144 Tenn. 113 | Tenn. | 1921
delivered the opinion of the court.
The Darnell-Love Lumber Company is a Tennessee corporation, created in 1902, with a capital stock of $25,000, which was subsequently increased by amendment to its character in 1907 to $250,000, with shares of the par value of $100 each. It is engaged in the lumber business in Mississippi, operating mills at Leland, and holding Jarge timber interests in the State named. The complainant, R. J. Wiggs, was one of the original incor-porators of the company, holding the position of secretary and treasurer until 1917, when the interest of the Darnell estate was purchased by Mr. Wiggs and Mr. F. T. Turner, then general manager of the company, and a reorganization was effected, whereby the former became president and the latter vice president and general manager of the company, Wiggs owning 800 shares of stock
The defendant assigns numerous errors to the action of the court of civil appeals authorizing a disaffirmance by complainant to any extent; those which we deem material and conclusive, and to which we direct our attention, being the void and illegal nature of the transaction and the right of complainant to obtain relief from the contract. The. assignments on behalf of complainant, will be overruled., The findings of the chancellor and the court of civil appeals upon the question of duress are
“It is no answer to say Nat shares having a market value must be regarded like any other personal property, and that no person is injured if a solvent corporation in good faith purchases shares in itself at their market value, inasmuch as the shares so purchased are property in the hands of the company, and may at any time be reissued or sold. No verbiage can disguise the fact that a purchase by a corporation of shares in itself really amounts to a reduction of the company’s assets, and that the shares purchased do in fact remain extinguished, at least until the reissue has taken place. The fact that such a transaction may not necessarily be injurious to any person is not a sufficient reason for supporting it. It is contrary to the fundamental agreement of the shareholders, and is condemned by the plainest dictates of sound poliev.”
In Civil Service Investment Association v. Thomas, supra, there existed a state of facts strikingly analogous to the circumstances of the instant case, upon which the defendant predicates the legality of its purchase, yet this court therein reaffirmed its adherence to the English rule that “a corporation, in the absence of statutory authority, cannot purchase its own shares, ’ ’ and further said:
“We are of'opinion that is it not competent for the members of a corporation to override the policy of the law, thus manifested in legislative acts, and work a change in. the charter or constitution which it received from a power above it, the state, by a mere by-law such as the one advanced here as justification for the purchase of the shares of Thomas.”
Supporting the conclusions there reached, reference is made to Trevor v. Whitworth, L. R., 12 App. Cas., 409, 57 L. J. Ch. N. S., 28, where it is said by Lord Herschell:
“What was the reason which induced the company in the present case1 to purchase its shares 1 If it was that they might sell them again, this would be a trafficking in the shares, and clearly unauthorized. If it was to retain them, this would be to my mind an indirect method of reducing the capital of the company.”
And, as pertinent to the purpose of the instant purchase as disclosed by the ratifying resolution adopted by the corporation, the speaker further observed:
*123 “I can quite understand that the directors of a company may sometimes desire that the shareholders should not be numerous, and that they should he persons likely to leave them with a free hand to carry on their operations. But I think it would he most dangerous to countenance, the view that, for reasons such as these, they could legitimately expend the moneys of the company to any extent they please in the purchase of its shares. No doubt if certain shareholders are disposed to hamper the proceedings of the company, and are willing to sell their shares, they may be bought out; but this must be done by persons, existing shareholders or others, who can be induced to purchase the shares, and not out of the funds of the company.”
