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(— C. C. A. —, 273 Fed. 441.)

BENTLEY GARDINER et al., Exrs., etc., of George N. Gardiner, Deceased, Plff. in Err.,

V.

EQUITABLE OFFICE BUILDING CORPORATION.

United States Circuit Court of Appeals, Second Circuit - April 6, 1921.

(C. C. A., 273 Fed. 441.)

Corporation assumption of contract of promoter

liminary services.

contract for pre

1. Where an original promoter of a corporation to erect a building employed a person to secure information as to the attitude of a proposed tenant to the enterprise, and upon turning the project over to another promoter, who in fact organized the corporation, the latter expressly promised that a specified commission should be paid to the employee for his services when the corporation was organized, such commission will be included in an agreement by the directors of the corporation to assume all expenses incurred by such promoter in bringing about the arrangement. [See note on this question beginning on page 452.] -liability for services of promoters.

2. There is no liability on the part of a corporation for services rendered by its promoters in effecting the organization, even though they were rendered under expectation of payment, in the absence of express promise by it after its organization, unless such liability is imposed by the char ter or its general laws.

[See 7 R. C. L. 80, 81.] - necessity of knowledge.

3. To render a corporation liable upon a promoter's contract, the benefit of which it has accepted, it must

have acted with knowledge of the facts.

necessity of knowledge of director -imputed notice.

4. A corporation is not charged with notice of facts known to a director in a transaction between him and the corporation, in which he is acting for himself, and not for the corporation. [See 7 R. C. L. 657, 658.]

- not chargeable with knowledge of promoter.

5. The knowledge of a promoter is not to be imputed to his corporation. [See 7 R. C. L. 302.]

(Hough, Circuit Judge, dissents.)

ERROR to the District Court of the United States for the Southern District of New York to review a judgment dismissing the complaint in an action brought to recover damages for alleged breach of a promoter's contract. Reversed.

Statement by Rogers, C. J.:

The plaintiffs are citizens of the state of New Jersey and the defendant is a corporation organized under the laws of the state of New York. The action is brought for breach of contract, and damages in the sum of $200,000 are asked, together with interest thereon from April 24, 1913. The complaint alleges the death of George N. Gardiner on July 17, 1914, and that the plaintiffs are the sole acting executors of his will. It sets out two causes of action.

For the first cause of action it is alleged that one Frank M. Andrews arranged with George N. Gardiner, the plaintiffs' testator, that the latter should ascertain from the officers of the Equitable Life Assurance Society whether or not a proposition would be entertained for the purchase of the site on which what was known as the "Equitable Building" stood, in the city of New York, and the erection thereon of a modern office building by an outside company, provided the society could be

assured of the good faith and financial ability of the persons interested to carry out the enterprise. It is alleged that Gardiner was personally acquainted with the officers of the society, and that he was to secure information in regard to the attitude of the officers towards such a proposition, and the terms on which they would be willing to entertain the same. It is alleged that Gardiner did procure such information, and that it was valuable to Andrews, and enabled him to prepare a plan for organizing and financing the project; that thereafter Andrews and T. Coleman Du Pont entered into arrangements whereby Andrews turned over the enterprise to Du Pont, and the latter promised to provide for and pay out of funds to come into the treasury of a company to be organized to carry out the project the obligations and expenses incurred in the formation thereof, including the sum of $200,000 to be paid to Gardiner, the payments to be contingent upon the closing of the deal with the Equitable Life Assurance Society, which deal was then in progress for the purchase of the Equitable site and the erection of a building thereon; that $100,000 was to be paid in cash, and $100,000 in par value of the common stock of the said company; that the cash commission was to be paid out of the first moneys available from the sale of the preferred stock and second mortgage bonds of the company.

