J'EDER'lii REPORTER,
vol. 63.
by with. EtAWLEY, and I am artthtlrized bylltm to say he concurs lD thIS .. · "J::
BRISTOL et al. v. SCRANTON et at
,
CQurt of Appeals,. Tbirll CirC)llt. September 14: 1894.)
.OF OF.FlcERs-Lr.mn.the p1:esldellt of a corporapop·. i,n. conducting R,consolidation W.1,t1l, anothercorpo,ratio"n, . tu,Jly protects . '.·. ' of ,his corporation, the', tatter Is not Emtltleq to the consideration coming to him for his per,'sdDltl agreement with the other corpora:tlon tha.t he would not, for a numbet of yearSI' engage"lnthe busiues$ :coudu<:ted by suchcol,1JOrat!ons.this being insisted on by the other corporation as a condition precedent to copsQlldation,,-his Interests not being thereby rendered antagonistic to thoillfof hlscorporatioft, "
-
WE?l:lie:r"i District otPennsylvania.
Appeal from the Circuit Court of ,the· United States for the . Suit by Louis H. Bristol and others against William W. Scranton tor an acconnti.ng. From a decree for defendants (57 Fed. appeal. Affirmed. SamneIDickson,. and Richard C. Dale, for appelIantlJ·' . '. T. Watson and John ,]t[cOlave, for appellees. BetoreDALLAS, CircuitJ;udge, and BUTLER and GREE:N, District Judges. .
GREEN, District Judge. The bill of complaint in this cause by Louis H.. Bristol and, othel's, stockholders of the Scranton Steel Company,. a' corporation organized under the laws of Pennsylvania, and doing business at Scranton in said state, agains(W1Hiam Walker Scranton and his brother Walter Scranton, respectively the pl'esident and vice president of the sald who to compel them to transfer and assign to the Rcranton Steel Company, for its benefit and behoof, certain bonds or money obligathms made and execnted by another Pennsylvania corporation,tlleLackawanna Iron & Steel Company, and by it delivered to the:saiddefendants und(!rthese circumstances, as appear from the proofs:in the case: The Scranton Steel Company and the Lacka· wannlilion & Coal Company were both engaged in the manufacture of steel rails at Scranton, Pa., and had been for years, and were at the daM of this transaction,engaged in active, if not hostile, competition,possibly to the financial injury of both. Certain gentlemen interested in the LackawannuCompany determined, if possible, to harmonize· these antagonistic .interests, and conceived the plan to consolidate Into a new corporation, to be known as the Lackawanna Iron '& Steel Company, the rival corporations. Negotiations looking :to this end were' thereupon opened oy them with the defendants, who were the' representative officers of the Scrallton Company, which were carried ,(}Ii With .varying Sl'lccess for some time. At
BRISTOL
'v.
SCRANTON.
219
last, in January, 1891, after· careful consideration and thorough discussion of the scheme of consolidation by the parties to; and a agreement in interested, it was finally writing, embracing in detail the terms of the merger and unhm, was lawfully executed by both of the contracting parties. By it the business interests ana plant of the Scranton Steel Company and of the Lackawanna I1'on & Coal Company were merged and con:solidated, and transferred to a new corporation, styled the Lackawanna Iron & Steel Oompany, which became in fact the successor, in all things, of the two consolidating corporations. Simultaneously. with the con.summation and execution of this contract of consolidation, another agreement was entered into by the Lackawanna Iron & Coal Company and by these defendants, wherein it 'Was covenanted and agreed as follows:· . "Article of agreement made this ninth day of January, in the year one thousand eight hundred and ninety-one, between the Lackawanna Iron and Coal Company, a corporation of the state of Pennsylvania, party of the first part, -and William W. Scranton,in said state, and Walter Scranton, of East Orange, in the county of Essex and state of New Jersey, parties of the second part. Whereas, with the approval and consent of the parties of the second part, the party of the first part has entered into a .certain contract with the Scranton "Steel Company for a consolidation of their manufacturing industries, bearing even date herewith: Now, therefore, in consideration of the making and execution of said contract, and of these presents and the covenants herein -contained, the parties hereto have agreed to and with each other as follows: .First. That, upon the complete execution of said contract between the Lackawanna Iron and Coal Company and the Scranton Steel Company, the ,party of the first j)art will assign, transfer, and:. deliver to the parties of the second part $350,000 of the mortgage bords of the Lackawanna Iron and Steel Company, described and provided for in said contract. Second. And in consideration thereof the said parties of the second part agree that they will not, nor will either of them, engage, directly or indirectly, in the manufacture of steel in any new competing works not now eXisting in any of the northern states of the United States, including Maryland, Virginia, and West Virginia, for the term of ten years from and after the complete execu:tion of said contract: that they will at once procure and deliver to said iron company the assent of the Scranton Gas and Water Company to the assignment of the contracts with that company specified and described in said contract between the Lackawanna Iron and Coal Company and the Scranton Steel Company. Third. That this contract shall be binding upon,. and inure to the benefit of, the successors, executors, administrators, and assigns of each .{)f the parties hereto."