The wholesomeness of our, public policy which prohibits a corporation from purchasing shares of its own stock springs, not only from the necessity of restricting such bodies to the actual powers conferred upon them by charter, and those fairly to be implied therefrom (Miller v. Ins. Co., 92 Tenn., 167-176, 21 S. W., 39, 20 L. R. A., 765); but also from the further vital consideration that the capital stock of a corporation is a trust fund for the security of existing and future creditors which shall not, save in the manner provided by law, be diminished or impaired by any act ultra vires the corporation. Whaley v. King, supra. It is of the highest importance that those dealing with a corporation be secure in the assurance that the amount fixed by charter is in fact available for the legitimate conduct of its business. In Machen on Corporations, section 626, the evil tendency of the exercise of such power is forcibly pointed out:
But it is said for the defendant that, even if the contract here ho held illegal and void, yet the complainant will not he permitted to rescind, for the reason that in its execution he is equally guilty with the defendant, and that he is to he repelled hy the rule, “In pari delicto potior est conditio defendentis.” Assuming the parties in equal wrong, though their respective circumstances and actions at the time of making the contract might well constitute a basis for argument that such is not true, the rule referred to is undoubtedly of general application where relief is sought upon illegal contracts which involve no consideration of the public welfare, hut a well-grounded exception to this rule is found in those cases wherein the public good is to he promoted hy permitting a disaffirmance of the contract although in so doing a party to its illegality may he benefited thereby. As stated in 6 R. C. L., section 220, p. 829:
“The general rule operates only in cases where the refusal of the courts to aid either party frustrates the object of the transaction, and takes away the temptation to engage in contracts contra tonos mores, or violating the policy of the law. If it is necessary, in order to dis*126 countenance such transactions, to enforce such a contract at law, or to relieve against it in equity, it will be done, through both the parties are in pari delicto. The party is not allowed to allege his own, turpitude, in such cases, when defendant at law, nor is he prevented from alleging it when plaintiff in equity, if the refusal to execute the contract at law, or refusal to relieve against it in equity, would give effect to the original purpose, and encourage the parties engaging in such transactions. In such cases the guilt of the respective parties is not considered by the court, which looks only to the higher right of the public; the guilty party to whom relief is granted being only the instrument by which the public is served. ’ ’
This exception is recognized in the case of Hale v. Sharp, 4 Cold., 275-281, where it is said:
“There is a well-defined distinction as to the nature and extent of the relief which will be granted to persons who are parties to agreements and other transactions against public policy, and therefore to be deemed par-ticeps criminis, and that which will be granted to parties to agreements, illegal merely because they are mala pho'hibita or mala in se. In cases where agreements or other transactions are repudiated, on account of their being against public policy, the circumstance that the relief is asked by a party who is particeps criminis is not in equity material. The reason is that the public interest requires that relief should be given, and it is given to the public through the party; and in these cases relief will be granted, not only by setting aside the agreement or other transaction, but also, in many cases, by ordering a repayment of any money paid under it. 1 Story’s Eq., sec. 298, and notes 1 and 2.”
Upon the facts of the present case under our decisions the corporation would he entitled to disaffirm the contract, and upon return of the stock recover the consideration paid. It may not necessarily follow therefrom that the right of rescission is reciprocal in the stockholder, yet we are convinced that where the latter seeks to restore the improperly diverted funds to the corporation and have returned to him the identical stock unlawfully acquired, in other words to re-estahlish the former legal status of the corporation with reference to its capital stock, and this it is possible to accomplish, the announced policy of the State is to be best subserved by affirmative action, rather than to permit by inaction the continued violation thereof.
We are referred to numerous cases applying the principle of in pari delicto upon which the defendant here relies. Particularly stressed and illustrative are the cases of St. Louis, Vandalia & Terre Haute R. Co. v. Terre Haute & I. R. Co., 145 U. S., 394, 12 Sup. Ct., 953, 36 L. Ed., 748, and Harriman v. Northern Securities Co., 197 U. S., 244, 25 Sup. Ct., 493, 49 L. Ed., 739. In neither of these cases is it to be found that there existed considerations of public policy deemed sufficient to take the eases out of the general rule, and the same was therefore applied, Mr. Chief Justice Fullee, in the Harriman Case, saying:
“In the present case complainants seek the return of property delivered to the Securities Company pursuant*128 to an executed contract of sale on the ground of the illegality of that contract, hut the record discloses no special considerations of equity, justice, or public policy, which would justify the courts in relaxing the rigor of the rule which here bars a recovery. . ...
“And it is clear enough that the delivery to complainants of a majority of the total Northern Pacific stock and a ratable distribution of the remaining assets to the other Securities stockholders would not only be in itself inequitable, but would directly contravene the object of the Sherman Law and the purposes of the government suit.” '
From the view which we take of this case it is apparent that the defenses of ratification and estoppel cannot avail the defendant; they cannot be relied on to supply the want of power in the corporation, for in contracts of this character the conduct of the parties cannot be held to have the effect of legalizing that which the policy of the law declares illegal.
While the defense of laches may be applicable in certain cases of this kind wherein intervening rights of innocent parties have become fixed, the instant case fails to present a state of facts upon which this defendant may claim the benefit of such defense.
A majority of the court are of opinion that there is no error in the judgment of the court of civil appeals, and the same is affirmed.
Concurring in the conclusions reached with reference to the corporate power here involved, Mr. Justice G-keeN and Mr. Special Justice E. J. Smith dissent from so much of the opinion authorizing a recovery by the complainant.