Irons v. Croft Hat & Notion Co.

• Decision Date: 21 September 1920
• Docket Number: 4039.
• Citation: 104 S.E. 111,86 W.Va. 685
• Parties: IRONS ET AL. v. CROFT HAT & NOTION CO. ET AL.
• Court: West Virginia Supreme Court

104 S.E. 111

86 W.Va. 685

IRONS ET AL. v. CROFT HAT & NOTION CO. ET AL.

No. 4039.

Supreme Court of Appeals of West Virginia.

September 21, 1920

Submitted September 14, 1920.

Syllabus by the Court.

An undenied allegation in a bill in equity is taken as true.

Maintenance or champerty may be interposed as matter of defense, only in an action or suit based directly on the contract affected by the infirmity of maintenance or champerty.

A trust created by an agreement made in pursuance of a resolution adopted by the stockholders of a corporation and signed by all of its stockholders, authorizing the trustees therein named and provided for to convert all of the assets of the corporation into shares of the capital stock of another corporation to be formed, by sale or exchange thereof, and to obtain a definite number of such shares, at a fixed price per share, devising ways and means of payment or security themselves, as to any excess of the cost of the shares above the value of the assets, issue trustees' certificates, representing the shares so to be acquired, to the individual stockholders of the old corporation, in proportion to their respective holdings therein, and hold and vote such new shares for a period of 10 years, paying to the certificate holders dividends received on the shares in excess of what may be needed for payment of purchase money of the stock, is an active, substantial trust, carrying interests and powers necessary to accomplishment of a lawful and meritorious purpose, and does not contravene any principle of public policy.

Under an agreement having such a purpose and conferring such powers and authority, and also obligating the certificate holders to indemnify and save harmless the trustees as to expenses costs, damages, and other liabilities arising out of their acceptance of the trust, the trustees have power and authority to pledge the shares so acquired to the issuing corporation, to secure payment of the subscription or purchase price of the stock, or to any other person to secure payment of money borrowed and used in the purchase of stock.

To determine the scope of such an agreement and the extent of the powers conferred upon the trustees by it, general and indefinite terms and clauses therein must be read and interpreted in the light of a preliminary contract it was designed to carry into effect, a resolution adopted by the directors of the corporation, indicating the main features and purpose of the trust agreement, and the resolution adopted by the stockholders, accepting the proposition evidenced by the contract, and authorizing preparation and execution of the trust agreement.

Under such an agreement, neither original assets of the corporation, remaining unapplied and unused in payment for the new stock, while indebtedness on account thereof still exists, nor any property subsequently acquired by the trustees with money borrowed on pledges of such stock, for use in what they deem to be within the scope of their trust are distributable assets of the old corporation while the trust remains in full force and effect.

Authorization of such disposition of the assets of a corporation as is contemplated by such an agreement, by a resolution adopted in a meeting of its stockholders, and distribution of the new stock to be acquired among its stockholders in proportion to their interests, works a dissolution of the corporation; but its corporate name, charter, franchise, officers, and powers survive, in so far as use thereof may be necessary to full and complete effectuation of the trust, and may be invoked and used by the trustees for such purpose.

Under such circumstances a decree of dissolution of the corporation, subsequently pronounced, is merely declaratory of a status already effected by voluntary corporate action.

Appeal from Circuit Court, Cabell County.

Suit by Harry S. Irons, administrator, etc., and others against Croft Hat & Notion Company and others. Decree for defendants, and plaintiffs appeal. Affirmed.

Fitzpatrick Campbell, Brown & Davis and Livezey & Irons, all of Huntington, for appellants.

George S. Wallace and Williams, Scott & Lovett, all of Huntington, for appellees.

POFFENBARGER, J.

