Richard Hanlon Millinery Company v. Mississippi Valley Trust Company

• Decision Date: 28 June 1913
• Citation: 158 S.W. 359,251 Mo. 553
• Parties: RICHARD HANLON MILLINERY COMPANY v. MISSISSIPPI VALLEY TRUST COMPANY, Appellant
• Court: Missouri Supreme Court

158 S.W. 359

251 Mo. 553

RICHARD HANLON MILLINERY COMPANY v. MISSISSIPPI VALLEY TRUST COMPANY, Appellant

Supreme Court of Missouri, First Division

June 28, 1913

Appeal from St. Louis City Circuit Court. -- Hon. Hugo Muench Judge.

Reversed.

Boyle & Priest, Nagel & Kirby and Arthur B. Shepley for appellant.

(1) After the amendment made to the second count of plaintiff's petition -- the demurrer to the evidence having been sustained to the first count -- it does not state a cause of action, Because: (a) If the defendant did not agree to subscribe, as therein alleged, to the capital stock of the plaintiff, there is no privity of contract between it and plaintiff, which would enable it to treat the defendant as a shareholder. (b) No charge of fraud or collusion, by which the defendant knowingly came into possession of assets of the Hanlon Company, is made against the defendant. (2) The demurrer to the evidence at the close of the whole case should have been given: Because, There is a total failure of proof of the allegation that the $ 20,000 was paid to defendant out of the funds of the Hanlon Millinery Company. The charge is that defendant: "Did in fact receive the sum of $ 20,000, out of the $ 70,000 paid on account of stock subscriptions by other bona fide subscribers to the stock of said company." There is no proof to sustain this averment. (3) The defendant neither made subscription nor had the power to subscribe to the stock of a corporation or to promote directly or indirectly a corporation. Such an act is beyond the power of a trust company organized under the laws of Missouri. Anglo-American Co. v. Lombard, 132 F 721. (4) There is no evidence "that defendant agreed to subscribe for and did subscribe for and receive and pay for the $ 200,000 preferred and in consideration of so doing it was unlawfully agreed between said defendant and said Hanlon that the defendant should receive the sum of $ 20,000 out of the $ 70,000 paid on account of stock subscriptions by other bona fide subscribers to the stock of said company." This allegation in the second count of plaintiff's petition is the basis of its right of recovery against the defendant. The essence of the charge is this: That defendant subscribed for $ 200,000 par value of the preferred stock of the Hanlon Millinery Company, in consideration that it should also receive from the assets of the company $ 20,000 in cash. If it was not a subscriber, it is not liable, even though it did receive $ 20,000 from the assets of the company, for then it was in no relation of trust or privity with the company or any of its shareholders, and there is no charge of fraud or collusion that would make it liable. If it did not receive the $ 20,000 from the assets of the company it is not liable even though it was a subscriber, for then the company had no interest in the money so received. The proof is very certain and clear that it was not a subscriber for the $ 200,000 of preferred stock. That it was a direct subscriber is not claimed. The only claim is that by some sort of construction of the instrument, made in the form of a proposal by Hanlon to defendant, to organize a company, Hanlon became the agent for the defendant, and Hanlon's subscription to the stock of the Hanlon Millinery Company was the subscription of the defendant. This written proposal carries no such meaning and is susceptible of no such interpretation. The $ 20,000 was never an asset of the Hanlon Millinery Company. It was paid defendant by Hanlon directly and from moneys borrowed by Hanlon on his own securities. (5) Even had the defendant, as a subscriber for the $ 200,000 preferred stock and in consideration of that subscription, received the $ 20,000 from the assets of the company there could be no recovery. Hanlon owns practically all of the stock. He acquired it to wind up the corporation which was in process of bankruptcy. He organized the company. He paid in only $ 15,000. All of its debts were settled at 33 1-3 cents on the dollar. He acquired all of the stock he now claims with the assets of the company in liquidation. With these he acquired the preferred stock for which defendant paid him $ 200,000. He acquired with these assets $ 173,000 of notes, which the company owed defendant for money loaned. He would be the only recipient of any recovery. Courts will not lend aid to accomplish any such fraud. There are no creditors or innocent subscribers of stock involved here. Copper Co. v. Lewisohn, 210 U.S. 206.

