Summary
APPEAL PROM THE 'CIRCUIT COURT OP THE UNITED- STATES POE THE EASTEpN DISTRICT OP VIRGINIA.
. The court stated the case as follows:
This is a suit in equity, brought in the Circuit Court of the United States for the Eastern District of Virginia, by Sarah C. Savage, a citizen of Pennsylvania, who sues for herself “ and all others, creditors of the Virginia Oil Company, who will •make themselves parties to this suit, on the usual terms,” against the ’ Virginia Oil Company, a Virginia corporation; John'Tyler, president of said company, and in his own right; John WV Otley, C. W. Tanner, Isaac Davenport, Jr., J. IT. Montague, C. E. Belvin, late directors in said company, and citizens of Virginia; and Joseph D. Evans and J. F. Crane, citizens of blew York.
The bill, which was filed December 11, 1885, so far as it is material to give its contents, set forth that the plaintiff, being anxious to secure a business position for her son, H. C. Savage, was.referred by "William E.-.Tanner, of Richmond, Virginia, With whom she had business transactions, to John Tyler, president of the Virginia Oil .Company, of which company C. W. Tanner, a son of William E. Tanner, was a member; that through William E. Tanner she. opened negotiations with Tylér, and was informed that she' could secure for her son a position equivalent to that of assistant secretary in the- company, by the investment of $10,00.0; that she 'was willing to make that investment in the shape.of a loan well secured, but Tyler declined to take the sum as a loan, and required that she should purchase of the company that amount of - its capital stock at its par value; that, to induce her to purchase the stock, Tyler, as president of the company, sent to her the following letter:
“ Vieg-inia Oil Company,
“Richmond, Ya., April 10th, 1884.
“ Mrs. S. C. Savage.
“My Dead Madam : Your favor o.f the 9th is rec’d. During the short interview I had with your son I concluded that he could easily undertake the duties that would be required of him in the employ of this company. 'W'ith regard to the nature of the investment conveyed in the proposition thro’ Col. Tanner, I would say that ive have no trouble in borrowing all the- money necessary for the conduct of the business upon its present basis, but the. proposition to you embraced the idea, (which we had been considering,) of permanently enlarging the scope of our business by increasing our capital stock and getting additional office help. You will readily appreciate the difference to' a man’f’g business between borrowing money, which may be’called for at the pleasure of the lender, and having the same ain’t in the shape of a permanent investment, so we concluded that whatever arrangement was made in this direction must be upon a stock basis.
“ As to the condition of our Co., the capital stock is at present $18,300, with authority from the stockholders to increase-it to $30,000. The last dividend that was declared was a 1°fo semi-annual. The fiscal year-énds on the first of June.
“The prospects of our Co. I consider flattering. We have in the past few months decreased our expenses and the outlook for business is better'than ever before.
“ Our products are sold Worth, South & "West, and the field we are working is so wide that we could without much risk double our business by adding moderately to our capital. Our manufactures pay a large profit and are favorably known throughout the territory we have- travelled. As to your chances of selling your stock at par whenever you might wish, • I can. only say that a gentleman of Wew York has bought 30 shares at par within the last ten days, but a sale of stock in any m’ffg Go. would depend on its profitableness at the time the sale was made. Should our negotiations result in your son’s coming with us, I shall personally try to make his position a pleasant one.
. “ Yery resp’y,’ John Tvxeb, Pres't; ”
that the plaintiff relied upon the statements made in'the letter, and had a right to rely on them, as a basis for. the investment of her money; and that the important statements made therein were as follows: (1) The then capital stock of the company was $18,800, with authority from the stockholders to increase it to $30,000; (2) the last dividend declared was seven per cent semi-annual, and the current fiscal year would end June 1; (3) the manufactures of the company were paying a large-profit, and were favorably known throughout a wide territory, north, south and west; (4) there had been a late decrease of expenses, and the outlook for‘business was better than ever before; (5) by adding moderately to their capital, they could, without much risk*double their business; and (6) a gentleman of ISTew York had bought thirty shares of the stock at par within the last -ten days.
