Gerhard v. Welsh

• Decision Date: 06 March 1912
• Parties: GERHARD et al. v. WELSH et al.
• Court: New Jersey Supreme Court

82 A. 871

80 N.J.E. 203

GERHARD et al.

v. WELSH et al.

Court of Errors and Appeals of New Jersey.

March 6, 1912.

(Syllabus by the Court.)

Appeal from Court of Chancery.

Bill in equity by George N. Gerhard and others against Benjamin L. Welsh and others. From a decree for complainants, defendants appeal. Affirmed.

The bill in this case was filed August 24, 1905, by George N. Gerhard and 21 others, stockholders of the Millstone Building & Loan Association of East Millstone, N. J., in behalf of themselves and all other stockholders, against said association and also Benjamin L. Welsh and others, directors thereof, for the purpose of requiring the directors to make good to said association the amount which had been invested by them in the purchase of 25 shares of the preferred capital stock of the Somervllle Woolen Mills, a manufacturing corporation of this state. Two purchases of this stock are charged; the first about the 1st day of January, 1896, of 10 shares for $1,000, the second about the 1st of November, 1896, of 15 shares for $1,500. The Somerville Woolen Mills in September, 1904, was placed in bankruptcy, and in such proceedings, its property being sold, the net proceeds were not sufficient to pay its creditors in full, so that the stockholders sustained a total loss. The stock at the time of its purchase was intended to pay 6 per cent. noncumulative dividends, and such dividends were in fact paid from that time to and including July, 1901, when they ceased. In March, 1902, the directors considered that the loan stock had matured by attaining the value of $200 per share, and discontinued receiving from the shareholders further monthly installments. One hundred and eighty-seven dollars and fifty cents had been paid upon each share, the difference necessary to make up $200 being represented by the shares of the woolen mills stock. No further settlement has been made with the shareholders of the association, owing to the inability to realize anything upon the stock. Edward V. H. Voorhees, one of the directors in office at the time of said purchases, died about April 1, 1898. Another, Arthur Thomas, removed from the state and ceased to be a director soon after the purchase of stock, and has since died. The places of these two directors, after the purchases had been made, were filled by Teter Sutphen and Peter Garretson, who, with the five survivors of the original directors, are sought to be held liable.

The final decree adjudges that the defendants, the survivors of the directors who were in office at the time of the making of the investments, and the estates of Edward V. H. Voorhees, Arthur Thomas, and Benjamin L. Welsh, then directors, who have since died, shall make good to the Millstone Building & Loan Association the moneys so improperly and unlawfully paid for said stock, together with interest thereon from July 1, 1901, amounting in the whole to $4,061.64, but that the defendants Peter Sutphen and Peter Garretson, who became directors after the purchase of said shares of stock, are not liable. From this decree appeal has been taken by the surviving directors only.

John F. Reger, for appellants.

George E. Pace and Alan H. Strong, for respondents.

VOORHEES, J. (after stating the facts as above). The question involved in this appeal concerns the personal liability of directors of a building and loan association for losses arising from an investment of the funds of the association in the stock of a manufacturing corporation. The insistence is that the purchase of such shares is not allowed by law. The association was organized April 1, 1890, under the general act then in force. Gen. Stat. 1895, p. 331. The same directors originally elected continued in office by re-elections until 1895, with the exceptions noted in the foregoing statement of facts. Section 8 of the act above cited (Gen. Stat. p. 333) directs that "every company formed * * * shall adopt a constitution. * * * The investments of every such association shall be made either in loans to, or a redemption of the shares of, or in purchasing lots and erecting dwellings for the members or in all of said modes, or in such other ways as the constitution of the particular association shall provide." The constitution of this association did provide another way for the investment of the funds, as follows: "In the event of the funds of the association lying unproductive, the directors are empowered to loan them to shareholders and others than shareholders, on undoubted security."

Without at this point stopping to determine whether a manufacturing stock was a proper investment for the funds of an association of this character, we pass at once to consider the limitations imposed by the statute and the constitution, adopted under it, upon the directors in rendering the funds productive. To purchase a security is one thing; to loan upon security is quite another. In the former transaction title is taken to the thing bought; in the latter,...