120 Wash. 214 | Wash. | 1922
— Action to rescind a subscription for capital stock of a private corporation, and for the return of a promissory note given in payment therefor. The demurrer of the defendants to the complaint was sustained, and plaintiffs having refused to plead further, a judgment was entered dismissing the action. They have appealed. Inasmuch as the sufficiency of the complaint is the only matter before us, it will be necessary to set out considerable portions of it.
It alleges that the respondent, Kelly, is the duly appointed, qualified and acting receiver of the respondent corporation; that, on January 27, 1921, the appellant subscribed for 1,667 shares of the capital stock of the corporation, agreeing to pay therefor six dollars per share, or a total of $10,000; that she paid down
In the argument here made it seems to be conceded that the complaint would be sufficient in a suit against the corporation as a solvent concern, but it is contended that, as against the receiver, it does not state facts sufficient to.justify any relief.
As a general proposition, it may be said that the capital stock of an insolvent corporation is a trust fund for the benefit of its creditors, and any unpaid subscriptions for the capital stock are assets of the corporation and a trust fund for the benefit of the creditors.
It seems to be the established rule in England that a suit to rescind a stock subscription on the ground of fraud cannot be maintained by a subscriber for stock
There are some Ajnerican cases which seem to hold that a subscription to capital stock, induced by fraud, cannot be rescinded after the insolvency of the corporation. Howard v. Glenn, 85 Ga. 238, 11 S. E. 610, 21 Am. St. 156; Meholin v. Carlson, 17 Idaho 742, 107 Pac. 755, 134 Am. St. 286; Hinkley v. Sac Oil etc. Co., 132 Iowa 396, 107 N. W. 629, 119 Am. St. 564. These cases and others, as well as the English cases, are rested on the theory that, as soon as the corporation becomes insolvent, all of its assets, of whatsoever kind or nature, at once become a trust fund for the use and benefit of creditors. It seems to us that these cases lose sight of the fact that the trust fund doctrine is itself based on equitable principles, and that it should yield to equities which are superior. It seems to us that the equities of one who was induced by fraud to purchase capital stock and who used all due diligence thereafter to discover the fraud, and to rescind his contract, and who
In the case of Park v. Kribs, 24 Tex. Civ. App. 650, 60 S. W. 905, discussing this question, the court said:
“We think that it may be stated that the great weight of authority in this county is, that where there has been no lack of diligence on the part of the stockholder in discovering the fraud, or unreasonable delay in asserting his rights after discovering the fraud, or active participation in the management of the corporation, or' debts have not been contracted by the corporation after his subscription, one who has been induced to become a stockholder in a corporation by reason of its fraud or that of its agents, is entitled to have the subscription rescinded and his stock cancelled, and the amount paid returned to him, upon tendering back his stock.”
In the case of Newton National Bank v. Newbegin, 74 Fed. 135, 20 C. C. A. 339, 33 L. R. A. 727, upon facts similar to those here, the court said:
“If a considerable period of time has elapsed since the subscription was made; if the subscriber has actively participated in the management of the affairs of the corporation; if there has been any want of diligence on the part of the stockholder, either in discov*220 ering the alleged fraud, or in taking steps to rescind when the fraud was discovered; and, above all, if any considerable amount of corporate indebtedness has been created since the subscription was made, which is outstanding and unpaid, — in all of these cases the right to rescind should be denied, where the attempt is not made until the corporation becomes insolvent. But if none of these conditions exist, and the proof of the alleged fraud is clear, we think that a stockholder should be permitted to rescind the subscription as well after as before the company ceases to be a going concern.”
In the case of Morrisey v. Williamis, 74 W. Ya. 636, 82 S. E. 509, L. R. A. 1915D 792, the court quoted approvingly from 2 Clark & Marshall, Private Corporations, §473, as follows:
“ ‘In England, and in some of the states of this country, it has been held that a subscription cannot be repudiated on the ground of fraud, for the first time, after the corporation has become insolvent, and has made an assignment or gone into the hands of a receiver or an assignee in bankruptcy, even though the fraud may not have been discovered before insolvency, and though there may have been no laches in discovering it. According to the better opinion, however, this doctrine cannot be sustained without qualification. Surely, the equity of a person who has been induced to subscribe for stock in a corporation, without negligence on his part, by the deceit of its officers or agents, and who has not been guilty of negligence, either in failing to discover the fraud, or in repudiating his subscription after its discovery, cannot be said to be inferior to the equity of persons dealing with the corporation and becoming its creditors, and he should not be denied the right to set up the fraud as a defense in an action or other proceeding to enforce his subscription, merely because the corporation has become insolvent, and it is sought to enforce* the subscription for the benefit of its creditors. . . . This rule should undoubtedly be applied where no debts have been contracted by the corporation since the date of the subscription.’ ”
It will he noticed that the appellant’s subscription was made less than a month before the company was adjudged insolvent and a receiver appointed, and that the allegations of the complaint with reference to lack of laches and diligence and as to conduct bring the case within the rule stated in these authorities.
