Moore v. Universal Elevator Co.

Grant, C. J. (after stating the facts). 1. A large part of the record is taken up with, testimony relative to the agreement between complainant and Schoonmaker Bros. & Co. relative to the conditions under which complainant became a stockholder in the corporation. It is immaterial what those private arrangements were. Upon ibis point the testimony is in sharp conflict. It is not necessary to determine what rights Mr. Moore has against his co-corporators and the defendant corporation. That controversy concerns them alone, and is not before us. The controversy now is between Mr. Moore and the bonus givers, and the sole question is, What are the rights of Mr. Moore, under his mortgage deed, as against those of the — 58 — defendant Livingstone, representing himself and his co-subscribers to the bonus fund? 2. It is essential to keep in mind a few facts in addition: to those above stated: (a) The organization of this corporation was a fraud in. law, if not in fact. As to the Schoonmakers and Hultgren, it was a fraud in fact. The amount of property which they conveyed to the company, for which they received paid-up stock to the amount of over $63,000, was not .worth any such sum. It was a gross and fraudulent overvaluation, and known by them at the time to be such. (b) The bonus subscribers had no knowledge or notice of the fraudulent character of the organization. They relied upon Moore’s connection with the corporation as a bona fide one. One of them, before subscribing, caused the articles of association, as filed in the county clerk’s office, to be examined. We are not unmindful of the testimony of Mr. Moore that some time in 1896, prior to the execution of the deed by Livingstone to the corporation,, he told Mr. Livingstone that he had no interest in the business. Moore at that time was a large creditor of the corporation. Mr. Schoonmaker had informed him that Mr. Livingstone refused to give the deed. Moore went to see Mr. Livingstone, and his version of the conversation, is as follows: “He refused to give the deed at first. I then said to him: ‘Mr. Livingstone, I have no interest in their business at all whatever. I have not a piece of land within five miles of it; and if you gentlemen who own the land out there are not going to take any interest in the matter, I am going to get out, and I will go down to the office, and resign, this morning.’ ” Just when this conversation took place does not appear,, but it was evidently some time in the early part of 1896. According to Mr. Livingstone’s version of this conversation, nothing was said to indicate to him that Mr. Moore was not a good-faith stockholder, and interested in the concern. Mr. Moore certainly was interested in getting — 59 — the deed from Livingstone to the corporation, and it was not very long after that the mortgage was made to him to secure his debt. (c) Defendant Livingstone has contributed $1,700 in cash,'and an acre and a half of land, worth at the time about $2,000. (d) Moore, by his act in subscribing for the stock, in being a director and president, held himself out to the public and to creditors as a bona fide stockholder, and as liable for the amount of stock subscribed by him. 3. Moore’s subscription contract was absolute upon its face, and, as between him and creditors who were uninformed of the situation, his liability thereunder cannot be changed by other contemporaneous agreements. Creditors are entitled to the full benefit of the stockholder’s contract as he has made and published it in subscribing, executing, and filing his subscription to the stock of the corporation. 1 Cook, Stock, Stockh. & Corp. Law, §§ 137, 138; Williams v. Benet, 34 S. C. 112; Downie v. White, 12 Wis. 176 (78 Am. Dec. 731). Mr. Livingstone and the other bonus givers relied, as they had a right to, upon the agreement which he signed as trustee, and upon his membership in the corporation. His subscription was a trust fund, and those who dealt with the corporation with knowledge that he was a stockholder had a right to rely upon that fund as a bona fide one. As against them, he cannot defend by setting up that he became a mere accommodation, and not an actual, stockholder. As a director he became a trustee for the creditors, and no declaration of trust was necessary; but by his trust agreement he agreed with the bonus givers that $75,000 of the $100,000 of capital stock should be subscribed within 10 days from the time the bonus was subscribed. This was to be a bona fide, and not a mere paper, subscription. It was not contemplated that the building was to be built, machinery purchased, and a full plant erected with the money of the bonus givers, but that stockholders were to be furnished who would contribute to the necessary funds — 60 — for that purpose. . This was not done. Not a share of stock was subscribed or sold aside from that issued to the original subscribers as fully paid. Efforts were made to get others interested, and to sell them some of the stock. These efforts were ineffectual, and probably for the very good reason that no prudent man would invest in such an enterprise without an examination, and an examination would disclose to him its fraudulent character. There were in fact no bona fide subscriptions. 