Shoun v. Armstrong

• Decision Date: 25 September 1900
• Citation: 59 S.W. 790
• Parties: SHOUN v. ARMSTRONG et al.
• Court: Tennessee Supreme Court

59 S.W. 790

SHOUN v. ARMSTRONG et al.

Court of Chancery Appeals of Tennessee.

September 25, 1900.

Appeal from chancery court, Knox county; Hugh G. Kyle, Chancellor.

Bill by J. H. Shoun against M. A. M. Armstrong and others. From a decree in favor of complainant, defendants appeal. Reversed.

Sansom, Welcker & Parker, for appellants. Ingersoll & Payton, for appellee.

WILSON, J.

This bill was filed to hold the defendants individually liable for a judgment or decree that complainant recovered against the Farmers' Mutual Fire Insurance Company, incorporated, or attempted to be incorporated, under the statutes of this state. The liability of the defendants is rested on the alleged grounds that they effected an invalid incorporation of the company, and, by virtue of their methods as its promoters and officers in conducting its business, they were simply co-partners in carrying on an insurance business under its name, and hence were responsible for its contracts. The chancellor granted the relief sought, and two of the defendants prayed and perfected appeals.

The case is an interesting one, and presents some important and novel questions, and we therefore state the pleadings and the facts appearing in the record in some detail, in order that these questions may be accurately seen. The bill avers, in substance:

(1) That on April 22, 1898, complainant recovered a decree in the chancery court of Knox county against the Farmers' Mutual Fire Insurance Company for $1,033.33, his loss by fire being covered by a policy issued to him by said company.

(2) That execution issued on his decree, and was returned nulla bona, and that the same was unpaid except $24.60, an assessment made by the company against him and allowed by him, and that the company has no assets out of which payment of his decree can be obtained, and that it is insolvent.

(3) That the defendants are liable to pay said decree, because: (a) They, with another, now a nonresident, and not sued because insolvent, November 7, 1896, organized said Farmers' Mutual Fire Insurance Company, signed their names to and acknowledged a so-called "Charter of Incorporation," declaring themselves therein as incorporators and "the directors of this corporation, with all the power and authority heretofore and herein given to the directors and the stockholders, and authorized to perform and do all the duties, and exercise all the authority, conferred on said corporation, until there has been written and contracted $2,800,000 insurance in one of the divisions in which they are authorized to do business." (b) They by said charter declared themselves incorporators empowered at pleasure to name the boundaries of each division, and allot thereto its own rights and liabilities, without respect to other divisions, and, moreover, in said charter, empowered themselves, as directors, to delegate their authority to an executive committee, to be selected by themselves from the executive officers of the company, and likewise by said charter authorized themselves to devise and apportion the powers, duties, and liabilities created by the charter into divisions independent of each other, and to have separate meetings of the stockholders and members of each division, and separate directors and officers therefor, and even providing that the members and stockholders of each magisterial district in a division shall select a director, retaining to themselves, however, as incorporators, a general supervision of affairs in each division. (c) Said so-called charter contained other similar extraordinary provisions not authorized by law, which render it illegal and ineffective to bring in existence a valid corporation, the result in all being that the parties so organizing it made themselves a co-partnership in law to carry on an insurance business, and hence liable as partners to parties dealing with them under said corporate name. The incorporators under the alleged charter appointed three of their number, to wit, defendants Armstrong, Youmans, and Maxwell, as an executive committee, who proceeded under the supposed authority conferred by the charter, and in furtherance of the original plan and the design of the incorporators, to exercise the powers, privileges, and franchises enumerated in the charter, and who, after carrying on the business of insurance for several months in the name of the Farmers' Mutual Fire Insurance Company, and finding the venture unprofitable and perilous, proceeded to dissolve said corporation, without regard to law, by canceling, or attempting to cancel, all its contracts of insurance by a general order and notification to policy holders that all contracts of insurance were rescinded, and all parties relieved at the same time from further liability under said contracts of insurance. This action of said alleged committee is said to have been taken August 26, 1897, a week before complainant's loss by fire, and that most of the policy holders were notified before the loss of complainant, but that complainant received no notice of this order until after his loss occurred; and in this connection it is averred in the bill, on information and belief, that members of the said company, policy holders therein, by reason of the said order of the said executive committee and the notice received by them, refused to contribute anything to the company or its officers to pay complainant's loss, relying upon said order and notice as a defense against any claim against them for the payment of their share of the loss. It is further averred that whether said order and notice of the executive committee aforesaid be valid or illegal, and whether it constitutes a good defense or not to policy holders to a demand on them to contribute their pro rata towards paying the loss of complainant, the cost of collecting the small sum due from the widely separated policy holders would consume the total sum collected, and hence the said action taken by the said executive committee has practically resulted in wasting and destroying all the assets of the company, and, in effect, dissolved it, and rendered it insolvent.

(5) That no meeting of the members of said company was ever called, and no directors or officers were ever elected by them; that they were never advised with in respect to any action taken by the company, and, under the extraordinary and unauthorized provisions of the charter of the company, it was entirely optional with the incorporators whether any meeting should ever be called; and that it was highly improbable, under the provisions of the alleged charter, that the contingency should ever happen which would terminate the absolute power of management retained by the incorporators as directors, and give the members of said company a right to have a corporate meeting and choose their own directors; and it is insisted that as defendants carried on under their absolute control the business of the company from its illicit birth to its unlawful death, and as they are responsible for its advent into the insurance world, for its sickly existence while it lived, and for its final unhappy dissolution, they are individually liable for the mismanagement of its affairs and the waste and loss of its assets.

(6) That complainant is a farmer, residing in a remote corner of the state, inexperienced in the formation of stock companies and corporations, and that at the time he made application for insurance to said company he relied wholly upon the representations then made, by its agent and solicitor, that said company was a lawful corporation, legally chartered under the laws of the state, and doing a regular mutual insurance business under the law of the state, and, relying upon these representations, he paid $10 for insurance for one year, and has paid all assessments made against him, and met all his obligations imposed upon him by his said insurance contract, and that only since his loss by fire has he learned of the illegal nature of said corporation, and of the extraordinary and unlawful powers claimed and exercised by defendants under their alleged charter.

(7) That the order and action of said executive committee of said company, empowered thereto by the directors, in canceling contracts of insurance by the company, thus dissolving the corporation and destroying and wasting its assets, was unauthorized and illegal, and that, as directors of said corporation, defendants are personally liable to complainant for malfeasance in office, to the extent of his decree and cost.

(8) That by the insertion of the extraordinary and illegal powers in the charter of the proposed company, mutual in its liability, which were subversive of the essential feature of a mutual company, and whereby they retained to themselves unlimited power and discretion for an unlimited period, defendants fabricated a company which was not a lawful corporation, but a co-partnership; and hence, as its organizers, managers, and the destroyers of its assets, they were personally liable to complainant.

The prayer of the bill is for a decree against the defendants for the unpaid part of the claim of complainant and the costs, and for execution against them.

The foregoing presents a full and fair summary of the allegations of the bill.

The defendants entered their appearance in court, and answered the bill, February 3, 1899. They admit the recovery of the decree by complainant alleged in the bill; that, so far as they know, an execution thereon had been issued, and returned nulla bona, except for the small sum stated; but say that the Farmers' Mutual Fire Insurance Company has some money and assets, as will be hereinafter stated in their answer. They each deny any individual liability for any part of the decree of complainant against said company, and in this respect state their connection and relation with said company. The substance of this part of the answer is that, in 1896, three of the defendants were approached by S....