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The railway company was entirely unable to pay $70,000 incash, and the stock had to take the place of the cash payment. They were reluctant to take the stock. The transaction was made at the instance of Judge Greene. The stock was not worth anything in the market. The road owed a floating debt of $500,000. We had no way of paying, except by its earnings and its stock, and by borrowing. * * *’ This testimony is not contradicted, and its truth must be conceded. It further appears that the mortgages upon the road were foreclosed, and the property was purchased by the mortgage bondholders, and the new company was organized. It is not claimed that the stock in question had, at the time it was issued to defendants, or afterwards, any value whatever; and, of course, the foreclosure of the mortgage extinguished the stock.
“ Now, under this state of 'facts, if we were to hold the defendant liable to the plaintiffs for eighty cents on the dollar of the stock which was issued to them, it would be grossly unjust. The stock was not issued in pursuance of an original stock subscription. It was issued in pursuance of the above resolution entered upon the records of the corporation. These defendants were creditors, and they took stock under that resolution, because they could get nothing else. The stock was then worthless, and so remained, and no creditor would have been defrauded if an unlimited amount of it had been issued. The plaintiffs, in effect, demand that, because defendants took this worthless stock, they are liqble to pay the debts due from the corporation to other creditors. This would be grossly inequitable, and we know of no rule of law requiring us to so hold. It appears that George Greene was president of the Burlington, Cedar Rapids & Minnesota Railroad Company at the time this stock was issued, and both he and Traer were stockholders and members of the construction company, and officers therein. These facts are alluded to in argument. But a stockholder or a director of a corporation may deal with the corporation, and the law will protect him, as well as any other party. His relation to the corporation goes only to the question of the good faith of the transaction. Smith 1/. Skeary, IO Sup. Ct. (Conn.) Rep. 456.
“ \Ve think the facts in this case fully rebut the presumption of fraud which attaches in transactions of that kind, and
that the court should have rendered a judgment against the plaintiff for costs."
It will be seen from the foregoing quotation that no question is made as to the general rule that the sale of stock in a corporation by the directors for less than the price fixed by the charter is unauthorized, and the stockholder is liable for the unpaid balance. Or, repeating the quotation from Morawetz, found in the foregoing opinion: “ The law is well settled that every device by which the stockholders of a. corporation seek to discharge themselves from liability to pay their stock subscriptions in full will be treated asafraud upon creditors, and may be set aside if the company should afterwards become insolvent;" or, as expressed in Taylor on Corporations: “ If the property received is grossly unequal in value to the par value of the shares, the subscriber who received the shares originally, or his subsequent transferee, with notice of the circumstances, may be compelled to make up the difference in value in a suit by or on behalf of the persons injured thereby." Now, why it is necessary for this court to elaborate and cite authority after authority to support so plain a proposition, is more than I can imagine. The principle is not denied by any counsel in argument in this case, and was not denied in the original opinion, but directly recognized. But the majority of the court ignore the question as to the right of a person found in the possession of shares of stock, which have not been fully paid, to show that he did not" acquire the same as a stock subscriber, and that the transaction by which the stock was issued to him was not a dishonest device, and was not prejudicial as to any one, and that no creditor or stockholder of the company was, or could be, defrauded thereby.
The evidence shows beyond question that the stock was absolutely worthless, and that the company was hopelessly bankrupt, and had no means to pay the debt due to the eonstruction company, and that the stock was taken because of that fact. ' In the face of this evidence, it is said in the majority opinion that the $70,000 of debt “ was more, as we infer, than the company could easily discharge by a cash payment; ” and that “ there might have been an understanding that dividends should be made upon it as upon other
stock; and that the remaining eighty per cent. should not be 6 Cor. Cas.—23.
called forfl" and tnat Greene and Traer may have had corrupt motives in taking the stock; and that they may have regarded the stock as of some value, and hoped that the company would be able to pay its debts. All the fear and apprehension expressed in the opinion as to the peril of creditors and other stockholders is completely answered by the undisputed facts in the case. The thought of the opinion, and, indeed, the only ground upon which it can be based, under the conceded facts, is that where a person who is a creditor takes payment of a debt in shares of stock in a corporation which is bankrupt and insolvent, and has nothing else to pay with, and the stock is worthless, and the face of the shares amounts to more than the debt, he must pay the difference to the other creditors of the corporation. In other words, the opinion holds that the transaction is conclusively presumed to be fraudulent, and the holder of the stock cannot be allowed to show that it was nota fraudulent device, and that the creditors were not in any manner prejudiced thereby.