4. It is urged by complainant that a bona fide stockholder may become a bona fide creditor of a corporation. This is well established. Sargent v. Webster, 13 Metc. (Mass.) 497 (46 Am. Dec. 743); 1 Cook, Stock, Stockh. & Corp. Law, § 11. And he may secure his claim in the same manner as any other creditor. If complainant stood, in this litigation, as such a stockholder, he would be a secured creditor, whose security the law would protect. But he does not stand'before the court as such a stockholder in his dealings with the bonus givers. As trustee under his agreement, and as a director, it became his duty to examine into the character and value of the property proposed to be turned over by Schoonmaker Bros. & Co., to determine its fair value, and to see that it was turned over to the company at such value. Instead, he made not even an inquiry, and for the reason, as he states, that'he did not consider himself actually concerned in the corporation, but only consented to become a stockholder and director and president to accommodate his friends. An inquiry which he did afterwards make disclosed to him the worthlessness of most of the property. We need not enter into the question of the good faith of Mr. Moore in the transaction. If he trusted the Schoonmakers and Hultgren, believing they were honest and would do no wrong, he, and not those who trusted the corporation on the faith of Mr. Moore’s open connection with it, must suffer. As between him and those dealing with the corporation in ignorance of his real connection with it, under his theory he cannot defend upon the ground that he — 61 — was a nominal party. He does not stand before the court in the light of a bona fide stockholder having a bona fide claim against the company. 5. It is a universal rule that when corporators transfer property to a corporation, for which they receive stock, they must act in good faith, and put in the property at its fair worth. Creditors have the right to rely upon the good faith of the stockholders, and to assume that they have contributed to the stock subscribed in money or money’s worth, or are liable therefor. This liability cannot be evaded by the issuance of fully-paid stock when it is not, or by putting in property grossly in excess of its real value. Peninsular Savings Bank v. Black Flag Stove-Polish Co., 105 Mich. 535; Van Cleve v. Berkey, 143 Mo. 109 (42 L. R. A. 593); Wetherbee v. Baker, 35 N. J. Eq. 501; Coleman v. Howe, 154 Ill. 458 (45 Am. St. Rep. 133); Osgood v. King, 42 Iowa, 478; Camden v. Stuart, 144 U. S. 104; National Tube-Works Co. v. Gilfillan, 124 N. Y. 302. Had Mr. Moore performed his duty in examining into the value of this property, he undoubtedly would not have consented to becoming a party to such a transaction. As already stated, neither Livingstone nor the others would have subscribed if Mr. Moore had not been connected with the corporation, and, as they believed, in a responsible manner. 6. Complainant’s deed was only a mortgage, and the corporation had the right to convey the property in payment of its debts, subject to his mortgage, if valid. The claim that his deed left nothing for the corporation to convey cannot be sustained. 7. Both parties attack the validity of the deeds. We do not deem it necessary to discuss the objections raised. Both deeds are in the nature of mortgages, and as such, we think, were properly executed. 8. It is, however, urged against the claim of the bonus givers that they did not comply with their contracts, and pay the full amount of their subscriptions, although the building was erected, machinery placed in it, some con — 62 — tracts taken, and some men employed. Mr. Moore and his associates had not complied with their contract. He testified: “Practically, there never were any active operations at the factory, so far as I know.” It was not contemplated that this building was to be built, and the machinery purchased, and the entire plant constructed upon the bonus subscriptions. It was understood and agreed that there were to be bona fide stockholders, liable upon their stock for whatever other funds should be necessary to complete the work. Instead of that, the bonus 'givers and Mr. Moore contributed all the funds that had been used. The company did not own the machinery that was placed in the building. All the machinery was obtained under a contract providing that the title remain in the vendor until paid for, and, shortly after this trouble began, the machinery