43 A. 810 | Md. | 1899
This is a suit by the trustee of an insolvent foreign corporation to recover from a stockholder the unpaid balance due on his subscription to the capital stock. The Roanoke Development Company of Virginia, after a brief career, made an assignment to the appellee for the benefit of its creditors. The company was one of the many ephemeral and speculative concerns, which, a few years ago, suddenly sprang into existence throughout portions of Virginia and Maryland, and perhaps elsewhere, and deluded the credulous and confiding by the promise of fabulous gains, and frequently misled the conservative and cautious to believe that obscure localities would, under their stimulating influence, speedily grow into permanent and important centres of commercial and manufacturing activity. It soon went the way of all such ventures and hopelessly collapsed. Amongst the assets which the deed of trust conveyed were the appellant's and other unpaid subscriptions. To the declaration filed in the cause, in addition to the general issue, there was a plea by way of equitable defence which *329 raises the material question to be disposed of on this appeal. The deed of trust is peculiar in that it sets forth specifically the indebtedness due by the company, and for the payment of which this and other like collections from stockholders are being made. An outline of the prominent facts will disclose the precise nature of the controversy.
The Roanoke Development Company was organized in eighteen hundred and ninety. It issued a prospectus in which it was stated that the company proposed to purchase thirteen hundred acres of land adjacent to Roanoke; that the capital stock was one million one hundred thousand dollars, of which five hundred thousand dollars are "for the purchase of the property." There were eight directors of the company, five of whom were residents of Roanoke, and three resided in Philadelphia. Terry, Jamison, Simmons, Sands and Gale were the Roanoke directors. In September and December, 1888, February, 1889, and March and June, 1890, Terry acquired sundry parcels of land for the aggregate sum of $37,600. On October the eleventh, eighteen hundred and ninety, Terry, who was the father-in-law of Jamison, conveyed this same property to Jamison for the consideration of one hundred and seventy-five thousand dollars, part of which was alleged to be cash, and part the promissory notes of the purchaser. The deed was acknowledged on November the twenty-fifth, 1890. On the same October the eleventh, Jamison and wife conveyed this same property to the Development Company for a consideration of two hundred and seventy-five thousand dollars. The deed was acknowledged December the twenty-first, 1890. Thus, property which had cost Terry, a few months before, only $37,600, and which he had not fully paid for, was turned over to Jamison at a profit to Terry of $137,400; and on the same day was turned over to the company at a profit to Jamison of $100,000. The whole of this consideration of $275,000 (except $30,201.29, which was cash), was made up of the company's promissory notes to Jamison for $87,306.05, and of Jamison's notes to Terry *330 for $139,201.29, which had been given by Jamison to Terry for this very same land, and the payment of which the company assumed, and also of something over $18,000 of Terry's notes to the parties from whom he had purchased this same land, the payment of which was likewise assumed by the company. On October the eleventh, 1890, Jamison and Simmons conveyed to the company another parcel of land in consideration of $100,000. This land they acquired from Terry on March the first, 1890, for $23,500. On October the seventeenth, 1890, Routt and Dennison conveyed to the company another parcel of land for $125,000. The land belonged to Routt. Dennison had an option on it for $81,000. Less than a year before, Routt had purchased the same property for $13,600. Dennison's share in this transaction amounted to $43,123,50. Routt received in cash $10,234.74. Thus, land which had cost these directors and promoters something over $70,000, was turned over to the company by them for $500,000, some of which consideration was paid in cash, but much the larger part either in notes of the company, or in notes given by some of these directors to other directors, and of which the company assumed the payment.
These transactions, by which the directors and promoters secured to themselves an enormous profit at the expense of the stockholders, whose interests they were bound to protect and were forbidden to betray, were gross and glaring acts of fraud which nothing can justify or excuse, and which no attempt has even been made to palliate. Subscriptions obtained to the capital stock of the company, when the subscribers were ignorant of these reprehensible deals, and when they were, in addition, assured that there was no promoters' fund or advantage, were subscriptions obtained by fraudulent means and were revocable by the deceived subscribers, if rescinded by them whilst the company was a going concern, and within a reasonable time after the discovery of the fraud. Wenstrom, c., Co. v. Purnell,
But fraudulent transactions like these may not only affect the liability of the subscriber to the company on his contract of subscription, but they are voidable as between the guilty director and promoter, on the one hand, and the company and its shareholders, on the other. Whilst the shareholder may have lost, by his laches or by his acquiescence, the right to rescind his contract of subscription on this ground, and may, in consequence, remain liable to pay his subscription when lawfully demanded; still such dealings between directors and the company of which they are directors, for their own personal gain and in violation of the trust which their positions impose, are voidable unless ratified by the company. If they are fraudulent they are voidable because fraudulent (Brantly on Contracts, 158); and it comes to the question whether, when a stockholder is sued by the company or by a trustee, standing in the place of the company, to recover his unpaid subscription, and he has lost the right to rescind his contract of subscription, he may successfully resist the demand, if the voidable contracts between the company and its directors have not been disaffirmed, and if the purpose of the suit against him is to collect money from him, which is to be appropriated in part to the payment of the very obligations given by the company to the directors in execution of the voidable contract? Can he, when thus sued, disaffirm the voidable contract between the company and its directors, and thereby nullify the obligations so given by the company to its directors, and defeat, altogether, a recovery against himself, even though some of the claims, towards whose partial payment this unpaid subscription, when collected by suit, would be applied, are claims *332 unaffected by and not growing out of the fraudulent conduct of the directors?
