
    STANDARD OIL CO. v. SCOFIELD.
    N. Y. Supreme Court, Second District ; Special Term,
    September, 1885.
    Action for Accounting. —Corporation ; what contracts ultra VIRES; PARTNERSHIP WITH INDIVIDUALS.—CONTRACTS; EXECUTED ENFORCED, THOUGH ULTRA VIRES; RESTRAINT OF TRADE.-PLEADING; PERFORMANCE OF CONDITIONS.
    A complaint by an Ohio corporation alleged the making of a contract between plaintiff and defendants, for refining and dealing in oil, and the retention by defendants of large sums in excess of their share of profits under the agreement, and asked for an accounting, payment, &c. On demurrer,—Held, that, assuming the contract to have been one of partnership between the parties, and, therefore, ultra vires as to the plaintiff corporation under its charter, that fact, while it would justify a court in refusing to aid the plaintiff in enforcing the contract by injunction so far as it remained executory, it did not avail the defendants as an answer to a claim that, so far as the contract was executed, they had applied to their own use moneys to which they were not entitled.
    
      A contract made the basis of a complaint will not, upon demurrer, be deemed void as in unlawful restraint of trade, and, therefore, contrary to public policy, if the contract is capable of a construction consistent with a lawful intent, although, upon a trial where all the facts are disclosed, it might appear that the arrangement was illegal, and to effect a combination inimical to the interests of the public.
    The rule that all reasonable intendments are to be indulged in support of a pleading demurred to,—applied.
    Although a contract designed to artificially enhance the price of a commodity by keeping the product of other persons out of the market, is illegal, yet one who puts money into a joint undertaking with strangers may lawfully bind them not to do more business than he thinks will be warranted by the capital to be employed, even if the result is to limit the production of a particular commodity.
    A complaint alleging that the plaintiff and defendants “ entered upon and continued to carry on ” the joint business provided for in the' contract between them in suit; that the defendants had applied to their own use from the receipts and profits of said business large sums of money greatly exceeding their proportion thereof, and that they refused to account,—Held (on demurrer for insufficiency in not averring due performance of all the conditions of the contract on the plaintiff's part), sufficient to sustain an action for an accounting.
    Trial of issues raised by demurrer to complaint.
    The Standard Oil Company, an Ohio corporation, brought this action against William C. Scofield and others, composing the firm of Scofield, Shurmer & Teagle, for an accounting, payment, &c., under a contract made between the parties as to the business of refining and dealing in crude petroleum.
    The complaint alleged the incorporation of the plaintiff under certain specified statutes of Ohio, the partnership of defendants, the making of the contract annexed as part of the complaint ; its suspension by notice from the plaintiff as provided therein; the defendants’ application to their own use of large sums in excess of their just proportion ; and their refusal to furnish plaintiff with a statement of the joint business.
    
      The contract appears in a note.
    The defendants demurred to the complaint as not stating facts sufficient to constitute a cause of action.
    
      
      James C. Carter, for the plaintiff, and the demurrer.
    
      Lucien Birdseye and Benjamin H. Bayliss, for the defendants, opposed.
    
      
       The contract, after reciting that the parties thereto were engaged in the oil business at Cleveland, Ohio, and desired “to enter into a joint agreement without being partners,” proceeded:
      “ It is agreed as follows:
      
        
        “First, [Defendants to continue business from July 20, 1876, to July 20, 1886, furnish their refinery and appliances therefor, and $10,000 in cash, for use continuously in the business, until July 20, 1886.]
      
        “Second. [Defendants agree to devote all their time and attention to the business during said period.] During the existence of this adventure they will not, nor will either of them, as a firm or as individuals, directly or indirectly engage or be concerned in any business connected with petroleum or any of its products in Cuyahoga county, Ohio, or elsewhere, exceptpn connection with the parties of the first part, under this agreement, nor shall they or either of them enter into any new business which will interfere with the time necessary to be devoted to the full and faithful conduct of the business of this adventure.
      “ Third. [Provides as to books of accounts.]
      “ Fourth. All contracts, purchases and sales under this adventure shall be made by the second party in their firm name of Scofield, Shurmer & Teagle. All products of the refinery aforesaid shall be shipped by such route or routes as the first party shall, from time to time, direct. The parties hereto, and the agents of each respectively, shall act in concert so far as may be in buying and selling, and in relation to prices to be paid and received, and it is agreed that no material change shall at any time be made by said parties of the second part in the mode of conducting said business or in the extension or contraction thereof, nor shall any change be made in the prices paid or received, without the consent of said first party; but it is clearly understood and agreed that this paragraph does not give the first party the right to withhold its consent to the said second party from buying or selling at the same prices as are paid or received by said first party on the same day; said first party agreeing to consult with said second party as frequently as they may desire, and advise them at all times of any change in the market for refined or crude, when requested.
      “ Fifth and Sixth. [Provides as to payment of rent and taxes, &c.]
      
        “Seventh. In order to equalize the business and give to the said second party their due proportion thereof, it is stipulated and agreed that the amount of crude petroleum to be distilled by said second party annually shall not exceed (85,000) eighty-five thousand barrels of 42 gallons each, in any year, and shall be distributed as nearly as practicable in equal quantities of 42,500 barrels of 42 gallons, each and every six months from July 20, 1876, A. D., but the said 42,500 barrels may at any time be run in a less period than six months, if so desired.
      “ Eighth. [Provides that plaintiff shall furnish $10,000 in cash for the business, and for the temporary suspension of the business in case of certain contingencies rendering it unprofitable, and repayment of investment and settlement of business, and for reviving the agreement upon notice, &c.]
      