was all taken under these contracts. For this condition of affairs Mr. Moore is responsible. He and his associates had broken their contract, and the bonus givers were under no obligátion to perform on their part. At the time the deed to Livingstone was made, neither he nor the other bonus givers knew of the contemplated action, or knew the financial condition the company was in. It is probably true that one of the purposes of the Schoonmaker brothers and Hultgren in making the deed to Livingstone was to destroy Moore’s security. Whether, in so doing, they acted in good faith, would depend upon whether their version of Moore’s agreement with them was true. Even though it were intended to defraud Moore, and though Mr. Livingstone knew nothing about it at the time, still he would be justified in accepting the deed, and the trust thereby conveyed, to secure himself and the others. 9. Defendants’ counsel rely upon Act No. 144, Pub. Acts 1895. Section 1 of that act makes it unlawful for any corporation to move, abandon, or discontinue in any way, to any material extent, any factory, etc., without repaying and restoring any and all moneys, bonds, lands, and other property which have been given or granted as a — 63 — oonsideratioD or inducement to its location or construction. Section 6 provides that, in case of the.suspension of any such business on account of the financial failure of the corporation, bonus givers shall become and be creditors of such corporation to the amount contributed, having all the rights of other creditors. Clearly, the first ■section has no application. The sixth contemplates a failure. That is not this case. There had been no financial failure, because the organization had not fairly commenced the business for which it was organized. This case must, .therefore, be disposed of on the general principles of equity applicable to cases of this character. 10. The organization of the corporation was a fraud upon the bonus givers, and complainant, however innocent of intended wrong, was a party to it. He did not perform his contract to organize a company with some responsibility attached to it, and with some tangible assets aside from the bonuses. It was his duty, under his contract, to do this for the protection of the bonus givers. Is it equitable now that he should escape the liability of a stockholder, and be protected in his debt, by taking, the lands and bonuses contributed to pay it ? The bonuses, including the land, amount to about $6,000. Under the theory of the complainant there is not now, and was not then, a stockholder of any financial ability, and he knew this. The land and the building thereon are all the valuable assets left. To them Mr. Livingstone, who was not interested in the corporation, has contributed about $3,700. Is it equitable to permit Mr. Moore to apply this property upon his debt ? Is this such action as will satisfy the conscience of a court of equity? We think not. We think the lien of the bonus givers superior to that of Mr. Moore. 11. It is further insisted that the defendant Livingstone must first exhaust his claim against the corporation by ■.suit, judgment, and execution returned nulla bona. We have not before us the case of an ordinary creditor enforcing his claim against a corporation. This is a case of defrauded bonus subscribers, who have received no con — 64 — sideration whatever for the gifts made. Parties resort to a court of equity to obtain relief when they have no adequate remedy in courts of law. Technicalities cannot be invoked to defeat the ends of justice and of equity, when they form no insurmountable obstacle to relief. Mr. Livingstone has a mortgage deed, the purpose of which was to secure him and the other bonus subscribers. He had possession under that deed. Mr. Moore resorts to a court of equity to foreclose his lien. All the parties interested, both lien holders, the bonus subscribers through Mr. Livingstone, the corporation, and the property itself, are before the court. We see no obstacle to granting relief. The decree of the court below will be reversed, and decree entered in this court declaring the lien of Mr. Livingstone superior to that of Mr. Moore. It is stated in the briefs that a receiver has already been appointed. If so, he will be directed to take possession, and proceed to sell and dispose of all the property of the corporation, and out of the proceeds pay — First, the costs of such proceeding; second, the amounts advanced by the bonus givers, including the land given by Livingstone at its value when the company was organized; and, third, to pay Mr. Moore. If no receiver has been appointed, the court below is directed to appoint one. The case will he remanded to the court below to carry out the decree in accordance with this opinion. Defendant Livingstone will recover the costs of this court. The other Justices concurred.