49 N.J. Eq. 402 | New York Court of Chancery | 1892
This is an application for the appointment of a receiver. Both parties are corporations. The complainant was organized under a law of the State of New York, and the defendant under a law of this state. They are the creations of different sovereignties, .and for that reason must be regarded as citizens of different states. The complainant claims to be both a stockholder and a creditor of the defendant, and seeks to have a receiver appointed for it on the ground of its insolvency. The defendant admits that complainant holds some of its stock as trustee, but denies that it is insolvent, and also that the complainant is its creditor. The sum in respect to which the complainant claims to be a creditor is a large one, being nearly $90,000, but its claim, both in whole and in part, is wholly unsupported by an express promise of the defendant. The defendant has never promised to pay a single penny of it in any way. On the contrary, it has always, from the time it was first intimated that a debt existed, disputed its liability, and denied that the complainant was its creditor. But it is not necessary that the complainant should be a creditor.
The power to dissolve an insolvent corporation and wind it up. is statutory. It formed no part of the original jurisdiction of the court. It was conferred by a statute passed in 1829, and the language by which it was conferred has remained unchanged-from that time to the present. Elm. Dig. 33 §§ 11, 13; Rev. 189 §§ 70, 72. This statute empowers the chancellor, on the-application of a creditor or stockholder, alleging that the corporation in which he is interested has become insolvent, to proceed in a summary way to inquire into the truth of such allegation, and if, upon such inquiry, it shall be made to appear that the corporation has become insolvent,,find shall not be about to. resume its business in a short time, with safety to the public and
The proof in support of a jurisdictional fact must always be-clear and convincing, for the court derives its power from the-fact, and hence, until the fact is shown to exist it has no power.. To doubt in such a case is to deny. The adoption of the opposite rule would unquestionably, in some cases, result in usurpation or an abuse of power. This is the view expressed by Governor Pennington, in Brundred v. Paterson Machine Co., supra. He there said, that where the proofs left the fact of' insolvency in doubt — his words are, “ if it be a balancing question” — and the conduct of tliose-who have had the management of the affairs of the corporation appears to have been upright and just, the court must resolve its doubt against the-application' and refuse to interfere. Nor is it the duty of the court to use its power in all cases where insolvency is shown. Something-more is required. The prerequisites prescribed by the statute-are, that it shall be made to appear that the corporation has become insolvent, and, also, that it will not be able to-resume its-business in a short time with safety to the public and advantage-to the stockholders. The power is only to be used when the ends of justice require its exercise. The court should strive in> such cases to foster and preserve rather than to- strangle or destroy. I suppose that but few manufacturing or mercantile-enterprises can be found, the business of which has been conducted according to the usual method' of buying and selling on-credit, and which have been in existence long enough’ to have passed through a period of great financial distress, when' business-was depresed, money scarce and values depreciated, that have not been in a condition of insolvency — when- enough- could' not' have-been realized from their assets, in any speedy way, to-discharge-their liabilities. At such times assets shrink and' shrivel in-value, but liabilities remained unchanged. They never diminish. Now, it is easy to see, if the court should put forth- its-power at such a time merely because the corporation assailed’ had, from-such causes, become insolvent, it would do -harm- rather than-good
This brings us to the initial question of the case, namely, has it been proved that the defendant is insolvent? The burden of proof is on the complainant. The defendant was organized in April, 1890, with a capital of $3,000,000, divided into one hundred and twenty thousand sháres of $25 each. Among the purposes for which it was organized were the manufacture, use and sale of electrical storage batteries. Making and selling such batteries is its principal business. The battery it makes is used for power, traction and illuminating purposes. Soon after the defendant's organization nearly the whole of its stock — one hundred and nineteen thousand, nine hundred and sixty shares of the one hundred and twenty thousand — was issued to the complainant. The par value of the stock so issued was $2,999,000. It was issued to the complainant to enable the complainant to acquire for the defendant the title to the storage battery plant and machinery then in a factory occupied by Henry G. Morris and Pedro G. Salom, at Camden, in this state; a patent issued to Edmund Julien, and two patents issued to Henry G. Morris and Pedro G. Salom; and also for the purpose of enabling the complainant to acquire for the defendant an exclusive license to make and sell storage batteries throughout the United States, under patents granted to Charles F. Brush. The resolution under which the one hundred and nineteen thousand, nine hundred and sixty shares were issued, declared, that the value of the property which the shares were issued to purchase was, in the opinion of the directors of the defendant, equal to the par value of the shares; in other words, the resolution declared that the property to be purchased with the shares was, in the opinion of the directors of the defendant, worth $2,999,000. The complainant, when it received the stock, knew of this resolution, and that the defendant estimated the value of the property, which the stock was issued to purchase, at $2,999,000. All of the property which the one hundred and nineteen thousand, nine hundred and sixty shares were issued to purchase has been transferred to the defendant. The defendant is still the owner of it.
