Rickerson Roller-Mill Co. v. Farrell Foundry & Machine Co.

• Decision Date: 15 June 1896
• Docket Number: 386.
• Citation: 75 F. 554
• Parties: RICKERSON ROLLER-- MILL CO. et al. v. FARRELL FOUNDRY & MACHINE CO.
• Court: U.S. Court of Appeals — Sixth Circuit

75 F. 554

RICKERSON ROLLER-- MILL CO. et al. v. FARRELL FOUNDRY & MACHINE CO.

No. 386.

United States Court of Appeals, Sixth Circuit.

June 15, 1896

The original bill was filed by the Farrell Foundry & Machine Company, as a judgment creditor of the Rickerson Roller-Mill Company, a corporation of the state of Michigan. The bill sought relief upon two distinct grounds: First, that there was an unpaid stock subscription made by the individual defendants, E. C. and Charles Fox, which was subject to call by a court of equity at the instance of a judgment creditor whose execution had been returned nulla bona; second, that the individual defendants, the Messrs. Fox as directors and officers of the Rickerson Roller-Mill Company, had converted to their individual use equitable assets of the corporation for the purpose of paying debts due from it to them, or debts due by it to others, upon which they were bound as sureties and which conversion, it was alleged, was invalid as against complainant. There was a decree against the Messrs. Fox upon both grounds. In November, 1882, one S. B. Rickerson made application for a patent for certain improvements in roller mills. Pending this application he interested certain others therein; among them, O. E. Brown. The persons thus associated with Mr. Rickerson in the ownership of the proposed patent organized themselves into a corporation, under the general law of the state of Michigan, known as the O. E. Brown Manufacturing Company. The articles of incorporation were recorded December 15, 1882, and, among other things, recited that the paid-up capital stock of the corporation was $100,000, divided into shares of $25 each; that the number of shares taken, owned and fully paid up was as follows: S. B. Rickerson, 2,000; O E. Brown, 1,600; S.W. Ousterhout, 200; and James L. Wheeler, 200. The corporation, it was recited, was established for the purpose of 'manufacturing the S. B. Rickerson patent improved roller mill and other mill machinery, and furnishing and dealing in mill machinery, and such other property of every kind as shall be necessary for the purpose of said corporation. ' On the 1st day of March, 1883, at a meeting of the stockholders of the said O. e. Brown Manufacturing Company, it was resolved that 'the capital stock of this corporation be, and is hereby, increased from $100,000 to $150,000. On the same day, at a stockholders' meeting, the following resolution was carried unanimously:

'Moved by Mr. Rickerson, and supported by Mr. Ousterhout, that the treasurer by authorized to sell to Messrs. E. Crofton and Charles Fox the additional $50,000 stock, $25,000 each,-- payment to be made as agreed,-- for the sum of $25,000. Carried. Moved by Mr. Ousterhout that a ballot be cast for two directors. Carried. Messrs. E. Crofton and Charles Fox were elected.

'(Signed) Charles Fox, Secretary.'

On the same day the following agreement purports to have been entered into and signed:

'Agreement made and entered into the 1st day of March, 1883, between S. B. Rickerson, of Grand Rapids, Mich., party of the first part, and O. E. Brown Manufacturing Company, of the same place, of the second part, witnesseth, in consideration of the stock now owned by the party of the first part in the O. E. Brown Manufacturing Company, the first party agrees that all inventions, improvements, or patents in any wise pertaining to the manufacturing of flour, or any machinery for the manufacturing of flour, shall be the property of, and belong to, the said O. E. Brown Manufacturing Company.

'S. B. Rickerson. 'O. E. Brown Mfg. Co., 'O. E. Brown, President.'

