107 P. 755 | Idaho | 1910
Lead Opinion
— This action was brought by the plaintiff as receiver, to foreclose an alleged pledge agreement and for other purposes. It is alleged, among other things, in the complaint, that the defendant and appellant, Carlson, on December 10, 1907, executed and delivered to the Capital State Bank his promissory note for $1,400, to secure the payment of which he pledged to the bank ten shares of its capital stock represented by certificate No. 183; that said note and the stock certificate came into respondent’s hands, as receiver of said bank; that said promissory note has not been paid, and prays for a decree of foreclosure and sale of said stock certificate and for attorney’s fees and for a deficiency judgment against the defendant.
The answer admits the formal allegations as to the corporate existence of said bank and the appointment of the receiver, also the execution of said promissory note, but denies.
On motion of plaintiff, all of the affirmative defenses were stricken from the answer. The action was thereafter tried before the court and the receiver was the only witness who testified on the part of the plaintiff. He testified, in substance, that he received the note and stock certificate when he took charge of the affairs of the bank as receiver; that there were no indorsements on the certificate and the blank assignment of the stock was not filled out; that he found no written pledge agreement, and the only evidence of any kind by which it was attempted to show a pledge agreement was an alleged admission which the receiver testified the defendant made to him about two or three months after he took charge of the bank as receiver; that at the time of said conversation with the defendant, the latter explained to him the condition under which the stock was issued and the note given. The court permitted him to testify, over the objections of the defendant, what was said by the defendant, and he testified that the defendant stated he was solicited to take the stock, and that the bank officials promised him the dividends from such stock would pay for it or pay said promissory note. The defendant testified in his own behalf that he had not delivered the note to the bank or to any of its officials, that the certificate of stock had never been delivered to him, that he never had it in his hands, and that he is not now and never has been the owner of said stock.
Judgment was entered in favor of the plaintiff. The appeal is from the judgment.
The first error assigned is the striking out of the affirmative defense of the answer and excluding the evidence offered in .support thereof. In support of that assignment counsel con
It appears that the original transaction, out of which said promissory note arose, was entered into two years prior to the execution of said note, and was a subscription to a new issue of bank stock and the purchase of that stock by the defendant, with an alleged secret agreement between the defendant. and the bank that he should never have to pay the note and that the dividends of the stock would pay it. The seventh, eighth, ninth, tenth and eleventh paragraphs of said answer are as follows:
“7. And further answering said complaint defendant avers that on or about the 16th day of December, 1905, he was solicited by said bank to purchase some of the new issue of the capital stock of said bank, for the reason, as stated by said bank, that it would be a benefit to said bank and tend to increase its business to have defendant’s name connected, therewith. That defendant declined on the ground that he did not have the means. That the said bank thereupon falsely and fraudulently represented to defendant that the stock of said bank was worth a premium óf forty per cent above its par or face value, or the sum of $140 per share and that the dividends therefrom would in a very short time equal the value of said stock, and it then and there represented to defendant that if he would permit the use of his name as being interested in said bank and thereby cause new business to be attracted to said bank, it would cause to be issued in his name ten fully paid-up and nonassessable shares of said stock, and would hold the same until dividends thereon would equal the sum of fourteen hundred dollars, the alleged value of said stock, and that on the happening of that event, the said stock should be delivered to and become the property of defendant.
“8. That the said bank thereupon, and by means of said false and fraudulent representations, and without any consideration whatever, induced defendant to exécute a note for*751 the sum of $1,400, dated on said 16th day of December, 1905, which note, except as to purporting to be due in six months, was in tenor and effect the same as the note set forth in said complaint, but the said bank stated that said bank would never call upon defendant to pay said note and that the note together with the certificate should constitute a memorandum of the transaction without any liability whatever on the part of defendant to pay the same or any part thereof, or to pay for the said certificate of stock, except as the same should be paid for out of the dividends therefrom. That certain dividends declared were applied in accordance with agreement by the bank but defendant cannot say how much.