        "Ninth. The name and the credit of the Standard Oil Company shall not be used in any way whatever in connection with the said business, nor shall the said Standard Oil Company be liable for any debts contracted by said parties of the second part.
      “ Tenth. [Provides for insurance.]
      “ Eleventh. [Provides for continuance of business by survivors in case of the death before the period of ten years expires, of any of the defendants.]
      “ Twelfth. The said Standard Oil Company agrees that the said parties of the second part, during the existence of this adventure, shall have the full benefit, to the extent of the business done under this agreement, of all contracts now existing or that may hereafter be made by the said Standard Oil Company relating to freight on crude and refined oil, and the said Standard Oil Company stipulates as a part of this arrangement that it will procure the shipment, when made in its own name, with the consent of the second party, of all, made and received by said parties of the second part in said business at the same prices paid by the Standard Oil Company for the shipments of like products, at the same time by the same routes, and allow to said parties of the second part the same rebate on freights as it shall at all times receive under contracts with the different carriers transporting the oil.
      “ Thirteenth. [Provides as to shipment and sale, and cost of handling, &c.]
      “ Fourteenth. It is understood and agreed, and it is hereby expressly declared that the object of this agreement is to reconcile any and all interests of the parties hereto which have seemed to be in conflict, and in entering upon this agreement both parties agree that they will carry out all its stipulations in the best faith, each striving lo secure the best results possible to this adventure ; to this end it is hereby agreed that if at any time, the officers of the said first party shall intentionally fail to give to said second party the benefit of all the advantages hereinbefore agreed by it to be given, or shall intentionally withhold the same from said second party, the said second party may, for any such violation of this agreement actually occurring, declare this adventure at an end, and such election to end the same when made known to the first party shall terminate this agreement, and tire business shall then be settled up as herein provided, the said first party remaining liable to said second party for all damages and losses to said second party occasioned by such violation to the time of such election ; and if the said second parties or either of them shall fail to give to the said business the time and attention required by this contract, or intentionally fail to fulfill and carry out the matters and things by them stipulated to be done and performed under this agreement, when such violation has actually occurred, the said first party may terminate this agreement by notice in writing to said second party, and upon delivering such notice at the place of business of said second party, this agreement shall be terminated, and the business shall then be closed and settled as herein provided ; the said second party remaining liable to said first party for all damages and losses to said first party, occasioned by such violation, up to the time of such election.
      “ Fifteenth. At the end of said term of ten years, or whenever the agreement is terminated, the said party of the first part shall receive back its investment, of ten thousand dollars (§10,000) provided the same has not been impaired by loss.
      
        “Sixteenth. [Provides for payment of certain amounts annually on account of profits.] In order to explain more fully the provisions of this agreement as hereinbefore recited, and for a more complete understanding thereof, it is mutually agreed and understood as follows ; to wit : A. That the covenant contained in section 2 shall not debar either of the parlies of the second part from continuing or engaging in the business of producing crude petroleum and selling such production. B. That the covenant in section 4 which gives the party of the first part the right to direct the route or routes bv which shipments shall be made, is not intended nor shall it be held as giving the first party an arbitrary right to dictate to the second party such routes or route, but it is agreed that the second party in conducting the business contemplated by this agreement will work in accord with the first party in all matters relating to transportation, whenever they can do so without prejudice to the interests of tlds adventure. 0. All moneys collected by the first party for drawbacks and rebates on shipments made by the second party under this agreement (referred to in section 12) shall be paid over to the second party as soon as the same are collected ; and it is agreed by the first party that it will (whenever requested) furnish for examination to one of the parties of the second part, the original copy of all agreements now in force or that may hereafter be made by and between the Standard Oil Company and any railroad company relating to the transportation of crude petroleum and the products thereof.”
    
   Bartlett, J.

Three objections are urged upon this demurrer to the complaint as not stating facts sufficient to constitute a cause of action: First, that the contract sued upon is ultra vires as to the plaintiff. Secondly, that the contract is void, as being in restraint of trade, and therefore against public policy. And, finally, that the complaint does not allege due performance by the plaintiff of all the conditions of the contract on its part.

I will consider these objections in the order in which I have stated them.

1. Is the contract in suit ultra vires ?

The complaint refers to the particular acts of the Ohio Legislature under which the plaintiff corporation was organized and exists. The demurrer admits that it was incorporated under these statutes. Assuming that this admission brings the charter of the plaintiff before the court, it is argued that no authority can be found therein which warrants a corporation in entering into a partnership with individuals, as the plaintiff did in making the contract now under consideration ; and I am referred to a decision to this effect made in a suit between these same parties, by the court of common pleas in Cuyahoga County, Ohio, on an application to enjoin the defendants from refining more oil than the quantity specified in the agreement.

I concur with the Ohio court in the view that the relation established between the plaintiff and the defendants was practically one of partnership, and adopt the construction which that tribunal puts upon the statutes of its own State in holding that the act of incorporation does not authorize the plaintiff to become a copartner with individuals. But while this conclusion justified the court there in refusing to interfere by injunction to aid the plaintiff in enforcing its claims under such portion of the contract as remained executory, can the fact that the joint undertaking was ultra vires on the part of the plaintiff avail the defendants in answer to a claim that, so far as the contract has already been executed, they have applied to their own use large sums of money to which they are not entitled ?

