Clarke v. Lincoln Lumber Co.

• Decision Date: 19 February 1884
• Parties: CLARKE v. LINCOLN LUMBER CO.
• Court: Wisconsin Supreme Court

59 Wis. 655

18 N.W. 492

CLARKE

v.LINCOLN LUMBER CO.

Supreme Court of Wisconsin.

Filed February 19, 1884.

Appeal from circuit court, Lincoln county.

James & Crosby, for respondent, John C. Clark.

Silverthorn, Hurley & Ryan, for appellant, the Lincoln Lumber Company.

TAYLOR, J.

The respondent brought this action in the circuit court to recover from the appellant $4,441.83, which he alleges he paid to said company upon a void contract for the purchase of the capital stock of said company, of the par value of $10,000. The complaint, in substance, alleges that the respondent subscribed for $10,000 of the capital stock of the company upon the agreement between himself and the company that he should pay therefor the sum of $5,000 only, and that as a further consideration for his subscription he should be appointed general manager of the company, at a salary of $2,000 per annum; that on April 13, 1883, said stock was duly issued to the plaintiff and duly transferred on the books of the company to him; that on the day of the issuing of said stock he paid the company as part payment therefor the sum of $2,580, and thereafter, and before the commencement of this action, he paid on said contract further sums, amounting in all to the sum of $959.17; that he had paid a further sum for salary, which it is alleged was agreed to be applied to the payment for said stock, which said sums, together with the amount unpaid on a promissory note given by him to said company in part payment for said stock, in all amounting to the sum of $4,650. The complaint then alleges “that the stock so issued to the plaintiff was wholly void and valueless;” “that the money had and received of the plaintiff by the company was without other or further consideration than the stock of said company before mentioned;” and further alleges a tender back to said company of the certificates of the stock issued to him, and a demand of payment of the money so paid to said company on the contract for said stock; a refusal of the company to receive such stock certificates, or to repay him the said sum of money or any part thereof, and demands judgment for the amount paid to the company, with interest. To this complaint the defendant demurred on the ground that it did not state facts sufficient to constitute a cause of action. The circuit court overruled the demurrer, and the defendant appeals from the order overruling the same.

Upon the argument of the case in this court, it is conceded by the counsel for the respondent that his ground of action is based upon the fact that under the provisions of section 1753, Rev. St., the contract made between himself and the company was void, because the corporation issued the stock to him upon an agreement to receive therefor less that its par value, viz., 50 per cent. of such value. The counsel for the appellant assents to this view of the case, if the facts stated show that such was the contract, but claim that the facts stated do not show that the contract was in contravention of said section. It is said by the counsel for the appellant that the consideration for the $10,000 of stock was not only the $5,000 in money agreed to be paid, but the further consideration that the plaintiff would serve the company as general manager, secretary, and treasurer for the sum of $2,000 salary per annum, and for aught that appears in the complaint such service of the plaintiff might be worth a much greater sum than the salary of $2,000, and might therefore make the consideration agreed to be paid for the stock $10,000. We are unable to see the force of this argument. On the contrary, we think it is apparent that the condition to make the plaintiff manager, etc., at a salary of $2,000 per annum was an inducement to the plaintiff to take the stock at 50 cents on the dollar. This is made apparent from the allegation in the complaint that shortly before the contract was made the plaintiff offered to subscribe for the stock at 40 per cent. of the par value, which offer was rejected by the company, and that immediately after the rejection of such offer of 40 cents the plaintiff made the offer that if he was made the general manager of the company he would subscribe for $10,000 of the stock of the company and pay 50 per cent. of its par value; and this proposition was immediately accepted by the company. It is evident from the whole complaint that it was not understood by the parties that the plaintiff was to give any greater consideration for the stock than the 50 cents on the dollar.

