Opinion · Supreme Court of the United States
Strong v. Repide
29 S. Ct. 521
- Type
- Opinion
- Court
- Supreme Court of the United States
- Jurisdiction
- Federal
- Date
- 1909-05-03
- Topic
- general
applying special facts test and recognizing, as matter of law, fiduciary duty of disclosure when shareholder and principal officer with insider information about value of the shares purchases shares from another shareholder | applying special facts test and recognizing, as matter of law, fiduciary duty of disclosure when shareholder and principal officer with insider information about value of the shares purchases shares from another shareholder | information was a “material fact affecting the value of shares of stock of the company” and thus, disclosure required | “it was the duty of the [purchasing shareholder], acting in good faith, to disclose to the agent of the [selling shareholder] the facts bearing upon or which might affect the value of the stock” | Philippine lawfor breach of fiduciary duty in context of separate stock transactions | which expounds the “special facts” exception
Citator
- Cited by
- 68 opinions
STRONGv. REPIDE,213 U.S. 419(1909)
29 S.Ct. 521
STRONGv. REPIDE.
ERROR TO AND APPEAL FROM THE SUPREME COURT OF THE PHILIPPINE ISLANDS.
No. 110.
Argued March 10, 11, 1909.
Decided May 3, 1909.
THIS action was commenced on the twelfth day of January, 1904,
in the Court of First Instance of the city of Manila, Philippine
Islands, by the plaintiffs in error, Eleanor Erica Strong and
Richard P. Strong, her husband, against the defendant in error.
It was brought by the plaintiff, Mrs. Strong, as the owner of
eight hundred shares of the capital stock of the Philippine Sugar
Estates Development Company, Limited, (the other plaintiff being
added as her husband), to recover such shares from defendant (who
was already the owner of 30,400 of the 42,030 shares issued by
the company), on the ground that the shares had been sold and
delivered by plaintiff's agent to the agent of defendant, without
authority from plaintiff; and also on the ground that defendant
fraudulently concealed from plaintiff's agent, one F. Stuart
Jones, facts affecting the value of the stock so sold and
delivered. The stock was of the par value of $100 per share,
Mexican currency.
The plaintiff never had any negotiations for the sale of the
stock herself; and was ignorant that it was sold until some time
after the sale, the negotiations for which took place between an
agent of the plaintiff and an agent of defendant, the name of the
defendant being undisclosed.
In addition to his ownership of almost three-fourths of the
shares of the stock of the company, the defendant was one of the
five directors of the company, and was elected by the board the
agent and administrator general of such company, "with exclusive
intervention in the management" of its general business.
The defendant put in issue the lack of authority of the agent
of the plaintiff, denied all fraud, and alleged that the purchase
of the stock from plaintiff's agent (which stock was payable to
bearer and transferable by delivery) was made by one Albert
Kauffman, who afterwards sold and conveyed the same to the
Page 422
defendant, and that the defendant, prior to the commencement of
the suit and prior to any demand made upon him by the plaintiff
in error herein, had sold, transferred and delivered the stock to
Luis Gutierrez, a citizen and resident of Spain. (He was a
brother of the defendant.)
In April, 1904, the case came on for trial in the Court of
First Instance, which, on the twenty-ninth of that month, duly
decided it and stated certain facts in the cause upon which it
based its opinion and judgment, among which were the facts that
the agent of the plaintiff had no authority to sell or transfer
the shares of stock in question, and also that the transaction
resulting in the delivery of the stock to the agent of the
defendant was fraudulent, because the defendant concealed from
the plaintiff's agent facts affecting the value of the stock,
which the defendant was in good faith bound to reveal, by reason
of which the sale of the stock to defendant was made for the
total sum of $16,000, Mexican currency, while within two months
and a half the shares were worth $76,256, United States currency.
Upon the findings the court directed that the plaintiff recover
from the defendant the sum found to be due by the court, which
(after deducting the $16,000, Mexican currency) amounted to
$138,352.71, Philippine currency, and the costs of suit, and it
was ordered that the judgment might be satisfied by the delivery
to the plaintiff, Mrs. Strong, of her eight hundred shares of
stock within the time mentioned in the decree, in which event the
plaintiff was to pay the defendant $16,000, Mexican currency, or
its equivalent in Philippine currency. Other particulars were
stated in the decree.