I think not. “Contracts with corporations made in excess of their powers, which are purely executory on both sides, and where no wrong will be done if the parties are left in their previous situation, should not be enforced, because such contracts contemplate an unauthorized diversion of corporate funds, and therefore a breach of private trust. But the executed dealings of corporations must be allowed to stand for and against both the parties, when the plainest ruKs of good faith so require ” (Parish v. Wheeler, 22 N. Y. hM, 508). So far as this specification of their demurrer is concerned, the defendants say to the plaintiff in substance : “Yes; we made an agreement with you. We carried on business with you under it. We have taken more than our share of the profits, and now you cannot have any redress, because the con tract between us was really one of copartnership, which you could not make without exceeding your corporate powers.” In my opinion, it needs no argument to show that to permit such a position to be successfully maintained would be to disregard the plainest principles of good faith.

S. Is the contract void as being in restraint of trade? and, therefore, contrary to public policy ?

I assume that the demurrer is not to be upheld on this ground, if the agreement is susceptible of any view consistent with the facts set out in the complaint, which would make it valid. Although upon a trial, where all the facts could be disclosed, it might appear that the true purpose of the arrangement between the parties was to effect a combination inimical to the interests of the public, this is not to be inferred upon a demurrer, where the instrument is capable of a construction consistent with a lawful intent.

Regarding the relation between the plaintiff and the defendants as substantially that of partners, the contract is not necessarily such as the law forbids. A man who proposes to put money into a joint undertaking with strangers may lawfully bind them not to do more business than he thinks will be warranted by the capital to be employed, even if the result be to limit the production of a particular commodity. In such cases as the present, the controlling question must be the purpose of the parties. If it be their design artificially to enhance the price of a necessary commodity by keeping-the product of others out of the market, their contracts to that end are illegal (Arnot v. Pittston & Elmira Coal Co., 68 N. Y. 558). A vast number of authorities might be cited in support of this proposition, but it is commonly applied only where the unlawful purpose has been found by the trial court as a matter of fact (68 N. Y. 558, 565) or is necessarily to be inferred from the circumstances of the case.

I think the most that can be said upon the pleadings here (outside of which I can consider nothing), is that the facts pleaded point to a probability that the contract was intended to be in restraint o£ trade. Those facts, however, are also consistent with a lawful intent. “ The presumption is in favor of the legality of contracts. The law does not assume an intention to violate the law, nor will an agreement be adjudged to be illegal where it is capable of a construction which will uphold it and make it valid” (Lorillard v. Clyde, 86 N. Y. 384, 387). This is expressly held to be the rule applicable in cases of demurrer. All reasonable intendments are to be indulged in sup-of the pleading. Construing the complaint herein accordingly, it must be held good so far as the second objection is considered.

Note on t-he Legal Rules applicable to Syndicates and Pools, and their members.

These organizations are voluntary associations which, by reason of their temporary character and limited objects, are not, to the full extent, subject. to all of the rules affecting partnerships, or, where they are so subject, it is often within narrow limits fixed by the character and objects of the organizations.

3. Is the absence of an averment that the plaintiff duly performed all the conditions of the contract on its part fatal to the complaint ?

The complaint does allege that the plaintiff and defendants “ entered upon and continued to carry on” the joint business provided for in the contract between them; that the defendants have applied to their own use from the receipts and profits of said business large sums of money greatly exceeding the proportion thereof to which they were entitled (amounting in the aggregate to $80,000), and that they refuse to account.

I think these averments are sufficient to entitle the plaintiffs to maintain their action for an accounting.

There must be judgment for the plaintiff on the demurrer, with the usual leave to answer over on payment of costs.

The name syndicate ” was originally given and is still chiefly used to designate a combination of merchants or capitalists, to accomplish a venture beyond the resources and influence of any one of them. But it is sometimes used, as “ pool ” more commonly is, to designate a combination intended to bring about changes in the market price of a commodity or stock, or in rates of toll, or other common public charges. In either use of the word, it designates co-operation by uniting all interests of its members, in taking common ground as towards the public, and adjusting the results as between the members equally or according to special agreement.

Such organizations are now extremely common, not only on the large scale in which they attract public attention, but in minor forms in which they are hardly deemed of sufficient significance to receive the name of syndicate. Their transactions have not very frequently been the subject of litigation until recently ; but the profession are frequently called upon to advise on them ; and the legal principles underlying them are common to all the various forms in which such organizations appear.

The chief elements of fact usually involved in the existence and management of such an organization are :

First. A combination for the purpose of acquiring interests or managing existing interests, together, in a different way from what the members would as individuals acting independently ; the object being to accomplish some financial result which could not be accomplished by individual action, and often with the purpose to gain some advantage over others of the same class who are not in the combination.

Second. The subjection of the specific interest or business of each member, as far as agreed, to the control of the combination or of its managing member or committee.

Third. The desistence of each member from other transactions of the same kind except under such control.

Fourth. The administration, usually by a manager or managing committee, of the combined p'roperty or business, so as to take advantage of the paramount influence secured by the aggregate amount thus brought under single control.

Fifth. The advantage expected to be enjoyed by all from peculiar facilities or means of information or judgment attributed to the member or committee entrusted with control.

Sixth. The securing of an advantage to each member, either by the consequent more profitable management of each separate interest or by his right to share in the profits of all the transactions accomplished by the combination.

