Opinion
No. 33473
Decided January 13, 1954.
Actions — Nature of, determined from pleadings — Petition — Alleging agency — Principal defrauded by false representations of agent — Agent secretly purchased and sold principal's property — Profits realized by agent unknown — Accounting and judgment requested — Allegations denied by answer — Paramount issue equitable — Appeal on law and fact.
1. Whether an action is legal and, therefore, appealable on questions of law only or equitable and, therefore, appealable on questions of law and fact is determined from the pleadings and the issues made thereby.
2. Where a petition alleges the designation of an agent in whom trust and confidence was reposed, that such agent made false representations to and deceived his principal, that such agent defrauded his principal by becoming a secret purchaser of the principal's property with the sale of which he was entrusted, that such agent then secretly disposed of the property so purchased and from such sale realized large profits, the amount of which is unknown to plaintiff, that an accounting is required with respect to all such transactions of such agent, and that the principal desires such accounting to be had and a judgment against such agent for all such secret and unlawful profits, and where all such allegations are denied by answer, the primary or paramount issues raised are equitable and any money judgment which may result from such accounting is merely incidental to the equitable relief sought.
APPEAL from the Court of Appeals for Lake county.
This cause originated in the Court of Common Pleas of Lake County. It was tried on the amended petition (hereinafter referred to as petition) of the plaintiffs, the answer of the defendants to the petition, and plaintiff's reply.
The petition alleges that the plaintiffs individually were shareholders in Cleveland Frog Crossing Company, an Ohio corporation; that the capitalization of said corporation consisted of 5,000 shares, all of which were issued and outstanding; and that the plaintiffs either individually or in representative capacity were the owners of 4,450 shares of the said stock.
The petition states that the defendant George W. Balkwill was the owner of 550 shares and was, at all times since its incorporation, a director of the company, and that the defendant Gen Corporation is the former Cleveland Frog Crossing Company, the defendant Balkwill having caused the name thereof to be changed to Gen Corporation.
The petition alleges that "in the latter part of 1949 defendant George W. Balkwill suggested to all the shareholders that it would be for their best interests to all join together in jointly disposing of their holdings in said Cleveland Frog Crossing Co. and said defendant, on or about that time and subsequently, proposed that he, as agent for all of the shareholders and on their behalf, would attempt to obtain a purchaser for the business of said company"' that with their consent defendant Balkwill endeavored to promote the sale of the business for the benefit of all the shareholders and urged the plaintiffs to dispose of their stock jointly, stating "it to be his belief that a fair offer could be best obtained" by sale of the interests jointly; and that defendant Balkwill at meetings with the shareholders thereafter held "outlined suggested plans of sale and offers he had obtained on behalf of all the shareholders, including said defendant, from certain charitable organizations located in or about Chicago, Illinois."
The petition alleges that plaintiffs "confided unto defendant George W. Balkwill the procuring of a purchaser for the business of said Cleveland Frog Crossing Co. and relied upon his integrity to do nothing to impair the interests confided to him in securing such a purchaser upon a joint and equal basis."
The petition alleges that on or about July 18, 1950, a written proposal to purchase all the shares of the company at $232.14 per share was submitted to all the shareholders by the defendant Balkwill and an agent named Brooks who was allegedly acting on behalf of a charitable organization; that a meeting of all the shareholders was thereafter held to consider the offer, where defendant Balkwill urged that the offer was a fair one and should be accepted, and offered to accept deferred payments for his, the defendant Balkwill's, shares, if necessary, in order to complete the sale; that "then and there defendant George W. Balkwill assured all the shareholders that his sole interest was to dispose of his shares in said corporation on the same basis as the other shareholders, and that his interest and the interests of all shareholders were identical and would be identical with respect to such sale"; and that as a result of such representations and assurances the plaintiffs, acting in concert, executed a formal escrow agreement to sell all the shares of the corporation, depositing all shares in escrow, including those owned by the defendant Balkwill.
