240 F. 863 | 2d Cir. | 1917
(after stating the facts as above).- This action is brought by the trustee in bankruptcy of the Syndicate to recover $250,000 upon an assessment made by (the bankruptcy court upon unpaid stock of the bankrupt held by the defendant, and which it is claimed was acquired by him with knowledge that it was not full-paid.
On December 29, 1911, the trustee in bankruptcy of the Syndicate instituted proceedings in the bankruptcy court of the district of New Jersey, to assess any stock of the bankrupt corporation which had been issued for less than its par value. An order to show cause why the trustee should not be directed to levy such an assessment was served upon the defendant by mail. He appeared specially and objected to the jurisdiction of the court. The referee considered the objection well taken and dismissed the petition, but his action was reversed in the District Court. In re Newfoundland Syndicate (D. C.) 196 Fed. 443 (1912). Thereupon the defendant appealed, and the United States Circuit Court of Appeals for the Third Circuit affirmed the court below. 201 Fed. 917, 120 C. C. A. 255 (1913). The referee was directed to determine whether an assessment was necessary and if found to be necessary to determine the rate thereof, and to levy the same upon whatever stock may appear prima facie to be subject to assessment.
Thereupon the referee in bankruptcy in the district of New Jersey on April 12, 1915, determined that the debts of the bankrupt amounted to $1,096,027.89 and the assets (not counting liabilities on unpaid stock) amounted to $2,500, and that it was necessary to assess the unpaid stock, and directed as follows:
“That an assessment he and. the same hereby is made and levied upon 5,000 shares of the capital stock of the Newfoundland Syndicate issued to J. M. Ceballos & Co., on the 8th of November, 1905, and upon 5,000 shares of the capital stock of the Newfoundland issued to August Heckscher on the 9th of November, 1905, at the rate of 50 per cent, of the par value thereof, of 8100 a share, together with interest thereon from November 1905.”
The trustee made a call upon Heckscher for the payment of the assessment of $250,000, with interest from November 8, 1905, and, the same not having been paid, brought this action to recover the amount of the assessment.
It appears that the Syndicate was originally organized with an authorized capital stock of $300,000. By an amendment of its charter, in July, 1905, this was increased to $2,000,000. At some time in October, 1905, it found itself in need of additional capital. An attempt was made to interest the banking firm of J. M. Ceballos & Co. in the matter, and interviews with its officers were had. On October 26, 1905, Ceballos & Co. sent to the Syndicate a letter which reads as follows :
“Confirming our several interviews with the officers of your company, we hereby ratify our agreement to take over $1,000,000 of the full-paid and non-assessable capital stock of your company, to provide for which an increase of $1,000,000 in the capital stock is to be duly authorized by the stockholders, that is to say, from $2,000,000, its present amount, to $3,000,000, and to pay*867 for said $1,000,000 stock the sum of $500,000, we in addition to receive a banker’s commission of $100,000 stock of tbe Newfoundland Syndicate.”
The same day this letter was written the directors of the Syndicate met, and the letter was read and its terms accepted. It was voted to call the necessary meeting of the board of directors and the stockholders to authorize the increase of the capital stock as proposed. The meeting was held at the office of the company in Jersey City on November 2, 1905, and the necessary vote was had. A certificate amending the certificate of incorporation and increasing the stock from $2,000,COO to $3,000,000 was executed and filed at Trenton, in the office of the secretary of state of New Jersey. The increase in the capital stock having been authorized, the directors voted to issue it, and also to purchase certain mineral licenses and locations from George P. Mumford, one of their number, which they valued at $1,000,000 and which they agreed to pay for in the new stock, which was to be issued to Mumford as full-paid and nonassessable. This having been agreed upon, Mumford offered to turn back the stock into the treasury and, his offer having been accepted, this was done. Thereupon the directors sold the $1,000,000 of stock to Ceballos & Co., as full-paid and nonassessable stock, for $500,000; and Ceballos & Co. at once turned over to defendant Heckscher one-half of the stock for $250,000, and the claim is that, as Heckscher only paid $250,000, for stock of the par value of $500,000, he. is liable to the trustee in bankruptcy of the Syndicate for the balance of $250,000 due on the stock. The case was submitted to a jury, which returned a verdict in favor of the trustee for the sum of $105,000. A new trial was denied and judgment has been entered for the plaintiff. Both parties have taken out writs of error to review the. proceedings.