The characteristic difference between a syndicate and a pool appears to be that a pool is usually the combination of a part of a class,—as a part of the stockholders or bondholders of a corporation or part of a number of corporations enjoying similarfranehises,or part of the merchants in a particular trade, —with the intention to bring their transactions into “ hotchpot ” and share in a fixed proportion the aggregate income or profit, while in a syndicate the interests of the members are often separate and distinct, like those of tenants in common.

The principal questions of law which concern the subject are :

What are the express obligations of each member under the arrangement made in the particular case ?

What is the degree of good faith required in respect to acting exclusively for the common interest, and abstaining from any outside transactions for individual account ?

What special degree of good faith is required of the manager, or members entrusted with control?

What are the limits prescribed by law to the advantages which a part of the owners of shares in a corporation or in any property owned in common, or the owners of a few out of many franchises, may seek to obtain over the others by a combination to which the others are not admitted ?

What are the limits prescribed by law to the attempt to influence prices, either in the markets at large, or of a particular estate or property, or of transportation charges and the like borne by the public generally, by means of a combination to diminish competition ?

In the absence of any considerable body of adjudications made in reference to these organizations, the answers to these questions are to be sought in the general principles of the law of partnerships, voluntary associations, corporations, agency, contracts, trusts, and frauds, all of which are in turn, and in the various modes, involved.

In the interesting group of cases which are presented in the text the first one,—Cohen v. Ellis,—relates to the obligation of the manager or managing committee or bankers of a syndicate. The second,—Bagaley v. Vanderbilt,—involves to some extent the right of members among themselves, and the power of the majority where there is a dissenting member. The third case,—Standard Oil Co. v. Scofield,—turns on the question of the power of corporations to enter into combinations, and the validity of a contract for such purposes.

The following cases will afford the reader a convenient clue to research into the manner in which the American courts have applied familiar legal principles to the transactions of these organizations and their members.

I. Judicial Construction op Joint Undertakings.

A. Where there has been held to he a partnership.

Five persons formed what was called a syndicate for the purchase of a coal mine with a view of forming a company, agreeing that the profits should be equally divided. He Id, that this formed a partnership for this limited purpose. Sir George Jbssel said: “ It is called a syndicate but it is nothing but a partnership.” Anderson’s Case, L. R. 7 Chan. Div. 75, 96.

Several parties purchased land on speculation, each party contributing to the expense. The title was taken for convenience sake in the name of trustees. Held, to be a partnership. Morse v. Richmond, 97 111. 303.

Where there was an agreement that land should be bought and held in trust for all parties, the absence of a stipulation that the parties should share equally in losses, was held not to prevent its being a partnership. Richards v. Grinnell, 63 Iowa, 44; S. C., 18 Northw. Rep. 668.

Complaint alleged that complainant was to give his services and defendant to advance money for the purchase of land ; that complainant and defendant were to have equal interest in lands so purchased and divide profits. Held, on demurrer, that the allegations made out a case of partnership and not of mere agency. Hunt v. Erikson (Mich. 1885), 23 Northw. Rep. 832.

Three parties agreed to manage certain property “ as a company.” Held, that this formed a present partnership, although the agreement provided' for a postponement of division of the profits. Bybee v. Hawkett, 12 Fed. Rep. 649.

Where the evidence showed that one party was to have half of the profits of a venture to be conducted chiefly by the defendant, and testimony as to the exact nature was conflicting, it was held that whether the agreement formed a contract of partnership or not, there existed between the parties a fiduciary relation entitling the plaintiff to an accounting. Sutherland v. Carter, 52 Mich. 151, 471; S. C., 18 Northw. Rep. 223, 875.

In Cooley v. Broad, 29 La. Ann. 345; S. C., 29 Am. R. 332, partnership by community of profits was held to be established by a contract by which the owners of vessels united in one association.

In Marsh v. Russell, 66 N. Y. 288; rev’g 2 Lans. 340, a combination of recruiting agents to pool their profits and losses in their respective businesses of furnishing town quotas, upon an agreement requiring each to keep up the price,-—was held a partnership.

B. Where it has been held that a partnership did not exist.

A- scheme contemplated the raising of subscriptions to form a fund for the purpose of purchasing municipal bonds. The bonds were to be purchased by a committee named in the deed. The subscribers to the fund received certificates entitling the holders to part of the profits. It was held, that the subscribers were not partners. Johnson v. Lewis, 2 McCrary, 479.

Compare Abb. Tr. Ev. 210, para. 16.

A contract was made between A., the owner of a marble quarry, and B., that A. should quarry the marble and deliver it to B. and pay half of express charges ; that B. should build the mill, manufacture the marble, sell it; and that the profits should be divided between the two. Held, not to constitute a partnership. Flint v. Eureka Marble Co., 53 Vt. 669.

Several persons signed articles of association with the object of forming a company. The scheme of incorporation failed, but the persons named in the articles for president and treasurer of the company which was to be formed, carried on business with the consent of the subscribers. Held, that they were not partners. Ward v. Brigham, 127 Mass. 24.

See also Stafford Bk. v. Palmer, 47 Conn. 443.

in Adriatic Fire Ins. Co. v. Treadwell, 108 U. S. 361, a combinafdon of corporations to defend suits, which should be brought against them severally, the suits to be managed by a committee, and the companies to pay pro rata for counsel,—was held, in effect, not a partnership.

See, also, cases cited in brief of counsel in the case in the text, ante, p. 367.

