90 Mo. App. 567 | Mo. Ct. App. | 1901
I. A plea to tbe circuit court’s jurisdiction over tbe Paducah Iron Company was interposed in tbe original action instituted by tbe plaintiff, to recover tbe balance due him for bis work in erecting and equipping tbe Paducah plant, on tbe ground that said company was a Kentucky corporation, having no office, place of business or business representative in this State. Evidence was taken on tbe plea and it was overruled by tbe circuit court, whose judgment is conclusive and tbe point can not be examined on its merits in this collateral proceeding. Baisley v. Baisley, 113 Mo. 544; Reed v. Nicholson, 158 Mo. 524.
II. A plea to tbe jurisdiction over tbe Paducah Iron
III. On one fundamental question, the numerous cases which treat of the liability of holders of corporate stock for balances charged to remain due on the par value of their shares, because they were paid for in property at an excessive valuation, are conflicting, namely; whether it is necessary in order to make a shareholder liable to a creditor of an insolvent company for the difference between the value of his property and the price at which it was put into the corporation, to show the property was knowingly and fraudulently overvalued in the trade; or whether it is sufficient to prove that in point of fact, and without regard to the motive of the parties, it was exchanged for shares at an exaggerated price? While the discrepancies among the authorities may be partially accounted for by attention to the facts, and sometimes also particular statutes on which the decisions turned, and with reference to which the reasons assigned for them were given, still, there remains a radical difference of opinion as to the principle on which the law governing such transactions should be moulded. Some courts are more concerned to protect persons, who deal with a corporation, against loss from having extended an undeserved credit to it on the strength of a nominal capital, which was fictitious in whole or in part because made up of overvalued assets; while others are chiefly impressed by the impolicy of granting relief
The decisions are logically divisible into several classes:
First. Those which hold that unless there is proof of fraud, the mere fact of an overvaluation of property of any kind paid by a subscriber for shares, does not render him liable over to either the company itself or its creditors, for an unpaid balance. This is the doctrine of all the English and most of the American courts and is supported by many precedents, of which the following are good examples: In re Raglan Hall Colliery Co., L. R. 5 Ch. 346; Coit v. Gold Amalgamating Co., 119 U. S. 343; Schenck v. Andrews, 57 N. Y. 133; Douglass v. Ireland, 73 N. Y. 100; Van Cott v. Van Brunt, 82 N. Y. 535; Brandt v. Ehlen, 59 Md. 1; Mallinchrodt v. Glass Co., 34 Ill. App. 404; Phelan v. Howard, 5 Dill, 45; Vail v. Phillips, 14 N. J. L. 45; Bickley v. Schlag, 46 N. J. Eq. 533; Coffin v. Ramsdell, 110 Ind. 417; Troup v. Norbach, 53 Neb. 795; Young v. Erie Iron Co., 65 Mich. 111; Kroenert v. Johnston, 19 Wash. 96; Kelly v. Fourth of July Min. Co., 42 L. R. A. (Mont.) 621; Medler v. Albuquerque Hotel Co., 6 N. M. 331; Smith v. Prior, 58 Minn. 247; American Tube Co. v. Baden Gas Co., 165 Pa. St. 489; Roller Mill Co. v. Ferrell, 43 U. S. App. 452; Northwestern Mut. Life Ins. Co. v. Cotton Ex. R. E. Co., 70 Fed. Rep. 55; Whitehill v. Jacobs, 75 Wis. 479; New Haven Horse Nail Co. v. Linden Spring Co., 142 Mass. 349; Kelly Bros. v. Fletcher, 94 Tenn. 1.
Second. Those holding that if property of substantial value is grossly overestimated in an exchange for stock, that
Third. Instances in which the worth of the property accepted by the company was wholly prospective or speculative, it being without a market value at the time it was exchanged for stock. In such cases, some courts hold that because of .the absence of any present value for the property, no payment was made on the shares at all, and that a company creditor may collect their par value from a subscriber; others make no distinction between these cases and those where property of substantial value was given, but inquire into the motives and good faith of the parties in either instance. This group is exemplified by Chisholm v. Bornet, 65 Ia. 333; Alling v. Wenzell, 27 Ill. App. 511; Salt Lake Hardware Co. v. Tintic Mill, 13 Utah 432; Graves v. Brooks, 117 Mich. 424; Lake Superior Iron Co. v. Drexel, 90 N. Y. 87. Paying for shares by inventions and patent-rights, supposed to be valuable but as yet untried, has caused much litigation of this sort.