The bill further averred that, with.those statements from the president of the company, she concluded that its stock was a safe investment, and consented to take .the stock instead of loaning the money, which was her preference, but which the letter assured her would not suit the company ; that thereupon, on May 19, 1884-,-she paid into the treasury.of the company $10,000, and received a certificate for one hundred shares of stock, which she. still holds; that, in accordance with her understanding with Tyler, her son was given a position at á salary of $800'per annum, and performed the'duties assigned to him until .the suspension of the office work-; that when the 1st of December, 1884, arrived, she was not informed of the declaration of the semi-annual dividend she had been led to expect, and on the 5th of that month she wrote to Tyler a •letter of inquiry concerning it; tnat in reply she received a letter from him, as follows:
“ ViRginia Oil Company,
“ Richmond, Va., Deo. 8th, 1884.
“Mrs.'S. C. Savage. '
“Dear Madam: Tour favor.of the 5th is reo’d.' Our company have tho’t it wise — as many other m’f’g Co.’s who have not a large surplus of capital have also — in view of the depression in business which causes payments to come in very slowly, to omit a semi-annual declaration of dividend.
“You are mistaken in supposing that the general condition of the finances of the country does not affect our business.' It has caused R. R’ds to be months behind in their payments, as well as slack in their orders, on whom the business is largely dependent, but in spite of this the business of the last six months shows a profit over and above expenses.
“ You will see, therefore, it is in the interest of all the stockholders that we have prudently determined to avoid weakening our treasury by withdrawing a dividend at this season.
“ Hoping this explanation will be satisfactory, I remain —
“Veryresp’y, ' John Tylee, PresH; ”
that, when the 1st of June, 1885, arrived she received no notice of dividend and some weeks later received' a statement of the business of the company for the fiscal year from June 1, 1884, to'June 1, 1885, showing a loss of $3602.47 for the year, and a circular, signed by Tyler as president, making suggestions in regard to reducing expenses, ,and giving reasons for the .depression of business, the reduction of expenses to involve the striking from the pay-roll of a son of Tyler, whose salary was $480 a year, and of the plaintiff’s son,’whose salary was $800; and that she also received from.Tyler a letter dated August 4,. ' 1885, stating that the company owed him between $5000 and .$6000, borrowed money, and proposing that, if the plaintiff .would assume'that debt to Tyler, he -would resign his position as president and allow her son-to remain in the employment of the company.
The bill also alleged that, for some time before 1881, Tyler and Otley, under the firm name of John Tyler & Co., conducted at Richmond a business in oils, railroad grease, etc., and. with Tanner, Montague, Davenport and Belvin formed a corporation under the laws of Yirginia, known as the Yirginia Oil Company, with a'capital of not less than $15,000 and not more than $300,000, the stock tó be divided into shares of the value of $100 each, to. pursue the business of refining and wholesale and retail dealing in petroleum oils, the manufacture and sale of illuminating and lubricating oils, and compounds, including animal, 'mineral and vegetable oils, the right of prospecting and boring for oils, and the privilege of buying and selling on commission or otherwise crude’petroleum and other materials used either separately or in combination for illuminating and lubricating purposes, of which company Tyler was named as president and the. other five corporators as directors; that certificates.of paid-up stock in the company were issued May 21, 1881, to Tyler, Otley and Tanner, respectively, for 50 shares each, and to Davenport, Montague and Belvin, respectively, for one share each, aggregating 153 shares or $15,300; that on November. 12, 1881, 30 shares were issued to Evans, making in all 183 shares; that the books show that no money was paid by Tyler and Otley for their shares, but ' that the $10,000 of their shares and $1,647.15 due by John Tyler & Oo. to Tyler, making in all $11,647.15, was balanced by tlie following items, namely: Amount of inventory turned over, $2450.51; merchandise, balances, $267.55, and cash, $46.50 ; machinery and fixtures, -$395.75; amount .of stock allowed Tyler and Otley in consideration of good will, formulas, etc., of John Tyler & Oo., $8486.84; total, $11,647.15; that Tyler, as president, Otley, as superintendent, and Tanner, ' as secretary and treasurer, were each paid a salary, believed ■ to be as much as $1500 per annum apiece, and on June lj .1882, at the end of the first year, dividends of 20 per cent upon the original capital-stock and seven per cent on the shares of Evans, were declared and paid, amounting to $3270 ; that since that date no dividend had been paid, and now the company was admitted to be insolvent; that on' April 3, ■ 1884, Ot-ley’s stock was surrendered • to the, company, and he was paid 