8, 1898, and the handkerchiefs imported by the Gascogne, entered March 7, 1898, were never examined by the appraising board, who neither had the cases nor samples of the goods, and could have made no personal examination or investigation of them. While the presumption is in favor of the correctness of official action, yet these facts were clearly testified to by the importers, who had adequate means of knowledge, and no opposing evidence was presented. The facts upon which the objection is founded must be regarded as proved. Repeated decisions of the circuit and of the supreme courts are to the effect that a neglect of the appraisers to take the means required by statute for an examination of the goods in question invalidates the appraisement. Converse v. Burgess, 18 How. 413, 15 L. Ed. 455; Oelbermann v. Merritt, 123 U. S. 356, 8 Sup. Ct. 151, 31 L. Ed. 164. Section 2901 of the Revised Statutes requires one package in ten to be opened, examined, and appraised, and in regard to the two named classes of articles the appraisers had neither package nor samples. They had a package of another importation containing embroideries, and a package containing handkerchiefs of another importation, the value of which was not advanced, but had no samples from the particular importation, and the articles in the packages in the public stores were not identical with the goods of which they had neither packages nor samples. The decision of the circuit court which affirmed the decision of the board of general appraisers is affirmed as to the protests against the action of the collector in regard to the hand embroideries and the handkerchiefs in the two invoices named herein, and is reversed as to the other grounds named in the protests. (107 Fed. 340.) YEISER et al. v. UNITED STATES BOARD & PAPER CO. No. 846. 1. CORPORATIONS-DUTIES AND LIABILITIES OF PROMOTERS-SECRET PROFITS. Promoters of a corporation, who become stockholders therein, assume a trust relation to the company and the other stockholders, which binds them to act openly and in good faith in all matters connected with its organization, and the acquiring of the property necessary for the transaction of the business for which it is organized, and they will not be permitted to make a secret profit on the sale of such property to the corporation, at least when by making themselves officers and directors in the initial organization they control the corporation, and assume to act in its behalf in making the purchase.1 Two of the defendants obtained an option to purchase a manufacturing plant for $75,000, their purpose being to organize a corporation to take over and operate the property. Together with the other defendants, whom they associated with them, they organized a corporation, placing the capital stock at $100,000, of which defendants subscribed for $25, 1 See note at end of case. 000, and elected themselves its directors. The holders of the option made a proposition to sell the property to the corporation for $100,000. which was accepted by the directors, and upon that basis defendants sold stock to others. When sufficient had been sold and paid for to enable the company to make the purchase on the terms agreed upon in the option, the board of directors, which had been changed somewhat in its membership, but was still controlled by defendants, again voted to buy the property for $100,000, and it was purchased by the defendant, who was president of the company, and a deed taken directly from the owners to the company, reciting a consideration of "one dollar and other valuable considerations." By means of cross checks, it was made to appear on the books of the company that defendants had paid for their stock, when in fact it was received as a profit on the transfer of the property. The majority of the stockholders had no knowledge of the price actually paid to the former owner for the property, but supposed it to be $100,000, until after the company had taken possession and was operating the plant, when, on learning the facts, they elected other officers, and the company brought suit against defendants for the cancellation of their stock. Held that, under the circumstances shown, the benefit of the purchase made by the holders of the option inured to the company, regardless of the actual value of the property, and that, since the purchase from them could not be rescinded without great injustice to the company, the cancellation of the stock as prayed for was an appropriate remedy. Appeal from the Circuit Court of the United States for the Southern District of Ohio. The bill in this cause was filed in the circuit court by the United States Board & Paper Company, the appellee here, for the purpose of obtaining a decree annulling certain certificates of stock in the corporation complainant alleged to have been unlawfully obtained by Browne, Stuart, Bell, Province M. Pogue, and Thomas L. Pogue, the defendants named in the bill, two of whom Browne, by representation of Yeiser, his administrator, and Stuart— are the present appellants. The bill also prayed for such other and further relief as the nature of the case might require. During the pendency of the suit, Browne has deceased, and, upon the suggestion of his death, the suit was revived as to that defendant by substituting Yeiser, the administrator of his estate. All the defendants, except Bell, against whom the bill was taken as confessed, appeared and answered, denying the material allegations thereof on which the claim to relief was founded. A replication was filed and proofs were taken. Upon final hearing, the court granted the specific relief prayed for in the bill. Two of