Felton v. Highlands Hotel Co.

Russell, C. J. The plaintiff based his suit upon the provisions of the Georgia securities law as originally passed in 1920 (Acts 1920, p. 250), and as amended by the act of 1922 (Acts 1922, p. 156), and asked that a subscription to the capital stock of the defendant be canceled, and that he have judgment for the amount already paid by him upon the subscription against the defendant, the Highlands Hotel Company. The demurrer was based upon various grounds, both general and special. The special demurrers need not be considered, because the case was dismissed upon general demurrer; and some grounds of the general demurrer need not be dealt with by this court, because it is a fixed rule of jurisprudence that a general demurrer is insufficient to dismiss a cause of action, if any portion of the petition affords good ground for a recovery in behalf of the plaintiff. Conceding, as a court must for the purposes of demurrer, that the plaintiff’s allegations are true, we think the trial court-erred in dismissing the suit, because under the facts stated in the petition the plaintiff was entitled to recover if he established that the full subscription of $500,000 was not subscribed by persons from whom it could be collected, or if for any other reason the defendant had not secured the amount of collectible subscriptions specified in the defendant’s subscription contract offering the stock for sale. Furthermore, we think the allegations of the petition require a finding in favor of the plaintiff under the provisions of the Georgia securities act, if the statements 'with reference to the procedure pursued in securing subscriptions to the capital stock are established upon a trial. If, as alleged in the petition, the — 603 — subscriptions to the stock of the Highlands Hotel Company were issued or sold without a compliance with section 13 of the law, which requires a very complete and explicit statement of the information to be given to the securities commission, any subscriber to this stock (which is class D), including the plaintiff, would have an election to rescind the contract and ask that it be canceled; and in case the subscriber has paid any money for such “securities” it is provided by section 35 of the act of 1920, supra, that he may recover the amount paid together with his reasonable attorney’s fees. The very evident purpose of the legislature in the passage of the original act of 1920 and in the addition of numerous amendments in the act of 1922 was to protect the public against imposition to which it might be subject on account of ignorance in financial affairs. Taken together, the two acts embody a very elaborate scheme, which, if followed under the rules passed and published by the securities commission, will go a long way toward remedying an evil of widespread proportions. The term “securities,” as defined in section 5 of the original act of 1920, includes “stocks, bonds, debentures, notes, certificates of participation, certificates of shares of interest, preorganization certificates, and subscriptions, certificates evidencing shares in trust estates, or associations, and profit-sharing certificates.” In this act there is a comma between the words “preorganization certificates” and the words “and subscriptions,” thus reading “preorganization certificates, and subscriptions,” but in the amending act of 1922 this comma is omitted, so that the section as' amended reads “preorganization certificates and subscriptions.” It is thus plain that the stock for which plaintiff contracted in this case comes within the definition of the word “securities” as embodied in the law. The securities law divides securities into four classes, A, B, C, and D. It is unnecessary to refer to the intrinsic qualities of each class as set forth in the act, further than to say that securities in class A and the sale thereof are not subject to the provisions of the act, and that by the provisions of section 12 of the act of 1920 “all securities other than those falling within classes A, B, and C, respectively, shall be known as securities in class D,” which class is further defined in section 7(4) as “securities based on prospective income, which shall be known as securities in class D.” The — 604 — stock in this proposed hotel corporation falls within class D. It therefore becomes pertinent to inquire whether the plaintiff in this case is entitled to ask for the cancellation of his obligation and the recovery of the partial payments made by him upon a stock subscription which he alleges was obtained in violation of the securities law of this State, upon the ground that neither the defendant nor any one acting for it had a right to sell the security or stock in question. But it is strenuously insisted by counsel for the defendant that an association of gentlemen whose predominant motive was to procure an attractive tourist hotel for their city, and who, without any special purpose to make profits from raising a fund with which to build it, organized an association or executive committee to promote the enterprise by the sale of stock in a corporation to be later organized as the owner of such hotel, does not come within the purview of the securities act. The allegations of the petition will appear from the statement preceding this opinion. According to these allegations, it does not appear to us that this was to any great extent a purely voluntary movement, while, of course, in a sense the signing of each and every subscription was a voluntary act. The hotel executive committee was a voluntary association, but the promotion of the stock and its sale as a security within the terms of the Georgia securities act was accomplished by the I-Iockenbury System at an expense of something over $27,000, which naturally had to be deducted from whatever amount has been received from the subscriptions which have been paid in full or in part. The subscription contract which was signed by would-be purchasers itself states that the Highlands Hotel Company is Lo be formed, thus showing that there was not at that time any corporation in existence whose future earning capacity could be