Fifth. Those in which the question of good or bad faith is ignored and the stockholder held responsible solely from the fact that the actual value of the property he gave for his shares, as ascertained by a court or jury from evidence aliunde, was less than the face value of the shares. Steam Stone Cutter Co. v. Scott, 157 Mo. 520; Van Cleve v. Berkey, 143 Mo. 109; Shickle v. Watts, 94 Mo. 410; Luecke v. Tredway, 45 Mo. App. 507; Farmers Bank v. Gallaher, 43 Mo. App. 432; Elyton Land Co. v. Birmingham, etc., Co., 92 Ala. 409. Most, if not all, the cases in this group might appropriately be classified under either the second or third class, but for the ground on which the opinions place the subscriber’s liability. In every one we have examined, the article, franchise or other property exchanged for stock, was either grossly overestimated or had only prospective value. The opinions, however, do not rest the judgment on that circumstance, but on the simple fact of overvaluation. In Yan Cleve v. Berkey, the court says: “It is the duty of the stockholder and not of the creditor to see that it (the stock) is so paid; hence, the inquiry in a case between the creditor and a stockholder, when property had been paid in for the capital stock of a corporation, is not whether the stockholder believed, or had reason to believe, the property was equal in value to the par value of the capital stock, but whether, in point of fact, it was such an equivalent.” That language unmistakably announces the rule that ’good faith in a transaction between the company and one who pays for his shares’
It is not easy to frame a perfect rule. On one hand lies the importance of protecting those who deal with companies, and have a right to rely on its capital stock, from being misled by simulated instead of real payments, and on the other of upholding, as far as possible, the right of a man to dispose of his property when he can, at what he and the party to whom he sells consider a fair price, whatever others may think. That privilege is of the very essence of the
The issues are uncomplicated by any claim that the respondents were ignorant of the actual facts about the property exchanged for their shares, or its value. They were all either original subscribers to the Paducah Iron Company’s capital and incorporators and promoters of that company, or interested in the enterprise from the first. The evidence convinces us that the furnace which they turned over to pay for one thousand shares of 'stock was not worth one hundred thousand dollars at the time, nor near that sum, and, hence, was not a fair compensation for the stock issued to them. It was a charcoal furnace and out of date, as the testimony shows that blast furnaces of that kind have been superseded by an improved design.' The material of which it was composed was second-hand, it having been purchased by the Nova Scotia company from a concern in Grand Tower, Illinois.
But there are facts in this case which conduct inevitably to the conclusion that the individual respondents knew they were exchanging the furnace for stock at an exaggerated price. They, as stockholders' and directors of the Nova Scotia company, sold it to the Paducah Iron Company for one thousand shares of stock and very soon afterwards transferred said stock to themselves at fifty cents on the dollar, in payment of debts the Nova Scotia company owed them. Moreover, they were part of the Paducah Iron Company themselves and were in effect dealing with themselves in -the transaction. Howard, E. C. Lackland, Harrison and Scott, who made the exchange, were four out of seven of the incorporators of the last-named company and four out of seven of its directors when the trade was effected. In less than a month the Nova Scotia company voted to turn said stock over to Lloward, Harrison and E. J. Lackland, at fifty cents on the dollar, and they, as stockholders and directors of the company last named, did the voting.
Much stress is laid by respondents on the fact that they did not initiate this transaction, but were sought by the directors of the Paducah Land, Coal & Iron Company for the purpose of buying the Nova Scotia company’s furnace, and the further fact that they insisted on the committee sent by the last named company making a personal inspection of it,, and therefore are shown to have been guilty of no fraud or bad faith in the transaction. This proposition we freely and fully concede. The entire negotiation was conducted by the respondents in an honorable manner; nor could the representatives of the Paducah Land Company claim they were in any way imposed on or defrauded. That circumstance weighed heavily with the learned circuit judge. But it is not
All the authorities agree that actual fraud as to corporate creditors, that is, a preconceived and cherished purpose to swindle them in the capitalization of a company, is not necessary to render stockholders liable. The cases so hold which exonerate subscribers when they act in good faith toward the corporation in paying for shares. Responsibility to creditors fastens on them if they knew the property exchanged for stock was not worth what it was valued at in the tradé. That constitutes legal or technical fraud and raises a claim in behalf of a creditor against the culpable shareholder. As was said by the Supreme Court of New York: “The fraud is consummated by the issue of its stock as full-paid stock which has not been fully paid, and it does not depend on any fraudulent intent other than that which is evinced-by the act of knowingly issuing stock for property in an amount in excess of its value.” Nat’l Tube Works v. Gilfillan, 124 N. Y. 302.
