184 Iowa 154 | Iowa | 1918
On the 10th day of'July, 191G, defendant the Towa Mercantile Company was a corporation and a going concern. On that day, one of its duly authorized agents solicited the intervenor, Kluss, to purchase stock in the company. In pursuance of the solicitation and representations and statements made by this agent, the intervenor made an application to the company for stock, in the following words and figures:
“Application for membership in Iowa Mercantile Com- • pany, Cedar Rapids, Towa. Class B stock, $60.00. Class A stock, $30.00. Original, to be Filed at the Company’s office.
“Date 7-10-1916.
“I hereby subscribe for five shares of Class B stock of the Towa Mercantile Company, for which I agree to pay $300.00, as follows: $100.00 this day, and $200.00 October 20, 1916. Upon acceptance, this application becomes a contract equally binding upon both parties hereto.
“Name, F. H. Kluss.
“Address, Luzerne, la.
“Occupation, Farmer and Stock Buyer.
“This application written by J. M. Thomas.
“Accepted...........Mgr. Stock Sales Department.”
On the receipt of this application, the company issued to the intervenor five shares of Class B stock, upon receipt of which the intervenor executed and- delivered to the company his two promissory notes of $100 each, and paid to
To this petition, the receiver, in answer, said: That he admits the insolvency of the company, as pleaded; admits that he is in possession of the notes in controversy, amounting to $200, and that the notes were given in pursuance of the written subscription of the intervenor for capital stock; denies that no rights of bona-fide creditors have accrued since the making of said note; and denies that no credits have been extended on account of said note and the subscription for said stock; and ■ alleges that the intervenor is not entitled to the relief demanded.
On the 5th day of Maj, 1917, the said cause coming on for hearing on the petition of intervention, and the parties appearing by their respective counsel, there was filed in said cause the following agreed statement of facts:
(1) That, in soliciting the intervenor to subscribe for stock in the Iowa Mercantile Company, the agent of said company made representations as to the conditions and property rights of said company, untrue and false in fact.
(2) That said representations' were made with the purpose and intent of inducing the intervenor to subscribe for stock and to give his promissory notes therefor, aggregating $200, and $100 in cash.
(3) That the intervenor was induced by said false representations to make the subscription made, believing said false representations to be true.
(4) That said representations were-made, the subscription entered into, and the notes and cash delivered on the 10th day of July, 1916, and application was made for appointment of a receiver for said company, and receiver appointed on the 7th day of September, 1916.
(5) That the two promissory notes given by the intervenor in s\ibscription for stock in said company, for the sum
(6) That the petition of intervention of intervenor was filed herein and notice given on or about the 25th day of October, 191G, asking the relief of rescission of his subscription and cancellation of said notes, and return of the $100 ‘cash payment.
(7) That the character and effect of the false representations were such that, in law, they would furnish the basis and warrant judgment and decree of a court of equity, adjudging rescission of the subscription and cancellation of the promissory notes and the return of the cash payment, if action therefor had been instituted against Iowa Mercantile Company before and prior to the application for and the appointment of the receiver.
(8) That the foregoing facts are submitted for judgment of law applicable thereto.
No further evidence was introduced. Thereupon, the case was submitted to the court, and judgment entered dismissing plaintiff’s petition.
Upon the record thus made, it is apparent that, if intervenor’s suit was prosecuted against the Mercantile Company, he would be entitled to the relief prayed for. If the interests of the Mercantile Company alone were involved, the relief prayed for could readily be given. The record shows, however, that the Mercantile Company is a corporation; that it is insolvent and in the hands of a receiver; that the suit by this intervenor was not commenced, nor was any action taken to rescind and to recover back the property in controversy, until after the affairs of the company had passed into the hands of the receiver.
A stockholder sustains a threefold relation: (1) to the corporation as a legal entity; (2) to his fellow stockholders; (3) to the creditors of the corporation. The capital is supplied, not by the artificial entity known as the corporation, but by its stockholders. This capital is supplied
When a corporation becomes insolvent, and action is begun to wind up its affairs, its entire property, including unpaid subscriptions to its capital stock, passes to the receiver, and becomes a fund for the payment of its debts. The so-called English, or trust, doctrine can be invoked only when the corporation has become insolvent, and passes into the hands of the receiver for the winding up of its affairs. While it remains a going concern, and has possession and management of its property, its creditors sustain the same relationship to its assets as do the creditors of
“The capital stock of an incorporated company is a fund set apart for the .payment of its debts. * * * It is publicly pledged to those who deal with the corporation for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company, as the cash which has been paid in upon it.”