'therefor. $2500, being at the rate of fifty ¡cents on the dollar, and'his duties and'salary ás superintendent ceased; that if that purchase of stock, and the original payments of Tyler and Otley for their' stock were permitted to stand,, the company was insolvent on April 10, 1884, when. Tyler represented it to be in a. prosperous condition; that Tyler’s letter of April 10, 1884, both by its statements and its omission's, was false and deceitful and operated as a fraud upon the' plaintiff, and would cause her to lose the money so obtained' from her unléss the proper relief should be granted to her; that the mode of settlement for their.stock adopted by Tyler and Otley was illegal and fraudulent, and ought to be set aside and they be made to pay for their stock in money; that the pretended sale of good will, formulas, etc., by John Tyler & Co. was in fact a purchase by Tyler from himself, which could not be allo'wed when he was using the assets of the corporation in the transaction; that the price placed upon that intangible property wras fictitious and fraudulent; that now, when the corporation was admitted to be insolvent, not one dollar was estimated as the value of such good will and formulas, in the inventory of the assets made by Tyler; that the taking out of the assets of $2500 by Otley on account of his stock was illegal, and he was a debtor for that sum, with interest; and that any dividend paid to directors and stockholders out of the capital stock of - the company made such directors and stockholders liable to the creditors of the company for such dividend.
• The bill further alleged that the sum of,$10,000' having been unlawfully obtained from the plaintiff “ by the misrepresentations of the affairs of the said company by John Tyler, its president and duly authorized agent, and the same having gone into the treasury of, and been expended by, the said company, the said sum; with interest thereon from the 1st day of June, 1884, is justly due her by the said Tyler and Virginia Oil Company, and she has a right to require all the, proper assets of the company to be gotten in and to have them applied to the liquidation of the debts due her and others'; ” that, if any money was due to the company for any part of the subscription of Evans to its ’stock, both Evans and Crane (the assignee of 1ns stock) were debtors to the company therefqr; that the com-party was insolvent; and that it was necessary that a receiver of its assets should be appointed.
The .bill prayed for answers by the defendants to the following interrogatories: “ 1. What amount of stock has been issued by the Virginia Oil Company, to Whom, and when-issued? 2. What was the consideration paid for said stock by the several stockholders, and when and how has it been paid ? 3. What sums havé been paid to the said stockholders as dividends and when were they so paid and by what authority ? 4 What sums have been paid to the several defendants who claim to have been officers of the company and by what authority? 5. Whether any stockholder has surrendered his stock to the company; and, if so, when and what was paid him for the same? '6. What was the statement made to the stockholders, at the end of each fiscal year; of the condition of the company and .its business, by the president and directors, or any of them ? ‘ T. What meetings of the stockholders have been held, and what were their proceedings at such meetings ? 8. How was the money paid in by your oratrix for her stock expended by the company ? 9. How and when was the capital lost ? ”
The bill further prayed for au account of the assets and debts of the company; that the assets be realized as quickly as possible and the funds arising therefrom be paid to its creditors ; that the plaintiff’s claim to be repaid the money she was induced to pay for the stock, issued to her, with interest thereon, be established and be made a debt of the company, and payment of the' same be decreed to her; that an injunction be granted, restraining the company and its officers and'' agents from managing.or interfering in its affairs;, that a receiver be appointed to take_ charge of its property and effects, and administer them under the direction of the court; and that. general relief be granted and all orders made that the nature of the case might require and to the court might seem meek
On notice, a receiver was appointed, and all the defendants, except Evan's and Crane, were served with a subpoena. Otley answered the bill and the interrogatories, and alleged that he; was not liable to the plaintiff. Tyler entered his appearance as president of the company and in his own right. The bill was taken as confessed against Tanner, Montague and Belvin. Tyler answered the bill, admitting that he wrote the letter of ' April 10, 1884, averring that everything stated therein as facts was then true, admitting also tha-t he wrote the letters of December 8, 1884, and August 4,. 1885, averring that their statements were true and made'in good faith, answering the interrogatories, and denying his .liability to the plaintiff. Tyler did not challenge the equitable jurisdiction of the court, nor demur to the bill for multifariousness.