This agreement has been fully carried out in all its provisions by the contracting parties, and it is with these bonds, so delivered to the defendants foT' and upon the consideration in this agreement expressed, that this bill of complaint concerns itself. Quoting from it, its most material allegations, after setting forth the proposed scheme of consolidation, are as follows: "And your orators further show that as part and parcel of the said arrangement by which the consolidation of the business interests and plants of said. two corporations was to be effected, and the plant of said Scranton Steel Company was to be transferred to a new and single corporation, known as the TAlckawanna Iron and Steel Company, said· 'Villiam "Talker Scranton and Walter Scranton, while acting in said negotiations for and in behalf of said ,8cmnton Steel Company, and as the directors and agents thereof, in violation .{)f the duty which, as said directors and agents, they owed to said Scranton Steel Company and to the stockholders thereof, including your orators, con'<Spiring and confederating together to receive for themselves large sums of
220
FEDERAL REPORTER,
moneY, on securities or tllrough and by, means of sale, conveyance, and transfer of.. substanti'!JI, JIll the. plan!. litj.d proper:ty of said Scranton Company 'to. said proppsed new corporitt1oll,. secretly, and without the knowledge, assent, or of the otlier iltockholders of said Scranton S.1;eel Qotnpany, or any of them, stipulated' that the surn of three hundred and dollars in bonds of said newcolPpallY, $ecured upon the property Qt ll8.ld new upon the llQnsumI\lation .of said consolidation, 1)epaid to them per$OJlally and individually. and for their own personal USe and .benefit, by the Lackawanna Iron and Coal Company. And your orators allege that the obtaining and procurement of sald bdnds by the said William ;Walker Scranton and Walter ScraIlton,for their personal use,benefit, and1)ehoof, was intraud of the rights Of. Sal!! Scranton. SteeLCompany and of your orators, as. stockholders thereof,. and that in truth and in fact said bondSWei.'eln substance part and parcel of the by the Lackawanna Iron and Coal Company for the transfer to said new company of themanutacturing plant of said SCran.toll Steel Company, pursuant to the terms of said written agreement, and tl).at .,!'Iaid bonds belong, in .equity and good conscience, not to said William walker Scranton and Walter Scranton, but to 'the' 8aid' SCranton Steel Company and to the stockholders thereof, ratably, in proportion to their several holdings of the stock of that company."
Then,after stating that the plaintiffs are informed that the Scrantons allege that the said securities were delivered to and reo ceivedbythem in consideration, upon their part, not to engage in business individually,or as officers of any other corporation, in .competition with the purchaser, the bill declares: "But your orators charge and aver that because and by virtue of the relation which the defendants then held to said Scranton Steel Company, of which they were then officers and agents, they were disqualified and prevented from taking or holding such personal benefit or advantage, and that the securities and bonds so received did in fact constitute a part of an entire consideration for the property and assets of said Scranton Steel Company conveyed as aforesaid, and it was the duty of the defendants to turn over and account for the same, and that in fact said securities were given and received by the defendants because they were oftlcers and agents as aforesaid of said SCranton Steel Company."
The defendants, in. their answer, while admitting the receipt of the bonds, .deny in detail these allegations and charges, and thus is raised the issue in the case. A mass of testimony .has been taken. Fortunately, it is not contradictory in its material points, or, at least, if apparently contradictory, it is easily reconcilable without questioning the veracity of the witnesses. It was most thoroughly considered and weighed in the court below; and as we have reached, upon the same grounds and for the same reasons, the same conclusion as that learned court did, it would be useless repetition to cite the testimony at length. Suffice it to say we think the evidence shows conclusively that, in . all things pertaining to the consolidation of these corporations, the defendants never once subordinated the interests of the corporation of which they were the representative<J to their own personal interests, or for their own personal behoof. On the contrary, it is quite apparent that William Walker Scranton was, up to the very last, consistently andcourageo)Jsly asserting and insisting upon the rights of hiscorporatlon in the premises, and compelling their recognition and admission, although individually he was net especially in harmony with the proposed scheme of consolidation, not approving his utmost to do awaYJ of its terms, and in very truth was
BRISTOL fl. SCRANTON.
