Hirschfeld v. McKinley

• Decision Date: 20 May 1935
• Docket Number: No. 7414.,7414.
• Parties: HIRSCHFELD v. McKINLEY.
• Court: U.S. Court of Appeals — Ninth Circuit

78 F.2d 124 (1935)

HIRSCHFELD v. McKINLEY.^*

No. 7414.

Circuit Court of Appeals, Ninth Circuit.

May 20, 1935.

Henderson Stockton, Frank H. Lyman, and Leon S. Jacobs, all of Phœnix, Ariz., for appellant.

Thomas W. Nealon, of Phœnix, Ariz., for appellee.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

GARRECHT, Circuit Judge.

From a decree of the court below directing the trustee in bankruptcy of the Hollander Drug Company, a corporation, forthwith to make an assessment of 100 per cent. upon the company's common stock, the present appeal has been brought to this court.

In May, 1931, E. M. Hollander and Dr. R. W. Craig orally agreed that a corporation was to be formed to conduct a drug business. The drug store was to occupy premises owned by the Central Avenue Investment Company of Phœnix, Ariz., a corporation of which Dr. Craig owned the entire capital stock, except two qualifying shares. The agreement was that when the drug company was organized, $7,500 of preferred stock was to be issued to Dr. Craig for the money that he put into the enterprise, and preferred stock was to be issued to Hollander for the amount of the appraised value of the stock and fixtures belonging to the latter, as laid down in Phœnix. The appraisement later made disclosed the value of those physical assets to be $11,500.

The common stock of the new corporation was to be divided equally between Dr. Craig and Hollander. C. T. Washburn became a stockholder of the company, holding two shares of common stock, and acted as an officer solely for the convenience of Dr. Craig.

Shortly after the series of conversations that culminated in the agreement above referred to, Dr. Craig made a trip to Evansville, Ind., to investigate Hollander. That trip was made by Dr. Craig as president of the Central Avenue Investment Company, the expenses being paid by that company.

In accordance with the agreement between Dr. Craig and Hollander, and with the understanding that a corporation was to be later organized to carry out their agreement, the Hollander Drug Company commenced operation as a drug store, occupying premises owned by the Investment Company.

The articles of incorporation were executed by Hollander, Ben L. Rudderow, and Don C. Babbitt. The last two named were attorneys in the office of Frank H. Lyman, who had drawn up and dictated the articles. Mr. Lyman described Mr. Rudderow and Mr. Babbitt as "mere supernumeraries * * * for purely mechanical purposes for organizing the corporation."

The certificate of incorporation was issued by the Arizona Corporation Commission on August 12, 1931. The articles of incorporation named Dr. Craig as statutory agent.

Rudderow and Babbitt participated with Hollander in the organization meeting held on August 13, 1931. At that meeting Hollander acted as chairman and Rudderow as secretary. From the minutes of the meeting, which were signed by Hollander and Dr. Craig, it appears that a list was opened to receive subscriptions of shares of the capital stock of the corporation. The list reads in part as follows:

"Capital Stock — $100,000, Divided into One Thousand Shares of the Par Value of $100.00 Each of Which, Five Hundred Shares are Preferred Stock and Five Hundred Shares, Common Stock.

"We the undersigned, hereby severally agree to take and pay for at the price and in the manner to be fixed by the Board of Directors of said corporation, the number of shares of the Hollander Drug Co. set opposite our respective names.

"Dated this thirteenth day of August, 1931.

                      Name                   Addresses              Shares
                  Ben L. Rudderow         Phoenix, Arizona              1
                  Don C. Babbitt          Phoenix, Arizona              1
                  Robert W. Craig         Phoenix, Arizona            250
                       (Subject to deduction of one share subscribed
                     for by Ben L. Rudderow for the
                     purpose of qualifying as Director of said
                     company.)
                  E. M. Hollander         Phoenix, Arizona            250
                       (Subject to deduction of one share subscribed
                     for by Don C. Babbitt for the purpose
                     of qualifying as Director of said company.)
                

"Robert W. Craig, E. M. Hollander "Secretary Chairman."

