Easton Nat. Bank v. Am. Brick & Tile Co.

• Decision Date: 16 February 1905
• Citation: 69 N.J.E. 326,60 A. 54
• Parties: EASTON NAT. BANK v. AMERICAN BRICK & TILE CO.
• Court: New Jersey Court of Chancery

60 A. 54

69 N.J.E. 326

EASTON NAT. BANK

v. AMERICAN BRICK & TILE CO.

Court of Chancery of New Jersey.

Feb. 16, 1905.

Bill by the Easton National Bank against the American Brick & Tile Company. Decree advised.

George M. Shipman, for William M. Davis. W. S. Kirkpatrick, for Easton National Bank. R. V. Lindabury and Samuel Dickson, for Edward M. Paxson, Charles A. Mayer, and E. P. Wilbur. R. C. Stewart, for Frederick, Green. W. H. Walters and E. J. Fox, for Easton Trust Company, Mary B. Knight, and Samuel W., William H., Elizabeth, Fletcher H., and R. S. Knight. J. H. T. Martin, for Henry A. Potter. James Buchanan, for E. P. Wilbur Trust Co. and Lehigh Valley National Bank. H. M. Hagerman, for Henry Short.

BERGEN, V. C. Upon the filing of the original bill in this cause the defendant was decreed to be an insolvent corporation, and William M. Davis was thereupon appointed receiver of the same under the law of this state, and, qualifying, gave the proper notice to creditors. Sundry claims were presented, and, finding no assets of the company other than the obligations of the subscribers to the capital stock of the defendant corporation for alleged unpaid subscriptions, he filed his petition praying that an order be made directing an assessment against the holders of such stock to the extent required for the satisfaction of the debts of the company. All stockholders were duly notified, and have answered the petition, denying their liability, and have also appealed from the order of the receiver allowing the claims of the creditors. The evidence on the hearing disclosed the fact that all the stock was issued by the company as full paid, and had stamped upon it the statement that it was issued for property purchased. I am satisfied that the stock, in the form in which it was issued, constituted a contract between the company and its stockholders, which would prevent an assessment until that contract was set aside as an agreement in fraud of creditors; also that no such order can be properly made under these proceedings, and that the proper course is by bill to have the contract set aside, and the delinquent stockholders decreed to pay a sufficient proportion of all unpaid subscriptions to satisfy the liabilities of the company; but, as all the evidence necessary to settle the questions that would be raised by such a bill has been taken, and counsel for all parties having on the hearing expressed their desire to have the controversy determined, I shall permit the petitioner to amend his petition, making it a bill of complaint, and thus present the issues raised, to which the testimony, which is quite voluminous, was directed, and the answers filed will be taken as answers to that bill of complaint.

The corporation was organized under the corporation act of 1875 (Revision 1877, p. 174), by the terms of which stock was issuable for the purchase of property to the "amount and value thereof," and when so issued "shall be declared and taken to be full-paid stock, and not liable to any further call; neither shall the holder thereof, be liable for any further payments, under any of the provisions of this act, and said stock shall have legibly stamped upon the face thereof the words 'Issued for Property Purchased.'" It will be observed that this differs from the law of 1896 (P. L. 1896, p. 293, § 49) in that the later act does not require stock issued for property to have stamped upon it the statement that it was issued for that purpose, but makes the judgment of the directors conclusive as to value, in the absence of actual fraud. This change has no other effect than expressing what our courts had already determined in construing the earlier legislation, for in Bickley v. Schlag, 46 N. J. Eq. 533, 20 Atl. 250, the Court of Appeals held that, if the transaction was not fraudulent, the difference in value between the property and the stock had no legal significance, and cited with approval Coit v. Gold Amalgamating Co., 119 U. S. 345, 7 Sup. Ct. 231, 30 L. Ed. 420, where the court said: "But where full-paid stock is issued for property received, there must be actual fraud in the transaction to enable creditors of the corporation to call the stockholders to account." The question now presented is, did these defendants, in issuing the whole capital stock of the company, representing at par $1,000,000, in payment for patents assigned to the company, commit an actual fraud upon the subsequent creditors of the corporation? The expression "actual fraud," as used in the cases last mentioned, must be interpreted to mean and include any device by which the stock of a corporation passes to a stockholder without payment in full either in cash or by property purchased "to the amount of the value thereof," and that an intentional overvaluation of property upon the understanding that a portion of the stock issued should be returned for distribution among the directors voting for the purchase without payment by them is such a device, and falls within the definition of "actual fraud," as intended by the Court of Appeals.

The minutes of this corporation contain no record of the determination of the board of directors to purchase the patents and to issue all of the capital stock in payment therefor, and it is sought by the testimony of witnesses to show such action; but the effort resulted in an utter failure, no proof sufficient to warrant a judicial finding of such a fact being offered. Chief Justice Paxson, in undertaking to state his recollection on this point, said: "A certain amount of this stock was to be issued to the patentees, and the balance of the stock was to be issued to those gentlemen who agreed to put in some money for the purpose of operating under the patents." Elisha P. Wilbur said, "I can only remember that a certain amount of stock was to be given to these gentlemen for their patents," but he was unable to state how much was to be issued for patents and how much for cash. Henry A. Potter does not recall where the meeting was held, nor anything more than the purport of the resolution, which was to issue the stock "for the possible value of the patents." These are all the parties testifying to this resolution, a resolution disposing of $1,000,000 of property, the contents and purport of which depend upon the recollection of busy men, engaged in large and most important enterprises, given nearly 17 years after its adoption; none of them being able to state where this meeting was held, and their recollection of the persons present is very indistinct and unsatisfactory. This evidence does not satisfy me that there was distinct official action by the directors fixing the value of the property and determining that all of the capital stock should be issued to the patentees in payment for their patents. On the contrary, I am of the opinion that no official action was taken, and that, with the exception of informal meetings, and perhaps general conversations with Judge Green, the carrying out of the negotiations with the patentees was confided entirely to Judge Green; that the expectation of the parties was that he would in some way arrange matters so that for the $10,000 each had advanced stock would be issued to them, which at par would be greatly in excess of that sum; and that they never expected that if all of the stock was issued for patents it would be retained by the patentees, for, under the view insisted upon, that all of the stock was to be issued for the patents, nothing would remain for those who had contributed towards the incorporation of this company; and this belief finds support in the fact that at the time Judge Green held a contract with the patentees as to the distribution of this stock, to which I shall hereafter refer. If we should accept the claim of these defendants that there was a meeting of the board of directors, at which it was voted to issue all of the stock for the patents, I am yet of the opinion that the proceeding was a device to issue to these directors stock for which they had not and did not expect...