780

I'EDERALRiPORTER ,

vol. 45.

tltepl8.oosrio limit upon the power and discl'etion of the board of county c,ommissioners in fixing the boundaries of cities of the class to which Anacortes properly belongs, and· I certainly consider that the If'gislature must'have contemplated that the boundaries of such a city would, in all probability, be so fixed as to include its harborjand. in my opinion, the proceedings are not invalid because the boundaries were !'O fixed. The last objection is more serious. The question whether to incorporate Ol"not must be determined, under this law, by the votes of the qual. ified electors residing within the boundaries of the proposed city. ,From the 'number of the inhabitants within the district proposed to be incor· porated in this city it appears that there was necessarily within the same district a voting population exceeding 250, and it was necessary, therefol'e,under the laws of this state, that the voters of the precinct embracing such district shoulUbe registered, and registration is essentialto the right to vote. I think that as, by the terms of the statute, only qualified electors are entitled to vote at an election to determine whetheria city shall be incorporated, where the registration law has been disregarded, as it plainly has in this case, the election is an absolute nullity. McCrary, Elect. (3d Ed.) § 100. This author says: "It being conceded that the power to enact a registry law is within the power to regulate the exercise of the elective franchise and preserve the purity of the ballot, it follows that an election held in disregard of the provisions of a registry law must be held void." In my opinion, a valid election is a necessary prerequisite to the creation of a validrnunicipal corporation under the laws of this state, and, as the election referred to in the plaintiff's bill is, for the reasons I have stated, invalid, proceedings to complete the incorporation of the city of Anacortes ought to cease until the question whether or not to assume the powers and burdens of an incorporatedcity, under the laws of this state, can be. determined by a vote of the'legally qualified electors thereof. In accordance with this opinion, the plaintiff's application for a temporary restraining order will be granted.'

CORTES Co. 'II. THANNHAUSER

et al.

(O(rcuUOourt, S. D. New York. April 25,'1891.)
VENDOR 'AND'VENDBE-RESOISSION OF CON,TRAOTS-FRAUDULENTREPRESENTATIONS.

Defenllantli received an option to, purchase mining property in Mexico, from the l)wners, for,.110,ooO, and authorized'an agent to sell the same for that amount, agree.to allow him two-thirds of anyexoess he might obtain over that prioe. The agent 'entered Into, negotiatloDs with. 0llrtl/-illpersons illl'\evr York city, whioh resulted in the formation of a syndicate to organize a cOl'porlition for pu,'chasing the property. The agent agreed with the promoters to sell the property for $150,000, and tosubso;:ribe and pay for two-tenths money;bimself as one of the promoters. The corporation was organized; and the agent sUbscribed for btock to the extent of his part of the purchase Illoney. He was irresponsible at the time, and . knOWD: to be so by the defendants. , .He\1a4, represented to .the other promoterS that the price whicl1 the defendants were to pay:the owners for the property was $150,OOO,less a small commissioD of about $2,500; that the whole price,less this commis-

CORTJ<.J3' 00. 11. THANNHAl1SER.

731

sion, went to the owners; and that the defendants wei'e interested only as oreditors of the owners and to the extent of .the commission. Before the corporation received a conveyance of the property. its" officers discovered the falsity of the tion made by the agent of die defendants, and notUled defendants that the corpor,ation would not accept a conveyance, .In the meantime the, ,agent, acting under a power of attorney from the:corporation, had gone into possession of the property, and, in conductioI'\" minlilji( operations tbere, had created debts against, the corporation. The defendants knew, that he had no authority to contract liahilities for the corporation beyond the amount of letters of credit which were to be furnished him by the company; buttbey advanced at bis request about $30,000 upon drafts drawn by ):lim upon the corporation. The corporation promptly offered to surreuder possession of the property to the defendants, and upon their refusal abandoned possessIon. The defendants brought suits at law, one to recover the purchase price of tbe property, and another to recover for their advances upon the drafts. Thereupon the corporation filed this bill in equity to restrain the prosecution of the suit at law, and annul the agreement of purchase. Held: (1) Complainant was entitlod to rescind the purchase because of fraudulent representations of defendants' though defendants themselves were innocent of fraud. (2) It ill the duty ofa promoter towards bls associates to make full and fall' disclosure of aU facts within his knowledge wbicb if known would probably lead to an abandonment of tbe enterprise. (3) That the agent sustained a fiduciary relation to his co-pur· chasers, and bis false representations entitled them and the corporation to rescind the agreement of purchase. (4) Defendants cannot be made liable for the expenses or conducting the corporation, although tbe purp·oses of its organiof zation failed by reason of the fraud of tbe defendants' agent. (5) The complainant is liable to the defendants for the moneys advanced on the drafts of the agent to tbe extent of letters of credit given to him by the,corporatioD, but no further.

