68 N.J. Eq. 450 | New York Court of Chancery | 1904
The complainant, as a creditor, seeks to compel the directors of a corporation to pay him $35,000, with interest, because, as he alleges, they have violated section 30 of the General Corporation act of this state.
The only defendant brought into court was Samuel T. ICerr, who has answered and interposed a defence. The complainant’s claim is that the East Coast Milling Company, which I shall call “Milling Company,” was organized January 11th, 1902, for the purpose of controlling the stock of the Eastern Milling and Export Company, which is hereinafter referred to as “Export Companj1',” and also the capital stock of the Atlantic Flour Mills Company, the assets of these companies being the capital stock of two Pennsylvania corporations. Under a proposed plan of organization certain shares of the capital stock of the “Export Compaq,” and all of the stock of the “Atlantic Company,” were deposited with a trust company doing business in Lancaster, Pennsylvania, to be disposed of according to said plan. Between the incorporation of the “Milling Company” and the 7th day of August, 1902, efforts were made by its officers to carry out this undertaking, but determining on the latter date that it could not be accomplished, they directed the trust company to restore the stock deposited to the depositors thereof, and this was done. After the date of organization of the “Milling Company,” and before the 7th day of August, 1902, the complainant asserts that the “Milling Company” became indebted to him in the sum of $34,000, for which a judgment was recovered after the latter date, and that the action of the directors in returning the stock was a withdrawal or reduction of the capital stock of the “Milling Company,” in violation of said thirtieth section, by reason whereof the directors who participated in the return of the stock, of whom this defendant was one, became liable to pay his debt.
The complainant limits his claim to sufeh stock as was actually transferred to the “Milling Company,” which embraced only a portion of the “Export Company” stock, and none of the “Atlantic” shares, for although all of the stock of the latter company was deposited and returned by' the samé act, no claim is
What actually happened, so far as is material to the determination of the questions presented, was that in the latter part of the year 1901 some of the officers of the “Export Company” submitted to the defendant Kerr a proposition looking to the incorporation of a company to acquire the stock of the “Export” and “Atlantic” companies, which latter company it was' proposed., to incorporate to take over a large and valuable property in the city of Philadelphia, in which the defendant Kerr was largely interested, and then consolidate the two corporations. The “Atlantic Company” was incorporated and the Philadelphia property conveyed to it. After considerable negotiation a Mr. Culver, of New York City, was consulted with reference to the promotion of the proposed scheme, and he consented to act as manager, and prepared and issued a prospectus or plan, which he sent to all the stockholders of the two companies, under which their stock was afterwards deposited with a trust company.
This paper was entitled “East Coast Milling Company plan of organization and subscribers’ agreement to exchange securities,” and bears date January 17th, 1902, signed “Frederick F. Culver, syndicate manager.” It recited that the “Milling Company” had been organized with a capital stock of $9,000,000, of which $2,000,000 in amount was preferred and $7,000,000 common stock; that the “Export Company” had outstanding bonds for $800,000, preferred stock $629,400, common stock $3,000,000; that the “Export Company,” through its ownership of the stock of -the Philadelphia Milling Company, a Pennsylvania corporation, controlled twenty-seven milling plants, and that the property of the “Atlantic Company,” which was elaborately described, was of great value. It then proposed that the “Milling Company” should acquire at least a majority, in the aggregate, of the preferred and common stock of the “Export Company” and all of tire stock of the “Atlantic Company” by exchanging the stock of these corporations for stock of the “Milling Company,’’ and that to carry out the plan a syndicate had been formed, with Culver as manager, to whom it was proposed the “Milling Company” issue $629,400 of its
“any balance of the said common stock of the ‘Milling Company’ not disposed of as above set forth shall belong to the syndicate, in consideration of their effecting the above exchange, defraying organization expenses, with the exception of legal expenses, and obtaining subscriptions at par from good and responsible subscribers for at least four hundred thousand dollars ($400,000) in amount, at par, of the preferred capital stock of the ‘Milling Company,’ the proceeds of which are to be used as cash working capital.”
