again by the Circuit Court of Appeals, and finally by the Supreme Court of the United States. Mr. Justice Holmes delivered the opinion of the court, which was unanimous.

The Massachusetts cases went again to the Supreme Court of the United States on writs of error from the final decrees of the Massachusetts court, but on a federal question with which we are not now concerned." The decision affirmed the Massachusetts decrees.

8

On the facts which I have already stated the Massachusetts court held that Bigelow was liable. If nothing more had appeared the case would have been decided as it was. "There are, however," said the court in the final opinion after the trial on the merits, "certain aspects of the evidence which seem to us to make it [the case] essentially different and materially stronger for the plaintiff.” These "aspects of the evidence" do not concern us now, for I am not criticising the decision but the doctrine which the court discussed through twenty pages of the opinion and laid down as applicable to the facts which I have stated. For our present purpose we can discuss the case as if the decision had turned, as the court was prepared to make it turn, wholly on those facts.

9

The assumption at the root of the Massachusetts doctrine is that, in a case like the Bigelow case, subscribers are deceived as to the real value of the company's assets. I do not say that this is laid down as a proposition of law, but I do say that unless it had been assumed as a fact the doctrine of fiduciary duty to the corporation in such cases would never have been dreamed of. The doctrine would never have been invoked unless the court had thought that the promoter had used the company as an instrument of fraud to deceive the public. The opinions in the earlier cases 10 and the opinion of Mr. Justice Rugg himself make it perfectly clear that the court assumed from first to last that in such cases subscribers are in fact deceived. It was assumed that subscribers have a right to believe that the promoters have taken only so much stock as repre

10 Hayward v. Leeson, 176 Mass. 310, 57 N. E. 656 (1900); Old Dominion Co. v. Bigelow, 188 Mass. 315, 74 N. E. 653 (1905).

sents the fair market value of any properties they may have sold to the corporation. It was assumed that subscribers have a right to believe that, if the promoters had charged an excessive price, the corporation, acting under their control, would not invite the public to take stock at par without a full disclosure. The doctrine of fiduciary duty was originally designed to afford protection to subscribers.

It is difficult to see why people who subscribe for stock are deceived by the promoters, when, if the promoters subscribe for the stock themselves and sell it again in the market, the people who buy it are not deceived. It is difficult to see why a subscription is so different from any other kind of purchase. It is difficult to reconcile the proposition that in legal contemplation the subscribers are deceived with familiar and well-established rules in the law of sales. We suspect that the courts were too quick to assume that the big promoters with their corporation on the one side and the small subscribers on the other do not meet on an equal footing and that the latter are likely to be overreached. We suspect that if the first case to arise had been one in which all the stock offered for subscription had been taken by a single rich man, the doctrine of the promoters' fiduciary duty to the corporation would not have seemed so plausible.

Although there may be serious difficulties in the way of maintaining it as a proposition of law, I nevertheless intend to assume, for all the purposes of this discussion, what the Massachusetts court assumed, namely, that when a promoter deals with a corporation as Bigelow dealt with the Old Dominion the subscribers are in fact deceived. That an appropriate and adequate remedy should be provided was, as I have already said, the view originally taken by the court. To provide such a remedy was the purpose and the only purpose which the court had in mind.

Serious misgivings as to the soundness of the Massachusetts doctrine rise in our minds when we examine the opinions of the court with care and reflect upon the consequences of applying the doctrine as the court has laid it down, because we soon discover that its reason was lost sight of and its purpose was not accomplished. To begin with, therefore, I intend to show that in the Bigelow case the doctrine was so applied that its purpose was accomplished only to a small extent, if at all, and that a great many people whom Bigelow

had not wronged, directly or indirectly, profited at his expense. Incidentally, I intend to show that the Massachusetts rule, which makes the market value of the stock wrongfully taken the measure of the promoter's liability to account, also fails to accomplish the purpose of the doctrine of which it forms a part. The rule, to be sure, is perfectly consistent with the doctrine as the Massachusetts court finally shaped it, but cannot be reconciled with its original reason and its original purpose.

For the sake of argument and simplicity of illustration, let us imagine a small corporation with $15,000 worth of capital divided into shares having a par value of $1 each. The promoters convey to the corporation properties worth $8,000, taking for them 13,000 shares. Two thousand shares are afterwards sold to subscribers. This keeps the relative proportions substantially what they were in the Bigelow case.

