Upchurch v. Goodroe

• Decision Date: 12 March 1942
• Docket Number: 6 Div. 958.
• Citation: 242 Ala. 395,6 So.2d 869
• Parties: UPCHURCH et al. v. GOODROE et al.
• Court: Alabama Supreme Court

6 So.2d 869

242 Ala. 395

UPCHURCH et al. v. GOODROE et al.

6 Div. 958.

Supreme Court of Alabama

March 12, 1942

DeGraffenried & McDuffie, of Tuscaloosa, for appellants.

McQueen & McQueen, Foster, Rice, Madison & Rosenfeld, Reuben H. Wright, and Ward W. McFarland, all of Tuscaloosa, for appellees.

FOSTER, Justice.

This suit is in equity to obtain the benefits of an agreement for the lease with an option to purchase a textile mill with plant and machinery in Tuscaloosa County, owned by Rosenau.

Complainants whom we will call Upchurch, claim that Goodroe, in whose name the lease and option was made with Rosenau, was acting as their agent for them as an undisclosed principal, and they seek to follow it into the possession of a corporation by the name of Cottondale Mills, Inc., to which it was assigned by Goodroe, and that it be vested in them and out of the corporation. The contract was dated December 17, 1940, to become operative January 1, 1941. The corporation was organized April 23, 1941, to take over the lease and to operate the plant. The incorporators were Goodroe, who subscribed to five hundred and ten shares of the par value of one dollar each, and paid for same by a transfer of the lease above mentioned: also Marvin Clark four hundred shares, paid for in cash $400, and Gordon D. Palmer ninety shares for $90 paid in cash.

The trial court found and decreed that Goodroe was in fact acting as agent for Upchurch, who was the equitable owner of the lease and agreement; that at the time of the organization of the corporation Goodroe was the employed representative of Upchurch, a non-resident, operating the plant for him on a salary and percentage of the profits; that Upchurch supplied all funds with which to pay the rental and for the operations and new equipment and supplies; that Goodroe perpetrated a fraud on Upchurch in assigning the contract to the corporation and having it take over the operations; that the corporation as such, and both Marvin Clark and Gordon Palmer as well as Rosenau, had no notice of the rights of Upchurch and were acting in good faith.

It was therefore decreed that the five hundred and ten shares of stock held in the name of Goodroe, purchased by a transfer of the lease, were in equity owned by Upchurch, and the court divested the same out of Goodroe, and invested them in Upchurch. Further consequential orders were made carrying into effect such finding and decree. Upchurch appeals, and the corporation, Goodroe, Marvin Clark and Rosenau cross-assign errors.

Upchurch claims, first, that the corporation was fraudulently organized and could not become an innocent purchaser of the stock, and that instead of the five hundred and ten shares being decreed to him, the entire lease should be so decreed.

The question then is whether a corporation which was fraudulently conceived and organized by its promoter became a bona fide purchaser from such promoter of the lease with which he paid for his subscription to the capital stock. This question seems to be answered by the authorities as dependent upon whether the other incorporators had notice of the fraud of the promoter, or of the equitable right of Upchurch in the lease. The knowledge which Goodroe had, who was the president in the organization, does not impart notice to the corporation as a matter of law, where he is acting for himself and in his own interest in assigning the lease to the corporation. It is said in Frenkel v. Hudson, 82 Ala. 158, 2 So. 758, 60 Am.Rep. 736, that under such circumstances the corporation is a bona fide purchaser unless the others interested had knowledge of facts sufficient to put them on inquiry as to the existence of the equity sought to be enforced. This opinion is used as a text in 18 Corpus Juris Secundum, Corporations, § 241, p. 675, note 71; Id. Corporations, page 531, § 127. In Lea v. Iron Belt Mercantile Co., 147 Ala. 421, 42 So 415, 8 L.R.A.,N.S., 279, 119 Am.St.Rep. 93, the person transferring the property was said to be almost the sole owner of the corporation, and therefore it was said the general rule does not apply. To this extent only was that opinion approved in Hall & Brown Woodworking Mach. Co. v. Haley Furniture & Mfg. Co., 174 Ala. 190, 56 So. 726, L.R.A. 1918B, 924. But in the instant case Goodroe only owned fifty-one per cent. of the stock. The others paid in full in cash. The question is were they innocent.

