Lavell v. Bullock

• Decision Date: 21 August 1919
• Parties: LAVELL v. BULLOCK et al.
• Court: North Dakota Supreme Court

43 N.D. 135

174 N.W. 764

LAVELL

v.BULLOCK et al.

Supreme Court of North Dakota.

Aug. 21, 1919.

Syllabus by the Court.

This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due to the corporation on his corporate stock. As trustee in bankruptcy, the plaintiff brings the action to recover from the appellant $700 and interest as the balance due on 14 shares of common stock in Everybody's Store. Held:

The evidence clearly shows that on such stock there never was any balance due to the company.

Stock issued as bonus stock in violation of section 138 of the Constitution, which prohibits corporations from issuing stock or bonds except for money, labor, or property received, is void.

Purchasers of stock issued in violation of the constitutional prohibition are not, under the circumstances in the instant case, precluded from asserting the void character of the stock as against creditors of the corporation.

Section 4554, Compiled Laws of 1913, which provides that each stockholder is liable individually for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him, is construed, and held to create no cause of action in favor of creditors as against a bona fide purchaser of stock originally issued as fully paid contrary to law.

Appeal from District Court, Cass County; Cooley, Special Judge.

Action by Charles H. Lavell, trustee in bankruptcy of Everybody's Store, a bankrupt corporation, against F. G. Bullock and another. Judgment for plaintiff, and defendant F. G. Bullock appeals. Reversed, and action dismissed.Lawrence & Murphy, of Fargo, for appellant.

Fowler & Green and Pfeffer & Pfeffer, all of Fargo, for respondent.

ROBINSON, J.

This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due on his corporate stock. As trustee in bankruptcy, the plaintiff brings this action to recover from appellant $700 as the balance due on 14 shares of common stock in “Everybody's Store.” The Constitution says that no corporation shall issue stock or bonds except for money, labor done, or money or property actually received. Section 138. The statute says:

“Each stockholder of a corporation is individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him.” Section 4554.

In the consideration of this case it is not necessary to enter upon any debatable grounds or to discuss any nice points of law. The purpose of the statute is to protect parties who deal with and trust corporations relying on obligations of stockholders to pay what they owe to their corporation. Under the statute a stockholder is not merely a person who picks up and holds stock that he may find lying on the street. He is a person who takes the stock under a contract to pay for it. When the corporation has received its pay for stock, it may be sold and transferred the same as any chattel or chose in action. Neither a corporation nor its trustee or assignee can maintain an action for a balance due on stock unless there is a balance due the corporation. In this case the proof does not show any balance due the corporation. All the common stock was bought and paid for by the president of the company. Then he traded some of it to Barney, who transferred to appellant 14 shares of his common stock, which reads on its face that it is fully paid and nonassessable. And it is stipulated that appellant paid full and fair value for this stock. He is a purchaser in good faith.

Here is the history of the case: In October, 1913, at Fargo, one H. M. Cornell opened a trading house known as “Everybody's Store.” At the end of three months he was in debt about $12,500 with assets of $25,000. Then he concluded to unload his debts and assets by turning himself into a trading corporation. Accordingly, in the name of himself, his wife, and one E. C. Hamilton, he filed with the secretary of state articles of incorporation fixing the capital stock at $100,000. This included 500 shares of preferred stock at $100 a share, and 1,000 shares of common stock at $50 a share. The purpose of the corporation was to do the general trading business, to assume debts and liabilities, and to borrow money in unlimited amounts.

The company at once proceeded to assume the debts and obligations of Cornell and took over his business. The 1,000 shares of common stock it issued to Cornell in payment of his lease and the good will of his business. 250 shares of preferred stock it issued to Cornell in payment of all his assets. Cornell at once elected himself president and treasurer. To his good wife, who became a director, he gave 20 shares of common stock, to E. C. Hamilton 125 shares, to one Flick of Minneapolis 125 shares. On the books of the company-the journal and the ledger-it does appear on several pages that for the lease and good will of the business the company was charged $50,000. On the trial the books were put in evidence. Cornell was called as a witness for plaintiff and testified that he bought over the common stock in exchange for the lease and good will of the business. He says:

“I gave for the common stock my lease and the good will of the business, the location and establishment of the business (17).