II. Oases relating to Doties of Pasties to Joint Undebtakings BETWEEN THEMSELVES.

A. Partners.

After a firm was dissolved, it was agreed to carry on the liquidation of the business together, in the premises occupied by the firm. Thereupon one of the members and a third party procured a renewal of the lease of the premises to them without the knowledge of the other members. Held, that they held such leases as trustees for the firm. Spiess v. Rosswog, 48 Super. Ct. (J. & S.) 135; applying the case of Mitchell v. Reed, 61 N. Y. 123 ; S. C., 19 Am. R. 252 ; reversing 61 Barb. 310. The case of Mitchell v. Reed was approved in 2 Pom. Eq. Jur. 624, n. Followed in Green v. Green, 2 Redf. Surr. 408. Qualified in Abb. Ann. Dig. N. Y. 1883, p. 361, opin. of Cooley, J. See a further decision in Mitchell v. Reed in 19 Hun, 418 ; affirmed in 84 N. Y. 556.

See also cases collected in 34 Moak Eng. 299.

Where a partnership business was to be carried on under the articles at a given spot, “or in such other place or places as the partners may agree upon,” and the lease of the premises where one branch of the business was carried on expired, it was held that one partner had no power to renew the lease without the consent of the other partner. Clements v. Norris, 38 L. T. R. N. S. 591.

After the death of one partner, one of the surviving partners falsely represented to his copartners that he had bought the interest of his deceased, and thereby prevented their negotiating for the purchase. He subsequently did purchase such interest. Held, that he held it in trust for all. Warren v. Schainwald, 62 Cal. 56.

Some of the partners purchased the interest of a copartner, through a third person, concealing that the purchase was made for their account. Held, that this did not amount to fraud as a matter of law. Geddes’s Appeal, 80 Pa. St. 442.

Where the articles of copartnership provided that none of the partners should engage in speculation or in any other business on his own account, and one of the partners, with the knowledge and without the objection of the others, devoted part of his time and material [belonging to the firm to the perfecting of certain patents,—Held, that these facts did not give the member of the firm any interest in these patents. Belcher v. Whittemore, 134 Mass. 330.

See, as to right of one partner to give to another an interest in his share, Cassels v. Stewart, L. R. 6 App. Cases, 64.

By articles of partnership, defendant, the managing partner, covenanted that “he would not alone, or with any other person, either directly or indirectly, engage in any trade or business except on account and for the benefit of a partnership.” The business of the firm .was that of salt brokers, selling salt on commission for manufacturers. After the expiration of the partnership, the plaintiff, the other partner discovered that the defendant, after the formation of the patnership, had entered into a secret partnership with one of their customers, and had carried it on simultaneously with the partnership with the plaintiff. Held, that the plaintiff had no right to share in the profits of defendant in the secret partnership, but the only remedy was by injunction or dissolution, or, after the termination of the partnership, by action for damages. Dean v. M’Dowell, 26 Weekly Rep. 486.

Plaintiff had been a sort of silent partner in working a construction contract. He brought action for an accounting, and recovered $5,000 for his share of the profits on work done after his partner had canceled the contract made with him, or pretended to do so on account of his absence, and had taken in another .partner. The court applied the principle that one partner cannot by his own mere will dissolve a partnership formed for a definite purpose or period, and thereupon appropriate to himself the assets or turn over the shave of his partner to another with whom he proposes to form a new partnership, and that if he does so, the excluded partner is nevertheless entitled to his share of the profits realized. Pearce v. Kuykendall (U. S. Supm. Ct. Oct. 1884).

See, as to mining partnerships, Bissell v. Foss, 114 U. S. 252. It is held there that a member of a mining partnership has the right, without consulting his associates, to sell his interest in the partnership to a stranger. It is further held that there is no relation of trust and confidence between such partners as makes the purchase of the Interest of an associate by another inure to the benefit of all. See Kahn v. Smelting Co., 102 U. S. 641 ; First Nat. Bank v. Bissell, 2 McCrary, 73.

B. Stockholders.

A company owned an iron mine. The defendants organized a corporation to work the mine, of which they held all the stock; they purchased a majority of the stock of the company which owned the mine, and assumed control of the business. At their instance a stockholders’ meeting was held, which removed the directors, appointed defendants in their stead, and authorized the lease of the property at very disadvantageous terms to the corporation organized by defendants. Held, a fraud on the minority of the mining company, and that they had the right to have the lease set aside. Meeker v. Winthrop Iron Co., 17 Fed. Rep. 48 (with, note by Francis Wharton). See Goodin v. Cinc. Canal Co., 18 Ohio St. 169, 182.

Where, in dissolving a corporation, a majority of stockholders favor unduly the interest of another corporation, in which they also form a majority, at the expense of the interests of the minority,—Held, that the court would interfere, though the acts were within the charter powers of the corporation. Ervin v. Oregon Ry. & Nav. Co., 20 Fed. Rep. 577.

See note to Cook v. Sherman, 20 Fed. Rep. 167; Wright v. Orville Mine Co., 40 Cal. 27; Menier v. Hooper Tel. Works, L. R. 9 Ch. App. 350, 353; Barr v. N. Y., L. E. & W. R. R. Co., 96 N. Y. 444.

All the stock of a corporation had been issued to certain defendants who were elected its officers. They afterwards entered into some transactions about the stock between themselves. Held, that as to these they dealt at arm’s length, and though, as officers and stockholders, they occupied trust relations to the corporation, that fact did not create trust relations inter sese. Gillett v. Bowen, 23 Fed. Rep. 625.

See, also, Reichwald v. Commercial Hotel Co., 106 Ill. 439.