The plaintiff replied generally to the answers of Otley and Tyler, and the bill was taken as confessed against the- corporation and Davenport.
The receiver reported to the court, on April 15, 1886, that he had not been able to sell the-machinery of the corporation, but had disposed of the remnant stock of soaps and' oils, and had found that the accounts due the company were almost all uncollectible. He made a statement of- receipts and expenditures, accompanied by vouchers, showing no money on hand, and asked to be relieved from his receivership.
. On May 14, 1886,. an order was made that the suit proceed without service on Evans and Crane, confirming the receiver’s report, accepting his resignation and discharging- him, appointing another receiver in his place, and referring it to a master to inquire and report, on the testimony of witnesses to be taken and returned by him to the court: “ 1. What amount of capital stock has been issued by the defendant the Virginia Oil Company, to whom and when issued. 2. What was the consideration paid by each holder for the stock issued to him, and when and how paid, and, whether full consideration was paid therefor. 3. What sums have been paid to the several stockholders as dividends, and when, and by what authority, were the payments made; and, if by order of the board of directors or of the stockholders, whether the orders were made at lawful meetings at which there was present a proper quorum. 4. What was the true condition of the company when such dividends were declared, and whether they were paid out of the profits earned or out of capital.or money borrowed. 5. Whether any stockholder has surrendered his stock or any part of it to the company; and, if so, when and what was paid him therefor; and what was the condition of the company at the time as to. solvency, and whether the said purchase of stock by.the company reduced its capital to less than the minimum allowed by the charter. 6. What sums have been paid to the several defendants, or any of them, who have acted as officers of the company, and by what authbrity; and if by orders of the directors or stockholders, whether at lawfully constituted meetings. 7. An account of the assets and liabilities of the Virginia Oil Company, showing any priorities which exist among the said liabilities. 8. A correct statement of the condition of the affairs of the company on or about the 1st June, 1884, when the plaintiff was induced to subscribe for stock therein, showing whether the said company was solvent and in' a prosperous condition as represented in the letter of John Tyler to the plaintiff, dated 10 April, 1884, and filed as Exhibitc A ’ with the bill. 9. Any other matter deemed pertinent .by the master or required by either party.” .
The new receiver reported in January, 1887, that in June, 1886, he had sold all the property of the corporation; that the proceeds of the sale 'amounted to $367.65; and that he had received in cash $123.89 and disbursed the whole thereof, and deposited in the bank to the credit of the court notes for $248.41. The court made an order confirming his report and discharging him.
In July, 1887, the master filed, his report as to the nine items of inquiry referred to him'.' ITe reported that the shares .of capital stock issued by'the corporation were, as stated in the bill, 283 in number, including the'100 issued to- the plaintiff; that the plaintiff paid for her stock on-May 19,1884, although the certificate issued to her was dated May '31, 18S4; that the consideration paid by Tyler and Otley for their stock was the good will of the business of John Tyler & Co., “ and a number of valuable recipes and for'mulas for the manufacture of oils and grease, together with the stock and fixtures of that business,” the former valued at $8486.84, and the latter at $1513.16 net; that the only dividend ever declared by the' corporation was made June 1, 1882, of 13 per cent on the capital stock of the .company owned by stockholders the first six months of the year, and 7 .per cent on that' owned by stockholders the last six months of the year; that the corporation was solvent and prosperous when that dividend was declared, and it was paid out of earnings; that no stock was surrendered by Otley to the corporation; that the salaries of Tyler as president,- Otley as superintendent, and Tannpr as secretary and treasurer, were $100 a ’month each for the year ending June 1,1882, and after-wards were $1500 a year each until the business was closed, excepting that Otley’s salary-ceased on'October 16,1883, when he sold his stock to Tyler; that there'was in’bank to the credit ■ of the court in the cause, $166.61; and that there were claims against the corporation, which had been' presented to the receiver, amounting to $715.,83.
