Summary
In Purchase v. Atlantic Safe Deposit & Trust Co. (81 N. J. Eq. 344, affd. 83 N. J. Eq. 353) the corporate trustee paid to one of its directors compensation for disclosing (italics supplied) a purchaser of a parcel of trust realty in the belief that the purchaser was a stranger when it was the director himself.
Summary of this case from Matter of CurranOpinion
12-26-1912
PURCHASE et al. v. ATLANTIC SAFE DEPOSIT & TRUST CO. et al.
Harvey F. Carr, of Camden, for complainants. Thomas E. French, of Camden, and William I. Garrison, of Atlantic City, for defendants.
Supplemental Opinion, March 20, 1913.
Suit by Albert E. Purchase and others against the Atlantic Safe Deposit & Trust Company and others. Decree for complainants.
Harvey F. Carr, of Camden, for complainants.
Thomas E. French, of Camden, and William I. Garrison, of Atlantic City, for defendants.
LEAMING, V. C. (orally). I doubt, gentlemen, whether it would be advantageous for me to take this matter under advisement All of the evidence in the case is fresh in my memory at this time, and I apprehend that my findings of fact will not be more accurate by additional reflection. Touching the law there is so little doubt that the case need not, I think, be held by me for further consideration of the legal questions involved.
The single question of fact involved is whether or not at the time this property was conveyed by the defendant company to Mr. Parsells, its board of directors knew or should have known that Mr. Mason was the real purchaser, and that the conveyance to Mr. Parsells was merely a subterfuge or blind to give the transaction the appearance of a conveyance to a person who was not a member of the board. If the transaction was of that nature (that is to say, if the board, realizing that by reason of their trust duties they could not convey a property to one of their number, to give to the transaction an appearance of legality caused the conveyance to be made to a third person for the benefit of one of their members), the transaction was unquestionably voidable at the instance of the cestuis que trust, complainants herein; and the trust company, being bound by the acts of its board, would be obliged to account to its cestuis que trust for such losses as the cestuis que trust should sustain or such benefits as should accrue to others by reason of the breach of trust.
Mr. Mason testified with positiveness that at the time this matter was brought up, or at one time, at least, that it was brought up before the board, and at a time before the transaction was consummated, his proposed purchase was a matter of discussion before the board; that is to say, that it was stated before the board that a conveyance could not be lawfully made by the trust company to Mr. Mason while a member of the board, and that the conveyance would have to be made to Mr. Mason through a third person in order to make it legal, and that Mr. Mason accordingly named Mr. Parsells as the purchaser, with the knowledge upon the part of the board that the purchase was really in his (Mason's) behalf. On the other hand, the members of the board, or many of them, have come here and testified that that is not true that they did not know at the time this conveyance was made, or did not believe atthe time the conveyance was made, or at any time until this suit was brought, that this property was purchased in the interest of Mr. Mason, but that they thought at the time that the property was being purchased by Mr. Parsells, to whom the deed was made.
I am not prepared to believe and do not believe that Mr. Mason has testified to what he believes to be false. I am prepared to believe that Mr. Mason is honest in his statements that the board was fully acquainted with the circumstances that this property was being purchased by him and that he had first consulted Judge Thompson and had been informed by Judge Thompson that this transaction had to take the form of a purchase through a third person, and that afterwards the same matter that had been submitted to Judge Thompson was brought to the attention of the board. I say I believe he is sincere in his testimony because of a number of circumstances surrounding the case. In the first place, his testimony impressed me as the testimony of a man who states what he believes to be true; in the second place, he testified to exactly the same thing in the trial of another case before me some years ago, in which trial that particular question was not thought to be one of any importance. On the other hand, it is impossible for me to believe that the members of this board who have come here and testified that they did not know that this property was being purchased in the interest of Mr. Mason are testifying to what they do not believe to be true. These men are men whose testimony is entitled to credence. Not only have they appeared upon the witness stand to be testifying conscientiously to what they believe to be the truth, but they are men whose testimony cannot be well doubted; they are leading men in this community and in this state; and that they have told the truth as they believe it to be there is not the slightest doubt. Not one of these men could come here for the sake of avoiding liability of this institution and deliberately perjure their consciences; any liability that may exist is, at most, small in amount.