Upon this understanding of the contract set out in the complaint there can be no doubt but the contract was a violation of the section of the statute above cited, and void. Being void by statute, it is equally clear that neither party could maintain an action founded upon such contract to enforce the same, nor could one party recover damages from the other for a refusal to perform it on his part. This has been so often determined in this and in other courts that it needs no further discussion. Smith v. Finch, 8 Wis. 245;Blanchard v. McDougal, 6 Wis. 167;Swartzer v. Gillett, 2 Pin. 238, 239;Moore v. Kendall, Id. 99; Brandeis v. Neustadtl, 13 Wis. 142;Knoll v. Harvey, 19 Wis. 99;Tiernan v. Gibney, 24 Wis. 190;Plank R. Co. v. Plank R. Co. 7 Wis. 59;Melchoir v. McCarty, 31 Wis. 252;Troewert v. Decker, 51 Wis. 46; [S. C. 8 N. W. REP. 26;] Ins. Co. v. Harvey, 11 Wis. 394;De Forbes v. Railroad Co. 52 Wis. 320; [S. C. 9 N. W. REP. 17;] In re Comstock, 3 Sawy. 218;Bank v. Merrick, 14 Mass. 324;Russell v. De Grand, 15 Mass. 37;Wheeler v. Russell, 17 Mass. 280;White v. Bank, 22 Pick. 181;Belding v. Pitkin, 2 Caines, 149;Shiffner v. Gordon, 12 East, 304; Noel v. Drake, 28 Kan. 265;Bank of U. S. v. Owens, 2 Pet. 538;Harris v. Runnells, 12 How. 83;Williams v. Cheney, 3 Gray, 222;Roche v. Ladd, 1 Allen, 441;Ins. Co. v. Pursel, 10 Allen, 232;Ins. Co. v. Slaughter, 20 Ind. 520;Ins. Co. v. Rosenthal, 55 Ill. 90. Admitting this to be the law, the learned counsel for the respondent contends that it does not bar his right to recover in this action. He claims he is not seeking to enforce the illegal and void contract, but repudiates it and claims the right to recover what he has paid to the corporation upon such void contract. This presents the real question in the case.

Section 1753, Rev. St. 1878, upon which the respondent relies for the recovery of the money paid to the company, as amended by chapter 93, Laws 1881, reads as follows: “No corporation shall issue any stock, or certificate of stock, except in consideration of money or labor, or property, estimated at its true money value actually received by it equal to the par value thereof; nor any bonds or other evidence of indebtedness, except for money, labor, or property, estimated at its true money value, actually received by it, equal to seventy-five per cent. of the par value thereof; and all stocks and bonds issued contrary to the provisions of this section, and all stock dividends or other fictitious increase of the capital stock of any corporation, shall be void: provided, however, that any corporation whose stock or bonds have been or shall be hereafter admitted to the stock exchange of Chicago, New York, Boston, or Philadelphia, or of either of said cities, may sell such stock or bonds so admitted at the best price or prices current for the time being obtainable therefor, or any of the said exchanges at which the same shall be offered for sale.” No question arises under the proviso to the section, as there is no evidence in the case tending to show that the stock in question was ever admitted to the stock exchange of either of the cities mentioned. The contract for the sale and purchase of the stock was clearly void under this statute. The statute was a declaration of a public policy, first enacted as chapter 24, Laws 1874, and is clearly in the interest of public morals, and tends to the protection of those dealings with corporations. Most of the corporations created under the laws of this state have no fund or capital which their creditors can reach, except that derived from the issuance or sale of their stock; and if this law be strictly followed in every case, corporations will not get credit upon the false pretense of having a large paid-up capital, when in fact a small percentage of the par value of the stock issued has ever come into the treasury of the company. The law is undoubtedly a salutary one, and its violation is clearly an illegal act, though no punishment is imposed by the statute for its violation. Without this statute such a contract between the corporation and a stockholder would be void as to the creditors of the corporation on the ground of fraud. See Morowitz, Pr. Corp. § 589, and cases cited.

The respondent in his complaint sets out a contract showing a clear violation of the act on the part of the company; and as every person is presumed to know the law, he shows he entered into the contract knowing that the contract was a violation of law. Whether the respondent would have been in any better position had he made it to appear from his complaint that he acted in good faith in the belief that the company had the lawful right to make the contract it did make, and that he paid the money to the company under a mistake of law, and that immediately upon his discovery of the fact that the contract was a violation of law he tendered back the stock and claimed the money paid therefor, we need not determine in this case, as no such case is made by the complaint. Upon the case, as made by the complaint, the respondent and the company are in pari delicto, both violators of the law, and no action in favor of either which grows directly out of the illegal contract can be maintained. It does not follow that because a contract is void, money paid under it can be recovered back by the payor in all cases.

The cases cited by the learned counsel for the respondent, in which the court has held...