Spring Company v. Knowlton

• Decision Date: 01 October 1880
• Citation: 103 U.S. 49,26 L.Ed. 347
• Parties: SPRING COMPANY v. KNOWLTON
• Court: U.S. Supreme Court

103 U.S. 49

103 U.S. 49

26 L.Ed. 347

SPRING COMPANY v. KNOWLTON.

October Term, 1880

ERROR to the Circuit Court of the United States for the Northern District of New York.

This suit was brought in 1869 by Dexter A. Knowlton, a citizen of Illinois, against The Congress and Empire Spring Company, in the Supreme Court of the State of New York, to recover the sum of $13,980, with interest from Feb. 20, 1866. In 1876 he died, and the suit was revived and continued by the administrators of his estate. They are citizens of Illinois, and on their application the suit was, March 20, 1877, removed to the Circuit Court of the United States. The parties, by written stipulation, waived a jury. The court tried the case, and found the facts to be substantially as follows:——

The Congress and Empire Spring Company is a corporation organized under the statute of the State of the State of New York of Feb. 17, 1848, authorizing the formation of corporations for manufacturing, mining, mechanical, or chemical purposes, and subsequent acts amendatory thereof. Its capital stock was $1,000,000, divided into ten thousand shares of $100 each, issued in payment of property purchased by the trustees of the corporation for its use.

The mode by which such a corporation might increase its capital stock is prescribed by sects. 21 and 22 of chapter 40 of the laws of 1848.

Sect. 21 prescribes how the notice of a meeting of the stockholders to consider the proposition to increase the capital stock shall be given, and what vote of the stockholders shall be necessary to carry the proposition.

Sect. 22 prescribes how the meeting of the stockholders, called under sect. 21, shall be organized, and declares that if a sufficient number of votes has been given in favor of increasing the amount of capital stock, 'a certificate of the proceedings showing a compliance with the provisions of this act, the amount of capital actually paid in, . . . the whole amount of debts and liabilities of the company, and the amount to which the capital shall be increased, . . . shall be made out, signed, and verified by the affidavit of the chairman and countersigned by the secretary, and such certificate shall be acknowledged by the chairman and filed, as required by the first section of this act; and when so filed the capital stock of such corporation shall be increased . . . to the amount specified in such certificate, . . . and the company shall be entitled to the privileges and provisions, and subject to the liabilities, of this act, as the case may be.'

The corporation passed a resolution, Jan. 11, 1866, to increase its capital stock by the addition thereto of $200,000, for the purpose of building a glass factory for the manufacture of bottles and providing a working capital. It also resolved that the books of the company should be opened for subscriptions to the additional stock, and that each stockholder should be allowed to take one share of the new for every five shares he held of the original stock, and that when he had paid $80 on each share the company should issue to him a certificate as for full-paid stock.

At a meeting of the board of trustees of the corporation, held Feb. 8, 1866, a dividend of four per cent on the original stock was declared, payable Feb. 20, and it was resolved that a call of twenty per cent on the new stock should be made, payable on the latter date; that the books of the company should be at once opened for subscriptions to the new stock; that each stockholder should have the privilege of taking one share of the new for every five shares of the old stock held by him, and that on failure of any stockholder to pay, on or before that date, $20 on each share of the new stock taken by him, all his claim to such new stock should be forfeited and the same divided ratably among the stockholders who had paid the instalment of $20 per share.

In pursuance of the resolutions the trustees immediately issued a stock subscription agreement, by which the subscribers stipulated to take the number of shares set opposite their names and to pay for each share $80, in instalments, as called for by the directors; and upon failure to pay the instalments within sixty days after call, that the money already paid on the stock should be forfeited to the company. By the same agreement the company bound itself to pay interest up to Feb. 1, 1867, on all sums paid on the new stock, and on Feb. 8, 1867, to issue for every share of said new stock on which $80 had been paid a certificate to the holder as for full-paid stock; and it was provided that the holders of such stock should be entitled to vote thereon, and the same should draw dividends and be treated in all respects as full-paid stock.

This agreement was signed by one C. Sheehan, who subscribed for six hundred and ninety shares of the new stock, he being the holder of thirty-four hundred and ninety shares of the old stock.