The Corporation Act of New Jersey (Revision of 1896) applicable to the transáctions now under consideration^ provides in section 21 that where the whole capital stock has not been paid in and the capital paid shall be insufficient to satisfy its debts and obligations, each stockholder shall be bound to pay on each share held by him the sum nec-cessary to complete the amount of such share as fixed by the charter of the corporation or such proportion of that sum as shall be required to satisfy such debt or obligation.
It is also provided in section 48 that nothing but money shall be considered as payment of any part of the capital stock of any corporation organized under the act except in tire case of the purchase of property.
And section 49 of the act reads as follows:
“Any corporation formed under this act may purchase mines, manufac-tories or other property necessary for its business, or the stock of any company or companies owning, mining, manufacturing or producing materials, or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full-paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this act; and in the absence of actual fraud in the transaction, the judgment of the directors as to the value of the property purchased shall be conclusive; and in all statements and reports of the corporation to be published or filed this stock shall not be stated or reported as being issued for cash paid to the corporation, but shall be reported in this respect according to the fact.” P. L. 1896, p. 293.
It is said that the stock now held by Heckscher was full-paid and nonassessable at the time it was delivered to Ceballos & Co., and through that firm to defendant, because of the prior sale of the stock to Mumford for his mining licenses, valued, as we have seen, by > the directors at $1,000,000. It is necessary, therefore, to consider that transaction more in detail. It appears that on the same day that the
While the resolution as to the purchase of the licenses was under consideration, Mumford retired from the room in which the directors were meeting and did not participate in the action taken. It was adopted, therefore, at a meeting at which a quorum was not present. A resolution was also adopted at the same time and by the same vote, adjudging that the licenses and locations were of the par value of $1,000,000. This action having been taken and made known to Mumford, he immediately assigned the licenses and locations to the Syndicate, and offered to return the stock into the treasury of the Syndicate, to be sold by it for the purpose of raising additional working capital. Thereupon it was voted, no quorum being present, to accept Mumford’s offer. The evident purpose of this proceeding was to make the stock full-paid and nonassessable. The fact that no quorum was present when the stock was issued to Mumford does not in itself invalidate the transaction, as will more fully appear hereafter. But the question remains whether the transaction with Mumford was invalid, in so far as it was agreed that the licenses were worth $1,-000,000 and that the stock should be regarded as full-paid and non-assessable.
There is no necessity for inferences, for Mumford’s own testimony ■makes the matter perfectly clear. He testified that he knew at, the time of the negotiations with Ceballos & Co. which led that firm to make its offer, and that he was- uncertain whether he had not himself initiated the negotiations. He admitted that he discussed the matter with Mr. Ceballos and with Mr. Fiske, a member of the firm of Ceballos & Co. prior to the offer of Ceballos & Co. to take the stock. He is a lawyer, and was a director and member of the executive committee of the Syndicate, and its legal adviser at the time. He testified that it was necessary to increase the capital stock, and that the whole matter of how the- thing was to be accomplished “so as to comply with the law” was left to him as counsel of the Syndicate. He says he discussed with the president of the company the fact that he was willing to turn over the licenses that were in his name as a basis for the issuance of the $1,000,000 of stock, and that he informed the presi
It is evident that the sole purpose of the transaction with- Mumford, was to make the stock full-paid and nonassessable.
“Their [directors’] honest judgment, if reached without due examination into the elements of value, or if based in part upon an estimate of matters which really are not property, * * * may lead to a violation of this statutory rule as surely as would corrupt motive.”
And see Holcombe v. Trenton White City Co., 80 N. J. Eq. 122, 144, 82 Atl. 618 (1912).
It does not appear in this record that the directors made any examination into the value of these licenses. In Honeyman v. Haughey (N. J. Ch.) 66 Atl. 582 (1906), stock was issued as fully paid stock to stockholders in exchange for a patent upon which a valuation of $1,-000,000 was placed. The stock was then turned back to the treasury. The vice chancellor in commenting on the transaction remarked that:
“If a proceeding of this kind can be sanctioned by the court, it would be a very simple matter for all stockholders to avoid payment for capital stock issued to them.”