The existence of innocent stockholders justifies corporate rights in many aspects, in relation to fraudulent promoters who may have a controlling interest. See Ex parte Brown & Co., 240 Ala. 157, 198 So. 138; Riles v. Coston-Riles Lbr. Co., 208 Ala. 508, 95 So. 43; Davis v. Las Ovas Co., 227 U.S. 80, 33 S.Ct. 197, 57 L.Ed. 426.

The trial court had the evidence given by the witnesses in open court. It was conflicting in this respect. We need not rehearse it. The finding of the court should be sustained on well known principles.

The lease and option agreement contained a clause whereby it was not assignable without the consent of Rosenau. He did consent in writing to the assignment to the corporation.

Respondents contend that even though Upchurch was entitled to an equitable assignment of the lease as between him and Goodroe and the corporation, Rosenau did not know of Upchurch as an undisclosed principal equitably entitled to the lease, and did not consent to the assignment to Upchurch, and does not now consent. The principle of law is well supported. See 2 Amer.Jur. 322, § 412; Birmingham Matinee Club v. McCarty, 152 Ala. 571, 44 So. 642, 13 L.R.A.,N.S., 156, 15 Ann.Cas. 237; Overton v. Harrison, 207 Ala. 590, 93 So. 564.

But this principle would have no application to relief in which the assignment to the corporation is sustained as an innocent purchaser when Rosenau agreed to that assignment without condition expressed in his written consent. The decree does not undertake to vacate the assignment but to enforce a trust on the property into which the lease is traced. Hall v. Hall, 241 Ala. 397, 2 So.2d 908(14); Culver v. Guyer, 129 Ala. 602, 29 So. 779; Small v. Hockinsmith, 158 Ala. 234, 48 So. 541; Smith v. Perry, 56 Ala. 266.

Rosenau is not in position to resist the right of complainant as decreed by the trial court though he may not have known of complainant's equity when he consented to the assignment to the corporation. This assignment was not set aside by the decree. It remains where he agreed it should be. He cannot control ownership of the corporate stock and his ignorance as to the respective claims of others is immaterial. So that whether he had notice of complainant's equity as now enforced, or did not know of it, is immaterial, since the lease is not here held to be the property of Upchurch, but only the stock into which the lease was traced.

Respondents also contend that to enforce rights as decreed by the trial court, gives effect to a parol trust in land, in that the lease created an interest in land which is within the statute of frauds, and therefore the creation of a trust in such a lease is also within the statute of frauds. Since the lease was to extend more than a year from its date, and included an option to purchase, we assume it would be conceded that the statute does apply. Code of 1940, Title 20, § 3(5).

But this principle has no application to a resulting trust. That right is not dependent upon contract, but the trust is raised by a doctrine of equity, and arises, broadly speaking, when the consideration of the purchase is paid by one party and the title taken in another. Butts v. Cooper, 152 Ala. 375(5), 44 So. 616.

When the purchase price consists of a cash payment and others which are payable in deferred installments, the right to resulting trust is said to depend upon the payment of that which was immediately payable and an obligation to meet those which are deferred as they mature. Owens & Co. v. Blanks, 225 Ala. 566, 144 So. 35; Bibb v. Hunter, 79 Ala. 351. In the instant case, the interest presently acquired by the lease and option agreement was a tenancy, and the purchase price was $100 a month as the rental price. This contract was to become operative January 1, 1941, after its execution December 17, 1940. But the $100 to be paid January 1, 1941, was paid at once after the execution of the contract in the following manner: Upchurch gave his check to Goodroe for $500, and he opened an account in his own name in the bank and gave his check on that fund for $100, pursuant to an agreement between him and Upchurch. Goodroe had no other funds in that account.

According to the contention of Upchurch, which the trial court properly sustained, we think, the lease contract was his and was taken for him exclusively, but in the name of Goodroe for reasons to which we will later refer. As between those two, Upchurch was the party bound to make the stipulated deferred payments. He did make them by sending the money...