I feel warranted in saying_that no court has ever held any such doctrine. I concede, and in the investigation of this case always have conceded, that it is incumbent on the person to whom the stock is issued to show the good faith of the transaction, and that no one was prejudiced thereby. \Vith due deference to the majority, I think that the case of Van Cott 21. Van Brunt, 82 N. Y. 535, is precisely in point. I quote from the head note of the case, which is a fair statement of the question decided:
“ Defendant V. B., being the president and director of the H. A. R. R., as such president entered into a contract with C., by which the latter agreed to build and equip a portion of the road for a certain sum in stock of the company, and for a certain sum in its bonds. Immediately afterwards, and in accordance with the previous arrangement, the contract was assigned by C. to V. B., who, with others associated with him, performed the contract at an expense less than the par value of the stock and bonds agreed to be paid therefor, which they received. In an action by plaintiff, among other things, to recover of V. B., as the amount unpaid upon the stock, a proportionate share of the difference between the par value of the stock so transferred and the cost of performance, it appeared that the contract was entered into and assignment
made in good faith, after full deliberation and consultation, with the knowledge and assent of all the directors and stockholders of the company, as the only means to insure the construction of the road, and that the amount expended exceeded the actual value of the stock and bonds delivered in payment. Held, that the stock so transferred was to be considered as full paid-up stock, and that the action was not maintainable."
I have written more than I intended to write, and would not have written anything if it were not for an abiding conviction that the majority opinion is radically wrong in holding, as it does, that the defendants are conclusively presumed to be liable. Their right to be heard ought not, in my judgment, to be denied by such proposition as that twenty cents are not worth I00 cents. If a laborer on the railroad at $1.25 a day had received for his month's pay $Io0 of this worthless stock, because he could get nothing else, according to the above opinion,the Louisa County National Bank, another -creditor, could recover of him the difference between the amount of his wages and the $100, upon the principle that twenty cents are not worth IOO cents, and his mouth would be closed against showing his good faith, and that the bank was not prejudiced, and the decision would be a solemn determination that by thus taking payment he was a party to a fraudulent transaction to the prejudice of the bank. '
Seevers, ]., concurs in this dissent.
225; Peck -u. Coalfield Coal Co., tr Ill. App. 88; Chouteau v. Dean, 7 Mo. Appt 210.
The main question in the principal cases is one of considerable difliculty. The rights of the creditors who have received the company's stock in payment as against the corporation, are not alone in controversy. If they were, a solutibn would, perhaps, be readily found. The matter is complicated by the claim of outside creditors to hold all owners of stock liable for amounts unpaid upon their stock, irrespective of any equities existing between the company and such owners. This claim is denied in England. Waterhouse '2'. jamieson, L. R. 2 H. L. (S. C.) 29; Currie's Case, 3 DeG. J. & S. 367; Carling, Hespeler and Walsh's Cases, I Ch. D. 115.
The English authorities are not, however, harmonious upon the question. Leeke's Case, L. R. Ir Eq. roo; s. C. on appeal, L. R. § Ch. 469; Disderi's Case, L. R. rr Eq. 242; Syke‘s Case, L. R. 13 Eq. 255; Forbes & ]udd's Case, L. R. 5 Ch.
169; Ferrao's Case, L. R. g Ch. 355. Compare a./10 Leifchild’s Case, L. R. I Eq. 23!; Ashworth 2'. Bristol, etc., R. R. I5 L. T. (N. S.) 561; Guest 2/. \‘Voi-caster Ry. L. R. 4 C. P. 9; I’ell's Case, L. R. 5 Ch. tr; Baron de Reville’s Case, L. R. 7 Eq. rr; Dent's Case, L. R. 15 Eq. 407; 8 Ch. 775; Fothergill's Case, L. R. 8 Ch. 270; Spargo's Case, L. R. 8 Ch. 407. Brown's Case L. R. 7 Ch. 102; Carling's Case, L. R.1Ch. D. n5.
The court in the principal case, it will be observed, distinguished the cases of Phelan 1/. Hazard, 5 Dill. C. Ct. 45;_ s. C. 6Cent. L. J. 107, and Van Cott 1'. Vari Brunt, 82 N. Y. 535. Another case apparently entitled to consideration, which does not seem to have been noticed at all, is Steacy 11. Litte Rock, etc., R. R., 5 Dill. C. C. 348. This was w ere, under its charter, the directors of a railroad company issued shares of stock to a contractor for building its road as full-paid shares (which contract was never questioned by shareholders as being either fraudulent or ultra vi/':.t), and such shares were sold by the contractor in the public market, as fullpaid shares to purchasers for value, without actual notice of the equities between the contractor and the company, the holders of such shares are not subject to such equities, or liable to have the shares thus issued and thus purchased treated as unpaid shares. See further upon this subject, Foreman 2/. Bigelow (U. S. C. Ct. Dist. Mass. Oct. 1878); s. c. 7 Cent. L. J. 430; Nich0ls's Case, 26 Weekly Rep. 334; Burkinshaw 1/, Nicholls, 26 Weekly Rep. 819.
Parties to whom stock in a corporation, organized for the manufacture and sale of a patented article which is worthless, is issued in consideration of their skill and experience in the business intended to be carried on, are liable to the creditors of the corporation on the stock so issued, in an action under Iowa Code, Secs. I082, 1084.
Statute of limitations held not to bar the action.