The remark appears as applicable to the case now before us as it was to the case in which it was made. In that case the vice chancellor had no difficulty in arriving at the conclusion that the transaction was fraudulent and that it was a perfectly clear case of overissue of stock for property at a gross overvaluation.
In Easton National Bank v. American Brick & Tile Co., 70 N. J. Eq. 722, 730, 64 Atl. 1095 (1906), an attempt was made to show that the stock was issued in exchange for certain patent rights and processes, and that the directors after careful consideration had determined that the patents were worth at least the sum of $802,400, and that the directors authorized the issue of 8,024 shares in payment therefor, together with a cash payment of $20,000. In regard to this transaction the New Jersey Court of Errors and Appeals, unanimously affirming the opinion of the vice chancellor in the court below, said:
“We also agree with tbe view of the vice chancellor that, if we were to accept the claim ‘of the appellants that the directors did determine to issue all the stock in question for the patents, it would result that the proceeding must be considered a mere device on the part of the directors to evade the letter and spirit of the Corporation Act, to accomplish which the patents were intentionally overvalued.”
“The whole spirit and policy of the act are so clearly opposed to any arrangement by which corporate stock shall be issued without receipt by the company of an equivalent in value to its par that any agreement to this effect must be deemed void as contrary to the policy of the law. If any doubt has existed upon this question, it must be taken as settled by the decision of this court in Volney v. Nixon, 68 N. J. Eq. 605 [60 Atl. 189], 70 N. J. Eq. 740, 64 Atl. 920, 8 L. R. A. (N. S.) 271, 10 Ann. Cas. 84.”
The theory upon which the case was submitted was that, in case the jury found that the value of the licenses was less than $1,000,000, they should place a value upon them as of the time when the Syndicate took them over, and that the difference between such value and $1,000,000 would represent the extent to which the $1,000,000 stock issue was unpaid when it was turned back into the treasury; that one-half of that difference would be the amount ITeckscher would have to pay for the one-half of the 10,000 shares he took, and that on that amount he should be credited with $250,000 in cash, which it was conceded he had paid, and that on the balance he should pay interest from November 8, 1905, that being the date when he acquired his stock.
In his charge to the jury the learned District Judge, in referring to the action of the directors in taking over the licenses for $1,000,000 of stock, informed them that:
“It seems from tbe minutes that there were five directors present, but that Mr. Mumford was interested in this transaction, and left the room or retired while the directors were considering this proposition, and took action upon this proposition, and was not present when it was acted upon. Of course, it would constitute a quorum if he was there, even though he had not voted; but if he left the room, so as to leave only 4 directors present, and 9 were required, it seems equally clear that there would have been no directors’ meeting at the time this action was taken, and therefore there would have been no finding by the directors, as required by section 49 of the Corporations Law, that the value of the property transferred was equal to the value of the stock issued.”
It is claimed, however, that because Mumford turned back the stock into the treasury of the company it became converted thereby into “treasury stock,” and as such could be sold “as full-paid and non-assessable” to Ceballos & Co. or anybody else for whatever it would bring, even though the purchaser knew all the facts connected with the original sale to Mumford. If that be true, then we are obliged to hold that a transaction which on its face was a sham and intended as an evasion of the statute was effective, and enabled the corporation to sell its stock for less than par, in direct violation of the Corporation Law under which it was organized and derived its powers. We do not believe that such is the law, or that courts can permit a corporation thus to collude with one of its directors to evade and circumvent the positive prohibition of the statute.
“Such stock having once been legally issued as full-paid stock, and then donated back into the corporate.treasury, can be legally sold for cash at less than par.”