The general nature of this suit is disclosed by the opinion filed on the disposition of a former appeal in it, which is found in 82 W.Va. 549, 96 S.E. 929, under the title Williams et al v. Croft Hat & Notion Co. et al. After the cause was remanded Williams died, and Harry S. Irons, appointed administrator of his estate, and the other two plaintiffs, A. P. Hudson and H. O. Boette, have prosecuted the suit to a final decree, which sustained the trust agreement attacked by the bill, and affirmed the right of the trustees to hold, under and by virtue of that agreement, all of the known assets of the Croft Hat & Notion Company, consisting of 1,000 shares of the common stock of the Croft-Stanard Company, 340 shares of its preferred stock, 111 shares of the Miller Supply Company, trustees' certificates representing 242 shares of the stock of the Croft-Stanard Company, purchased by the trustees from S. M. Croft, a $1,000 note of S. M. Croft, purchased from Ed. L. Boggs, and some cash and accounts and bills receivable. It dissolved the Croft Hat & Notion Company on the ground of cessation to do business, and referred the cause to a commissioner for an inquiry and report as to the existence of any assets of the company other than those above indicated. From this fruitless decree the plaintiffs have appealed.

The bill was predicated in part on an allegation that the trust agreement was not executed by Williams, wherefore, by its terms, it never became effective; but this allegation wholly failed. It was clearly proved that he had signed it.

One purpose of the suit is dissolution of the Croft Hat & Notion Company. To maintain such a suit, the plaintiffs must own one-fifth of the capital stock. The Williams estate owns 14 2/3 shares, Boette 15 shares, and Hudson claims 183 shares by assignments from J. H. Long, S. M. Croft, the administratrix of Annie E. Croft, and Frank P. Swan. These shares admittedly represent more than one-fifth of the capital stock, but Hudson's title is disparaged in argument and by some evidence disclosed in the record. As the answers do not deny his title, but, on the contrary, aver his purchase of the stock at the instance of O. L. Stanard and with his assistance, the allegation of his own ership of the 183 shares must be taken as true for the purposes of the bill and the suit. Ihrig v. Ihrig, 78 W.Va. 360, 88 S.E. 1010.

Taint and contamination of the titles of Boette and Hudson, by reason of alleged maintenance and champerty, constitute another ground of attack upon their claims of right to maintain the suit. Stanard was formerly general manager of the Croft-Stanard Company. For some reason he was ousted from that position, and he and his friends do not own enough of the stock of the company to enable them to elect a majority of the directors and thus get the management in their hands. It is charged that the principal object of this suit is dissolution of the trust agreement under which 1,000 shares, exactly one-half, are held, in consequence of which these shares would be distributed, and some of them fall into the hands of Stanard's friends. He and S. R. Pierson arranged for the purchase of the Croft Hat & Notion Company stock claimed by Hudson, and executed the note by which the money was raised for payment of the purchase price. Hudson is no party to the note, and does not seem to have paid any of the purchase money nor to have obligated himself therefor. Stanard and Pierson, associates in business, seem merely to be using his name in this suit. Between Stanard and Boette there is a contract by the terms of which the former is conditionally bound to take over the latter's stock at a certain price, in the event of the success of the suit, and to pay the costs and expenses incident thereto.

Hudson's contracts may be invalid, as between him and the vendors of the stock, under the legal principle known as maintenance, and Boette's contract may be vitiated, as between him and Stanard, by champerty, a form of maintenance; but, as the enforcement of these contracts is not the purpose of this suit, their infirmities cannot be invoked by way of defense. None of the defendants is a party to these contracts or either of them. "Strangers to a champertous contract cannot take advantage of it; only a party to it can do so." Harrison v. Harman, 102 S.E. 224. To the same effect see Davis v. Settle, 43 W.Va. 17, 26 S.E. 557. In some jurisdictions it is otherwise, but our rule seems to accord with the better reason and the weight of authority. 5 Am. & Eng. Ency. L. 834; Burnes v. Scott, 117 U.S. 591, 6 S.Ct. 865, 29 L.Ed. 991.

If the trust agreement assailed by the bill is valid and invulnerable, there will be no occasion to inquire whether the plaintiffs are estopped, Boette by his own conduct, and the others by the conduct of their predecessors in title. As has been stated, the court below has held that it is valid, and that the trustees, by virtue thereof and the contract of which it is said to be a part or an incident, hold all the properties and assets in controversy.

On July 8, 1913, the Croft Hat & Notion Company, a corporation having an authorized capital stock of $200,000, of which 977 shares of the par value of $100 had been subscribed and paid for, was engaged in a wholesale dry goods business at Huntington, W.Va. On that day S. M. Croft, president of the company, entered into a written agreement with O. L. Stanard, providing for the organization of a new corporation, to be known as the Croft-Stanard Company, and to have a paid-up common capital stock of...