Leland v. Ford

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] 1. To my mind the serious question presented on this record is involved in the first ground urged. The bill alleges in substance that the Fords agreed that the Lelands should be the managers of the new corporation and should be elected to its board of directors. It also alleges that the agreement, which was an oral one, contemplated a settlement with the Lelands and stockholders other than brokers, others who had bought stock at $3 per share or less, and other than those who purchased stock after the appointment of the receiver. It was not alleged in the bill that there were stockholders of these classes, and for this reason the trial judge declined to consider this question. I think the question of the validity of the contract which is sought to be enforced is before us and should be decided. The contract upon its face excluded certain classes of stockholders who for want of a better name we will style minority stockholders; if there were no such stockholders, there was no necessity for considering them in the agreement, and if there were none of such classes, plaintiffs should have so stated in their bill. If the agreement by the Fords to vote for the Lelands for directors and managers of the corporation was invalid and the agreement contemplating the exclusion of minority stockholders was a fraud upon them and rendered the contract invalid, and defendants may be heard in a court of equity to assert such invalidity, it should be so held upon this appeal. I shall consider the points separately.

(a) The bill alleges that the Lelands were president and vice-president respectively of the old corporation, and that they were to have the management and control of the new company and were to have important and probably lucrative positions in it. It alleges that after it was organized they were given such positions but were later relieved of them. Of this they complain, and it is patent that they construe the contract to require their continued employment, and their continued election to their respective offices.

In West v. Camden, 135 U.S. 507 (10 Sup. Ct. 838), it was held (quoting from the syllabus):

"An agreement by a director of a corporation to keep another person permanently in place as An officer of the corporation is void as against public policy, even though there was not to be any direct private gain to the promisor."

This case was followed and exhaustively quoted from inScripps v. Sweeney, 160 Mich. 148. In Wilbur v. Stoepel,82 Mich. 344 (21 Am. St. Rep. 568), the same rule was recognized, and it was held that the contract was not a severable one and the invalid provision permeated the whole of it and rendered it unenforceable. There is no allegation in the bill that it was agreed that the reorganized corporation was to be a close corporation. It had to have more than two stockholders. Act No. 84, Pub. Acts 1921, § 1 (Comp. Laws Supp. 1922, § 9053 [1]). It is alleged that as organized the defendants Ford own all its stock, but that one share is in the name of defendant Craig for organization purposes. Whether the rule announced in the cases above cited should obtain in the case if it was agreed that the new corporation was to be a close corporation is not before us. Possibly leave should be granted to apply to the court below for permission to amend in this particular.

(b) The bill shows that directors of the old company other than the Lelands had decided that a reorganization of the company was necessary, and that the Lelands opposed such plan and that the appointment of a receiver was obtained by such other interests. The bill alleges that after the receiver was appointed the Lelands publicly announced that such action was against their protest and that they proposed to secure a reorganization which would protect the creditors and stockholders from loss, and that many of the stockholders, relying on such announcement, took no steps to protect themselves. After making this public announcement with the reliance on it by the stockholders, the Lelands proceeded to make a contract with defendants Ford, which, if carried out, insured them continued employment and important positions, insured them and a part of the stockholders a return of their money invested in the company, and left the minority stockholders out in the cold. We need not disagree with plaintiffs' counsel in their contention that, when the receiver was appointed, the officers, including plaintiffs, ceased to function. We may, for the purposes of the case, hold that upon the appointment of a receiver they owed no legal duty to help the stockholders or any one else in reorganizing the company. What we do hold, and it is all that the purposes of the case require, is that after they publicly announced that they were going to look after the interest of the stockholders, if they acted at all, their duty required them to act for all, not for a portion of the stockholders. A contract for the reorganization of a corporation which contemplates the taking care of a portion only of the stockholders, and the exclusion of another portion from the benefits of the reorganization, is fraudulent and cannot stand. This question has been before this court and is settled by Sparrow v. E.Bement Sons, 142 Mich. 441 (10 L.R.A. [N. S.] 725). In Bankof China v. Morse, 168 N.Y. 458, 478 (61 N.E. 774, 56 L.R.A. 139, 85 Am. St. Rep. 676), it was said:

"The equal and ratable distribution of the assets and the equal and ratable enforcement of the liabilities of a company, according to the interest of shareholders therein, is equitable and should be enforced, so that each shareholder may receive an equal proportion of the assets and contribute only an equal proportion to discharge its liabilities. This principle, we think, applies as well to the proceeds of calls as to property already in hand. In other words, shareholders have equal rights and must bear equal burdens."

