Olson v. State Bank
| Decision Date | 19 January 1897 |
| Docket Number | Nos. 10,320 - (99).,s. 10,320 - (99). |
| Court | Minnesota Supreme Court |
| Parties | HANS H. OLSON v. STATE BANK and Others.<SMALL><SUP>1</SUP></SMALL> |
J. D. Emery, J. O. Pierce, C. H. Slack, and C. E. Vanderburgh, for appellants.
John B. Arctander, for respondent.
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This action was brought by the plaintiff, in behalf of himself and all other creditors of the defendant bank, to enforce the liability of stockholders for corporate debts. The defenses interposed by the appellant defendants were, substantially, that (1) they were induced to purchase the stock by false and fraudulent representations which entitled them to rescind; (2) the stock, being illegally issued, was absolutely void and never had any legal existence as stock. The court held defendants liable as stockholders, and ordered judgment accordingly; and the only question presented by this appeal is whether the findings of fact justified this conclusion of law.
So far as here material, the findings are substantially as follows: The defendant bank was organized as a banking corporation under chapter 33 of the General Statutes,2 with a paid-up capital of $75,000, but with authority under its articles of association to increase it, by a majority vote of its shareholders, to $500,000. In July, 1892, the stockholders duly voted to increase the capital stock to $100,000 by the issue of 250 additional shares of $100 each. Ten shares of this increased stock were subscribed for by defendant Nelson Williams, 5 shares by defendant Mrs. Williams, 15 shares by other persons not parties to this appeal, and the remaining 220 shares by Kristian Kortgaard. On August 10, 1892, the cashier of the bank certified under oath to the public examiner of banks to the payment in cash of the $25,000 increase, and on August 12 the public examiner issued his certificate certifying that the bank had complied with all the provisions of law in regard to such increase of stock, and that the $25,000 had been paid in as part of the capital of the bank, and approving of such increase.
Certificates for this increased stock were issued to the persons assumed to be entitled to the same. Neither the bank nor the subscribers seem to have awaited the official action of the bank examiner, for the stock certificates were issued to Mr. Williams August 3, to Mrs. Williams August 6, and to Kortgaard August 10. Of this increased stock issued to Kortgaard, he sold and transferred certain shares, August 15, to defendant Woodward; August 19, to defendant Brown; December 5, to one Snyder, who on December 8 assigned to defendants C. H. Chadbourn & Sons; December 8, to defendant Nowell; December 15, to defendant Sanborn; December 15, to defendant Manley; January 6, 1893, to defendant Jenks; February 4, to defendant Mrs. Williams. All of these transfers were made on the books of the bank, and new certificates issued to the transferees in place of those issued to Kortgaard.
During all this time Kortgaard was the president of the bank, and its virtual manager, without any direct or active supervision of its affairs on part of the board of directors, who left everything solely to him. He was also treasurer of the city of Minneapolis, and had deposited to his credit as such treasurer in other banks large sums of city funds. He represented to the Williamses, when they subscribed and paid for their stock, that the bank was sound and prosperous, and that its stock was a good and desirable investment, and then worth more than par. He made the same representations to the other defendants, to whom he sold portions of his own stock, and each and all of the defendants purchased the stock in reliance on these representations.
The court finds that it does not appear, from the evidence, that such representations were made with the consent, knowledge, or connivance of either the stockholders or directors, or that they ever authorized him to make them, or that they ratified them, except as such authority may be inferred from the fact that the stockholders passed a resolution authorizing the president and cashier of the bank to offer the increased stock for sale, and to issue certificates therefor. It does not appear that the bank ever received any of the money paid to Kortgaard for the stock sold by him.
The representations made by Kortgaard as to the condition of the bank and the value of its stock were wholly false. As a matter of fact, at the time the increased stock was voted and ever afterwards, the bank was, on account of the embezzlement and fraudulent misappropriations of its funds by Kortgaard, utterly and hopelessly insolvent over $375,000 of its nominal assets consisting of worthless notes of corporations which Kortgaard had organized for the express purpose of enabling him to borrow large amounts of money from the bank. These facts, however, were unknown to the other stockholders and directors, who voted for the increase of stock in good faith, on Kortgaard's representations that the bank was prosperous, and that the increase was required to meet the increase of its business. None of the defendant stockholders had notice or knowledge of any fact tending to excite suspicion as to the true condition of the bank, until its failure in June, 1893. But neither at the time they purchased their stock, nor at any time before the failure of the bank, did they make any examination or inspection of its books or records in order to ascertain its condition, or ever request the privilege of doing so. Had they made such investigation and examination, they would have discovered facts reasonably tending to show the true condition of the bank, and that it was utterly insolvent.
All of the defendants, except Jenks and Mrs. Williams (as to the five shares purchased from Kortgaard), received dividends on their stock. No question is made but that Mr. and Mrs. Williams paid in full with their own money for the stock, which they purchased directly from the bank. Kortgaard, in payment of the 220 shares increased stock issued to him, drew checks, signed by him as city treasurer, payable to the defendant bank, on the banks in which the city funds were deposited, for the aggregate amount of $22,000. These checks were presented through the clearing house to the banks on which they were drawn and by them paid, and the money represented by them received by the defendant bank, and converted to its own use. For the remaining $440 (the stock having been subscribed for at 2 per cent. premium) Kortgaard gave his own personal check on the defendant bank, where his account was already overdrawn.
None of the officers or stockholders of the bank, other than Kortgaard himself, knew that he had paid for his stock with city funds. Neither was it known to any of the defendants until it was discovered by an expert after the bank failed, nor could the fact have been discovered, except with the aid of an expert, by a careful scrutiny of the books, and by tracing the checks through the clearing house. There is no evidence that this money has ever been paid back to the city, or that the city has ever made any demand for it, or ever had any notice of the transaction before the bank failed.
The court finds that Haugen, the successor of Kortgaard as city treasurer, "has proved its claim against said bank in this action for a sum exceeding $106,000, which sum was due from said bank to said city at the time of the failure of said bank." But it clearly appears, from the thirtieth finding, in connection with the schedule of claims attached to the findings, that this claim is for money deposited on open account by Haugen himself as city treasurer subsequent to February 15, 1893. Hence, upon the findings, it must be assumed that the city has never made any claim against the defendant bank for the money which Kortgaard misappropriated, but that the bank still retains the benefit of it as part of its assets.
On June 22, 1893, the bank closed its doors, and suspended business, and on the 27th of the same month made an assignment of all its property for the benefit of its creditors. There have been filed and allowed against the bank claims for over $500,000, including a preferred claim in favor of the state for $75,000. The assets in the hands of the assignee, after paying the claim of the state, will not pay over 10 per cent. of the other claims. Eighty-four persons, with claims aggregating over $40,000, became creditors subsequent to September 1, 1892, and prior to February 15, 1893. One hundred and fifty-two others, with claims aggregating nearly $270,000, became creditors subsequent to February 15, 1893. But the court finds that it does not expressly appear whether any of these creditors became such or contracted with the bank upon the faith or credit of the apparent ownership of this stock by the defendants.
About a year after the bank failed each of the defendants brought an action to have the stock issued to him canceled and declared null and void, offering to return the dividends which they had received. These actions are still pending. So far as appears, this was the first movement looking to a rescission or a repudiation of the relation of stockholders.
It must be apparent, from this statement of facts, that this case, in all its legal aspects, is fully covered by the decision in Dunn v. State Bank, 59 Minn. 221, 61 N. W. 27, which was an action brought by a holder of some of this increased stock to have it...
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