State Trust Co. v. Turner

• Decision Date: 24 May 1900
• Citation: 82 N.W. 1029,111 Iowa 664
• Parties: STATE TRUST CO. v. TURNER.
• Court: Iowa Supreme Court

111 Iowa 664

82 N.W. 1029

STATE TRUST CO.

v.TURNER.

Supreme Court of Iowa.

May 24, 1900.

Appeal from district court, Polk county; C. P. Holmes, Judge.

Action at law to recover of defendant the amount of a judgment held by plaintiff against a corporation known as the Hess Electric Storage-Battery Company. The case was tried to the court on an agreed statement of facts, resulting in a judgment for defendant. Plaintiff appeals. Affirmed.Bowen & Brockett, for appellant.

Phillips, Ryan & Ryan, for appellee.

DEEMER, J.

The Hess Electric Storage-Battery Company is a corporation organized under the laws of this state in the year 1890. It was created “to perfect a storage-battery system patented by one H. K. Hess, and to adapt it to practical use for light and power; the buying and selling of the patent and any other necessary and proper to be used herewith; to procure other letters patent; and to buy and sell electric light plants, patents, batteries, etc.; and to lease, purchase, or sell electric current for any legitimate purpose.” The capital stock was fixed at $100,000, divided into 1,000 shares of $100 each, of which not exceeding $90,000 might be issued and used as fully paid for the purchase of patents or property to be used in the business. The balance of the stock was to remain as treasury stock, and sold to such persons and on such terms as the board of directors should determine; none of it to be issued, however, until fully paid. The articles were signed by H. C. Porter, H. K. Hess, A. R. Case, defendant, and others. Defendant was vice president and a director of the corporation. After the filing of the articles, Porter, Case, and Hess made a proposition to sell certain patents which they claimed to own and hold, to the corporation, for $90,000 of its capital stock, fully paid up, and an additional sum of $500 in cash as soon as the corporation was able to pay. The board of directors of the corporation accepted the proposition, and Porter, Case, and Hess made an assignment of their patents, and of such property as they had on hand for experimental and manufacturing purposes, to the corporation, and received from it $90,000 of its fully-paid stock. The books of the corporation show that, the day before the aforesaid proposition was made, 10 shares of stock, of the face value of $1,000, were issued to defendant, Turner. This stock recited that it was fully paid. Turner paid nothing to the corporation for the stock, but the same was treated by all parties as a part of the $90,000 to be issued to Porter et al., and was issued to him on their order. He paid Porter and his associates 20 cents on the dollar in cash for the stock, and has owned the same to this day. On the day the proposition was made, 20 shares of the stock were issued to Porter; but he never receivedthem, and the books show that they were canceled and reissued to D. H. Gouring and T. S. Catcart. Ten of these shares issued to Gouring were canceled, and new certificates for the same were issued to defendant. The other 10 of these 20 shares were also canceled and reissued to defendant. Neither Turner, Gouring, nor Porter paid anything to the corporation for this stock, but it was treated as a part of the $90,000 hitherto mentioned. Turner paid Gouring 20 cents on the dollar for the stock issued to him. The remainder of the $90,000 in stock was issued as follows: 10 shares to R. R. Ballis, 10 to F. B. Collins, 10 to George C. Boggs, 5 to O. L. F. Browne, 5 to D. W. Chase, 5 to A. I. Lee, 5 to J. H. Woods, 5 to F. A. Fields, and 5 to W. H. Langan, all of whom had signed the original articles of incorporation; and the balance was issued to Porter et al., or to other persons on their order. The stockholders have never held a meeting, but the board of directors held meetings until the latter part of the year 1894, since which time it has held no meetings. It was also agreed as follows: “(6) That the chemicals, material, and property mentioned in the said written proposition, including tools and instruments intended or adapted to the manufacture of batteries and motors, or used or intended for experiment, were of the value of $500, and at the time of the purchase of said property by the said Hess Electric Storage-Battery Company, as hereinbefore stated, the said patented articles had not been put largely into practical use, but many experiments and tests had been made with reference to its practical utility, all of which were known to the said Hess Electrical Storage-Battery Company, and its tests and experiments had shown satisfactory results; and the incorporators believed at the time of said purchase of said patent and property that the same was of very great value, and hoped and believed said company would realize therefor and thereon largely more than the $90,000 paid therefor. (7) That the said incorporators and stockholders of said incorporation continued to experiment with and test said patented articles until late in the year 1894, receiving numerous offers for the purchase of territory and for the placing of the same in use upon cars and otherwise, many of which offers were rejected by said Hess Electric Storage-Battery Company because of the belief that said patents and the use of said patent articles were worth more than the offers made therefor, and for the use thereof; that during said period other inventions for the use and application of electricity as a motive power were discovered and invented, whereby and by reason whereof the Hess Electric Storage-Battery Company has not, so far, been able to realize revenues therefrom to any large extent,--that is to say, the said corporation has not been able to make any sales satisfactory to said company, and the said patents and property have never brought to the corporation any remuneration adequate to meet its entire expenditures.” In September of the year 1893 the corporation borrowed of the Commercial Loan Association the sum of $670, and executed its notes therefor, due one month after date. The loan association had knowledge of all the facts hitherto recited regarding the organization of the corporation, and of the manner in which it had issued and disposed of its stock, and was fully cognizant of all the facts regarding the purchase and sale of the patents and property, and of the value thereof. After the maturity of the note, the loan association transferred the same to plaintiff. Plaintiff recovered judgment thereon against the corporation, and after an execution had been issued, and returned “No property found,” it commenced this action. On these facts the case was tried to the court, resulting in a judgment for defendant, and from that judgment the appeal is taken.

