Labor Inv. Corp. v. Russell

• Decision Date: 09 March 1965
• Docket Number: No. 40631,40631
• Citation: 405 P.2d 1008
• Parties: LABOR INVESTMENT CORPORATION, a corporation, Plaintiff in Error, v. Ralph W. RUSSELL, Defendant in Error.
• Court: Oklahoma Supreme Court

Page 1008

405 P.2d 1008

1965 OK 50

LABOR INVESTMENT CORPORATION, a corporation, Plaintiff in Error, v. Ralph W. RUSSELL, Defendant in Error.

No. 40631.

Supreme Court of Oklahoma.

March 9, 1965.

Rehearing Denied Sept. 21, 1965.

Syllabus by the Court

1. Under 18 O.S.1951 § 1.46, options to purchase shares of stock could only be granted by corporation in response to and in fulfillment of stock purchase subscription, and not just to compensate its officers or incorporators for past or future services.

2. After suit has been commenced on a cause of action, an Act of the Legislature subsequently passed cannot have the effect of destroying and existing defense to such suit.

3. When a suit is brought against a corporation on an ultra vires contract, that is a contract merely void from excess of power, or want of compliance in some formal matter, and where such corporation has received benefit under such contract, the action is not maintained by virtue of such contract, but upon a contract, which the law implies, that the corporation will return, or account for, the benefit received by it. To maintain such an action is not to affirm, but to disaffirm, the original contract.

4. Ordinarily matters not presented nor considered by a trial court will not be considered by this Court on appeal.

5. The statute of limitations is an affirmative defense which must be pleaded by the party asserting or claiming it; when it is not pleaded, it is waived; and motion to strike is not proper pleading to assert bar of limitations.

Appeal from District Court of Oklahoma County; Boston W. Smith, Judge.

Action by Ralph W. Russell, as plaintiff, against Labor Investment Corporation, a corporation, as defendant, for breach of a stock option contract. He also asked by way of reply for recovery on quantum meruit for different services furnished. Defendant denied liability. From a judgment in favor of Russell on quantum meruit Labor Investment Corporation appeals and Russell cross-appeals. Affirmed.

George F. Short, Pierce, Mock, Duncan, Couch & Hendrickson, Oklahoma City, for plaintiff in error.

Charles Nesbitt and Morton Y. Loar, Oklahoma City, for defendant in error.

HALLEY, Chief Justice.

Defendant in error (plaintiff below) commenced this action on February 15, 1960, in the District Court of Oklahoma County, Oklahoma, against plaintiff in error (defendant below) for breach of a stock option contract. The parties will be referred to as they appeared in the trial court.

The facts are not in dispute. Defendant was organized on March 26, 1956, for the purpose of raising capital for the formation of a life insurance company as a whollyowned subsidiary. Plaintiff, one of seven organizers, subscribed for 5,000 shares of defendant's stock from the 28,000 shares originally subscribed, prior to the organizational and first meeting of the stockholders. At this first meeting of the shareholders on March 26, 1956, the defendant corporation was authorized to enter into the stock option contract with plaintiff, which is the subject of this action.

The stock option contract, dated March 28, 1956, provided that in consideration of services already rendered by plaintiff in the organization and formation of defendant, and services to be rendered by plaintiff in the public sale of defendant's stock (pursuant to a Securities Sales Agreement of even date between the parties), plaintiff was granted an option to purchase 50,000 shares of Class B voting capital stock of defendant at $2.00 per share for and during the period of four years from the date thereof. The parties executed a written amendment to the Stock Option Agreement on April 13, 1956, providing that instead of the option to purchase all Class B voting shares, the option should be in the ratio of purchasing five Class A non-voting shares to one Class B voting share.

Plaintiff prepared all legal instruments for defendant's incorporation and organization, including its articles of incorporation, by-laws, minutes, stock and necessary contracts. He filed application of registration for public sale of 250,000 shares of defendant's stock with the Oklahoma Securities Commission; appeared before that commission on several occasions; and secured its approval to sell defendant's stock to the public and the use by defendant therein of a sales and advertising prospectus prepared by plaintiff.