Thereupon a contract was made between Sheehan and Knowlton, whereby the former agreed to lend the dividend on his old stock to the latter, who agreed to assume the new stock subscribed for by Sheehan, and pay all future calls thereon. Sheehan's dividend on his old stock amounted to $13,988. Knowlton, in consideration of the transfer to him of this dividend, delivered his note to Sheehan for $13,980, dated Feb. 20, 1866, payable in one year, and secured the same by a pledge of one hundred and fifty shares of the stock of the company. He paid the residue, to wit, $8, in cash.

Knowlton paid to the company, March 8, 1866, the call of twenty per cent on the new stock, subscribed by and sold to Sheehan as aforesaid, by the application thereto of Sheehan's dividend on the old stock, amounting to $13,980, for which the company gave Knowlton a receipt.

About December, 1868, Knowlton paid in full his note to Sheehan for $13,980.

Calls and personal demands were made both upon Sheehan and Knowlton more than sixty days before Jan. 25, 1867, for the payment of subsequent instalments on the stock subscribed by Sheehan, and both of them neglected and refused to pay the instalments called for; whereupon the trustees of the company passed a resolution by which they declared that the new stock subscribed by Sheehan and assumed by Knowlton should be and was forfeited.

From August, 1865, to August, 1866, Knowlton was a trustee and vice-president of the company; he advised the increase of the capital stock above mentioned, proposed the resolutions in relation thereto, moved their adoption, drew up and signed the stock subscription agreement, and advised others to sign it.

At a meeting of the stockholders of the company, held Aug. 7, 1867, it was resolved that the capital stock of the company should be reduced to the original sum of $1,000,000, and that the trustees be authorized to arrange with the holders of the new stock for retiring the same on such terms and conditions as they should deem for the interest of the company.

On the same day the board of trustees met and passed a resolution, whereby the executive committee of the board was authorized to adjust, on the best terms for the company, the claims of all persons holding receipts for payments on the new stock ordered to be retired.

The executive committee passed a resolution, March 27, 1868, that the company issue five-year coupon bonds sufficient to refund the payments made on the new stock of the company which had been retired.

No tender of these bonds was ever made to Knowlton, nor was any demand made for them by him; but he demanded repayment of the amount paid by him on his new stock, and the company refused to repay it or any part of it.

The majority of the holders of the original stock became subscribers for the new stock, and all of them except Sheehan, Knowlton, and one or two subscribers for small amounts, paid the calls made on them in respect to the new stock. The first call of twenty per cent on the new stock was paid mainly by the dividend on the old stock above mentioned, but about $3,000 were paid in cash. All the stockholders who did not subscribe for new stock were paid their part of the dividend in cash. About $86,500 of said five per cent bonds were issued by the company to retire the new stock.

As a conclusion of law from these facts, the court held that the plaintiffs, as such administrators, were entitled to judgment against the Congress and Empire Spring Company for the sum of $13,980, with interest from Feb. 20, 1866, and rendered judgment accordingly. The company sued out this writ of error.

It appears by a bill of exceptions that the defendant's counsel requested the court below to decide that the proceedings of the defendant in increasing its capital stock, and forfeiting the amount paid by the plaintiffs' intestate, were in all respects legal and valid. The court refused so to find, and ruled that the plan devised by him and the other trustees of the company was contrary to the provisions of the statute, against public policy, and a fraud upon stockholders not consenting thereto, and the public.

It further appears that the defendant's counsel requested the court to decide that, inasmuch as the intestate devised, counselled, and assisted in passing and adopting all the acts and resolutions for an increase of stock by the company, the plaintiffs were not entitled to recover. The court refused so to decide, and ruled that the intestate had a right to abandon the illegal transaction to which he was a party, and that by declining to pay further calls, and demanding repayment of the payments made before the consummation of the illegal scheme, he did abandon it, and his representatives were entitled to recover. To these refusals and rulings the defendant's counsel excepted.

The errors assigned here are that the court below erred in each of its refusals and rulings, and in deciding that the plaintiffs were entitled to recover.

1. The scheme and contract to increase the stock were in violation of the...