Hinkley v. Sac Oil & Pipe Line Co.
| Decision Date | 19 May 1906 |
| Parties | C. J. HINKLEY v. SAC OIL AND PIPE LINE CO. and H. W. PETERSMEYER, Appellants |
| Court | Iowa Supreme Court |
REHEARING DENIED, WEDNESDAY, NOVEMBER 21, 1906.
Appeal from Sac District Court.--HON. F. M. POWERS, Judge.
ACTION for the amount paid for stock in the defendant company and to cancel said stock. Judgment and decree as prayed. The defendants appeal. Affirmed.
Decree affirmed.
Will E Johnston and J. B. McCrary, for appellants.
W. A Helsell, for appellee.
Early in the year 1902 the defendant Petersmeyer and nine others met in Odebolt, Iowa, and there and then concocted a scheme by which a company was to be organized to engage in some enterprise, the means of which should be obtained by the sale of stock therein to the public, and of that remaining enough should be issued to themselves gratuitously to give them the control of its affairs. In pursuance of this design each contributed a few dollars to a fund out of which the expenses were borne of one of them to investigate the prospects of zinc mining in Arkansas and of another to ascertain the situation with respect to the discovery of oil in Texas. The report of the latter proved the more enticing, and as a result the Sac Oil & Pipe Line Company was incorporated under the laws of Arizona, to be operated in Iowa, for the purpose of engaging in the oil business in Texas. The capital stock was divided into 499,999 shares, of the par value of $ 1 each, and a few of these were issued to each of the promoters to enable them to elect eight of their number to serve as directors and officers of the company. Some days later the directors met and resolved to "accept from C. H. Smith, of Odebolt, Iowa (one of their number), a certain contract made between R. L. Cox & Co., of Beaumont, Tex., under date of March 19, 1902, for the purchase of a certain block of land located in the Hogg-Swayne subdivision of blocks 36, 37, and 38, located on Spindle Top Heights, near Beaumont, Tex." This contract had been brought back by the representative who had gone to Texas. Neither he nor Smith had paid anything for it. While it purported to bind Smith, there is no dispute but that it was entered into with the intention of assigning it to some company to be formed upon which by its terms he should be released, and it was not to be enforced against him. In other words it amounted to no more than an option prior to its assignment. As assignee the company assumed the obligation of paying the entire purchase price. By the terms of this contract Cox & Co. agreed to convey 1-64 acre of land, the deed to be left with a bank at Beaumont, Tex., in escrow to be delivered upon the payment of the purchase price of $ 15,000. The company was to deposit $ 2,000 with the same bank, to be paid to Cox & Co. upon the completion and acceptance of an oil well of average producing capacity, six inches in diameter, piped and domed, all to be done within ninety days after such deposit. Cox & Co. also agreed to sell interests in their pipe lines to the railway and that to be constructed to Port Arthur at prices stated therein, and to sell oil which would net $ 4,500 or "the proportionate amount thereof" in part payment of the well; to loan oil to supply demands until the well should be completed which should be repaid therefrom. Upon acceptance of the well payments were to follow at short intervals. The contract named $ 30,000 as the price, but the additional sum was inserted to enable the assignor to obtain a "margin" for his "services."
It was further resolved by the board of directors:
That this corporation issue to C. H. Smith, in consideration of said contract, 499,989 shares of capital stock of this corporation on the condition that he surrender back to this corporation 250,989 shares, which may be used by the corporation to be sold at such price as the board of directors may so elect from time to time for the purpose of carrying out further promotions of this company; further, that 210,000 shares of the stock so issued to C. H. Smith be his stock, which he is allowed to allot to such parties as assisted him in the purchase of the above contract and on the condition that the balance, 39,000 shares, be turned over to the company for the purpose of being sold by them at a less price than the treasury stock will be sold by the corporation. It is to be understood that the 39,000 shares being sold at a less price than the regular stock will be sold, is for the purpose of getting in some outside assistance if the company sees that it is absolutely necessary. And on the 1st day of August, 1902, whatever amount of the 39,000 shares is not sold or whatever part may be left of it, and still in the hands of the corporation shall revert back to the said C. H. Smith which he may divide among the said parties who assisted him in the purchase of the above said contract. On motion, a block of 75,000 shares of the treasury stock of this corporation shall be placed upon the market to be sold at 25 cents per share subject to the call of the board of directors. On motion, the president and secretary were authorized to prepare suitable subscription blanks as they deem necessary for the business of the corporation.
