179 Ky. 384 | Ky. Ct. App. | 1918
Opinion op the Court by
Affirming.
In. a proceeding instituted by tbe Insurance Commissioner of the State of Kentucky, pursuant to the provisions of section 753 of the Kentucky Statutes, the appellant Jeffers was appointed receiver of the Central Life Insurance Company, a corporation organized under the laws of Kentucky in 1911 for the purpose of conducting a general life insurance business. After his appointment the receiver qualified as such and took charge of the affairs of the company. He then instituted this proceeding against the appellants, Preston and Copley, to recover from them on certain notes which they had executed to the insurance company in payment of stock for which they had subscribed.
The appellants and defendants filed separate answers in which they each urged as a defense fraud on the part of the company in procuring their respective subscriptions to the stock, and the execution of the notes sued on. The fraud and misrepresentations relied upon, as specified in the answer of the defendant Preston, was (a)
. that the company represented to- him at the time that it would establish a branch office at his home town of Paints-ville and put him in charge of it as its agent at a salary of $3,600.00 per year; that it had failed and refused to do this and never intended to do so; that he relied upon it and was induced to make his subscription and execute his notes, and that this was the consideration
The answer of the defendant Copley relied' upon some of the matters alleged in the answer of Preston, except that he 'was not promised a fat salary as agent in charge of another branch office to be established at the place of his residence; neither did he question the solvency of the corporation, but he relied upon the additional allegation that after he had executed his notes the president of the company agreed with him in consideration that he pay a part of them to cancel and surrender to him the note upon which he is sued; that he made the payment but the note was not surrendered to him, although he afterwards labored under the impression that it was cancelled and that he was no longer liable. Each of the defendants also alleged that no stock was ever delivered to them, and through want of knowledge or information sufficient to form a belief they denied that any was ever issued. To each of the answers
Before considering other defenses it might be well enough to dispose of the last one referred to, i. e., that no stock was issued, or, if so, none delivered to the defendants. The notes, as well as the subscriptions for the stock, are filed as exhibits, and the latter show that the stock to be issued should-be in lien to the company as security for the payment of the subscription, and the notes expressly show that the certificates of stock were held by the company as collateral security for the indebtedness. This would at least account for the fact that no . certificate was delivered to either defendant, since it was retained by the company until the indebtedness was paid. But disregarding this, the rule is well settled that in a suit to recover calls for subscription to stock the fact that no certificate had ever been issued by the company furnishes no defense. Setting forth this rule, it is stated in Thompson on Corporations, 2 ed., vol. 1, sec. 774, that: “Hence it may be stated as a general rule that the mere failure to issue a certificate does not release the subscriber and is no defense by him to an action'on his subscription.”
The reason for the rule as stated by the author of that work and other authorities is that the issuance of a certificate is not necessary to the completion of -the transaction, the certificate being only evidence of the ownership of the stock. The owner’s rights as a stockholder are just as great without the issual of a certificate as with it, the only difference being that in some instances he might have greater difficulty in establishing the fact that he was in truth a stockholder. This rule has been recognized by this court in the cases of Wright v. Shelby Railroad Company, 16 B. Mon. 4; Shelbyville Trustees v. Shelbyville & E. Turnpike Co., 2 Met. 54, and Smith &c. v. Gower, 2 Duv. 17.
Turning now to the other defenses which it is alleged constituted fraud in the procurement of the subscriptions and the execution of the notes, we find the rule to be that the alleged defrauded subscriber in such cases must move within a reasonable time after the opportunity to discover the fraud to obtain relief either
In the Reid case the defendant had subscribed for some of his stock in the bank more than two years before it became insolvent, and for a part of it not more than one year before that time (here the subscriptions were made from three to five years before), and it was held that the time was sufficient to afford a reasonable opportunity for investigation to discover the fraud and to take such steps as may have been deemed necessary to obtain relief from it. In denying the defense there urged, and similar to the one presented here, this court in that case summed up its conclusions thus;
“In brief, our conclusion is that when a stockholder has been induced by the false or fraudulent representations of the officers of a corporation to purchase its stock he may during the solvency of the corporation, if the action is brought within a reasonable time after the fraud is discovered and before the statute of limitation .has barred it, have a rescission of his contract upon equitable terms or recover the loss sustained by the fraud. But if the corporation is insolvent when the action for rescission or other relief is brought, or if proceedings have then been instituted to liquidate its affairs on the ground of ■ insolvency, and the rights of creditors will be affected, the shareholder who has been induced by fraud or misrepresentation to purchase stock cannot obtain relief from his contract unless he became a stockholder so shortly before the insolvency as not to have had reasonable time or opportunity to investigate its affairs and discover the fraud, nor unless upon the discovery he without delay asserts his right to appropriate relief. Having this view of the question, we think the lower court properly refused to permit the shareholders to rescind their contracts. Scott v. Deweese, 181 U. S. 203, 45 L. Ed. 822; Scott v. Abbott, 160 Fed. Rep. 573; Bacon, 86 Fed. Rep. 553; Wallace v. Hood, 89 Fed. Rep. 11.”
