Iron Co. et al. v. Hays et al.

• Decision Date: 07 January 1895
• Citation: 165 Pa. 489
• Parties: American Tube & Iron Co. et al. <I>v.</I> Baden Gas Co., and W. S. B. Hays et al., Appellants.
• Court: Pennsylvania Supreme Court

165 Pa. 489

American Tube & Iron Co. et al.

v. Baden Gas Co., and W. S. B. Hays et al., Appellants.

Supreme Court of Pennsylvania.

October 26, 1894.

January 7, 1895.

Argued Oct. 26, 1894.

Appeal, No. 23, Oct. T., 1894, by Hays et al., stockholders, defendants, from decree of C. P. No. 2, Allegheny Co., April T., 1888, No. 361, on bill in equity.

Before STERRETT, C. J., WILLIAMS, McCOLLUM, MITCHELL, DEAN and FELL, JJ. Reversed.

COPYRIGHT MATERIAL OMITTED

P. C. Knox and D. T. Watson, Jas. H. Reed, T. D. Carnahan and Johns McCleave with them, for appellants.—Defendants had the right to sell their property to the Baden Gas Co., it being such property as was essential to that company's business, and had the right, with the company's consent, to set off the purchase money against their liability upon the subscriptions to its capital stock: Lungren v. Pennell, 10 W. N. 297; Densmore Oil Co. v. Densmore, 64 Pa. 43; McElhenny's Ap., 61 Pa. 188; Thompson, Stockholders, ed. 1879, § 134; 2 Beach, Corp. § 557; 2 Morawetz, Corp. § 826; Peck v. Coal Co., 11 Brad. (Ill. Ap.) 88; Coffin v. Ransdell, 110 Ind. 417; Walburn v. Chenault, 43 Kans. 352; 23 Pac. R. 657; Young v. Iron Co., 65 Mich. 111; Crawford v. Rohrer, 59 Md. 599; Liebke v. Knapp, 79 Mo. 22; Wetherbee v. Baker, 35 N. J. Eq. 501; Bank v. Alden, 129 U. S. 372; Phelan v. Hazard, 5 Dil. 45; Coit v. Amalgamating Co., 14 Fed. R. 12; Coates's Case, L. R., 17 Eq. 169; Cook, Stocks, §§ 13, 18; Clark v. Farrington, 11 Wis. 321; R. R. v. Hickman, 28 Pa. 318; Phelan v. Hazard, 5 Dil. 45; Carr v. LeFevre, 27 Pa. 413; Waterhouse v. Jamison, L. R. 2 Scotch & Div. Ap. 29; Currie's Case, 32 L. J. Ch. 57; Carling's Case, L. R. 1 Ch. Div. 115; Nicholl's Case, 26 W. R., H. L. 821; Foreman v. Bigelow, 4 Cliff. 508; Spargo's Case, L. R. 8 Ch. Ap. 412.

The contract of Feb. 17, 1886, having been executed by the transfer and delivery to the gas company of all the property therein described, and the consideration therefor paid by the gas company by crediting the subscriptions an equal amount, the transaction is binding upon all parties, in the absence of proof of fraud.

The burden of proving fraud is in this, as in all cases, upon those who allege it. Fraud is never presumed: Kerr, Fraud, 383; Phelan v. Hazard, 5 Dil. 45; Carr v. LeFevre, 27 Pa. 413; Bickley v. Schlag, 46 N. J. Eq. 533; Spargo's Case, L. R., 8 Ch. Ap. 412; Baglan v. Colliery Co., L. R. 5 Ch. 346.

Fraud is neither alleged nor proved here, nor is there evidence of overvaluation.

Even if there was evidence of overvaluation, such evidence would not raise the presumption of fraud; 36 Cent. L. J., p. 94; Peck v. Coal Co., 11 Ill. Ap. 88; Walburn v. Chenault, 43 Kans. 352; 23 Pac. R. 657; Young v. Iron Co., 65 Mich. 111; Wetherbee v. Baker, 35 N. J. Eq. 501; Bickley v. Schlag, 46 N. J. Eq. 533; 20 Atl. R. 250; Boynton v. Hatch, 47 N. Y. 225; Boynton v. Andrews, 63 N. Y. 93; Douglass v. Ireland, 73 N. Y. 100; Tube Works Co. v. Gilfillan, 124 N. Y. 302, 26 N. E. R. 538; Coit v. Amalgamating Co., 119 U. S. 343; S. C., 14 Fed. R. 12; Bank v. Alden, 129 U. S. 372; Phelan v. Hazard, 5 Dil. 45.

Plaintiffs are estopped from questioning the validity of the contract under which the Baden Gas Co. acquired its property, and through which defendants paid up their subscriptions to its capital: Coffin v. Ransdell, 110 Ind. 417; Coit v. Amalgamating Co., 14 Fed. R. 14; Green's Brice's Ultra Vires, 181; Colville's Case, 48 L. J. (Ch.) 633; Miller v. Assn., 50 Pa. 32; Vick v. LaRochelle, 57 Miss. 602; Burke v. Smith, 16 Wall, 390.