the defendants only-Yeiser, as administrator. and Stuart-have appealed, the other defendants having declined to join. Details of the material facts are stated in the opinion which follows. Province M. Pogue and C. B. Matthews, for appellants. SEVERENS, Circuit Judge, having made the preceding statement, delivered the opinion of the court. From the record it appears that in the latter part of June, 1896, the defendants Browne, Stuart, and Bell conceived the project of taking an option to purchase the paper-mill plant of the Leonard Paper-Box Board Company, hereinafter called the "Leonard Company," located at Carthage, Ind., and organizing a company, obtaining stock subscriptions, and with the proceeds of such subscriptions buying the mill for the company at an advanced price, which would enable them to make a considerable profit. With this scheme in view, and for the purpose of carrying it out, Browne and Stuart, on July 17, 1896, after some preliminary negotiations, secured from the president and secretary of the Leonard Company an option to purchase their plant within 90 days for the sum of $75,000. There was no vote of the stockholders or board of directors of that company authorizing the granting of the option. On the 23d day of July, 1896, Browne, Stuart, Bell, Province M. Pogue, and Thomas L. Pogue incorporated the company, with the title of the United States Board & Paper Company, and with a capital of $100,000, under the laws of Indiana, by filing articles of association thereof in the proper office, and the said incorporators adopted by-laws for the company. On the 3d day of August, following, these five persons subscribed, but did not pay, for $25,000 of stock, and, they being thus far the only subscribers for stock, elected each other directors. They constituted the whole board. Bell was authorized by the board to solicit additional subscriptions to the capital stock. Browne and Stuart submitted a proposition to sell to the company the mill property at Carthage for $100,000, the deed to be made by the Leonard Company. This proposition was accepted by the unanimous vote of the board. A prospectus was prepared by the directors, which, together with the minute book of the proceedings of August 3, 1896, was used by Bell in soliciting subscriptions as evidence of the condition and prospects of the company. It was stated among the great advantages of the company that the business would not have to be delayed for the building of a mill, for the complete strawboard mill of the Leonard Company could be transferred by Browne and Stuart to the company, just organized, for $100,000, and the operation of the mill would go on without interruption; and this, it was said, was a "feature worth alone $50,000 to the stockholders." Equipped with the prospectus and minute book, Bell secured in a few months cash subscriptions for stock to the amount of $45,000. On the 16th day of December, 1896, although the option of July 17, 1896, had been renewed and was still open, Browne and Stuart made a fresh proposition to the Leonard Company to buy the mill property for $40,000 in cash, and $35,000 in the bonds of the new company, secured by mortgage on the property, upon the condition that the latter company should, before the 1st of January following, accept a proposition submitted to it by Browne and Stuart for the sale to it of the same property. This proposition was accepted by the Leonard Company at a meeting of its stockholders. On the 19th day of the same month, all of the subscribers to the additional $45,000 of stock, which had been sold after the meeting of the directors in August, paid in the sums which they had subscribed, each one at that time supposing that the purchase price of the mill which their company was buying was $100,000, except two. One of these persons was Henry C. Yeiser, an intimate personal friend of Browne and Stuart, who had at their request subscribed for $3,500 of the stock, to pay for which they advanced the money. They requested him also to become a director, telling him of the profit they were intending to make out of the sale of the mill to the company, and asked him not to disclose that feature of the transaction to the other directors or stockholders. All this he agreed to. The other of the new stockholders who was aware of the actual price at which the mill was sold was E. N. Hill, who was also a stockholder in the Leonard Company. He was induced by Browne to subscribe for $3,000 of the stock in the new company, upon the agreement that he should have $1,000 of the $25,000 of stock which had been originally subscribed, and should be given employment by the new company. This arrangement with Hill was not known to the other subscribers. On the same 19th day of December, Stuart and the two Messrs. Pogue withdrew from the directory, and Yeiser, J. H. Duncan, and H. M. Wrigley, the latter two being new subscribers, were chosen in their places. Neither Duncan nor Wrigley had any knowledge of the actual price at which the mill was purchased from the Leonard Company, but supposed it was $100,000. On the same day the following resolution, which had been previously prepared, was passed by the new board of directors: "That whereas, the company is desirous of purchasing the paper-making plant located at Carthage, Indiana, from Browne and Stuart, who have purchased the same from the Leonard Paper-Box Board Co.; and whereas, the directors have made careful examination as to the investment and the conditions of the deed provided for by Browne and Stuart from the Leonard Paper-Box Board Company to the United States Board and Paper Company; and whereas, it is for