135 P. 730 | Okla. | 1913
In the month of June, 1909, the plaintiff in error, hereinafter designated as plaintiff, exchanged with the defendant in error Oklahoma Steam Baking Company, a domestic corporation, an undivided one-half interest in two certain lots in Oklahoma City for 100 shares of the capital stock of the defendant Oklahoma Steam Baking Company. The shares were valued at $25 each. At the time of the exchange and of the delivery of deed and certificates, the capital stock of the baking company was $10,000. The full amount of the capital stock had been paid in, and for which certificates of stock had issued. Upon the entering into of the contract, plaintiff had been assured by his brother, who was president of the baking company, that the capital stock of the latter company had been increased from $10,000 to $15,000. On January 27, 1910, plaintiff's said brother died, whereupon plaintiff for the first time discovered that the capital stock of the corporation had not been increased, as had theretofore been represented. Nor was the capital stock increased until October 6th following. Various sums of money had been paid plaintiff by the corporation as advancements on dividends. Three of these payments, amounting to $20 each, *511 were paid after plaintiff had discovered that the capital of the corporation had not been increased. Suit to rescind the contract and for a cancellation of the deed was brought April 18, 1910, in which plaintiff asked that he be charged with the amount of the so-called dividends and be credited with the value of the reasonable use and occupation of his interest in the two lots, and that an accounting be had. The case was submitted to a jury to find specially on certain interrogatories propounded by the court. The answers to these interrogatories, save one, were favorable to the plaintiff's contention. The remaining interrogatory, to the submission of which objection was made, propounded to the jury the question whether or not plaintiff, after discovering that the capital stock had not been increased, ratified the former agreement by the acceptance of the advanced payments as dividends on his stock. The interrogatory, in the form submitted, was objectionable and should not have been given, although the court could properly have submitted to the jury the question whether or not plaintiff had accepted payments and whether such payments were accepted as dividends. The legal effect, however, of the acceptance of the advanced payments, and whether by it plaintiff ratified his former agreement or was estopped to assert his right to rescission, was properly a question of law for the court.
It is urged by defendants in error that the acceptance of the several payments of money made plaintiff by the baking company constituted on his part a ratification of the original contract, after discovery of the fraud; hence the action cannot be maintained. That a fraud was practiced on the plaintiff, whether intentional or otherwise, is clear. For his interest in the real estate conveyed he received worthless certificates of stock, issued in plain violation of law. Section 1285, Comp. Laws 1909 (section 1238, Rev. Laws 1910), provides:
"Excess Issue Void. — A corporation whose capital is limited by its charter, either in amount or in number of shares, cannot issue valid certificates in excess of the limit thus prescribed."
The act, therefore, of the baking company in issuing to plaintiff the 100 shares of its stock, in excess of the amount *512 limited and prescribed by its articles of incorporation, was a nullity. It is said in Cook on Stock and Stockholders, sec. 292, in stating the law on this subject:
"By overissued stock is to be understood stock issued in excess of the amount limited and prescribed by the act of incorporation. Certificates of stock issued in excess of the certificates that represent the full authorized capital stock of the corporation represent overissued stock. Such stock is spurious and wholly void. This is the settled law, and it prevails equally whether the overissue is the result of accident or mistake, or want of knowledge of the law, or is due to fraud and intentional wrongdoing. The animus or intent of the parties to the overissue is not material. Overissued stock, no matter how overissued, represents nothing and is wholly and entirely valueless and void. So rigid and well established is this rule that not even a bona fide holder of such stock can give to it any validity or vitality."
Both by statute and at common law the issuance of the stock, delivered to plaintiff in exchange for his land, as we have seen, was void and not merely voidable at plaintiff's election. The corporation knowingly did that which it was without authority of law to do.
It is said that ratification in its correct sense is impossible equally of an illegal and a void contract. Moog v.Hannon's Adm'r,
When a corporation is acting within the general scope of the powers conferred upon it by the Legislature, the corporation, as well as persons contracting with it, may be estopped to deny that it has complied with the legal formalities which are prerequisites to its existence, or to its action, because such requisites might in fact have been complied with. But when a contract is beyond the powers conferred upon it by existing laws, neither the corporation nor the other party to the contract can be estopped, *513
by assenting to it or by acting upon it, to say that it was prohibited by those laws. Neither can the contract be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity or be the foundation of any right of action based upon it. Central Transportation Co. v. PullmanPalace Car Co.,
Had the baking company afterwards increased its capital stock and then paid to plaintiff dividends or advancements on dividends, and he, with knowledge of the facts, had accepted the same, a very different question would be presented. In the instant case, however, the capital stock was not increased until almost six months after the suit for a rescission was filed. While it may be true that pending litigation rendered unwise earlier action in this regard on its part, it constitutes no defense to plaintiff's suit. Where the issue of shares is illegal for the want of power of the company to issue them, where the shares cannot legally exist, the person taking them cannot, by estoppel or otherwise, become a member in respect to them. Hence, being open to repudiation by the corporation itself or by dissenting shareholders, the person taking them has a right to rescind the contract under which the stock was taken and be restored to his original position. 10 Cyc. 375. The money paid plaintiff could not in fact have been paid him as dividends, as he was not a stockholder. No consideration whatever passed to him, and he was not bound to accept stock issued six months after the institution of his suit. Handy v. St. Paul Globe Pub. Co.,
A very similar question was before the Supreme Court of Massachusetts in American Tube Works v. Boston Machine Co., *514
"The issue of special stock being invalid and being open to repudiation by the corporation itself or by dissenting stockholders, the plaintiff had an election to rescind the contract under which the special stock was taken and to be restored to its original position. Allen v. Herrick, 15 Gray, 274, 284. It was not bound by any estoppel. In all the cases which have come under our observation where one has been held to be deemed a stockholder by estoppel, there has been a legal creation of the capital stock. Such was the case in Turnbull v.Payson,
There, it will be noted, notice of rescission was not given until 27 months after the first issue of the special stock to the plaintiff, while here the suit was brought within ten months from the issue of the spurious stock and about ten weeks after the first discovery of the fraud.
By section 984, Rev. Laws 1910, it is provided that a party to a contract may rescind the same in the following, among other, cases:
"First. If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party. Second. If through the fault of the party as to whom he rescinds the consideration for his obligation fails in whole or in part. Third. If such consideration becomes entirely void from any cause."
Section 986, Rev. Laws 1910, provides how and when a rescission may be accomplished.
Plaintiff has offered to account to the defendant for the payments made him and is not, under the facts of this case, estopped from asserting his rights to a rescission. For almost a year he had been kept out of the use and enjoyment of his property; and, even were it true that the original contract was voidable and not void, it is doubtful whether the acceptance on account of the small sums of money paid him after discovery of the wrong would be such a ratification as would prevent a rescission. McClelland v. McClelland,
The cause should be reversed and remanded for further proceedings not inconsistent with this opinion, without prejudice to the rights of the Oklahoma State Bank, and an accounting should be directed in respect to the sums paid plaintiff and other proper charges between the parties.
By the Court: It is so ordered.