People's State Bank v. Jacksonian Hotel Co.

• Decision Date: 28 May 1935
• Citation: 261 Ky. 166
• Parties: People's State Bank v. Jacksonian Hotel Co. et al.
• Court: United States State Supreme Court — District of Kentucky

261 Ky. 166

People's State Bank v. Jacksonian Hotel Co. et al.

Court of Appeals of Kentucky.

Decided May 28, 1935.

1. Corporations. — One obtaining stock of domestic corporation without paying full par value therefor is liable to corporation for difference between price paid and par value (Ky. Stats., secs. 547, 568).

2. Corporations. — Bona fide stockholder may maintain action in behalf of corporation to recover from other stockholders unpaid portion of par value of stock or for cancellation of stock in excess of that paid for, if corporation refuses to sue and there are no creditors (Ky. Stats., secs. 547, 568).

3. Corporations. — Oral agreement of incorporator of proposed hotel corporation to deliver his stock to bank as collateral security for loan to procure hotel property created valid equitable pledge of stock to be issued, and subsequent delivery of stock to bank consummated pledge.

4. Corporations. — Bank which loaned incorporator of proposed hotel corporation money to procure hotel property, taking incorporator's

stock as collateral, without information that hotel property would be mortgaged by incorporators to raise money for payment for their stock, held under evidence a bona fide pledgee for value without notice to extent of amount loaned (Ky. Stats., secs. 547, 568).

5. Corporations. — Directors of corporation are required to exercise utmost good faith, and their acts are subject to closer scrutiny than those of mere stockholders.

6. Corporations. — Mortgaging of property of corporation to pay for stock of incorporators constitutes fraud upon corporation, its creditors and those stockholders and their pledgees who have no knowledge of transaction and who did not directly or indirectly participate in misappropriation (Ky. Stats., secs. 547, 568).

7. Corporations. — Bank taking incorporator's stock as security for loan made to procure property for corporation, and as security for pre-existing debt of incorporator, without knowledge of misappropriation of corporation's assets, held entitled to recover from directors that proportion of money borrowed by corporation on mortgage which pledgee's stock bore to total stock issued, where money borrowed was used to pay for directors' stock and where there were no creditors or other innocent stockholders (Ky. Stats., secs. 547, 568).

8. Corporations. — Pledgee of corporate stock has right to invoke aid of equity to preserve corporate assets.

Appeal from Allen Circuit Court.

TAYLOR & MILAM for appellant.

W.D. GILLIAM for appellees.

OPINION OF THE COURT BY JUDGE RICHARDSON.

Reversing.

This appeal portrays the venture of businessmen in a line of business outside of that for which they were trained and in which they were inexperienced.

Prior to September, 1929, Cary O. Andrews owned a hotel building and equipment located in Scottsville, Allen county, Ky. The Southern Surety Company was the holder of a mortgage on the property executed and delivered by Andrews to it to secure the payment of $33,000.00. Andrews conducted a hotel in the property, and, not succeeding, he decided to dispose of his equity in order to escape greater, increased loss.

