Garrison v. Technic Elec. Works

• Decision Date: 29 June 1897
• Parties: GARRISON v. TECHNIC ELECTRICAL WORKS et al.
• Court: New Jersey Court of Chancery

37 A. 741

53 N.J.E. 708

GARRISON

v. TECHNIC ELECTRICAL WORKS et al.

Court of Chancery of New Jersey.

June 29, 1897.

(Syllabus by the Court.)

Bill by Prank Lynwood Garrison against the Technic Electrical Works and others. Heard on demurrer. Overruled.

This bill is filed by Frank Lynwood Garrison, complainant, against George M. Sinclair, John J. Zimmele, and the Technic Electrical Works, defendants. The complainant states: That the Technic Electrical Works was duly incorporated under the laws of New Jersey on July 14, 1893. That the object of the incorporation was the manufacture and repair of electrical and other machinery. The company commenced business in the month of September, 1895. In February, 1895, the defendant Sinclair had been secretary and treasurer of the company for a month, and the defendant Zimmele was at the same time a stockholder and president and manager of the corporation. Sinclair requested the complainant to purchase of him 50 shares of the stock at $40 per share, and 20 shares of the treasury stock of the corporation; and it was represented to the complainant by Sinclair and Zimmele, principally the former, that the company was in a solvent condition, but that its collectible assets were in excess of its liabilities, counting the capital stock issued as part of the liabilities. They exhibited to the complainant a balance sheet of the condition of the company, which they stated was true, and that the receipts from sales of its manufactured commodity were in excess of its expenditures; that it was then doing a profitable business, and, with a small additional capital, and attention such as the complainant could give, it would make money and become prosperous; and that, if the complainant would purchase the stock, he should be elected an officer of the company, and receive a salary of $25 per week for his services as such officer. Relying on these statements, the complainant agreed to purchase 50 shares of the capital stock of the company belonging to Sinclair for $2,000, and 20 shares of the treasury stock of the company for $1,000, cash, to be at once paid to the treasurer of the company,— the $2,000 to be paid to Sinclair to be one-half cash and one-half by duebill of the complainant. On March 2, 1896, Sinclair and Zimmele gave the complainant a memorandum of the agreement, which, however, contained no mention of the office and salaries to be bestowed as above stated, and by the memorandum of agreement Sinclair and Zimmele pledged their word that their assets and liabilities of the corporation, as stated in trial balance sheet of February 1, 1890, submitted to the complainant at that time, and their statement as to the solvency, credit, and condition of the corporation, were true, as the memorandum, a copy of which is annexed to the bill, will show. On March 5, 1896, the complainant paid Sinclair, under the agreement, $1,000 in cash, and gave him a duebill for $1,000, and on the same day he paid into the treasury of the company $1,000. The complainant received, by transfer from Sinclair, 50 shares of stock, and from the company 20 shares of stock, and from Zimmele 20 additional shares of stock, making in all 90 shares, and was thereupon elected president of the company in place of Zimmele, and placed in the management of its affairs and business, and given power to control the disbursements of the company by regulation that all the checks of the treasurer should be countersigned by the complainant as president. Zimmele was made secretary and treasurer of the corporation in the place and stead of Sinclair. There are 137 shares of the stock of the company held by other persons than the complainant, the principal part of which were held by Sinclair and Zimmele, although the complainant is the largest individual holder of the stock, and Sinclair is the next largest holder. The company does not own any real estate. Its manufactory and works are rented in the city of Philadelphia. The employment of Zimmele was to obtain orders for goods to be manufactured by the company. When the complainant took charge he found the plant of the company, including the orders on hand, engaged in the work of making up The complainant cut off unnecessary expenses, and reduced the force of employes, so that there should be no more than sufficient to fill profitable orders, in which course Zimmele and Sinclair acquiesced. The complainant states that shortly after be took charge he ascertained that the balance sheet of February 1, 1896, was inaccurate in several particulars: Bills payable to the amount of over $400 were admitted by Sinclair to have been omitted from that item on the balance sheet. The inventory of the plant and tools stated as assets had been made up over a year prior to that time, and no allowance had been made for depreciation. The item, accounts receivable, had been represented to the complainant to be collectible to the extent of two-thirds, but the complainant found that less than one-half was collectible. The balance sheet was in every respect incorrect and misleading. About the end of March the complainant was paid three weeks' salary at the rate of $25 per week, and the complainant ascertained that, notwithstanding the additional capital which had come into the treasury, yet, by reason of Sinclair taking stock for a part of the account which he held against the company, the company was in financial difficulties.