The man who bought a share of stock for $3 acquired the same interest in the company as the man who paid $50 for his share of stock. It is possible that this question could be eliminated by an amendment alleging, if true, that there were no stockholders of the classes mentioned.

(c) May the defendants in this action urge that the contract sought to be enforced and to which they were parties is invalid because contrary to public policy and because fraudulent? The case is in equity, but the maxim "he who comes into equity must come with clean hands" does not apply to defendants; they have not come into a court of equity seeking any relief, they were brought there by plaintiffs. Klosowski v. Klosowski, 266 Ill. 360 (107 N.E. 634); Hayes v. Schall, 229 Mo. 114 (129 S.W. 222); McIver v. Clarke, 69 Miss. 408 (10, South. 581). On the other hand, plaintiffs seek in a court of equity the enforcement of a contract made with the defendants which in one particular is contrary to public policy, and in another in fraud of third parties. Plaintiffs and defendants are in pari delicto. The general rule is thus stated in 2 Pomeroy's Equity Jurisprudence (4th Ed.), § 940:

"The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation."

And in section 401 of the same work, it is said:

"If a contract has been entered into through fraud, or to accomplish any fraudulent purpose, a court of equity will not, at the suit of one of the fraudulent parties, — a particepsdoli, — while the agreement is still executory, either compel its execution or decree its cancellation, nor after it has been executed, set it aside, and thus restore the plaintiff to the property or other interests which he had fraudulently transferred. Equity will leave such parties in exactly the positions in which they have placed themselves, refusing all affirmative aid to either of the fraudulent participants. The only equitable remedies which they can obtain are purely defensive."

And further in section 402, it is said:

"Wherever a contract or other transaction is illegal, and the parties thereto are, in contemplation of law, in pari delicto, it is a well-settled rule, subject only to a few special exceptions depending upon other consideration of policy, that a court of equity will not aid a particeps criminis, either by enforcing the contract of obligation while it is yet executory, nor by relieving him against it, by setting it aside, or by enabling him to recover the title to property which he has parted with by its means."

Quite likely at first blush we react against such a rule. A deeds to B his farm to defraud his creditors with an agreement that B shall reconvey when requested. We do not admire the sportsmanship of B when he refuses to reconvey, and it may be that we are reluctant to refuse specific performance to A. But if the rule were otherwise, it would be an open invitation to all kinds of fraudulent contracts. Courts should not be eager to find that contracts fall within the prohibited class, or to find that the parties are in pari delicto, but when once satisfied that the contract is permeated with illegality and conceived in fraud, and even though the fraud is aimed at a third person, courts should refuse relief to either and leave the parties where, by their fraudulent conduct, they have left themselves. The reason and purpose of the rule is quite well stated in an early Wisconsin case. In Clemens v. Clemens,28 Wis. 637, 654 (9 Am. Rep. 520), it was said:

"The principle or policy of the law, therefore, is to reject the suit of and reprove the plaintiff for his wrong, not to reward the defendant. The plaintiff must be punished, even though it be at the expense of allowing the defendant, an equally guilty party, to obtain most unjust and unfair advantage for himself. This looks like punishing one party and rewarding the other for the same immoral or illegal act or contract. But fraud and immorality must be rebuked and discouraged, and this object can not be accomplished in any other way. The suit of the party compelled to seek the aid of the courts, in order to obtain the fruits of his fraud or wrong, must be dismissed, although it may result in unjustly giving to the other equally culpable party the entire benefit of them."

in speaking of the rule, Justice Shauck said inKinner v. Railway Co., 69 Ohio St. 339, 344 (69 N.E. 614):

"It denies all relief to a suitor, however well founded his claim to equitable relief may otherwise be if, in granting the relief which he seeks, the court would be required, by implication even, to affirm the validity of an unlawful agreement or give its approval to inequitable conduct on his part."

In Barnes v. Starr, 64 Conn. 136, 155 (28 A. 980), it was said:

"A very numerous class of cases coming within the same equitable doctrine is, where the contract or other act is substantially a fraud upon the rights, interests, or intentions of third parties. In a case of this kind, relief is refused to a plaintiff on the ground that he does not come into court with clean hands. The general rule is that the parties to a contract must act not only bona fide between themselves, but they shall not act mala fide in respect to other persons who stand in such a relation to either as to be affected by the contract or its consequences."

