Scott v. Abbott

• Decision Date: 27 March 1908
• Docket Number: 2,607.
• Citation: 160 F. 573
• Parties: SCOTT et al. v. ABBOTT.
• Court: U.S. Court of Appeals — Eighth Circuit

160 F. 573

SCOTT et al. v. ABBOTT.

No. 2,607.

United States Court of Appeals, Eighth Circuit.

March 27, 1908

The appellants, who by consent and on one record prosecute joint appeals to this court, were separate holders of preferred stock in the Tennent Shoe Company, a manufacturing and business corporation, organized under and pursuant to the general laws of the state of Missouri. The shoe company originally had a capital stock of $400,000. It undertook to comply with the provisions of the statutes of Missouri to increase its capital stock to $800,000, and to make $300,000 thereof preferred stock and $100,000 common stock. At a meeting of the stockholders called for the purpose, pursuant to the provisions of section 1329, Rev. St. Mo. 1899 (Ann St. 1906, p. 1072), a resolution was adopted providing for the increase. Subsequently a statement of the proceedings of the meeting, showing compliance with the provisions of the statute, was duly signed, verified, acknowledged, and recorded in the recorder's office of the city of St Louis, as required by law, and a certified copy of the same was filed in the office of the Secretary of State on December 28, 1903. Upon that day a certificate was issued by the Secretary of State, to the effect that the corporation had complied with the law for the increase of its capital stock and that the same had been increased to the extent of $400,000; $300,000 preferred, and $100,000 common stock. The instrument so recorded and filed contained the statement that the amount of capital stock of the company paid up was $400,000, that the amount of assets of the company was $1,387,066.82, that the amount of its liabilities was $501,460.99; that the amount to which the capital stock was increased was $800,000, and that all said increase of capital stock had been actually paid up in lawful money of the United States, and was in the hands of the board of directors of the company. Contemporaneously with securing this certificate the officers of the company arranged with the Little & Hays Investment Company of St. Louis for the sale of the preferred stock, and placed in their hands, at the time, a written statement, over the signature of the corporation by its president, John H. Tennent, to the effect that $300,000 of preferred stock had just been issued in strict conformity with the laws of Missouri; that all the common and part of the preferred stock was owned by the officers and directors of the company; that the total net earnings available for annual dividends would not be less than five times the amount required for dividends on the preferred stock. They also gave the investment company a written statement, falsely setting forth in detail the assets and liabilities of the company, and that it had received paid subscriptions to its increased capital stock amounting to $400,000, which made its capital and surplus $885,605.83. Those statements, together with others of similar character, were delivered to the investment company for the purpose of having them exhibited to the public, to bring about sales of the preferred stock. The investment company, making use of them for the intended purpose, in the course of a year sold some over 2,000 shares of the stock, accounted to the shoe company for about 90 per cent. thereof, and retained the balance as its commission. The appellants, Scott, Martin, and Gauss, were among the purchasers. The shoe company, through sales made by the investment company and others, making use of the same statements, realized about $300,000 from the total sales of all stock. Soon after receiving the certificate of increase the shoe company commenced paying quarterly dividends on the preferred stock so sold, at the rate of 7 per cent. per annum, and continued so doing during the years 1904 and 1905, the last payment being made on January 1, 1906. In January, 1906, an examination of the books of the shoe company was made at the instance of the preferred stockholders, and disclosed the fact that the company was insolvent, and had been so for years, and was so when its capital stock was increased; that the statements made by the company to secure the increase of capital and otherwise to influence purchasers were false and fraudulent, and that the evidence of their falsity had been concealed from the stockholders and public by the president of the shoe company. It further turned out that the increased stock had not been subscribed or paid for at the time the statement was made for securing the increase, and never had been paid for, except as the investment company and others sold the same and turned over the proceeds to the shoe company. The appellants bought their stock upon the faith of the representations made in the statements so made and uttered by the shoe company and repeated by the investment company. Investigation into the affairs of the company proceeded during the months of January and part of February when, upon the advice of counsel, the appellants repudiated their contract of purchase, and tendered back the stock and dividends which they had received from the shoe company. About that time, on February 10, 1906, a petition in bankruptcy was filed against the shoe company, which was afterwards confessed by the company, and an adjudication followed on March 2, 1906. Appellants undertook to prove claims against the estate in bankruptcy for the amount of money paid by them, respectively, for their preferred stock less such dividends as they had received thereon. Their claims were disallowed by the referee, and his action was approved by the district court on proper proceedings bringing it there for review. The present appeal challenges the rulings so made.