221
with what might have seemed the wisdom and necessity of the act, by attempts to insure otherwise the financial safety of his corporation, and by other proposed business connections, directly antagonistic to the idea O'f consolidation. In our opinion the transaction, as consummated, so far as the consolidation of these two companies is concerned, is not tainted by a scintilla of fraud on the part of the defendants. It was conducted openly' and fairly; was brought in its earlier and later stages to the knowledge of a very large number, if not of all, the stockholders interested,who were represented by the defendants; and the terms of the consolidation, as finally agreed upon, when submitted to the stockholders of the Scranton Company, including the complainants, was approved, not only with entire unanimity, but, as well, as a great "triumph." On this point of the case, we accept and paraphrase the conclusion of the court below, that the contract of consolidation was conceived in integrity of purpose, was born of good faith, and was indelibly marked with the im· press of honor and fair dealing. But it is further contended on the part of the appellants that, admitting the transaction disclosed no actual fraud on the part of the defendants, yet the relation which they sustained to the Scranton Steel Company was of such a character that it forbade them to make a covenant, growing out of the main transaction, which would inure profitably to them personally, and that if such covenant were made, although made in good faith, the beneficial results must be given 'and appropriated to their principal, the Scranton Steel Company, for its sole benefit. It was ably argued on the part of the appellants that the policy of the law will not permit one party to a contract to agree to pay to the confidential agent of the other contracting party a personal compensation for effectuating the contract, and that the case at bar fell directly within the ban of this principle. Undoubtedly, it is a rule of the broadest application in equity that no one who has fiduciary duties to discharge shall be permitted to enter into contracts or engagements, in which he has a personal interest, which actually do conflict or may conflict with the interest which he represents, and which he is bound to protect. To uphold such prooeedings,-to justify such conduct,-would be contrary to public policy. The law does not permit fiduciary agents to subject themselves to temptation to serve their own interests in preference to those of their principals. An agent's interest and an agent's duty must be coterminous and harmonious. These principles are perfectly well settled. If they ruled this case there would be-could be-no defense. But the answer to this contention of the appellants is to be found in the necessary lack of application of the principles stated to the facts of the case. The evidence makes it very clear that this personal contract of the defendants, so strenuously objected to by the appellants, was not based upon the successful accomplishment of the consolidation, nor did it spring from it. It did not come in the character of payment or a reward, or a consideration to the Scrantons for successfully effecting the consolidation. On the contrary, it was clearly a condition precedent to any consolidation at all. The representatives of the Lackawanna Company in
222
FEDERAL ll:EPORTER,
vot. 63.
fabt1'1'ffl:eriif.rlffustW to consider iconsolidlttion,' except' upon the terms that the Scrantons of years,bel()lil!t'to it. .As a matter of experience the Im'tlkaiWaiina C<>mpany· kne:w the disastrouse:ffeet of rivalry enSUdhrivalry must be surely absolutelyMVrOOJfor a. term, or at :eQilsl>lidatiou'would be futIle to ac:H:ence tit was made by their representatives,'8!iprerequisite to consolidation that by the obligation of a solenllloofamtntthe SCrantons'Dmst contract\to refrain from such rivalry. :11 such covenant were made, then the consolidation might ·follow.n llot,then cdntinued and bitter war..The principle of equity which isrelietlupon justifies itself on the ground that the agent's interest mus1: in 'no wise, or manner oonflict with 'or antagonize,or at least '!he of his principal. His fidelity in the discharge of the dut;r cast uponhim by therelatlonship assumed must not"be 'weakened"b;y:the detlland of a personal interest. But in the at bar the interests of the Scranton Company were not .only frilly protected by its chosen these· defel?-dants,in theiconsolidatton, but, as well, the' assertIOn ;and proteeti&nwere ·made posgible, and only so, by the consent of the ScrantOnsto accept the bonds in question as compensation for their i'etlremen'tfrom' all rivalry with, the proposed new corporation to be bo'rn o'Hhe consolidation. Had they refused:to sell their time, tMii' their kn'owledge, their ability, the stockholders of the ScriJInfunCompany;never would have had the opportunity to wire their congratulations to William Walker Scranton upon the the consolidation, and upon the great he had won for them. To quote from the exhaustive opinion.' '0£ JUdge Ac.heson in the court below: "In no proPel."sense We1'e'the bonds in controversy a profit made out of the agency or fiduciary relationship which . They Were not a gratuity, nor were. they paid tct the Serantons because of their fiduciary position. · , . . Tb.El two contl'act,s .were distinct in parties, sUbje.ct-matter, and conside1"l)tion,"
conclusions, l;lotersely expressed,answer completely the contention of the appellants. We unhesitatingly concur in them. 'l'be result is that the jU9gment below is affirmed.
no:RINsoN T. HALL et at. (Circuit Court I!'onrth Circuit. October 2, 1894.) PERSONAL NATIOJ:tAL BANKS-INSOLVENOY .....NEGLIGENCEOF DIRECTORS BILITY" '. .' ..:. '" .
LIA-
DIl'ect?-\1IOf a natlonlll bank leftl,ts managen;lent for more than three Yllars almhsfwholly to Its cashier, .who had but little tJroperty, and of whom they' 'required' no bond; and! iliey knowingly permitted loans to be made to individuals and firms largely. in excess of the amounts allowed by If!.w·.. IIlso,falled to record'p;lortgages given to secure large debts due t)le'J:liJ..Qk, even after they werE; of Its insolvency, and erroneously examiner who had tl1ken charge of the bank that it was not neeeSsary to record them. .Held, that the directors were personally