The object of this manipulation was to render the stock paid up and nonassessable. It was issued as directed, and Smith transferred the two hundred and fifty thousand nine hundred and eighty-nine shares back to the company as treasury stock, so-called. By the men who assisted Smith was meant the other nine promoters of the company. All but about twenty-five thousand of the two hundred and ten thousand shares were distributed to the promoters gratuitously. While they may have advanced a little money, and given some for the promotion of the company, no stock was issued in payment thereof. Nor were the advancements made or services rendered with a view to their return or compensation therefor by the corporation when organized. In these circumstances compensation by the company could not have been enforced. Low v. Connecticut R. Co., 45 N.H. 370; Marchand v. Loan, etc., Ass'n., 26 La.Ann. 389; Perry v. Little Rock, etc., R. Co., 44 Ark. 383; 10 Cyc. 264; Thompson, Corp., section 486. See Bell's Gap R. Co. v. Christy, 79 Pa. 54 (21 Am. Rep. 39). The portion of Petersmeyer was fifteen thousand one hundred shares. Fifty-six thousand nine hundred shares of treasury stock were disposed of at twenty-five cents a share. Much of this, if not all, was sold by the promoters acting for the company on applications similar to that signed by the plaintiff. It, with part of the printed matter, may be set out:
Original: Money returned unless a gusher is brought in. J. W. Jackson, secretary, Lake City, Iowa. No. 70. I hereby subscribe for 1,000 shares of the capital stock of the Sac Oil & Pipe Line Co., at 25 cents a share, par value $ 1.00 full paid and nonassessable. In payment therefor I remit $ or deposit $ 250.00 in the Farmers' National Bank of Odebolt to be held by said bank until a flowing oil well of 40,000 to 80,000 barrels capacity per day is brought in on the company's property on Spindle Top Heights near Beaumont, Texas. Should no gusher be brought in within six months from date this money will be returned. Name: C. J. Hinkley. P. O. address: Odebolt, Iowa.
Accepted June 5, 1902. Sac Oil & Pipe Line Company, J. W. Jackson.
This order should be signed in duplicate. If you remit, one will be returned to you. If you deposit amount in your local bank, we return the duplicate to your bank to be held in trust. When accepted this is an agreement binding the company to deliver the shares or return the money. Stock will be advanced to 50 cents as soon as a gusher is brought in.
In the fore part of June, 1902, satisfactory proof was received that oil had been struck, and that the capacity of the well was from forty to eighty thousand barrels per day, whereupon the plaintiff paid the amount of his subscription and received a certificate of one thousand shares. Prior to this, and on the 6th day of May, the company had contracted for another well at $ 10,000, of which $ 1,000 was to be paid when oil was reached and the remaining $ 9,000 out of the sale of oil to be obtained from the well. By the time proper connections were made and a vat procured oil ceased to flow from the top, and it was necessary to agitate with air, and later to employ a "steam head" and pumps. In this way oil to the value of between $ 4,000 and $ 5,000 was taken out. Then water came in, and the price of oil wells went down, so that one witness declared he now had them for sale at ten cents a piece. This somewhat extended statement of facts has seemed essential to a full understanding of the case. The petition is in three counts, in the first of which recovery of the amount paid by plaintiff for his stock is demanded on the ground that there was a conspiracy to defraud the public, the second because of the fraudulent representations and concealment of defendant Petersmeyer, and the third owing to the nonpayment of stock by the promoters. The first two only need be considered.
II. The ten men who planned and organized the defendant company were promoters, within the meaning of the law. The Telegraph v. Loetscher, 127 Iowa 383, 101 N.W. 773. A promoter is a person who brings about the incorporation and organization of a corporation. This was done by all of them, and with a specific design to defraud any of the public whom they might be able to induce to subscribe for stock. Those of them who were called as witnesses candidly admitted that the scheme adopted at the preliminary meeting was to engage in some enterprise, the costs of which and of its development should be paid solely from the...
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