be under his own control for a sufficient time to enable him to realize the fruits of his enterprise. Unless the promoter of the company is restrained by the obligations of a duty which prevents him from bringing the consequences which are liable to result to others who may be led into danger, he may practice such schemes with impunity. Of course, these observations do not apply to a case where the corporation, having knowledge of the facts and freedom of action, consents to a contract proposed by another, even though he may be a stockholder or a director. The corporation could not in such case complain, nor could a stockholder, if there had been no actually fraudulent purpose towards him. In the present case, while there is some conflict of testimony in the minor details, there is really no room for dispute in regard to the controlling facts.

It is clear that the purpose to organize a corporation to take the mill property, if it should be purchased, was formed in the beginning. The option to purchase the property was not taken with a view to the use of it by the parties to whom the option was given. The option was renewed and kept alive while the corporation was being organized, and as soon as form was given to the latter, so that it was supposed to be competent to act, and its board of directors had formally accepted the proposition of Browne and Stuart to sell the mill to the company, and all things had been shaped to a definite assurance that the sale to the company would go through, and there were sufficient means secured to pay for it, the bargain with the Leonard Company was closed, and the title to the property was conveyed directly from the Leonard Company to the company which Browne and Stuart and their associates had brought into existence. When, on August 3, 1896, Browne and Stuart made their proposition to sell the mill to their company, and they and their cooperating associates, acting as the board of directors, accepted it for the company, the company was completely in fetters. While it was made to be a purchaser, it was dominated by the seller. It had no organ for seeing, hearing, or even knowing what was going on. Its whole constituency was engaged in bringing about the sale for the sellers. We have, on several occasions, held that where one who assumes to act as the agent of another in a given transaction is really acting as the agent of a third person, or in behalf of some scheme of his own, his apparent principal, having no knowledge of such alien purpose, is not bound by such pretended agent's acts, nor by any notice or knowledge of facts which such agent had at the time the transaction was going forward. Thomson-Houston Electric Co. v. Capitol Electric Co., 12 C. C. A. 643, 65 Fed. 341; Wilson v. Pauly, 18 C. C. A. 475, 72 Fed. 129, 134; Louisville Trust Co. v. Louisville, N. A. & C. R. Co., 22 C. C. A. 378, 75 Fed. 433, 469. And see Surety Co. v. Pauly, 170 U. S. 133, 18 Sup. Ct. 552, 42 L. Ed. 977; Innerarity v. Bank, 139 Mass. 332, 1 N. E. 282. This rule is supported by still stronger reasons where the principal is in such condition that it can by no possibility either learn the facts or have any judgment to form its own course with regard to them.

The farcical nature of this transaction must have been apparent to the actors, for it was subsequently arranged that it should be

confirmed after the cash subscriptions to the stock had been obtained and paid in. Then, three of the directors stepped out, and three new ones were brought in, but the efficiency of the board for consummating the scheme was not thereby affected. Browne and Bell remained, and Yeiser was a nominee of Browne and Stuart, under a pledge of co-operation. Duncan and Wrigley, the other new members, although they had no knowledge of the purpose of the others, and therefore no motive to wrong the corporation, were, from the very fact of their want of knowledge, of no service in defending the interests of the company. It seems probable that Stuart's resignation, at least, was made for the purpose of giving a fairer show to the directorate, and inspiring confidence in the good faith of the transaction. In truth, however, the corporation was still as completely in the hands of the parties who were seeking to sell the mill to it for $100,000 as before. They had a majority of the board, and could pass the measure whether opposition was made or not. The other two members were new men. They knew of no ground for raising a question, and naturally they would have confidence in the men who had been promoting the enterprise.

And thus, again, when the transaction was finally consummated, the company not only had no notice of the fact, but was helpless to protect itself if it had had such notice, and all of the stockholders who were not in the scheme were still equally ignorant of the fact thus purposely concealed. It is evident that the actors planned that the stockholders should remain ignorant. They not only refrained from communicating any information on the subject themselves, but they framed their prospectus in a way to mislead. They secured a promise of secrecy from Yeiser. They silenced Hill with a premium. They gave their check for the $25,000, which they never paid, and inserted a blinding consideration in the deed from the Leonard Company. The stockholders had visited and examined the mill property at Carthage, and were satisfied with it and the price to be paid. How it should have happened that no one of them should have learned of the price at which it was to be bought on the occasions of these visits, is left a matter for inference.

