Baldwin v. Timber Investment Co.

.Robinson, J. This suit was commenced in the summer of 1916. It is a suit by one defunct and bankrupt corporation against another of [642] the same kind, and against several persons who were induced to subscribe for the worthless stock of the Timber Company. Before the action was commenced each corporation was legally dead and buried. It had ceased to exist and its charter had been canceled. However, judgment went against the Timber Company for some $40,000, against its subscribers, — Noecker, $5,115; Burgess, $1,390; Collinson, $112; Johnson, $667. The case presents a wealth of material in the form of testimony, account books, and exhibits. The principal actor was Edward Wilson, who quit the state and went to New York city in January, 1913. In each corporation he was the organizer, president, manager, treasurer,— and the whole thing. Receiver Baldwin was nearly always the treasurer or director in one or both of the corporations, but Wilson never allowed him or any other person to handle the money, give checks, or keep the bank books. The first corporation was organized in 1906, with a stock capital of $100,000; the second, in 1909, with a capital of $1,500,000. The real purpose of each corporation was to sell blocks of worthless stock and investment certificates at 100 cents on the dollar, and to put the money into the pockets of Wilson. This he knew well how to do, and he did it. The complaint is on a note to this effect:— Fargo, May 27, 1906. On the 1st day of December, 1912, for value received, I promise to pay to the order of the North Dakota Improvement Company $29,-345.50, with interest at 8 per cent. [Signed] Timber Investment Company, By E. A. Wilson, Pres. Then it avers that each personal defendant is a stockholder of the Timber Investment Company, and has not paid for his stock. By answer each one denies that he is a stockholder, and avers that in 1910, by fraud and deception of said companies, their agents, and managers, he was induced to subscribe for certain shares of worthless stock, and that in the year 1912 the subscription was duty rescinded and canceled. The default judgment was given against the Timber Company without proof that Wilson had authority to make the note; It was given on an affidavit that on July 6, 1916, the summons and complaint were served on H. H. Aaker, secretary of the company. But in truth Aaker was not secretary of the company. It had ceased to exist and [643] its charter was canceled February 1, 1915. In January, 1913, Wilson left the company for good, taking with him E. M. Farmer, who had been the real secretary. The company at once collapsed. The books fail to show that it ever did another particle of business, and fail to show that Aaker was ever secretary. But the only purpose of the judgment against the defunct Timber Company was to lay the foundation for a judgment against the other defendants. As it appears, each appellant subscribed for a few shares of stock, made a pa(t payment, and refused to pay the balance. Each received from the Timber Company a certificate, giving the number of shares, the sum paid, and a promise to deliver the stock upon full payment. The by-laws of the company provide that “no certificate of stock shall be issued until full payment.” Ex. A-15. A sample of the real stock certificate is in evidence. It is an imposing and magnificently engraved document, surmounted by a glorious spread eagle. It shows that the person therein named is a stockholder, and that his stock is fully paid. (52) Stockholders of a corporation are persons who hold stock. They are limited partners, because each has a right to share in the profits and losses, and, by his vote and otherwise, to direct and control the affairs of the company. In dealing with a corporation the creditors have a right to assume that the members are honest, and have paid, or will pay, for their stock which they have accepted and received. And the creditor who does not know to the contrary may assume that a corporation of $1,500,000 is not organized to swindle those who subscribe for stock. By statute each stockholder of a corporation is liable to honest .creditors to the amount unpaid on his capital stock. Comp. Laws, § 4555. Now the questions here present are few and simple:— (1) Is the Wilson Improvement Company a creditor — an honest judgment creditor — entitled to maintain this action? The answer is: No, no, no. (2) Are the appellants’ stockholders? No. (3) Were the subscriptions obtained by fraud and without consideration? Yes, yes. (4) Were the subscriptions canceled before this action was commenced ? Yes, yes; most assuredly. Certain.it is that in December, 1911, and December, 1912, the cancelation of each subscription was duly entered on the books of the company, both on the journal and in the ledger; and in like manner numerous other cancelations were made, amounting to some $30,000. [644] While the books of the corporation are not necessarily evidence in its favor, they are certainly evidence against it. Wilson knew of good reasons for canceling the stock. He knew, and all his agents and managers knew, that the stock was a mere gold brick; that the Timber Company had no property, save a worthless option on some timber licenses. He knew that no person had subscribed for or made payments on the stock, without some deceptive allurments and -promises. He knew how he had contracted to exchange large blocks of stock for timber licenses which he did not deliver, and how he had, at the same time, acted as buyer and seller. Ex. A-62. It may well be that, in dealing with his pals, Wilson was not as generous as he ought to have been, and yet they must have had some crumbs from their master’s table. Baldwin paid for his ten shares of stock only $100. He was allowed for commissions a credit of $625, and he was permitted to pay the balance by merely adjusting it. Tie testifies: “I don’t owe the company anything. I have adjusted the matter.” Q. “How did you adjust it?” A. “Nothing more than by my statement.” (75) What amazing innocence! Manifestly there is no consideration for the stock subscriptions, and the law will not enforce a promise to pay good money for nothing. 13 C. J. 368; Shellberg v. Wilton Bank, 39 N. D. 530, 167 N. W. 723. The promise to purchase the timber stock was in no way different from a promise to purchase a regular gold brick. The enormous one and a half million charter which the Timber Company displayed was itself a fraud and a gold brick. It cost $775, and it represented nothing of value. Indeed it is passing strange that any court should entertain a suit on such a contract. In such a case the quibbles and fine theories of the law are of no avail. It is time for courts and counsel to know that the law must not be used to rob men of their property. Counsel say the answer of Noecker is merely a general denial, and he did not appear at the trial; but that is no reason for asking the court to aid in robbing Noecker. The judgment against him is manifestly unjust. The Timber Company has had $1,500 of his good money for nothing, — for absolutely nothing. To hold that he must give up for nothing a further sum exceeding $5,000 would be a lasting reproach to the court. Judgment reversed and action dismissed, with costs.