It also provided that immediately upon the issue to the syndicate manager of the preferred and common stock of the “Milling Company,” the manager should deposit the same with the trust company for the purpose of making the exchanges, and that thereupon, since the balance earned by the syndicate would be $4,400,000 of such common stock, that certificates representing the same should forthwith be delivered by the trust company to said Culver, his assignees or appointees, and that certificates of stock of the “Export” and “Atlantic” companies, endorsed for transfer, subject to the control of the manager, should be deposited with the trust company upon the execution of the agreement to deposit, which was referred to in the prospectus as “the agreement hereinafter contained,” and recited that “the undersigned have read and approved the foregoing
Hnder this jdan at least a majority of the stock of the “Export Company,” and all of the “Atlantic” stock required, were deposited, and certificates were issued to the “Milling Company” on the 19th day of April, 1902, for thirty-nine thousand and thirty-seven shares of the common, and six thousand nine hundred and thirty-seven shares of the preferred stock of the “Export Company.” The minutes of a special meeting of the board of directors of the “Milling Company,” held on the 7th day of August, 1902, show that it was resolved that, as there had been delivered to the “Milling Company,” pursuant to said plan, six thousand nine hundred and thirty-seven shares of the preferred and thirty-nine thousand and thirty-seven shares of the common stock of the “Export Company,” for which new certificates had been issued to the “Milling Company,” and that it was deemed to be for the best interest of all concerned that the plan of organization should not be carried out, and that the stock of the “Export Company” so issued to the “Milling Company” should be returned to the trust company, to be redelivered to the original depositors, and that all other stock of the “Export Company,” and the stock of the “Atlantic Company” deposited with the trust company under said plan should be returned to the holders of the trust receipts which had been issued under the terms of the plan, and that tire company consented to the abandonment and rescission of the plan, and directed the syndicate manager and officers of the company to take the necessary steps to carry out the resolution.
The insistment of the defendant is that the plan never became effective because its terms had not been complied with, and also because the financial condition of the “Export Company” had been so grossly misrepresented as to justify the stockholders of the “Atlantic Company,” whose stock had not been transferred, in withdrawing their deposits of stock, without which the plan could not be carried out, and that the transfer of the stock of the “Export Company,” issued to the “Milling Company,” was procured by the syndicate manager without the right to do so, as he held it in trust, upon terms not fulfilled.
As to the charge that the terms of the agreement had not been complied with, it is insisted, first, that it does not appear that any of the preferred or common stock of the “Export Company” had been accepted for exchange with the written consent of the syndicate manager and Andrew J. Toomey, as the plan required. I am not disposed to accord much force to this objection, because the issue to the “Milling Company,” in exchange for stock deposited, was within the knowledge of the syndicate manager and Toomey, and they having made no objection, should be considered as waiving the formal written consent.
The second insistment under this head presents a more serious question. The plan contained a statement that one of the considerations for the stock issued to the syndicate manager as earnings was the obtaining from responsible persons subscriptions for $400,000, at par, of the preferred stock of the “Milling Companjq” to be used as working capital and for the erection of the plant and mills of the “Atlantic Company,” and it is admitted that efforts were made to secure this subscription, without success. The complainant contends that the procuring of these subscriptions was not necessary to the binding of the depositors, and that when their stock was deposited and transferred the
By the terms of the agreement the syndicate manager was to have transferred to him a large part of this stock, the ownership and possession of which made' him an influential factor in the management of the companjr, and entitled him to a share of the profits, in common with stockholders who were surrendering property as a consideration for the stock to be issued to them. For the stock issued to him as earnings, the manager agreed to obtain subscriptions for the preferred stock to the amount named, and the depositors of stock, who were in fact
In addition to the prospectus, the syndicate manager issued and sent to the stockholders of the “Export Company,” of whom the complainant was one, a circular letter, dated March 1st, 1902, addressed to the stockholders of the company, setting forth, among other things, that the manager reserved the right, at any time in his discretion, to wholly abandon the transaction, in which event all stock deposited was to be returned to the depositors, so that at the time the complainant’s debt was created he had knowledge that the manager might, in his discretion, abandon the transaction, and he entered into the arrangement he sets up, with full knowledge that the stock to be acquired might never be assets upon which he could rely.