The complainant then made a thorough examination of the financial condition of the company, and ascertained that its assets then were, and for over two years prior thereto had been, insufficient to pay its debts and continue its business; that its expenditures for the previous five months had been in excess of its receipts, without any corresponding increase in the assets; that its business for the previous five months had been unprofitable; that the company had been for over two months, and at the time of the statement made to the complainant was, insolvent, and unable to pay its liabilities without suspending its business. The complainant charges that the mistake in fact made by him in the condition of the company, which led him to invest his $1,000 in the company, was entirely due to the misstatements, misrepresentations, and concealment of the condition of the company, made by Sinclair and Zimmele; that it arose from no want of care or omission of legal duty on the part of the complainant. The complainant refused to pay the duebill of $1,000, which fell due on the 1st of April, 1896, and proposed to Zimmele that the company should go into liquidation, to which Zimmele at first acceded; and when the complainant made an application to the circuit court of the United States in the district of New Jersey for a decree of insolvency and the appointment of a receiver, the complainant having failed in the said application, abandoned his suit, and dismissed the bill, Sinclair brought suit against the complainant ou the duebill for $1,000 in the Philadelphia common pleas, to which suit the complainant filed an affidavit of defense and put in a counterclaim against Sinclair for the $1,000 which he had already paid. Since the futile proceedings in insolvency, the control of the business has been interfered with, and the complainant ousted therefrom, and combination of the safe has been changed to prevent his access thereto, and by-laws adopted containing provisions for a vice president, and giving him power to countersign the treasurer's checks, which power theretofore was held exclusively by the president. Pending the application of insolvency in the United States court, the company's business was practically suspended, and not carried on in a way to be substantially effective, owing to the financial condition of the company. Since that time the business has been carried on by borrowing large sums of money, increasing its liabilities, without adding to its assets, and Zimmele and Sinclair are carrying on the business at a heavy loss, consuming the assets of the company, and in fraud of the complainant, making his stock daily less valuable. The complainant further charges that the company is doing business at a loss, consuming its assets and increasing its liabilities in the regular course of business, and that, if it did pay its liabilities, there would not be over $1,000 of assets left to be divided among its stockholders, holding capital stock to the amount of $11,350, less the stock held by complainant; and the complainant states, if the company is allowed to proceed with its business, these remaining assets will be consumed, and nothing left for its stockholders. He further states that, since he knew of the insolvency of the company, he took measures to rescind his contract by which he paid $1,000 into the treasury of the company, and is now ready to return to the treasurer of the company and to return to Zimmele the stock that he received from them when he paid $1,000 to the company. The bill prays answer without oath, and that the defendant may be decreed to pay to the complainant the $1,000 paid by the complainant to the company, with interest, upon the complainant delivering up to the company and to Zimmele the 40 shares of stock received by him from them, and that, on failure, a receiver may be appointed to take the assets of the company and sell or dispose of the same for so much as it may be necessary to pay the complainant his said sum of $1,000 and interest, or, if it be more equitable, that the receiver may first pay all other debts of the company than the capital stock and the claim of the complainant, his said sum of $1,000, with interest, provided they be sufficient, and, if they be insufficient therefor, that the balance of the $1,000 be paid by Sinclair and Zimmele, or one of them, and that an injunction be issued to the company, and Sinclair and Zimmele restrained from further carrying on the business of the company, and disposing of or meddling with the same,...