The proofs show that the defendant’s assets, exclusive of its patents and license, are worth about $25,000, and that its liabilities, excluding the claim asserted by the complainant, amount to about $57,000. If this statement was fair to the defendant and embraced everything which, on such an application, was entitled to be treated and considered as assets, there can be no doubt that it would show that the defendant was in a state of hopeless insolvency. It would then appear that the defendant’s assets were not sufficient to pay fifty cents on the dollar of its liabilities, and if the claim of $90,000, asserted by the complainant, should be established, they would not be sufficient to pay more than ten or fifteen cents on the dollar. But this statement is manifestly unfair to the defendant. It leaves out of view that part of the defendant’s property which, from the beginning, has been regarded by it, and by the complainant too, as its most valuable asset, and which the undisputed facts of the ease show constituted nearly the whole foundation of its immense capital. The principal purpose for which the.defendant was created a corporation was to make and sell a patented article — to make and sell an article that no other person could lawfully make and sell; its machinery and other property are, therefore, mere adjuncts or .accessories to its patents. Its patents are the foundation of its business; they constitute its principal substance and main source of wealth. They are the only foundation the corporation has. But for them no corporation would have been formed, and without them the corporation could do nothing and would be nothing. It would have no business, and would, beyond all question, be a -dead and useless concern. From the defendant’s organization its patents have been carried on its books at a valuation of over $2,700,000. In this situation of affairs, it is manifest, that it is not possible for the court to declare the defendant to be insolvent until proof has been submitted as to the value of the patents, or it has been proved that they are worthless. The complainant
And, now, what do the proofs show the value of the patents to be? The president of the defendant corporation swears that he believes them to be worth, at a low estimate, $2,000,000. They are all for such electrical devices as are useful in the manufacture of storage batteries. The defendant claims, indeed, that no practical storage battery, such as can be used for traction and power purposes with commercial success, can be made without them. There is proof in the case giving substantial support to-this claim. It was elicited on the cro^s-examination of the complainant’s witnesses. The person who swears that he believes the patents to be worth $2,000,000 possesses the requisite knowledge and experience to entitle what he says on that subject to-consideration. Though a lawyer by profession, he has for several years made electricity, as applied in utilizing light andi
This is all the evidence there is, on either side, going to show the aggregate value of the patents, or their value as a unit, except such as is furnished by the action of the defendant in issuing to the complainant nearly the whole of its capital stock to be used in the purchase of certain property. The complainant says, by its bill, that all the items of property mentioned in the resolution, under which all of the defendant’s stock, except forty shares, was issued to it, were transferred to the defendant “ in pursuance of said resolution.” By the resolution here referred to, it was declared that the value of the property which the defendant should acquire in consideration of the stock to be issued to the complainant, was, in the judgment of the defendant’s directors, the sum of $2,999,000. It is an undisputed fact that the complainant accepted stock from the defendant, of the par value of $2,999,000, to purchase certain property for the defendant, which the defendant’s managers estimated to be worth a, sum equal to the par value of the stock, and that the property was purchased and transferred to the defendant and that the defendant still owns it. It is likewise a fact that the complainant has not proved, nor attempted to prove, the value of the defendant’s property. In its bill it charges that the defendant’s patent account, in which its patents are put down at a valuation of over $2,700,000, “consists entirely of patents and options and other invisible and intangible assets;” and in an affidavit annexed to its bill, it is said that the same item of defendant’s assets consists of patents and options relating to electric machinery and apparatus, and does not consist of real •estate or tangible personal property, but not one word is said on
The value of the Brush license to the licensor must, I think,, be regarded as unalterably settled. The license was granted by the Brush Electric Company, of Cleveland, Ohio (the owner of the Brush patents), for a term of six years, extending from April 1st, 1890, to April 1st, 1896, with a right in the licensee-to take an additional term extending from the date last named to' March 2d, 1903. The terms upon which it was granted were: first, the payment of $65,000 in cash, and, second, the payment of a minimum royalty of $25,000 a year, making a total, for the cash payment and the royalty for six years of $215,000.. The $65,000, and so much of 'the royalty as has become due, has been paid. The defendant did not pay them, but the complainant did, and the complainant is bound to pay such part of the royalty as shall hereafter accrue, as it becomes due, to the Brush company. This obligation arises out of a tripartite agree
*416 “subject to the terms and conditions of a certain agreement between the Consolidated Electric Storage Company of the first part, the Brush Electric Company, of Cleveland, Ohio, of the second part, and the Atlantic Trust Company of the third part.”