Henderson, Marshall & Becker for respondent.

(1) Reduced to a final analysis, the cause of action stated in the two counts of the petition is this: Prior to September 8 1902, Hanlon had for many years been employed by other persons and corporations in the millinery business in St. Louis. Prior to that date the defendant, through its officers and agents, conceived and concocted and proposed to Hanlon a scheme or plan to organize a corporation to engage in the millinery business, and prepared a written proposition directed to itself and caused Hanlon to sign the same, to organize the Hanlon Millinery Company, with a capital stock of $ 500,000, of which $ 200,000 was to be seven per cent cumulative preferred stock and $ 300,000 to be common stock. The defendant agreed to subscribe and pay for the $ 200,000 preferred stock and to receive a bonus of $ 100,000 of the common stock, and also a bonus of $ 20,000 of the $ 70,000 to be realized from the sale of the remaining $ 200,000 of common stock, which the scheme provided should be sold to or subscribed for by other persons at thirty-five cents on the dollar, thus starting the company with $ 250,000 cash, and giving to the defendant the bonus of $ 100,000 of the common stock, and the $ 20,000 in cash for promoting the scheme. The proposition prepared by the defendant and signed by Hanlon was accepted by the defendant; the corporation was organized along the lines aforesaid; the defendant taking the preferred stock and paying therefor and receiving the $ 100,000 common stock and the $ 20,000 cash out of the $ 70,000 which was realized from the sale of the $ 200,000 common stock at thirty-five cents on the dollar to other persons. Instead, however, of the defendant subscribing for the preferred stock in its own name, it caused Hanlon to subscribe for 19,998 shares (the remaining two shares it caused other persons to subscribe for), and also to subscribe for 2020 shares of the common stock, other persons subscribed for the remaining 980 of the common stock and paying for the same only thirty-five cents on the dollar. Neither the preferred nor the common stock was issued to Hanlon, but the certificates therefor were made out in his name and he was required to and did indorse said certificates to the defendant company, so as to conceal from the other stockholders the fact that the defendant was a stockholder and also to conceal from them all knowledge of the scheme aforesaid. But notwithstanding said certificates were indorsed by Hanlon to the defendant, the defendant required Hanlon to vote all of the preferred and common stock so acquired by it at all meetings of the corporations. So that none of the other stockholders knew as long as the defendant controlled three-fifths of the capital stock of the corporation and elected directors selected by it, anything concerning the scheme of incorporation or of the bonus in stock or the promoter's profit of $ 20,000 which the defendant received. The defendant continued to dominate and control the Hanlon Millinery Company until about June, 1907, when a new board of directors was selected, and when that board came into power and ascertained the facts aforesaid, it immediately made a call for the unpaid subscriptions to the capital stock payable July 1, 1907, and demand was made on defendant for the unpaid subscription of $ 100,000 for the common stock received by it as a bonus as aforesaid, and also for the $ 20,000 secret profits made by the defendant, which being refused this action was instituted. (2) It will not profit us nor in any manner aid this court in the determination of this case to consider whether or not all of the original subscribers for the stock in a corporation can agree among themselves that the stock will be full paid stock, either because something transferred to the corporation at a valuation placed thereon by such original subscribers, was or was not sufficient to pay for the stock in full, or whether anything was transferred in payment of the stock subscription. For no such condition is present in this case. Here the arrangement was made between Hanlon and the defendant, and was concealed from the subscribers for the nine hundred and eighty shares of the capital stock of the company, who paid their money therefor. Consequently this case does not fall within the limits of a discussion as to whether or not under the Constitution and laws of Missouri (whatever may be the law elsewhere), it is or is not legal or within the power of all of the stockholders or original subscribers for stock in a corporation to agree that the stock shall be full paid stock, and thereby being in pari delicto, none of them can enforce payment for unpaid stock subscriptions. If it was necessary in this case we would insist that under section 8 of article 12 of the Constitution, which ordains "that no corporation shall issue stocks or bonds, except for money paid, labor done or property actually received," and under Sec. 962, R.S. 1899, carrying this constitutional provision into effect and under Sec. 1312, R.S. 1899, which requires incorporators to certify that all of the shares of stock in a business corporation have been bona fide subscribed and one-half thereof actually paid up in lawful money of the United States, and under the...