As to the inquiry what was the condition of the affairs of the corporation on or about June 1, 1884, and as to whether it was solvent and in a prosperous condition on April 10, 1884, the date of Tyler’s letter to the plaintiff, the master reported ■ that, according to a statement made by Tyler, the assets then exceeded the liabilities by $3261.45, but the items of assets in that statement included $5000 for the stock purchased from Otley; that such $5000 ought to be stricken out entirely,' or, if " the stock was paid for out of the company’s money, ought to be reduced to the $2500 actually paid, leaving an excess of assets of $761.45 to represent the whole of the cash-paid stock; but that, as Otley’s stock was. purchased without authority from the corporation, and the purchase never was approved by it, that item of $2500 also ought to be stricken out, and thus Tyler’s statement presented the corporation as having lost its entire cash paid stock and' being largely in debt besides; that the'formulas and recipes purchased for $8486.84 were then and ever since had been without value or at least unsalable; ■and that, in a word, the corporation wTas bankrupt.
The master reported further that on May 19, 1884, the day the.-plaintiff’s stock was paid for, there was paid to a bank in Richmond by the company $5900, of which $4900 'vvent to take up notes of the company, indorsed by Tyler and Tanner, and $1000 to take up a note of Tyler’s, secured by stock of the company ; that on May 20, 1884, $300 was paid to Tyler by the company for loans made to it by him in the previous part of that month; that on May 18, 1884, the cash receipts and payments were very nearly balanced; that after that date to the close of that month the receipts were about $320, and, according to Tyler’s statement, the amount on hand Tune 1, 1884, was $246.32 ; and that it was obvious, therefore, that the large payments above mentioned were made from the money received from the plaintiff.
The master with his report returned the depositions he had taken. The plaintiff filed exceptions to the report, but none of ■the defendants excepted. The case was heard, and on'the 20th of February, 1888, a decree was made which stated that “ the court, being of opinion that the defendant John Tyler, individually, and the remaining assets of the Virginia Oil Company, are liable to the plaintiff, Sarah 0. Savage, for the sum of ten thousand dollars paid by her into the treasury of the company, at the instance of the said John Tyler, on the 19th day of May, 1884, for a certificate of one hundred shares of stock in said company, which said company was represented to her by the said Tyler, its president, to be in a flourishing condition, when, in fact, it was insolvent, doth so decide, and having caused a statement to be made and filed, marked (R. T.), showing how the fund of $176.24 in the Merchants’ Rational Bank of Richmond to the credit of this cause should be distributed, doth adjudge, order and decree that M. F. Pleasants, the clerk of this court, do draw a check upon the said fund to the credit of the court in this cause in the Merchants’ Rational Bank of Richmond, in his own favor, for the sum of $88 in full of his fees and charges in this cause, and a check upon the said fund in favor of W. W. Henry, attorney for Sarah C. SavT age, for $50, the amount of cost paid, by the plaintiff in this case, and that he do check upon the said fund for the balance thereof, to wit, $33.24, in favor of the said W. W. Henry, attorney for Sarah C. Savage, of which $20 is the docket fee taxed for plaintiff’s attorney, and $Í3.24 shall be a credit on the said claim of the plaintiff for ten thousand dollars.; and the court doth further adjudge,- order and decree-that the defendant John Tyler do pay to the plaintiff, Sarah C. Savage, ten thousand dollars, -with interest thereon, at the rate of six per centum per annum, from the 19th day of May, 1884, till paid, subject to á credit of $18.24 as of this day, and that the ^plaintiff be at liberty to sue out execution.for the same; and.the report of the master is confirmed in all other respects.”
The court thus distributed a fund of $176.24 [171.24?] in. its hands, the proceeds of the property of the corporation, by paying to the clerk $88 for fees, and to the plaintiff’s attorney $50 for costs, and $20 as a docket fee, and the remainder, $13.24,- - as a credit on the claim of the plaintiff for $10,000; and then it ordered the defendant Tyler to pay to the plaintiff $10,000, with interest at six_ per cent from May 19, 1884, subject to a credit of the $13.24, as of the date of the decree. From- this decree, Tyler appealed to this court.