On May 3, 1904, a motion was made by defendant for a new
trial, which, on May 9, 1904, was overruled.
A bill of exceptions was then made and appeal filed.
Subsequently, and on January 18, 1906, the same was duly argued
in the Supreme Court of the Philippine Islands, and on April 28,
1906, a decision was rendered by the court, holding that the
agent of the plaintiff had no power to sell or deliver her stock,
and it affirmed the decree of the Court of First Instance
Page 423
on that ground, but not on the second ground taken by that court,
that the sale of the stock through the plaintiff's agent had been
procured by fraud on the part of the defendant.
Subsequently to the affirmance of the judgment the defendant,
through his counsel, made a motion for a new trial on the ground
of newly-discovered evidence, which consisted of a power of
attorney (that had been mislaid and after the trial had been
found) from Mrs. Strong to Mr. F. Stuart Jones and Mr. Robert H.
Wood, which authorized both, or either of them, to sell or
otherwise dispose of the property of the plaintiff as they or he
might choose. After opposition this motion was granted and leave
given to the parties to submit new evidence as to the nature of
the authority delegated by the plaintiff in error to her agent
Jones, and under that permission the newly-discovered power of
attorney was put in evidence. Upon that piece of evidence the
court held that the authority of the agent Jones was sufficient
and that the paper became absolutely decisive of the issues in
the case, and the order affirming the judgment of the court below
was therefore set aside, the judgment of the Court of First
Instance reversed and the action dismissed upon its merits. From
that decree of reversal and dismissal the plaintiffs seek to
bring the case here for review, and have sued out a writ of error
and taken an appeal.
The facts out of which the controversy arises are in substance
these:
In 1902 it was thought important for the Government of the
United States to secure title, if reasonably possible, to what
were called the friar lands in the Philippine Islands. To that
end various inquiries were made on the part of the Government
from time to time as to the possibility of obtaining title to all
those lands and what would be the probable expense. The lands
were not owned by the same people, but were divided among
different and separate owners. The Philippine Sugar Estates
Development Company, Limited, owned of these lands what are more
particularly described as the Dominican lands,
Page 424
and they were regarded as nearly one-half the value of all the
friar lands.
On July 5, 1903, the governor of the Philippine Islands, on
behalf of the Philippine Government, made an offer of purchase
for the total sum of $6,043,219.47 in gold for all the friar
lands, though owned by different owners. This offer, so far as
concerned that portion of the lands owned by defendant's company,
was rejected by defendant in his capacity as majority
shareholder, without any consultation with the other
shareholders. The representatives of all the different owners of
all the lands, including defendant's company, in answer to the
above offer, then fixed their selling price at $13,700,000 for
all of such lands. During the negotiations consequent upon these
different offers, which lasted for some time after the first
offer was made, an offer was finally, and towards the end of
October, 1903, made by the governor of $7,535,000. All the owners
of all these friar lands, with the exception of the defendant who
represented his company, were willing and anxious to accept this
offer and to convey the lands to the Government at that price. He
alone held out for a better offer while all the other owners were
endeavoring to persuade him to accept the offer of the
Government. The defendant continued his refusal to accept until
the other owners consented to pay to his company $335,000 of the
purchase price for their land and until the Government consented
that a thousand hectares should be excluded from the sale to it
of the land of defendant's company. This being agreed to the
contract for the sale was finally signed by the defendant as
attorney in fact for his company, December 21, 1903. The
defendant, of course, as the negotiations progressed knew that
the decision of the question lay with him, and that if he should
decide to accept the last offer of the Government his decision
would be the decision of his company, as he owned three-fourths
of its shares, and the negotiations would then go through as all
the owners of the balance of the land desired it. If the sale
should not be consummated and things should remain as they were,
the defendant also knew that the
Page 425
value of the lands and of the shares in the company would be
almost nothing. He himself says, in speaking of these lands owned
by his company, that had the Government "given the haciendas the
protection which they ought to have received they would have been
worth $6,000,000 gold; but, considering the abnormal condition in
which they were on account of the failure of the Government to
protect these haciendas, it is impossible to fix any value; they
were worth nothing; they were a charge." Also, the company had
paid no dividends, and only lived on its credit, and could not
even pay taxes. The company had no other property of any
substantial value than these lands. They were its one valuable
asset.
