H.B. Humphrey Co. v. Pollack Roller Runner Sled Co.

• Decision Date: 03 March 1932
• Citation: 180 N.E. 164,278 Mass. 350
• Parties: H. B. HUMPHREY CO. v. POLLACK ROLLER RUNNER SLED CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

278 Mass. 350

180 N.E. 164

H. B. HUMPHREY CO.

v.POLLACK ROLLER RUNNER SLED CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

March 3, 1932.

Appeal from Superior Court, Suffolk County; Wilford D. Gray, Judge.

Suit by the H. B. Humphrey Company against the Pollack Roller Runner Sled Company and others. From decree for defendants, plaintiff appeals.

Reversed and remanded with directions.

S. H. Babcock, of Boston, for appellant.

J. F. Neal, of Boston, for appellees Leon Pollack and Leroy C. Percy.

RUGG, C. J.

The corporate defendant (hereafter called the defendant) is indebted to the plaintiff in a substantial sum on a judgment rendered in an action for indebtedness incurred prior to January 1, 1928. The present suit is brought to recover the amount of that judgment from three individuals who were directors of the defendant, because of certain false statements in the certificate of condition of the defendant filed in March, 1928. The only issue now material relates to a statement in that certificate of condition to the effect that the amount of stock issued and outstanding at the date of the last annual meeting was 10,000 shares with par value, and that the amount paid thereon was $100,000. The trial judge found the facts to be that there were issued and outstanding at the date of the last annual meeting preceding the filing of that certificate of condition 10,000 shares of common stock of the par value of $10 per share, and that these shares of stock were issued and paid for as follows: Patent Rights $51,000, Services-Organization and Promotion $24,500, Expenses-Promotion $24,500; that these facts apeared in the articles of organization made in the usual form by the directors and filed in the office of the Secretary of the Commonwealth pursuant to G. L. c. 156, §§ 10, 11; that the value of the patent rights was not easily determined and was a matter of judgment and opinion; that that valuation was honestly made in the light of facts then known and, although subsequent events indicated that the actual value was not as higg as stated, that none of the defendants knew or could have known this statement to be false; that the services were fairly worth at most only a small part of the amount stated and that expenses of promotion amounting only to a trifling portion of the amount stated were actually incurred. He ruled as matter of law that, while the directors might be responsible for issuing stock in violation of G. L. c. 156, §§ 15, 16, the stock was actually issued as stated in the certificate of condition and therefore that statement was not false. He further found that, if his ruling was wrong and if, on the facts found, the statement in the certificate of condition was false as matter of law, then two of the individual defendants (hereafter termed the defendants) were familiar with all the facts relating to the issue and, if false, they knew it to be false although they acted without dishonest intent and left the details of organization of the corporation to a lawyer who knew all the facts and was responsible for the manner in which the stock was issued. A third individual defendant, having become a director subsequently to the issue of stock, was completely exonerated. In any event he drops out of the case.

The evidence not being reported, the findings of fact made by the trial judge must be accepted as final. The question to be decided is the kind of decree which ought to be entered on those facts under the frame of the bill. First Baptist Society in Brookfield v. Dexter, 193 Mass. 187, 189, 79 N. E. 342;In re Commissioner of Banks in re Cosmopolitan Trust Co., 249 Mass. 144, 147, 144 N. E. 73;Granlund v. Saraf, 263 Mass. 76, 79, 160 N. E. 408.

The liability here sought to be enforced arises under G. L. c. 156, § 36, whereby ‘directors of every corporation shall be jointly and severally liable for all the debts * * * of the corporation contracted * * * while they are officers thereof * * * if any statement or report required by this chapter is made by them which is false in any material representation and which they know, or on reasonable examination could have known, to be false. * * *’ The certificate of condition in question was required by G. L. c. 156, § 47, cl. 4, and must state among other matters the ‘amount of stock with par value * * * issued and outstanding and the amount then paid thereon. * * *’ The significant mandate here is that the amount ‘paid’ on the capital stock must be stated. That cannot be met by an inflated or grossly exaggerated statement of value. By G. L. c. 156, § 15, capital stock may be issued ‘for cash, at not less than par,’ for ‘property, tangible or intangible,’ or for ‘services or expenses.’ Those words import substantial values. The context implies that, where things other than cash are taken in return for the issue of stock, they shall be received by the corporation at a value bearing fairly accurate relation to the par value of the stock issued in exchange therefor. The purpose of these statutory provisions is to give to the public information under the sanction of the oath of responsible officers concerning the character and condition of the corporation, so that those dealing with it may know or have means of knowing the facts concerning its financial resources and business responsibility as far as afforded by the subjects included within the requirements of the certificate. Thayer v. New England Lithographic Co., 108 Mass. 523, 528;Empire Laboratories, Inc. v. Golden Distributing Corp., 266 Mass. 418, 422, 164 N. E. 772.

Where property is conveyed in return for stock issued, and the valuation of such property is not fixed by an actual market but rests necessarily on opinion, a valuation honestly made as the basis of transfer would not render the directors liable. Heard v. Pictorial Press, 182 Mass. 530, 533, 65 N. E. 901;Craig v. Wade, 159 Cal. 172, 112 P. 891. That principle rightly was applied by the trial judge to the transfer to the corporation of the patent rights.

The expense and services in organization and promotion stand on a different footing. The provisions of G. L. c. 156, § 15, authorizing the issuance of capital stock of a corporation ‘for services or expenses,’ were intended to mean something real. They cannot be satisfied by fanciful overstatement. There can be no justincation for a statement in the articles of organization of a corporation that stock was issued for ‘Expenses' amounting to $24,500, when only a trifling part of that amount was actually incurred. ‘Expenses' in this connection means an actual and honest disbursement. Likewise a statement of issuance of stock in the same amount for ‘Services-Organization and Promotion,’ when such services were worth at most only a small part of that amount, cannot be justified. The services in organization and promotion of a corporation must be placed at a value bearing some rational relation to the par value of the stock issued therefor. These statements in the articles of organization were manifestly false.

Th statutes as to the organization of corporations and the annual certificates and returns to be filed with state officers, although varying from time to time, are designed in part to render their management honest and to prevent them from becoming a ‘system of frauds.’ Peabody v. Flint, 6 Allen, 52, 55;Old Dominion Copper Mining & Smelting Co. v. Bigelow, 203 Mass. 159, 188, 89 N. E. 193,40 L. R. A. (N. S.) 314. If G. L. c. 156, § 47, cl. 4, as to the certificate of condition (already quoted so far as material) is to be a genuine force and not a vain form, the word ‘paid’ therein must be construed, as applied to things other than cash, to mean a payment at a reasonable and honest valuation and not at one having only a trivial relation to the truth. The findings of the trial judge make it plain that there was no compliance...