It appears that this court has not before considered this exact question. Of all'our cases, the one nearest in point is Johns v. Coffee, 74 Wash. 189, 133 Pac. 4. The facts in that case were that Coffee subscribed for certain of the capital stock of the Pioneer Fire Insurance Company, and gave his note in payment therefor. He was induced to purchase this stock through fraudulent representations concerning the affairs of the company. Before it became insolvent he learned of the fraud and at once served notice on the company, repudiating the stock subscription and demanding its' cancellation. He did not take any further steps in that direction. The company continued to do business and create indebtedness for some months afterwards, when it was adjudged insolvent and a receiver was appointed, who sued Coffee on his subscription. After quoting from Thompson on Corporations to the effect
“No different rule should be applied, we think, merely because the action was delayed until after the corporation had gone into the hands of a receiver. If the respondent had a defense against a suit to recover on the unpaid balance by the corporation itself, he had a like defense against a suit by the receiver of this corporation; unless of course he has committed some affirmative act subsequent to serving his notice of rescission which would estop him from making the defense, such as inducing others to become creditors of the corporation on the faith and belief that he was a stockholder therein. No mere delay on his part will work that result. Here there is nothing to show that any of the persons the receiver represents became creditors of the corporation on the faith of the belief that the respondent was a stockholder therein. On the contrary, it is not shown that any of them ever knew he was such a stockholder until the books were searched after the corporation’s insolvency.” (Johns v. Coffee, supra.)
Practically the only difference between that case and the one at bar is that the subscriber gave written notice repudiating the transaction before the corporation became insolvent. That fact, however, would not make any difference if the subscriber were diligent in discovering the fraud and in action after such discovery.
The case of Cox v. Dickie, 48 Wash. 264, 93 Pac. 523, is cited. There the receiver of the insolvent corporation instituted suit against certain persons who had subscribed but not paid for their stock. A defense was made on the ground that the capital stock of the company had not been fully subscribed, and that the trust fund theory was not applicable because it was not shown that the creditors relied on these stock subscriptions, and fraudulent representations which induced
“It must be remembered that this is not an action by the corporation to enforce collection of subscriptions for stock or its contracts with its subscribers, but is an action brought by a receiver, under order of the court, to enforce such subscriptions for the benefit of creditors. As between the corporation itself and the stockholders all these defenses would probably be good, but as between the stockholders and the creditors of the corporation another rule prevails.”
There is nothing in that case to indicate that the stock subscribers had been diligent in discovering the fraud, or had acted promptly thereafter, or that they had not actively participated in the business affairs of the corporation. In the absence of these equities in their favor, the stockholders ought not to be permitted to defend on the ground of fraud.
The case of Silvain v. Benson, 83 Wash. 271, 145 Pac. 175, is also cited. But the controlling facts of this case cannot be found there. We have examined all the other cases from this court cited by respondents, but none of them is controlling or lends very much light to the question here.
The respondent calls our attention to Rem. Comp. Stat., § 3842, which provides:
“. . . Each and every stockholder shall be personally liable to the creditors of the company, to the amount of what remains unpaid upon his subscription to the capital stock, and not otherwise: . ,. .”
He argues from this section that the appellant is not entitled to recover so long as there are any creditors, whether the debts were incurred before or after the subscription. It is true that this section makes no distinction between classes of creditors, but it imposes the obligation on stockholders, which necessarily means those whom the law will determine to be such. We are
Respondent also calls our attention to Rem. Comp. Stat., § 3803, which provides :
. . that no such corporation shall commence business or institute proceedings to condemn land for corporate purposes until the whole amount of its capital stock has been subscribed: . .
He says that in most states there is no statute requiring all of the capital stock to be subscribed before the corporation commences to do business, and insists that this statute must have an important bearing on the question in this case. We frankly confess our inability to see how this statute can affect the question under discussion. If the appellant were seeking to rescind on the ground that she is not liable because the stock she contracted to purchase was or was not such as the statute requires must be subscribed before the corporation commences to do business, then respondent’s argument might apply. But appellant makes no such contention. The sole ground on which the right to rescind is based is fraud, and the sole question in the case, as it is now before us, concerns superior equities.
We need not inquire whether the appellant would be entitled to the relief sought if it appeared that there were creditors who became such after her subscription. A decision of that question is not necessary, because the complaint here shows that the corporation did not have any creditors who became such after appellant’s subscription. In other words, so far as this case goes, we reserve decision as to the rights of a receiver who represents creditors who became such after the subscription was made and the note delivered.
We have not overlooked respondent’s motion to dismiss the appeal. It is contended that the motion should
. . When the notice of appeal is not given at the time when the judgment or order appealed from is rendered or made, it shall be served in the planner required by law for the service of papers in civil actions and proceedings, upon all parties who have appeared in the action or proceeding: . . Bern. Comp. Stat., § 1720.
It is contended that the record shows that, at the time of the appeal here, a large number of persons had filed claims with the receiver. They, however, were not in any manner brought into this proceeding; they took no part in it and could, under no circumstances, be said to be parties in interest or upon whom it was necessary that notice of appeal be served.
The case of Cole v. Washington Motion Picture Corp., 112 Wash. 548, 192 Pac. 972, is cited in support of the motion. The situation there was entirely different from that here. In that case the receiver had reported the allowance of various claims in various amounts, which, generally speaking, were less than the creditors ’ bills called for. Upon the order of the court, these creditors were cited into court for the purpose of determining what amounts should be allowed. Many of the creditors were contenders against the claims of the other creditors. One of the creditors appealed from the amount allowed him, and it was held that the other creditors had appeared at the hearing and were adverse parties and were necessary parties to the appeal, and
In the case of Jensen v. Angeles Brewing & Malting Co., 87 Wash. 392, 151 Pac. 825, the situation was substantially as it is here, and a motion to dismiss was made on the ground that it was necessary to serve the various creditors who had filed claims. We said:
“We think the phrase ‘parties who have appeared in the action or proceeding,’ refers, in cases like the present, to those parties who have appeared in the particular proceeding in which the order appealed from is entered, not to those who may have filed claims with the receiver and have taken no further part in the proceedings.”
The motion to dismiss the appeal is denied. The judgment is reversed and the cause remanded with instructions to overrule the demurrer to the amended complaint.
Parker, O. J., Fullerton, Mitchell, and Tolman, JJ., concur.