City National Bank v. Debaum

• Decision Date: 07 July 1924
• Docket Number: 104
• Citation: 265 S.W. 648,166 Ark. 18
• Parties: CITY NATIONAL BANK v. DEBAUM
• Court: Arkansas Supreme Court

265 S.W. 648

166 Ark. 18

CITY NATIONAL BANK v. DEBAUM

No. 104

Supreme Court of Arkansas

July 7, 1924

Appeal from Sebastian Circuit Court, Fort Smith District; John E Tatum, Judge; affirmed.

Judgment reversed and cause remanded.

James B. McDonough, for appellant.

Warner Hardin & Warner and Gallaher & Gean, for appellees.

Appellees were entitled to an instructed verdict, because the notes sued on were illegal and void, having been given for stock issued and sold in violation of the statutes, the Blue Sky law, and of the Constitution, art. 12, § 8, by a domestic corporation. C. & M. Digest, §§ 750 et seq.; 147 Ark. 402; 217 F. 904; Ann. Cas. 1916A, 701.

Cravens & Cravens and James B. McDonough, in reply.

The Blue Sky law does not apply to a glass manufacturing company. This company was not organized under that law but under C. & M. Digest, §§ 1700 et seq. The Blue Sky law is directed against the sale of contracts, stocks and securities of fly-by-night concerns, and not against the issuance of stock by an operating manufacturing corporation. The capital stock of the glass company is not a security within the meaning of the Blue Sky law, and the definition of an investment company under C. & M. Digest § 751, does not include a corporation organized to manufacture glass. In this case, DeBaum and Fentress were in the attitude of subscribers for part of the residue of the capital stock remaining unsubscribed by the corporators, the authorized capital stock being $ 100,000, and the incorporators having subscribed $ 51,000. C & M. Dig., § 1714; 54 Ark. 316; 161 Ark. 294; 123 Ark. 575; 242 U.S. 539; L. R A., 1917F, 524, note; 217 F. 904; 110 Ark. 269; 218 F. 482; 37 Neb. 197; 149 Wis. 631; 88 N.E. 879.

SMITH, J. HART and HUMPHREYS, JJ., concur.

OPINION

SMITH, J.

The City National Bank brought suits on the promissory notes of appellees DeBaum and Fentress, which were consolidated and tried together. The notes were payable to the Crystal Glass Company, and had been indorsed and delivered by that company to the bank as collateral to a loan made the company by the bank. The Crystal Glass Company, hereinafter referred to as the company, was organized as a manufacturing corporation with an authorized capital of $ 100,000. Fifty-one thousand dollars of this stock was subscribed for, of which $ 10,000 was paid in cash and $ 41,000 in property. After the company had received its certificate of incorporation, stock was sold to DeBaum and Fentress, in payment of which they executed their notes to the company. We think this so clearly appears that it may be treated as an undisputed fact. The articles of agreement and incorporation of the company do not show that either DeBaum or Fentress were among the original incorporators or that either of them were subscribers for stock in said company at the time of its incorporation in August, 1920.

The notes first given for this stock were not paid, but were renewed after a payment had been made on one of them, and before the renewal notes matured the company was adjudged a bankrupt, and, when DeBaum and Fentress refused to pay the notes on their maturity, this suit was brought to enforce payment.

It was shown on behalf of the bank that it accepted the notes in the usual course of business, for value, and before maturity, and without knowledge of the consideration for which they had been given, and as to one of the notes the bank offered testimony to the effect that one of its officers asked the maker of the note about it before accepting it and was assured that the note would be paid by the maker. It was not shown, however, that any question was asked about the consideration for the note, or that the maker made any misrepresentation concerning it. The bank therefore insists that the maker of this note is estopped to question its validity on that account.

It is admitted that the company did not comply with the provisions of the statute known as the Blue Sky law (§§ 751 et seq., C. & M. Digest), and the notes are voidable for that reason.

It is insisted that it was not shown that the stock was actually issued; but we regard this as unimportant, as the consideration for the notes was the agreement on the part of the company to issue the stock upon the payment of the notes, so that the consideration for the notes was in fact the agreement to issue the stock. The company had therefore agreed to issue stock for a note, and it had made this contract without complying with the requirements of the Blue Sky law.

The case of Randle v. Interstate Grocer Co., 147 Ark. 402, 227 S.W. 760, appears to be decisive of this case, unless the bank is an innocent holder of the note sued on. There the corporation had sold Randle shares of its stock and had taken renewal notes in payment, and, upon his refusal to pay his note, the corporation sued him. The provisions of §§ 751 and 762, C. & M. Digest, were set out in the opinion, and the court held that the sale, having been made in violation of law, was void, and the corporation's right to recover was denied. We quoted from the case of Compagionette v. McArmick, 91 Ark. 69, 120 S.W. 400, as follows: "A sale is illegal where the statute expressly declares it to be so, or where it prohibits its execution; and a sale is equally invalid where the statute only imposes a penalty upon the party for making it. It is not necessary that the statute should expressly declare the contract of sale to be void; but the infliction of a penalty upon what is declared as an offense implies a prohibition of such act, and thereby renders void any contract founded on such act. In this State it is the well settled doctrine that 'every contract made for or about any matter or thing which is prohibited and made unlawful by statute is void.'" Following this quotation we said: "So here the statute makes it unlawful for a person, firm or corporation of another State to come into this State and sell stocks without obtaining permission from the Bank Commissioner, in accordance with the statute. The plaintiff sold the stock without complying with the statute, and thereby rendered the contract void."

It is true that the sale in the Randle case was made by a foreign corporation, while in the instant case the contract of sale was made by a domestic corporation. But this fact is unimportant, for the reason that the statute imposes the same requirements on the domestic corporation in the matter of the sale of its stock as is imposed upon a foreign corporation.

Section 751, C. & M. Digest, reads as follows: "Every person, corporation, copartnership, company, or association (except those exempt under the provisions of this act), organized or which shall hereafter be organized in this State, whether incorporated or unincorporated, which shall either himself, themselves or itself, or by or through others, sell or negotiate for the sale of any contract, stock, bonds or other securities issued by him, them, or it, within the State of Arkansas, shall be known for the purposes of this act as a domestic investment company. Every such person, corporation, copartnership, or association a resident of or organized in any other State, territory or government shall be known, for the purposes of this act, as a foreign investment company."

It will be observed that this section designates every person, corporation, copartnership, company, or association (except those exempt under the provisions of this act), organized or which shall hereafter be organized in this State, whether incorporated or unincorporated, which shall sell or negotiate for the sale of any contract, stock, bonds or other securities issued by him, them, or it, as a domestic investment company. And that every such person, corporation, copartnership, or association a resident of or organized in any other State, territory or government shall be known for the purposes of the act as a foreign investment company. No distinction is made therefore between domestic and foreign corporations, except that the first is designated as a domestic investment company, while the latter is designated as a foreign investment company.

As no other distinction is made between domestic and foreign corporations, the same rule must be applied to each and, if a foreign corporation cannot sell or contract to sell its stock without complying with the...