• As to the charge of misrepresentations, it must be remembered that the complainant was, at the time they are alleged to have been made, the president of the “Export Company,” and properly chargeable with knowledge of the financial condition of that company. In order to induce deposits and to secure subscribers to the preferred stock of the “Milling Company,” a circular was issued, which contained, among other things, a statement of the company, signed by “David R. Loeher,” the treasurer of the “Export Company,” he being the principal witness for the complainant, and the person who managed the sale
I am entirely satisfied, on this, branch of the case, that the officers of the “Export Company” knowingly misrepresented the condition of their company for the ■ purpose of inducing the “Milling” and “Atlantic” companies to exchange stock. It further appears that after considerable of tire stock had been deposited it was discovered by the officers of the “Milling Company” that the complainant, as president of the “Export Company,” had, without any authority, endorsed accommodation paper, with the name of that company, to the extent of $64,000; that when his attention was called to it he agreed to relieve his company from such liability by the 10th of May, 1902; that he did not fulfill this agreement on the date specified, and although during the summer of 1902 he had partly done so, he did. not complete it until after the resolution to abandon the enterprise was adopted. The testimony also shows that sufficient stock of the “Milling Company” was never deposited by the syndicate manager to provide for the exchange of all the stock deposited,
I wall next consider the character of the complainant’s claim. It seems that he, although president of the “Export Company,” having knowledge of its financial condition, declined to deposit his stock for exchange under the proposed plan, and that the “Milling Company,” by a resolution, not adopted at a meeting of its board of directors, but signed by them at different places, agreed, as the complainant alleges, to purchase from him one thousand shares of the preferred stock and two thousand shares of common stock of the “Export Company,” for $34,000, payable October 1st, 1902, in bonds' of the Atlantic Flour Mills Company, or in cash, if the bonds were not delivered. As the bonds were not delivered owing to the failure of the plan, the complainant brought suit against the “Milling Company” in the United States circuit court for the eastern district of Pennsylvania, and recovered a judgment against the company for the full amount claimed, with, interest. The transcript of that judgment was offered in evidence and admitted, after proof satisfactory to me that process was duly served on an officer of the company residing in that state where it was carrying on business, although the only plea interposed was one wdiich challenged the jurisdiction of tire court. This record is proof of the fact that such a judgment was recovered against the company, and, so far as it wras concerned, would establish a debt upon which recovery might be had in the courts of this state, but on the hearing I was of opinion that the record was not conclusive against the defendant as a director, proceeded against under the thirtieth section of the Corporation act; nor would it be even if the judgment was domestic and not of another jurisdiction, as in this case, and further consideration of the question has strengthened my conviction that it was necessary to support the claim with proof of the sufficiency of the original obligation of the company to the extent required if no judgment had been recovered. The complainant, while protesting against the correctness of this conclusion, undertook to establish his debt by evidence other than the record. As that evidence may be insufficient, in which event the question of the conclusiveness of the record as proof of
The thirtieth section of onr Corporation act, while not strictly penal in its character, imposes a liability, not arising from any contract, but because of the misfeasance of a director. As it would be a great hardship to hold a director liable for the amount of a judgment recovered against a company in an action to which he was not a party, upon the ground that a corporation ought not to have the power to suffer a recovery, and thereby bind the director, without further proof, to the payment of a debt which, if properly resisted, might have no legal existence, such judgment ought not to be held conclusive unless the weight of authority sustains so severe a construction, especially in a case like this, where it appears from the record that the judgment was recovered without any defence by the company as to the merits, the recovery being practically by default.