I. The first question to be considered is that of jurisdiction. The only ground on which the bill can be supported against Tyler is, that it contains averments to the effect that Tyler is indebted to the Virginia Oil Company on account of-his stock therein, and that what is thus owing' by him is a part of the assets of the company, and that -the complainant has an equity to compel payment of the amount thus due, and to subject it to her claim for damages against the company.
The only equity the plaintiff pretended she had against Tyler was to demand that he should be compelled to pay for his stock in the Virginia Oil Company in money,- it being averred that what had been claimed to be a payment for the stock was largely fraudulent and fictitious.
This contention, so persistently made, was declared by the master to be untenable in view of the facts established ■ before him, and the decree confirms the master’s report over the plaintiff’s exceptions on this head.
This action of the court and master, from which there is no cross appeal by appellee, left the case entirely destitute of equity against Tyler, and the bill should have been dismissed. If parties could give jurisdiction in equity to the United States courts by mere averments unsubstantiated by proof, the constitutional guaranty of trial by jury would be worthless. This ■ court carefully protects that constitutional right from invasion by equity. Bussell v. Ciarle, 7 Crancb, 69; Parkersburg v. Brown, 106 U. S. 487; Buzard v. Houston, 119 U. S. 347; Hrrnier v. Cohñ, 119 U. S. 355. Upon this ground alone it would seem that the bill should be dismissed. '
II. The, decree is outside the case made by the bill. It was a surprise, as well as an injustice to the appellant, who has as fair a name as any person in the city of Richmond. Indeed, it is noticeable that the decree, in stating the deduction of the court from the evidence, does not state that Mr. Tyler had made false representations to Mrs. Savage, knowing them to be false, but merely says that the representations were not true; but it did not follow, necessarily, that Tyler knew ' they were not true. The draughtsman of that decree no doubt thought, and properly, too, that it would be a libel upon Mr. Tylei’, from a moral point of view, to make the decree recite that that gentleman had wilfully misled Mrs. Savage ; and in this way we may account for the remarkable omission from the decree of that necessary element of the plaintiff’s case.
An examination of the bill shows that the complainant proceeded on the theory that the defendants Tyler and Otley owed the Virginia Oil Company more than $10,000 for the 5.0 shares of stock held by each of them, and alleged to have been paid for in a way that was a fraud on the company and its creditors, and the tenacity with which -the complainant cluing to this point up to the final decree shows that she and hep counsel deemed it to be well founded. The bill also claims that! the defendant Otley owes the company the further sum of $2509, with interest, the same being money of the company paid him,.illegally, as alleged, by Mr. Tyler, as president of the company, for the purpose of retiring the shares of stock held by him. It is manifest, therefore, that the plaintiff considered that she had in these and other supposed assets of the company an ample fund for the satisfaction of her demand, and that there was no necessity for pressing.any claim she might have against Tyler personally, otherwise than as a stockholder who is.alleged not to have paid up his stock. Tyler and the other stockholders were made parties to the bill because they were supposed to be debtors to the company on their stock.
The truth is, no doubt, that it was no part of the complainant’s original plan of ■ attack to urge a demand against Tyler for the alleged fraud, and that it was hot until the complainant’s case against the defendants Tyler and Otley, as debtors to the company, broke down, that an attempt was' made, to hold Tyler personally responsible for the alleged fraud.
The complainant had no right to- urge a demand against Tyler covertly, and thereby throw him off his guard and surprise him at the last moment, when it was too late to demur for multifariousness, and the court will presume from the face of the bill that no such improper course was intended, -while every doubt in the bill will be resolved against the complainant, according to the well known rule. Upon this ground, also, the decree is invalid, being entirely outside the case made in the bill. ' '
III. Upon the question of fraud we have to say that after a careful examination of this record, we do not hesitate to say that it is incomprehensible to us how the learned judge -below could have felt warranted in putting the stigma of this decree on .the appellant, who is among the most honorable and respected citizens of Eichmond.
Syllabus and headnotes are prepared by the reporter or publisher, not the court, and are not part of the opinion.