Then it is alleged that thereafter an agreement was entered into between the society and Du Pont, wherein it was agreed that the former would sell the site hereinbefore referred to, and the latter agreed that the corporation to be organized by him would erect upon the premises a thirty-six-story fireproof office building according to plans to be approved by the society. It is further alleged that Du Pont caused the defendant corporation to be organized and incorporated, and that he became a director thereof; that Du Pont then made a certain offer to the defendant concerning

the plan and enterprise herein before referred to, which offer was accepted by the defendant; that the the defendant, in accepting Du Pont's offer, "agreed to assume and discharge and reimburse said Du Pont for all of his expenses in connection with negotiating for and securing the delivery of the various instruments and agreements in connection therewith, and in connection with the work done and materials supplied for the construction of the building in anticipation of the arrangement between him and the defendant, and of all other expenses of every kind, either incurred or which might be incurred by him in bringing about such arrangements, including the claim of the plaintiffs' testator." There are other allegations in connection with the first cause of action, but which it is not necessary in this connection to set forth.

For the second cause of action it is alleged that T. Coleman Du Pont, acting for and on behalf of a corporation thereafter to be formed (the defendant) entered into an arrangement with Frank M. Andrews to take over the enterprise on behalf of the corporation and to provide for the payment of the obligations incurred in the formation thereof, including an item of $200,000 to be paid to the plaintiffs' testator in consideration of the services rendered and to be rendered by Gardiner in connection with the enterprise, and that the said Du Pont acting for and on behalf of the corporation thereafter to be formed promised and agreed to provide for, and pay out of funds to come into the treasury of the said company, the obligations and expenses incurred in the promotion thereof, including the sum of $200,000 to be paid to plaintiffs' testator as aforesaid, the same to be contingent upon the closing of the deal with the Equitable Life Assurance Company.

The 17th paragraph of the complaint reads as follows: "Upon information and belief, that in consideration of the said promises and

(C. C. A. —, 273 Fed. 441.)

agreements, said Andrews turned over and transferred to said Du Pont, acting for and on behalf of said company thereafter to be organized, the enterprise and project referred to, and said Du Pont, on behalf of said corporation, accepted and took over the same, and as part payment and consideration therefor, and for services rendered and to be rendered by the plaintiffs' testator in connection therewith, acting for and on behalf of said corporation, made and entered into an agreement with the plaintiffs' testator, wherein and whereby he agreed that there was to be paid out of funds to come into the treasury of said company one hundred thousand dollars ($100,000) in cash and one hundred thousand dollars ($100,000) par value of the common stock of said company, same to be contingent upon the final closing of the deal then in progress for the purchase of the Equitable site and the erection of a building thereon, the cash commission to be paid out of the first moneys available from the sale of the preferred stock and second mortgage bonds of the company."

It is alleged that the deal above referred to was consummated between the Equitable Life Assurance Society and the said Du Pont, and that a modern office building had been erected on the Equitable site, from which the defendant was receiving the rents, and that there had come into the defendant's treasury from the sale of its preferred stock and second-mortgage bonds moneys in excess of $3,000,000, and far more than sufficient to pay the cash commission of $100,000 agreed to be paid to the plaintiffs' testator, and that there had been issued by the defendant shares of its common stock to an amount far in excess of the $100,000 par value of common stock agreed to be delivered to the plaintiffs' testator as provided for in the agreement.

When the cause came on for trial, counsel for the defense moved that the first cause of action be tried in 17 A.L.R.-28.

equity, and that the second cause
of action, if construed as a pro-
moter's contract, be dismissed.
the second cause of action was not
to be construed as a promoter's con-
tract, but in effect as a different
way of repeating the facts set out
in the first cause of action, then that
the second cause of action also be
tried in equity.

The court took the matter under advisement, and then announced that in his opinion the first cause of action stated a cause of action in equity; that the second cause of action might be considered as a cause of action arising out of a socalled promoter's contract; that, so regarded, he thought it stated a cause of action at law, which entitled the plaintiffs to a jury. He added that, if at the trial the testimony failed to indicate that after the corporation came into existence a new contract was made, as distinguished from a so-called ratification of the promoter's agreement, he would feel bound to dismiss the complaint as to that cause of action.

In the discussion which took place between the court and counsel, it was suggested that no services were rendered by Mr. Gardiner to anybody after August 9, 1912, and that the defendant corporation was not organized until April 24, 1913. The court declared that, if it should appear that such were the facts, he thought a motion to dismiss the second cause of action would have to be granted; that if counsel for the plaintiffs elected to stand on the first cause of action, it would be tried in equity; that if he elected to stand on the second cause of action, he would try without a jury, first, the third separate defense, reserving the right to call in a jury if he deemed it proper as the case developed; the third separate defense being that the representations made by Andrews to Du Pont that Gardiner had rendered services of value were false-that being a defense cognizable solely in equity, there being no representations that these false representations were al

so fraudulent; that the proper order of procedure in the trial of a case at law to which there was an equitable defense was that such defense must first be tried.