“9. That no indebtedness of any kind was,ever due from defendant to said bank, and the said certificate of stock was never delivered to defendant, and defendant never delivered the said note to said bank, and no consideration whatever passed to defendant for or on account of the execution thereof, and the said plaintiff has'never at any time parted with anything of value, for or on account of said transaction.
“10. That the said representations were false and the actual value of the capital stock of said bank at the time said representations were made did not, upon the best information and belief of defendant, exceed twenty-five dollars per share; and the said ten shares of said stock, purporting to be represented by said certificate No. 183 were at no time of any value whatever, for the reason that the said stock which they purported to represent was not issued for labor done, services performed or money or property actually received, and was therefore wholly fictitious and void. And defendant further avers, upon his information and belief, that said bank was at that time and at all times subsequent thereto in a failing condition, and if called upon at that time or any time' thereafter to meet its just obligations, would have been unable to do so, and said bank has since become insolvent and has been placed in the hands of receivers, and its capital stock is of no value whatever. And defendant further avers, upon his information and belief, that at the time the said certificate of stock attached to said complaint and marked ‘Exhibit A5'*752 was filled out and signed by George D. Ellis, as President, and H. E. Neal, as Cashier, the said Neal was engaged in numerous fraudulent and criminal transactions in connection with the assets and funds of said bank, by reason of which the actual value of the capital stock of said bank was at that time greatly depreciated, and it was at that time of little or no actual value whatever, and that all of these facts were well known to said .plaintiff but were entirely unknown to defendant, and the defendant was misled thereby and executed said note, as well as the note mentioned in said complaint, relying wholly upon the representations and promises of plaintiff, as aforesaid.
“11. That no demand was ever made upon the defendant for the payment of said first note, but, on the contrary, the said plaintiff thereafter requested defendant to sign the note set forth in plaintiff’s complaint in place of the said prior note, and at the same time repeated said representations and promises set forth in the three preceding allegations hereof, and promised and agreed with defendant that said note was never to be paid. That these promises together with the other representations made by plaintiff, as aforesaid, were the only inducements for the signing of'said last-mentioned note by defendant, and the said note was never delivered to plaintiff, but was held by said plaintiff, together with said certificate of stock, in all respects in the same manner and for the same purposes as the previous note signed by defendant, as hereinbefore fully set forth.”
Those allegations show that in becoming a subscriber and purchaser of said stock, the bank entered into an agreement with appellant by which the stock itself was to be a gift, that is, it was not to be paid for by appellant, his note to be a nullity, and the bank was to represent to the public that the defendant, who was a prominent business man and a merchant, was a stockholder of the bank; that he had paid for his stock; that the money had gone- into the assets of the bank; that his stockholder liability was available to creditors in the event of a failure of the bank; that its affairs were to have the benefit of his supervision as one financially in
The question, then, is directly presented whether said defense is one that the law will recognize — one that can be successfully pleaded against the issues made by the complaint.
In the seventh paragraph of the separate defense above quoted, the appellant avers, “and it [the bank] then and there represented to defendant that if he would permit the use of his name as being interested in said bank and thereby cause new business to be attracted to said bank, it would cause to be issued in his name ten fully paid-up and non-assessable shares of said stock and would hold the same until dividends thereon would equal the sum of $1,400, the alleged value of said stock, and that, on the happening of that event, the said stock should be delivered to and become the property of the defendant.”
In the eighth paragraph it is averred: “And without any consideration whatever, induced defendant to execute a note for the sum of $1,400, dated on said 16th day of December, 1905, which note, except as to purporting to be due in six months, was in tenor and effect the same as the note set forth in said complaint, but the said bank stated that said bank would never call upon defendant to pay said note and that the note, together with the certificate, should constitute a memorandum of the transaction without any liability whatever on the part of defendant to pay the same or any part thereof, or to pay for the said certificate of stock, except as the same should be paid for out of the dividends therefrom.”