Following this increase in stock, and the authority given the treasurer to sell the same for $25,000 in money, Messrs. E. C. Fox and Charles Fox became the purchasers and holders of the entire increased stock, of the par value of $50,000, paying therefor to the treasurer of the company the sum of $25,000, which sum was accepted by the corporation as full payment for the said stock; and certificates were issued, representing that the stock was fully paid up, and liable to no other or further assessments. The original stock, of $100,000, was issued to Rickerson and his associates, in the proportion heretofore stated, as fully paid and nonassessable stock; the only consideration received therefor being the assignment by Rickerson of his rights in any corporation began its operations with no capital, save that invested in the Rickerson patents. The necessity for an increase of capital was, from the beginning, recognized; and negotiations were immediately commenced with the Messrs. Fox, looking to their taking a one-third interest in the venture. In the meantime some machines were made under contracts with other manufacturing establishments, and orders taken for those made, though no effort was made to commence manufacturing operations, for the want of a cash capital. When the Fox brothers finally concluded to enter upon the adventure and take a third interest, the purpose was consummated by increasing the stock to $150,000, and assigning to them the new shares for $25,000 in money. This increase was authorized March 1, 1883; and on the same day the stock was assigned to E. C. fox and Charles Fox,-- $25,000 to each,-- upon a money payment to the corporation of $12,500 by each of them, and on the same day each was made a member of the board of directors. In May, 1883, an account was opened with the Farrell Foundry & Machine Company, from whom were purchased large amounts of rolls used in the manufacture of the improved Rickerson roller mill. This account began May 5, 1883, and continued until the 16th of July, 1887, during which time rolls to the amount of $61,148.31 were purchased. From time to time payments were made thereon, or settlement by note or draft, so that in the summer of 1887 the total credits upon this account were $60,148.31, leaving a balance due on open account of $1,000. The judgment in favor of the Farrell Company was upon three items of indebtedness: A note dated March 31, 1887, for $1,065; a note dated August 18, 1887, for $670, and $1,000, the balance due on open account as above shown. The bill alleges that this judgment is a debt of the corporation, for which the Messrs. Fox are liable by reason of the fact that they have paid but 50 per cent. of the par value of the stock taken in the manner heretofore set out. With respect to the second ground of liability, the facts, as they appear to us upon the whole record, and necessary to be here stated, are these: The business of the Rickerson Roller-Mill Company proved unprofitable. The patents turned out to be practically worthless, and the cash capital utterly insufficient for the projected business. It was therefore resolved early in July, 1887, that the business of the corporation was unprofitable, and that it was to the interest of all parties concerned that the assets of the company should be disposed of. Shortly thereafter all of the tangible assets of the corporation, and all unfinished machines, and all material, were sold to the John H. Hutchison Manufacturing Company for 4,000 shares of the stock of that company, the shares being of the nominal value of $25 each. Having thus disposed of its assets, excepting a few uncollected accounts, this stock was assigned and transferred to three of the directors,-- S.W. ousterhout, E. C. Fox, and Charles Fox,-- on the 10th of October, 1887, to secure them in the indorsement of corporation paper upon which to raise money to discharge corporate obligations which had shortly before gone to protest. This stock was subsequently sold by these directors at public outcry, and brought in by themselves, for $1,000, and the proceeds applied to their reimbursement; they having theretofore paid off the $10,000 note, as indorsers for the corporation. The remaining assets of the corporation, consisting of certain uncollected claims, partly in litigation, were transferred by the corporation in May, 1888, to Ousterhout, E. C. Fox, and Charles Fox, to be applied on the liability of the corporation to them by reason of their payment of the note above mentioned. At the date of the transfer of the John Hutchison Manufacturing Company stock to Ousterhout and the Fox brothers, they were already bound as indorsers upon corporation paper theretofore made, which had gone to protest. The new note of October, 1887, was made for the purpose of paying off this old liability, which, by protest, had become a fixed liability of these directors.

Albert Crane, for appellants.

A. C. Denison, for appellee.

Before TAFT and LURTON, Circuit Judges, and HAMMOND, J.

LURTON Circuit Judge, after making the foregoing statement of facts, .

The first defense made by the Messrs. Fox to their liability as unpaid subscribers to the capital stock of the Rickerson Roller-Mill Company is that they never were in fact subscribers for said stock, but that it was in reality issued to S. B. Rickerson and his associates as a further consideration for the patents theretofore applied for, and such as should thereafter be obtained, pertaining to roller-mill machinery, and that they purchased this stock, as fully paid up stock from Rickerson and his associates, who had recieved it is consideration of the property sold and transferred to the corporation. This defense is unsupported by the circumstance. Rickerson had theretofore agreed to transfer to this corporation all pending applications, as well as all applications which he should thereafter make, for and in consideration of the entire capital stock, of $100,000. The increase of stock was solely for the purpose of obtaining additional capital, to the end that the business of the company might be increased, and put on such a footing as would give the...