With that proposition we have no quarrel. What we hold is that, where such stock has been illegally issued as full-paid stock and then donated back into the corporate treasury it cannot under the New Jersey Corporation Act be legally sold for less than par. The rule is correctly stated in Marshall on Corporations, page 561:
“It is too clear to admit of question that, when stock has been once issued and fully paid for, there is nothing to prevent the stockholders from returning the whole or part thereof to the corporation, or to a trustee for its use, to be*875 disposed of for its benefit, and in such a case the corporation or trustee may dispose of the stock at less than its par value without -violating statutory or constitutional provisions regulating the issue of stock, and without rendering purchasers thereof liable to creditors beyond the price which they agree to pay. This exception to the general doctrine does not apply, however, where the transaction under which the corporation reacquires the shares is not in good faith, but a mere device on the part of the stockholders to avoid payment in full. Stockholders cannot escape liability to creditors by subscribing for stock, and then surrendering it to the corporation before payment therefor, and afterwards taking the same from the corporation, controlled by them, at a reduced value.”
‘‘So, if the stock were not fully paid according to the laws of New Jersey, it would make no difference, as I see it, whether Mr. Heeksher, when he bought the shares, had knowledge of that fact or not, and for this reason: Probably, if he bought it on the stock market or from a purchaser other than the company itself, the rule might be different, if he also purchased in good faith and for value, without notice that the company had not received full value for the stock; in that event he might have been a bona fide transferee, and could not be subjected, under the New Jersey law, for the unpaid stock subscription, if there was any. In this .case, however, it is without dispute that he bought this stock either from Ceballos & Co. directly or jointly with Ceballos & Co., who purchased the stock from the company. In either case he knew the stock was being purchased from the company, and that the company had only received 50 cents on the dollar from the par value of the stock, when he made the purchase, and therefore, as I see it, he would not be a purchaser in the open market in the ordinary course of business, and under such circumstances as that he would be charged with knowing that the company did not get full value, if that was a fact, since he was only paying to it, or knew that Ceballos was only paying to it, 50 cents on the dollar, instead of the 100 cents on the dollar. If it was not fully paid up under those circumstances, he would become responsible; and if he did not actually know it to be a fact, it would not exonerate him from liability.”
This part of the charge was duly excepted to. The plaintiff’s expert on the law of New Jersey testified as follows: . .
“I think, where there is a transfer of shares which have not been fully paid for, that the transferee is liable for the balance of his shares, unless he can show that he has acquired those shares in the ordinary course of business, for full value, and without notice of the fact that there was an unpaid amount, or illegality about the issue of the shares.”
“It is understood that this payment is to be applied on account of purchase of $500,000 to be paid by you for $1,000,000 of Syndicate stock under the terms of your offer of October 26, 1905, accepted by the board of directors upon that date.” x
Then at the meeting on November 2, 1915, after the deal with Mumford already stated had been consummated, the stock, having a par value of $1,000,000, was authorized to be issued to Ceballos & .Co. for $500,000. The certificates were issued to Ceballos & Co. on November 8, 1905, and one-half of the certificates were at once surrendered to Heckscher.' It is evident that Ceballos & Co. were acting for themselves and Heckscher in making this purchase. And in law Heckscher, if he did not otherwise have knowledge of the facts, would be charged with notice of the facts known to Ceballos & Co., his agent in the transaction, that they were purchasing from the company $1,000,000 of stock for. $500,000.
There is another circumstance in this connection which also shows what the relation was between Heckscher and Ceballos '& Co. in the purchase of this stock.- The offer to the Syndicate was not simply to pay $500,000 for $1,000,000 in stock, but the purchasers were in addition to receive a banker’s commission of $100,000 of the original stock. This was turned over to -Ceballos & Co. and the latter transferred one-half of it to defendant Heckscher. This $100,000 of stock would not have been divided with Heckscher, unless the purchase of the new stock had been a joint transaction. This stock was obtained by the Syndicate from the stockholders by a voluntary contribution of 5 per cent, of their respective stockholdings on the basis of the capitalization of $2,000,000. If Ceballos & Co. had bought the new stock for 50 cents on the dollar, and then sold it to Heckscher as full-paid stock for what they paid for it, then Heckscher would not have been liable, unless he had notice of what Ceballos & Co. paid for it; and whether he had notice would have been for the jury. But that is not this case. We think the charge of the judge on this part of tire case was, under the circumstances, correct. If Heckscher knew, at the time of his purchase of the stock, of the previous issue of the stock to Mumford for the licenses, he must be held to have had knowledge of the law that that transaction did not make the stock full paid and
In something less than a year after the issue of the new stock Heckscher evidently learned that the issuance of the stock as full-paid when he had only paid 50 cents on the dollar for it was liable to involve him in trouble. He proposed to give back one-half of the issue and asked Ceballos & Co. to do the same. On September 1, 1906, he addressed a letter to Ceballos & Co. in which he inclosed the certificates for 5,000 shares and said:
“I have learned quite recently that the issue of this stock was made under a mistake, which in my judgment makes it proper that a rescission of the transaction he demanded. Tou will therefore he kind enough to turn over these certificates to the Syndicate, and to deliver to me, in exchange therefor, either the cash, $250,000, paid by me with interest, or else certificates for 2,500 shares of stock, for which the Syndicate has received cash at par.
