19 Wash. 493 | Wash. | 1898
Lead Opinion
This is the same plaintiff that was before this court in the case reported in 16 Wash. 499 (48 Pac. 333, 737), and the relator in the application for a writ of prohibition reported in 17 Wash. 380 (49 Pac. 507), and the appeals herein relate to the same proceedings.
While said former appeal, which was taken by certain creditors from an order dismissing their petitions, was pending in this court the plaintiff, on December 29, 1896, procured a decree of foreclosure of its mortgage in the lower court. An order of sale was issued thereon and the property struck off to the plaintiff, but, before a confirmation was had, the remittitur was sent down from this court and the lower court rendered another decree on June 4, 1897, setting aside the sale and its, judgment of dismissal as •against the appealing creditors, and modified the foreclosure decree by establishing a priority in their favor as against the bonded indebtedness, and also made provision to the end that other creditors might be enabled to show a preference right. For convenient reference the creditors, aside from the bondholders, were classified substantially as follows:
Class “ A ” — The five original petitioners who had appealed to this court. 16 Wash. 499, supra.
Class “ B ” — Those other creditors who had presented claims to the receiver pursuant to his published notice under the court’s order, which were reported by him as allowed subject to the superior lien of the plaintiff’s mortgage, but who did not appeal and who were referred to in the decree of June 4th.
Class “ 0 ” — The Manhattan Trust Company in its own right and J. D. Smith & Company, who did not present their claims to the receiver until May, 1897, after the time
Class ‘ D ” — The Seventh National Bank of America, The Bank of America, Alexander M. White and J. B. Alexander, who did not present their claims until after the order and decree of June 4. In its last decree of February 23, 1898, the court provided that all the creditors in Class “ B ” and some of those in the remaining classes should take precedence over the bonded indebtedness and established certain preferences- among the various creditors as against each other, some being admitted to share pro rata with class “ A.”
The principal appeal was taken by the plaintiff contending in part that the decree of foreclosure rendered on December 29, 1896, was final as to all creditors except those in Class “A ” who had previously appealed and that by it the bonded indebtedness under the mortgage was given preference as to all except the five creditors in Class “ A ” aforesaid, and contending further, in case the mortgage should be set aside, that all of the' bondholders are entitled to come in as general creditors, and share equally in the distribution of the funds. Appeals are presented, also, by some of the general creditors, which for convenience have been designated as cross-appeals, and raise questions as to the preferences decreed. In rendering the last decree the lower court was of the opinion that the matters had been determined on the former appeal but admitted all the proofs of the respective parties to the end that the controversies might be finally disposed of, and it is here practically for a trial de novo. In consequence of the voluminous record and the numerous conflicting claims presented, the case is a most complicated one, but it will not be necessary to set forth all of the contentions in detail, owing to the conclusion we have reached with reference to the mortgage.
The plaintiff contends that under the decision of this court in Kroenert v. Johnston, ante, p. 96 (52 Pac. 605), the company had a right to place its own valuation upon its property, and that under the statute, § 4280, Bal. Code (1 Hill’s Code, § 1588) the entire capital stock might be
This land, when purchased, was in an undeveloped.state; and testimony was introduced with reference to its estimated or prospective value in substance as follows: One Gilman testified that
“ I was the original promoter [of the Seattle, Lake Shore & Eastern Railway], My attention was first called to Seattle by a description being sent to me of this particular coal field, and I went there from Mew York for the express*499 purpose of looking into this coal field. After I had, in company with a skilled coal mining engineer, examined the property, I came to the conclusion that it would require about twelve to fourteen hundred acres to control the field .and make a successful operation, and I therefore, from that time, about 1883, set about negotiating options on about that number of acres owned by various parties. Nothing had been done toward the development of these lands except the sinking of a few pits. In connection with that I had to consider the question of transportation to tide water; in a direct line, 25 miles; by the only practical '.route, 40 miles. I then organized the Seattle, Lake Shore & Eastern Railroad Company, and secured terminals at tide water at Seattle, had partial surveys of the route made, ;and came to New York for the purpose of raising the money necessary to build this 40 miles connecting the •coal field with tide water at Seattle. I was successful in that by reason of the valuable terminals at tide water that I had an option on and the control by option of this coal field, which by reason of the state of the coal trade there would show an enormous profit in the operation of such a railroad.
At the time I secured the options I knew pretty well what the extent of the coal field was. The owners did mot. Before, the property was in several ownerships, and the individual owners were never able to develop it, nor could they do anything toward the construction of the railroad to tide water. In my opinion, uniting all of the properties into one ownership and the building of the railroad enhanced the value of the properties.