The petition then alleges that the plaintiff shareholders did receive $232.14 for each of their 4,450 shares from the escrow agent.
The petition alleges that the defendant Balkwill instead of selling his shares as part of the joint enterprise had, prior to the execution of the escrow agreement, entered into a fraudulent understanding with Pettibone Mulliken Corporation of Chicago, whereby he retained his 550 shares and purchased the 4,450 shares owned by plaintiffs, saving a secret and undisclosed profit for himself. Details of the alleged transactions carried on by Balkwill are alleged at length. Included are allegations that Balkwill caused the Cleveland Frog Crossing Company to open a bank account in Chicago to which he caused the funds of the company to be transferred from the Cleveland bank where the accounts had been maintained, the amounts so transferred being unknown to the plaintiffs but alleged to be in excess of $225,000; that the defendant Balkwill caused the Cleveland Frog Crossing Company to sell to Pettibone Mulliken Corporation its entire inventory for approximately $450,000 in cash and to sell to that corporation all the company's machinery and fixtures for $400,000, for which latter amount the Cleveland Frog Crossing Company holds an obligation of Pettibone Mulliken Corporation; that Balkwill further caused the company to lease its land and buildings to Pettibone Mulliken Corporation for a period of 20 years at a total rental of $1,100,000 payable in annual installments of $55,000; that Balkwill further caused the company to mortgage its land and buildings to an insurance company in the amount of $400,000; that "as a result of defendant's machinations he has received sums of money in an amount not ascertainable by the plaintiffs, but which they believe, and therefore aver, to be more than sufficient to pay to himself the sum of $232.14 per share for his 550 shares as provided for in said escrow agreement; and that in addition said defendant, through his sole ownership and control of said corporation, holds title to said land and buildings and also said $400,000 obligation of said Pettibone Mulliken Corporation."
Plaintiffs aver that said Balkwill has caused the name of the company to be changed to Gen Corporation and has in some manner caused 4,450 shares of said corporate stock heretofore owned by the plaintiffs to be retired with the result that there are now issued and outstanding only 550 shares of the common capital stock of Gen Corporation and all that stock is owned and held by Balkwill.
The petition then alleges that plaintiffs, "because of their long association with and/or their relationship to defendant George W. Balkwill, reposed faith and trust in him; that said defendant, in utter disregard of the trust confided in him, exercised every effort to keep from plaintiffs the fact that he was dealing with said Pettibone Mulliken Corporation and was making a secret profit; but that, on the contrary, he always advised plaintiffs that his interest coincided with their interest and that, in the sale of the shares of said Cleveland Frog Crossing Co., all the plaintiffs and defendant George W. Balkwill were on an equal basis."
The petition then alleges that an accounting will be necessary to determine the exact nature and extent of the financial transactions among Balkwill, Cleveland Frog Crossing Company, Gen Corporation and Pettibone Mulliken Corporation to determine the exact amount of the secret and fraudulent profit obtained by defendant Balkwill through his alleged fraudulent scheme.
The prayer of the petition is as follows:
"Wherefore, plaintiffs pray: (1) that an accounting be taken of all improper, unlawful and secret profits made by defendant George W. Balkwill; that said defendant be required to account to plaintiffs for their lawful share of such profits; that the amount thereof be determined and that judgment be entered for the amount found to be due the plaintiffs; (2) that an accounting be taken of the assets of defendant Gen Corporation which represent secret profits procured by defendant George W. Balkwill; that a trust be impressed upon such assets in favor of the plaintiffs to the amount that may be found to be due them; (3) that pending final hearing hereof defendant George W. Balkwill and defendant Gen Corporation be enjoined from disposing of or otherwise alienating the assets of Gen Corporation; that they be enjoined from transferring any of its shares of stock or from issuing certificates for further shares of stock, and from changing in any way its capital structure; and (4) that the plaintiffs have such other and further relief in the premises as the court may deem meet and just."