And so it remains for this court, exercising the function of a jury, to ascertain who is mistaken in recollections of this transaction. Is Mr. Mason's recollection accurate or is the recollection of the witnesses who have testified in behalf of the trust company accurate? It is entirely manifest that somebody is mistaken, and the difficult task is imposed upon this court to determine who. It is undoubtedly true, as has been suggested by counsel, that Mr. Mason, having been personally interested in this transaction, would perhaps be more likely to have the details firmly impressed upon his recollection than members of the board of directors to whom the transaction was simply one of a day's occurrences; but, while that is perhaps a circumstance worthy of consideration, it does not stand as a single controlling circumstance or one of overpowering force. It is entirely possible that Mr. Mason's recollection may be at fault; it is equally possible that the recollection of the several members of the board may be at fault.
It is admitted by both Mr. Mason and by some of the witnesses who have testified in behalf of the trust company that there was a discussion touching the right of the company as a trustee to pay to Mr. Mason, as one of the members of the board, commissions for the sale of this property. That discussion undoubtedly occurred, and it is entirely possible that the recollection of that circumstance may have made an impression upon the mind of Mr. Mason that has to-day assumed the form of a recollection that there was also under discussion the other and separate and independent subject of whether or not the conveyance should be made to him direct or through an intermediary. It has occurred to me during the progress of the trial that it was altogether possible that, if such a discussion occurred touching the right of a member of the board to receive commissions in the event of his finding a purchaser, it might well be recalled six years afterwards (I think it was about six years afterward that the testimony of Mr. Mason was given in the other trial) that the discussion included the element touching the lack of right or authority of the company to convey directly to one of its members and the necessity of having the transaction assume the form of a conveyance to a third person. There are other circumstances in the case that would somewhat indicate, on the other hand, that members of the board may be mistaken in this matter. The letter from Judge Thompson, written on the day, or day succeeding, the meeting on which the transaction was probably finally determined, referred to the title being taken in the name of Mr. Parsells. That is not a very significant circumstance, and yet it is in harmony with the testimony of Mr. Mason to the effect that Mr. Parsells' name was only used as the ostensible rather than as the real purchaser. A natural expression from the standpoint of Judge Thompson, in his letter to Mr. Chamdler, would have been that the property was purchased by Mr. Parsells. But that is not at all conclusive, because it is not unusual for people dealing in or engaging in real estate transactions to simply refer to the name of the purchaser rather than to the purchaser as such. In fact, very many purchases that are made nowadays are made in the name of a stranger to the transaction. On the other hand, coming again to the standpoint of Mr. Mason, I am strongly impressed that the truth may be, and that if Mr. Mason's recollection can be brought to entire accuracy he will perhaps recall, that, knowing that there was some question whether or not he would beentitled to receive commissions in case he found a purchaser because of his membership in the board, he might not have independently thought, without conference with any one, that, in order to make sure of those commissions, it was necessary for him to produce a third person as a purchaser. It seems to me, from the standpoint of Mr. Mason, that, with a suggestion pending that it might be unlawful for him to receive commissions by reason of his membership in the board, the thought would have naturally occurred to him that to make sure of those commissions he had better not acquaint the board with the fact that he was really making the purchase in his own behalf; and to that end and for that purpose and under those circumstances it seems reasonable and natural that he may have informed the board that this purchase was being made by his son-in-law, and that he was loaning the money to his son-in-law to assist him in making the purchase.