The cases in which the principle of equity which we have endeavored to state has been declared and illustrated are quite numerous, both in England and in this country. We shall refer to a few of them only. The leading English case is that of Phosphate Co. v. Erlanger, 5 Ch. Div. 73, in the court of appeals; the same case in the house of lords, 3 App. Cas. 1218, the names of the parties being reversed. The facts were that the Baron Erlanger and his associates, who were under his control, purchased, for the purpose of speculation, a lease of the island of Sombrero, on which were phosphate mines, for the sum of £55,000. Having procured the lease to be assigned to one Evans, an agent of Erlanger, they proceeded to organize a company for mining purposes, to which they intended to sell the lease at a large profit. They established a board of directors, consisting of five members, of whom two were out of the country. Of the other three, one was Evans, who held the lease; another was MacDonald, who was a near friend of Erlanger, and to whom Er

langer transferred some stock to qualify him; and the other was Dakin, who was a large stockholder, but who knew nothing of the purpose of selling at a profit. At a meeting of the board of directors, consisting of those last named, a proposition from Erlanger to sell the lease to the company for £110,000 was accepted. A prospectus was issued, which stated, among other things, that the lease of the island had been secured for £110,000, and reciting numerous facts to show the value of the bargain. A large number of subscribers were induced to take and pay for shares in ignorance of the profit which was being made by Erlanger and his associates in selling the lease to the company. The truth eventually leaked out, the board of directors was reconstituted, and the new board was authorized to bring suit to recover the amount of profit which the promoters had made on the sale to the company of the lease, and this was done. There were other facts on which incidental questions arose, but the foregoing constitute the main case. On the hearing, the bill was dismissed by the vice chancellor, but on appeal the decree was reversed by the unanimous judgment of the court of appeals, and a decree ordered that the contract of purchase be rescinded, and that other incidental relief be granted. The defendants thereupon appealed to the house of lords, where the case was twice argued, the last time before seven of the law lords,—an unusual number, and the judgment of the court of appeals was confirmed, and the appeal dismissed. The lord chancellor (Lord Cairns) did not concur, because he thought there had been laches in bringing the suit, but all concurred in holding that the company was entitled to the relief if the suit has been seasonably brought. The case was in all its essential particulars like that at bar, and all the principal grounds and reasons for decision which have been raised and argued here were elaborately discussed. The same fact, upon which so much reliance has been placed by the appellants here, existed in that case, namely, that the promoters had already acquired the right to the benefits of their purchase from the former owners, and were in a position to sell their purchase to any one who would buy. Indeed, the defendants in that case had a firmer advantage, for they had actually acquired the property before they formed the company, while here the defendants had not made any purchase, but only made secure the way by which the property could be sold to the company which they proposed to organize, and this difference was a fact much relied upon by Vice Chancellor Malins in the court of first instance. We cannot give space to recite the reasoning of the elaborate judgments given in the case, but the final decision firmly established in England the doctrines which we think it right to ap ply to the present case. Another case to which we intended more especially to refer is that of Gluckstein v. Barnes [1900] App. Cas. 240, which was also a case in the house of lords. In that case a syndicate was formed to buy certain property and resell it to a company, to be formed for the purpose, of which the directors should be the trustees of the syndicate. These trustees bought up some charges on the property, on which they realized £20,000 for the syndi cate. The price of their purchase of the property itself was £140,000,

and they sold it to the company, at a time when they were directors, for £180,000. The prospectus showed this, but did not show the profit of the £20,000 made in buying up the charges on the property. This latter fact was concealed from the persons who became stockholders, but, being eventually discovered, suit was brought by the official receiver of the company to recover the £20,000. The suit was sustained by the house of lords, upon the ground that the promoters had been, from the time of their original purchase of the property, acting in a fiduciary relation to the company to which they proposed to convey it, and that the profit belonged to the company; and it was further held that, as the circumstances had rendered it impracticable to rescind, the company might recover the money gained by the promoters. Much emphatic language was used by the law lords in giving judgment in that case. It is sufficient to say that the doctrine of the Erlanger Case was repeated, and the various devices employed in such schemes were condemned with much energy. Other English cases in which the subject has been discussed, upon facts more or less similar to those of the case we have in hand, are Hichens v. Congreve, 4 Russ. Ch. 562; Beck v. Kantorowicz, 3 Kay & Johns, 230; Gover's Case, 1 Ch. Div. 182; Twycross v. Grant, 2 C. P. Div. 469; Bagnall v. Carlton, 6 Ch. Div. 371; Printing Co. v. Green, 5 Q. B. Div. 109; Mining Co. v. Lewis, 4 C. P. Div. 396; In re Cape Breton Co., 29 Ch. Div. 795; and Ladywell Min. Co. v. Brookes, 35 Ch. Div. 400. They do not differ in the essential principles upon which they were decided, though in some of them the vital fact that the property bought for the purpose was imposed by the promoters upon their company, coerced by themselves to take it at a price yielding them a profit, did not exist, and, of course, the absence of this circumstance led to the exoneration of the promoters.