Those averments must be taken as the agreement and understanding between the bank and the appellant at the time said stock purchase agreement was entered into in the decision of said motion. Counsel for defendant contend that he was in
The rule is well established that a secret agreement by which a purchaser of stock from a corporation is to get an advantage over other stockholders, such as that he shall not pay the purchase price for his stock, is void, and constitutes no defense to an action brought to recover the purchase price by a receiver of an insolvent corporation; and that where false and fraudulent representations are alleged as inducing the purchase of said stock, the purchaser must use the utmost diligence to discover the fraud and repudiate the contract; and that unless he does so, he cannot avoid payment, and where the corporation, whose stock has been purchased under such representations, has become insolvent or has been thrown into the hands of a receiver, no such defense is available. The defendant averred in his affirmative defense that when urged to subscribe for said stock, he entered into an agreement under which said stock was issued to him in his name, and that he gave said note to the bank for the purchase price of said stock with the understanding that he should incur no liability upon the note nor for the stock, but that the dividends should pay the note and that the stock should thereupon become his own. We think the rule is well established that under that state of facts the law avoids the secret understanding but enforces the contract of purchase.
In Clark & Marshall on Private Corporations, p. 1452, the author states: “A corporation has no authority to accept subscriptions upon special terms, where the terms are such as to constitute a fraud upon the other subscribers, or upon persons who may become creditors of the corporation in reliance upon a bona fide and regular subscription of the authorized capital stock. In such a case,' however, the subscription is not void. The fraudulent and unauthorized stipulations are void, and the subscriber is liable on his subscription as if no such stipulations had been inserted. It has been held, therefore, in many eases, that any secret agreement between a subscriber for stock in a corporation and the corporation or its agents or promoters, by which he is allowed to subscribe upon different terms than other subscribers, since it is a fraud upon the latter, and any secret agreement by which he is to be released in whole or in part from liability on his subscription, since it is a fraud both upon the other subscribers and upon persons who afterward become creditors of the corporation, is void, and the subscription may be enforced by the corporation, or by or for the benefit of creditors, as if no such agreement had been made.”
It is stated in 10 Cyc., p. 433, as follows: “Hence it will be no defense to an action to enforce the subscription that the subscription was colorable merely, not intended to be paid, and that there was a secret agreement that it should not be paid, but that it was intended merely to enable the corporation to get sufficient, stock subscribed to enable it to become incorporated under the law, to induce others to subscribe for shares or to give credit to the concern. The rule extends so far as to avoid all secret conditions annexed to the contract of particular subscribers, by which their engagement is rendered more onerous to the corporation, more favorable to
In secs. 252 and 253, Purdy’s Beach on Private Corporations, the author states the rule to be that though such secret agreements are void, the contract itself stands and may be enforced.
We do not think that there is any considerable authority holding otherwise upon the question under consideration.
In Blodgett v. Morrill, 20 Vt. 509, the court said: “Here the alleged fraud consisted in the agreement not to enforce the subscription. This portion of the contract was in bad faith, it is said. Perhaps it is so. But if so, the defendant is equally in fault with the agent; the rest of the association knew nothing of any' such secret agreement. The defendant knew the subsequent signers were to be decoyed by his name. Clearly, then, he ought to be held to his contract. ’ ’
Counsel for appellant, however, urges that he was induced to enter into the contract for the purchase of said stock by false and fraudulent representations as to the financial standing of the bank and that the dividends on such stock would “in a very short time equal or pay the note.” Appellant also alleges that it was represented to him that said shares of stock were worth $140 each at the time of the purchase in 1905, and that such stock was not worth, in fact, more than $25 per share, and that said bank has since become insolvent and the stock of no value, whatever. The appellant further alleges in his answer that dividends were declared upon the stock in question and were applied in partial payment of. said note, but it is not alleged just how much said dividends amounted to, and it is averred in the answer that under the contract for the purchase of said stock, it was represented that said dividends would be sufficient in “a very short time” to pay said note. However, it does appear from the record
Morawetz on Corporations, sec. 108, says: “If a person has been induced by fraudulent representations to become a member of a corporation, he must proceed with the utmost diligence if he desires to annul his contract.