While this state of things existed, and before the final offer
had been made by the governor, the defendant, although still
holding out for a higher price for the lands, took steps, about
the middle or latter part of September, 1903, to purchase the 800
shares of stock in his company owned by Mrs. Strong, which he
knew were in the possession of F. Stuart Jones, as her agent. The
defendant, having decided to obtain these shares, instead of
seeing Jones, who had an office next door, employed one Kauffman,
a connection of his by marriage, and Kauffman employed a Mr.
Sloan, a broker, who had an office some distance away, to
purchase the stock for him, and told Sloan that the stock was for
a member of his wife's family. Sloan communicated with the
husband of Mrs. Strong and asked if she desired to sell her
stock. The husband referred him to Mr. Jones for consultation,
who had the stock in his possession. Sloan did not know who
wanted to buy the shares, nor did Jones when he was spoken to.
Jones would not have sold at the price he did had he known it was
the defendant who was purchasing, because, as he said, it would
show increased value, as the defendant would not be likely to
purchase more stock unless the price was going up. As the
articles of incorporation, by subdivision twenty, required a
resolution of the general meeting of stockholders for the purpose
of selling more than one hacienda, and as no such general meeting
had been called at
Page 426
the time of the sale of the stock, Mr. Jones might well have
supposed there was no immediate prospect of a sale of the lands
being made, while at the same time defendant had knowledge of the
probabilities thereof, which he had acquired by his conduct of
the negotiations for their sale, as agent of all the
shareholders, and while acting specially for them and himself.
The result of the negotiations was that Jones, on or about
October 10, 1903, assuming that he had the power, and without
consulting Mrs. Strong, sold the 800 shares of stock for $16,000,
Mexican currency, delivering the stock to Kauffman in Sloan's
office, who paid for it with the check of Rueda Hermanos for
$18,000, the surplus $2,000 being arranged for, and Kauffman
being paid $1,800 by defendant for his services. The defendant
thus obtained the 800 shares for about one-tenth of the amount
they became worth by the sale of the lands between two and three
months thereafter. In all the negotiations in regard to the
purchase of the stock from Mrs. Strong, through her agent Jones,
not one word of the facts affecting the value of this stock was
made known to plaintiff's agent by defendant but, on the
contrary, perfect silence was kept. The real state of the
negotiations with the Government was not mentioned, nor was the
fact stated that it rested chiefly with the defendant to complete
the sale. The probable value of the shares in the very near
future was thus unknown to any one but defendant, while the agent
of the plaintiff had no knowledge or suspicion that defendant was
the one seeking to purchase the shares. The agent sold because,
as he testified, he wanted to invest the money in some kind of
property that would pay dividends, and he was expecting nothing
from this company, as negotiations for the sale of the lands had
gone on so long, and there appeared no prospect of any sale being
made, at any rate not for a very long time.
It is undeniable that during all this time the subject of the
sale of the friar lands was frequently mooted and its
probabilities publicly discussed in a general way. Such discussion
was founded upon rumors and gossip as to the condition of the
Page 427
negotiations. The public press referred to it not infrequently,
but the actual state of the negotiations, the actual
probabilities of the sale being consummated, and the particular
position of power and influence which the defendant occupied in
such negotiations, prior to the time of the purchase of
plaintiff's stock, were not accurately known by plaintiff's agent
or by anyone else outside those interested in the matter as
negotiators.