The reasons for the rule aye' clearly set forth in that case and others from this court following it and referred to above, and they need not be repeated here. Suffice it to say that they are based upon wholesome and sound equitable principles, one of which is that if a loss occurs it should be borne by the one who is the most culpable and not by the one who was induced by appear
“In Chase v. Chase, 20 R. I. 203, the doctrine of laches was defined as follows:
“ ‘Laches, in legal significance, is not a mere delay, but delay that works a disadvantage to another. So long as parties are in the same condition, it matters little whether one presses a right promptly or slowly, within limits allowed by law; but when, knowing his rights, he takes no step to enforce them until the. condition of the other party has, in good faith, become so changed that he can not be restored-to his former state, if the rights be then enforced, delay becomes inequitable and operates as estoppel against the assertion of the right. The disadvantage may come from loss of evidence, change of title, intervention of equities, and other causes; but when a court sees negligence on one side and injury therefrom on the other, it is a ground for denial of relief. ’ ”
Neither can the defense that other stockholders were released from their indebtedness growing out of their subscriptions for stock avail the defendants in this case. Cook on Corporations, 6 ed., vol. 1, sec. 191; and mismanagement of the corporate affairs is equally devoid of
• What we have just said also applies to the defense interposed by the defendant Copley, that such officers and agents attempted to ■ release him from his obligation by promising to surrender his notes. In the first place we fail to find any consideration for that promise, but if one existed as between the corporation and the answering defendant it could not be permitted to prevail in this case where the rights of creditors are involved, for it would be .a manifest fraud upon them and1 would permit through possible collusive action between' the officers and stockholders an entire dissipation of the corporate assets at the expense of the creditors. As well might it be contended that a corporation might surrender all of its assets to its stockholders, and when the . latter would be called upon by the creditors to account for the assets for them to defend upon the ground that they held the assets under an agreement with and consent of the corporate officers as a gift or donation. No court would tolerate such a defense, and the one here relied upon is equally untenable.
But it is insisted by the appellant Preston that he by his answer put in issue the fact of the insurance company being insolvent. However, that question was passed-upon in the receivership proceeding, in which case these suits by the receiver against the appellants are filed, and it might be successfully argued that the court would presume the corporation to be insolvent from the fact of the appointment of the receiver. But, waiving that question, the correctness of the order appointing the receiver is not drawn in question by either of the defendants, and when we examine the pleadings of the appellant
We have already referred to the fact that mismanagement of the affairs of the corporation whereby its assets have been wrongfully paid out constitutes- no defense for the reasons which we have stated, and clearly .it cannot under any rule known to us be insisted that the . receiver would first have to exhaust the remedies of the corporation against the officers to whom payments were .wrongfully made before he could proceed against the stockholders to collect their subscriptions. Moreover, ■this is an insolvency proceeding. Other stockholders have no doubt paid their subscriptions- in full and are entitled to be made -equal with those who have paid nothing. It is the duty of the receiver to equalize these matters between the stockholders, as well as to pay the debts of the corporation to its general creditors, and if after the latter are taken care of anything remains it would be the duty of the receiver to distribute it equally between the stockholders. We therefore conclude that the defense now under consideration is not available under the facts disclosed by the record.
It is further insisted that if the defendants are liable at all they are liable only for the par value of the stock, as clearly the amount above that sum agreed to be paid was superinduced by fraud. This, however, carries us back • to the proposition hereinbefore discussed. „ The creditors are presumed to have become such because of the information which they possessed in regard to what constituted the assets of the corporation. Part of those assets were the notes of these defendants to which from all appearances no defense existed, and it is now too late to make this complaint in this proceeding, which is primarily for the benefit of creditors.
In'this case Preston’s notes were executed something over two years after be subscribed for tbe stock. He not only bad ample opportunity to discover tbe fraud, but each day furnished him additional evidence that tbe alleged promise which be now says constituted tbe consideration was being violated by tbe company. Neither be nor Copley received any dividends, and they appear to have been willing to recline upon a couch of ease until tbe day came when tbe company would “cut tbe melon.” In tbe meantime policies were being issued, which they must have known; deaths were occurring, and debts accumulating. Neither of them took action of any kind, and although they might have been repeatedly assured that tbe harvest day would some time in tbe future arrive, this furnished no excuse for their complete passiveness because of which perhaps some of tbe liabilities of the company were contracted and creditors deceived into, becoming such.