Plaintiff served the defendant corporation as Executive Vice President, Secretary and Treasurer, and General Counsel, devoting his full time to the management of defendant's business affairs for a period of approximately five months. During this time, plaintiff handled all applications for purchase of the corporation's stock; collected any periodical installments due defendant from the sale of its stock; attended meetings to promote stock sales; made the corporation's bank deposit, handled all its day-to-day legal problems; and attended to the accounting and investment of money received. Plaintiff further furnished a corporate and sales office for the defendant corporation at his own expense, and paid all defendant's telephone, office and secretarial expenses. He received no salary, compensation, nor reimbursement for his services or expenditures.

Disharmony among the corporation's directors brought about plaintiff's resignation as an officer and sales agent for the defendant corporation; plaintiff's assignment, on August 10, 1956, to defendant of his interest in the Securities Sales Agreement; and defendant's repudiation, on March 11, 1957, of the Stock Option Agreement and the present lawsuit.

Plaintiff's petition set out his option contract with the defendant corporation to purchase its stock and alleged that the defendant had breached the contract on March 11, 1957. Plaintiff alleged that the fair market value of defendant's stock at the time of the agreement in its inception was ultra vires, that he had been damaged in the sum of $149,964 by reason thereof and prayed for judgment in that amount.

Defendant, by answer, asserted that the agreement, by answer, asserted that the because in violation of 18 O.S.1951 § 1.46, and further alleged both failure of consideration and accord and satisfaction. By way of reply, plaintiff alleged defendant was estopped to claim that the stock option contract was ultra vires for reason that plaintiff performed valuable legal services in the value of $25,000, without compensation, in reliance upon the contract, and that defendant corporation received exclusive benefit of the services rendered.

The matter was tried to the court without a jury. The trial court found that the stock option contract was ultra vires, but that the plaintiff was entitled in equity to recover on a quantum meruit basis for the reasonable value of the services rendered defendant, and entered judgment for the plaintiff against the defendant in the sum of $17,500. Defendant perfected this appeal, which is presented under three general propositions. However, plaintiff filed a cross-appeal based upon the trial court's failure to render judgment in his favor for damages for breach of the option contract in the sum of $149,964, which is presented under five general propositions. We shall consider plaintiff's and defendant's propositions together when applicable.

Plaintiff's first proposition on his cross-appeal is that the stock option contract sued upon does not violate 18 O.S.1951 § 1.46, and that consequently, plaintiff is entitled to judgment for damages for breach of the stock option contract. We cannot agree.

At the time this cause of action arose, the power of a domestic corporation to grant options to purchase capital stock was set out in 18 O.S.1951 § 1.46, which provided in part:

'a. Subject to any further limitations or restrictions contained in the articles of incorporation, every domestic corporation may grant, but only in connection with the allotment of shares * * * and only to the persons to whom such allotments * * * is made * * * options to purchase or subscribe for shares * * *.' (Emphasis added.)

Allotment is defined by 18 O.S.1961 § 1.2(12) as 'the apportioning of shares to a subscriber in response to his subscription, * * *.'

Plaintiff's stock, an organizer of the defendant corporation, was subscribed for prior to the date of the stock option contract, of March 28, 1956. The option contract was to compensate plaintiff, as an officer and incorporator of defendant, for past and future services. The above cited statutes were an obvious attempt to prevent abuses of the option device by the officers and incorporators of a domestic corporation, and their plain wording compels us to the conclusion that options to purchase shares of stock could only have been granted by a domestic corporation, under those statutes, in response to and fulfillment of a stock purchase subscription. It is unmistakenly clear that the stock option contract under consideration was not granted to plaintiff in response to and fulfillment of his stock purchase subscription.

The case of Emerson v. Labor Investment Corp., 10 Cir., 284 F.2d 946, involved an identical stock option contract held by another of the organizers of the defendant corporation, and was decided upon the precise question involved herein. In the body of that opinion, page 949, the Court of Appeals said:

'* * * But the plain wording of the statute compels the conclusion that options to purchase shares of stock can only be granted by the corporation in response to and fulfillment of a stock purchase subscription or pursuant to the declaration of a stock dividend, 18 O.S.A. § 1.2(12). In other words, the definition of 'allotment' contained in 18 O.S.A. § 1.2(12) and the use of the phrase 'only in connection with the allotment of shares or the issuance of bonds or other securities' in 18 O.S.A. § 1.46 prevent the corporation from entering an agreement such as this to compensate its officers or incorporators for past or future services,...