Rogers v. Gross

• Decision Date: 18 January 1897
• Docket Number: 10,317--(263)
• Citation: 69 N.W. 894,67 Minn. 224
• Parties: FRANCIS ROGERS v. PHILIP H. GROSS and Others
• Court: Minnesota Supreme Court

69 N.W. 894

67 Minn. 224

FRANCIS ROGERS v. PHILIP H. GROSS and Others

Nos. 10,317--(263)

Supreme Court of Minnesota

January 18, 1897

Appeal by defendant Gross from an order of the district court for Morrison county, Searle, J., denying a motion for a new trial. Modified.

George W. Stewart, for appellant.

This is an action to enforce the so-called double liability of stockholders. The provision of the constitution creates an individual liability of the stockholder. McKusick v Seymour, 48 Minn. 158, 50 N.W. 1114. The complaint alleges an assignment to the plaintiff for a valuable consideration of the judgment against the corporation mentioned in the complaint. The amount of the consideration is not disclosed, nor whether plaintiff is seeking to speculate upon the liability of the defendants. The law will not permit speculation upon such a liability. While the original creditor may recover the full amount of his debt his assignee, if he can recover at all, can recover only enough to indemnify him against loss. It is compensation and not fulfilment of a legal obligation that is covered by the constitutional provision. Hospes v. Northwestern M. & C Co., 48 Minn. 174, 50 N.W. 1117; Wilson v. St. L. & W. R. Co., 120 Mo. 45, 25 S.W. 527; Kitchen v. St Louis, K. C. & U. Ry. Co., 8 Am. Corp. Cas. 199; Cook Stockh. 660.

The court erred in admitting in evidence the alleged subscription paper. The relation of stockholder can only be established by showing a stock subscription accepted by the company, or showing a direct contract with the company. The only competent evidence of ownership of stock would be either a certificate or the books of the company. Oral evidence was not competent to prove the agreement to issue bonus stock because there was no note or memorandum of the contract. A contract for sale of corporate stock, when no memorandum is made, no stock issued and no payment made upon it, is within the statute of frauds, G. S. 1894, § 4210, and is void. Tisdale v. Harris, 20 Pick. 9; Baltzen v. Nicolay, 53 N.Y. 467; North v. Forest, 15 Conn. 400; Pray v. Mitchell, 60 Me. 430; Fine v. Hornsby, 2 Mo.App. 61; Colvin v. Williams, 3 Harr. & J. (Md.) 38; Southern L. I. & T. Co. v. Cole, 4 Fla. 359; Johnson v. Mulry, 4 Robertson, 401. There was no memorandum of the contract and no payment by Gross. Any payments made by him were made subsequently, but a payment upon an oral contract, to take it out of the statute, must be made at the time of sale, or be made with a reaffirmance of the contract at the time of payment. Jackson v. Tupper, 101 N.Y. 515, 5 N.E. 65; Hunter v. Wetsell, 57 N.Y. 375, s. c. 84 N.Y. 549; Allis v. Reed, 45 N.Y. 142. There is no evidence that the oral agreement was ratified, approved or adopted by the corporation. There was no consideration for the agreement.

The agreement was void upon the ground of public policy. Apart from statute it is the general rule that shares of corporate stock can only be issued in the first instance for their full value. The corporation must receive an equivalent at so much per share. Upton v. Trebilcock, 91 U.S. 45; Chouteau v. Dean, 7 Mo.App. 210; Kehlor v. Lademan, 11 Mo.App. 550; Williams v. Evans, 87 Ala. 725, 6 So. 702; Zelaya Min. Co. v. Meyer, 28 N.Y.S. 759, 8 N.Y.S. 487; Sturges v. Stetson, 1 Biss. 246, Fed. Cas. No. 13,568; Thompson v. Reno Savings Bank, 19 Nev. 103, 7 P. 68; Lee v. Imbrie, 13 Ore. 510, 11 P. 270; Great Western Tel. Co. v. Gray, 122 Ill. 630, 14 N.E. 214; Osgood v. King, 42 Iowa 478; Jewell v. Paper Co., 101 Ill. 57; Joy v. Manion, 28 Mo.App. 55; Crawford v. Rohrer, 59 Md. 599; Topeka Mnfg. Co. v. Hale, 39 Kan. 23, 17 P. 601; Tobey v. Robinson, 99 Ill. 222; Ex parte Daniell, 1 De Gex & J. 372; West C. Ry. Co. v. Mowatt, 12 Jur. 407; Coolidge v. Goddard, 77 Me. 579, 1 A. 831; Oliphant v. Woodburn C. & M. Co., 63 Iowa 332, 19 N.W. 212; Knowlton v. Congress & E. Springs Co., 57 N.Y. 518; Mann v. Cooke, 20 Conn. 188; Coleman v. Howe, 11 Am. Ry. & Corp. R. 19, 39 N.E. 725. The term "public policy" is hard to define. Courts declare that, whenever any contract conflicts with the morals of the times and contravenes the established interests of society, it is void as against public policy. Ray, Contr. Limit. 197; 2 Thompson, Corp. § 1582; Woodstock Iron Co. v. Richmond & D. Extension Co., 129 U.S. 643, 9 S.Ct. 402.

The agreement in controversy contemplated (1) a fraud upon the public in reference to the assets of the company; (2) that the stock should earn excessive dividends; (3) an advantage upon incoming stockholders; and was a corrupt agreement. The contract was therefore void upon grounds of public policy. Fuller v. Dame, 18 Pick. 472; Bestor v. Wathen, 60 Ill. 138; Rue v. Missouri Pac. Ry. Co., 74 Tex. 474, 8 S.W. 533; Chippewa Valley Ry. Co. v. Chicago, St. P., M. & O. Ry. Co., 75 Wis. 224, 44 N.W. 17; Attaway v. Third Nat. Bank, 93 Mo. 485, 5 S.W. 16; Atlee v. Fink, 75 Mo. 100; Bliss v. Matteson, 45 N.Y. 22.

