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Chain O'Mines Inc. v. United Gilpin Corp.

January 26, 1940

CHAIN O'MINES, INC., ET AL.
v.
UNITED GILPIN CORPORATION ET AL.



Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Evans

Before EVANS, SPARKS, and KERNER, Circuit Judges.

EVANS, Circuit Judge.

This appeal is from a decree directing defendants to convey to plaintiffs, free of claim for money advanced to satisfy liens, and without right to any reimbursements, certain mining properties in Colorado theretofore owned by Chain O'Mines. The order of conveyance was based on the theory and the finding that the defendants acquired the property through a fraudulent conspiracy.

The facts are most complicated. They can be best stated by identifying the chief actors, both personal and corporate, and setting forth the historical facts, chronologically.*fn1

Plaintiff, Chain O'Mines, was in 1934 the owner of large tracts of land described as gold mining properties. Its financial affairs were in desperate straits. Its property was subject to a $300,000 mortgage. It had unsecured creditors with claims aggregating $100,000. There were unpaid taxes, and labor and power claims. Two holders of labor and power claims, the Public Service Co. of Colorado and Edward H. Lewison (through his attorney Leroy J. Williams), owned a lien claim (approximately 32/97ths and 65/97ths, respectively) which they purchased on public sale for $97,226.65. It was in an attempt to rescue Chain O'Mines property from this lien that most of the ensuing complications and difficulties arose. The fractional interests, during the redemption period, were the constant subject matter of contract between the owners and the corporate and personal defendants, which contracts arranged for instalment payment. These contracts generally were immediately in default, and new efforts were directed to financing the defaults.

A Dr. Muchow had been the leading spirit in Chain O'Mines, and he tried desperately to raise money from the stockholders, and failing this, approached defendant Georges Kremm, a Chicagoan, and one evidently well versed in corporate finance. Kremm put Charles L. Schwerin and Louis M. Seeley into the picture, the former, president of many corporations, and the latter on the board of a Colorado corporation. These three men are the central figures in the alleged conspiracy, the corporate defendants being instruments of their creation in furtherance of their alleged scheme, and employees of those corporations. These three men personally contributed substantial amounts which were used in the purchase of the lien certificates and towards the operation of the plaintiff company and its mines.

The District Court was of the firm belief that the three men (and incidentally the other defendants) had devised a fraudulent scheme whereby they would gain possession of the plaintiff's mines, and that they in fact mined ore greatly in excess of the value of $700,000*fn* for which they should account. The trial court interpreted the defendants' failure to float the $2,000,000 mortgage provided for by the June 19, 1934 contract as indicative of their intent to cheat the plaintiff after lulling the plaintiff and its stockholders into the belief that the acquisition of the labor and power lien certificate with defendants' funds was a temporary phase in the refinancing project, and that all its property would be restored to it upon the floating of this mortgage, which never occurred.

The conclusions of law which the District Court made after hearing the evidence may be briefly summarized as follows: Kremm and Schwerin on May 8, 1934, entered into a conspiracy, and were later joined by Seeley, to defraud plaintiff of certain of its property; that Schwerin and Seeley knew Kremm was a stockholder and director of plaintiff, at the time the June 19, 1934 agreement was executed; that the three aforenamed defendants effectuated their scheme through the purchase of a sheriff's certificate on a labor and power lien, from Lewison and Public Service Company, and by acquiring tax deeds purchased in the name of Enos and paid for by Beedee Management Company, one of the defendants, on property of plaintiff; the scheme resulted in their acquisition of legal title on November 23, 1937, of plaintiff's property; such acquisition resulted in equity's impressing a constructive trust on the property; that United Gilpin Company, present holder of the property, holds it illegally because all mesne conveyances are tainted with the fraud and are void; that said United Gilpin Company holds the property impressed with a trust, "free from any and all liens or claims of defendants * * * and without indemnity, reimbursement or credit to such defendants for loans, contributions, advances, and for debts and liabilities incurred by said defendants, or any of them, and should be forthwith conveyed to Chain O'Mines, * * * "; that the three individuals controlled the corporate instrumentalities and used them in perpetrating their fraud; that plaintiff is entitled to an accounting of the properties and proceeds of operation and receipts; it granted a perpetual injunction; decreed equitable title in plaintiff in the real and personal property; ordered a reconveyance of the property "without indemnity, reimbursement or credit * * * for loans, contributions, advances, and for debts and liabilities incurred by said defendants."

We direct our attention first to that provision of the decree ordering a conveyance of the property involved to plaintiff, "without indemnity, reimbursement or credit * * * for loans, contributions, advances, and for debts and liabilities incurred by said defendants." Is this conclusion justifiable?

If it were to be conceded for a moment that a trust ex maleficio existed, and a court of equity properly directed the conveyance of the property, even then, such order should not direct the reconveyance except upon the condition that reimbursement be made to the trustee ex maleficio, of the amount which he had expended in the acquisition of the property. A trustee ex maleficio may not profit from his wrongdoing, but equity will not penalize him for contributions which are really for the benefit of the cestui.

Volume 1, Section 158 of the Restatement of the Law of Restitution provides:

"A person is entitled to specific restitution of property from another * * * only on condition that he compensate the other for expenditures with reference to the subject matter which have inured to his benefit, to ...


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