G. Bondholders.

Where a statute provides that a reconstruction of a company can be made at the instance of a majority of the debenture-holders, the court has the right to inquire whether the persons voting in favor of the scheme were acting bona fide in the interest of all the debenture-holders ; and it was held that the vote of persons who would be benefited to a much greater extent by the proposed reconstruction in other capacities than they would be injured by it as holders of bonds, could not be taken into consideration. In re Wedgwood Coal Co., L. R. 6 Ch. Div. 627.

A statute of a foreign State, by which the majority of bondholders of a corporation created under the laws of that State, were given the right to bind the minority, was held not to be inequitable, and was enforced, although it was passed after the bonds had been issued. It was intimated that the same provisions might be made in a statute Of the United States, under the provisions of the constitution confering power to establish uniform laws on the subject of bankruptcy. Canada South. R. R. Co. v. Gebhard, 109 U. S. 527.

It was held in Gilfillan v. Union Canal Co., 109 U. S. 401; that though bondholders are not necessarily bound like stockholders, in the absence of fraud or undue influence, by the will of the majority, they occupy to some extent an analogous position towards each other. A law passed by a State, that unless the holders of bonds should signify their dissent from a proposed plan of reorganization, they would be held to assent,—Held, proper and not an impairment of the obligation of the contract.

In Pennock v. Coe, 23 How. (U. S.) 117, the defendants, holders of some of the mortgage bonds of a corporation, got a judgment on the bonds and were about levying execution on the property covered by the mortgage. In an action to enjoin them from levying execution, it was held that all the bondholders had a common interest in the security, and were equally entitled to benefit from it, and that to permit one of them to proceed at law would give him an inequitable preference over his associates.

III. Cases Relating to duty on Persons Organizing and Managing such Associations.

A syndicate was formed between five persons to purchase a certain mine. One of the five, who was entrusted with the negotiations, and of whose knowledge and information the other four availed themselves, represented to them that it was impossible to obtain better terms than the price asked by the vendor. At the time he made those statements, he had made a secret contract with the vendor guaranteeing to him a large bonus, if the sale should take place. The sale was made to the syndicate while the other parties were in ignorance about this agreement. Held,, that, as between the members of the syndicate, the sale could not be sustained. Beck v. Kantorowicz, 3 K. & J. 230.

Where a person had induced another, by false representations that he had no interest in the matter, to authorize him to purchase certain property at a much higher price than it could be bought for, and part of the excess was paid to the agent,—Held, that the remedy of the party deceived against the agent was an action at law for damages not an action in equity to rescind the contract. McMillan v. Arthur, 98 N. Y. 167.

A., B. and 0. agreed to put up a certain amount to purchase a particular piece of real estate, and left the negotiations to A. A. agreed secretly with the seller that the latter would convey part of the property to him, if he succeeded in bringing about the sale. Thereupon A. told his associates that part of the lot had been sold, but that the remainder could be bought for the sum they had put together. The sale was made, and part of the lot conveyed to D. at request of A. On discovery of the fraud, it was held that A.’s associates were entitled to a decree that, D. held that part as trustee for them also. Hodge v. Twitchell (Minn. 1885), 23 Northw. Rep. 547.

In an action by a limited liability company against certain persons who were promoters thereof, to set aside a contract for the sale to the company of certain property, in which the promoters were the real vendors, it was held, sustaining'the company’s right to the relief asked, that the promoters stood in a fiduciary position to the company, analogous to that of a trustee, so far as to preclude them from deriving any profit from the sale in question. New Sombrero Phosphate Co. v. Erlanger, L. R. 5 Ch. Div. 73.

In Wilson v. Church, 41 L. T. R. N. S. 50, it was held that bondholders who had lent their money for a common object, which turned out to be, in a business and commercial sense, impracticable, had a right to have their money returned, as against any number of other bondholders who insisted that the money, which had not yet been applied, should be used as intended ; that the majority of bondholders could not bind the minority, but the minority had no right to insist on having the common fund thrown away.

Several persons signed and issued a subscription agreement, to the effect that they, with those who should unite in the agreement, designed to become joint purchasers of certain property at a certain price. One of these persons undertook to receive the sums subscribed as a trustee for the purpose of applying them to the payment of the purchase money. Held, that these persons were precluded from making a profit out of their associates by being themselves the vendors of the property, which they had acquired for a much smaller sum than the one mentioned in the agreement. Getty v. Devlin, 54 N. Y. 403 ; S. C., 70 Id. 504. This case is explained in Brewster v. Hatch, 13 Abb. N. C. 460, below cited, and in Moak's Underhill on Torts, 1 Am. Ed. 535.

Where a person is organizing a mining company and induces other persons to sign a paper by which they agree to take some of his stock, there is no such trust relation between him and the subscribers as compels him to disclose all the arrangements between him and the company. The agreement on its face shows that the subscribers do not get stock, issued directly to them by the company, but buy the stock of the person who induces them to subscribe; and the only duty of that person to them, therefore, was not to make false representations. Brewster v. Hatch, 13 Abb. N. C. 460. See same case, on demurrer, 10 Abb. N. C. 400.

Where a person who was owner of an undivided half of land and was charged with the sale, introduces evidence tending to prove that before obtaining his power of attorney he told his co-owners that he would make special terms for his own share, and that they consented to this, it is error for the court to charge in an action brought to recover a share in the extra profit, that the plaintiffs are entitled to recover, unless it is shown that all the facts relating to the sale, even after the power of attorney has been obtained, have been communicated to them. The evidence tended to show that there was an antecedent consent fairly obtained, and the charge of the court was to take this point from the jury. Ranney v. Barlow, 112 U. S. 207.