The minutes show that, at the meeting of the board of directors held immediately following the organization meeting, the secretary reported that all 500 shares of the common stock had been subscribed. Rudderow thereupon resigned as director of the company, and tendered an assignment of one share of the common stock to C. T. Washburn. After Rudderow's resignation had been accepted, Hollander nominated Dr. Craig, "a holder of common stock in said company," for director. Dr. Craig was unanimously so elected. Babbitt also tendered his resignation, together with an assignment of one share of the common stock to Washburn, who was unanimously elected director. The board of directors elected Hollander president, Washburn vice president, and Dr. Craig secretary and treasurer.

The following resolution was then adopted by unanimous vote of the directors:

"Whereas, the subscribers to all of the common capital stock of this corporation, less two qualifying shares issued to the incorporators named in the Articles of Incorporation, have invested in the promotion and organization of said corporation, substantial sums of money, relatively equal in amount, and have performed services in the promotion of said corporation, adequate as consideration for the issuance to them in equal proportion, of all of the common stock of said company, at its full par value.

"Now, therefore, be it resolved that in consideration of such expenditures and services, there be issued to Dr. Robert W. Craig, 250 shares of the common stock of said corporation, less one share originally issued to Ben L. Rudderow and now held by C. T. Washburn, all fully paid for, and that 250 shares of the common stock be issued to E. M. Hollander, less one share originally issued to Don C. Babbitt, and now held by C. T. Washburn, all fully paid for."

Thereupon, Dr. Craig proposed to buy 75 shares of the preferred stock at the par value of $100 and pay therefor in cash. His offer was accepted and the secretary was directed to deliver the shares to Dr. Craig. Hollander then proposed to transfer to the company a stock of drugs and fixtures at a value acceptable to the board of directors, and to take payment therefor in shares of preferred stock, at the par value of $100 each. Hollander's proposition was accepted.

In accordance with the resolution and the minutes quoted above, certificates of preferred and common stock were issued to the various shareholders. Most of those certificates were signed both by Dr. Craig, as secretary, and by Hollander, as president.

As to the consideration paid by Dr. Craig for his common stock, the Doctor himself testified as follows: "No money consideration was paid by me for the issue of 249 shares of the common capital stock in the Hollander Drug Co. There was a money consideration paid by the Central Avenue Investment Co. for this 249 shares of common stock. There was the expenses of a trip to Evansville, Indiana, of two or three hundred dollars, and the only other consideration was services rendered in the promotion of the company by a trip to Evansville, Indiana, investigating Mr. Hollander, and various conversations and such with reference to the establishment of the store. I made this investigating trip as, and in the capacity of, president of the Central Avenue Investment Co." The parties seem to be in virtual agreement that the consideration paid by Dr. Craig for his stock was grossly inadequate. Referring to the case of In re Phoenix Hardware Co. (Long v. Christy) (C. C. A. 9) 249 F. 410, the appellee says in his brief: "Appellee especially calls the court's attention to the resemblance of that case to the case at bar. In the former, the stock was issued for merchandise at a fictitious valuation, while in the case at bar the stock was issued upon a claimed consideration of $50,000 for `promoter's expenses'. The only actual amount paid, or claimed to be paid, in cash was a promotion expense of approximately $350."

The appellant states: "The only possible consideration for the purported issuance of common stock to R. W. Craig was the small amount of money spent by the Central Avenue Investment Company in sending respondent R. W. Craig to Evansville, Indiana, prior to incorporation of the Hollander Drug Company and such services as respondent R. W. Craig performed subsequent to incorporation in the furtherance of the business of the corporation. Counsel for the trustee below argued that this is no consideration at all. We do not concede his position but in any event the consideration was of but little value."

The master's finding on this subject, confirmed by the court below, was as follows: "* * * that no payment was ever made by R. W. Craig for the common stock issued to him * * *." The appellee did not file any exceptions to the master's report and has presented no cross-appeal.

The record shows that the par value of Dr. Craig's 249 shares was $24,900.

In his petition, the appellee averred: "That said corporation, its officers, directors, managers and agents represented to the public at all times since its organization and the issuance of said stock as herein set out, that its capital stock to the extent of $50,000.00 for common stock and $19,000.00 for preferred stock, had been subscribed for and had been, or would be paid in full, and relying on such representations the public, and especially the creditors of said corporation extended credit to said corporation in the amount and to the extent hereinafter set forth."

The appellee also alleged:

"That at the same time there was issued to said Robert W. Craig 249 shares of the common stock of said corporation, for which he paid into the treasury of the corporation no consideration therefor other than his promise to pay for same; and there was then issued to said...