Denny Hotel Co. of Seattle v. Schram

• Decision Date: 24 March 1893
• Citation: 6 Wash. 134,32 P. 1002
• Court: Washington Supreme Court
• Parties: DENNY HOTEL CO. OF SEATTLE v. SCHRAM.

32 P. 1002

6 Wash. 134

DENNY HOTEL CO. OF SEATTLE v. SCHRAM.

Supreme Court of Washington

March 24, 1893

Appeal from superior court, King county; Richard Osborn, Judge.

Action by the Denny Hotel Company of Seattle against John Schram to recover subscriptions to stock in plaintiff corporation. From a judgment for defendant, plaintiff appeals. Affirmed.

Burke Shepard & Woods and Hawley & Prouty, for appellant.

Hughes Hastings & Stedman, for respondent.

DUNBAR C.J.

There are two controlling questions in this case: First. Is a subscriber to the stock of a corporation, in this state liable for the amount of his subscription upon the failure of the corporation to obtain subscriptions to the extent of the full capital stock? Or, expressed in other words, is the obtaining of the subscription to the extent of the full capital stock, a condition precedent to the liability of the subscriber? Second. Can a corporation, under the laws of this state, become an incorporator by subscribing for shares in another corporation?

On the first proposition the contention by respondent that the subscriber is not liable, we think, is sustained by the overwhelming weight of authority, as well as by right reasoning, and the plain principles of justice and fair dealing. While it may be a well-recognized principle, as asserted by appellant, that defenses to subscriptions are not favored by the courts, the principle can only be recognized in its application to inequitable defenses. Contracts of subscription and capital stock of corporations like other contracts, are entered into by individuals with reference to the responsibilities imposed; in this case, no doubt, with reference to the relative responsibilities of the subscribers, and the character and cost of the hotel to be constructed. The inequitable result of holding the subscribers bound in a case where the whole amount of the stock is not subscribed is set forth with so much clearness and particularity in Corporation v. Ropes, 6 Pick. 23,-a leading case on the subject,-and the arguments and illustrations of the court in that case are so often repeated, and so nearly universally indorsed, that we will content ourselves with a reference to, and an indorsement of, the reasoning in that case. Even in the absence of statutory requirements, such seems to be the prevailing holding. "It is an implied part of the contract of subscription that the contract is to be binding and enforceable against the subscriber only after the full capital stock of the corporation has been subscribed. This condition precedent to the liability of the subscriber need not be expressed in the corporate charter, nor the subscription itself. It arises by implication from the just and reasonable understanding of the subscriber that he is to be aided by other subscribers. This rule is supported also by public policy, in that corporate creditors have a right to rely upon a belief that the full capital stock of the corporation has been subscribed." Cook, Stock, Stockh. & Corp. Law, (2d Ed.) § 176. "It is a general principle that the members of a corporation cannot be required to pay assessments upon their shares until the company is authorized by law to begin the prosecution of its enterprise." 1 Mor. Priv. Corp. § 137. The capital of a corporation being fixed by its charter, the corporation has no authority to begin business until the whole amount of such capital has been subscribed. Hence it follows that the members cannot be required to pay assessments until the full capital stock is subscribed. "When the capital stock and number of shares are fixed by vote or by-law, no assessment can be lawfully made on a share of the subscriber until the whole number of shares has been taken." Wat. Corp. § 183. "As a general rule, where, on the organization of a corporation, the number of shares of the capital stock, and the sum to be paid for each share, are agreed upon, and inserted in the agreement of subscription, the subscribers are not bound to pay their subscriptions until the requisite...