See Emma Silver Min. Co. v. Grant, L. R. 11 Ch. Div. 938, to the effect that the liability of a trustee de son tort to refund a profit is incurred at the moment the profit is made, and is not affected by the fact that, by some subsequent arrangement, the purchase price is reduced so that the cestui qui trust does not incur any damage.

As to the liabilities of third persons who act with knowledge that the manager is unfaithful to his trust, see Bear v. American Rapid Tel. Co., 60 How. Pr. 274.

As to the rights of manager, if a contract has been made with him that he shall have exclusive management, see Grant v. Parker, 115 U. S. 51. In that case it was held that where a person had joined a syndicate to buy the majority of stock in a mining company, on condition that he should control the management of the mine, and had thereupon been elected president, it was no violation of the agreement if the directors passed resolutions to the effect that checks should be countersigned by the secretary, and that the vice-president should have the power to sign checks in the absence of the president.

Bor recent cases as to averments necessary to excuse the fact that a party has not understood the meaning of an instrument lie signed, see Hazard v. Griswold, 21 Fed. Rep. 178 ; McKinney v. Herrick, (Iowa, 1885), 23 Northw. Rep. 767 ; Linington v. Strong, 111 Ill. ; Abstr. S. C., 32 Alb. L. J. 157 ; Davis v. Snider, 70 Ala. 315. See also Redgrave v. Hurd, L. R. 20 Ch. Div. 1. In the latter case, an attorney had advertised that his practice was worth £300 a year. An intending purchaser was shown papers showing receipts to the amount of £200. On asking for the remaining £100, he was shown some memoranda, which in reality, only amounted to a few pounds. Without reading them, he closed the sale. Held, in an action to rescind, that he did not give up his original reliance on the false statements and that his mere negligence to inquire further was not sufficient to debar him from equitable relief.

The distinction between an agency of bankers acting for a munic- . ipal corporation to place a loan by its issue of bonds, and a purchase by bankers or a syndicate from a municipal corporation, was discussed in Whelen’s Appeal (Penn. Supm. Ct., October, 1885, 2 Eastern Rep. 1), the court holding that where the city had power to issue bonds, provided they be sold at not less than par, but with power to allow reasonable compensation for sale on negotiation—a sale at par by bankers with the reservation of a commission to the-latter to be deducted from the price was ultra vires.

IV. Agreements for Joint Action held Void.

A. As being opposed to the Policy of a Statute.

A statute authorized a town to receive sealed proposals for the collection of the taxes of that town, and awarded the collection thereof to the persons offering terms most favorable. Agreement-was made between two parties, who sent in proposals, that, if either of them obtained the award of the collection of the taxes, both should share equally in the profits and be liable to an equal share of the losses. Held, that such an agreement was void, even though it did not appear that such agreement did really produce any result detrimental to the public interest. Atcheson v. Mallon, 43 N. Y. 147.

A statute provided that a town should give its printing to the lowest bidder ; an agreement was made between several printers that they would make a joint bid and that all would participate in the profits. Held, that such a contract was void, if the intention, effect or necessary tendency was to diminish competition,’and that the burden of proof to show that this was not the fact was on the persons wishing to enforce the contract : (citing Breslin v. Brown, 24 Ohio St. 565). Woodruff v. Berry, 40 Ark. 251. Compare, however,, Marsh v. Russell, 66 N. Y. 288; rev’g 2 Lans. 340.

B. Combination of Common Carriers.

The owners of canal-boats made a pooling arrangement, and agreed! to divide all the earnings made, in a certain ratio. Held, that such an agreement was an act “injurious to trade,” and was illegal within the provisions of the statutes on that subject. Hooker v. Vandewater, 4 Den. 349.

Compare Hatch v. Am. Union Tel. Co., 9 Abb. N. C. 223, 233; see-also Stanton v. Allen, 5 Den. 434, with which compare also note in 30 Am. R. 106; art. in 16 West. Jur. 329.

A contract made between two connecting railroad companies to-pool profits, and not to do any business with companies which might be organized within the territories over which the business of the parties to the contract extended, held unlawful. Denver & N. O. R. R. R. Co. v. Atchinson, Top. & Sta. Fe R. R., 15 Fed. Rep. 650.

It was further field in that case, that another railroad subsequently organized, might claim the same facilities for traffic, and the same rights which had been arranged between the parties to the agreement. The case was reversed on that point in 110 U. S. 667. The decision of the supreme court does not seem to be adverse to that part of the decision of the circuit court which was quoted above. See, as to pooling arrangements, note in 15 Fed. Rep. 667.

G. To liaise the Price of Merchantable Commodities.

A voluntary association of salt manufacturers, providing that all the salt manufactured should become the property of the company, and should be sold at prices to be fixed by the company, and prohibiting the members of the association from selling except at retail, —Held, to be invalid. Salt Company v. Guthrie, 35 Ohio St. 666.

The grain dealers of a town entered into a secret arrangement to poo] profits, fixing the price at which grain should be sold and stored. The agreement provided that the business should be conducted outwardly as if there were no partnership. Held, a fraudulent combination in restraint of trade, and void. Craft v. McConoughy, 79 Ill. 346; S. C., 22 Am. R. 171.