In Equity. L. E. Chittenden, for complainant. Jesse W. Lilienthal, for deflmdants.
WALLACE, J. The complainant bringe this suit in equity to restrain the prosecution of certain actions at law brought by the defendants in this court to recover the purchase price of certain mining property bought by the qomplainant of the defendants, and moneys advanced and paid out by the defendants for complainant. The bill proceeds upon the theocy that the complainant was induced to purchase the mining property by fraud, and that the claims of the defendants for moneys advanced grow out of transactions consequent upon the purchase. The complainant insists that the matters alleged in its bill are a good equitable defense to the actions brought by the defendants. This contention was sustained by Judge BJ,ATCHFORD, who, in 1882, heard a motion for an injunction pendente lite, and granted the injunction, conditioned upon the filing by complainant of stipulations authorizing the defendants to take for such recoveries in the suits at law as might be adjudged in their favor in the present suit. The facts established by the proofs are as follows: Prior to June 30, 1879, Messrs. Dauriac, Vermot & Ernst were the owners of certain mining property situate in the Valle Perdido district of Lower California, about 45 miles distant from La Paz, the capital of the district, and a sea-port on the Pacific coast. The mining property, which for convenience may be called the "Valle Mines," of several mines on different veins, with machinery, buildings, and supplies. June 30. 1879, the owners executed to the defendants a bond, which was in legal effect an option, whereby, upon the payment by defendants of $110,000 on or before January 1,1880, they agreed to convey the property to

732

FEDERAL REPORTER,

vol. 45.

defendants by a good and sufficient deed· with the usual covenants of warranty. The defendants were bankers at San Francisco, and had made advances to the owners. The owners had not been successful in their mining business, and were in debt to tpe defendants and to others. The bond was given in the expectation that Henry S. Brooks, who was a friend of the owners, and also of the defendants, would negotiate a sale of the property. Subsequently it was agreed between the defendants and Brooks that the latter should proceed to New York city, at the expense of the defendants, and endeavor to sell the property at a price of not less than $110,000, and that, in the event of a sale, Brooks should have twothirds of any sum realized beyond that price. In order to exhibit Brooks' authority to gell the property the defendants executed to him a bond, dated July 25, 1879, giving him an option to purchase the property at any time prior to January 1, 1880, at the price of $160,000; and at the same time they delivered to him a letter of the same date, giving him full authority to dispose of the propE'rty at that price, and containing . also this statement: "We consign to you this property, with all our rights and title, being in substance the same as those stipulated in your bond, in virtue of a bond executed to us by the owners dated June 3D, 1879, and expiring January 1. 1880, certified by a notary public and the Mexican consul, a duplicate of which will be sent by the steamer Newberne, sailing August 5, 1879, to La Paz, to be legally recorded... Brooks arrived in New York city in August. In October he met the members of the firm of Hatch & Co., Wall-Street bankers, and some of their friends, including L. E. Chittenden,who was the counsel of Hatch & Co., and a lawyer of exceptional familiarity with the conditions of mining enterprises. After several interviews Brooks entered into a tract with Hatch & Co., of the date of October 28, 1879,executed by him as attorney for the defendants, whereby the defendants gave Hatch & Co. an option to purchase the mining property on or before January 1, 1880, at the price of $160,000. The contract provided that Hatch & Co. should cause the property to be visited and examined by an agent in their own interest without liny avoidable delay, and, if the result of such examination should be satisfactory, and should verify and confirm the statements made to them respecting the situation, value, and promise of the property, they should give notice to the defendants of their election to purchase the property, and in that case should make the payment or deposit of $160,000, and receive a good and sufficient deed with the usual covenants conveying the property in fee-simple and free from all incumbrances. The contract also provided that the defendants would use their influence with the beneficial owners of the property to extend the time for making payment and completing the sale, not exceeding two months beyond January 1, 1880, and that Hatch & Co. might at any time before the actual payment of the purchase price rescind and .cancel the agreement to purchase. When this contract was made Ha,tch & Co. knew that the only title of the defendants to the property was a bond executed to them by the owners, the letter from

