Farrell v. Davis

161 P. 94 | Or. | 1916

Mr. Justice Bean

delivered the opinion of the court.

1. This suit was instituted in 1908. The theory of the complaint is that the $40,000 worth of stock issued in exchange for the contract with the Fibre Company was entirely without consideration, for the reason that the contract was not property within the meaning of Section 6696, L. O. L. The suit is defended upon the theory that the stock subscribed was fully paid up by the assignment in good faith to the Mattress Company of a valuable contract right which would be considered as property under the section of the statute referred to which provides as follows:

“All sales of stock, whether voluntary or otherwise, transfer to the purchaser all rights of the original holder or person from whom the same is purchased, and subject such purchaser to the payment of any unpaid balance due, or to become due, on such stock; but if the sale be voluntary, the seller is still liable to existing creditors for the amount of such balance, unless the same be duly paid by such purchaser; provided, that any corporation formed under the laws of this state may purchase real or personal property, including the stock of any other corporation, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be fully paid .stock and not liable to any assessment; 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 or reports of the corporation to be published or filed, stock so issued 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. ’ ’

All that part of the section commencing with the word “provided” was added thereto by an amendment in 1903.. If there was no actual fraud in the transaction of issuing the stock for the contract we are precluded by the legislative mandate from questioning the judgment of the directors of the Mattress Company as to the value of the contract. The evidence shows that the machine for the manufacturing of fibre from pine needles was patented by a man at Grants Pass, Oregon, and that the Oregon Pine Needle Fibre Company had obtained the patent right. There appears to have been but little, if any, question in the minds of all. the interested parties at the time but that the manufacturing of the fibre by the Fibre Company and the manufacturing and sale of mattresses by the Mattress Company would be a very profitable business and that the obtainment of the ten years’ contract of the fibre plants was a very valuable right. McCarthy was vice-president of the Fibre Company and in connection with Bruner was apparently armed with this chose in action in order to interest other capitalists in the manufacturing of mattresses and thereby make a demand and sale of the output of their factory. About November 5, 1904, Davis was presented with a prospectus showing a detailed statement of the estimated cost of operating and the profits of the Oregon Pine Needle Fibre Company’s plant for a rnn of ten months taking the prices named in the contract as' a basis and leaving a net balance of profit of $91,597.40. Emphasis was placed upon the fact that “this is the only pine-needle fibre machine in the world and the only process in operation” and covered by a patent. For the company to be organized for manufacturing the fibre into mattresses and selling the products, oil, etc., an estimate was made of the cost and selling price for the same length of time, and after deducting all expenses a net profit was estimated at $140,400. All appear to have had confidence in the success of the venture, to have believed that the advantage of the contract would work out a good profit, and that it was valuable. There was no actual fraud on the part of the directors in estimating the value of the rights obtained under the contract. Defendant Davis proved his good faith in the transaction by putting $10,000 into the treasury of the Mattress Company for a one-fifth interest in the contract right. In order to do this he relinquished an established position with a well known, reliable concern to devote his entire time to promote the success of the enterprise, and later he paid $10,000 more for that amount of the capital stock of the Mattress Company.

Actual or positive fraud has been said to consist in circumventing, cheating, or deceiving a person to his injury, by any cunning, deception or artifice: 20 Cye. 8. A contract right being a chose in action comes within the legal understanding of property: 32 Cye. 654. Thus a contractual license to mine, revocable only by consent or condition broken, is property though coupled with an obligation to continue the work, and may be accepted by a corporation in payment of a subscription to its stock: Shepard v. Drake, 61 Mo. 134. See, also, Beyrich v. Liebler, 3 N. Y. Supp. 293. The same principles govern the payment for stock by a contract right as control the analogous line of cases where stock is paid for by other intangible' rights such as patent rights: Rich v. Bank, 7 Neb. 201.

It is said in 4 Thomp. Corp., Section 3953: “ * * An agreement between the owner of a patent right and a third party that the latter should form a corporation to work the patent and should issue to the former a certain number of full paid shares of the capital stock of the corporation for the transfer of the patent right, there being no evidence of fraud or of a purpose to impose upon the public, has been held a valid agreement.”

The fact that it subsequently turned out that this contract had little or no value is not of itself sufficient to show fraud on the part of the directors: American Tube & Iron Co. v. Hayes (Pa.), 30 Atl. 936; Young v. Erie Iron Co., 65 Mich. 111, 122.

S. B. Hendee, a stockholder. of the Oregon Pine Needle Fibre Company, appears to have assisted H. H. McCarthy in promoting the enterprise and everything seems to have been done in the interests of that company as well as the Mattress Company. On November 5,1904, Hendee wrote Davis in part as follows:

“In presenting the within Manufacturing Enterprise, I would respectfully call your attention to the truthfulness of the statements that can be verified and indorsed by your family physician, also the point that the sale of every article assists in retaining as well as restoring to health the purchaser, besides providing the owners of mill and factory a handsome profit.”