“Very truly yours, August Heckscher.”
On the same day Ceballos '& Co. wrote a letter to the. Syndicate inclosing their certificates for 5,000 shares and Heckscher’s certificates for 5,000 shares, and asked for either the return of $500,000 they paid for the 10,000 shares issued to them, or the cancellation of the stock and the issue of half the number of shares. The letter stated that:
“In view of the mistake on your part, it does not seem to us right or proper that the shares of stock issued should longer remain outstanding.”
When on the stand, Heckscher was asked what the mistake was to which he referred in his letter to Ceballos & Co., and he answered that he could not tell, that the letter was written by counsel whom he had requested to look into the affairs of the Syndicate. And Mr. Fiske of the firm of Ceballos & Co. when on the stand was asked the same question and. he also replied that he did not know, but that he had been requested by Heckscher to write the letter sent by Ceballos & Co. and he did it; that Heckscher said he (Heckscher) was asked to have that letter written by him (Fiske) on advice of counsel, and he did. He did not compose it, but was given the form and sent it.
“Rules of law forbidding tlie issue of shares for less than their par value, whether they be the result of judicial decisions or be laid down by the Legislature, have no application to the reissue of shares which, having been once legally issued, have by forfeiture, gift, or in any other legal mode reverted to the company; but such shares may be legally reissued or sold for whatever can be obtained for them. According to some strong American authorities, the same thing is true of shares issued by way of increase of capital by a going concern. Indeed, according to high authority, wherever a corporation has carried on business with its original authorized capital not fully subscribed, so that the shares have acquired a rating in the market, the unsubscribed shares of the original authorized capital may be issued for whatever they would bring in the market, even though less than par, and if the shares have no market value they may be issued gratuitously.” 1 Machen on Corporations, § 779.
And in Handley v. Stutz, 139 U. S. 417, 11 Sup. Ct. 530, 35 L. Ed. 227 (1891) the Supreme Court said:
“The liability of a subscriber for the par value of increased stock taken by him may depend somewhat upon the circumstances under which, and the purposes for which, such increase' was made. It it be merely for the purpose of adding to the original capital stock of the corporation, and enabling it to do a larger and .more profitable business, such subscriber would stand practically upon the same basis as a subscriber to the original capital. But we think that an active corporation may, for the purpose of paying its debts, and obtaining money for the successful prosecution of its business, issue its stock and dispose of it for the best price that can be obtained. Stein v. Howard, 65 Cal. 616 [4 Pac. 662]. As the company in this case found it impossible to negotiate its bonds at par without the stóck, and as the stock was issued for the purpose of enhancing the value of the bonds, and was taken by the subscribers to the bonds at a price fairly representing the value of both stock and bonds, we think the transaction should be sustained, and that the defendants cannot be called upon to respond * * * to the original stock of the company.”
The question in the case involved a statute of Kentucky which provided as follows:
“Nothing herein shall exempt the stockholders of any corporation from individual liability to the amount of the unpaid installments on the stock*879 owned by them, or transferred by them, for the purpose of defrauding creditors; and an execution against the company may, to that extent, be levied upon the private property of such individual.” Bullitt & Iceland's General Statutes of Kentucky 1883, '§ 14, p. 549.
In Clark v. Bever, 139 U. S. 96, 11 Sup. Ct. 468, 35 L. Ed. 88, (1890) the court had before it a statute of the state of Iowa which declared that:
“Nothing herein contained exempts the stockholders of any corporation from individual liability to the amount of the unpaid installments on the stock owned by them.” Revision 1860, § 1172.