Upon all the evidence in the case, even including the power of attorney, the defendant was guilty of the fraud alleged. "Consent given by error, under violence, by intimidation, or deceit shall be void." Civil Code, Art. 1265. "There is deceit when by words or insidious machinations on the part of one of the contracting parties, the other is induced to execute a contract which, without them, he would not have made." Civil Code, Art. 1269. See also Manresa, vol. 8, p. 623. And as to the principles governing this case,Oliverv.Oliver,118 Ga. 362;Stewartv.Harris,69 Kan. 498;Minerv.Belle Isle Co.,93 Mich. 97;Ervinv.Oregon c. Co., 27 F. 625, 631;Wheelerv.Abilene c. Co., 159 F. 391;Sidellv.Mo. Pac. Ry., 78 F. 424;Ritchiev.McMullen, 79 F. 522;Farmers' Loan Trust Co. v.New York Co.,150 N.Y. 410;Hunterv.Hunter,50 Mo. 229;Stonev.Moody, 84 P. 617; 1 Bigelow on Fraud, pp. 231, 297, 312; Domat's Civil Law, vol. 1, p. 574, No. 1457;Id., p. 584, No. 1490;Id., p. 510, No. 1259;Id., No. 1260;Id., p. 511, No. 1262; Escriche, Fraude.Mr. George E. Hamilton, with whomMr. John W. Yerkes, Mr.M.J. ColbertandMr. John J. Hamiltonwere on the brief, for defendant in error:
Under the facts of this case the decisions of the courts of several of the States, holding that a director and stockholder must disclose his intention to another stockholder before buying stock from him, have no application, even if that rule was thePage 428correct rule under the authorities controlling the question in this country; but that rule is not supported by the current of American authority.Hookerv.Midland Steel Co.,117 Ill. App. 441;Haarstickv.Fox,9 Utah 110.
While directors stand in a fiduciary relation to the corporation itself, they do not stand in that relation when dealing with other stockholders for the purchase or sale of stock. In the purchase and sale of stock between stockholders there must be some actual misrepresentation in order to constitute fraud. Mere silence is not sufficient.Walshv.Goulden,130 Mich. 531. See alsoKrumbhaarv.Griffiths,151 Pa. 223;Bloomv.Loan Company,152 N.Y. 114;O'Neilv.Ternes,32 Wn. 528.
A director of the corporation itself may buy and sell its stock like any other individual. He is entitled to the benefit of his facilities for information. No confidential relation exists between him and a stockholder, as to sales of the stock; and, so long as he remains silent and does not actively mislead the person with whom he deals, the transaction can not be set aside for fraud. See Cook on Corporations, 4th ed., 1898, § 320, p. 622; and Taylor on Corp., 5th ed., § 698; Beach on Corp., §§ 246, 614.
Upon appeal to the Supreme Court of the islands the judgment was affirmed by a divided court, upon the ground of thePage 429lack of authority of the plaintiff's agent to make the sale, but not upon the ground of the alleged fraud on the part of the defendant. Two of the judges dissented, on the ground that there was authority to make the sale, although they agreed with the majority that there was no fraud.
One of the majority held not only that there was no authority to sell, but that there was fraud, and therefore only concurred in the result in affirming the judgment for the plaintiff.
When the motion for a new trial was subsequently granted on account of newly-discovered evidence the majority of the court, on the authority of the second power of attorney (which was the newly-discovered evidence then received), held that it was sufficient to authorize the plaintiff's agent to make the sale he did in her behalf, and as the majority held there was no fraud in the case, the judgment for plaintiff was reversed and the complaint was dismissed.
Mr. Justice Johnson dissented, and filed a dissenting opinion in favor of the affirmance of the judgment of the Court of First Instance on both the grounds taken by it.
We are now called upon to review the judgment of the Supreme Court dismissing the complaint of the plaintiff. If the purchase of the stock by the defendant was obtained by reason of his fraud or deceit, it is not material to inquire whether the agent of the plaintiff had power to sell the stock. If fraud or deceit existed, the sale cannot stand. We shall therefore determine the question whether or not there was evidence of such fraud or deceit as would avoid the sale.
Although there is no technical finding of facts by the Court of First Instance, yet in its opinion that court does state facts upon which it bases its judgment, and which may be referred to for the purpose of determining what the facts are. On appeal or writ of error from the judgment of the Supreme Court of the Philippine Islands the facts (when the courts below differ) will be reviewed by this court under the tenth section of the act of July 1, 1902, c. 1369,32 Stat. 691.De la Ramav.De laRama,201 U.S. 303,309.Page 430
A careful perusal of the evidence brings us to the conclusion that it was ample to sustain the judgment of the Court of First Instance, considered with reference to the law applicable to the Philippine Islands.