determined from past results; and it also appears that those who were, taking subscriptions, not being in any way connected at that time with the Highlands Hotel Company (which was not then in existence but which upon its organization accepted the subscriptions), which of necessity must be the issuer of the stock, were only dealers within the meaning of the Georgia securities law. From a review of the facts stated in the petition we have no difficulty in reaching the conclusion that the contracts embodying a subscription to the stock of the proposed corporation fall within the purview of the Georgia securities law. • — 605 — Section 13 oí the securities act of 1920 (Ga. L. 1920, p. 256) declares that “No securities in class D shall be sold or offered for sale until there shall have been filed, in the office of the commission, statements and documents as follows:” Then follow requirements embodied in 15 subdivisions of the section, which concludes with the further requirement that there shall be given “such other facts relative to such securities and the sale thereof as the commission shall prescribe.” In this ease the petition alleges that no statement was ever filed in the office of the securities commission. Section 14 of the act provides that at the same time the applicant shall file with the commission a duly executed written instrument, irrevocable, consenting that any action brought against such applicant arising out of or founded on the sale of such securities may be brought in any county in the State where such securities are sold, and, when the applicant is not a resident or was not organized under the laws of this State, shall also file with said commission a written instrument as power of attorney, authorizing some person who is a resident of this State to acknowledge or receive service of process in any proceeding that may be instituted against such applicant,” etc. By the provisions of sections 15, 16, and 17 of the act those who sell securities in class D are required to take out a printed license which shall bear at' the top in bold-face type “License for the Sale of Securities in Class . . under the Georgia securities law. Neither the State of Georgia nor the Securities Commission nor any officer of the State assumes any responsibility for any statement contained herein, nor recommends the securities described below.” The Highlands Hotel Company did not apply for or obtain any license authorizing the sale of their stock by subscription or otherwise. So we are of the opinion that under the terms of the Georgia securities law the contract entered into by Felton was illegal and void, and entitled him to the relief prayed for. While this court has not heretofore had occasion to deal with the question now before us, the Court of Appeals, in Witt v. Trustees Loan Co., 33 Ga. App. 802 (127 S. E. 810), in a well-considered opinion delivered by Judge Bell in behalf of that court, held in a somewhat similar case that “Where an action was brought by a corporation on a subscription for its stock, designated as securities in class 'D’ under the *securities act’ (Ga. — 606 — L. 1920, p. 250), it was a valid defense that the corporation, at the time of taking the subscription, had not complied with the provisions of section 13 of the act, as to the filing of certain statements with the securities commission, notwithstanding a license had been applied for and obtained from the commission.” As pointed out by Judge Bell, section 35 of the act now before us provides that every saje and contract of sale made in violation of any of the provisions oE the act shall be void at the instance of the purchaser at any time within twelve months from the date of the purchase or contract of purchase. The case at bar was instituted within twelve months and, as well ruled in the Wiit case, according to the clear and unequivocal language of the act as expressed in sections 13 and 35, a sale of securities in class “D” may be voided by the purchaser within twelve months if there was a failure to comply with the requirements of section 13, regardless of whether a license was issued. In the case at bar the stress of argument has been laid by very able counsel for the defendant upon the fact that the promoters of the hotel company were not required to procure a license in order to enable them to sell their stock, because issuers of stocks are not required to procure the statutory license. Conceding, but not deciding, that sales made in behalf of the defendant in this case may be treated as sales by the issuers of the stock, which would obviate the necessity of applying for a license, it nevertheless seems to be manifest that under the provisions of section 13 it is a preliminary essential to the selling or offering for sale of any securities in class “D” that the statement prescribed in the section shall be filed. While issuers of stock may be relieved from taking out a license and the accompanying expense (Smith v. State, 161 Ga. 103, 129 S. E. 766), it clearly was not the intention of the legislature to allow would-be organizers or promoters of corporations whose stock was designed to be vended to the general public to determine for themselves whether they were issuers, or, for that matter, to define their own relationship in any of the particulars embraced within the statute. Without the provisions of section 13, which requires the statement of the purposes of the proposed corporation as well as its probable ability to perform its undertakings, it would be possible for many corporations to organize without the knowledge of the securities commission, and great damage perhaps to be done to the public — 607 — before their existence was ascertained. The Witt case, supra, was one in which the contention that the contract of subscription was invalid was upheld for noncompliance with the provisions of section 13 of the act as to the filing of statements; for it appears that as far as the license was concerned this permit had been obtained by the Trustees Loan and Savings Co. As appears from the record, the Highlands Hotel Company is a foreign corporation, it being stated in the petition that the defendant