Conceiving they could organize a corporation, issue stock, acquire the property, and successfully operate it until the stock of the corporation could be disposed of at a profit, R.W. Comer, I.D. Turner, Henry Counts, L.O. Johnson, W.B. Fowler, Guy Comer, and E.F. Welch agreed among themselves to acquire the hotel property and have it deeded to a corporation. At that time I.D. Turner was engaged in the mercantile business in the city of Scottsville, in the name of a corporation in which he held $5,000 of its stock. He also had life insurance on his own life. He was indebted to the People's State Bank, Scottsville, Ky., $15,000; to the Farmers' National Bank, Scottsville, Ky., $3,000. The debt of the former was secured by the $5,000 stock in the mercantile establishment and life insurance; that of the latter by a mortgage on his residence. To equip himself so as to participate in organizing the corporation and to acquire the hotel property, he applied to the People's State Bank for a loan of $3,000 with which to pay his indebtedness to the Farmers' National Bank, imparting at the time to its officials the information that he and his associates contemplated organizing a corporation, have the title to the hotel property vested in it, and pay for the stock which he expected to take in the corporation, by conveying to Andrews his residence at the price of $10,000. Realizing the doubtfulness of his indebtedness and the insufficiency of the collateral security, and to better secure his indebtedness of $15,000 the People's State Bank agreed to loan him an additional $3,000 with which to pay his indebtedness to the Farmers' National Bank, so as to relieve his residence of the lien, and thus enable him to convey it to Andrews at the price of $10,000, free of the lien, on the condition that he put up, as collateral to secure the $18,000, the stock to be issued to him by the corporation when organized to acquire the title to the hotel property. This arrangement was agreed to by Turner and the officials of the People's State Bank. The $3,000 was paid to the Farmers' National Bank and his residence deeded to Andrews. Turner's deed to Andrews is not in the record; therefore its date is not shown. The articles of incorporation were acknowledged September 20, 1926. The capital stock was $59,400, divided into 594 shares of $100 each. The incorporators and the amount of stock each subscribed are as follows: I.D. Turner, 250 shares; Henry Counts, 74; L.W. Johnson, 32; W.B. Fowler, 32; L.O. Johnson, 64; E.F. Welch, 32; Guy Comer, 39; and R.W. Comer, 71. The corporation was named Jacksonian Hotel Company. Andrews deeded the hotel property to I.D. Turner, trustee, on the 12th day of September, 1929. At a meeting of the incorporators, R.W. Comer, I.D. Turner, Henry Counts, L.O Johnson, Guy Comer, W.B. Fowler, and E.F. Welch were elected directors of the corporation. At a meeting, on the 20th day of September, of the board of directors, Guy Comer was elected president, I.D. Turner, vice president, and E.F. Welch, secretary and treasurer, of the corporation. At this meeting of the directors, in consideration of the stock of the corporation, issued and delivered to the stockholders, in proportion to the number of shares respectively subscribed for by them, Turner, as trustee, deeded the property to the Jacksonian Hotel Company. The deed was accepted by the corporation. At the same meeting a resolution was adopted authorizing and directing I.D. Turner, vice president, and E.F. Welch, secretary and treasurer, to borrow $26,500; to execute the note or notes therefor of the corporation "to be absolutely binding" upon it; and to "pledge any property of the corporation, real and personal, to secure said loan." The $6,500 paid by the incorporators for their stock was obtained on the note of Turner, Fowler, Counts, Comer, and Comer, executed and delivered to L.O. Johnson. On January 29, 1931, the board of directors authorized and directed Turner and Fowler to execute a mortgage on the hotel property to L.O. Johnson to secure him in the payment of the $6,500 note. The mortgage was accordingly executed and delivered on the 31st day of January, 1931. $20,000 was borrowed of Hobdy and also secured by a mortgage on the hotel property. The resolution authorizing the borrowing of the $26,500 recites:

"That it is necessary to borrow $26,500 in order to finish paying off the mortgage the Southern Surety Company holds against the Jacksonian Hotel property."

This was the balance of the Andrew mortgage on the hotel property. The corporation thereafter assumed and exercised ownership of the property and conducted therein a hotel. It successively failed to meet the payment of Hobdy's $20,000 and Johnson's $6,500 note. Hobdy filed this action to recover the $20,000, and Johnson interpleaded to recover the $6,500, and a decree was entered enforcing their mortgages and directing the sale of the corporation's property to satisfy these debts, interest and costs. It was sold for the price of $28,984.14, the amount of their debts, interest due, and costs. After the 250 shares of stock were issued and delivered by the corporation to Turner, he delivered it as collateral to secure his indebtedness of $18,000 to the People's State Bank. Later, Turner's debts were discharged by bankruptcy proceedings, leaving the bank with his notes, secured by the 250 shares of stock in the Jacksonian Hotel, and $5,000 stock in the mercantile establishment; the life insurance which it held as collateral had lapsed. The mercantile establishment had failed. Its stock became valueless. As pledgee of the 250 shares of stock in the Jacksonian Hotel Company, the People's State Bank filed an intervening petition in Hobdy's action, setting up the foregoing facts, and sought to compel the incorporators, the stockholders, and directors of the Jacksonian Hotel Company to pay for their stock, or as directors to account for the value of the property mortgaged by the corporation, to secure the Hobdy $20,000 and the Johnson $6,500 note. The court dismissed its petition and denied all relief.

It is here insisting that, as pledgee of the Turner stock, it is entitled to maintain this action; that the stockholders and directors were without right to mortgage its assets to secure their individual debts or to pay for the stock issued and delivered by the company to them; that the facts disclose a disposition, fraudulent in law, of the corporation's assets by the stockholders, the directors, and the officers who participated therein, and they are liable therefor to the amount of $20,000.

In Goff v. Henry Goff & Co.'s Assignee, 257 Ky. 519, 78 S.W. (2d) 758, 760, we reviewed our previous construction of section 193 of our Constitution and sections 547 and 568, Kentucky Statutes. We said:

"...