It has been said that one of the objects of fixing the capital of a corporation by its charter at a definite amount is to provide a fund to pay the company’s legal obligations, and to secure those who may give it credit. In England, because of peculiar statutory enactment, the courts generally hold that, after insolvency, and after proceedings have been instituted to wind up the affairs of a corporation, and a receiver has been appointed, all the assets of the defunct corporation become a trust fund in the hands of a receiver for the benefit of all the creditors; and that, though the right of a defrauded stockholder to rescind his contract of subscription and recover what he has paid, existed in its full force before the institution of the proceed
We gather, from this record, that the plaintiff in this suit, the Independent Van & Storage Company, commenced an action on account against the Iowa Mercantile Company. The time when this suit was commenced does not definitely appear. Certain of the stockholders of the Mercantile Company appeared in that suit, and, on the 7th day of September, 1916, filed a petition, alleging, among other things, that the defendant company was. organized on May 1, 1915; that its officers were grossly mismanaging the company; that the defendant was insolvent; that it was owing creditors about $58,000 for merchandise. On the same day, the receiver was appointed, and, on the 9th of October, 1916, he made application for an order, stating that, in his opinion, the affairs of the company should be wound up as speedily as circumstances would permit; that many of the assets of the company in the hands of the receiver and un
The facts supporting intervenor’s contention are found in the record as follows:
(1) On the 10th day of July, 1916, the intervenor was induced to subscribe for certain stock in the defendant company, by reason of false and fraudulent representations made by the agent of the company which were sufficient to warrant a court of equity in rescinding the contract of subscription, cancelling the notes, and directing the return of the money paid upon the subscription.
(2) That certificates of stock were issued to the intervenor,. in pursuance of his application.
(3) Some time after that — the date of which does not appear — the Independent Yan & Storage Company commenced an action against the Mercantile Company.
(4) On September 7, 1916, seven of the stockholders of the Mercantile Company appeared in that action, and alleged that the company was being mismanaged by its officers, and was insolvent, and was largely indebted for merchandise, and prayed for the appointment of a receiver.
(5) A receiver was then appointed, who took charge of the assets of the company.
(6) Thereafter, on the 9th day of October, the receiver made an application to wind up the affairs of the company, and on the same day, an order was made to that effect.
There is no affirmative showing as to when the plaintiff discovered the fraud upon which he predicated his right to rescind this contract. There is rio express showing as to what diligence he exercised in an effort to discover the fraud. There is no showing whether or not the indebtedness against the corporation, or.any of it,, accrued before or after plaintiff’s subscription. There is no proof — no showing made — as to when the company became insolvent. The only statement is that it was insolvent on the 7th day of September, 1916. There is no showing as to its available assets or liabilities. The English rule is discussed by Justice Ladd in Hinkley v. Sac Oil & P. L. Co., 132 Iowa 396. Upon a careless reading, it would seem to be approved; but in that case the rescission was made before the proceedings had been commenced to wind up the affairs of the corporation, for it is said:
“Nor does it appear that any proceedings in insolvency had been commenced, or that’it had committed any act of •insolvency.”
It did not, in that case, even-appear when the company became insolvent. The rule was- recognized that, if the defrauded stockholder is diligent ,in discovering and repudiating the fraud, insolvency will not. defeat his right to rescind. The English rule is also discussed in Johnson v. Morgan, 178 Iowa 577. The right to rescind, upon a showing of diligence to discover the fraud and repudiáte the contract, was recognized.
The time intervening between the subscription and the filing of the petition for the appointment of receiver was less than 60 days. The character-'.of the deceit practiced
It may be claimed that the burden was on the interven or to show that there are no creditors whose claims ac
Upon the whole record, *we think the court erred in dismissing plaintiff’s petition, . and that the plaintiff is entitled to the relief prayed f.br under this record; and the cause is reversed, with direction to enter decree as herein indicated; or, on the election of intervenor, a decree may be entered in this court. — Reversed.