We can first suppose that the subscribers discover what has been done soon after they have paid their subscriptions and while they and the promoters still hold their stock - the promoters their 13,000 shares and the subscribers their 2,000. The corporation would naturally have its choice of three remedies to compel (1) rescission, or (2) the return by the promoters of 5,000 shares, or (3) the payment by the promoters of $5,000. Any one of these remedies would accomplish substantial justice. The remedy of rescission (1) would work like an emetic. The promoters would disgorge all their stock and would get back their property. This would leave the corporation with cash assets of $2,000. All the stock, 2,000 shares, would be held by the subscribers and would be worth par. The surrender of 5,000 shares (2) by the promoters to the company would not affect the real value of the company's assets. The assets would still consist of property worth $8,000 and cash paid in by the subscribers $2,000, or $10,000 in all. The amount of stock would be reduced and the company's assets would be represented by the 8,000 shares retained by the promoters and the 2,000 shares originally taken by the subscribers. The payment of damages to the amount of $5,000 (3) would increase the value of the assets to $15,ooo, and each and every share would then have behind it one dollar's worth of property and no more. Any of these remedies would work substantial justice between the promoters and the subscribers.

But unless the remedy be administered immediately the conse

sequences are likely to be very different. With the lapse of time things are likely to happen which reduce the number of remedies which can possibly be applied, and change greatly the actual effect of applying any one of them. Rescission may become improper or impossible for either of two reasons: (1) The condition of the property may have changed; its value may have been reduced so that restoring it to the promoters would not put them in statu quo; its value may have been increased so that it is not right to ask the company to restore it for what the promoters received as the purchase price. (2) The promoters may no longer hold the stock or be able to buy it in the market. In the Bigelow case involving the mine itself rescission was impossible for both of these reasons. It was impossible in the other case involving what were known as the "outside properties," for the second reason. Bigelow could not do his part in a rescission without returning all the stock that he had got for the property. He had disposed of all his stock and there was in the market no stock which he could buy. This same reason may likewise make it impossible to order the promoter to restore the part of the stock representing his unrighteous profit. After a time the only remedy left is very likely to be, as in the Bigelow case, an accounting for the value of the stock wrongfully taken.

The form of remedy, however, is comparatively unimportant. The important thing is the effect which the application of any one of the remedies has on the real parties - the promoters who have done the wrong and the subscribers who are the persons, and the only persons, who have been injured. If the remedy be not applied immediately the promoters may have disposed of their stock in the market before their wrongdoing has been discovered, and the subscribers may have sold their stock and taken their loss in ignorance of any claim which the company has against the promoters. Such changes in the situation of the parties were regarded as immaterial by the Massachusetts court, but I think it can be shown to a demonstration that they affected the equities in a most material and substantial way. And when I say the "equities" I am using the word not in a popular sense but in a scientific sense.

When, as in the Bigelow case, the promoters have disposed of all their stock, let us see whither the Massachusetts doctrine carries us. I do not mean to intimate that the court did not face the consequences boldly. They did face them not only boldly, but, as I think,

blindly. They pursued their theory that the promoter was a trustee regardless of the sense in which he might be so regarded and the purpose for which he might be so treated.

We are now assuming that the promoters have sold all their stock before the discovery of the claim against them and before suit is brought. The purchasers have bought with reference to the real value of the company's assets. The present holders of those 13,000 shares have presumably paid for them what they were really worth, or 6623 cents a share. They may have paid more. They may have paid less. But whatever they paid, the 15,000 shares of stock had behind them assets worth only $10,000, and 2/3 of par was all that the buyers had any right to suppose the stock was worth. We will assume for the present that the original subscribers have retained their stock. The company brings suit and recovers $5,000 in damages. This makes its assets stand as follows:

The subscribers' stock has been made worth what it ought to be, or $1 a share. But in order to accomplish the same result directly the promoters would have had to pay the subscribers only 333 cents on each of 2,000 shares, or $666.6623 in all. The promoters are in fact required to pay $5,000, and of this amount $4,333.33 goes to the stockholders who bought their stock from the promoters themselves and have not suffered in any way by reason of the supposed wrongdoing.

In the Bigelow case of what Bigelow was ordered to pay, or over eighty-five per cent of $2,000,000, inured to the benefit of stockholders who derived title from the promoters themselves and had not been injured by them.

It would certainly seem that if the corporation is allowed to recover at all it ought in such a case to recover for the sole benefit of those who have in fact been injured by the wrongdoing of the promoters, and then only so much as is required to make the injured persons whole.

It is plain that the original subscribers are the only persons really injured by the wrongdoing of the promoters. But if seven years,