Old Dominion Copper Mining & Smelting Co. v. Lewisohn
28 S. Ct. 634, 210 U.S. 206, 1908 U.S. LEXIS 1504 (1908)
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Rule of Law:
A corporation does not have a cause of action against its promoters for profits made on a sale of property to the corporation if, at the time of the transaction, the promoters and their associates were the sole shareholders. In such a case, the corporation is deemed to have assented to the sale with full knowledge of the facts, and this assent is not nullified by the subsequent issuance of shares to new, uninformed subscribers.
Facts:
- In May and June 1895, Albert S. Bigelow and Leonard Lewisohn obtained options to purchase mining properties and the stock of the Old Dominion Copper Company of Baltimore.
- Bigelow and Lewisohn formed a syndicate of investors to fund the purchases, with a plan to sell the properties to a new corporation at a significant profit.
- On July 8, 1895, Bigelow and Lewisohn organized the plaintiff corporation, Old Dominion Copper Mining & Smelting Co. (New Old Dominion), using their nominees as the initial members.
- On July 11, 1895, with Bigelow, Lewisohn, and their associates controlling the board and owning all issued stock, New Old Dominion's board voted to purchase the properties from them in exchange for 130,000 shares of its stock.
- The value of the 130,000 shares was substantially greater than the price Bigelow and Lewisohn had paid for the properties, resulting in a large profit for them and their syndicate.
- On July 18, 1895, after the sale was consummated, New Old Dominion's board voted to offer its remaining 20,000 shares to the public to raise working capital.
- These 20,000 shares were subsequently purchased by subscribers who were unaware of the profit that Bigelow and Lewisohn had made on the initial property sale.
Procedural Posture:
- Old Dominion Copper Mining & Smelting Co. filed a bill in equity against the estate of Leonard Lewisohn in the U.S. Circuit Court for the Southern District of New York (a federal trial court).
- The defendant's demurrer (motion to dismiss) to the initial bill was sustained by the trial court.
- The plaintiff amended its bill, the defendant demurred again, and the trial court sustained the second demurrer, dismissing the case.
- The plaintiff (appellant) appealed the dismissal to the U.S. Circuit Court of Appeals for the Second Circuit.
- The Circuit Court of Appeals affirmed the trial court's dismissal.
- The plaintiff (petitioner) was granted a writ of certiorari by the United States Supreme Court.
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Issue:
Does a corporation have a cause of action against its promoters to recover profits from a sale of property to the corporation, when the promoters and their associates owned all of the corporation's issued stock at the time of the sale, even if the promoters intended to and subsequently did sell additional stock to the public without disclosing their profit?
Opinions:
Majority - Mr. Justice Holmes
No. A corporation cannot sue its promoter to recover profits from a sale where the corporation, through its sole shareholders at the time, assented to the transaction with full knowledge. At the time of the sale, the only parties involved were Bigelow, Lewisohn, and their syndicate, who were on both sides of the transaction. Because they owned all the stock, the corporation had full knowledge of the facts and consented to the deal; therefore, no wrong was done to the corporation itself at that moment. The wrong, if any, was a potential fraud against the subsequent, innocent subscribers who purchased shares without disclosure. However, this potential wrong to new shareholders does not retroactively create a cause of action for the corporate entity, which remains unchanged in its legal identity despite the change in its membership. To allow the corporation to recover would create an injustice, as the recovery would benefit all shareholders, including the 'guilty' members of the original syndicate who were party to the transaction.
Analysis:
This decision establishes the 'federal rule' regarding promoter liability, which stands in contrast to the 'Massachusetts rule' that allowed a corporation in a similar situation to recover from the other promoter, Bigelow. The case reinforces the legal fiction of the corporation as a distinct entity whose rights and assent are determined by its shareholders at a specific point in time. By holding that a wrong to subsequent shareholders is not a wrong to the corporation itself, the ruling limits the avenues for recovery, potentially forcing subsequent investors to pursue individual fraud claims rather than utilizing the corporate form for a derivative suit. This creates a significant legal distinction based on the timing of stock issuance, making it critical whether promoters sell property to a corporation before or after bringing in outside investors.