Q. What were the 250 shares of common stock issued to Flick and Hamilton for? A. That really belonged to me, and I turned them off to them gratis. (17). The 20 shares of stock issued to my wife I just gave her as a present.

Q. What was the value of the good will and lease? A. I figured it was worth what we sold it to the company for, $50,000; I think we figured it at $50,000. We estimated it was worth that amount (102).”

In a written contract on December 29, 1913, it is recited and agreed that Cornell sold to the company the good will of the business and the lease of the premises and property amounting to $25,000; that, in consideration of such sale, the company agreed to issue to the seller certain certificates of fully paid stock to the amount of $75,000, namely, 250 shares of preferred stock and 1,000 shares of common stock. In a subsequent written agreement of January 2, 1914, it is recited that the corporation has sold and delivered to Cornell 1,000 shares of common stock, and he agrees to replace in the hands of the treasurer 250 shares of the common stock to be retained by the treasurer and allotted to purchasers of preferred treasury stock as an inducement to buy the preferred treasury stock. Doubtless, the company assumed the great load of debts and paid too much for its whistle. But that was the purpose of its organization, and this is not an action to rescind the contract of sale, and the mere inadequacy of the price does not make the contract void. As the record shows, Mr. Cornell purchased and paid for all the common stock which reads on its face that it is fully paid and nonassessable. Then he transferred to one Barney 15 shares of stock, and Barney transferred 14 of his shares to appellant. But on said 14 shares there is nothing due to the corporation. It never had any cause of action against the appellant. It had no dealings with him.

Suing as the representative of the corporation and his creditors, of course, the plaintiff can assume no rights only such as belong to the corporation and its creditors Furthermore, the purpose of the statute is to protect parties who deal with and give credit to a corporation on the faith and credit of its stockholders to the amount of their corporate stock. In this case it appears that after the incorporation the business taken over was conducted in the same name and in the same manner as before the incorporation. And there is no showing that the creditors in dealing with the corporation knew that it was a corporation or that it had any stockholders. Certainly, there is nothing to show that they were in any way deceived in regard to the holders of the common stock. The records of the company were open to them, and those records were very brief. They clearly showed that Cornell had purchased and paid for all the common stock, and that on such stock no balance was due to the company. Hence the judgment must be reversed, and the action dismissed, with costs.

BRONSON, J., concurs.

GRACE, J., concurs in the result.

BIRDZELL, J., and HANLEY, Special Judge (concurring specially).

[1][2] The certificates of stock involved in this case were issued without consideration. It was bonus stock for which no consideration was given, promised, or expected; it being stock that was used by the corporation as an inducement to purchasers to buy the preferred treasury stock. The Constitution of this state provides:

“No corporation shall issue stock or bonds except for money, labor done, or money or property actually received; and all fictitious increasesor indebtedness shall be void.” Section 138, Constitution.

The Code provides:

“* * * No corporation shall issue any certificate or stock under an agreement or with the understanding that the full par value shall not be paid.” Section 4527, Compiled Laws 1913.

Also:

“No corporation shall issue stock or bonds except for money, labor done or property, estimated at its true money value, actually received by it.” Section 4528, Compiled Laws 1913.

When the Constitution and laws passed in conformity thereto forbid corporations to issue stock except for labor done, services performed, or money or property actually received, and make all fictitious increases of stock void, such an issue of stock is fraudulent, and persons to whom it is issued for which they do not pay, or do not expect to pay, anything, do not thereby become shareholders of the corporation in any sense. Thompson on Corporations, vol. 4, p. 154; Arkansas River Land T. & C. Co. v. Farmers' L. & T. Co., 13 Colo. 587, 22 Pac. 954. The instant case is not one in which stock was subscribed for and payment agreed upon and full payment not...