Sullivan v. Farnsworth

• Decision Date: 10 October 1915
• Parties: SULLIVAN v. FARNSWORTH.
• Court: Tennessee Supreme Court

179 S.W. 317

132 Tenn. 691

SULLIVAN v. FARNSWORTH.

Supreme Court of Tennessee.

October 10, 1915

Appeal from Chancery Court, Shelby County; Francis Fentress Chancellor.

Action by J. H. Sullivan, receiver of the Lake View Traction Company, against C. F. Farnsworth. Judgment for plaintiff and defendant appeals. Affirmed.

Caruthers Ewing, of Memphis, for appellant.

Metcalf & Metcalf, of Memphis, for appellee.

FANCHER J.

Complainant is receiver of the Lake View Traction Company, a Maine corporation. This concern undertook to construct an interurban railway running out from Memphis to a point in northern Mississippi, and became insolvent.

The defendant was induced by his friend, the late W. A. Percy, of Memphis, to take stock in the concern. He first on July 31 1906, put up $1,000 on the assurance of Percy, acting for the traction company, that this was the full extent of his liability. Later, on May 9, 1907, $1,000 of additional stock was issued in his name, and finally, on February 24, 1910 under a representation that it was necessary in order to successfully carry out the enterprise, he agreed to and did pay in $5,000. Preferred stock issued to defendant to the par value of $7,000. The second $1,000 was not paid for, and the sum of $6,000 was the total amount of money paid by defendant. He is not contradicted in his statement that he did not make these payments as an investment, but in order to assist his lawyer and friend, W. A. Percy.

Defendant also received as a bonus additional common stock to the par value of $4,500, and it is inferred that the second $1,000 of preferred stock was not intended to be paid for. Percy assured Farnsworth that the money he had paid would be his total liability, and Farnsworth did not inspect the certificates, and did not know that he had received any other than the $6,000 of stock for which he had paid. He did not know whether this stock was common or preferred. The record of the corporation shows his receipt, however, for the full amount issued to him, and he retained all this stock until this suit was brought, June 10, 1913.

The company, in all its sales of preferred stock, issued an additional 50 per cent. of common stock as a bonus. Its entire capital, when organized, March 17, 1906, was $50,000, but this was increased by amendment of its charter to $1,000,000; the stock being divided equally, common and preferred. Its charter was filed in Tennessee with the secretary of state.

In addition to a bonded debt of $350,000, there was established and judicially determined unpaid unsecured debts of $119,000, at the time the present suit was brought. Under a general creditors' bill its entire assets were administered and exhausted in payment on certain secured debts, leaving all unsecured debts unpaid.

Thereupon the receiver was ordered to institute such action or actions as may be necessary to recover on account of unpaid stock subscriptions as may be due, for the common benefit of all who may be creditors in the receivership cause, and entitled to have said assets collected.

The present suit is brought to collect of defendant on behalf of the unsecured creditors the $5,500, being the amount of the face value of the capital stock of the traction company, issued to defendant, for which it is conceded he did not pay anything, either in money or services.

The chancellor rendered a decree against defendant for $5,500, with interest from June 24, 1910, date of the last delivery of stock to defendant.

The defendant has appealed, and upon his assignment of errors presents a number of propositions to determine.

It was not necessary to make defendant liable to the responsibilities of a stockholder that he should have formally subscribed for stock. The fact that he receipted for, accepted, and held the certificates, rendered him amenable to all the responsibilities attaching in favor of unsecured creditors. Upton v. Tribilcock, 95 U.S. 45, 47, 23 L.Ed. 203; Chubb v. Upton, 95 U.S. 665, 24 L.Ed. 523; Sanger v. Upton, 91 U.S. 56, 23 L.Ed. 220; Thompson's Liability of Stockholders, § 105; Jackson v. Traer, 64 Iowa, 469, 20 N.W. 764, 52 Am. Rep. 456; Calumet Paper Co. v. Stotts, 96 Iowa, 147, 64 N.W. 782, 59 Am. Rep. 362; Clevenger v. Moore, 71 N. J. Law, 148, 58 A. 88; Dunn v. Howe (C. C.) 96 F. 160; Barron v. Burrill, 86 Me. 66, 29 A. 939; Id., 86 Me. 72, 29 A. 938 (two cases); Cook on Corporations, p. 251, § 52; Shickle v. Watts, 94 Mo. 410, 7 S.W. 274.

