Stevens v. Associated Mortg. Co. of N.J.

• Decision Date: 05 December 1930
• Citation: 152 A. 461
• Parties: STEVENS, Attorney General, v. ASSOCIATED MORTG. CO. OF NEW JERSEY.
• Court: New Jersey Court of Chancery

152 A. 461

STEVENS, Attorney General,

v. ASSOCIATED MORTG. CO. OF NEW JERSEY.

Court of Chancery of New Jersey.

Dec. 5, 1930.

Syllabus by the Court.

Process is the means of compelling a defendant to appear in court; and it need not necessarily be a subpoena or other writ, it may be an order or notice; as every state has the power to prescribe a reasonable notice in order to subject a defendant to the jurisdiction of its courts.

Syllabus by the Court.

A hearing under the New Jersey Securities Act (Blue Sky Law), chapter 79, P. L. 1927, p. 138, is summary, and the court proceeds to hear the affidavits, proofs and allegations offered on behalf of the parties; and if it shall appear to the court that the act in question has been violated, it may issue an injunction and appoint a receiver.

Syllabus by the Court.

This summary hearing is a complete trial of the issues presented by the pleadings; the defendant corporation may present an answer or only affidavits, and may, without answer or affidavits, contest the charges contained in the complainant's bill; after summary final hearing no process of subpoena is issued, as the entire function of process has been performed by service of the order to show cause or other notice under the direction of the court; no subsequent final hearing can be had. Syllabus by the Court.

Facts examined, and held to show a violation by defendant of the New Jersey Securities Act; and that therefore the complainant is entitled to an injunction and the appointment of a receiver, in accordance with the statute and the prayer of the bill.

Syllabus by the Court.

Stevens v. Adelphia Finance Service, 107 N. J. Eq. 222, 152 A. 460, followed.

Suit by William A. Stevens, Attorney General, against the Associated Mortgage Company of New Jersey.

Decree for complainant.

On final hearing on bill, affidavit, and exhibits, and answering affidavits.

William A. Stevens, Atty. Gen., Richard C. Plumer, Asst. Atty. Gen., and Philip L. Coffin, Jr., Sp. Asst. Atty. Gen., for complainant.

Herbert S. Killie and George M. Hillman, both of Mt. Holly, for defendant.

WALKER, Chancellor.

The complainant filed a bill against the defendant under the provisions of the New Jersey Securities Act, chapter 79, P. L. 1927, p. 138, and the acts amendatory thereof and supplemental thereto, which bill is verified by the affidavit of the Special Assistant Attorney General, who investigated the situation; and to whose affidavit is annexed several exhibits.

The defendant filed no pleading herein up to the return day of the order to show cause, but went to hearing on the bill and affidavit and exhibits annexed to the affidavits of certain of the promoters, officers and employes of the defendant. The day after the bearing, and the day after the making of the final decree herein, the defendant filed an answer. Upon the hearing reliance was only had upon the bill, affidavit and exhibits, and the affidavits put in by the defendant. The case was fully argued by both sides upon the theory that it was on final hearing, and submitted to the court for decision. All the questions were fully argued by counsel on both sides; and immediately upon its conclusion the court decided the case, and shortly thereafter signed the final decree. While no objection was made to the summary hearing, the defendant in its petition of appeal now says that the hearing was preliminary and it is entitled to another. Not so.

These proceedings under the New Jersey Securities Act are akin in a great measure to those against insolvent corporations under 2 Comp. St. 1910, p. 1640, § 65, which provides among other things that the court may proceed in a summary way to hear the affidavits, proofs and allegations offered on behalf of the parties, and if it shall appear to the court that the corporation has become insolvent, it may issue an injunction; and by section 66, may appoint a receiver.

In Pierce v. Old Dominion, etc., Smelting Co., 67 N. J. Eq. 399, at page 410, 58 A. 319, 323, Vice Chancellor Stevenson said: "On the return day of the order to show cause the statute prescribes a 'summary' hearing of the 'affidavits, proofs, and allegations which may be offered on behalf of the parties.' Under our modern practice in the vice chancellors' courts this summary hearing often is, and always will be where justice so requires, a complete trial of the issues presented by the pleadings. The defendant corporation may present an answer, or only affidavits, or may, without answer or affidavits, contest the charges contained in the complainant's petition or bill. * * * After the summary final hearing no process of subpoena is issued, or ought to be issued. The entire function of process has been performed by service of the statutory notice under the direction of the court. * * * No other subsequent final hearing can be had."