This statement of the district judge gave counsel full information as to what might be expected, and saved the time and expense which would have been involved if the parties had gone to trial and testimony had been taken. This was made unnecessary by a stipulation of counsel as to the facts. Before putting that stipulation on the record, counsel for the plaintiffs made two motions, both of which were denied, and exceptions were granted:

First. That the third defense to the first cause of action be dismissed, on the ground that no facts were set up to show a legal or an equitable defense, and the plaintiffs were entitled to their jury trial.

Second. That there was no allegation on the part of the defendant to return or offer to return the fruits of the contract which it took, and, having taken the benefit, it must assume the burden.

Thereupon the stipulation of the parties was read into the record. It was stipulated, first, that the contract alleged in ¶ 17 of the complaint as having been made between the plaintiffs' testator, George N. Gardiner, and T. Coleman Du Pont, is set forth in the following letter: "August 9, 1912. "Mr. T. Coleman Du Pont, "Wilmington, Delaware. "Dear Sir:

"Confirming my conversation with you and recording our understanding in connection with the Equitable Building deal, there is to be paid Mr. George N. Gardiner a commission for services rendered, and to be rendered, of $100,000 cash and $100,000 par value of the common stock of the company, same to be contingent upon the final closing of the deal now in progress for the purchase of the Equitable site and the erection of a building thereon. The cash commission will be paid

[blocks in formation]

"Dear Frank:-The above is just as I understand it, and provisions will be made to take care of this as early as possible.

"[Signed] T. C. Du Pont."

Second. That from the date of said letter, August 9, 1912, to about December 12, 1912, no one called upon George N. Gardiner to render any services to Mr. Andrews, Mr. Du Pont, the Du Pont Company, the defendant corporation, or any other person or corporation, and on or about December 12, 1912, Mr. Du Pont informed Mr. Gardiner that no future services would be required of him. Other matters stipulated will be referred to in the opinion.

Counsel for the defense moved to dismiss the complaint as an entirety, on the ground that the facts alleged were not sufficient to constitute a cause of action at law or in equity. The court thereupon dismissed the complaint and each cause of action thereof.

Argued before Rogers, Hough, and Manton, Circuit Judges.

Messrs. Kellogg & Rose and Alfred C. Pette for plaintiffs in error.

Messrs. Simpson, Thacher, & Bartlett, Julius F. Workum, and Adrian L. Foley, for defendant in error:

The second alleged cause of action fails to state a liability on the part of the defendant on a so-called promoter's contract.

Union Selling Co. v. Jones, 63 C. C. A. 224, 128 Fed. 672; Sun Printing & Pub. Asso. v. Edwards, 51 C. C. A. 279, 113 Fed. 445; Seitz v. Brewers' Refrigerating Mach. Co. 141 U. S. 510, 35 L. ed. 837, 12 Sup. Ct. Rep. 46; Dady v. O'Rourke, 172 N. Y. 447, 65 N. E. 273; Pitcairn v. Philip Hiss Co. 61 C. C. A. 657, 125 Fed. 110; Ehrich, Promoters,

$50; McArthur v. Times Printing Co. 48 Minn. 319, 31 Am. St. Rep. 653, 51 N. W. 216; Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 30 S. W. 163; Marconi's Wireless Teleg. Co. v. Cross, 16 Haw. 390; Van

(C. C. A., 273 Fed. 441.)

