Meholin v. Carlson

• Citation: 17 Idaho 742,107 P. 755
• Parties: M. P. MEHOLIN, Receiver, Respondent, v. ANDREW E. CARLSON, Appellant
• Decision Date: 03 March 1910
• Court: United States State Supreme Court of Idaho

107 P. 755

17 Idaho 742

M. P. MEHOLIN, Receiver, Respondent, v. ANDREW E. CARLSON, Appellant

Supreme Court of Idaho

March 3, 1910

BANK STOCK-PURCHASE OF-PAYMENT BY NOTE-DEFENSES-AGREEMENT LIMITING LIABILITY OF STOCKHOLDER-FRAUD ON STOCKHOLDERS AND CREDITORS-AGREEMENT ENFORCED-SECRET AGREEMENT VOID-FRAUDULENT REPRESENTATIONS-DILIGENCE-EQUITY OF CREDITORS-LACHES-EVIDENCE-SUFFICIENCY OF-PROHIBITED CONTRACTS-ULTRA VIRES-MUST BE PLEADED-ISSUE OF STOCK-VALUABLE CONSIDERATION-PROMISSORY NOTE-ASSET.

1. Where an agreement was entered into by the bank and C. on the 16th of December, 1905, whereby the bank agreed to sell and issue to C. a certificate for ten shares of a new issue of its capital stock for $140 per share, and C. agreed to execute and deliver to the bank his promissory note for $1,400, that being the purchase price for said stock, and it was understood and agreed that said promissory note should be paid out of dividends arising on said stock, and that C would not be called upon otherwise to pay said promissory note, and that he should be held out to the general public as a stockholder of said bank, held, that that part of the contract as to the manner of payment for said stock is void and that an action may be sustained on said note to enforce the collection of the purchase price of said stock.

2. A suit to recover the purchase price of corporate stock may be maintained by the receiver of a bank, and any secret agreement between the bank and a purchaser of stock limiting the purchaser's liability on his unpaid subscriptions is void as against corporate creditors.

3. A corporation has no authority to accept subscriptions to its capital stock upon special terms where the terms are such as to constitute a fraud upon other subscribers or upon persons who become creditors of the corporation.

4. Such fraudulent or unauthorized stipulations are void, and the subscriber is liable, and the subscription may be enforced by the receiver of the corporation for the benefit of the creditors.

5. Where false and fraudulent representations are alleged as a defense, the purchaser must use the utmost diligence to discover the fraud and repudiate the contract, and unless he does so, he cannot avoid payment of the purchase price.

6. In case of corporate insolvency, the equities of the creditors supersede those of the stockholder, even when his subscription has been induced by fraud; and when the subscriber has waited until suit has been brought by a receiver, then it is too late for him to plead fraud and misrepresentations.

7. Where a stockholder has for a considerable period of time prior to the failure of a corporation occupied the position of one of its stockholders, and exercised and enjoyed the rights, privileges and fruits of that relation, and received dividends on his stock, after the failure of the corporation it is too late to rescind his contract for the purchase of the stock on the ground of false representations.

8. Held, that the affirmative defenses set up by the answer were not legal or valid defenses, and were properly stricken out by the court.

9. Held, the evidence shows that the stock certificate was pledged or held as collateral for the payment of the promissory note given for the purchase price thereof.

10. Under the provisions of sec. 2976, Rev. Codes, a bank is prohibited from accepting as collateral its own capital stock, except in cases where the taking of such collateral shall be necessary to prevent loss upon a debt previously contracted in good faith. That section prohibits certain acts by the bank, but fails to impose any penalty or forfeiture for its violation, and the creditors of the bank should not be punished and the purchaser of stock rewarded by permitting him to avoid the contract, for the reason that it is prohibited by the statute.

11. When a corporation enters into a contract not authorized by its corporate grant or the statute, the doctrine of ultra vires cannot be raised by the person with whom it has dealt as a means of avoiding his obligation, after the corporation has become insolvent.

12. The doctrine of ultra vires should not be applied when it would defeat the ends of justice or work a legal wrong.

13. The defense of ultra vires is never sustained out of regard for a defendant, but only where an imperative rule of public policy requires it.

14. The question of ultra vires must be plead, and cannot for the first time be raised in the appellate court.

15. Under the provisions of sec. 9, art. 2, of the Constitution of Idaho, no corporation is permitted to issue stocks or bonds except for labor done, services performed or money or property actually received. Held, that the promissory note received in payment for corporate stock is personal property was a thing in action or evidence of debt, and was a valid consideration given for the stock purchased by the appellant and was an asset of the bank that might be collected for the purpose of discharging its debts.

APPEAL from the District Court of the Third Judicial District for Ada County. Hon. Fremont Wood, Judge.

Action by the receiver of the Capital State Bank of foreclose a pledge and to recover on the promissory note of the appellant given as the purchase price for ten shares of the capital stock of said bank. Judgment for the receiver. Affirmed.

Judgment affirmed, with costs in favor of respondent.

Johnson & Johnson, and L. F. Clinton, for Appellant.