The two cases of Barron v. Burrill are especially appropriate to this question. It would be highly dangerous to absolve a stockholder from liability because it appeared from his own statements that he did not remember or did not know that he had receipted for and held bonus stock in a corporation. Very many might escape the liability if this were so.

What are the laws of Maine upon the subject? We quote from the Code of Maine, 1903, as follows:

Chapter 47, § 50:

"Any corporation may * * * issue stock for services rendered to such corporation and the stock so issued shall be full paid stock and not liable to any further call or payment thereon; and in the absence of actual fraud in the transaction, the judgment of the directors as to the value of the * * * services rendered, shall be conclusive."

Chapter 47, § 87:

"The capital stock subscribed for any corporation is declared to be and stands for the security of all creditors thereof; and no payment upon any subscription to or agreement for the capital stock of any corporation, shall be deemed a payment within the purview of this chapter, unless bona fide made in cash, or in some other matter or thing at a bona fide and fair valuation thereof."

Chapter 47, § 89:

"Any person having such judgment [i. e., on claims enumerated in section 88], or any such trustees, receivers or other persons appointed to close up the affairs of an insolvent corporation, may, within two years after their right of action herein given accrues, commence an action on the case or bill in equity, without demand or other previous formalities, against any persons, if a bill in equity, jointly or severally, otherwise severally, who have subscribed for or agreed to take stock in said corporation and have not paid for the same; * * * and in such action they may recover the amount of the capital stock so remaining unpaid or withdrawn, not exceeding the amounts of said judgments or the deficiency of the assets of such insolvent corporation. But no stockholder is liable for the debts of the corporation not contracted during his ownership of such unpaid stock, nor for any mortgage debt of said corporation; and no action for the recovery of the amounts hereinbefore mentioned shall be maintained against a stockholder unless proceedings to obtain judgment against the corporation are commenced during the ownership of such stock, or within one year after its transfer by such stockholder is recorded on the corporation books."

It is said that the laws of Maine were not properly pleaded.

It is necessary to allege and prove the statutes of another state in order to pursue a remedy afforded or enforce a liability existing under such laws. N. & C. R. Co. v. Sprayberry, 9 Heisk. 852; Railroad v. Foster, 10 Lea, 351; Railway Co. v. Lewis, 89 Tenn. 235, 14 S.W. 603; Kelley Bros. v. Fletcher, 94 Tenn. 1, 28 S.W. 1099; Harris v. Water & Lt. Co., 114 Tenn. 328, 348, 85 S.W. 897; Mandel v. Swan, etc., Co., 154 Ill. 177, 40 N.E. 462, 27 L. R. A. 313, 45 Am. St. Rep. 124; Ball v. Anderson, 196 Pa. 86, 46 A. 366, 79 Am. St. Rep. 693; Rice v. Merrimack Hosiery Co., 56 N.H. 114; Salt Lake, etc., Bank v. Hendrickson, 40 N. J. Law, 52; Nashua, etc., Bank v. Anglo-Amer. etc., Co., 189 U.S. 221, 23 S.Ct. 517, 47 L.Ed. 782.

We think, however, the complainant was excused in this case from setting up the statutes and laws of Maine:

(a) Because the answer of defendant pleads those laws, averring:

"The defendant claims that the rights of the parties are to be determined by the laws of Maine, which, without further proof, may be taken and treated as shown in the public statutes, and decisions of the Supreme Court of Maine."

(b) Because the agreed stipulation of proofs made by the parties filed as exhibit a copy of the Revised Statutes of the State of Maine in relation to unpaid stock subscriptions. The only qualification to the agreement was that:

"Defendant did not know the Maine laws and denies their materiality."

There is no exception by defendant to the introduction of the laws on the ground that they were not pleaded.

Defendant did not set forth the statutes of Maine in his answer, but insisted they were controlling, and agreed that they may be taken and treated as shown in the public statutes and decisions of the Supreme Court of Maine. He will not be allowed on appeal to take a position so contrary to his pleading and proposed agreement made of record.

The insistence is, further, that the action cannot be maintained, except under the statutes of Maine, and these laws only provide a remedy in case of "subscription to or agreement for the capital stock." In Barron v. Burrill, 86 Me. 72, 29 A. 938, involving the question, the court said:

"An actual taking of shares is equivalent to subscriptions or an agreement to take. Either comes within the meaning of the statute."

That was a rational and practical construction of the statute. Defendant received and receipted for the shares sued on, and he should not be heard to say that he did not know or remember of the transaction.

Another proposition presented is that the stock was issued to defendant as a result of the action of the board of directors on account of what they thought was or would be valuable services rendered by the defendant, and no...