The same thought was conveyed by Mr. Justice GRANT inDakin v. Rumsey, 104 Mich. 636, where he said:

"He, therefore, was willing and believed that he was participating in a fraud upon Rumsey. Since he has participated in a supposed fraud upon another for his own gain, equity will not lend its aid to assist him, even if he were the defrauded party."

In Reynolds v. Boland, 202 Pa. 642, 647 (52 A. 19), it was said:

"Equity springs from conscience and is administered through it. He who would reach the conscience of a chancellor must come with his own void of offense for 'He that hath committed iniquity shall not have equity.' 1 Pomeroy's Equity Jur. 434-443; Bisham's Equity, 60, 61. Specific performance is here prayed for; but it is of grace and not of right. Pennock v. Freeman, 1 Watts, 409; Henderson v.Hays, 2 Watts, 148; Orne v. Kittanning Coal Co., 114 Pa. 172 (6 A. 358); Datz v. Phillips, 26 W. N.C. 512; Brown v. Pitcairn,148 Pa. 387 (24 A. 52). From the lips of this complainant, who sues for grace, along with his prayer for a decree that the defendant specifically perform his agreement there comes a confession that its purpose was to deceive, and the ear of the chancellor will not hear the prayer. Into hands soiled by a contract, equity will not place her decree for its enforcement. 'The doors are shut against one, who, in his prior conduct in the very subject-matter at issue, has violated good conscience, good faith or fair dealing.' Orne v. Kittanning Coal Co.,supra. * * *

"It is not pretended that, in the agreement of June 3, 1899, Reynolds and Boland tried to take advantage of each other, or that either was attempting any fraud upon the other. Its sole purpose was the deception of Stetler, to enable Reynolds to accomplish through it what was apparently impossible without it. But this does not relieve it from its baseness, and in it there is no equity for the plaintiff. * * * Stetler is to be wronged. The compact of June 3, 1899, was for that purpose. It still is executory, and equity frowns at the mere suggestion of its enforcement. Both parties to it are parties to its iniquity, and neither has any equity against the other. 'Who comes into equity must come with clean hands. In pari delictomelior est conditio defendentis. These are the principles which stand in the plaintiff's way. * * * Who does iniquity shall not have equity; equity has no relief for a party who, in the practice of one fraud, has become the victim of another.'Hershey v. Weiting, 50 Pa. 240."

In the early day the equity side of the exchequer, in the case of Everet v. Williams, dealt most severely with those inpari delicto — who sought its aid. The bill set up a partnership between the parties and that the parties:

" 'dealt with several gentlemen for divers watches, rings, swords, canes, hats, cloaks, horses, bridles, saddles, and other things to the value of £200 and upwards;' and how there was a gentleman at Blackheath who had several things of this sort to dispose of, which defendant represented 'might be had for little or no money, in case they could prevail on the said gentlemen to part with the said things;' and how, 'after some small discourse with the said gentleman,' the said things were dealt for 'at a very cheap rate.' The bill further recites that the parties' joint dealings were carried on at Bagshot, Salisbury, Hampstead, and elsewhere, to the amount of £2,000 and upwards; and that the defendant would not come to a fair account with the plaintiff touching and concerning the said partnership."

A reference was had to the master, where it developed that the parties were highwaymen, and the partnership property referred, to in the bill was their loot. The bill was dismissed, the counsel who signed it, Jonathan Collins, was required to pay the costs, the solicitors for the plaintiff, William White and William Wreathock, were each fined 50 pounds. Later the parties to the suit were hanged. For résumé of this interesting case, see 2 Pothier on Obligations, 2, note; Lindley on Partnership (9th Ed.), p. 124; 9 Law Quarterly Review, 197; Burrows v. Rhodes, 1 Q. B. Div. (1899) 816.

As we shall remand the case with permission to apply to the circuit court for leave to amend in the particulars noted, we should dispose of the other questions.

2. We are not concerned with the alleged promise of the Fords to pay the creditors of the corporation; they have all been paid. Stockholders are not creditors of the corporation as that word is generally understood. In 7 R. C. L. p. 201, it is said:

"There is one sense in which stockholders, common as well as preferred, are creditors. It is in the sense that a corporation includes all its capital stock among its liabilities, but it is a liability which is postponed to every other liability. As such a creditor, a stockholder is subordinate to every other creditor of the corporation. In the ordinary sense, however, a stockholder cannot be a creditor of the corporation by virtue of his ownership of stock."