Involved primarily is the so-called “trustfund doctrine,” as applied to stockholders' obligations to creditors. This is founded on the proposition that as the state undertakes to relieve the stockholder in a corporation of general liability for the debts of the concern, to the amount that he has invested in the enterprise, he ought, in good faith, to pay in money or its equivalent the face value of the stock received; and, if he fails to do this, he should be treated as holding the remainder in trust for the benefit of the creditors of the corporation. From this proposition two apparently conflicting and inconsistent rules have grown up, one of which may be called the “true-value rule,” and the other the “good-faith rule.” Courts adopting the good-faith rule are also divided on the proposition as to what is necessary to be shown to constitute good faith. Some of them hold that, in the absence of an affirmative showing of fraud aliunde, mere overvaluation of the property given in exchange for stock will not render the stockholder liable for the difference, while others hold that overvaluation itself, especially if gross, constitutes, or at least raises a strong presumption of, fraud. The development of the trust-fund doctrine may be gathered from a reading of the following: Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944; Sawyer v. Hoag, 17 Wall. 610, 21 L. Ed. 731;Handley v. Stutz, 139 U. S. 427, 11 Sup. Ct. 530, 35 L. Ed. 227, and cases cited therein; Hollins v. Iron Co.; 150 U. S. 371, 14 Sup. Ct. 127, 37 L. Ed. 1113;Osgood v. King, 42 Iowa, 478. Cases holding to the true-value doctrine are as follows: Van Cleve v. Berkey, 143 Mo. 109, 44 S. W. 743, 42 L. R. A. 593;Joseph v. Davis (Ala.) 10 South. 830;Gates v. Stone Co., 57 Ohio St. 60, 48 N. E. 285;Haldeman v. Ainslie, 82 Ky. 395;Libby v. Tobey, 82 Me. 397, 19 Atl. 904;Elyton Land Co. v. Birmingham Warehouse & Elevator Co., 92 Ala. 407, 9 South. 129, 12 L. R. A. 307;Clayton v. Knob Co., 109 N. C. 385, 14 S. E. 36;Gogebic Inv. Co. v. Iron Chief Min. Co., 78 Wis. 427, 47 N. W. 726. Some of those holding to the first division of the good-faith rule are Smith v. Prior, 58 Minn. 247, 59 N. W. 1016;Schenck v. Andrews, 57 N. Y. 147;Van Cott v. Van Brunt, 82 N. Y. 535;Graves v. Brooks (Mich.) 75 N. W. 932;Coit v. Amalgamating Co., 119 U. S. 343, 7 Sup. Ct. 231, 30 L. Ed. 420;Kelley v. Fletcher, 94 Tenn. 1, 28 S. W. 1099;Rickerson Roller-Mill Co. v. Farrell Foundry & Machine Co., 43 U. S. App. 452, 23 C. C. A. 302, 75 Fed. 554; Phelan v. Hazard, 5 Dill. 45, Fed. Cas. No. 11,068; New Haven Horse-Nail Co. v. Linden Springs Co., 142 Mass. 349, 7 N. E. 773. And of those holding to the second division are Douglass v. Ireland, 73 N. Y. 104;Boynton v. Andrews, 63 N. Y. 96;Hastings Malting Co. v. Iron Range Brewing Co., 65 Minn. 28, 67 N. W. 652;Kelly v. Mining Co. (Mont.) 53 Pac. 959, 42 L. R. A. 621;Lloyd v. Preston, 146 U. S. 630, 13 Sup. Ct. 131, 36 L. Ed. 1111;Wallace v. Manufacturing Co. (Minn.) 73 N. W. 189. It will be noticed that there is some confusion in the New York and United States supreme court cases, and it is difficult to say just what rule prevails in Illinois. See Sprague v. Bank, 172 Ill. 149, 50 N. E. 19, 42 L. R. A. 606. But the supreme...