The Civil Code of that jurisdiction after providing by article 1261 for the requisites of a contract, among which is the "consent of the contracting parties," says in article 1265 as follows: "Consent given by error, under violence, by intimidation, or deceit, shall be void." Articles 1266 to 1268, inclusive, explain the meaning of the words as used in article 1265, and describe what may be error, under violence or by intimidation. It is then provided by article 1269 that "There is deceit when by words or insidious machinations on the part of one of the contracting parties the other is induced to execute a contract which without them he would not have made." The meaning of the words "insidious machinations" may be said to be a deceitful scheme or plot with an evil design, or, in other words, with a fraudulent purpose. Thus, the deceit which avoids the contract need not be by means of misrepresentations in words. It exists where the party who obtains the consent does so by means of concealing or omitting to state material facts, with intent to deceive, by reason of which omission or concealment the other party was induced to give a consent which he would not otherwise have given. Article 1269. This is the rule of the common law also, but in both cases it is based upon the proposition that, under all the circumstances of the case, it was the duty of the party who obtained the consent, acting in good faith, to have disclosed the facts which he concealed.Stewartv.WyomingCattle Ranch Co.,128 U.S. 383,388. This was the Spanish law before the adoption of the code. Partidas 5, Titulo 5, Ley 57; Partidas 7, Titulo 16, Ley 1. See also Scaevola, Codigo Civil, Articles 1269, 1270. In such cases concealment is equivalent to misrepresentation.
The question in this case, therefore, is whether, under the circumstances above set forth, it was the duty of the defendant, acting in good faith, to disclose to the agent of the plaintiffPage 431the facts bearing upon or which might affect the value of the stock.
If it were conceded, for the purpose of the argument, that the ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists. The supreme courts of Kansas and of Georgia have held the relationship existed in the cases before those courts because of the special facts which took them out of the general rule, and that under those facts the director could not purchase from the shareholder his shares without informing him of the facts which affected their value.Stewartv.Harris,69 Kan. 498;S.C., 77 P. 277;Oliverv.Oliver,118 Ga. 362;S.C., 45 S.E. 232. The case before us is of the same general character. On the other hand, there is the case ofBoard of Commissionersv.Reynolds,44 Ind. 509-515, where it was held (after referring to cases) that no relationship of a fiduciary nature exists between a director and a shareholder in a business corporation. Other cases are cited to that effect by counsel for defendant in error. These cases involved only the bare relationship between director and shareholder. It is here sought to make defendant responsible for his actions, not alone and simply in his character as a director, but because, in consideration of all the existing circumstances above detailed, it became the duty of the defendant, acting in good faith, to state the facts before making the purchase. That the defendant was a director of the corporation is but one of the facts upon which the liability is asserted, the existence of all the others in addition making such a combination as rendered it the plain duty of the defendant to speak. He was not only a director, but he owned three-fourths of the shares of its stock, and was, at the time of the purchase of the stock, administrator general of the company, with largePage 432powers, and engaged in the negotiations which finally led to the sale of the company's lands (together with all the other friar lands) to the Government at a price which very greatly enhanced the value of the stock. He was the chief negotiator for the sale of all the lands, and was acting substantially as the agent of the shareholders of his company by reason of his ownership of the shares of stock in the corporation and by the acquiescence of all the other shareholders, and the negotiations were for the sale of the whole of the property of the company. By reason of such ownership and agency, and his participation as such owner and agent in the negotiations then going on, no one knew as well as he the exact condition of such negotiations. No one knew as well as he the probability of the sale of the lands to the Government. No one knew as well as he the probable price that might be obtained on such sale. The lands were the only valuable asset owned by the company. Under these circumstances and before the negotiations for the sale were completed the defendant employs an agent to purchase the stock, and conceals from the plaintiff's agent his own identity and his knowledge of the state of the negotiations and their probable result, with which he was familiar as the agent of the shareholders and much of which knowledge he obtained while acting as such agent and by reason thereof. The inference is inevitable that at this time he had concluded to press the negotiations for a sale of the lands to a successful conclusion, else why would he desire to purchase more shares which, if no sale went through, were, in his opinion, worthless, because of the failure of the