The constitutional liability of stockholders is created exclusively for the benefit of corporate creditors. It is not an asset of the corporation, and the corporation has no interest in it. The corporation cannot enforce it by assessment upon stockholders, nor upon insolvency assign it for the benefit of creditors. It is a liability running directly from the shareholders to the creditors of the corporation. It can only be enforced by the creditors themselves in their own right and for their own benefit. In re People's L. S. Ins. Co., 56 Minn. 180, 57 N.W. 468; Bristol v. Sanford, 12 Blatch. 341, Fed. Cas. No. 1,893; Arenz v. Weir, 89 Ill. 25; Billings v. Robinson, 94 N.Y. 415; Farnsworth v. Wood, 91 N.Y. 308; Cuykendall v. Corning, 88 N.Y. 129; Liberty F. C. Assn. v. Watkins, 70 Mo. 13; Cook, Stockh. § 218. This constitutional liability is purely statutory. Allen v. Walsh, 25 Minn. 543; Canal & M. Co. v. Woodbury, 14 Cal. 265; Neilson v. Crawford, 52 Cal. 248; Sonoma V. Bank v. Hill, 59 Cal. 107; Morrow v. Superior Court, 64 Cal. 383, 1 P. 354; Hyman v. Coleman, 82 Cal. 650, 23 P. 62; Green v. Beckman, 59 Cal. 545; Moore v. Boyd, 74 Cal. 167, 15 P. 670; Parrott v. Colby, 6 Hun, 55. The rule is otherwise in federal courts upon cases arising under the national bank act, but this act expressly declares the liability of executors and administrators and is enforcible by the receiver for the benefit of creditors. The authorities warrant the assertion that this constitutional liability is purely statutory, belongs to the creditors and does not survive the death of the stockholders. It is an original and not a secondary liability. In other words the stockholders are original debtors and not guarantors or sureties. Middletown Bank v. Magill, 5 Conn. 28; Moss v. Oakley, 2 Hill, 265; Moss v. Averell, 10 N.Y. 449; Culver v. Third Nat. Bank, 64 Ill. 528; Hawthorne v. Calef, 2 Wall. 10.

The constitutional liability is therefore a liability purely personal and not assignable. It arises purely by operation of law and is analogous to a vendor's lien, which is not assignable. Hammond v. Peyton, 34 Minn. 529, 27 N.W. 72; Law v. Butler, 44 Minn. 482, 47 N.W. 53. Hence an assignment of the debt will not convey an assignment of this liability.

A director or stockholder in a corporation cannot make profit at the expense of the company or of its other stockholders. If he buys in a claim against it, it is entitled to the benefit of the purchase. Thompson v. Meisser, 108 Ill. 359; Abbey v. Long, 44 Kan. 688, 24 P. 1111; Smith v. Mosby, 9 Heisk. 501; Lingle v. National Ins. Co., 45 Mo. 109; Bulkley v. Whitcomb, 121 N.Y. 107, 24 N.E. 13; Chouteau Ins. Co. v. Floyd, 74 Mo. 286; Kitchen v. St. Louis Ry. Co., 69 Mo. 224; Balch v. Wilson, 25 Minn. 299. If a stockholder individually liable to creditors buys any claims against the company at a discount, he can only claim a discharge to the amount paid by him. Thompson v. Meisser, supra; Abbey v. Long, supra.

Lindbergh, Blanchard & Lindbergh, for certain respondents.

The case of Holland v. Duluth I. M. & D. Co., 65 Minn. 324, 68 N.W. 50, is conclusive that Gross was a stockholder. He is also liable on bonus stock the same as the other stockholders. The agreement was accepted by the company. The statute of frauds does not apply to contracts of purchase of stock in a corporation not yet formed. 23 Am. & Eng. Enc. Law, 594. The original stock subscription is a contract. Minneapolis T. M. Co. v. Davis, 40 Minn. 110, 41 N.W. 1026; 23 Am. & Eng. Enc. Law, 789.

There is nothing in the language of the constitution which supports appellant's claim that this liability cannot be enforced by an assignee of it. The liability survives against the representatives of a deceased stockholder. Richmond v. Irons, 121 U.S. 27, 7 S.Ct. 788; Irons v. Manufacturers' Nat. Bank, 21 F. 197; Chase v. Lord, 77 N.Y. 1; Beach, Priv. Corp. 135, and cases cited on page 136. Cases under the national bank act were not decided upon the theory indicated by appellant. See Richmond v. Irons, supra; In re Martin, 56 Minn. 420, 57 N.W. 1065. The liability is contractual. Hawthorne v. Calef, 2 Wall. 10; Thompson, Liab. Stock. 25; Day v. Vinson, 78 Wis. 198, 47 N.W. 269; Beach, Priv. Corp. 24, 146. When such liability is created as a punishment, it is sometimes held to be penal. When a statute establishes a liability in favor of a particular class of persons, it has been contended that such liability was a personal privilege and could not be transferred, but the courts hold otherwise. Day v. Vinson, supra; 3 Thompson, Corp. § 3143; Reading Ind. Mnfg. Co. v. Graeff, 64 Pa. 395; Pilcher v. Brayton, 17 Hun, 429; Beach, Corp. 158; Krauser v. Ruckel, 17 Hun, 463; Bonnell v. Wheeler, 1 Hun, 332.

The assignment of a demand entitles the assignee to every assignable remedy, lien or...