CORTES CO. 11. THANNHAuaER.

733

defendants to Brooks of the date of July 25th having been exhibited to them, as well as the bond executed to Brooks by the defendants. Contemporaneously with the execution of the contract Brooks delivered to Hatch & Co. a written stipulation, whereby he promised that the commission of $12,500 accruing to him on the sale of the property should be divided between Hatch & Co. and the persons they might associate with themselves as a company or syndicate in completing the purchase; that he would assume two-tenths of the purchase and provide two-tenths of the purchase money if it should be thought best that he should take an interest and become an officer of the company which should be organized; that one-tenth of the stock of the company should be issued to Hatch & Co. as their compensation for forming a company and completing the purchase, and another tenth to Mr. Chittenden as his compensation; and that he, Brooks, would place such mines as he then owned on the San Antonio lode to the joint account of Hatch & Co. and himself. Brooks informed defendants by telegrams that he had closed negotiations for selling the property for $160,000, less $12,500 commission. In November, Chittenden, as the agent for Hatch & Co., mentioned in the contract, visited lind examined the property in Lower California, accompanied by Brooks. While he and Brooks were at the mines, and on November 15th, Brooks procured from one of the owners of the property, who assumed to act in behalf of all, a written consent to extend the time of the option until March 1, 1880. While at the mines, and on November 26, 1879, Chittenden wrote to Messrs..Dauriac, Vermot & Ernst as follows: "On the eve of my departure from this place, and after as thorough an examination of the mines and ores upon your property as their present development has enabled me to make, I take pleasure in sayinK that I shall inform the parties in New York at whose request I came here that in my judgment the property fully sustains, and in many respects surpasses, the statements made by your representative in New York, and that I shall recommend its purchase. I desire to add that I am much pleased with your own acts and treatment since I came to the Valle. You have given me every facility for , my investigation, and have answered all my questions with candor and intelligence." Chittenden returned to New York about January 1, 1880. He made a favorable report to Hatch & Co. respecting the property in writing. Among other things, this report stated that the cost of the improvements, including machinery and buildings, made upon the property by the present owners had probably exceededS100,OQO. In referring to Brooks the report states that he had offered, if a company were formed, with a proper capital, to work the mines, and not speculate in the stock, to take and pay for upon equal terms with others such portion of the stock as might be desired, and to return to the Valle for a period of four or six months to organize the enterprise, etc.; but that this offer was made upon condition that a competent manager, having the confidence of the shareholders, should have exclusive charge of the finances of the company. Brooks returned to New York shortly after Chittenden. Thereafter Hatch & Co. concluded to form a syndicate and or-

734

FEDERAL lUilPoRTER,

vol. 45.

