Barden v. A. Heller Sawdust Co.

• Court: Michigan Supreme Court
• Writing for the Court: FELLOWS
• Citation: Barden v. A. Heller Sawdust Co. , 240 Mich. 549, 215 N.W. 364 (Mich. 1927)
• Decision Date: 03 October 1927
• Docket Number: No. 76.,76.
• Parties: BARDEN v. A. HELLER SAWDUST CO. et al. A. HELLER SAWDUST CO. v. BARDEN

240 Mich. 549

215 N.W. 364

BARDEN

v.A. HELLER SAWDUST CO. et al.

A. HELLER SAWDUST CO.

v.BARDEN

No. 76.

Supreme Court of Michigan.

Oct. 3, 1927.

Error to Circuit Court, Charlevoix County; Parm C. Gilbert, Judge.

Action by Frank O. Barden, Sr., against the A. Heller Sawdust Company and others, with action by the A. Heller Sawdust Company against Frank O. Barden, Sr., consolidated and tried together. Judgment for defendant in each action, and plaintiff in the first action brings error. Affirmed.

Argued before the Entire Bench.E. A. Ruegsegger, of Boyne City (Clink & Williams, of East Jordan, of counsel), for appellant.

J. M. Harris, of Boyne City, for appellees.

FELLOWS, J.

Frank O. Barden, Sr., Alex Heller, and Charles T. Sherman caused to be incorporated under the Michigan statute the A. Heller Sawdust Company, with a capital stock of $10,000, all common, to which each subscribed for one-third. They became directors of the corporation so organized. Heller furnished either by check or note $1,000. Neither of the other parties furnished or paid in any money. It should be here noted that we are not dealing with the purchaser or retirement of preferred stock. Mr. Barden's business required him to move to an eastern state, and the company purchased his stock for $5,000 and released him from liability on his stock subscription. The purchase price of the stock was made up of $3,000 cash, which was borrowed from a bank, and a note for $2,000 signed by the company and Heller and Sherman. The first of these suits is on this note, and the second to recover for the stock subscription. The cases were tried together, and a verdict was directed for defendants in both cases. As a writ of error is prosecuted only in the first case, we shall only have occasion to refer to the second case on a question of practice.

The cases had been, before the present trial, tried together before the court without a jury, a like result being reached. Separate judgments for defendants had been entered. Mr. Barden desired to review the first case here and took the necessary steps to settle a bill of exceptions. The stenographer, however, lost his notes and on motion of Barden's attorneys a new trial was granted for this reason. The trial judge supposed that the granting of a new trial applied to both cases as they had been tried together. Upon the present trial, counsel for Barden insisted that the judgment for him was res adjudicata of questions here involved, and as it still remained in force the other party was bound by it. After considerable discussion the trial judge caused an order to be entered granting a new trial in the second case and directed the trial to proceed in both cases together as they involved the same state of facts. We shall not discuss the question of res adjudicata.

The trial judge set aside the judgment and granted a new trial in the case which is claimed to be res adjudicata. This he had a right to do on his own motion. Ft. Wayne & Belle Isle Ry. Co. v. Wayne Circuit Judge, 110 Mich. 173, 68 N. W. 115. He would even have the right to grant a new trial after affirmance in this court. Reynolds v. Newaygo Circuit Judge, 109 Mich. 403, 67 N. W. 529;Parkey v. Galloway, 147 Mich. 693, 111 N. W. 348. Under the circumstances here disclosed, the trial judge did not abuse his discretion in granting a new trial on his own motion in the second case. The first case is, therefore, before us with the question of res adjudicata eliminated, and is the only case before us.

While it may not be established beyond dispute that the company was insolvent when it purchased the plaintiff's stock and that it purchased it for itself, there is substantial evidence in the case sustaining these facts. Both parties having moved for a directed verdict, it is our duty to affirm if the court's decision is right in law and supported by substantial evidence. Hannan Real Estate Exchange v. Davis, 238 Mich. 257, 213 N. W. 61, and authorities there cited. Therefore the meritorious question before us is the right of an insolvent corporation to purchase its own corporate stock.

The English courts are quite unanimous in holding that a corporation may not purchase its corporate stock unless authorized so to do by its charter. Some of the American courts follow the English rule, but a majority of them, including this court, have not. The rule in this state has been thus stated:

‘A corporation acting in good faith, without objection from stockholders and without prejudice to creditors, may purchase shares of its own stock, regardless of the purpose for which it was organized, unless forbidden by statute.’ Cole v. Cole Realty Co., 169 Mich. 347, 135 N. W. 329.

See, also, Clark v. E. C. Clark Machine Co., 151 Mich. 416, 115 N. W. 416;Otsego Paper Stock Co. v. Brown, 230 Mich. 260, 202 N. W. 991. In each of these cases there was no question of the solvency of the company at the time the transaction took place.

The text-writers and courts which recognize and follow this rule, however, agree that it is not applicable to insolvent corporations or corporations, which, by using their assets to purchase their own stock, thereby become insolvent, and some go further and hold that it is not applicable where such action will deplete the capital account, that it may only be purchased out of surplus. Mr. Cook in his valuable work on Corporations while recognizing the majority rule applicable to solvent corporations unequivocally and with the citation of numerous decisions, says (2 Cook on Corporations, p. 1040 [8th Ed.]):

‘If the corporation is insolvent at the time of the purchase, it is clearly an invalid transaction and will be set aside. The rule goes still further, and declares that if a corporation, by a purchase of shares of its own capital stock, thereby reduces its actual assets below its capital stock and debts, or if the actual assets at that time are less than the capital stock and debts, such purchase may be set aside and the guilty corporate officers, as well as the vendor of the stock may be rendered liable thereon at the instance of the corporate creditor.’

The Circuit Court of Appeals for the Second Circuit, in the case of In re Fechheimer Fishel Co., 212 F. 357, said:

‘As the note was given by the corporation for its own stock, the right to...