The answer of the defendants, after admitting that the plaintiffs owned the stocks as claimed, and that the written proposal to purchase all shares of stock in the Cleveland Frog Crossing Company at $232.14 per share was submitted, alleges "that said offer was presented by one William V. Brooks acting independently of defendant George W. Balkwill."
Defendants allege further "that said written proposal also gave to the purchaser, William V. Brooks the right, at his election, to purchase only 4,450 shares of said corporation representing the shares of all of the shareholders other than defendant George W. Balkwill."
Defendants deny that any other representations, assurance or advice of any kind or nature was made in the meeting of July 18, 1950, or at any other time, concerning or relating to the sale of said stock. They then set forth the terms of the escrow agreement, as executed, and allege that each plaintiff shareholder fixed the price and terms of sale of his shares and independently entered into and signed the escrow agreement of July 18, 1953.
Defendants allege that plaintiffs were officers of said corporation or were particularly represented by an officer thereof other than the defendant Balkwill; that they were at all times fully acquainted with all the factors pertinent to the valuation of their shares in said company; and that there was no concealment of any material fact by the defendant Balkwill, which affected the value of the shares or related to the transaction of sale.
Defendants deny "that defendants George W. Balkwill or Gen Corporation ever acted, was ever authorized to act, ever offered to act, or ever presumed to act as the agent for the plaintiffs or any of them, or any other shareholder of said Cleveland Frog Crossing Co. in the sale of their said shares," and that "plaintiffs and the other shareholders of said corporation never jointly or severally conferred upon the defendants George W. Balkwill or Gen Corporation any power or authority whatsoever to represent them or to enter into any transaction whatsoever in their behalf affecting or relating to the sale of their said shares."
The second defense of the answer is misjoinder of parties and the third defense is estoppel of the plaintiffs by reason of their knowledge of the facts.
The answer was put in issue by a reply specifically denying the new matter contained in the answer.
The case was tried to the court without a jury, the record not disclosing, however, an express waiver thereof. The court found for the defendants and made a finding of fact in which it specifically found for the defendants on all controlling allegations in plaintiffs' petition.
An appeal on questions of law and fact was prosecuted to the Court of Appeals. Defendants filed therein a motion to dismiss the appeal on questions of law and fact, which motion was sustained, the court retaining the appeal as on questions of law.
The cause is before this court on the allowance of a motion to certify the record of the Court of Appeals.
Messrs. Spieth, Spring Bell, Messrs. Blakely Blakely and Mr. John H. Ritter, for appellants.
Messrs. Baker, Hostetler Patterson and Messrs. Baker Baker, for appellees.
The sole question presented in this appeal is whether the judgment of the Court of Common Pleas was appealable to the Court of Appeals on questions of law and fact. Appeal to this court was prosecuted immediately upon the dismissal by the Court of Appeals of the appeal as on questions of law and fact. Consequently, the Court of Appeals did not consider or pass upon either the merits of the controversy or any claimed errors of law.
The plaintiffs urge that the primary or paramount relief sought is equitable and that, therefore, the Court of Appeals should have entertained the appeal on questions of law and fact. The defendants urge that the primary relief sought is legal; that whatever equitable relief is sought is incidental or ancillary to the primary legal relief; and that the cause, therefore, is one at law and appealable to the Court of Appeals only on questions of law.
It may be states at the outset that the nature of the action whether legal or equitable is to be determined from the pleadings and from the issues made thereby, and that such determination is not to be influenced by the evidence introduced in the trial in the Common Pleas Court. Taylor v. Brown, 92 Ohio St. 287, 110 N.E. 739; Hummer v. Parsons, 111 Ohio St. 595, 146 N.E. 62; Wall v. Dayton Federation Co., 121 Ohio St. 334, 168 N.E. 847; J.P. Loomis Coal Supply Co. v. Garchev, 123 Ohio St. 316, 175 N.E. 456.
