Hobgood v. Ehlen

• Decision Date: 16 May 1906
• Citation: 53 S.E. 857,141 N.C. 344
• Parties: HOBGOOD v. EHLEN et al.
• Court: North Carolina Supreme Court

53 S.E. 857

141 N.C. 344

HOBGOOD v. EHLEN et al.

Supreme Court of North Carolina

May 16, 1906

Appeal from Superior Court, Forsyth County; E. B. Jones, Judge.

Action by F. P. Hobgood, as trustee in bankruptcy of the Ronda Lumber & Manufacturing Corporation, against W. B. Ehlen and others. From a judgment for plaintiff, defendant Ehlen appeals. Affirmed.

This was an action brought by the plaintiff, trustee in bankruptcy of the Ronda Lumber & Manufacturing Corporation against the defendants, who were the subscribers to and holders of the stock of said corporation, to recover from them the amount of their unpaid stock subscriptions, the plaintiff alleging that the defendants had attempted to pay for the stock in property which had no real value. The plaintiff had a judgment below and the defendant W. B. Ehlen alone appealed.

These are the issues submitted: "(1) What amount of stock was issued to W. B. Ehlen in the Ronda Lumber & Manufacturing Corporation? Answer: $50,300, par value. (2) What amount of stock was issued to W. H. McElwee in the Ronda Lumber & Manufacturing Corporation? Answer: $19,500, par value. (3) What amount of stock was issued to Robert Hickerson in the Ronda Lumber & Manufacturing Corporation? Answer: $19,500 par value. (4) Was the Ronda Lumber & Manufacturing Corporation organized and its stock issued in conformity with the laws of Delaware? Answer: Yes. (5) Was there an intent to defraud and cheat on the part of the defendants, or either of them, in the organization and issuing of the stock in the Ronda Lumber & Manufacturing Corporation to the defendants or others? Answer: Yes, all. (6) What was the value of the property of the Ronda Pin & Bracket Company at the time of the organization of the Ronda Lumber & Manufacturing Corporation? Answer: $896.63. (7) What is the amount of the indebtedness of the Ronda Lumber & Manufacturing Corporation? Answer: $38,983.92. (8) In what amount is the Ronda Lumber & Manufacturing Corporation indebted to W. B. Ehlen? Answer $20,637.80. (9) What is the amount of assets in the hands of Hobgood, Trustee? Answer: $5,769.36."

Busbee & Busbee, E. J. Justice, and Stedman & Cooke, for appellant.

L. M. Quirk, Lindsay Patterson, and Manly & Henbren, for appellee.

BROWN J.

The first 10 exceptions appearing in the record relate to matters connected with the relations existing between Ehlen and his codefendants prior to the organization of the Ronda Lumber & Manufacturing Corporation. It is insisted that such matters are not material to the issues and that the evidence was irrelevant and calculated to prejudice the jury against Ehlen. We think the evidence was material, and the exceptions are without merit. In order to show the motives and purposes which prompted the parties in forming the corporation and the fraudulent character of the transaction, it was material to show the antecedent steps, and how the defendant Ehlen came into the enterprise.