Many cases which I have examined relate to actions against stockholders for non-payment of subscriptions for stock, as distinguished from proceedings against an officer for a misfeasance, and, while they are alike in character, there is a distinction in favor of a director, pursued, not for a debt due to the company on a subscription, or on any previous obligation assumed by him, but upon a liability created by statute. In Miller v. White, 50 N. Y. 137, the action was against directors for the omission of a statutory duty. The trial court held that a judgment recovered against the company was not only prima facie, but conclusive, evidence of the debt as against the defendants. This was unanimously reversed by the court of appeals, and it was there held that the directors were not bound by the judgment, nor was it even prima facie evidence against them, Judge Peek-ham saying: “There is no hardship in requiring a party to prove his case against these defendants. If lie has sold the company goods, loaned it money or rendered it service, it is easily proved in this action. It seems to me that connivance and fraud are prevented by requiring such proof.”
In McMahon v. Macy, 51 N. Y. 155, the majority of thé commissioners of appeals held that a judgment against the com
In Stephens v. Fox, 83 N. Y. 313, it was held, in a suit by a creditor against a stockholder for unpaid subscriptions, that a record of a judgment against the company was sufficient evidence of the debt, because the stockholder was indebted to the company and the creditor was subrogated to the company’s right; but, referring to Miller v. White, supra, the court said: “The defendant was not pursued as a debtor to the corporation, or for any pre-existing liability of his own, but upon an original liability created by the statute, and it was not in the power of the corporation to admit away his case, or suffer' a recovery which should be binding upon him, and create, as against.him, a liability to which he was not previously subject;” but, in a proceeding for unpaid subscriptions, “whether the company owed the debt or not was of little consequence to the stockholder, and did not affect his liability to the company. He was bound to pay to the company even if there was no creditor.”
In Allen v. Clark, 108 N. Y. 269, the action was based upon the failure of the directors to file an annual report, and the record of a judgment against the company for costs was held to be pñma facie evidence of its existence, the conclusion' being put upon the ground that the judgment against the company had been recovered prior to the date fixed for filing the annual report, and that it being then an existing debt it became the duty of the directors to malm it known by such report. The opinion in this case, however, distinguished it from Miller v. While, supra, because the judgment in the latter case rested upon a debt “antecedently existing,” the distinction being that in Miller v. White the judgment was recovered after the default, while in the case the court was then considering the judgment existed as a debt of the company prior to the default. The principle established in Miller v. White has never been repudiated by the courts of New York. There are a number of cases relating to suits brought-by creditors to compel payment of unpaid subscriptions to stock which were cited for complainant, and which I have examined, as in Stutz v. Handley, 41 Fed. Rep. 531; Powell v. Railroad Company, 38 Fed. Rep. 187; Glen v. Springs, 26 Fed.
In Tabor v. Commercial National Bank, 62 Fed. Rep. 383, it was held, under the Colorado statute requiring annual reports' to be hied by the directors, and in case of failure imposing a personal liability for the debts of the company, that a complaint which counted upon a judgment, and did not plead the original debt, was good, and under the statute of Colorado the judgment might be introduced in evidence to prove the debt it established. In this case judgment was recovered against the company before the last default of the directors, and the question to be settled was whether the judgment was a debt of the corporation, for which the director was liable, within the meaning of the statute he was construing.
A careful comparison of the statutes of New York and Colorado shows they are substantially the same, and the court, in determining the case last cited, stated that the result reached is contrary to the doctrine held by the courts of New York on this subject. The law, as established in New York, has, however, been approved by the supreme court of the United States. That court, in considering the New York statute, rejected the judgment against the corporation as either evidence or ground of liability against the directors, and founded the liability upon the obligation of the corporation, on which the judgment itself rested. Chase v. Curtis, 113 U. S. 452. It seems to me that sound reason and the weight of authority uphold the proposition that it would be inequitable to hold that a judgment recovered against a company is conclusive against a director; but, on the contrary, it is the duty of the complainant, under facts similar to those shown in this case, to satisfy the court, as a part of his case, that the original obligation upon which the judgment against the company is founded is of such a character as to make him a creditor of the company holding a claim which, in equity, he should be allowed to enforce against a director under the statute invoked.
