Wrightsville Hardware Co. v. McElroy
| Decision Date | 01 July 1916 |
| Docket Number | 166 |
| Citation | 98 A. 1052,254 Pa. 422 |
| Parties | Wrightsville Hardware Co., Appellant, v. McElroy |
| Court | Pennsylvania Supreme Court |
Argued May 17, 1916
Appeal, No. 166, Jan. T., 1916, by plaintiff, from decree of C.P. York Co., April T., 1915, No. 1, dismissing bill in equity for cancellation of certain bonds in case of Wrightsville Hardware Company v. Harry McElroy and Howard L Keller, Executors of the Last Will and Testament of Henry McElroy, Deceased, Henry Birnstock and Harry McElroy Individually. Affirmed.
Bill in equity for the cancellation of certain corporate bonds. Before WANNER, P.J.
The facts appear by the opinion of the Supreme Court.
The lower court dismissed the bill. Plaintiffs appealed.
Error assigned, among others, was in dismissing the bill.
Decree affirmed at appellant's costs.
Elbridge L. Adams, of the New York Bar, with him William H. Keller and Cochran, Williams & Kain, for appellant. -- Plaintiff received no real consideration for the notes given to the defendant, nor for the bonds subsequently issued to take up the notes: Guaranty Title & Trust Co. v. Dilworth Coal Co., 235 Pa. 594.
The issuance of the notes to the defendants was an ultra vires act, the notes being merely for accommodation: Reade v. Pacific Supply Asso., 40 Oregon 60 (66 Pac. Repr. 443); Culver v. Reno Real Estate Co., 91 Pa. 367; Monument National Bank v. Globe Works, 101 Mass. 57; National Bank of Republic v. Young, 41 N.J. Eq. 531 (7 A. Repr. 488); Perkins v. Trinity Realty Co., 69 N.J. Eq. 723 (61 A. Repr. 167); Tod, et al., v. Kentucky Union Land Co., 57 Fed. Repr. 47.
Not even majority stockholders have power to make an accommodation acceptance binding on the corporation, by ratification: Cook v. American Tubing & Webbing Co., 28 R.I. 41; Gunnison Water Co. v. Whitaker, et al., 91 Fed. Repr. 191.
Defendants had notice of all the facts and are therefore not holders in good faith and without notice.
There is no proof that the bonds of the novelty corporation had any value; the burden of proof on this subject rested on defendants: Guarantee Title & Trust Co. v. Dilworth Coal Co., 235 Pa. 594.
The notes taken by the defendants being invalid, the bonds issued to take up such notes are also invalid: McClure v. Oxford Township, 94 U.S. 429.
The increase of indebtedness represented by the notes and subsequently by the bonds was fictitious within Section 7, Article XVI, of the Constitution of Pennsylvania: Shellenberger v. Altoona & Philipsburg Connecting R.R. Co., et al., 212 Pa. 413; Powell v. Blair, 133 Pa. 550; Guarantee Title & Trust Co. v. Dilworth Coal Co., 235 Pa. 594.
Henry C. Niles, with him Michael S. Niles, Charles A. May and George E. Neff, for appellees. -- The issuance of the notes by the plaintiff to the defendants was valid and was received by defendants in good faith: Louisville, New Albany & Chicago Ry. Co. v. Louisville Trust Co., 174 U.S. 552 (19 S.Ct. Repr. 817).
The subsequent exchange of the notes for bonds of the plaintiff estopped plaintiff from setting up a defense of ultra vires or fraud: Fidelity Ins., Trust & Safe Dep. Co. v. West Penn & Shenango Connecting R.R. Co., et al., 138 Pa. 494; Sandy Lake Boro. v. Sandy Lake & Stoneboro Gas Co., 16 Pa.Super. 234; Presbyterian Board v. Gilbee, 212 Pa. 310.
Before BROWN, C.J., MESTREZAT, POTTER, MOSCHZISKER and FRAZER, JJ.
The Wrightsville Hardware Company is a Pennsylvania corporation engaged in the manufacture of hardware at Wrightsville, this State. Henry McElroy, Henry Birnstock and Harry McElroy, who owned a majority of its capital stock, sold the same in November, 1906, to the National Novelty Corporation, a New Jersey corporation, and thereafter they held none of the stock of the hardware company, and never participated in any way in the management of its affairs. For each share of stock they sold to the National Novelty Corporation they received $10 in cash, $20 in stock of the said corporation and $10 in its first mortgage bonds. In the summer of 1907 the National Novelty Corporation, desiring to take up all of its outstanding first mortgage bonds, offered the McElroys and Birnstock, in exchange for their boldings of the same, first preferred stock of the Hardware and Woodenware Manufacturing Company, a new corporation organized under the laws of New York for the purpose of taking over the assets and liabilities of the National Novelty Corporation. This offer was refused, the holders of the said bonds demanding cash for the same, and it was finally arranged to have the Wrightsville Hardware Company buy the bonds, giving its notes therefor, and then surrendering them to the National Novelty Corporation for preferred stock of the Hardware and Woodenware Manufacturing Company. This plan was subsequently carried out, after the appellees had been indemnified against any loss which might arise if it should be judicially determined that the notes which were to be issued to them for the bonds were invalid or not enforceable. Subsequently, in 1908, a bill in equity was filed by certain minority stockholders of the Wrightsville Hardware Company against it and other defendants, among whom were the present appellees -- Henry McElroy having died in the meantime -- averring gross mismanagement of the business of the company, and praying, inter alia, that the notes which the appellees had received from the Wrightsville Hardware Company, in exchange for their bonds of the National Novelty Corporation, be delivered up for cancellation. In that proceeding W. A. Coventry, who was the manager of the Wrightsville Hardware Company, filed an affidavit denying that the directors of that company had mismanaged its business or had allowed an increase of indebtedness without a corresponding increase of the assets, or that the property and assets of the company had been used by the directors to the disadvantage of the company or its stockholders. This suit was settled under an agreement to which Coventry, as president of the Wrightsville Hardware Company, was a party, providing for the issuing of first mortgage bonds by that company; and he subsequently, as its president, delivered a number of them to the appellees in exchange for the notes which it had given to them for their National Novelty Corporation bonds. In 1915 this bill, attacking these bonds, was filed by the Wrightsville Hardware Company and sworn to by the said Coventry, its president, who, as its manager, had made the affidavit in the prior equity suit. Its material averments -- at marked variance with that affidavit -- are that the bonds which the appellees received from him, as president of the Wrightsville Hardware Company, were issued and given to them as part of a scheme of the National Novelty Corporation to wrongfully, illegally and fraudulently exercise absolute domination and control over the affairs of the hardware company; that the appellees are not holders, in good faith and for value, of the said bonds, and the same are wholly null and void; that the National Novelty Corporation has used the property, assets and business of the said hardware company for the advantage and profit of itself and of its successor,...
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