is a corporation organized under the laws of the State of Delaware. The State of North Carolina, under statutes very similar to our own, recognizes the necessity of imposing the same duty of making a preliminary statement upon any person, firm, or corporation intending to issue or sell securities, and certain statutes of that State, very similar to our own, have been interpreted by the Supreme Court of North Carolina just as we understand the meaning of the provisions of the acts of 1920 and 1922. Section 6365 of the Consolidated Statutes of North Carolina declares that “Before offering or attempting to sell any such securities to any person or persons, doing or offering to do any business whatever in this State, excepting that of preparing the documents hereinafter required, every such company shall file in the office of the insurance commissioner of this State, together with the fees prescribed for fidelity companies, the following documents, to wit: A statement showing in full detail the plan upon which it proposes to transact business; a copy of all applications for and forms of contracts, securities, bonds, or other instruments, which it proposes to make with or sell to its contributors; a statement which shall show the name, location, and head office of the company, . . and such other information, and in such form, touching its affairs as said officer may require.” Then follows the provision' similar to that in our own statute as to the license. Dealing with the validity of a note given in payment for stock under circumstances similar to those alleged in the petition in this case, the court held that a note given in a transaction which did not comply with the blue-sky law is non-enforceable as between the parties. Planters Bank &c. Co. v. Felton, 188 N. C. 384 (124 S. E. 849). Mr. Justice Clarkson, delivering the opinion of the court, said: “These organizers and promoters who sell stock in person or by agents must obtain license. If they do not obtain license, they are guilty — 608 — of a criminal offense. If they obtain license and sell stock, they must put the contract of subscription or sale in writing with the provision in it in the language of the statute. If this is not done, it is made a criminal offense. The purpose and intent of the act is to prohibit organizers and promoters, whether foreign or domestic, who organize and promote the sale of what is commonly known as £ blue-sky stock/ from doing business without complying with the statutes. The further purpose and intent of the act was to guard and protect an unsuspecting and trusting public from what are commonly known as ‘ wild-catorganizers and promoters and their agents. Now the question arises, if these provisions are not complied with, is a note given for stock enforceable in the courts of this State? We think not, as between the parties. The courts would not lend their aid to enforce the collection of a note between the parties, given without complying with the statute and which makes the officer or agent who violates this provision of the act guilty of a crime. It would be contrary to public policy. The transaction is illegal — voidable, not void.” In Burlington Hotel Corporation v. Bell, 192 N. C. 620 (135 S. E. 616), it was held that since neither the plaintiff to the action on the stock-subscription contract nor its agent had been licensed by the insurance commissioner as required by C. S. § 6363, which was applicable, plaintiff could not recover on the stock subscription contract. In that ease the agent employed to promote the enterprise and sell the stock was the Hockenbury System Incorporated, just as in the case at bar; and it was agreed that the Hockenbury System Inc. was the agent of the plaintiff, employed to sell stock and receive a commission for the sale of stock; and while this statement is only contained in the petition in the case at bar, for the purposes of demurrér it must be taken as true. But we are of the opinion that the petition should not have been dismissed upon general demurrer, even though the subscription taken was not invalid by reason of non-compliance with the provisions of the Georgia securities act. The subscriptions were not to become valid and binding unless there were actual bona ñde subscriptions amounting to $500,000, and, according to the allegations of paragraph 11 of the petition, this amount was never subscribed. By amendment, in response to the defendant's demurrer, the plaintiff set out a list of all of the subscriptions to — 609 — the stock; to show the total subscription of $501,200, and proceeded to show that by reason of insolvency on the part of subscribers, and want of authority on the part of signers of the contract to bind the purported subscribers, and other reasons specifically stated, the amount of bona fide subscriptions is some thousands of dollars below the $500,000 specified in the contract. It is well settled that conditions such as that involved in the contract under consideration, that the subscription shall “become valid and binding only when actual bona fide subscriptions for $500,000 in preferred stock shall have been subscribed. If this amount is not subscribed, any amount paid thereon shall be returned to the subscriber,” are binding and will be enforced by the courts. Holliday v. Persons, 158 Ga. 742 (124 S. E. 353); Memphis Branch R. Co. v. Sullivan, 57 Ga. 240; Hendrix v. Academy of Music, 73 Ga. 437. The plaintiff in the present case is not estopped to rely upon the breach of the condition precedent to which we have referred, because estoppel can not arise unless the party sought to be estopped has done some act by which the situation of the opposite party has been altered to his injury. Nor, under the allegations of the petition, can the defendant assert a waiver of the condition on the part of the plaintiff, because it is alleged that in making the payments the plaintiff acted in ignorance of the facts that the $500,000 of bona fide subscriptions had not been subscribed, and that the securities were being sold in violation of law. Judgment reversed. All the Justices concur, except Beck, P. J., and Atkinson, J., dissenting.