It is perhaps impossible to ascertain with entire certainty and with entire satisfaction what the exact facts may be, occurring, as the transaction did, so many years ago; but my best judgment in the matter is that the testimony does not justify an affirmative finding that this board was made acquainted with the fact that this purchase was being made by Mr. Mason in his own behalf. I feel fully convinced that an affirmative finding of fact to that effect would not be justified by the evidence. It is to my mind almost inconceivable that Judge Thompson, an able lawyer, as we all know him to be, and that members of this board, with extended business experience almost to a man, some of them having been theretofore familiar with transactions which acquainted them with the fact that a trust company holding property in trust could not convey to one of its directors, could have permitted this transaction to go through in this form as a blind to cover up what they well know was unlawful. There was no personal gain to be had by any member of this board of directors in passing title to this property to Mr. Mason and in thus violating what they knew to be the law. There is no suggestion of any secret arrangement by which members of the board were to profit in this matter with Mr. Mason. The only motives that impelled the board or that could have impelled the board, under the evidence, was a desire to get rid of the property for the benefit of the estate and in no sense for their own benefit; and nothing suggests itself to my mind to justify the conclusion that these men, whom I have already described touching their business qualification and their knowledge of business affairs of the world, would have deliberately falsified the true nature of this transaction, either on the books of the company, or in the form that the transaction took, or in their testimony to-day, for the mere purpose of aiding the company that they represented to dispose of this property. If Judge Thompson in fact advised Mr. Mason in advance that the trust company could not convey directly to him without violating the law, and that it would be necessary to make a sham conveyance to some other person, he necessarily knew that the truth was liable to come to light at some future day and give to the cestuis que trust a right of action against the company, and what is there to induce a court or a jury to believe that Judge Thompson, who necessarily knew those things, would have, without reward or hope of reward to himself, entered into this foolish scheme which was liable to subject the company, which he represented both as a director and as its attorney, to just such a liability as is here sought to be imposed upon the company?
My conclusion is, gentlemen, that the evidence does not justify a finding that the board of directors of this company knew, or should have known from anything that transpired, that this property was not purchased by Mr. Parsells in his own interest. If it were true that Mr. Parsells was a man who was known to be unable to purchase such a property, that circumstance would be well worth consideration; but the testimony here is that Mr. Parsells was a man so circumstanced that his purchase of this property did not and would not appropriately excite investigation. The testimony also is that Mr. Mason was a man who was well able to borrow $10,000 from the bank without exciting investigation; and, the more consideration I give to the details of the case and the circumstances surrounding it, the more I am convinced that this board did not as a fact know, and did not have reason to suspect, that Mr. Mason was buying this property in his own interest.
Now the other branch of this case involves the responsibility of Mr. Mason who admittedly, while a member of the board, purchased property which the institution which the board represented held in trust for complainants. That he is liable for any losses that have been sustained by the cestuis que trust, or is liable for any profits that he may have obtained in the transaction, there cannot be a shadow of doubt. I have thought and suggested during the progress of the trial that it might be necessary for the cestuis que trust, before a reference is made to a master for an accounting, to ascertain or determine and elect upon what basis of an accounting they would stand, but I am not at all clear that that is necessary.
I think a reference should go to a master directing an accounting upon the part of Mr. Mason in all matters touching this property, and that the master should report to this court the amount (the maximum amount) for which Mr. Mason can be liable upon any election which the cestuis que trust can make.
Another element exists in the case which I would not like to finally determine at thistime, although I feel well convinced in my own mind, but I think I should wish to hear further from counsel before finally determining it; that is, touching the $1,000 paid to Mr. Mason by the trust company for commissions. My present view is that a company holding a property in trust for purposes of sale would have no right, power, or authority to pay commissions to a member of its board for finding a purchaser. If such a company is permitted to pay commissions to a member of its hoard, it is permitted to pay commissions to any number of members of its board, which would be in effect a board paying commissions to itself. It seems to me that the transaction is one that is against public policy; that a real estate agent who for commissions makes a sale of property for a company, which property the company holds in trust, must be a man outside of the company. The desire to earn commissions seems to me to be incompatible with the performance of the duties which belong to the director as such. If this be true, the trust company and Mr. Mason would be jointly liable to the cestuis que trust for the return of that money, with interest, and I shall so determine, unless briefs from the respective counsel convince me that I am in error as to this. I will ask Mr. French, on behalf of the trust company, to submit a brief upon that point, if he is convinced I am in error, and to submit whatever briefs he wishes to submit on that point to Mr. Carr before its presentation to me, or with its presentation to me.
I will make a reference to Mr. Bourgeois, if counsel find he has time to take care of it; if it is found that he has not I will make it to any master counsel may agree upon.
Supplemental Opinion.
Wilson & Carr, of Camden, for complainants.
Thompson & Smathers, of Atlantic City, for defendants.
LEAMING, V. C. I am unable to doubt the accuracy of the conclusion stated by me tentatively at the final hearing as follows: "My present view is that a company holding a property in trust for purposes of sale would have no right, power, or authority to pay commissions to a member of its board for finding a purchaser."