From all indications these corporations were closely allied and it is not easy to believe that the officers of the Pine Needle Company did not know all about the arrangement as to the issuance of the stock for the contract. In fact the circumstances show that they were aware of this.

2. The claims of the Pine Needle Company for fibre, etc., which have been assigned to an individual constitute the principal part of the indebtedness of the Mattress Company for which this suit is brought. As a general rule, a corporate creditor cannot complain where, at the time when he contracted with the company, he knew that the stock had been issued for property taken at an overvaluation: 1 Cook on Corp., § 46, p. 203, citing Bank of Fort Madison v. Alden, 129 U. S. 372 (32 L. Ed. 725, 9 Sup. Ct. Rep. 332); McDowell v. Lindsay, 213 Pa. St. 591 (63 Atl. 130); Bonet etc. Co. v. Central etc. Co., 153 Mo. App. 185 (132 S. W. 270); Davis v. Ball, 64 Wash. 292 (116 Pac. 833, Ann. Cas. 1914B, 750); Johnson v. Tennessee Oil Co., 74 N. J. Eq. 32 (69 Atl. 788); Bank v. American etc. Co., 69 N. J. Eq. 326 (60 Atl. 54); Lea v. Iron etc. Co., 147 Ala. 421 (42 South. 415, 119 Am. St. Rep. 93, 8 L. R. A. (N. S.) 271).

The Oregon Pine Needle Fibre Company, being the father of the whole enterprise and instrumental in interesting Davis to the extent of paying $10,000 to the Mattress Company for stock, and afterwards $10,000 more to McCarthy, the vice-president of the Oregon Pine Needle Fibre Company for his stock in that company, is in a poor position to insist that Davis bear another large share of the burden or to assert that the contract executed by it and sent out into the market to raise funds for the enterprise in which that company was vitally interested was then of no value. There is no actual fraud shown in the issuance of the stock after-wards purchased by Davis. Under our statute the court cannot readjust the matter by revising the judgment of the directors of the Mattress Company in fixing the value of the then much prized monopoly contract for the exclusive right to market the products of the Oregon Pine Needle Fibre Company’s factories for the period of ten years.

The decree of the lower court will therefore be reversed and the suit dismissed. .

Reversed and Suit Dismissed.

Mr. Justice McBride and Mr. Justice Benson concur.

Denied December 27, 1916. Rehearing denied February 13, 1917.

Application for Supplemental Opinion.

(161 Pac. 713.)

On application of appellant A. E. Davis for a supplemental opinion. Application denied. Petition for rehearing denied.

Messrs. Wood, Montague, Hunt <& Gookingham, for the application.

Mr. Turner Oliver and Mr. Frank 8. Grant, contra.

Department 2. Mr. Justice Bean delivered the opinion of the court.

3. Defendant A. E. Davis has applied for a supplemental opinion adjudicating his claim against the assignee of the estate of the Hygienic Mattress Company, an insolvent debtor. It is stated in the application that Mr. Davis filed a claim against the insolvent company for over $6,000, representing the disbursements made by him in behalf of the corporation and overdue salary; that after a full hearing on the merits Judge Cleland of the Circuit Court allowed the claim in full and entered an order requiring the assignee to list it for payment of dividends. In the present suit against Mr. Davis to recover for unpaid stock subscriptions he pleaded the decree of Judge Cleland rendered April 6, 1908, allowing his claim in the sum of $6,535.42, together with the other defense which is referred to in the original opinion in this case filed November 28, 1916. Upon the hearing of the present suit in the Circuit Court, as the application recites, Judge Morrow made a finding that Mr. Davis was entitled to a salary of $150 a month for sixteen months, or a total of $2,400, hence modifying the findings of Judge Cleland concerning the salary and disregarding the same. According to the original opinion herein the decree of Judge Morrow will he reversed and the suit dismissed as prayed for in defendants ’ answer. It therefore becomes unnecessary in this suit to pass upon the claim of Mr. Davis for salary. The proceedings in the matter of the assignment of the Hygienic Mattress Company were not made a record in the present snit either as an exhibit or otherwise. Neither was the claim of Mr. Davis filed as an exhibit and the record in regard thereto is very meager.

We are of the opinion that this application seeks for an expression in advance in regard to the settlement of a claim against the assignee estate which, as the application states, has already been passed upon by Judge Cleland of the Circuit Court, and from which no appeal has been taken. If it were necessary to further adjudicate the matter in this suit the record is not sufficient for such an adjustment. There is no further question involved herein which this court can legally decide or upon which it can express an opinion.

The application will therefore he denied.

Application por Supplemental Opinion Denied.

Rehearing Denied.

Mr. Justice Harris and Mr. Justice Benson concur.