Joseph S. Laurie and Frederick N. Judson (John F. Green, on the brief), for appellants.

B. Schnurmacher and Lee W. Grant (Leo Rassieur, on the brief), for appellee.

Before HOOK and ADAMS, Circuit Judges, and CARLAND, District Judge.

ADAMS Circuit Judge (after stating the facts as above).

Appellants claimed below, and now claim here, that they are entitled to prove their claims against the estate of the shoe company in bankruptcy, for two reasons:

First, because the issue of preferred stock, of which they acquired a part, was fictitious and void, in that it was never subscribed or paid for, as required by the Constitution and statutes of Missouri, and consequently they never sustained the relation of stockholders to the company, but that of creditors to the extent of the money paid for their stock; second, because they were induced to purchase the same by false and fraudulent representations made by the corporation and its agents, and repudiated and rescinded their contracts of purchase upon discovering the fraud practiced upon them. We will consider these two propositions in the order in which they are stated.

Article 12, Sec. 8, of the Constitution of Missouri (Ann. St. 1906, p. 304), ordains that:

'No corporation shall issue stock or bonds except for money paid, labor done or property actually received; and the fictitious increase of stock or indebtedness shall be void. The stock and bonded indebtedness of corporations shall not be increased, except in pursuance of the general law, nor without the consent of the persons holding the larger amount in value of the stock first obtained at a meeting called for the purpose, first giving sixty days' public notice, as may be provided by law.'

The pertinent statutes enacted to carry this constitutional provision into effect are sections 962, 1327, and 1329 of the Revised Statutes of Missouri 1899 (Ann. St. 1906, pp. 860, 1071, 1072). Section 962 is a re-enactment of the constitutional prohibition providing that the shares of stock or bonds arising from an increase thereof shall only be disposed of 'for money paid, labor done or money or property actually received,' and that 'all fictitious issues or increase of stock or of bonds shall be void. ' Section 1327, relating especially to 'manufacturing and business companies,' provides that:

'Any corporation increasing its capital stock shall before the same shall take effect, cause to be paid up of such increase of capital stock not less than fifty per cent. in lawful money of the United States.'

Section 1329 makes provision for holding a meeting and taking the vote of stockholders on a proposition to increase or diminish the amount of capital stock, and provides that:

'A statement of the proceedings showing a compliance with the provisions of this article, the amount of capital actually paid in * * * the whole amount of assets and liabilities of the corporation, and the amount to which the capital stock shall be increased or diminished, shall be made out, signed and verified by the affidavit of the chairman, and be countersigned by the secretary; and such statement shall be acknowledged by the chairman, and recorded, as provided in section 1313, and a certified copy of such recorded instrument shall be filed in the office of the Secretary of State, who shall thereupon issue a certificate that such corporation has complied with the law made and provided for the increase or decrease of capital stock, as the case may be, and the amount to which such capital stock is increased or decreased; and such certificate shall be taken in all courts of this state as evidence of such increase or decrease of stock; and thereupon the capital stock of such corporation shall be increased or diminished to the amount specified in such certificate: * * * Provided, that in case of increase of capital stock, the statement above provided for shall set out the percentage of the increase that has been actually paid up in lawful money of the United States, and that it is in the custody of the board of directors.'

1. The first contention...