160 F. 573 | 8th Cir. | 1908
(after stating the facts as above). Appellants claimed below, and now claim here, that they are entitled to prove their claims against the estate of the shoe company in bankrupt
Article 12, § 8, of the Constitution of Missouri (Ann. St. 1906, p. 304), ordains that:
“No corporation shall issue stock or bonds except for money paid, labor done or property actually received; and the fictitious increase of stock or indebtedness shall be void. The stock and bonded indebtedness of corporations shall not be increased, except in pursuance of the general law, nor without the consent of the persons holding the larger amount in value of the stock first obtained at a meeting called for the purpose, first giving sixty days’ public notice, as may be provided by law.”
The pertinent statutes enacted to carry this constitutional provision into effect are sections 962, 1327, and 1329 of the Revised Statutes of Missouri 1899 (Ann. St. 1906, pp. 860, 1071, 1072). Section 962 is a re-enactment of the constitutional prohibition providing that the shares of stock or bonds arising from an increase thereof shall only be disposed of “for money paid,' labor done or money or property actually received,” and that “all fictitious issues or increase of stock or of bonds shall be void.” Section 1327, relating especially to “manufacturing and business companies,” provides that:
“Any corporation increasing its capital stock shall before the same shall take effect, cause to be paid up of such increase of capital stock not less than fifty per cent, in lawful money of the United States.”
Section 1329 makes provision for holding a meeting and taking the vote of stockholders on a proposition to increase or diminish the amount of capital stock, and provides that:
“A statement of the proceedings showing a compliance with the provisions of this article, the amount of capital actually paid in * * * the whole amount of assets and liabilities of the corporation, and the amount to which the capital stock shall be increased or diminished, shall be made out, signed and verified by the affidavit of the chairman, and be countersigned by the secretary; and such statement shall be acknowledged by the chairman, and recorded, as provided in section 1313, and a certified copy of such recorded instrument shall be filed in the office of the Secretary of State, who shall thereupon issue a certificate that such corporation has complied with the law made and provided for the increase or decrease of capital stock, as the case may be, and the amount to which such capital stock is increased or decreased; and such certificate shall be taken in all courts of this state as evidence of such increase or decrease of stock; and thereupon the capital stock of such corporation shall be increased or diminished to the amount specified in such certificate: * * * -Provided, that in case of increase of capital stock, the statement above provided for shall set out the percentage of the increase that has been actually paid up in lawful money of the United States, and that it is in the custody of the board of directors.”
Dees the fact that the authorized preferred stock had not been subscribed or paid for before the statement was made and the certificate of conformity was issued by the Secretary of State render the whole issue fictitious and void? As we interpret the statutes of Missouri on the subject of increasing the capital stock of an existing corporation, a scheme is provided by which such increase may be authorized, and thereby a subject of sale created. It is only after the increase is authorized that a company can have any increased stock to offer for subscription and sale. The Constitution of the state makes little reference to the method of authorizing or increasing capital stock. It provides merely that it shall not be increased, except pursiiant to general law, with the consent of persons holding a majority in value of the stock, and after sixty days’ notice, as may be provided by law. The important prohibition relates to the use to be made of the stock after it is authorized. It ordains that “no corporation shall issue stock * * * except for money paid, labor done or property actually received and all fictitious increases of stock * * * shall be void.” The word “issue” here employed is obviously used in its ordinary commercial or financial sense, meaning “to emit,” “put into circulation,” or “dispose of securities” already authorized and prepared for disposition. Black’s Raw Dictionary; Century Dictionary; Folks v. Yost, 54 Mo. App. 55, 59. The word “fictitious” employed in the Constitution is found in immediate connection with the prior provision relating to the issue of stock, and by the most natural and familiar rule of construction ought to be construed in connection with it; and as so construed, it means, in our opinion, that all increases of capital stock which are not issued for money paid, labor done, or property actually received are fictitious and void. The record discloses that the shoe company disposed of or put into circulation much, if not all, of its increased stock. Such disposition, in our opinion, amounted to the issue of the stock within the contemplation of the constitutional pro
Not only so, but section 1327, Rev. St., affords very persuasive evidence of the correctness of the foregoing conclusion. It provides, not that 50 per cent, at least of the increase must be paid for before the statement is made to secure its authorization, but before the increase “shall take effect.” This phraseology seems to assume the completion of proceedings to secure an increase of stock before payment is required ; and wisely provides that it shall not take effect as a recognized addition to the capital stock or increased liability of a corporation until it is at least half paid up. As further support to the conclusion reached attention is called to the fact that there is no statutory provision for making any preliminary subscription to increased stock like that made by section 1327 Rev. St. (supra), with reference to the original stock of a manufacturing and business corporation. That statute is in pari materia with the one under consideration, and may properly be considered in ascertaining the legislative intent.