The jurisdiction of the Courts of Appeals as established by the 1912 amendment of Section 6, Article IV of the Ohio Constitution, is appellate with the exception that they are specifically given jurisdiction in "the trial of chancery cases." Unless and until the appellate jurisdiction of the Court of Appeals is changed by legislative action it remains as it was at the time of the amendment to the Constitution which became effective January 1, 1945. Youngstown Municipal Ry. Co. v. City of Youngstown, 147 Ohio St. 221, 70 N.E.2d 649.
In the trial of a chancery case in the Court of Appeals on an appeal on questions of law and fact, the case is heard de novo on the pleadings filed in the Court of Common Pleas or on new or amended pleadings. See Kiriakis v. Fountas, 109 Ohio St. 553, 143 N.E. 129.
The argument that in this cause the Court of Appeals is required to consider the facts as a prerequisite to and as a feature of its determination of the ultimate question whether the cause is in chancery is inconsistent with the requirement that the right to a trial de novo in the Court of Appeals is determined from the issues made in the pleadings.
In determining the meaning of the words, "chancery cases," as those words are used in Section 6 of Article IV of the Constitution as amended in 1912, the courts look to and are guided by the well established rules for distinguishing cases in chancery from those in law as those distinctions existed prior to the adoption of the 1912 Amendment of the Constitution.
In the case of In re Estate of Stafford, 146 Ohio St. 253, 65 N.E.2d 701, this court said in the first paragraph of the syllabus:
"A chancery case is one in which, according to the usages and practices in courts of chancery prior to and at the time of the adoption of the Code of Civil Procedure, remedies were awarded in accordance with the principles of equity and not in accordance with rules of law. (Definition announced by Chief Justice Nichols in Wagner v. Armstrong, 93 Ohio St. 443, 456, approved and followed.)"
Also in this connection we refer to paragraphs one and two of the syllabus in Ireland v. Cheney, 129 Ohio St. 527, 196 N.E. 267, which read:
"1. Since the terms `equity' and `chancery' are synonymous and interchangeable in meaning, appealable cases under Section 6, Article IV of the Constitution of Ohio, providing that the Courts of Appeals shall have `appellate jurisdiction in the trial of chancery cases,' are those which are equitable in their nature and recognized as chancery cases prior to the adoption of the Code of Civil Procedure.
"2. Where the principal, primary and paramount relief sought, as shown by the pleadings, is equitable, the cause is one in chancery notwithstanding the fact that as incidental thereto the court is compelled to find what amount, if any, is due and owing to the person seeking the relief."
In that case the purpose of the suit was to enforce a lien for attorney fees upon a fund resulting from a judgment against the defendant and to assert ownership in one-half of that judgment by way of equitable assignment. It was there held that the relief sought was equitable in nature and that a money judgment which might result was merely incidental to the main relief. The converse of the factual situation which existed in Ireland v. Cheney was before the court in Nordin v. Coulton, 142 Ohio St. 277, 51 N.E.2d 717, where a personal money judgment on two causes of action was sought and foreclosure of a mechanic's lien to enforce such judgment was requested in a third cause of action. In that case the court held that the primary or paramount relief was legal not equitable. The general principles to be followed are stated in the syllabus as follows:
"1. The nature of a case is determined from the pleadings and the issues presented.
"2. It is equitable if it is necessary to determine first whether the plaintiff is entitled to equitable relief before legal redress can be granted; but if the primary or paramount relief sought is legal and the equitable redress merely incidental, it is an action at law."
A similar result was reached in Borton v. Earhart, 144 Ohio St. 334, 59 N.E.2d 37, where the primary relief sought was a money judgment and incidental thereto the foreclosure of a mortgage.
