Lea v. Iron Belt Mercantile Co.

• Decision Date: 06 July 1906
• Parties: LEA ET AL. v. IRON BELT MERCANTILE CO.
• Court: Alabama Supreme Court

42 So. 415

147 Ala. 421

LEA ET AL. v. IRON BELT MERCANTILE CO.

Supreme Court of Alabama

July 6, 1906

Rehearing Denied Dec. 5, 1906.

Appeal from Chancery Court, Calhoun County; R. B. Kelly, Chancellor.

"To be officially reported."

Bill by the Iron Belt Mercantile Company against Preston Lea and the Piedmont Land & Improvement Company. From a decree for plaintiff, defendants appeal. Reversed and rendered.

J. J Willett, for appellants.

Blackman & Agee and Cabaniss & Bowie, for appellee.

TYSON J.

The bill in this case was filed by a judgment creditor of the Piedmont Land & Improvement Company, an insolvent corporation, after execution with a return of "No property found," seeking to condemn an alleged unpaid subscription to capital stock of said corporation made by respondent Lea. When this cause was here on former appeal the equity of the bill was sustained, not upon the theory that complainant's right to condemn the unpaid subscription was on account of any privity of contract existing between it and the subscriber Lea, or that the statute under which the debtor corporation was organized created a liability which the complainant would have the right to enforce, but solely upon the ground of fraud, in that the complainant, on the facts averred "would be justified in presuming * * * that the law requiring the subscription to stock to be paid in money or in property at its reasonable value had been strictly complied with." Lea v. Iron Belt Mercantile Co., 119 Ala. 271, 24 So. 28. In Elyton Land Company v. Birmingham Warehouse Company, 92 Ala. 407, 9 So. 129, 12 L. R. A. 307, 25 Am St. Rep. 65, the bill was by a judgment creditor, as here seeking to subject an unpaid subscription, on the ground that the property was knowingly accepted by the corporation, in discharge of the subscription obligation, at a valuation grossly in excess of its true value. The court, after an exhaustive examination of the authorities and a careful review of the constitutional and statutory provisions bearing upon the subject of the organization of corporations, held that, while the acceptance of the property may bind the corporation, it was not binding on creditors, without notice of the mode in which the stock subscription was undertaken to be paid, because it was a fraud upon them, in that "the capital stock of a corporation constitutes the basis of its credit, and persons dealing with the corporation have a right to assume that the stock has been actually paid in or that it may be reached."

The case now being before us on its merits, the first question to be determined is whether the allegations of the bill charging fraud in the discharge of the subscription obligation by the conveyance of property at an overvaluation are satisfactorily shown by the evidence. It appears that a number of persons, owning or controlling a tract of land costing them about $100,000 organized the Piedmont Land & Improvement Company for the purpose of selling the lands as town lots, and subscribed for $1,250,000 of stock, paying the same, under their contract of subscription, by conveyance of the tract of land, comprising some 2,200 acres. Respondent Lea's subscription was $118,750, which was paid by his pro rata share of the land. The capital stock of the company, to the extent of $250,000, was donated to the company, thus reducing the price at which the land was valued to $1,000,000. The company was organized in January, 1890, took possession of the property, and sold in a few weeks about 200 acres of this land for about $350,000, and the same land shortly afterwards was worth in the market and sold for as much as $700,000. These events occurred during the excitement of the speculative period, in full force at the time of the organization of the company and for some time afterwards. When the collapse came, it was realized that values were based on illusions, and this company, with many others, became insolvent. The fact that this was not an isolated case of adventure, but an example of the general excitement of the country at that time, and that the expectations of the organizers of this company seemed on the point of full realization, go very far to show that its organization was in entire good faith and without the least purpose to defraud. And so we must take it that the original subscribers for stock intended merely to take advantage of the opportunity and sell through the instrumentality of the corporation their body of land. Still we cannot resist the conclusion, and so hold, that the land conveyed was not at that time of the money value at which it was estimated, and that the corporators must have known that fact, however much they may have believed it would advance in the future.

Having reached this conclusion, we shall now consider the defenses. The respondent Lea, in his answer, after denying the overvaluation of the land conveyed to the company in payment of his stock subscription, asserts that the complainant had notice that his stock subscription had been discharged to the corporation in the manner shown to have been done, and it is insisted that to compel a subscriber to pay otherwise than as he agreed to pay for his stock to a party who knew, before extending credit, how the subscription had been discharged would be an injustice. The question presented for our determination, in view of the fact that there was an overvaluation, is whether the fact of knowledge by complainant of the overvaluation, if true, is a good defense, and whether this defense is supported by the evidence. The complainant was organized in 1891, and made the loan, the basis of the judgment sought to be enforced, in 1894 or 1895. It therefore became a creditor of the debtor corporation after that corporation had accepted the lands in discharge of the subscription obligations at the overvaluation complained of. It cannot be doubted that if complainant had notice of the actual state of affairs, being a subsequent creditor, it cannot disturb the arrangement between the company and its stockholders. It is impossible, with notice of the character and value of the land, for complainant to have acted on and trusted appearances, rather than the true condition of affairs, and, therefore, to have been deceived. This seems to be the universal doctrine of the courts. This principle, as well as the one upon which the equity of the bill must rest, are ably discussed by Messrs. Clark & Marshall in their work on Private Corporations, at page 2327. These authors, after showing that assets of a corporation are not a trust fund for creditors in any proper sense, say: "It has been repeatedly held, in the absence of special statutory provisions, that where a corporation issues stock as bonus, or for less than its par value in cash, or for property taken for an overvaluation, the transaction cannot be assailed, and full payment by the stockholders required, by or for the benefit of persons who became creditors before the stock was so issued or who participated in the transaction, or who afterwards dealt with the corporation and became creditors with knowledge, for in neither of these cases is there any fraud as against them." "It is difficult, if not impossible," said the Minnesota Supreme Court, "to explain or reconcile these cases upon the trust-fund doctrine, or, in the light of them, to predicate the liability of the stockholder upon that doctrine. But by putting it upon the ground of fraud, and applying the old and familiar rules of law on that subject to the peculiar nature of a corporation and the relation which the stockholders bear to it and to the public, we have at once rational and logical ground on which to stand. The capital of a corporation is the basis of its credit. It is a substitute for the individual liability of those who own its stock. People deal with it and give it credit on the faith of it. They have the right to assume that it has paid-in capital to the amount which it represents itself as having; and if they give it credit on the faith of that representation, and if the representation is false, it is a fraud upon them; and, in case the corporation becomes insolvent, the law, upon the plainest principles of common justice, says to the delinquent stockholder, 'Make that representation good by paying for your stock.' It certainly cannot require the invention of any new doctrine in order to enforce so familiar a rule of equity. It is the misrepresentation of fact in stating the amount of capital to be greater than it really is that is the true basis of the liability of the stockholder in such cases; and it follows that it is only those creditors who have relied, or who can fairly be presumed to have relied, upon the professed amount of capital, in whose favor the law will recognize and enforce an equity against the holders...