Noy v. Central Union F. Ins. Co. 168 Mo. App. 287, 153 S. W. 1090; Richard Brown & Son Contracting Co. v. Bambrick Bros. Constr. Co. 150 Mo. App. 505, 131 S. W. 134; Re Empress Engineering Co. L. R. 16 Ch. Div. 125, 43 L. T. N. S. 742, 29 Week. Rep. 342, 1 Eng. Rul. Cas. 699; Kelner v. Baxter, L. R. 2 C. P. 174, 36 L. J. C. P. N. S. 94, 15 L. T. N. S. 313, 15 Week. Rep. 278; Melhado v. Porto Alegre, N. H. & B. R. Co. L. R. 9 C. P. 503, 43 L. J. C. P. N. S. 253, 31 L. T. N. S. 57, 23 Week. Rep. 57; Re Johannesburg Hotel Co. [1891] 1 Ch. 119, 60 L. J. Ch. N. S. 391, 64 L. T. N. S. 61, 39 Week. Rep. 260, 2 Megone, 409; Re Northumberland Avenue Hotel Co. L. R. 33 Ch. Div. 16, 54 L. T. N. S. 777, 2 Eng. Rul. Cas. 351; Koppel v. Massachusetts Brick Co. 192 Mass. 223, 78 N. E. 128; Penn Match Co. v. Hapgood, 141 Mass. 145, 7 N. E. 22; Ireland v. Globe Mill. & Reduction Co. 20 R. I. 190, 38 L.R.A. 299, 38 Atl. 116; Rockford, R. I. & St. L. R. Co. v. Sage, 65 Ill. 328, 16 Am. Rep. 587; Gent v. Manufacturers' & M. Mut. Ins. Co. 107 Ill. 652; Western Screw & Mfg. Co. v. Cousley, 72 Ill. 531; Oldham v. Mt. Sterling Improv. Co. 103 Ky. 529, 45 S. W. 779; Pratt v. Oshkosh Match Co. 89 Wis. 406, 62 N. W. 84; Franklin F. Ins. Co. v. Hart, 31 Md. 59; Jones v. Smith, Tex. Civ. App., 87 S. W. 210; Battelle v. Northwestern Cement & Concrete Pav. Co. 37 Minn. 89, 33 N. W. 327; Wright v. St. Louis Sugar Co. 146 Mich. 555, 109 N. W. 1062; Stainsby v. Frazer's Metallic Life Boat Co. 3 Daly, 98; Munson v. Syracuse, G. & C. R. Co. 103 N. Y. 58, 8 N. E. 355; Clark & M. Priv. Corp. p. 312; 1 Morawetz, Priv. Corp. § 549, p. 525.

Rogers, Circuit Judge, delivered the opinion of the court:

This is the third time that the subject-matter of this litigation has been before this court. It came here first in Du Pont v. Gardiner, 151 C. C. A. 605, 238 Fed. 755. We held at that time that an injunction was improperly granted restraining Gardiner from maintaining an action at law against Du Pont. All that we decided in that case was that, in an action brought on a contract which was not under seal, it was a good defense at law that the

contract was induced by fraudulent representations. The matter came here next in Gardiner v. Du Pont, 162 C. C. A. 363, 250 Fed. 227, and we decided that the evidence was insufficient to sustain an action against Du Pont for breach of contract; the evidence not indicating that Du Pont was binding himself individually, or that the parties believed he was binding himself, but that the understanding was that the contract should be performed by a corporation to be formed.

In the present suit the action is brought against the corporation which the parties contemplated should be formed, and which later was formed. It having been decided that the contract was not the personal obligation of Du Pont, we must now determine whether there exists any obligation on the part of the defendant corporation.

It has been held in some jurisdictions that, if the promoters of a corporation necessarily perform services or incur expenses in obtaining a charter, in securing subscriptions to the capital stock, and in otherwise perfecting the organization, and such services were necessary and reasonable, and not rendered gratuitously, but with the understanding and expectation of the promoters that they were to be paid for, a promise to pay by the corporation, after its organization and acceptance of the benefits of such services or expenses, will be implied. Farmers' Bank v. Smith, 105 Ky. 816, 88 Am. St. Rep. 341, 49 S. W. 810; Low v. Connecticut & P. Rivers R. Co. 45 N. H. 370; Hall v. Vermont & M. R. Co. 28 Vt. 401. In laying down the above rule it has been said that any other doctrine would render it difficult to organize any corporation, however necessary. But the weight of authority seems clearly to be that there is no such liability on the part of a corporation to its promoters, in the absence of an express promise by it after its organization, unless, as is

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