Process is the means of compelling a defendant to appear in court; and it need not necessarily be a subpoena or other writ, it may be an order or notice. Every state has the power to prescribe a reasonable notice which shall be given in order to subject a defendant to the jurisdiction of its courts. In re Martin, 86 N. J. Eq. 265, 273, 98 A. 510.

The New Jersey Securities act in every section indicates that the suit is one of summary jurisdiction; if anything were wanting to show that the court has summary jurisdiction in these matters as in section 65 of the Corporations Act, it is furnished by the amendatory act of 1930, P. L. p. 254, § 5, approved four months before this bill was filed, which amends § 6 of the original act by providing among other things that "the court * * * may proceed in a summary way to hear the affidavits, proofs and allegations which may be offered on behalf of the parties," etc., having already provided in the original act for the issuance of injunction and appointment of a receiver.

The defendant company was incorporated on December 2, 1927, with an authorized capitalization of 10,000 shares of 7% cumulative preferred stock of $100.00 per share, and 20,000 shares of no par value common stock. Following the organization of the corporation 9,000 shares of no par value common stock was issued to the promoters and organizers for promotion work, but no estimate was made of the value of their services, so it cannot be told what valuation the corporation held or considered this stock to have had. Contract was entered into between the corporation and Marquis T. Perkins, whereby he was to sell the stock of the corporation and receive a commission of 25% of the subscription price. On April 30, 1930, $111,110.00 worth of stock of the corporation had been sold, while $51, 882.28 was the cost of organizing and distributing that stock, which showed that the net worth of the corporation's property had depreciated to $59,227.72.

Joseph R. Cheesman, the president of the corporation, received several thousand shares of the common no par stock of the corporation, for which he paid nothing, and later sold 745 shares of that stock to the corporation itself at $5.00 per share, which the corporation purchased out of capital, having insufficient earnings to pay for it out of surplus; and Cheesman obtained $3,725.00 in cash for stock for which he had paid nothing except, perhaps, some work in organization, etc., which was never valued. He says in his affidavit that he intends to pay back the $3,725.00 and the company lists it as an asset.

The defendant company said in its circulars that dividends had consistently been paid by the corporation; while, in fact, the total earnings of the corporation from its organization, December, 1927, up to and including June, 1930, were $1,728.00, while dividends totalling $3,401.02 had been paid. It is apparent that the corporation had not earned sufficient money to enable it to pay such dividends out of the earnings and also the cost of sale of its securities, organization expenses and operating overhead, and its deficit on that date was $43,429.67.

Although the business of the corporation was to loan money on first mortgages, it spent considerable sums in the purchase of securities of other corporations, to the damage and impairment of its financial condition. One purchase was that of stock of the Burlington Real Estate Company, a competitor of the defendant, which was headed by the officers and directors of the defendant corporation. Its president was Cheesman, who was the president of the defendant.

At the time of the organization of the corporation, two men, Messrs. Perrine and Dickson, appeared before the directors and stated they were entitled to a large number of shares of common stock for work, labor and services in organization of the company. The officers of the corporation, acting under orders from the board of directors, thereafter issued 3,000 shares of the corporation's no par common stock to Perrine and Dickson, as payment for organization expenses, neglecting, however, to establish the actual money value of the services they had performed. Eater, at a special meeting of the directors, Perrine stated that he was attempting to procure capital with which to operate the company's business, and urged that members of an advisory board be procured, consisting of men of wide acquaintanceship and esteem, so that he might thereby be able to more readily dispose of the corporation's securities. There was issued to him 6,000 shares of common no par stock, to be used in the procurement of members of the advisory board, the board of directors, however, not establishing the value of his work or the stock so issued for it.

Cheesman, the president, being examined by the Special Assistant Attorney General, testified as follows:

"Q. At the time of the organization, was 9,000 shares of stock issued to Perrine and Dickson?

"A. 3,000 at one time and 6,000 at another.

"Q. What did they pay for that stock?

"A. Well, the first three thousand, I do not suppose they paid anything. That was for...