It is now urged, in support of the right, that the contract for the payment of commissions was made by a majority of the board of directors with one of its members, and that any open and fair contract so made may be enforced against the corporation. In support of this contention the text of 10 Cyc, at pages 781 and 794, is cited. The text cited at page 794 is as follows: "Directors are not disabled from entering into contracts with the corporation, provided there are enough directors on the other side of the contract to make a quorum, and provided the contract is open, fair, and honest." The text at page 781 is to the same effect.
The text above quoted is not a correct statement of the law of this state.
Three views are entertained touching a contract between a director of a corporation and the corporation he represents. In some jurisdictions the view is that stated in the text above quoted. A second view, which is entertained in other jurisdictions, is that the trust relation between a director and his corporation renders such contracts void as against public policy. The theory upon which this view is supported is that the law will not allow a trustee for his own private advantage to do that which may place him in a position in which his interest is antagonistic to that of the beneficiaries of his trust. The third view is that such contracts are not absolutely void, but voidable at the option of the corporation or its representative, provided the option is exercised within a reasonable time under all the circumstances of the case. This third view is the one which obtains in this jurisdiction. It was adopted by our court of last resort in Stewart v. Lehigh Valley Railroad Co., 38 N. J. Law, 505, and has since been uniformly maintained. Except for the power of ratification which this rule reserves to the stockholders of a corporation (U. S. Steel Corporation v. Hodge, 64 N. J. Eq. 807, 54 Atl. 1, 60 L. R. A. 742), it may be said to be essentially the same as the rule which holds such contracts absolutely void, for as against the will of the corporation, exercised within a reasonable time, such engagements are given no contractual force, however open, fair, and honest they may be.
The relation of a trustee to his cestui que trust touching trust property is essentially the same. As against the will of the cestui que trust, the trustee cannot contract with himself touching the trust property. Staats v. Bergen, 17 N. J. Eq. 554.
Under the trust which was assumed by defendant corporation, it became the duty of that corporation to find an advantageous purchaser of the property of its cestui que trust. As that corporation could only act through its board, that duty necessarily belonged to the board and to each member of the board. In finding a purchaser for the trust property, a member of the board did no more than perform his plain duty as a director—a duty which he owed alike to the corporation and to the cestui que trust of the corporation which he was representing. The corporation and the cestui que trust were alike entitled to the service which was performed by the director, and were alike entitled to the free exercise of the judgment of the director touching the desirability of the sale, uninfluenced by hope of personal gain, for the relation of the board to the cestui que trust was clearly in the nature of a trust relation notwithstanding the fact thatthe corporation which the board primarily represented was the legal trustee. The right of the corporation to compensation for the services performed by it in effecting the sale as a part of its duty in administering its trust is not questioned; but its right to pay to a member of its board of directors, out of the funds of its cestui que trust, compensation for disclosing a purchaser for the trust property cannot, in my judgment, be sustained. The right of the corporation to compensation for services performed as trustee is entirely distinct from its right to an allowance for an expenditure of this nature.
Another question arises from the peculiar circumstances connected with the transactions already referred to. The defendant corporation paid to its director, out of the funds of the cestui que trust, a compensation for disclosing a purchaser for the trust property. At that time it was believed by all the members of the board, except the director to whom the payment was made, that the purchaser of the property was a stranger. It has since been ascertained that the real purchaser was the director to whom the compensation was paid. That director is a party defendant and has been already ordered to account to the cestui que trust for all profits flowing to him from the purchase. The item here under consideration may be appropriately classed as one of the items of profits made by the director through his purchase of the property. For this item both the director and the corporation are liable to the cestui que trust; for the other items for which the account is to be taken only the director is liable, as the sale of the property was made by the corporation in good faith without knowledge of the fact that the director was the purchaser. Under these circumstances, the joint liability of the director and the corporation for the money paid to the director for disclosing a purchaser falls within the rule defined in McCartin v. Traphagen, 43 N. J. Eq. 323, 334, 11 Atl. 156, for the corporation received no benefit from the payment and the director received the sole benefit; the liability for the return of the money should, in equity, be primarily cast upon the director and secondarily on the corporation.
I will sign a decree in accordance with the views stated by me at the conclusion of the hearing.