ganizea corporation to theproperty; and it Was arIMween them;and:']3rooksthat' the price of the property should be Hatch & Co., and that the property should be conveyed by them to the syndicate or corporaiion for that sum and one-sixth of the stock of the corporation. It ,,'as also arranged between them that Brooks should place $40,000 or $50,000 of the syndicate subscription, and they should place the balance. Thereafter a subscription agreement was prepared by Hatch & Co., whereby they agreed with each subscriber thereto to sell and convey the property to a company to be organized by the subscribers for the sum of $150,000 in mane,}' and one-sixth of the capital stock of the company to, be formed to own and work the property.' Between February 10th and 28th the syndicate of purchasers had been' formed, and the subscriptiooagreement signed for the whole purchase'money; Brooks, who' had in the mean placed $10,000 of the subscription with another person in New York, subscribing $40,000 for himself, and Hatch & Co., Chittenden, and their friends subscribing the balance. Hatch & Co. and the other members of the syndicate were induced to becomepurchaisers of the property largely by confiding in representations made by Brooks respecting his mining operations at Triunfo, a place about 10 miles distant from the Valle property. He rep'resented to them that ;he had built up at Triunfo from a small beginning an extensive and successful mining establishment, and had remained there about 14 years; that he had invented new machinery and processes, and opened many mines; that the business no longer rl?quired his personal attention, and he had turned it over to the charge of an agent,and removed to San Francisco. He stated that he was not a seller of mines, but wanted to induce a few influential men in the east of Lower Califorto join him in taking up a new enterprise in nia; that the Valle property afforded an opportunity to invest a small sum which would pay dividends almost from the start, and would demonstrate what could be done in that region; and that he proposed to become a purchaser on the same terms with the others, and would give his associates the benefit of his experience in promoting the success of the enterprise. He said the owners of the Valle property were incompetent mine managers, had adopted wrong processes, had become involved in debt, and had quarreled with each other, and that he, as their friend, had induced them to agree to sell; that with great difficulty he had got them to consent to sell for $160,000, but in this price there was an allowance of $12,500 for commissions, which would be shared among the purchasers. He stated that the defendants had no interest in the property except their debt and an ordinary business commission on the sale. by the syndiFebruary 28, 1880, the Cortes Oompany was cate as a New York corporation, pursuant to the statutes of New York, and its first corporate meeting was held upon that day. Its capital stock was fi1Ced at $1,000,000, divided into 50,000 shares, and Chitten':' den was 1llected president' and :Brooks vice-pI'esident. Shortly thereafter BrOOKS assigned to Hatch & Co; ,the bond executed to him by the defendants of the date of June 25, 1871}, and Hatch & Co. assigned this

CORTES CO. V.

735

bond, together with the contract .of October 28th between themselves and the defendants, to the company; and Hatch & Co. entered into a covenant with the company that it spould be placed in possession of the property under a good and sufficient title, and under a deed containing the usual covenants of warranty. Thereupon the whole capital stock of the company was issued and delivered to Hatch & Co., and by them distributed among the members of the syndicate according to their respective interests, Brooks receiving 10,000 shares. February 28th, pursuant 'to instructions of the company, the president sent the defendants a telegram as follows: "The CortpB Mining ('.ompany accepts sale of mining prlJperty, payment to be made when in possession under good title. Can make a small remittance to bind contract." The next day the defendants replied by telegram, stnting that they would advise Dauriac, Vermot & Ernst to prepare title for the Cortes Mining Company, and that the small remittance was not required. At this time the defendants had not been fully informed by Brooks of what had taken 'place in New York between himself and the other members of the synclicate; but they had been informed in substance by telegrams from him :that the Cortes Company had been organized to acquire the property; that the subscription for the purchase had been signed, that the purchase price was $150,000, and that Brooks had subscribed for $40,000 of the price. Brooks was irresponsible pecuniarily, and the defendants knew it, and they understood that the $40,000 which he had subscribed would have to be deducted from the $150,000, the purchase price of the property, and that they would have to be content with receiving 8110,000 for the property, or treat the fruits of this subscription as the profit to be divided between him .andthemselves upon the sale, of which would belong to him. Immediately upon learning b)- his telegrams that the property had been sold upon terms by which they would receive only $110,000 in money, they undertook to procure a modification of their contract with the owners, and in this behalf one of $em took the steamer for La Paz, which sailed March 3d, and yisited the owners at Valle Perdido. While there be induced the owners to aclieu of the $110,000 which they were to receive by the "cept terms of their original contract with the defendants; but to obtain this ,reduction he had to pay to Ernst, secretly,the sum of $3,000, to induce him to consent to it, and he also had to a\lsunie the payment of Qertain debts of the owners, amounting to about $7 ,300. !thad been understood between Brooks and the others of the syndicate that he would superintend the operations at the mines, without compensation, until the business should be properly organized; and as soon as the company was incorporated ,it was definitely arranged between him and the officers that he should go so as to reach La Paz by the steamer Newberne, which »,ould sa,ilf\'om San Francisco early in April. March 1st the company notitled,the defendants that its, agent would sail on the Newin April l , and should be placed in pQ$Session of the propertY:1,and .meanwhile to follow instructions. On or. about

736

FEDERAL REPORTER,

vol.