I was one of the parties organizing the Seattle Coal and Iron Company, and had a share in fixing the capitalization of that company. It was based on what I' conceived to be the earning capacity of the property after the railroad was constructed to it. I had studied the history of the coal business on the Pacific coast two or three years prior to that time, and ascertained the various sources of supply, foreign and domestic, the number of tons that came from Puget Sound, the cost of mining and transportation, and that investigation showed that the profits prior to that
Mr. Gilman says he assigned the options to Jones, who-paid cash for the lands and turned them into the company with the capitalization, and that the promoters placed a certain amount of stock with Jones and the syndicate that took bonds as an additional consideration for the bond purchase. There was testimony by at least one other witness to the same effect as to the values of the property, and as an expert having a special knowledge of the subject-
According to these estimates by the promoters, more than ten million tons of coal existed in these lands above water level. The cost of mining and transporting the same •could be fairly well estimated. The scope of the demand and net value of the product in the market were measurably known. It does not appear that the vendors knew •of the existence of the coal, or could procure the means to develop the mines if they did know it. Ho accurate money valuation could well be placed upon these lands, under the circumstances. As the plaintiff argues, to say that the ascertainment of the quantity and quality of the •coal, the consolidation and ownership of the land, the securing of money for the development and the prosecution of the enterprise, did not largely enhance the valuation of the property in the estimate of those acquiring it, would be unwarranted. There is no showing now that the quantity or quality of the coal was not as estimated, or that the •estimate was insincere. In fact, it fairly appears that the failure of the enterprise was due to the financial and business conditions existing for some time, but commencing ¡several years thereafter. Ho inference of bad faith should be drawn from the fact that the projectors could not forecast this.
It has been urged that the fact that some two million •dollars of the stock was turned back into the corporation, to be disposed of to assist in raising funds for the prosecution of the enterprise, and was sold, with the bonds,
The plaintiff also produced upon the trial, so far as it Avas able, the stock books, transfer books and corporate records of the Seattle Goal and Iron Company, and proved that it did not have or control certain records of said company.
Without going more fully into the testimony it is sufficient to say that it establishes, in the opinion of the majority of the court, entire good faith on the part of the-promoters and the corporation in the matter of the capitalization, and we are compelled to find at this time, regardless of whether we were right or wrong before, that there was no fraud shown, even though it was conceded' that the value of the land was exaggerated in the capitalization of the company. If there was any fraud contemplated, what Was it? One would naturally look for some-system or scheme to defraud, if fraud was intended at its-inception. The fact of an exaggerated value might have-an important bearing under certain conditions; for instance, if the bondholders Were here complaining that they had been deceived by an excessive valuation placed
It is no longer a question as to whether the former decision of this court was right or not, but only as to how far it is binding and conclusive. The suit was brought originally to foreclose the mortgage and it was not an insolvency proceeding, although the general creditors were invited or notified to present their' claims. It, however, has become substantially an' insolvency proceeding, the parties all being before the court, although the receiver did not represent the general creditors, at least originally. But the case presented is very different from one where a mortgage is given by a corporation after its insolvency, with reference to the distribution of its funds among its creditors.
The decree rendered in the lower court pending the appeal did not establish the validity of the mortgage as against the other creditors, because it was not final, under our previous holdings. See opinion on rehearing, 16
As to the rights of the creditors in class “ A ” as against the bondholders, the mortgage being sustained, we may not fully understand the plaintiff's contentions, owing to the complicated arguments presented, rendered necessary to meet the various phases the case might assume as the court might find with reference to the numerous questions raised. It is urged in case the mortgage lien should be set aside that all the holders of bonds should be
A further claim was made by the appellant to the effect that these creditors in class “ A ” abandoned their right to priority in consequence of their having invited or assisted certain other creditors, viz., those in class “B,” to come in and participate on paying them a percentage; but it appears that there was no intention on the part of these creditors in class “ A ” to relinquish their priority as against the plaintiff, and their claims would have been paid in full, even if those in class “ B ” were allowed to participate. "We do not think they should be held estopped thereby.
There was a contention also by one of the respondents to the effect that there was a large amount of personal property not covered by the mortgage, the proceeds of which should be held for distribution among the creditors generally. As against this, it has been urged that there was no request for a separate sale of the personalty and that the decree provided for the sale of the property, both real and personal, as an entirety, which had not been appealed
There was a further contention that this is a proceeding in rem and that all parties and creditors were bound by the proceedings and decision. The binding effects of the prior decision have been sufficiently discussed, and it is unnecessary to enlarge upon it. The contention now would be practically fruitless to those urging it, the mortgage being held valid as against them, and it being conceded that there is not enough property to pay the creditors in class “ A ” and the holders of the bonds, who would be entitled to a prior payment, as against these other parties, even though it were a proceeding in rem.
It has also been urged by the creditors in class “ B ” that this proceeding should be held similar to a railroad receivership, to the end that certain of their claims, which were for supplies used in the conduct of the business of the company and furnished within a few months prior to the appointment of the receiver, should be given precedence. This matter was noticed incidentally in the former opinion (16 Wash. 516; 48 Pac. 337), but was not expressly decided, although it was said that the plaintiff's contention that the payment of such claims out of current receipts was confined by the courts: to railway receiver-ships, was amply sustained by many authorities; but it was intimated, under the facts then appearing, that the plaintiff might not be allowed to raise the question; but there was nothing conclusive in this, in any event, as against these parties now questioning1 it, and we are of the
Reversed, to be remanded accordingly.
