Wallace v. Carpenter Electric Heating Manufacturing Company And Another
| Decision Date | 03 December 1897 |
| Docket Number | 10,815--(149) |
| Citation | 73 N.W. 189,70 Minn. 321 |
| Parties | THOMAS WALLACE v. CARPENTER ELECTRIC HEATING MANUFACTURING COMPANY and Another |
| Court | Minnesota Supreme Court |
Action in the district court for Ramsey county against the Carpenter Electric Heating Manufacturing Company and the American Electric Heating Corporation to ascertain and enforce the liability of the Heating Corporation for unpaid installments on the stock of the Manufacturing Company owned by it, in case the Heating Corporation failed to pay a judgment in favor of plaintiff against the Manufacturing Company amounting to $ 5,587.71. From a judgment dismissing the action, entered pursuant to findings and an order of Otis J., plaintiff appealed. Reversed.
W. S Dwinnell, for appellant.
The capital stock of a corporation must be paid for in money or money's worth, and any attempt to issue it otherwise is a fraud upon creditors. Hastings v. Iron Range, 65 Minn. 28; First National v. Gustin, 42 Minn. 327; Hospes v. Northwestern, 48 Minn. 174; Rogers v Gross, 67 Minn. 224. By the construction of the lower court G. S. 1894, § 3415, is in derogation of the common law, which requires capital stock to be, in fact, fully paid. 2 Morawetz, Priv. Corp. § 825; Taylor, Priv. Corp § 545; 23 Am. & Eng. Enc. 858. If it was intended to depart from the common law, it should clearly so appear from the terms of the statute, as in section 2832, relating to mining corporations, which provides that "no stock so issued or sold, purporting to be full-paid, shall be subject to any further assessment in the hands of the lawful holder thereof without his consent." There is no such language in section 3415, hence the legislature did not intend it should have such a construction.
The burden of proof is on respondent to show itself a bona fide purchaser. The purchaser of a stock certificate, silent on its face whether it is full-paid or not, takes it without any presumption as to full payment. If such purchaser makes no inquiry as to whether the certificate is full-paid he cannot claim, when his stock is subsequently assessed by the company, that the certificate is full-paid as to him and that he is an innocent holder of full-paid stock. Such purchaser takes the stock subject to all burdens then attaching to it whether in favor of the corporation or of its creditors. If there are unpaid assessments he must pay them when called upon, or if the assessments are collectible by the creditor he must pay them to the creditor. Hence, in the absence of direct representations, there is no presumption whether the stock is full-paid or not. A purchaser takes it charged with knowledge of the facts relating to its issue and payment. Our practice shows the correctness of this reasoning. A company undertaking to collect an assessment shows that there are assessments unpaid and that the defendant is a stockholder. This makes a prima facie case. If defendant asserts representations were made to him by the company leading him to believe the stock full-paid, that becomes defensive matter to be affirmatively proved by him. Likewise if defendant asserts he bought his stock from one to whom such representations were made. In this case respondent is shown to be a stockholder and that its stock was not full-paid. This makes a prima facie case. If it wished to defend on the ground that the company represented to defendant or its vendor that the stock was full-paid, it should have affirmatively proved it.
Capital stock is not negotiable paper in the sense that a person takes it free from the equities of the corporation. 2 Thompson, Corp. §§ 1682, 2353; Hammond v. Hastings, 134 U.S. 401; Young v. South, 85 Tenn. 189; President v. New York, 13 N.Y. 599; Hawes v. Gas Consumers, 9 N.Y.S. 490; Upton v. Hansbrough, 3 Biss. 417.
We know of no case where the evidence as to overvaluation is so plain as in the case at bar, and, as the supreme court of Iowa said in the case of Boulton v. Mills, 78 Iowa 460, parol testimony as to the value of assets turned over in payment for stock will not be received to rebut the facts as set forth in the corporate records. See, also, Hastings v. Iron Range, 65 Minn. 28.
The respondent cannot claim to be an innocent holder of full-paid stock. Boulton v. Mills, supra; Bailey v. Pittsburg, 69 Pa. St. 334; Boynton v. Hatch, 47 N.Y. 225; Northwestern v. Prior, 68 Minn. 95. When a stockholder undertakes to escape liability on the ground that he is an innocent purchaser, the burden is on him to show the fact. Upton v. Tribilcock, 91 U.S. 45; Upton v. Hansbrough, supra; Keystone v. McCluney, 8 Mo.App. 496; Young v. Erie, 65 Mich. 111.
Otto Kueffner, for respondent.