In Hoffman v. Brooks (Cinn. Super. Ct., 11 Weekly L. Bull. 258), a pooling contract, made by all the tobacco warehousemen in Cincinnati, to provide against competition, by forbidding certain methods of doing business, and fixing a complete schedule of prices, was held void as against public policy. The contract provided for the collection of a guarantee fund from a pool formed out of part of the receipts, and each party was made liable to forfeit his interest, as well as to pay a heavy fine, in case of his violation of any condition of the contract. The action was brought on a certificate of indebtedness given to the trustees of the association, as representing part of the receipts to be put into the pool; and the plaintiffs sought also for an account of the business done by the defendants subsequent to the time when they refused to continue to abide by the contract. The court held that, as the contract embraced all the persons engaged in the business in the city, was unlimited in duration, and had the effect to remove prices beyond the operation of every natural cause of fluctuation, it must be regarded as against public policy; and as the invalid provisions could not be separated from some which were otherwise valid, no recovery could be had.

An agreement between two coal companies by which one agrees to buy a certain quantity of the other, in consideration of that company. not selling to any one else, is void. Arot v. Pittstown and Elmira Coal Company, 68 N. Y. 558; S. C., 23 Am. R. 190; rev’g 2 Hun, 591; S. C., 5 Supm. Ct. (T. & C.) 143. Followed in Raymond v. Leavitt, 46 Mich. 447; S. C., 41 Am. R. 170 ; McBirney & Johnston White Lead Co. v. Consol. Lead Co., 9 Cin. L. Bul. 310. See also Lewin v. Johnson, 32 Hun, 408. See Morris’ Run Coal Co. v. Barclay Coal Co., 68 Penn. St. 173 ; S. C., 8 Am. R. 159.

An agreement to advance the selling price of stocks by means of fictitious dealings designed to produce a false impression on the minds of observers concerning their real value, is void. Livermore v. Bushnell, 5 Hun, 285.

An agreement was made on the following terms: “For value received from and paid to each other, we, the undersigned stockholders of the Genesee Valley Canal Railroad Company, mutually agree with the other and to all, that we will not sell, assign, transfer, set over, pledge or give power of attorney to vote, or agree to sell, assign, transfer, set over, pledge or give power of attorney to vote in any way, shape or manner the stock which we respectively or individually own or possess in said company, without the concurrent consent of all the signers to this instrument. . . This agreement is made for mutual protection, and to prevent the sale of the company’s franchise by a majority of the members of the present board of directors who are and who represent a minority of the shares of the capital stock of this company.” Held, that this agreement was void, as being, among other reasons, against public policy and in restraint of trade. Fisher v. Bush, 35 Hun, 641.

See articles on the subject Am. L. Reg. April and May, 1885 ; 19 Cent. L. J. 62, 81.

V. Contracts for Joint Action which have been Sustained.

An agreement among the stevedoies of a certain port to divide the stevedoring business, sustained. Collins v. Locke, 4 L. R. App. Cas. 674.

Pooling agreements between railroads, sustained, in Hare v. London & Northw. Rw. Co., 30 L. J. Chan. Div. 817 ; Shrewsbury R. R. Co. v. The Same, 20 L. J. Chan. Div. 90, 102.

An agreement was made between parties engaged in the business of furnishing recruits, to divide profits and not to furnish recruits under $100. Held, valid, and the case of Hooker v. Vandewater, 4 Denio, 349, and similar cases, distinguished, on the ground that in the case at bar the primary object was not to raise prices. Marsh v. Russell, 66 N. Y. 288; rev’g 2 Lans. 340; reviewed in Story Partn. 7 ed. § 6, n.

Several parties owning stock of a corporation entered into an agreement, with the purpose of affecting a change in the administration of the company's affairs, to the effect that the stock of the parties should be combined and not sold until after election. Held, that the agreement was valid. Havemeyer v. Havemeyer, 43 Super. Ct. (J. & S.) 506; affirmed, 86 N. Y. 618.

It was held, incidentally in Wabash, St. L. & P. R’y. Co, v. Cent’l Trust Co., 22 Fed. Rep. 138, that the holders of bonds of a corporation have such common interests that combinations for the common protection should be recognized and enforced by the court.

In Harrison v. Lockhart, 25 Ind. 112, the rule was laid down, that an agreement which would have been void as tending to raise the price of commodities according to general rules, would be enforced if the trade which it restrained was contrary to public policy, and that therefore such an agreement between dealers in spirituous liquors should be sustained.

VI. Distribution of Proceeds accumulated under Illegal Contract.

An agreement was made to which directors of a corporation were parties to purchase land and sell it to the railroad in order to locate its tracks. In an action for an accounting, brought after the sale was made, against the p.erson who had received the money, it was held, that a person who had merely contributed services was not entitled to such an accounting, as to allow this, would be to enforce an illegal contract; but otherwise as to one who had actually contributed money as his right of action was not based on the illegal contract, but existed independently of it. Cook v. Sherman, 20 Fed. Rep. 167.

See also Western Un. Tel. Co. v. Burln. & Sth. Westn. R. R. Co., 11 Fed. Rep. 1, 6 ; Wann v. Kelly, 5 Fed. Rep. 584 ; Norton v. Blinn, 39 Ohio St. 145 ; Woodworth v. Bennett, 43 N. Y. 273.

A pooling contract between two railroads had been fully carried out, and its existence was known to the parties who, on foreclosure of a mortgage made by one of the railroads, had asked for the appointment of a receiver. Held, that the receiver would be ordered to pay over the money accumulated under the contract to the other railroad in pursuance of the provisions of the agreement, without reference to its original validity. Cent. Trust Co. v. Ohio R. R. Co., 23 Fed. Rep. 806.  