Government to properly protect the lands in the hands of their then owners? The agent of the plaintiff was ignorant in regard to the state of the negotiations for the sale of the land, which negotiations and their probable result were a most material fact affecting the value of the shares of stock of the company, and he would not have sold them at the price he did had he known the actual state of the negotiations as to the lands and that it was the defendant who was seeking to purchase the stock. Concealing his identity whenPage 433procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of the defendant. Why did he not ask Jones, who occupied an adjoining office, if he would sell? But by concealing his identity he could by such means the more easily avoid any questions relative to the negotiations for the sale of the lands and their probable result, and could also avoid any actual misrepresentations on that subject, which he evidently thought were necessary in his case to constitute a fraud. He kept up the concealment as long as he could, by giving the check of a third person for the purchase money. Evidence that he did so was objected to on the ground that it could not possibly even tend to prove that the prior consent to sell had been procured by the subsequent check given in payment. That was not its purpose. Of course, the giving of the check could not have induced the prior consent, but it was proper evidence as tending to show that the concealment of identity was not a mere inadvertent omission, an omission without any fraudulent or deceitful intent, but was a studied and intentional omission to be characterized as part of the deceitful machinations to obtain the purchase without giving any information whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to in that way obtain the same at a lower price. After the purchase of the stock he continued his negotiations for the sale of the lands, and finally, he says, as administrator general of the company, under the special authority of the shareholders, and as attorney in fact he entered into the contract of sale December 21, 1903. The whole transaction gives conclusive evidence of the overwhelming influence defendant had in the course of the negotiations as owner of a majority of the stock and as agent for the other owners, and it is clear that the final consummation was in his hands at all times. If under all these facts he purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or the defendant cast in damages for his fraud.
The Supreme Court of the islands, in holding that there wasPage 434no fraud in the purchase, said that the responsibility of the directors of a corporation to the individual stockholders did not extend beyond the corporate property actually under the control of the directors; that they did not owe any duty to the members in respect to their individual stock, which would prevent them from purchasing the same in the usual manner. While this may in general be true, we think it is not an accurate statement of the case, regard being had to the facts above mentioned.
It is said that by the code of commerce of the Philippine Islands the directors are declared to be mandatories of the society, and that by article 1459 of the Spanish Civil Code they are prohibited from acquiring by purchase, even at public or judicial auction, the property the administration or sale of which may have been entrusted to them, and that this is the extent of the prohibition. This provision has no reference to the purchase for himself, under such facts as existed here, by an officer of a corporation, of stock in the corporation owned by another. The case before us seems a plain one for holding that, under the circumstances detailed, there was a legal obligation on the part of the defendant to make these disclosures.
It is further objected, however, that the plaintiff, Mrs. Strong, denied that she had ever authorized her agent to sell this stock, and therefore by her own evidence there had never been any consent by her, obtained by fraud or otherwise, because there had never been any consent at all. There is nothing in this objection. Mrs. Strong contended that such authority as she had given never authorized her agent to sell this stock. That had nothing to do with the obligation of the defendant to make the disclosure of the facts already adverted to before the purchase of the stock from plaintiff's agent, and if, by reason of such failure, the defendant was guilty of a fraud in procuring the purchase from the plaintiff's agent it was a fraud, for which he became liable to the plaintiff, even though the plaintiff maintained that her agent was not authorized to sell. The court held that he was authorized, and therefore if he sold byPage 435reason of the fraud committed by defendant the plaintiff was thereby injured and the defendant became liable. In legal effect her consent was obtained by the fraud.
We have not overlooked the objections made in regard to the form of the judgment in the Court of First Instance, but are of opinion that such objections are not of a material nature, and we are disposed to follow the course pursued by that court in this case.
Other objections made by the defendant's counsel we have examined, but do not regard them as important. We therefore reverse the judgment of the Supreme Court, dismissing the complaint, and affirm that of the Court of First Instance, andIt is so ordered.