And the court said:
/‘The local statute undoubtedly proceeds upon the ground that unpaid installments of stock subscribed constitute — no other rule being prescribed by legislative enactment — a trust fund for the benefit of creditors. But it does not declare that a corporation is without power, under any circumstances whatever, to dispose of its stock at less than par, or that stock purporting to be full paid shall, in all cases, and without reference to the circumstances under which it was acquired, be deemed unpaid to the extent that the amount given for it by the owner, whether in money or in property, was less than its. face value. On the contrary, the statute itself imposes no express restriction upon the disposition by a corporation of its stock except such as is imposed upon individuals, and prescribes no rule in respect to the liability of a stockholder to creditors except that, when corporate property cannot be found to pay a judgment creditor, his private property may be seized under the execution to the extent of any unpaid instailnients on the stock owned by him. Whether any such indebtedness really exists upon the part of a particular stockholder, and whether he in law or in fact owes any sum on the stock held by him, was left by the statutes to be determined in each case, upon its own circumstances, and in accordance with the principles of general law touching the rights and liabilities of creditors and stockholders. If the Legislature had intended that the acquisition of stock at less than its face value should be conclusive evidence in every case that the stock, as between creditors and stockholders, is ‘unpaid,’ it would have been easy to so declare, as has been done in some of the states. If such a rule be demanded by considerations of public policy, the remedy is with the legislative department of the government creating the corporation. A rule so explicit and unbending could be enforced without injustice to any one, for all would have notice from the statute of the will of the Legislature. It is not for the courts by mere interpretation of a statute, not justified by its language, to accomplish objects that are within the exclusive province of legislation.”
This makes it necessary to consider whether the New Jersey Corporation Act, under which the stock herein involved was issued, is similar to the Kentucky and Iowa statutes, or whether the New Jersey act is so explicit that it cannot be said of it that it leaves the question whether any indebtedness exists upon the part of the stockholders to be determined upon its own circumstances. The New Jersey act reads as follows:
“Where the whole capital of a corporation shall not have been paid in, and the capital paid shall be insufficient to satisfy its debts and obligations, each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of such share, as fixed by the charter of the corporation, or such proportion of that sum.as shall be required to satisfy such debt and obligation.” P. L. 1896, p. 284, § 21.
We therefore hold that the doctrine of Handley v. Stutz and of Clark v. Bever cannot be invoked to protect Heckscher from paying
At the trial the plaintiff put on the stand an attorney and counselor at law practicing in New Jersey and asked him whether so much of the decision of Handley v. Stutz as held that under certain circumstances the stock of a corporation might be sold for less than its par value found any support in the decisions of New Jersey. He replied that in his judgment certain of them which he mentioned — See v. Heppenheimer, Easton National Bank v. American Brick & Tile Co., Hebberd v. Southwestern Land & Cattle Co., 55 N. J. Eq. 18, 36 Atl. 122, and Holcombe v. Trenton White City Co. — were inconsistent with that case and had practically determined it otherwise. He testified, too, that the case of Hebberd v. Southwestern Hand & Cattle Co., supra, decided exactly the same point in a different way. He also stated that under- the law of New Jersey, where there is a transfer of shares which have not been fully paid for, that the transferee is liable for the balance on his shares, 'unless he can show that he has acquired those shares in the ordinary course of business for full value and ‘without notice of the fact that there was an unpaid amount or illegality about the issue of the shares.
The defendant also called a counselor at law of New Jersey, and asked him whether the courts of New Jersey had passed on this doctrine of Handley v. Stutz, and he replied that the doctrine had never been definitely passed upon by the courts of that state. We have examined the cases cited by the plaintiff’s expert. They are cases relating to the issue of original stock, and do not raise tire question directly involved in Handley v. Stutz. It is a delicate and not always satisfactory task for the courts of another jurisdiction to declare the law of a state. But the courts of New Jersey do not seem to have expressly decided whether the doctrine of Handley v. Stutz is or is not applicable to the Corporation Act of that state. We do not rest our decision upon the testimony of the experts but upon what seems to us to be the meaning of the legislative act.
Jüdgment affirmed.