Owing to the complicated and conflicting rights urged on these several appeals a period of thirty days will be allowed after the time for filing petitions for a rehearing-has expired and after such as may be filed, if any, are disposed of, to the respective parties to make a written claim or showing as to which ones and against which ones costs-of these appeals should be allowed, with the items claimed.
Anders and Gordon, JJ., concur.
Dissenting Opinion
(dissenting). — I dissent. My understanding-of the disposition of this case when it was before this court at its January term in 1897 was that this mortgage was held void as to the creditors who then appeared and to all others who stood in the same position as the creditors appealing. This is not exactly the language of the opinion, but it was my understanding of the opinion, and I think can be fairly gathered from the language used. These creditors in class “ B ” presented their claims under
“ It has been urged that the fact that some two million dollars of the stock was turned back into the corporation to be disposed of to assist in raising funds for the prosecution of the enterprise and was sold with the bonds for considerably less than its par value, goes to show that the projectors knew that the estimate was extravagant and fraudulent, but we do not think this in anywise tends to establish fraud as against these creditors.”
The opinion further states that
“The fact of an exaggerated value might have an important bearing under certain conditions; for instance, if the bondholders were here complaining that they had been deceived by an excessive valuation placed upon the property and had been led thereby into buying the bonds on the belief that they were amply secured, then the question would be brought directly in issue, for there was an intention to float the bonds of the company and many of them were disposed of to various parties, not all of them stockholders. But it is sufficient to say that no bondholder is complaining of any fraud.”
I cannot understand under what theory of law or ethics the fraud would be any more vicious or violent, if by reason of this exaggerated value bonds were sold to innocent purchasers, than it would be, if by reason of an exaggerated value, credit was obtained and goods secured which could only be obtained and secured by reason of the fraudulent holding out of the value of the property of the corporation. All the laws compelling these valuations and prescribing the actions of corporations in cases of this kind are for
Dissenting Opinion
(dissenting). — I am constrained to dissent from the opinion of the majority of the court, and more particularly from the process of reasoning upon which the decision is based. That property may be taken by a corporation upon its organization in payment of the capital stock subscribed by a stockholder has been announced by this court heretofore and is the rule uniformly followed here. The payment of the capital stock must be made in good faith by the stockholder. So long as there are honest differences in the estimate of the market value of the property so taken in payment for stock, the valuation made
“ It must necessarily follow, for the protection of creditors who dealt with these corporations, that the stock subscribed for must be paid in cash or in property of an equivalent value. In other words, the corporation must be in the actual condition which it represents itself to be in financially. If it were allowed to hold itself out as having a capital stock of $100,000, when in reality the capital stock, which is and must be, under the theory of the law, assets in the hands of the corporation, is worth only one-half that amount, the corporation is to that extent doing business under false colors, and is obtaining credit upon the faith of an asserted estate which is purely fictitious. And where, by any arrangement between the shareholders and the corporation, the stock is issued as fully paid up, when in fact it has not been paid to the full amount of its face value, but has been paid in property of a fictitious or inflated value, a court of equity will compel a payment by the stockholder for the benefit of the creditor who has dealt with the corporation relying upon the asserted value of its assets to the full amount or face value of the stock. Such is almost the universal holding of the courts of the present day.”
The statute, §4266, 1 Bal. Code (1 Hill’s Code, §1511) declares:
“ Each and every stockholder shall be personally liable to the creditors of the company, to the amount of what remains unpaid upon his subscription of the capital stock.”
Section 4269, 1 Bal. Code (1 Hill’s Code, § 1513) provides:
“ It shall be the duty of the trustees of every company incorporated under this chapter to keep a book contain*514 ing the names of all persons, alphabetically arranged, who are or shall be stockholders of the corporation, and showing the number of shares of stock held by them respectively, and the time when they became the owners of such shares, which book . . . shall be open for the inspection of stockholders and creditors of the company . . . and such book . . . shall be presumptive evidence of the fact therein stated in any action or proceeding against the company.”
Section 4265, 1 Bal. Code (1 Hill’s Code, § 1510) provides:
“ It shall not be lawful for the trustees to . divide, withdraw, or in any way pay to the stockholders, or-any of them, any part of the capital stock of the company, unless in the manner prescribed in this chapter. Provided, that this section shall not be construed to prevent a division and distribution of the capital stock of the company, which shall remain after the payment of all its debts upon the dissolution of the corporation or the expiration of its charter.”
I think it apparent that the legislature -has thus, as it might rightfully do in the formation of corporations, provided for the full payment of the capital stock of the corporation in money (but the courts have gone a step further and sanctioned a payment in money’s worth); that the capital stock, if remaining unpaid, is always a trust fund for the creditors; and it would be trite to recall the presumption that the subscribers to the capital stock are deemed solvent, and that the fund thus created is really in existence.
The case of Kroenert v. Johnston, ante, p. 96 (52 Pac. 605) decided after that of Adamant Mnfg. Co. v. Wallace, supra, was by a divided court, Judge Dunbau dissenting and the writer concurring in the result. I do not, however, think the reasoning in that case is the law, or in consonance with the better authority. I believe the rule
I do not deem it necessary to express any further view upon the facts of the case as now presented to the court.