expense of the high tension service, it is equally clear that the Trust Company definitely accepted the contract of December 28 by formally executing the same, by affixing its seal and the signatures of the proper officers, and by proceeding to carry it into execution. If the Trust Company was misled into so doing by mistake or misrepresentation as to Lovell's authority in the premises, the contract of sale would not be void, even if it might be avoided by an election of the party misled to rescind the contract and return what had been received under it. But as under such circumstances the contract would not be void, the Trust Company acquired a valid title to the property, good until it should elect to rescind and return it. But it is difficult to find legal ground for such rescission. The Trust Company dealt with the plaintiffs' corporation through its president as its agent. They knew that as president, merely, he had no implied power to bind the corporation. While suggesting that they required the express agreement of the Construction Company as a preliminary to their acceptance of the contract, they did accept it upon the assurance of the president and waived the corporate action which was necessary to make the agreement asked for binding upon the corporation. In the shape matters then stood, it may be clear why, as a practical proposition, the assent of Lovell, the common stockholder, was considered sufficient; but nothing appears upon which it could be found that the Trust Company accepted the contract upon the mistaken belief that the corporate assent of the Construction Company had been given to the installation of the high tension service at its expense. There is no suggestion of any representations by Lovell as to his power in the matter by which they could have been misled. If the Trust Company cannot rescind the contract because of the refusal of the Connecticut Company to recognize Lovell's authority to modify the terms of the sealed instrument, it is very clear the Connecticut Company cannot do so; and even if on any ground, the Trust Company could rescind, until they did so the contract would be binding upon the other party. Butler v. Northumberland, 50 N.H. 33, 39; Willoughby v. Moulton, 47 N.H. 205, 208. "The right to abandon a contract vests only in the party who has been guilty of no default." 1 Chit. Cont. (5th Am. Ed.) 741; Greeley v. Wyeth,10 N.H. 15; Bryan v. Bancks, 4 B. Ald. 401; Clough v. Railway, L. R. 7 Exch. 26, 34. The Connecticut Company agreed to sell their property to the Trust Company upon the terms embodied in the sealed instrument. If they did not agree and are not bound to pay the high tension expense, they get full relief by a discharge from the obligations of that agreement.

In addition to what has been said, there is a technical reason fatal to the conclusion of the trial court, assuming that the exchange of letters was anterior to or contemporaneous with the execution of the sealed instrument. When parties engage in negotiations by parol looking to the making of a contract, and do make such contract in writing, all stipulations by parol anterior to or contemporaneous with the written agreement are merged in the writing, which is conclusively presumed, in the absence of fraud or mistake, to contain the matter as to which the minds of the parties met. Where the final expression of the purpose of the parties is by specialty, — a writing under seal, — all other matter in writing is in parol and merged in the sealed instrument. Whatever the parties may have proposed orally or in writing as to the terms of their proposed treaty, the final expression of their agreement is the writing under seal, which cannot be contradicted or altered by any anterior or contemporaneous writing of less degree. This is not merely a rule of evidence, but a rule of substantive law. 4 Wig. Ev., ss. 2400-2455; Stark, Ev. (3d Am. Ed.) *995. The defendants suggest that an agreement which is collateral to, or independent of, the stipulations of the written or sealed instrument may be proved, even if the proof rests in parol. Hurt v. Hickey, 67 N.H. 411, 417; Durkin v. Cobleigh, 156 Mass. 108; Morgan v. Griffith, L. R. 6 Exch. 70; and numerous authorities cited by them. The question in these cases is as to the proof or binding effect of the collateral agreement, which may be proved and enforced if collateral or independent, but if otherwise is merged in the written agreement which is not affected by a parol agreement which is not capable of proof. If the defendants are wrong in their contention that the stipulation of the letters is independent of, or collateral to, the stipulations of the sealed instrument, the only result would be the legal conclusion that the sealed instrument contains the entire matter to which the parties finally agreed; while if they are right, and the matter of the letters is open, the evidence that the Connecticut corporation did not become bound thereby would establish one of the steps necessary to a rescission by the Trust Company, but would not, as has been seen, render the contract void or voidable by the Connecticut Company. Whether, therefore, the stipulation of the letters is collateral or independent is not material, for neither conclusion would render the sealed instrument void.

As legal assent binding upon the plaintiffs' corporation was duly given to the taking by the Trust Company of the property in question, the conclusion of the trial court that the Trust Company is bound to account as trustee for the property so taken cannot be sustained; and the decree resting upon that conclusion of law must be set aside and the case stand in the superior court for a finding upon the undecided issue now before that court. The error in the finding lying at the foundation of the decree renders the consideration of the other objections urged by the defendants unnecessary at this time. If considered, the only decision that could be made would be as to their validity, or otherwise, as an answer to the decree upon the ground upon which it was placed. If the main question presented by the pleadings is decided in favor of the plaintiffs, the facts upon which such finding may be based may be material and important upon the other questions which have been suggested. It is not advisable to consider them at present, further than to say that the finding that if the defendants "are chargeable only for the value as determined by subsequent developments, then the property was never worth as much as they paid for it" is not understood to be a finding that the defendants paid full value for the property. If the defendants are obliged to account for the property, they would in any event be chargeable with its value when they took it. Subsequent developments would be evidence, but not the only evidence, on this question. Whether there is any evidence of actual fraud does not appear to be one of the questions transferred, and is not properly considered by this court while the question of fact remains open in the trial court to which it was submitted without any objection of this character.

Case discharged.

WALKER and BINGHAM, JJ., concurred in the foregoing opinions: YOUNG, J. dissented.