And at sec. 839: “It has accordingly been settled, that, if a corporation is insolvent, a stockholder whose contract of subscription was obtained by the fraud of the company’s agents, cannot diminish the security of bona fide creditors, by rescinding his contract to contribute the amount of capital subscribed by him.”
To the same effect is Jones on Insolvent and Failing Corporations, sec. 399.
Purdy’s Beach on Private Corporations, at see. 628, lays down the following rule: “In case of corporate insolvency, the equities of the creditors supersede those of the subscriber, even when his subscription has been induced by fraud. While ordinarily the law does not readily presume acquiescence or waiver in the case of subscriptions procured through fraud, nor hasten to impute laches to subscribers so deceived by the corporate agents; yet when the corporation has become insolvent, a contract of subscription procured through fraud, cannot be rescinded to the prejudice of the rights of creditors.And when the subscriber has waited until suit has been brought by a receiver, it is then too late for him to plead fraudulent misrepresentations, although the fraud was not discovered until after insolvency.”
In the ease at bar, the contract for the purchase of stock was made on December 16, 1905, and this action was brought
As bearing upon the question, see Ross-Meehan Co. v. Southern M. I. Co., 72 Fed. 957; Newton Nat. Bank v. Newbegin, 74 Fed. 135, 20 C. C. A. 339, 33 L. R. A. 727; Wallace v. Hood, 89 Fed. 11; Scott v. Abbott, 160 Fed. 573, 87 C. C. A. 475. In the last-cited case, the court said: “When •one has for a considerable period of time prior to the failure •of a corporation occupied the position of one of its stockholders, and exercised and enjoyed the rights, privileges and fruits of that relation, including the chance of enhanced value of his holdings, when fortune frowns and the chances turn against him, it is too late to assert, as against creditors of the corporation, the right to rescind his contract of stock subscription on the ground of false representations after a state of insolvency has supervened, and after proceedings to wind up the corporation for the benefit of creditors have been or are about to be instituted.” (Chubb v. Upton, 95 U. S. 665, 24 L. ed. 523; Martin v. So. Salem L. Co., 94 Va. 28, 26 S. E. 591; Moosbrugger v. Walsh et al., 35 N. Y. Supp. 550, 89 Hun, 564; Olson v. State Bank, 67 Minn. 267, 69 N. W. 904.)
In Jones on Insolvent and Failing Corporations, at see. 399, in treating of the effect of fraud on a contract of purchase of corporate stock, the author says: “It is valid and binding until the defrauded party elects to treat it as void; and if he fails to repudiate it before the rights of innocent third parties have intervened, their equities to treat it as valid may be superior to his claim to avoid it. So if he has not been vigilant in discovering the fraud and repudiating the contract, it will be no defense as to creditors of the corporation; and that in general, it will be too late for him to set up the fraud after the corporation has become insolvent or bankrupt.”
The appellant averred in his separate defense as follows: “Said note together with the certificate of stock should constitute a memorandum of the transaction,” and it clearly appears from the allegations or averments of the answer and the evidence that the bank was to sell and issue the stock to the appellant, in his name, which it did, and the appellant gave his note to the corporation representing the amount of the pm'ehase price, specifying therein the amount that should be paid, the date it should fall due, and the rate of interest, which note was signed by the appellant. It is clear that the note and stock did in fact constitute a memorandum of the transaction and there appears no fraud or mistake in any of the terms of said memorandum. The appellant contends that there was a contemporaneous oral agreement wholly varying its terms. That agreement, even if it were no fraud on the other purchasers of stock and on the creditors, is clearly inadmissible in evidence under the rule of evidence established by the foregoing citations. The alleged affirmative defense was no defense to the recovery in this action, as the alleged secret contract was of itself a fraud, and the appellant has been guilty of laches in not repudiating it.