In this country the courts have accepted the essential principle laid down in the English cases, and hold, with scarcely any variation, to the doctrine that the promoter of a company stands in the relation of a trustee to it and those who become subscribers to its stock, so long as he retains the power of control over it. There is some difference of opinion, as there is in the English cases, in regard to the time when he becomes such promoter, within the meaning and operation of the rule. Some courts are of opinion that he is chargeable with the duties of a trust when he enters upon the execution of the scheme which is intended to result in the transfer of the property to a company to be organized and controlled by him. All, however, agree that he comes within the rule when he begins to organize the company, and that from that time he is bound to deal openly and fairly, and in such a way as that those having independent charge of the company, as well as those who are induced to become subscribers to its stock, may be fully advised of the relation he bears to the property which he proposes to sell, in like manner as one who as sumes to act as the agent of another in the purchase of property. We refer to a few of the well-considered cases in this country which support what we regard as the doctrine settled upon sound reasons: Brewster v. Hatch, 122 N. Y. 349, 25 N. E. 505; Land Co. v. Case, 104 Mo. 572, 16 S. W. 390; Hebgen v. Koeffler, 97 Wis. 313, 72 N. W. 745; Oil Co. v. Densmore, 64 Pa. 43; Hayward v. Leeson (Mass.)

57 N. E. 656; Burbank v. Dennis, 101 Cal. 90, 35 Pac. 444; Stove Co. v. Wilcox, 64 Conn. 101, 29 Atl. 303, 25 L. R. A. 90. The particular subject does not seem to have been before the supreme court of the United States for consideration, but there have been at least two decisions at the circuit, and they are in harmony with the views we have expressed. Chandler v. Bacon (C. C.) 30 Fed. 538, per Colt, C. J.; Cortes Co. v. Thannhauser (C. C.) 45 Fed. 730, per Wallace, C. J.

The company, as well as the stockholders, are entitled to the benefit of the independent judgment of the trustee in regard to the value of the property to be purchased, and the price to be paid, as well as its fitness for the intended use. It is said that the property was worth what the company paid for it, and is adapted to the company's requirements. It happens so. But this in no manner affects the operation of the rule. The benefit of the purchase by Browne and Stuart inured to the company. In the present instance the conveyance was with covenants of warranty by the Leonard Company, and the price which that company received would seriously affect the measure of the liability of the vendors by reason of those covenants. With regard to the kind of relief which should be awarded, it must be adapted to the situation at the time when it was applied for; that is, when the suit was commenced.

There could not be a rescission without gross injustice to the parties wronged. The business has gone on with the use of the mill. It could not be restored without serious prejudice to the interests of the company. We do not think the defendants have any equity to have it restored. It was the company's money which paid for it. It is quite clear that the defendants did not intend to make the purchase for their own use. The substance of the whole matter is that through their breach of trust they were enabled to get $25,000 of the company's stock without paying for it. It seems to us that a decree annulling their title to it is an appropriate remedy. The decree of the circuit court is affirmed.

1. In General.

NOTE.

Acts of Corporators and Promoters.

[a] (U. S. C. C., Cal., 1893) R. agreed to convey certain property to H., or to a corporation to be formed by H., and H. agreed to pay R. $5,000, to issue to him half of the capital stock of the corporation, and to deposit with the corporation's treasurer $25,000, to be used in developing said property. Held, that the $25,000 paid to the corporation should not be credited to R. on the books of the company.-Hardee v. Oil Co., 56 Fed. 51.

[b] (Cal. Sup. 1892) By an instrument preliminary to incorporation, the subscribers agreed to take the number of shares set opposite their names respectively, and to pay 20 per cent. of the par value of the shares so subscribed to one W. By the same instrument the subscribers appointed defendants and another as their agents and as the agents of the corporation to be formed, with authority to purchase property for the corporation, and to draw from W. the money paid to him, and to use such money in paying for the property purchased. Held, that defendants and their colleague were authorized, as agents of the subscribers, to negotiate for the purchase of property until the formation of the corporation, when their agency for the subscribers would cease, and thereafter they should act for the corporation. --Water Co. v. West, 29 Pac. 785, 94 Cal. 399.