Van Cleve v. Berkey

• Decision Date: 29 January 1898
• Parties: Van Cleve et al. v. Berkey et al.; Brettelle et al., Appellants
• Court: Missouri Supreme Court

44 S.W. 743

143 Mo. 109

Van Cleve et al. v. Berkey et al.; Brettelle et al., Appellants

Supreme Court of Missouri

January 29, 1898

Appeal from the St. Louis City Circuit Court. -- Hon. Jacob Klein Judge.

Affirmed.

W. B Thompson for appellants.

(1) The decree in this case is based upon the dictum of the Supreme Court in the case of Shickle v. Watts, 94 Mo. 417 that the court has the right to inquire into the sale and transfer of the property received by a corporation for its stock, whether such sale and transfer is fraudulent or not; which decision has been overruled by the Supreme Court. Woolfolk v. January, 131 Mo. 620. (2) The transaction between the original stockholders and the corporation, whereby the corporation acquired the right to the invention of Braun for purifying and separating middlings in the manufacture of flour, if honest and straightforward and not impeached for fraud, can not be disturbed simply because the corporation has made a disadvantageous sale of its stock. Fogg v. Blair, 139 U.S. 118; Clark v. Beaver, 139 U.S. 96; Handley v. Stutz, 139 U.S. 117; Streator Car Seat Co. v. Rankin, 45 Ill.App. 226; Whitehill v. Jacobs, 75 Wis. 474; Schenk v. Andrews, 57 N.Y. 133; Boynton v. Andrews, 63 N.Y. 93; Douglas v. Ireland, 73 N.Y. 100; Coit v. North Carolina Gold Co., 119 U.S. 343; Lake Superior Iron Co. v. Drexel, 90 N.Y. 87; Knowles v. Duffy, 40 Hun. 485; Coffin v. Ransdell, 110 Ind. 417; New Haven Horse Nail Co. v. Linden Spring Co., 142 Mass. 349. (3) In the absence of fraud the defendants, Brettelle and Dustin, were innocent purchasers of full-paid and non-assessable stock. In the absence of any arrangement constituting any fraudulent overvaluation of the patent rights sold to the corporation, Dustin and Brettelle are innocent purchasers of full-paid and non-assessable stock, which was issued to them as fullpaid and non-assessable, and hence the fact that they had knowledge that the stock which they purchased had been paid for by the invention sold to the corporation would not affect their position as innocent purchasers of said stock. Woolfolk v. January, 131 Mo. 620.

Frank E. Richey and J. L. Secor for respondents.

(1) The capital stock of a corporation is a trust fund for the benefit of creditors, and a rigid scrutiny will be made in the interest of creditors into every transaction by which the liability is sought to be avoided. Cook on Stock and Stockholders [3 Ed.], sec. 199; Ramsey v. Mfg. Co., 116 Mo. 313. (2) No device by which members of a corporation attempt to avoid stockholders' liability will be upheld. No release can be had except by fair and honest dealing for a valuable consideration. Coleman v. Howe, 154 Ill. 458; Ins. Co. v. Mfg. Co., 97 Ill. 537; Alling v. Wentzell, 46 Ill.App. 562; Bates v. Tel. Co., 134 Ill. 546; Kern v. Bldg. Ass'n, 40 Ill.App. 356. (3) Payment must be made in money or in money's worth. Beach on Private Corp., sec. 557; 2 Thompson's Corp., sec. 1606; Garrett v. Kansas City Coal Co., 113 Mo. 330. (4) It is not necessary to allege fraud in cases of this kind. The expectation of the stockholders was blasted, and nothing ever having been paid for the stock then or thereafter, they became liable for the debts of the company, not on account of actual fraud, but because they issued and accepted as full paid stock, well knowing that, in fact, notng was paid on it at the time ofits issue or subsequently. Boynton v. Hatch, 47 N.Y. 225; Bank v. Gallaher, 43 Mo.App. 482; Leucke v. Tredway, 45 Mo.App. 507; Boulton Carbon Co. v. Mills, 78 Iowa 460; Howe v. Ill. Ag'l Works, 46 Ill.App. 85; Malting Co. v. Brewing Co., 67 N.W. 652; Coleman v. Howe, 154 Ill. 458. (5) If property taken in payment for stock is "practically worthless or is unsubstantial and shadowy in its nature, the courts will hold that there has been no payment at all," and stockholders will be held liable accordingly. 1 Cook, Stock and Stockholders [3 Ed.], sec. 46; Leucke v. Tredway, 45 Mo.App. 507; Nat'l Tube Works v. Gilfillan, 124 N.Y. 302; Chisholm v. Forny, 65 Iowa 333; Hardware Co. v. Tintic Milling Co., 45 P. 200; Camden v. Stuart, 144 U.S. 104. (6) The appellants, even though assignees of stock, are liable to the creditors even if the stock certificates bore the statement "full paid and non-assessable," for they knew, before they acquired their stock, that the statement was not true. Ill. Stat. 1872, chap. 32, sec. 8; Shickle v. Watts, 94 Mo. 410; Boulton Carbon Co. v. Mills, 78 Iowa 460; Close v. Sherwood, 25 N.Y.S. 980. (7) In the case of Woolfolk v. January, 131 Mo. 620, the plaintiff was not either a bona fide creditor nor an innocent purchaser, while in the case at bar the respondents are bona fide creditors. (8) The law requires that the entire capital stock of the corporation shall be taken, and that its face value in some form shall find its way into the treasury of the corporation. Cook on Stock and Stockholders, sec. 199; Ins. Co. v. Mfg. Co., 97 Ill. 537; Shickle v. Watts 94 Mo. 410; Garrett v. Kansas City C. M. Co., 113 Mo. 330; Leucke v. Tredway, 45 Mo.App. 508. (9) No device, however plausible, though good as between stockholders, will, as against the creditors of the corporation, deprive the corporate stock of its trust character, or excuse the stockholders from payment therefor in full. Sawyer v. Haag, 17 Wall. 610; Alling v. Wenzel, 133 Ill. 264; Upton v. Tribilcock, 91 U.S. 45. (10) Where property is taken in payment of stock at an exaggerated estimate, a strong presumption is raised that the valuation is not in good faith and is made for a fraudulent purpose. Cook on Stock and Stockholders, sec. 47; Douglass v. Ireland, 73 N.Y. 104; Boynton v. Andrews, 63 N.Y. 93; Osgood v. King, 42 Iowa 478; Coleman v. Hill, 154 Ill. 458. (11) Gross inadequacy of price is sufficient to put the purchaser upon inquiry and charge him with all that might have been learned by diligent investigation. Dewitt v. Perkins, 22 Wis. 473; Hoppin v. Daily, 25 Wis. 573; Wade on Law of Notice, sec. 23; Cook on Stocks and Stockholders, secs. 49, 50; Upton v. Tribilcock, 91 U.S. 45; Morawetz on Private Corp., sec. 195; Jackson v. Trear, 64 Iowa 496.