West McMurray, C. C. Dickey with him, for appellees.—Defendants were legally bound to the payment of $500,000 in cash, because their subscriptions were open and unqualified: Ry. v. Stewart, 41 Pa. 54; Bailey v. Ry., 69 Pa. 340.

The stockholders can be compelled to pay in full for their stock. This doctrine results from the character of the capital stock of corporations. It is a trust fund. It exists for the benefit of creditors whenever their rights and interests require it. Its payment can be enforced in modes which are not available to the corporation without using its name: Lane's Ap., 105 Pa. 62; Sawyer v. Hoag, 17 Wal. 610.

Coffin v. Ransdell, 110 Ind. 417, is in direct conflict with Lane's Ap., 105 Pa. 49; Cornell's Ap., 114 Pa. 153; Upton v. Triblock, 1 Otto, 60; Bell's Ap., 115 Pa. 88, and a host of authorities in the other states. An examination of the Pennsylvania cases cited by defendant shows them to have been proceedings by purchasers of stock against promoters of the company, to set aside some fraud alleged in the dealings of the promoters with the company, and they do not have any bearing on cases of creditors' bills.

OPINION BY MR. JUSTICE WILLIAMS, Jan. 7, 1895:

This bill was filed by creditors of the Baden Gas Company, a corporation organized under the act of 1885, known as the Natural Gas Act. The relief prayed for, and obtained under the decree appealed from, is an adjudication that the defendants are liable to the receiver for the amount of the capital stock of the Baden Gas Company subscribed for by each of them, and that they pay the same over in money for the benefit of the plaintiffs and other creditors of the corporation which is admitted to be insolvent. The defendants admit the fact that they were subscribers to the capital stock of the Baden Gas Company, but insist that their subscriptions were paid in full, in property transferred by them to the corporation, immediately after its organization. The liability of the defendants depends therefore upon their allegation of actual payment; and this can be intelligently determined only upon a careful consideration of the facts and circumstances attending the organization of the gas company, and their legal value.

The fourth finding of fact made by the learned master, adopted by the learned judge of the court below, and conceded on all hands to be correct, informs us that the defendants and others who composed the Baden Gas Company had been previously associated in business under the firm name of the Allegheny Oil Company. The master then proceeds in this finding to tell us that "The Baden Gas Company was organized to take the place of the said Allegheny Oil Company, and the said subscribers, soon after their incorporation, proceeded to sell and transfer the gas property and interests of the said Allegheny Oil Company and $300,000 of their subscribed stock to the said Baden Gas Company for a price equal to the corporate stock of the latter company, to wit, $500,000."

In the fifth finding of fact we are informed that the gas property and interests so transferred consisted of between four and five thousand acres of gas leases including two large producing gas wells, certain rights of way, ordinances for the introduction of gas into the boroughs of Freedom, Baden, Sewickley, Osborne, Glenfield, West Bellevue and Bellevue, and contracts for the supply of gas, and certain patents relating to the business of transporting gas. All this property belonged to the Allegheny Oil Company and was transferred by that company and the persons comprising it to the Baden Gas Company. The findings from the seventh to the eleventh inclusive inform us of the plan adopted for the organization of the corporation and the transfer to it of the property of the Allegheny Oil Company described in the fifth finding. The corporation was to be organized under the Natural Gas Act in order to secure the rights and franchises conferred by that act. Its capital stock was fixed at $500,000. The price of the property to be transferred to it was fixed at the same sum. The stock was to be paid for with the property, or the corporation was to pay for the property with its stock, which is exactly the same thing; but this arrangement was made subject to the condition that but $175,000 of the stock so issued should be retained by the members of the firm of the Allegheny Oil Company, while the remaining $325,000 of it should be returned or contributed to the corporation to provide it with a working capital in order to enable it to develop its leases, lay additional pipe lines, and embark in the business of supplying natural gas as a fuel to the city of Allegheny and the towns along its line.

The seventh finding assures us that the $325,000 of capital stock set apart to provide a working capital was actually turned into the treasury of the corporation and used in the manner contemplated. Shares amounting at par to $55,000 were sold for cash at eighty cents on the dollar and the proceeds used in the business of the corporation. The balance of the stock was used in the extension of its lines to Allegheny City; and at the date of the filing of this bill not one share out of the entire amount remained in the treasury undisposed of. But in the execution of the sale from the oil company to the Baden Gas Company and in the payment of the subscriptions to the capital, a clumsy device was resorted to. A half million of dollars was apparently raised on a note signed by the members of the oil company and placed to the credit of the treasurer of the corporation in the Fifth National Bank as payment for the stock. It was checked back to the treasurer of the oil company as payment for the property bought by the corporation from the oil company. The property was then conveyed, the stock issued and disposed of as already stated, and the note taken out of bank. Not a dollar in actual money was used in the transaction, and what end was accomplished by all this idle ceremony it is impossible for us to see. But if it did no good we cannot see, in the absence of any finding of fraud intended or practiced, that it did any serious harm. We are to look at it in the light of all that was done in connection with the organization of the corporation for the purpose of gathering therefrom the real character of the transaction. Neither unnecessary formalities nor clumsy devices nor palpable mistakes...