There are two kinds of obligations to pay for stock, not paid for dollar for dollar when issued. The first is a contractual obligation of the stockholder towards the corporation to pay for the stock or any unpaid instalment thereof, and is referred to in G. S. 1894, § 2600, subd. 1. The second is the equitable obligation enforced by the courts in favor of a creditor on the ground of fraud or misrepresentation. In order to give the court jurisdiction, the creditor must show equitable grounds. He must show that he is a bona fide creditor for value and without notice. Hospes v. Northwestern, 48 Minn. 174, 197; First National v. Gustin, 42 Minn. 327; Hastings v. Iron Range, 65 Minn. 28. He must then show that a fraud has been committed by the corporation and the stockholder, such as the issue of fictitious or watered stock, or that the stockholder received his stock for property grossly overvalued and that he knew it was overvalued. In order to invalidate stock issued for property taken at an overvaluation, it must be shown not only that there was an overvaluation, but that it was intentional and therefore fraudulent. Cook, Stockh. § 47; Coit v. Gold, 119 U.S. 343; Kelley v. Fletcher, 94 Tenn. 1; Coffin v. Ransdell, 110 Ind. 417; Phelan v. Hazard, 5 Dill. 45; American v. Hayes, 30 A. 936; Handley v. Stutz, 139 U.S. 417; Streator v. Rankin, 45 Ill.App. 226; Clark v. Bever, 139 U.S. 96. A corporation may market and sell its stock for the best obtainable price without a trust arising in favor of creditors. Handley v. Stutz, supra; Van Cott v. Van Brunt, 82 N.Y. 535; Steacy v. Little Rock, 5 Dill. 348, and cases cited. Foreman v. Bigelow, 4 Cliff. 508; Johnson v. Lullman, 15 Mo.App. 55; Keystone v. McCluney, supra; Burkinshaw v. Nicolls, L. R. 3 App. Cas. 1004.
G. S. 1894, § 3415, as it now stands, was in force at the time of the organization of this corporation, May, 1891. The original law of 1866 forbade the issuance of fully paid-up stock, except for an equivalent in money or money's worth, unless the corporation was expressly authorized to do so by a special clause in its charter or articles of incorporation. The amendment of 1867 expressly excepted railroad, navigation and manufacturing corporations from this limitation and specially empowered and authorized their boards of directors to issue full-paid stock whenever they might deem it advisable; the directors of the Carpenter Company followed this proviso. G. S. 1894, c. 34, tit. 2, § 2832, grants similar privileges to mining corporations. This section was construed by this court in Ross v. Kelly, 36 Minn. 38.
Even in equity in cases of conflicting evidence the supreme court will defer to the findings of the trial judge. Erskine v. Lowenstein, 82 Mo. 301.
This is an equitable action by a judgment creditor to enforce payment of his judgment by a stockholder of the debtor corporation on the ground that its stock was fraudulently issued as fully paid up, when in fact it was not.
The material facts, as found by the trial court, are substantially these: The plaintiff on October 31, 1895, recovered judgment for $ 5,587.71 against a corporation of this state known as the "Carpenter Electric Heating Manufacturing Company," which will be designated as the "Carpenter Company." The judgment has never been paid. The capital stock of the defendant Carpenter Company was $ 400,000, divided into 4,000 shares of the par value of $ 100 each. Prior to the recovery of such judgment the other defendant herein, the American Electric Heating Corporation, which will be designated as the "American Company," purchased and became and now is the owner of 3,946 shares of the stock of the Carpenter Company, and immediately thereafter the latter sold all of its assets for full value to the American Company. Shortly prior to May, 1891, a third corporation, which for brevity we designate the Nevins Company, then owning certain letters patent upon devices used in manufacturing electric heating apparatus, entered into a written contract with George H. Finn, whereby the Nevins Company granted to Finn and his assigns the exclusive right to manufacture and sell, and also the right to sell to others the right to use, this patented device; also all other like patented devices the Nevins Company might thereafter acquire.
In consideration of this grant, Finn agreed to pay to the Nevins Company a royalty of 25 per cent. of the list prices of all goods manufactured thereunder. He also agreed to organize a corporation for the manufacture of such devices, with a nominal capital stock of $ 400,000, to which corporation he would transfer the license so obtained, and pay such corporation $ 5,000 for developing the devices and carrying on the business of such corporation, for which he or those named by him should receive 1,500 shares of the full-paid capital stock of the new corporation, and cause 1,000 other shares of such stock to be issued and delivered to the Nevins Company. The remaining 1,500 shares of stock were to be held in trust and sold for the benefit...
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