It is next contended by counsel for appellant that the evidence is insufficient to justify the findings of the court to the effect that there was a pledge of the stock. Taking .all the evidence upon this question contained in the record,
It is next contended that the court erred in denying appellant’s motion to dismiss the action on the ground that the-alleged pledge agreement was in violation of sec. 2976 of the-Rev. Codes of Idaho, was ultra vires and therefore could not be the basis of a suit. That part of said section which applies to this casé is as follows:
“But no such bank shall accept, as collateral, or be the-purchaser of, its own capital stock, except in cases where-the taking of such collateral, or such purchase, shall be necessary to- prevent loss upon a debt previously contracted in-good faith.”
It is conceded that this stock was not collateral to secure-the payment of a prior indebtedness to said bank. It is contended that the recognition of this- pledge agreement, would nullify said provisions of the statute and be a direct encouragement to banks to disregard its mandatory terms. While said section prohibits the bank from accepting its own capital stock as collateral except to prevent a loss upon a debt" previously contracted, it does not impose any penalty or-forfeiture for its violation. The provision of the national banking act prohibits eértain acts by banks or their officers,, but provides no penalty for their violation.
In Thompson v. St. Nicholas National Bank, 146 U. S. 240, 13 Sup. Ct. 66, 36 L. ed. 956, the court said: “More
In Camp v. Land, 122 Cal. 167, 54 Pac. 839, the bank as cross-complainant sought to foreclose a mortgage. The plaintiff pleaded that it was a security forbidden to the bank by law, but the court said that if that be true, “it did not lie with the plaintiff to raise this point.” (Logan Co. Nat. Bank v. Townsend, 139 U. S. 67, 11 Sup. Ct. 496, 35 L. ed. 107; National Bank v. Whitney, 103 U. S. 99, 26 L. ed. 443; Walden Nat. Bank v. Birch, 130 N. Y. 221, 29 N. E. 127, 14 L. R. A. 211.)
We think the rule laid down in those cases might with reason be applied to the facts of this ease under the provisions of said sec. 2976. If the said insolvent bank had been solvent and a creditor of the stockholder had attached said stock, the bank would have been precluded by the provisions of said section from setting up the pledge agreement, and we* think the appellant himself might have replevined that certificate had he desired to do so, in a suit between himself and the bank, during the solvency of the bank. But as the bank has become insolvent and a receiver has been appointed to* take charge of its affairs to protect its creditors as well as its stockholders, under the facts of this case the appellant cannot successfully plead the provisions of said section and' thereby defeat the foreclosure of said pledge.
Said motion to dismiss was made at the close of the trial and upon the pleadings as they then stood and the evidence-introduced. The evidence shows that the contract for the-purchase of the stock was completed. The appellant agreed to purchase the stock and the bank to sell and deliver it. The bank complied with its part of the contract by issuing;
In Union Nat. Bank v. Matthews, 98 U. S. 621, 25 L. ed. 188, the court had under consideration a prohibited contract, and said: “We cannot believe that it was meant that stockholders and perhaps depositors and other creditors should be punished and the borrower rewarded by giving success to this defense whenever the offensive fact shall occur.” (Fortier v. New Orleans Nat. Bank, 112 U. S. 439, 5 Sup. Ct. 234, 28 L. ed. 764; Union Gold Min. Co. v. Rocky Mountain Nat. Bank, 96 U. S. 640, 24 L. ed. 648; Weber v. Spokane Nat. Bank, 64 Fed. 208, 12 C. C. A. 93; Central Trust Co. v. Columbus H. V. & T. Ry. Co., 87 Fed. 815; Farmers' Nat. Bank v. Robinson, 59 Kan. 777, 53 Pac. 762.)
Counsel contend that there has been no performance of the contract on either side, and for that reason it cannot be enforced. We think there was a full performance. The bank sold him ten shares of stock; he gave his note for $1,400 for the purchase price and then repeatedly renewed said note. The bank performed its part by issuing the stock; appellant has performed his original contract by executing said note. (29 Am. & Eng. Ency. of Law, p. 56, and authorities there cited.)