This presents an inquiry as to the effect of a voidable contract of the character of those under consideration. Is it inoperative unless ratified? Or, is it operative unless disaffirmed? The doctrine on this subject is as well stated inThomas v. Brownsville R.R.,
Of course we do not mean to question, by anything we have said, the doctrine followed in Davis v. Shaw,
Bearing in mind that the transactions denounced are only voidable, and therefore do not need ratification to make them valid, it is obvious they are binding until properly avoided. It must be a corporate act that avoids them, if they are avoided by a disaffirmance, and not by a decree; and that corporate act must be done either by the directors or the stockholders. All corporate action must be taken by at least a majority of those who are authorized to act for the corporation — whether they be directors or stockholders — and as a disaffirmance — not a judicial annulment — of these contracts could only have been effected by corporate action, it could only have been accomplished by the action of a majority of the directors or stockholders. "The rule is that the majority governs, and every stockholder contracts that such shall be the rule." 1 Mor.Cor., sec. 474; Hart v. Ogdensburg L.R.R. Co., 89 Hun. 316. This is the pivotal point of the case.
Now, whilst the deed of trust includes, amongst the claims to be paid some of the notes given by the company in consideration of these sales by the directors to it, there are also enumerated other debts, which are not tainted in the same way. Some of these notes are apparently in the hands of the original payees; some have gone into the possession of other holders, and part of the indebtedness, for the payment of which the deed provides was, according to the evidence in the record, incurred for money borrowed by the company from other parties. The rights of these alleged innocent holders are not before us, and were not and could not have been before the trial Court. As to them it is obvious, if the stock subscription has not been rescinded, the liability of the stockholders is unimpaired by any fraudulent dealings between the directors and the company, for the unpaid subscriptions are a trust fund for the payment of debts. Rider
v. Morrison,
Though one of the objects designed to be accomplished by the deed of trust was the ratable distribution of the assets amongst all the creditors, including the holders of the notes given in execution of these voidable transactions; it cannot be said that the deed "by its terms may operate as an instrument in aid of the fraud," (Farrell v. Farnan,
With these observations, we come to the rulings on the prayers. The plaintiff's second and third prayers and the defendant'sfirst (all of which were granted) submitted to the jury the question, whether after the discovery by the defendant of the fraud, by the practice of which he had been induced to subscribe to the company's capital stock, he rescinded his subscription in a reasonable time. These instructions are free from error. The defendant's second prayer proceeds upon the theory that if the fraudulent and voidable sales made by the directors to the company "were never submitted to the stockholders of said company for ratification," and if the trustee named in the deed of trust had knowledge of these transactions and accepted the deed, "for the purpose of enforcing the same against the stockholders, * * * the deed of trust is void." But the vice of the prayer lies both in the premise and in the conclusion. *336
It is erroneously assumed in the former, that a failure to submit these voidable sales to the stockholders for ratification, of itself, operated to avoid the sales, whilst precisely the converse, that a voidable contract is valid until disaffirmed, is the rule; and in the conclusion it is asserted that the deed of trust is void because these voidable contracts were not ratified and because the trustee accepted the deed with a knowledge of the circumstances attending the consummation of those sales. The conclusion, that the deed of trust is void, is again faulty, because it disregards the principle thus stated in the appellant's brief, "that the mere presence of fraudulent claims, along with honest ones, in a deed of trust need not invalidate the deed." The voidable contracts of sale, and the deed of trust are distinct and different acts, and their validity must be determined according to their respective merits. The making of the previous fraudulent contracts did not deprive the corporation of the right to make a deed of trust of all its property for the equal benefit of all its creditors. Horwitz, Garnishee, v.Ellinger,
This is not a case where stockholders are seeking redress against delinquent directors as in Booth v. Robinson,
The verdict and judgment in the Baltimore City Court were rendered in favor of the plaintiff, the trustee, and against the defendant stockholder for the amount of the unpaid balance due on his subscription to the capital stock. We find no errors in the rulings of the trial Court. We cannot conclude this opinion without condemning in the strongest terms the culpable and atrocious fraud practiced upon the appellant to induce him to become a stockholder; and but for the fact that the jury have declared he failed to repudiate the subscription in a reasonable time after discovering the deceit, he would be released from all liability. As the case now stands, however, we are obliged to affirm the judgment.
Judgment affirmed with costs.
(Decided June 20th, 1899). *338