It has been well said also: “If there is any meaning at all in the proposition that subscribers to the shares of a corporation must pay for them either in money or in money’s worth, and if this principle has any substance at all when
Oases very similar to this one, in which shareholders were made to contribute to pay the company’s debts, are found in jurisdictions which steadfastly adhere to the good faith doctrine. In Boynton v. Andrews, 63 N. Y. 93, the capital stock of the company was one hundred thousand dollars, which was paid for by a steam engine, boilers, machinery and some personal property purchased by stock issued to one of the trustees. No witness estimated the value of the machinery at more than fifty thousand dollars. The trustee from whom it was purchased knew all about its value. Under these circumstances, the court said: “There could be no mistake or error of judgment in fixing the value of this particular property by its owner and, under the circumstances, it is manifest there was a plain case of overvaluation with full knowledge of the facts. Such a transaction is fraudulent in law on its face.”
Certainly, these respondents, as officers of the Paducah Iron Company, or as promoters of .it, were bound to exercise their judgment and discretion honestly in the sale of its shares. Their position as directors was one of trust and confidence; they owed the duty of conscientious fidelity to the public and could not disregard it in buying and selling their own property. They bought shares from the Nova Scotia company for fifty thousand dollars for which they claim to
In Addison v. Pac. Coast Mill Co., 79 Fed. Rep. 459, stock was issued to the amount of two hundred and fifty thousand dollars for a mill worth only one hundred and thirty-five thousand dollars. It was held a subscriber could not, under these circumstances, claim his stock had been paid.
So, where the directors of a corporation, knowing the value of their property, sold it to the corporation for shares at a price nearly twenty-five' per cent above its value, the court treated the transaction as fraudulent and made them contribute. Northwestern Mut. Life Ins. Co. v. Cotton Ex. R. E. Co., 46 Fed. 42.
And likewise, where stock of the, face value of three hundred and fifty thousand dollars was paid to members of a construction aompany for a debt of seventy thousand dollars. Jackson v. Fraer, 64 Iowa 469.
And where land of the value of not more than twenty-seven thousand five hundred dollars was put in to pay for shares amounting to one hundred and ninety thousand dollars, it was held the stock had not been paid. Osgood v. King, 42 Iowa 478.
A case arose in New Jersey very similar to the present one. The capital stock of a company was fixed at one hundred thousand dollars, all of which was subscribed by five persons, who became the directors. Certain lands were purchased for fifty thousand dollars and the deed thereto was made directly to the corporation, which gave its obligation for the entire purchase money. The directors then appraised the
The foregoing citations are from jurisdictions which exonerate the subscriber from liability, if good faith characterized the giving and accepting of property for stock. It is evident that tested by the principle those courts enunciate, the stock of the respondents has not been fully paid. While none of these parties were connected with the original scheme of the Paducah Land Company, they all finally participated in projecting and organizing the Paducah Iron Company, which was thought necessary to consummate the land company’s plans, and were parties or privies to the unwarranted impairment of the capital of the iron company. As a majority of its board of directors, they were peculiarly obligated to deal fairly with its capital stock. As was said in Elyton Land Co. v. Birmingham, etc., Co., 92 Ala., supra: “In making and accepting payment in property, they are bound
We are compelled by the evidence to find they knowingly overpriced the furnace when they sold it to the iron company of which they were officers; that it was not then worth, at the most liberal estimate, the par value of their shares; that- their subscriptions have only been partially paid and enough remains due on them to satisfy plaintiff’s demand. The individual respondents are, therefore, bound to contribute to make good his judgment against the insolvent company in proportion to their respective holdings of its stock.
The judgment of the court below is reversed and the cause remanded with directions to ascertain the sum which each of the said individual respondents ought to contribute to satisfy plaintiff’s judgment, computed according to the amount of stock he holds in the Pudacah Iron Company, and to enter a decree against respondents for such sums and for the costs of this litigation.