The remaining exceptions raise the question of the sufficiency of the evidence. The defendant insists that the court should have instructed the jury that there was no evidence as to him to warrant an affirmative answer to the fifth issue, which involved the question of fraud. We think the whole controversy hinges on the correctness of that ruling. The corporation, known as the "Ronda Lumber & Manufacturing Corporation," was organized by the defendants under the laws of the state of Delaware, which contains the following provision: "Section 14. Any corporation existing under any law in this state may issue stock for labor done or personal property or real estate or leases thereof; in the absence of fraud in the transaction, the judgment of the directors as to the value of such labor, property, real estate, or leases shall be conclusive." 22 Laws Del. 1901, pt. 1, p. 292, c. 167. The liability of the defendant, as an organizer and stockholder, for the debts of the bankrupt corporation is, therefore, to be determined by the law of Delaware, the domicile of the corporation. Thompson on Liability of Stockholders, § 89. In consequence of the ruling of the judge below, it is necessary that we should determine that constructive fraud is sufficient to support the finding of the jury. Upon this issue the court charged as follows: "The law under which this case is to be tried is the law of Delaware, and I charge you that where fraud is referred to in that statute 'actual' and not 'constructive' fraud is meant. Constructive fraud, as distinguished from actual fraud, is inferred from illegal or improper acts that result in loss or injury to others. Actual fraud is established by competent proof of corrupt purposes, wicked or unlawful intent to cheat another or others. Applying it to this case, constructive fraud would be that kind of fraud that might be inferred from an overvaluation of property conveyed to the corporation, in the absence of proof of actual intent to defraud. The directors of the Ronda Lumber & Manufacturing Corporation, having placed a valuation on the property conveyed and set over to said corporation and issued stock therefor, if you believe the evidence, their action in that matter is conclusive as to the value of said property unless you find that this was done in actual fraud. It is not enough for the jury to find that the property was valued at too much by the directors of the Ronda Lumber & Manufacturing Corporation, but in order to answer the fifth issue 'Yes' you would have to go further and find fraudulent overvaluation."

We think the facts and circumstances in evidence amply sufficient to be submitted to the jury upon the issue of actual fraud, and warranted their finding. It is very difficult to prove actual fraud in many cases. It is frequently necessary to seek out the earmarks or badges of fraud and present them to the jury as evidence from which they may infer it. A bare recital of the facts which the evidence tends most strongly to prove will suggest to the impartial mind, it seems to us, that the animating purpose in forming the corporation was to float a lot of worthless stock with the design to cheat and defraud an unsuspecting public, as well as to give a fictitious credit to a worthless concern. Not only was Ehlen's stock issued to him in direct violation of the statute for so-called services to be performed, but the entire capital stock issued was "water" pure and simple. In or about April, 1902, the defendants Hickerson and McElwee, as copartners, began a small lumber business in the town of Ronda, N. C., under the firm name of "Ronda Pin & Bracket Company," and this business was continued by McElwee and Hickerson until it was absorbed by the Ronda Lumber & Manufacturing Corporation. The tangible assets of this partnership were valued by the jury at $896.63. In September, 1902, the defendant Ehlen proposed to the defendants McElwee and Hickerson to form a corporation under the laws of the state of Delaware, with a capital stock of $50,000, and that the corporation should take over the assets and good will of the partnership and pay therefor its total authorized capital stock, to wit, $50,000. The defendant Ehlen was to finance the corporation, and by the word ""finance" it was meant that he was to loan to the corporation the money on which it was to do business and to take therefor the note of the corporation. This was agreed to by all the defendants, but in a few days this agreement was modified by increasing the capital stock of the corporation to $100,000 and agreeing that the defendants should receive that amount in payment for the assets of the partnership, instead of $50,000. The only consideration for this increase in value was the agreement of Ehlen to finance the company to a larger extent; that is, he was to loan it more money on which to do business. It was further agreed that Ehlen was to have 51 per cent. of the stock, and the remainder to be equally divided between Hickerson and McElwee.

In accordance with these contracts, the defendant Ehlen employed Messrs. Bayard & Coe, of Baltimore, to organize the corporation, and these gentlemen obtained the services of the Delaware Charter & Guarantee Company to secure a charter under the laws of the state of Delaware, and the company did on the 29th day of September, 1902, obtain a charter for the bankrupt corporation with authorized capital stock of $100,000, divided into 2,000 shares of the par value of $50 each, and by the terms of the charter the amount of capital stock with which the corporation would commence business was fixed at $1,000, this being 20 shares. This stock was subscribed for as follows: Six shares by Richard H. Bayard, one of the attorneys employed by the defendant Ehlen, 6 shares by Josiah Marvel, an official or employé of the Guarantee & Trust...