45.

March 8th ;Brooks left New York for San Francisco and Valle Perdido. He <larried with him a written of instructions from the company, authorizing him to receive the title to and take possession of the mining property for the company. The letter contained also the '":>llowing clause: "It is our wish, and on this subject we would give definite ins ,ructions, that no debt of any character be incurred in the company's name beyond the amount of the letters of credit or other written authority with which you are now furnished, or which may be hereafter furnished to yOll or our business manager. If at any time, or by any accident, this sum orsums should prove insufficient, you are to suspend the works of the c\>mpany untilreceipt of further instructions." He carried with him also a letter of credit addressed by the company to the defendants, dated March 4th, authorizing him to draw his drafts at five days' sight on the treasurer in such amounts as he might find necessary in the business of the company. He also carried with him a letter prepared by the president of the company, which he was instructed to deliver to the defendants for their signature. This letter was addressed to the president of the company, and read as follows: "As soon as it can con veniently be done after the arrival of your agent, Mr. Henry S. Brooks, in Lower California, a deed conveying the property known as the 'Valle Perdido,' as granted to and held by Messrs. Dauriac, Vermot & Ernst, with all the machinery, improvements, and personal property thereon, will be executed to the Cortes Company, and Mr. Brooks will be put into possession thereof for said company, in conformity with the laws of the country where the property is situated. The deed will be forwarded to our agent in the city of New York, with instructions to deliver the same to you upon payment of the purchase money. The original price was $160,000. Mr. informs us that the commission of $10,000 has been waive,d, and instructs us to proyide here for the amount of liis subscription,$40,OOO. You will therefore receive the deed of the property from our agent on paying to him the sum of $110,000. Reasonable notice of our willingness to deli ver the deed will be given to you, and our agent so instructed to consult with you, and to arrange for the payment of the money." Brooks arrived in San Francisco March 19th. He presented to the defendants his letter of instr\lctions, the letter of credit, and also the letter which the president of the company had prepared for their signatures. The defendants signed the latter letter, and mailed it to the company. Brooks remained in S'an Francisco until April 3d, when he sailed by the steamer for La Paz. While he was in San Francisco, and on or about March 30th, he received from the company a formal power of attorney, which had been prepared before he left New York, but had not been delivered to him, authorizing him to take title to and possession of the mines, and do all acts and execute all papers which he might deem proper to vest and confirm the title of the Cortes Company to the property. Before he left, he and the defendants came to an understanding, by which they were to advance $8,331 towards the working' capital of the company, as the proportion to be contributed for his 10,000 shares. April 19, 1880, Brooks having reached Valle Perdido, Messrs. Dauriac, VerJXlQt & Ernst executed to him as agent for the company, documents

COR'rESCQ. V. '.rHANNHAUSER.

737

of title conveying the prolJetty·to the Cortes Company, and Brooks took formal and actual possession. The documents were forwarded to the defendants. The defendants forwarded them to Seligman & Co., their agents at New York, with instructions to deliver them to the company upon receiving payment of $110,000; and ,the company Was duly notified by the defendants by telegram and letter. The day the document reached Seligman & 2d,-'-the company received a letter from the defendants,stating that thedEifendants hild on May 25th indorsed two drafts drawn by Brooks on the company, one for 86,000 and the other for 88,300. At the same time the company received letters from Brooks, and a translation of the documents of title, which were in the SpanisH language. The translation disclosed'that Dauriac, Vermot & Ernst had received $80,000 for the property, and that the property was not worth more than that sum, and the letters that· Brooks had drawn drafts largely iIi excess of his authority, being in all for about $23,500. The letters from Brooks also informed the company of facts respecting the merits ahd prospects of the enterprise, and his transactions since he had been at the mines, which strongly tended to impeach his business capacity, his integrity, and the truth of some of the representations made b} him as inducements to the purchase. The company immediately sent a telegram to the defendants as follows: "Consideration expr!'lssed in deed is $80,000; consideration in your contract with Hatch $150,000. "'What becomes of the difference?" The next day the oompany received a reply from the defendants by telegram as follows: "Owners get $80,000; balance for assumption and payment of debts and for supplies on hand at time of transfer. 'and for traveling and other expenses inourred." 'The 'president of the" company immediately. wrote to the defendants as follows: ' ,
"