By this arrangement, it will be observed, that the complainant was entitled to receive interest at the rate of six per cent, per annum on the $215,000, but became bound to pay only four. The complainant still holds the note of the Traction company and the collaterals pledged for its payment. No part of the note-has been paid and nothing has been realized on the collaterals. It is also a fact that this court, in May, 1891, adjudged the-Traction company to be insolvent and appointed a receiver to-wind it up.
These facts seem to me to make one thing perfectly plain, and that is, that they unalterably fix the value of the Brush license-as against the complainant, and in favor of the Brush company and the defendant, at $25,000 a year during the remainder of' the term for which the license is to run. There can be no doubt that, by the terms of the tripartite agreement, the complainant is irrevocably bound to pay that sum annually to the Brush-company, and it is equally clear, by the terms of the same agreement, that if in any year the complainant shall not be required' to pay that sum to the Brush company, because the defendant shall itself have paid the royalties for that year, the complainant will, in that event, be bound, by au obligation precisely similar to that which it is under to the Brush company, to pay the $25,000 for that year to the defendant. The effect of the tripartite agreement, as I understand it, is to give the defendant the right to use the Brush license free of charge to the extent of' $25,000 a year, for it plainly provides that, if the defendant shall itself pay the royalties accruing under the license for any year directly to the Brush company, the complainant shall,, in that event, pay the $25,000, held by it as security for the-royalty of that year, to the defendant. The respective positions ’ of the defendant and complainant under the agreement may then be correctly stated as follows : if the defendant pays the royalties to the Brush company as they accrue, the complainant'.
The complainant occupied, in the negotiation of the tripartite agreement, a position where it was master of the situation, and where it' could make its choice or will, as to the thing which should be deposited with it to stand as indemnity for its promises, the law unto all the parties. It was in a position where it had the power to dictate terms and to demand money or anything else for its indemnity that it saw fit. While thus master of the situation, it accepted the note of the Traction company, with, the collaterals accompanying it, and treated and dealt with them as equivalent, in all respects, to $215,000 in current funds. It did so voluntarily and deliberately, without fraud or evil practice of any kind. It does not pretend that any misrepresentation was made to it, nor that it was deceived or defrauded in any way, nor that its action was the result of mistake. Everything appears to have been open, fair, honest and well and correctly understood. And just here, I think, it is important to remember, that among the things made over to the comjrlainant for its indemnity, and which it accepted as part of the consideration for its promises to the Brush company and to the defendant, were the same sixty thousand shares of the defendant's stock which had been deliv
This view decides this case in all its branches. It demonstrates that the complainant is not a creditor of the defendant. The only foundation on which it rests its claim as a creditor is ¡that it has made the payments to the Brush company-, which, by the tripartite agreement, it promised to make. But it did not thereby become a creditor of the defendant. As already shown, the rights of the defendant, against the complainant, under that agreement, stand, in a legal point of view, precisely as they 'would have stood had the complainant, instead of taking securities as the consideration for its promises, asked for and received actual cash. In the latter situation of affairs, a claim that the
The complainant’s application must be denied, with costs.