the best interests of the company to further its business in purchasing the same; therefore be it resolved, that pursuant to the authority vested in us by the articles of incorporation and by-laws of the stockholders, that we purchase said plant, with its good will and appurtenances, for $100,000, and in payment therefor, pay $65,000 cash, and in payment of the balance that bonds of the company, to the value of $35,000, being seventy bonds, of $500 each, the bonds numbered from one to thirty-five, inclusive, being payable in one year from the date of the execution of the trust mortgage hereinafter referred to, and bonds Nos. 36 to 70, inclusive, being payable in two years after the date of the execution of the trust mortgage, with interest coupons attached, payable semiannually, at the rate of 7 per cent. per annum, be issued and duly signed by the president and secretary, who are hereby authorized, empowered, and directed to sign the same; and be it further resolved, in connection therewith, that the president and secretary execute the trust mortgage deed of the company to Louis Leonard, trustee, of Piqua, Ohio, to secure said issue of bonds, and that the said mortgage deed be given on all real estate of the company situated at Carthage, Indiana." On the 22d of December, 1896, a deed with full covenants of warranty from the Leonard Company was executed and delivered. This deed recited a consideration of "one dollar and other valuable considerations." The officers of the Leonard Company were requested to allow the deed to recite a consideration of $100,000. But as they objected to this, and those managing the business for the new company were not satisfied to have the consideration stated at $75,000, it was finally concluded to put it as it appears in the deed. On the same day the following transaction took place: Browne and Stuart, to pay for the original stock subscription of themselves and their associates, gave to the United States Board & Paper Company their check on the Equitable National Bank for $25,000, without having the money there to pay for it. Browne, as president of the United States Board & Paper Company, gave that company's check on the same bank to Browne and Stuart for $65,000. To the extent of $25,000, the $65,000 satisfied the check given by Browne and Stuart for their shares, and the remaining $40,000 went through Browne and Stuart to pay the cash part of the purchase price agreed to be paid by Browne and Stuart to the Leonard Company for the mill. A mortgage to secure the bonds was given as contemplated. The result of all this was that Browne and Stuart received from their own company the $25,000 wherewith they paid for their stock subscription, and it is the validity of this stock that is the matter in controversy. Certificates therefor were eventually issued, $8,300 each to Browne and Stuart, $8,200 to Bell, and $100 each to the Messrs. Pogue, the two latter having been concerned as attorneys only for the others in the preparation of the papers used in conducting the business, and standing for directors in the organization of the company, presumably for the parties principally interested. But it is not questioned that all these parties were aware of the facts above referred to, as they transpired. The business of the new company went on, and the stockholders, other than as above stated, remained in ignorance of the fact that the purchase price of the mill to the Leonard Company was only $75,000. But it was finally discovered, and at a meeting of the stockholders, held shortly afterwards, a resolution was passed directing the bringing of the present suit. Judge Thompson, at the circuit, held, in a wellconsidered opinion, that the company was entitled to the relief prayed, and we are of opinion that he reached the right conclusion. It is a well-settled principle of equity that those who participate in bringing about the organization of an incorporated company, and in getting it in condition for transacting the business for which it is organized, assume the obligations of a trust towards the company and those who shall be invited to come into the enterprise as stockholders and share in its fortunes. The latter have the right to rely on the good faith and fair dealing of those who have promoted the company, and to assume that they have not perverted the organization by secret means to the accomplishment of selfish purposes, and the destruction of that equality of right which, in the absence of some known modification, all the shareholders are entitled to enjoy. Indeed, some of the decided cases hold a wider doctrine, and declare that, whether the promoter becomes a stockholder himself or not, he owes a like duty to those who became such, and cannot, by covert manipulation of the company while it is under his control, and without the faculty of acting for itself, take a personal profit from his dealings with it. The recognition of a fiduciary relation in such circumstances is merely for the application of a familiar principle of equity, which fastens a trust upon one who has such power over another and his affairs as to give the former an opportunity to make personal gains in his dealings with them. The reasons for the enforcement of that principle in such cases as this are obvious. Without it there is nothing to hinder the concoction of schemes which the reports of decisions show are becoming quite too frequent in recent years, during which corporations have so greatly multiplied, whereby one may take an option or conditional contract for the purchase of property, and then turn it over, at a profit to himself, to a corporation to be organized, and |