.' ," Although. our power of attorney directed plainly otherwise, and the dispatch was .sent :Mr. Brooks.on the eve of saillng that the corporate name was the Cortes, Company, aJ;ld not the Cortcs :Mining Company, the deed is ,made to theOortes Mining Company, and 'could not on that account be accepted without correction.. The deed also contains provisions showing that the consideration paid is $80,000, instead of $150,000, and that,the property is not worth mOre than the smaller sUm. These provisions raise a question of the gravest .character, and until it is arranged l have no righttc;> reconlmend the payment be made, there would acceptance of tbe title to our trustees. be a sum of $70,000 'for which no consideration appears to be received by company. The error is unfortunate, and is calculated to Create a feeling in the minds of our shareholders that some one between the owners and our company is to make a profit on the sale. The inquiry was frequently made whether there was any profit in this sale to anyone, and always promptly met by a negative answer a!ld the statement tbat the price only just reimpursed the owners for t}1eir investment. Your relation to the property was stated to be that of creditors and agents for the owners. A to anyone on. this sale would not only invalidate thesaIe, but would release our subscribers from their obligation. I can see n:o better way than to preserve evv.45F.no.11-47

738
;Mr. Brooks next steamer, one inbeh"l,f eOf tbecompaoy wUlmeet yourselves and " '" ,'. ' him iri.!)an,':E'rancisco.,"',·.

that they the arrival of Mr. i about th,e 22d instant. Since" April 19th, ,qompany had I in possessi9n of tb,e prpperty, conducting miningo,perations on an inconsiderable scale,un4en th!'l supervision of Wilds, JITpo,had as general busines.s Brooks,leftJ.he mines about the middle of June, arri,ving iJ,1ij)an Francisco abou,t lune 22d. ThencefQ"tlJ. his connection with the ApNareJ,1tly he, was broken in body and 'miJ,1d ,as the 9f excessive use.. Qfliquor while he had been at the mines. Dllring. short period ()f his, admillistrati9n as, vice-presideJ;lt an acwith the defeQdants arising from advances made for the purcha!!'ElJof s,up;plies for tPe comp;tny upon his; order, and from drafts drawn the company by him, amounting 'to over $30,000. Chittenden, Francisco' July lat, and had an interview with soon after with. the defe119ants. Ee remained in San FranIn,the mean time, having been placed in possession by t,ll,e (,lefE;lndants of the letter;s and documents which had passed between themselves and the mine-owners and Brooks in reference to the tbatJhe made by Brooks that the whole purcbiise price wa;s, totheorigillal owners, and that no one between them and the"pufchasers was to make a profit on the property, being mIse, avoided ,the '!la)e. Various; propositions looking to a new contract by which the company might be induced not to rescind the sale reached. July were 20th he shouldnQ lopger consider any proposed arrangement except under the advice of the board oidi... rectors a",ait , August 2d, havingrecel\Ted 'ad vices by telegramfrohl the Chittenden notified the defendants the company had decided to rescind the contract, and abandon the enterprise." August 3d Chittenden propoEled to the defendants instruct .general manager, Mr. Wilds, .oithe smce tbe departure of Brooks, who lilld ,be-en left 10 pqssession, to Mr. for the Mendoza beto ing an agent of ;the at Valle Perdido. The defendants elined this proposition." i ,Ontbe, satii'e day Chittenden notified Wilds by mail to ll.bltndbli ithe property, lind cease operations. Immediately upon receipt bfthis leHer, 'a.nd in the latter 'part of August"Wilds carried out instrubtioi'ls, away. ',Since that tim6,'lleither the comowners have been in possession of the property,. ,i '" "i. Upon these 'facts the'right fof the complainant to rescind the salem clear ofany'other elell1 ent offraud the false price lit he'offered the the ,to receive, and that ther toJ'egel"{e a.QY profit by the sale,

a:u

c6lt·£:&s· 'co.

