Erickson v. Revere Elevator Co., Nos. 16,392—(63)

Nos. 16,392—(63) | Minn. | Apr 22, 1910

O’Brien, J.

According to the complaint, on September 14, 19.03, defendant delivered to Minnesota Grain Company its promissory note for $6,000, payable on or before one year from date. Plaintiff signed tbe note as a surety, and on March 11, 1909, was compelled to pay a balance of $3,161.45, remaining unpaid, and brought this action to recover that amount. Defendant served an answer containing general and special denials, and alleging as a separate defense that on May 21,. 1907, N. H. Dahl, H. IP. Dahl, A. O. Anderson, C. 0. Nichols, E. L. Nelson, and the plaintiff were owners of the entire capital stock of defendant, and on said date, through N. H. Dahl, their duly constituted agent, sold their entire holdings to Charles Gamble, Martha Anderson, A. G. Anderson, E. J. Sheffield, and K. E. Mo for $7,500, upon- a statement representing and warranting “that, the said corporation was free from debts and every and all obligations,” and “that there were no liens, incumbrances, or indebtedness-of any kind against said corporation or any of its said property.” In reliance upon the representations those named purchased and still own all the stock. Therefore it is claimed the plaintiff is es-topped. The same allegations are reasserted for damages as a counterclaim or set-off. Plaintiff demurred to- the allegations of affirmative defense. This appeal is from an order sustaining the-demurrer.

There can be no doubt that, if the allegations of the answer are true, there must be some procedure by which the stockholders, who are the beneficial owners of the defendant corporation and its property, can be protected. But we do not think this demurrer can be overruled without violating the fundamental principles underlying the creation and legal status of corporations. It is true that where the corporate form is used by individuals for the purpose of evading the law, or for the perpetration of fraud, the court will not permit, the legal entity to be interposed so as to defeat justice. The necessity for this rule is becoming more apparent each day, not only in the maintenance of private rights, but for the preservation of public rights in the regulation and necessary control of large corporations. State v. Creamery Package Mnfg. Co., supra, page 415, 126 N.W. 126" court="Minn." date_filed="1910-04-22" href="https://app.midpage.ai/document/state-v-creamery-package-manufacturing-co-7975286?utm_source=webapp" opinion_id="7975286">126 N. W. 126, and cases cited. But in ordinary business transactions, and for the purpose of determining the respective rights,, responsibilities, and powers of corporations, its officers, stockholders, and those dealing with them, it is necessary that the distinction between the corporation, as a legal entity, and its members, be strictly maintained.

The note sited upon was not a debt of the original stockholders, but of the corporation. The sale of the stock was not a corporate act, but that of the individual stockholders. A stockholder in his individual capacity, or any number of stockholders, cannot bind the corporation in its corporate capacity, except under the extraordinary circumstances already referred to. The sale of the stock, therefore, in no. manner affected the liability of the corporation upon the note, and the corporation itself, considered as a distinct entity, cannot avail itself of the rights of its present stockholders possessed by them as individuals. Gallagher v. Germania Brewing Co., 53 Minn. 214" court="Minn." date_filed="1893-05-09" href="https://app.midpage.ai/document/gallagher-v-germania-brewing-co-7967869?utm_source=webapp" opinion_id="7967869">53 Minn. 214, 54 N. W. 1115. Notwithstanding this, a stockholder has a direct and real interest in the property of the corporation, and may, when the corporation will not or cannot fully protect its property, be recognized as a proper party to prosecute or defend an action involving primarily the corporation’s rights. Baldwin v. Canfield, 26 Minn. 43" court="Minn." date_filed="1879-05-15" href="https://app.midpage.ai/document/baldwin-v-canfield-7963567?utm_source=webapp" opinion_id="7963567">26 Minn. 43, 1 N. W. 261, 276.

The difficulty here is that the corporation is attempting to assert a defense which is personal to the individual stockholders, who are not parties to the action, and who are at liberty at any time to dispose of their stock holdings, a transaction which would not transfer to the purchaser the rights relied upon in the answer. If we had before us a demand upon the part of the individual stockholders to be allowed to intervene and protect their interests in this action, it would be a different question, and one upon which we express no opinion. Becker v. Northway, 44 Minn. 61, 46 N. W. 210, 20 Am. St. 543.

Order affirmed.