Bank of Dermott v. Measel

Hart, J., (after stating the facts). Section 8, article 12, of our Constitution provides that no private corporation shall issue stock or bonds except for money or property actually received, or labor done. It is conceded that, in the construction of this clause of our Constitution, this court has held that a note given for the purchase price of corporate stock is neither money nor property actually received, within the meaning of the Constitution, and the note itself is void. Bank of Commerce v. Goolsby, 129 Ark. 116, 196 S. W. 803. In that case the court said: “When notes are taken in exchange for stock, it is a palpable violation of the constitutional provision, because notes are merely evidences of indebtedness, and such a transaction shows upon its face that the stock has not been paid for. The .design of the framers of the Constitution was that stock should not be issued and sold except for its value in money or property actually received, or labor done. A note is not property, in the sense of the Constitution, because it only indicates that the stock has not, in fact, been paid for, and, where the notes are worthless, the stock has been exchanged* for nothing. Notes are not money and not bankable paper, but mere dioses in action, and it in no sense meets the requirements of the above provision of the Constitution to accept a note in exchange for stock.” The language here used is too plain to be .misunderstood, and this is conceded by counsel for the plaintiff. He earnestly insists, however, that the substance of this transaction is that Measel first borrowed some money from the bank and subsequent^ used it in the purchase of its capital stock. This contention, however, is contrary to the evidence. Both Measel and Franklin, who was cashier of the bank at the time, testified that the gist óf the transaction was that Measel executed his note to the bank for shares of its capital stock. The purpose of the constitutional provision was to protect creditors of the corporation, as well as stockholders who had purchased stock in the corporation and had actually paid money or property therefor. The words, “actually received,” mean the receipt of something tangible and which could be used in the payment of the debts of the corporation. If the bank could lend money and the same money could be immediately used in payment of the stock of the bank, it is plain that the clause of the Constitution under consideration would serve no useful purpose. The substance, and not the form, of the transaction should be looked to. A preponderance of the evidence shows that the defendant never borrowed a dollar from the bank. The original note simply represents the amount of money which he agreed to pay the bank for stock which it had issued to him. To call it by another name could not in the least change the real character of the transaction. If the corporation could not take the note of a subscriber in payment of its own capital stock, it is plain that it could not lend money to a subscriber to its own capital stock in payment of it. This would be a palpable evasion of the Constitution. There is no more a payment of money where the corporation lends the money to the subscriber and then receives it back in payment of the stock than where it receives a note originally in payment of a stock subscription. Watts v. Worcester Umbrella Co., 193 Mass. 138, 78 N. E. 886. Again, it is insisted that the note sued on, being a renewal of the original note, takes the case out of the inhibition of the Constitution. We cannot agree with this contention. The same defense which the maker of the note might have made to an action by the holder of the note originally given by him may be made by him in this action on the note given in renewal of the original note. Both notes were given for the same illegal consideration. The renewal note is not a payment of the original note, but is merely an extension of the time of payment of such prior note¡ In Hollan v. American Bank of Commerce & Trust Co., 159 Ark. 141, 252 S. W. 359, it was held that a contract is itself usurious which is issued in renewal of the usurious contract. Again, in City National Bank v. DeBaum, 166 Ark. 18, 265 S. W. 648, it was held that contracts made in violation of law are not rendered valid by renewal or by subsequent promises to pay them. If the law were otherwise, the constitutional provision under consideration would have no practical use. A subscriber of capital stock of a corporation might execute a short-term note in payment of it, and, by executing a renewal contract when the original note became due, could validate the contract which had been declared illegal and void by the Constitution itself. Finally, it is insisted that the court erred in taxing the cost in the case. The chancellor taxed two-thirds of the cost to the plaintiff and one-third to the defendant. It is well settled that the taxation of the costs is within the discretion of the chancellor. Mt. Nebo Anthracite Coal Co. v. Martin, 86 Ark. 608, 112 S. W. 882, and Hayes v. Bankers’ & Planters’ Life Assn. of Ft. Smith, 164 Ark. 202, 261 43. W. 296. In the case at bar, the principal sued on was $900, and the amount received by the plaintiff was only $78.38. It is evident that the plaintiff has no cause of complaint as to the taxation of costs. The result of our views is that the decree of the chancery court was correct, and it will therefore be affirmed.