OPINION

In Banc.

Brace J.

-- This is a proceeding in equity in behalf of various judgment creditors of the Braun Machine Manufacturing Company against that company and the other defendants who are stockholders therein, whereby it is sought to charge the individual defendants, as the owners of unpaid stock in said corporation, with a sum sufficient to pay the several judgments of the plaintiffs remaining unpaid.

The corporation was formed under the laws of the State of Illinois, and was to have a capital of $ 100,000 which was subscribed by the parties in interest as follows:

William F. Braun

$ 90,000

Alfred Berkey

2,000

Solomon L. Cohen

2,000

Mayers Jacoby

2,000

Edwin Massa

2,000

Nelson G. Ziebold

1,000

Louis Lesaulmies

1,000

To whom the full amount of the stock, as subscribed was issued as full paid and non-assessable; the consideration therefor being a transfer, or an agreement on the part of said Braun to transfer, to the company an invention of his for an improved process of manufacturing flour, for which he claimed to have a French patent and for which application had been made for a United States patent. The trial court held that such transfer was not full payment for said stock, and charged the defendants as holders of unpaid stock. From the judgment of the circuit court two of the defendants Dustin and Bretelle, who were not original subscribers, but purchasers of stock soon after its organization, appeal. Their counsel have kindly inserted in their brief the opinion of the learned judge who tried the case below, the following extracts from which contains a fair statement of the case, with his rulings:

Judge Klein says: "The essential facts shown by the evidence are these:

"One William F. Braun, claiming to be the inventor of a valuable improvement in the manufacture of flour, and claiming to have obtained a patent on his invention from the French government, induced the defendants, Berkey, Cohen, Jacoby and Massa, and the other subscribers to the capital stock of the corporation above named, who are made defendants in the bill but who have not been served with process, and are therefore not in court, to interest themselves in the matter; and doubtless also induced them to believe that the invention which he claimed to have made, was of the greatest value and would revolutionize the whole milling business of the world. He seems to have been impecunious himself, but to have had great powers of persuasion, and as a result of a number of interviews the parties named agreed to form a corporation under the laws of Illinois, with a capital of $ 100,000, which was subscribed by the parties above named in the proportions above stated. It is not clear from the evidence whether the original arrangement made between Braun and these parties was to the effect that they should severally become interested in the invention itself, prior to its transfer to the corporation to be formed, or whether the invention was to be turned over to the corporation by Braun in payment of the shares of stock subscribed by him, and that the other subscribers should contribute certain sums of money to be used in procuring a patent upon the invention in the United States, and as sort of working capital for the corporation; but it does not seem important to the court which of these two views that may be taken of the evidence is the correct one. The testimony of the defendants, who have testified in the case with relation to that matter, is extremely unsatisfactory, and it is not the fault of any of the plaintiffs that all of the books and records of this corporation have...