The ground upon which the motion to strike was made (Trans., fol. 58), that defendant sought to vary the terms of the note by parol, is not tenable, and the distinction is clearly pointed out in Burke v. Dulaney, 153 U.S. 228, 14 S.Ct. 816, 38 L. ed. 698. The same rule was applied in Brick v. Brick, 98 U.S. 514, 25 L. ed. 256, citing Peugh v. Davis, 96 U.S. 336, 24 L. ed. 775.

The highest state courts have universally followed the same rule. (Higgins v. Ridgway, 153 N.Y. 130, 47 N.E. 32; Lime Rock v. Hewett, 50 Me. 267; Benton v. Martin, 52 N.Y. 570; Julliard v. Chaffee, 92 N.Y. 529; Beach v. Nevins, 162 F. 129; Barghoorn v. Moore, 6 Idaho 531, 535, 57 P. 265.)

By the overwhelming weight of authority, the defense interposed by Carlson to the note would be good against the bank. These defenses, we contend, are equally available against the receiver of the bank, as, under the statutes of Idaho, such a receiver stands in the shoes of the insolvent corporation. (Litchfield Bank v. Peck, 29 Conn. 384; Republic Life Ins. Co. v. Swigert, 135 Ill. 150, 25 N.E. 680, 12 L. R. A. 328; Gottlieb v. Miller, 154 Ill. 44, 39 N.E. 992; Young v. Stevenson, 180 Ill. 608, 72 Am. St. 236, 54 N.E. 563; Johnston v. May, 76 Ind. 293; Shopert v. Indiana Nat. Bank, 41 Ind.App. 474, 83 N.E. 515; Ray v. First Nat. Bank, 111 Ky. 377, 63 S.W. 762, 769; Nix v. Ellis, 118 Ga. 345, 98 Am. St. 111, 45 S.E. 405; Miller v. Savage, 60 N.J. Eq. 204, 46 A. 633; Bell v. Shibley, 33 Barb. 610; Catt v. Olivier, 98 Va. 580, 36 S.E. 980; Shuey v. Holmes, 20 Wash. 13, 54 P. 540; In re Hamilton, 26 Ore. 579, 38 P. 1088; Chase v. Petroleum Bank, 66 Pa. 169; McLaren v. First Nat. Bank, 76 Wis. 259, 45 N.W. 223; Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L. ed. 1059; Fourth St. Bank v. Yardley, 165 U.S. 634, 17 S.Ct. 439, 41 L. ed. 855; Auten v. City Electric St. Ry. Co., 104 F. 395; Central App. Co. v. Buchanan (C. C. A.), 90 F. 454, 33 C. C. A. 598; High on Receivers, 3d ed., sec. 245; Beach on Receivers, sec. 699.)

The uncontradicted evidence in this case is that appellant was never the owner of the stock in question, never had the same in his hands, never exercised any control over it, never misled anyone in regard to the title to same, and neither actually nor constructively made or attempted to make any transfer of the stock certificates. Consequently he could not have delivered the same in pledge to the bank. An actual or constructive delivery is necessary in order to constitute a pledge. (Commercial Bank v. Flowers, 116 Ga. 219, 42 S.E. 474; Heilbrou v. Guarantee Loan & Trust Co., 13 Wash. 645, 43 P. 932.)

The court erred in denying appellant's motion to dismiss the suit upon the ground that the alleged pledge agreement was in violation of sec. 2976, Idaho Rev. Codes, was ultra vires, and therefore could not be the basis of a suit. (Nicollet Nat. Bank v. City Bank, 38 Minn. 85, 8 Am. St. 643, 35 N.W. 577; Maryland Trust Co. v. Bank, 102 Md. 608, 63 A. 70; Conklin v. Bank, 45 N.Y. 655; Buffalo Insurance Co. v. Bank, 162 N.Y. 170, 56 N.E. 523, 48 L. R. A. 107.)

The act of a bank taking its own stock as collateral security, except for an antecedent debt, is ultra vires. There has been no performance on either side, and in view of this there is no conflict in the authorities in holding in such cases that the contract is absolutely void and of no effect, and not merely voidable. (Northwestern Union Packet Co. v. Shaw, 37 Wis. 655, 19 Am. Rep. 781; Tennessee Ice Co. v. Raine, 107 Tenn. 151, 64 S.W. 29; Norton v. Deery Nat. Bank, 61 N.H. 592, 60 Am. Rep. 334; Davis v. Old Colony Ry. Co., 131 Mass. 258, 41 Am. Rep. 221; Brunswick Gas Light Co. v. United Gas etc. Co., 85 Me. 532, 35 Am. St. 385, 27 A. 525; National Home Building Assn. v. Home Sav. Bank, 181 Ill. 35, 72 Am. St. 245, 54 N.E. 619, 64 L. R. A. 399; Converse v. Norwich etc. Trans. Co., 33 Conn. 166; Simmons v. Troy Iron Works, 92 Ala. 427, 9 So. 160; Ward v. Joslin, 186 U.S. 142, 22 S.Ct. 807, 46 L. ed. 1093.)

A subscriber to void stock does not thereby become a stockholder and cases holding that subscribers are liable to creditors for their unpaid subscriptions are not applicable. Such stockholders possess no rights, and are not subject to any liabilities upon the stock so issued. (Scoville v Thayer, 105 U.S. 143, 26 L. ed. 968; ...