Having concluded that it is incumbent upon the complainant
I cannot resist the impression created by the evidence that Mr. Locher, with full knowledge of the unsound condition of the “Export Company,” undertook, as the agent of the complainant, and with his knowledge, to impose upon his fellow-directors, and thereby effect a sale of this amount of stock, most, if not all, of which could not be delivered because it was held in pledge by the complainant’s creditors, and in order to allow the complainant to relieve the stock and deliver it, unlawfully used the credit of the company for that purpose.
It is insisted, on behalf of the defendant, that when this agreement to purchase was made the true condition of the “Export Company” was not made known; that this complainant, as president of that company, had full knowledge of its weakened condition; that Mr. Locher, as its treasurer, when acting for the complainant in the sale of this stock, and in inducing the directors of the “Milling Company” to sign the resolution, also concealed the condition of the company, and that this misrepresentation and concealment of the truth was a fraud upon the “Milling Company,” which justified it in refusing to accept the stock. It is also- claimed by the defendant that when the negotiations for the sale of this stock were proceeding it was not known
My conclusion on this branch of the ease is that the complainant, with the aid of Loclier, was guilty of a fraud upon the directors of the “Milling Company” when the sale of his stock was made, and that the agreement would never have been made if the complainant had disclosed the true condition of his compan37, instead of permitting this defendant and his co-directors to rely upon the misstatement made by Mr. Locher, as treasurer, and that a court of equity should not hold this to be an obligation for which this defendant is liable. I also find that the complainant agreed to extinguish the endorsement objected to by May 10th, 1902, and that he did not comply with his agreement.
The defendant also insists that the debt of the complainant, at the time of the transfer of stock of which the complainant complains, was not an obligation of the company, because no lawful corporate action, looking to that end, was ever taken by
“Any resolution, in writing, signed by all tbe members of tbe board of directors or executive committee, shall be and constitute action by sucb board or executive committee, as tbe case may be, to tbe effect therein expressed, witb tbe same force and effect as if tbe same bad been duly passed by tbe same vote at a duly called meeting- of sucb bodies, respectively, and it shall be the duty of tbe secretary of tbe company to place sucb resolution, as signed, in tbe minute book of tbe company under its proper date.”
As the complainant rests his right upon a resolution adopted in that manner, it becomes important to ascertain whether the power attempted to be conferred by this clause is supported by the law under which the articles of association were filed. Wren authority to manage the affairs of a corporation is vested in a board of directors it is conferred upon them as a board and not as individuals. If they act or give their consent separately, and not as a board, their conclusion is not the action of the corporation, although all may consent, and the corporation is not bound, in the absence-of ratification. Clark & Marsh. Corp. 2074 § 677; First National Bank of Fort Scott v. Drake, 35 Kan. 564; 57 Am. Rep. 193.
This eminently wise and just rule, the complainant claims, may be abrogated by persons incorporating themselves under the General Corporation act of this state, and he relies upon subdivision 7 of section 8 of the act, which permits any provision which the incorporators may choose to insert
*467 “for the regulation of the business, and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class or classes of stockholders; provided, such provision be not inconsistent with this act.”
If the power to legislate as these incorporators have legislated exists, it must be found in the expression, “any provision creating, defining, limiting and regulating the powers” of directors.
Under this clause, it is insisted that the legislature has granted the right, not only of creating, defining, limiting and regulating the powers of the corporation, but also the right to authorize the directors to exercise the powers thus established according to any method the incorporators may see fit to adopt, although the power to do this is not granted in express terms. I do not so interpret these words. The right “to create” is limited to the establishing of or regulating a power to be exercised by the. corporation through its directors, which power shall not be inconsistent with the terms of the general act. The method of exercising the power created must conform to settled legal principles, unless it be otherwise distinctly authorized by the legislative act. No such express authority is conferred by this act and it ought not to be inferred from ambiguous expressions.