The case relied upon by defendants' counsel, Gansey v. Orr,173 Mo. 532 (73 S.W. 477), involved the construction of the word "miscarriage" in the statute of frauds of that State, and it was held to include mismanagement of corporate affairs. The case has been criticized by other courts. The allegations of the bill before us assert in effect that the Fords promised as part of the purchase price to pay the stockholders the amount they had invested in the company; this was a primary obligation. If it was entered into the statute of frauds does not prevent its enforcement.

3. Agreements which stifle competitive bidding, or chill the sale, as it is sometimes called, are, generally, contrary to public policy. This is not always so. Cases frequently arise in receivers' sales where no sale could be made except by a combination of interests. Receivers' sales of railroads and of large corporations are of this class. There are but few men in the country with enough money to buy the property offered. There must be a combination of capital, or many interests, in order to effectuate a sale of large properties. Take a railroad receivership: there are usually several mortgages differing in seniority; there are usually several issues of equipment obligations, common stock, preferred stock, possibly different classes of debentures, unsecured claims, etc. These different interests are usually represented by committees who finally get together and work out a reorganization plan, and it is agreed in advance that the property be sold to a purchasing committee at an agreed figure. Such an agreement is not against public policy and void. Unless such agreements may be made few railroads could ever be sold at receivers' sales. What has been said about railroads is equally applicable to large corporations. The instant case is illustrative. The property as a going concern was worth many millions, but there were few men in the country with enough money to buy or with disposition to buy even if they had the money. Quite likely but little would have been realized even by creditors if an arrangement had not been made with the Fords or others of means in advance of a public sale. The courts have to deal with practical problems, and have, therefore, recognized that agreements made in good faith, which do not operate to chill the sale, but on the contrary produce the best results obtainable, are not contrary to public policy and are not void. In 2 R. C. L. p. 1133, the rule is thus stated:

"While the rights of the vendor and others interested in the property are to be protected, nevertheless prospective purchasers have the right to consult and promote their own interests so long as they do not resort to any fraudulent artifice for that purpose. It is true that in every association formed to bid at a sale whereby one is designated to bid in behalf of the rest, there is an agreement, express or implied, that no other member will participate in the bidding; and hence in one sense it may be said to have the effect of preventing competition. But it by no means necessarily follows that if the association had not been formed, and each member left to bid on his own account, the competition at the sale would be as strong and efficient as it would by reason of the joint bid for the benefit and upon the responsibility of all. The doctrine which would prohibit associations of individuals to bid, as preventing competition, however specious in theory, is too narrow and limited for the practical business of life, and would oftentimes lead inevitably to the evil consequences it was intended to avoid. Sales in many instances could be effected only after a sacrifice of the value to bring the price within the reach of the means of the individual bidders. Consequently not every combination or association of bidders will invalidate the sale. The courts will look to the intention of the parties, and if that is fair and honest and the primary purpose is not to suppress competition, but to protect their own rights or advance their own interests, and there is no fraudulent purpose to injure or defraud others interested in the result of the sale, the agreement may be upheld. This is especially true in the case of a union of several persons formed on account of the magnitude of the sale, or where the quantity offered to a single bidder exceeds the amount which individuals might wish to purchase on their own account. The intention with which the parties enter into such an agreement is a question of fact for the determination of the jury."

And in 6 C. J. p. 831, it is said:

"Sales which are effected by combinations of interests or agreements not to bid are voidable or not, according to the object for which parties enter into the agreements. If the purpose is to chill the sale and purchase property for less than its market value, the seller may avoid the sale. If on the other hand, the agreement is made without any design to commit a fraud, but to enable the parties to the agreement to purchase conveniently, or if the agreement is for any honest purpose, the sale will be valid."

From the face of the bill, and that is all we have before us, it is patent that the agreement was not entered into to chill the sale, and to allow a purchase of the property below its actual value. It is quite evident that the sale brought more money and better results for the creditors and interested parties than would have resulted had the receivership run its course.

The bill before us will be dismissed, and the case remanded with leave to plaintiffs to apply for permission to file an amended bill as indicated in this opinion. Defendants will have costs of this court.

NORTH, C.J., and FEAD, McDONALD, and POTTER, JJ., concurred with FELLOWS, J.