As to the question of ultra vires, a party who has had the benefit of an agreement will not be permitted to ques
"We are satisfied that the decided weight of authority is in accord with the decisions-above cited. It is a general rule that ultra vires will not be permitted to work injustice. It would be unjust to permit the appellant to enter into the contract he did with the bank, to have the stock issued in his name, himself held out to the public as a stockholder for the purpose of securing new depositors and then to escape liability on his note as a stockholder on the ground that the bank could not receive said stock as collateral security to his note.
In Burke etc. Co. v. Wells-Fargo & Co., 7 Ida. 42, 60 Pac. 87, this court held: “The rule is that that doctrine (ultra vires) should not be applied when it would defeat the ends of justice or work a legal wrong.”
In Ohio & Miss. Ry. Co. v. McCarthy, 96 U. S. 258, 24 L. ed. 693, the court said: ‘ ‘ The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.”
In Carson City Savings Bank v. Elevator Co., 90 Mich. 550, 3 Am. St. 454,. 51 N. W. 641, the court held that the plea of ultra vires should not, as a general rule, prevail, whether interposed for or against a corporation, when it would not advance justice, but, on the contrary, would accomplish a legal wrong.
But the question of ultra vires was not pleaded in the case at bar and is raised for the first time in the supreme court. The defense of ultra vires is special and is not available under general denial, but must be specially pleaded and proven. (10 Cyc., p. 1156; 5th Ency. of Pl. & Pr., p. 95; Commercial Bank v. King, 47 Iowa, 64.)
It is next contended under the provisions of sec. 9 of art. 2, of the constitution of Idaho, that the stock is void. Said section is as follows: “No corporation shall issue stocks or bonds except for labor done, services performed, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void.” It is therein provided that no stock shall be issued except for labor done, services performed or money or property actually received. The word “property” includes both real and personal property, and “personal property” includes money, goods, chattels, things in action and evidences of debt. (Sec. 16, Rev. Codes.) Said promissory note was actually received by the corporation and was a thing in action or evidence of debt. That note was an asset of the bank and it appears that the bank had the authority to issue the stock; that it was not a fictitious issue of stock but a valid issue. The bank then received said promissory note for said stock, which was “property” as defined by said sec. 16 of our Rev. Codes.
Farmers’ & Mechanics’ Bank v. Jenks, 7 Met. (48 Mass.) 592, was a case where the defendant and others had given their notes for stock in fraud of the banking laws, and that fact was pleaded in defense to the promissory note which they had given after the failure of the bank. In the course of the decision, the court said: “As to fraud, this, in point
We find no error in the record, and the judgment is affirmed, with costs in favor of respondent.
Concurrence Opinion
Concurring. — I concur in the affirmance of the judgment in this ease, and agree with all that is said as to the liability of Carlson on the note sued upon. I agree, also, that the receiver is entitled to a judgment foreclosing the lien on this stock. As to whether or not the bank itself, if still solvent and a “going institution,” would be allowed to foreclose a lien on its own capital stock taken in violation of see. 2976, Rev. Codes, I reserve my judgment. I am satisfied, however, that after the bank became insolvent, quit doing business, and went into the hands of a receiver and the receiver commenced an action, as he has done in this case, to foreclose a lien or pledge, that the stockholder who pledged his stock in violation of the provisions pf the statute ought in justice to be estopped from pleading that the stock was taken in violation of the law. The receiver not only represents the bank, but he represents its creditors as well. So far as he represents the creditors of the bank, he is repre-
Concurrence Opinion
Concurring. — I concur in the conclusion that this “judgment should be affirmed. I do not think Carlson is in a position to urge the provisions of sec. 2976, Rev. Codes, as against an action brought by the receiver to foreclose a pledge of stock given to secure an indebtedness due the bank. He cannot claim immunity in an action brought to repair the wrong done in violating'the statute. (Farmers’ & Mechanics’ Bank v. Jenks, 7 Met. (48 Mass.) 592; 34 Cyc. 405.)