2. In apparent conformity with the provision of section 1329, Rev. St. Mo. 1899, the recorded statement made by the officers of the shoe company set forth “that all of the increase of capital stock had been actually paid up in lawful money of the United States, and was in the hands of the board of directors of the company.” This last statement was doubtless false in fact. None of it had then been sold, and no proceeds of sales were then in the hands of the board of directors. But the statement as a whole was correct in form, and set forth facts which justified the Secretary of State in issuing the certificate. He acted upon it, and issued the certificate of compliance, which operates under the laws of Missouri as an official declaration of a lawful increase of stock. The statement cannot now be assailed on the ground of its falsity in the particular just mentioned. Assuming that a statement on the subject falsified was one of the details required by law for securing a certificate of increase, its truthfulness was not fundamental to the validity of the increase. We have already seen that the stock was paid for when it was actually issued. The failure to have 50 per cent, or more of the increased capital actually paid for, and that amount of money actually in the custody of the board of directors before the required statement was executed
3. Do the false and fraudulent statements made by the shoe company and its agents warrant the attempted rescission by appellants of their contracts of purchase? There is some difference in the facts attending the purchase of stock by the three appellants. Scott acquired his directly from the shoe company, in reliance, however, upon one of the false statements furnished the investment company by the shoe company. Gauss and Martin purchased theirs directly from the investment company. But in the view we take of this case these differences are immaterial. Much evidence appears to have been taken and considerable attention was given below to the question whether the investment company originally purchased the stock from the shoe company, or whether it acted as its agent in disposing of it. This question was not answered by the referee or the court below, and in our opinion does not require determination by us. Whether the investment company sold it as owner or agent, it made use of the false statements purporting to show the true financial condition of the shoe company, which had been furnished to it by the shoe company for that purpose. The latter company, when it placed these false statements in the hands of the investment company, knew they were false, and intended they should be used to induce purchasers to buy its stock. In other words, it knew that the statements were adapted to deceive and were to be employed for that purpose. In such circumstances the law reinforces the plain moral obligation, and holds the maker of them liable to persons deceived by them. City Bank of Columbus v. Phillips, 22 Mo. 85, 64 Am. Dec. 254; Clark v. Edgar, 84 Mo. 106, 54 Am. Rep. 84; Holmes v. Harrington, 20 Mo. App. 661; Gries v. Blackman, 30 Mo. App. 2; Bank v. Lanier, 11 Wall. 369, 378, 20 L. Ed. 172; Windram v. French, 151 Mass. 547, 24 N. E. 914, 8 L. R. A. 750; Peterson v. People’s Building, Loan & Savings Ass’n, 124 Mich. 573, 83 N. W. 606; Cazeaux v. Mali, 25 Barb. (N. Y.) 578, 583; Williams v. Wood, 14 Wend. (N. Y.) 127; 1 Cook on Corporations (5th Ed.) § 144.
4. The record shows that at least $275,000 of the present indebted
Prom the foregoing summary of the main and essential facts we find ourselves confronted with the following question of law: Whether persons who have been induced by false statements of the officers of a corporation to innocently purchase some of its preferred stock, and who for a year or more have accepted dividends declared quarterly upon the stock purchased by them, may, after discovering the falsity of the statements made, and after a state of insolvency and actual bankruptcy of the corporation has supervened, repudiate their purchases, and participate in the assets of the insolvent estate pro rata with general creditors who innocently contracted their debts on the strength of the validity of the increase of stock and of the additional resources which appellants and others similarly situated have reasonably caused them to believe the corporation possessed? Ordinarily it is true that any person who has been deceived by false and material statements of another into making a contract with him may, by timely action and observance of other equitable principles, rescind the same and recover back money paid in its performance. And this is ordinarily true when individuals make contracts with corporations. The executive officers of the corporations, acting within the scope of their general authority, may so misrepresent material facts as to entitle per
In Sawyer v. Hoag, 17 Wall. 610, 623, 21 L. Ed. 731, Mr. Justice Miller, speaking for the Supreme Court on the relation of a corporation to its stockholders, uses the following language:
“It is very true, that by the power of the Legislature there is created in all acts of incorporation a legal entity, which can contract with its shareholders in the ordinary transactions of business as with oilier persons. * * * But, after all, this artificial body is but the representative of its stockholders, and exists mainly for their benefit, and is governed and controlled by them through the officers whom they elect. And the interest and power of legal control of each shareholder is in exact proportion to the amount of his stock. It is, therefore, but just that when the interest of the public or of strangers dealing with this corporation is to be affected by any transaction between the stockholders who own the corporation and the corporation itself, such transaction should be subject to rigid scrutiny, and if found to be infected with, anything unfair towards such third person, calculated to injure him, or designed intentionally and inequitably to screen the stockholder from loss at the expense of the general creditor, it should be disregarded or annulled so far as It may inequitably affect him.”
In Sanger v. Upton, Assignee, 91 U. S. 56, 60, 23 L. Ed. 220, Mr. Justice Swayne, speaking for the Supreme Court on the same subject, said:
“The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or ai>plied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity.”
In Hawkins v. Glenn, 131 U. S. 319, 329, 9 Sup. Ct. 739, 712, 33 L. Ed. 184, Mr. Chief Justice Fuller, speaking for the court, said:
“A stockholder is so far an integral part of the corporation that, in the view of the law, he is privy to the proceedings touching the body of which he is a member.”