To hold that the legislature of our state, by the adoption of our General Corporation act, intended to confer upon individuals an indefinite power of legislation, would require the adoption of a liberality of construction which the act does not warrant, and which upon every known principle is contrary to public policy. The act is, by its terms, sufficiently broad, elastic and liberal, and I am unwilling to read into it any such power as this complainant insists upon, for, in my judgment, it is only a board duly convened and acting as a unit that is made the representative of the company. Nowhere in this act is it intimated that a board of directors may act independently or otherwise than as a united body, counseling with each other with regard to every determination that may affect the corporation. On the contrary, it requires that the business of every corporation shall be managed by its directors, and that all votes of the corporation and directors shall be recorded by the secretary in a book to be kept
The proposition that the stockholders, in assenting to this provision in the articles of association, waived the advantage and protection they would enjoy under the common law and our Corporation act, does not meet the case. Stockholders may waive an advantage, but they cannot by waiver ordain a method of corporate action which the law does not recognize, nor dispense with the aid of a board of directors as a means of corporate action. Such a course is not sanctioned by our law and is inconsistent with the twelfth section of our act, which requires that “the business of every coloration shall be managed by its directors.” But we ought not to confine the consideration of this question to the relationship' existing between the stockholders and the directors. The business of the state is to a large extent carried on by corporations, and their transactions directly and vitally affect the interests of all the people. In committing the transaction of business so generally to corporations, the legislature mav be presumed to have provided for and recognized-deliberative meetings of directors-.as.. a._safegmrd-Yo-ihe--'pnblic interest, which presumption ought not to be overthrown by a forced construction of the act. The fundamental idea of a business corporation involves an advantage coming from the aggregation of wisdom, knowledge and business foresight which results from bringing a large number of stockholders and directors into a common enterprise. It is their knowledge and wisdom combined, acting as a unit, that gives efficiency and safety to the corporate management.
I am satisfied that the section of this charter now under consideration is contrary to the provisions of our Corporation act, and that there is no express or implied authority conferred thereby which will allow a corporation to determine, in its articles of association, that its board of directors may avoid the performance of their duties in the manner required by the word and spirit of our act and the well-settled law on that subject. To permit it would engraft upon the law a vicious and dangerous power, and in the absence of express legislative authority I am
As to the delivery of a part of the stock to the company, the evidence shows that it was done by the complainant through his two friends, Mr. Toomey and Loeher, without the knowledge of the board of directors, and never came to their notice until after the abandonment of the proposed plan.
It was argued, on behalf of the defendant, that the act complained of was not such as section 30, above referred to, defines, and that section 30 was confined in its operation to “capital stock” as distinguished from “capital,” and that therefore the defendants had not divided, withdrawn or paid to the stockholders its capital stock. In my judgment, the words “capital stock,” as used in this section, can have no other meaning than that it is such part of the property of the company as represents its capital, for which the stock was issued, and if the defendant, as a director, has aided in withdrawing a portion of the assets of the company, in violation of the statute, he would be liable to creditors for the amount placed beyond their reach. The complainant undertook to establish the value of the stock returned to the depositors by proof of sales of the stock nearly a year prior to the alleged unlawful disposition of it. But this evidence must be considered in connection with the fact that the sales were made shortly after the company was reorganized, during the first six months of its business, and before any statement of its profits had been or could be ascertained. The only shares, that I now recall, being sold after January 1st, 1902, were bought for the purpose of qualifying the defendant, and perhaps one other, for directorship, without reference to the intrinsic or market value thereof, and, while I have disposed of this case on other grounds, I doubt whether, on August 7th, 1902, when it was decided to return this stock to its depositors, it had any intrinsic value; certainly there is no proof that it had any market value.
The conclusions which I have reached are as follows — first, that the stock of the “Atlantic Company” and of the “Export Company,” deposited under the agreement, never became the
Under the views above stated the complainant has not presented a case which commends itself to a court of equity, and in my judgment equitable aid ought not to be extended to him. I will therefore advise a dismissal of the bill of complaint.