The problem to be solved by this court in the instant case is one of applying well established principles to the issues made in the pleadings. The petition characterizes the defendant Balkwill as an "agent" in whom the plaintiffs placed faith and trust and upon whose representations and assurances the plaintiffs relied, but which agent allegedly profited personally and secretly while engaged in a sale of plaintiffs' property. The allegations with respect to the relationship of the plaintiffs and defendants which are relied upon to establish a fiduciary relationship on the part of Balkwill are in themselves unusually involved and difficult of determination. As a result of the alleged breach of the fiduciary relationship so allegedly existing, the plaintiffs seek an accounting and recovery of whatever amount may be due them. Are such issues equitable or legal?
The relationship of principal and agent is generally held to be fiduciary in nature. In Manhattan Life Ins. Co. v. Smith, 44 Ohio St. 156, 5 N.E. 417, 58 Am. Rep., 806, Spear, J., says tersely in the opinion at page 164: "The relation of principal and agent implies trust, confidence."
The following statement in 2 American Jurisprudence, 203, Section 252, is pertinent:
"It is well settled that an agent is a fiduciary with respect to the matters within the scope of his agency. The very relation implies that the principal has reposed some trust or confidence in the agent. Therefore, the agent or employee is bound to the exercise of the utmost good faith and loyalty toward his principal or employer. * * *"
As stated in 3 Pomeroy's Equity Jurisprudence (5 Ed.), 819, Section 959:
"Equity regards and treats this relation (principal and agent) in the same general manner, and with nearly the same strictness, as that of trustee and beneficiary. The underlying thought is that an agent should not unite his personal and his representative characters in the same transaction; and equity will not permit him to be exposed to the temptation, or brought into a situation where his own personal interests conflict with the interests of his principal and with the duties which he owes to his principal."
With respect to the alleged conduct of Balkwill, the following statement in 1 Perry on Trusts and Trustees (7 Ed.), 358, Section 206, seems particularly pertinent:
"Whenever one person is placed in a relation to another, by the act or consent of that other, or the act of a third person, or of the law, so that he becomes interested for him or with him in any subject of property or business, he will in equity be prohibited from acquiring rights in that subject antagonistic to the person with whose interest he has been associated."
The defendants vigorously urge that the controlling motive of the plaintiffs is to procure a money judgment. With that conclusion we can not agree. It is true that a money judgment in favor of the plaintiffs may result but it can result only after the establishment of fiduciary relationship, a breach of the duties arising through that relationship and an accounting.
The following statement contained in 1 Mechem, Law of Agency (2 Ed.), 978, Section 1343, is pertinent:
"It is well settled that the mere relation of principal and agent is not sufficient to authorize the principal to come into a court of equity for an accounting. For very many of the questions arising between them, the ordinary legal remedies are, as has been seen in the preceding section, entirely adequate; and where this is the case, resort cannot ordinarily be had to equity. When, however, the agency is one of a strictly fiduciary character, involving a question of confidence between the parties, or, in many cases, where fraud is alleged or a discovery sought, the equitable jurisdiction will attach, even though some remedy at law might also have been found. So where the account is so complicated that it cannot be settled at law without great difficulty, a bill in equity may be maintained. * * *"
To the same effect is the following found in 1 Corpus Juris Secundum, 655, Section 19:
"Equity has jurisdiction of an accounting where a fiduciary relation exists as to money or property; an accounting is necessary to determine the amount due, even though the accounts are not mutual or complicated and no discovery is sought, and there is a concurrent remedy at law; but a bare agency is insufficient to confer jurisdiction."
It is the conclusion of this court that the primary or paramount relief sought in this case is equitable and that any money judgment which may result is incidental. The cause was, therefore, appealable to the Court of Appeals on questions of law and fact and should have been so entertained by the Court of Appeals.
The judgment of the Court of Appeals is reversed and the cause is remanded to that court for hearing as an appeal on questions of law and fact.
Judgment reversed.
WEYGANDT, C.J., HART, STEWART and LAMNECK, JJ., concur.