Ewing v. Swenson
| Decision Date | 16 April 1926 |
| Docket Number | No. 25171.,No. 25170.,25170.,25171. |
| Citation | 208 N.W. 645,167 Minn. 113 |
| Parties | EWING v. SWENSON. |
| Court | Minnesota Supreme Court |
Appeal from District Court, Hennepin County; T. H. Salmon, Judge.
Action by Frank H. Ewing, as receiver of the Security Bond & Investment Company, against Paul Swenson. Judgment for defendant, and plaintiff appeals from an order denying his motion for a new trial. Affirmed.
Morphy, Bradford & Cummins and James E. Trask, all of St. Paul, for appellant.
S. S. Smith and James D. Shearer, both of Minneapolis, for respondent.
The action is by the receiver of the Security Bond & Investment Company, a South Dakota corporation doing business in this state, to recover from defendant, the holder of certain shares of stock, the alleged unpaid part of their par value; in other words, the claim is that defendant purchased the stock under the agreement that he should receive 2 shares of bonus stock for every share for which the full face value was paid. Defendant insists that the stock was represented to be fully paid and nonassessable and that he relied thereon in trading 15 shares of stock of another corporation for 45 shares of the Security Bond & Investment Company. The court found, in substance, the defendant purchased and received 45 shares of stock in this corporation "in the course of a single and indivisible transaction," whereby said corporation, on October 2, 1919, transferred the same to him in exchange for 15 shares of the stock of the Minnesota Mutual Investment Company, which were then of the value of not less than $1,800; that said transaction was conducted by H. G. Stark, the secretary and a director of the corporation, duly authorized to act for it, who represented the 45 shares to have been fully paid and to be nonassessable; that defendant bought in good faith, believing the same to be fully paid, and with no notice or knowledge of how the same had been issued. Judgment was directed in favor of defendant. Plaintiff appeals from the order denying his motion for a new trial.
It is thoroughly settled in this state that one to whom a corporation issues its stock for less than par is liable to subsequent creditors for the difference between what was paid and the par value. The creditors have a right to rely on the representation that for the shares issued the corporation received full payment or a promise to pay in full. If shares are issued without being paid in full, or without a promise of full payment, it is deemed a fraud as to subsequent creditors, and on that basis the holder may be compelled to pay full value, even though as between him and the corporation the latter has no right to recover. First Nat. Bank of Deadwood v. Gustin W. C. M. Co., 44 N. W. 198, 42 Minn. 327, 6 L. R. A. 676, 18 Am. St. Rep. 510; Hospes v. Northwestern Mfg. & Car Co., 50 N. W. 1117, 48 Minn. 174, 15 L. R. A. 470, 31 Am. St. Rep. 637; Hastings Malting Co. v. Iron Range Brewing Co., 67 N. W. 652, 65 Minn. 28; Wallace v. Carpenter Electric Heating Mfg. Co., 73 N. W. 189, 70 Minn. 321, 68 Am. St. Rep. 530.
The origin of the stock was not known to defendant at the time he procured it. Corporation stock has not the qualities of negotiable paper, and the holder thereof may not invoke the protection accorded an innocent good-faith purchaser. But, obviously, if the stock which defendant holds was in fact fully paid for to the corporation by a prior holder, this action must fail. It is undisputed that 15 shares of defendant's holdings are an original issue to him by the corporation and that 30 shares are a part of the 400 shares issued to one Hegg, assigned by the latter in blank and turned over to the corporation for the purpose of facilitating the sale of other stock. This Hegg stock is spoken of by the officers of the corporation as bonus stock. It appears that this corporation was organized for the purpose of financing the erection of large buildings in order to derive therefrom the expected dividend earnings. The Hegg stock was issued under this arrangement, in substance, as found by the court: The board of directors agreed to buy from Hegg "the franchises, leases, good will, trade-name and all other things of whatsoever description belonging to or relating to" his contracting business, and pay therefor its reasonable worth of $40,000 by the issue of full-paid common stock to him in that amount, the stock to be delivered upon receiving a bill of sale of the business; that no bill of sale was given, but, in lieu thereof, Hegg transferred to the corporation one-half of the net anticipated profits of $90,000 from a contract which Hegg had obtained for the erection of a hotel in St. Paul for the Minor Realty Company, the cost not to exceed $900,000, which contract he had obtained with the co-operation of the Security Bond & Investment Company; that accordingly the 400 shares of stock were issued to Hegg, but, in view of this substituted agreement, 350 shares thereof were assigned by Hegg in blank and turned over to the managing officers of the corporation to be used as bonus stock to induce purchasers to buy original stock. If these findings are supported by the evidence, the case was rightly disposed of, for there is no question but that full payment was made by defendant for the original issue of the 15 shares, and, if the 30 shares coming from the Hegg issue were fully paid for by the transactions above referred to, no fraud has been perpetrated upon the creditors by the holder of these 45 shares.
Of course, it is elementary that property and services at full and fair value or market price may be used to pay for stock in lieu of cash. It is true, money stringency prevented the Minor Realty Company from carrying out its contract. How much this failure was due...
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