See, also, to the same general effect, the following cases: Glenn v. Liggett, 135 U. S. 533, 10 Sup. Ct. 867, 34 L. Ed. 262; Fogg v. Blair, 139 U. S. 118, 11 Sup. Ct. 476, 35 L. Ed. 104; Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371; 14 Sup. Ct. 127, 37 L. Ed. 1113.
In view of the foregoing facts and principles the rights of the innocent general creditors are superior to those of the deceived stockholders. It is a familiar, general principal of law, as well as of morals, that when one of two innocent parties must suffer by the fraud of another, the one who has enabled such third party to commit the fraud ought to sustain the loss. United States Bank v. Bank of Georgia, 10 Wheat. 333, 344, 6 L. Ed. 334; Friedlander v. Texas, etc., Ry. Co., 130 U. S. 416, 425, 9 Sup. Ct. 570, 32 L. Ed. 991; Rice v. Groffmann, 56 Mo. 434, 437; International Bank v. German Bank, 71 Mo. 183, 197, 36 Am. Rep. 468; Smith v. Armour Packing Co. (C. C. A.) 158 Fed. 86; Chapman v. Rose, 56 N. Y. 137, 141, 15 Am. Rep. 401; Scanlon-Gipson Rumber Co. v. Germania Bank, 90 Minn. 479, 488, 97 N. W. 380. Reference may also be made to 16 Cyc. p. 703, for a statement of the rule and collection of many cases in which it has been recognized and followed. Applying this rule to the facts of the present case, there seems to be no escape from the conclusion that the purchasers of the preferred stock in question largely contributed to the ability of the shoe company and its officers to occasion loss to its general creditors. Within the limitation of the rule made appropriate by the peculiar facts of the case of Western Union Telegraph Co. v. Schriver, 72 C. C. A. 596, 141 Fed. 538, 4 L. R. A. (N. S.) 678, the same result would follow. The stockholders gave their agents,^the
5. The Supreme Court of the United States, in the case of Scott v. Deweese, 181 U. S. 202, 21 Sup. Ct. 585, 45 L. Ed. 822, considered the double liability of stockholders in national banks, provided for by section 5151 of the Revised Statutes (U. S. Comp. St. 1901, p. 3465), and in that case a question arose, much like that now before us, touching the effect of false statements and false representations made by the officers of the bank. It was there said by Mr. Justice Harlan, speaking for the court (page 213 of 181 U. S., page 589 of 21 Sup. Ct. [45 L. Ed. 822]):
“If the subscriber became a shareholder in consequence of frauds practiced upon him by others, whether they be officers of the bank or offices of the government, ho must look to them for such redress as the law authorizes, and is estopped, as against creditors, to deny that he is a shareholder, within the meaning of section 5151, if at the time the rights of creditors accrued he occupied and was accorded the rights appertaining to that position.”
We find in the present case all the elements upon the assumption of which Mr. Justice Harlan made the observation just quoted. The appellants, at the time the rights of most, if not all, of the general creditors of the shoe company accrued, occupied the position of shareholders, and were accorded rights as such, including the right, which was frequently exercised, of sharing in the supposed net earnings of the company in the form of dividends.
In the Scott Case the Supreme Court had under consideration many phases of the relation of stockholders to national banks and to their creditors, both before and at the time of the failure of the hank, and the case contains an instructive consideration of the g-eneral subject, as well as a review of prior authorities on the same and kindred questions. While it is there assumed, without commitment, however, that a stockholder may, by proper proceedings, instituted in good faith and in due time before the suspension of a bank, secure a rescission of his contract of subscription for fraud practiced upon him by the officers, yet the case affords direct authority for what we deem to be a just and practical general rule: That 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
A case involving the foregoing elements inevitably discloses such want of diligence, such delay or inactivity, or such counter-equities in favor of creditors as within well-recognized principles precludes resort to a court of equity for redress by a defrauded stockholder. The rule just announced has not been established without opposition and vigorous dissent, but we think it is now so firmly fixed as to command general obedience. This appears, not only by the Scott Case already considered, but by the following cases: Newton Nat. Bank v. Newbegin, 20 C. C. A. 339, 74 Fed. 135, 33 L. R. A. 727; Scott v. Latimer, 33 C. C. A. 1, 89 Fed. 843; Lantry v. Wallace, 182 U. S. 536, 21 Sup. Ct. 878, 45 L. Ed. 1218; Ib., 38 C. C. A. 510, 97 Fed. 865; Hood v. Wallace, 182 U. S. 555, 21 Sup. Ct. 885, 45 L. Ed. 1227; Wallace v. Hood (C. C.) 89 Fed. 11.
Learned counsel for appellants have called our attention to many cases, all of which have been carefully considered. Some of them have fallen by the way in the progress of the development of the rule just announced. Others being inconsistent with that rule, and with what we believe to be the doctrine of the Supreme Court, cannot -receive our approbation.
Other minor questions were ably argued at the bar, but as they are unimportant in view of our conclusion on the more fundamental questions already considered, we will not prolong this opinion by discussing them.
The decree of the district court was for the right party, and it is accordingly affirmed.