'1". ·THANNnXUSl!:rt.

739

to".annultbe contriwt madenby'onewbow.as about to enttlrint<Fthe fiduciary relation of· a cOo'pullobasel' with those to whom hernade it; Thil: materiality of such representations Its inducement for the c6ntract is obvious. The statemehuded them to suppose that he was willing to risk his money in the ·enterprise,and'wasrisking it, upon-equal terms -tvith them; ,and that they were obtaining the property upon the best terms that could be made with the owners; whereas,: if they-had stood that he w.as not anS'money, and that his wfts.merely a bonus forrgetting them to buy We property,they might have attempted to get better.terms,if,inGl-eed,they would hav& felt in';' elined to C'onsider the purchase ,at all. There is a fiduciary relation between promoters and between a promoter and the eompany in its corporate' capacity wbich imposes on the former the duty of full and fair disclosure oiaU'facts whkh,if.Jtnown, would, probably lead toa withdrawal from the enterprise. . It is tbe duty of a 'pron1<>tel' towards those who are invHed to, in :enterprise not only to abstAin 'from stating as a/fact that which is not so, but not to omit to state:any fact. withinhia knowledge ,the existence of which might in any form affect the extent or the:qutility of the advantages held out as an indueement. Phosphate Co. v.Erlanper,6 Oh. Div. 73; BagnaU v. Carlton, 6 Oh.Div. 371; Mining Co.v.Grant, 11 Oh. Div.918, 936; Railroad Co. v. Kisch, L. R. 2 H. L. 99, 113. As Brooks was the agent of the defendants ill selling the property,notwithstanding they werApersonaHy. innocent of lilisrepresentatiori,'his fraud is imputable,to them. The cOlltractthey atcseeking to enforce in the suit at law is tainted by his frand. Their action proceeds upon the theory that he was their agent in making thesalc; and they cannot repudiate: his <8.cts while seeking to obtain the fruits. They were entitled by the agreement with him to share the profit arising from the sale, and to claim one-third of the stock represented by the subscription. The theory -that his agency terminated before the transaction was consummated is ,too preposterous to require notice. The complainantoftered to rescind in due season, and did all in its power to restore the 'defendl1nts totheposilion which they occupied at the time of the sale·. In, the absence of any evidence as toihe law of Mexico, inasmuch as tbe documents of title were never delivered to the complainant, but were left in the hands of the agents of defendants at New York city, awaiting payment of the purcbase money, it must be assumed that the complainant did not acquire any documentary title to the property. Oonsequently it was not incumbent on the complainant to tender a reconveyance, and the surrender of the possession of the property, with notice to the defendants, was a sufficient offer of rescission. The complainant insists that the defendants should be held responsible for the expenses incurred in the organization of the corporation, and in its administration, including the services of its officers and agents, because these expenses were the direct result of the fraud committed by Brooks. Brooks was the agent of the defendants merely to sell the property. If the purchasers chose to incur unnecessary expeost'S with a

an

740

DDERAL REPORTER,

vol. 45.

view of capitalizing their investment and managing it through the instrumentalities of corporate organization, that was not the affair of the defendants; and the losses, incident thereto are not the direct or immediate consequences of any acts ofBrooks for which they are accountable. The demand of the defendants for money advanced and paid out for the company pursuant to the request of Brooks as vice-president, and while he was in charge of its affairs at the mines, is a valid claim against the company to the extent to which Brooks was authorized to obtain credit by. his letter of instructions. That letter l which was shown to the defendants by. Brooks, .informed them that he was to incur no debt of any character beyond the amount of the letters orcredit or other written authority with which he might be furnished by the company. He was furnished by the company with a letter of credit for $10,000, and that letter was shown by .him to ,the defendants. Had it not been for the limitation as to the amount of debt which he was authorized to incur, the defendants would have been justified, so long as they acted in good faith, in dealing with him as with a general agent of the company. He was the alter ego of the company at the mines, carrying on operations there which necessitated large monthly expenditures for supplies and wages; and the defendants, as the bankers at San Francisoo of the company,would have beElIiauthorized· to advance moneys upon his drafts, and pay for supplies ordered by him apparently in the legitimate busi* ness of the mines. If the defendants had shown that·the company in any way got the benefit 'of the moneys which they advanced in excess of $10,.000, they would be entitled to'recover the excess. As it is, they only recover to the extent of $10;000, and from that amount is to pe deducted the draft of $4,209 whioh.had been paid by the company. A decree is ordered for the complainant, annulling the sale, and staying further prosecution of the suit by the: defendants to recover the purchase price. Pursuant to the stipulation filed by the complainant and by the persons composing its board of trustees, the defendants are entitled to judgment in the other actions at law for the sum·which has been indieated, and the decree, in this suit will so adjudge,;a.bd will provide for a. stay of prose0ution o£those. actions, except to collect :that sum and the taxable. cost$ of, the auits.
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VETTERLEIN 'V. BAnKER.

741

VETTERLEIN

et ale

'V. BARKER.

(Of,rcuit Court, B. D. New York. Harch 21,1891.)

L

VAOA'1'ING DEOREE-EvIDENOB-RBS AlnUDlOATA.

the court which rendered it, where it appears that the collateral decree was void for want o.f jUrisdiction of the court, and was vacated tor that reason. The vacating of tbe decree did not detract from its original inoperativeness as res adJudicata, and therefore is not new matter arising since the decree now to be annulled, within the rules that apply to bills of review.
S.

OF TRUSTBB. " . .

A bill of review to annul a decree cannot be maintained on the ground that a decree in flo collateral suit between the parties, which was introduced as res ad:1udft. cata upon some of the issues in the cause, has, since the decree, been set aside by

A bill to annul a decree for fraud cannot be maintained upon the theory that the defendants, who were trustees, were derelict their duty to their cestuis que trustent in not availing themselves ot defenses which they might have presented, where it does not appear that the complainant in the suit was cognizant ot any misconduct on the plutof the trustees, and where they were the proper parties to represent the beneficiaries aud litigate the cause for them. Under such circumstances the verse party cannot be deprived of the benefit of the adjudication which he has obtained.

In Equity. Roger M. Sherman, for plaintiffs. John ProctOr Clarke, for defendant. W AI,LACE,' J. This if! a bill to reverse and set aside a decree of this court, (16 Fed. Rep. 759,) in affirmance of a decree of the district court (Id. 218) adjudging that certain insurance policies, the property of the bankrupt firm composed of Theodore H. Vetterlein and Bernhard. E. Vetterlein, and assigned to trustees for the benefit of the wife and children of Theodore H. Vetterlein, were so assigned in fraud of the rights of the assignee in bankruptcy of the Vetterleins. The present complainants are the wife and children of Theodore H. Vetterlein, the beheficiaries named in the assignment of the policies. The defendants lire t4e assignors in bankruptcy, who are the successors of the complainant in the former suit, and the defendants in that suit. The bill proceeds upon three grounds: (1) That a decree in a. collateral suit between the parties to the original suit, which was put in evidenco as res adjudicata. upon the issueoUraud, has since been aimulled by the court which reh:. dared. it as void for want of juriediction; (2) that the use of the coIlat:. eral decree as evidence in the original suit was in fraud of an agreement made between the parties to that suit;· and (3) that the defendants in the original suit, who were trustees for the present complainants, violated their duty to their cestuis que trustent by omitting to avail selves of defenses which existed, and setting up defenses in hostility to their trust,-of all which the complainant in the original suit was aware at the time. The bill has been discussed by counsel as though it were . a bill of review. So far as it proceeds upon the theory that the vacating- of the collateral decree is new matter, which has arisen since the original decree, it would state facts appropriate for such a bill, if it did not appear that the collateral decree was void for want of jurisdiction of