Dunn v. State Bank

Canty, J. This action comes up on appeal from an order overruling a demurrer to the complaint. The complaint states that the State Bank of Minneapolis is a corporation organized under the banking laws of this state; that one Kortgaard was its managing' officer, and during the time from 18S9 until the assignment of the bank in 1893, by fraudulent means, and through irresponsible corporations organized by him for that purpose, he borrowed more than $300,000 of the funds of the bank, to secure which he gave it worthless security; that during the time he was thus embezzling the funds of the bank, and as a part of the same fraudulent scheme, he procured the capital stock of the bank to be increased from $75,000 to $100,000, which was done on July 7, 1892; that having bought from the bank 220 shares of this increased stock on August 14, 1892, he paid the bank for it $22,240, by checks drawn by him as city treasurer of Minneapolis on city funds on deposit in other banks in his name as such treasurer, which he then was; that said State Bank then well knew that the money so paid it was city funds,so embezzled by him, and that it then became, and still is, liable to said city for said funds; that on January 13, 1893, he sold to plaintiff fifteen shares of the same stock for $1,575, and, for the purpose of inducing plaintiff to purchase the same, falsely represented to him that all of said increased stock was lawfully issued and fully paid for, and that the bank was in good financial condition, sound and solvent, and that plaintiff believed and relied on said representations, and was by them induced to purchase said stock; that in fact said bank was then insolvent, and could not pay its depositors twenty five per cent, of their demands; that plaintiff had never paid for said stock so purchased by him, except with said stolen funds; that the bank then issued to plaintiff said fifteen shares of stock; that on June 22, 1893, the bank was hopelessly insolvent, and suspended payment, and on June 27th made an as [227] signment for the benefit of its creditors, under the insolvency laws of this state, and the defendant Hahn is now the assignee; that the bank had full notice and knowledge at all times of all the foregoing facts, but plaintiff had no notice or knowledge thereof until ten days before the commencement of this suit. The relief prayed for is that plaintiff have judgment against Kortgaard for the $1,575, paid him, and interest, and that the pretended membership of plaintiff in the corporation be declared null and void, and his name stricken from the roll of members. None of the creditors are made parties to the action. The defendants Hahn and the bank each demur separately, on the ground that the complaint does not state facts sufficient to constitute a cause of action as to him, and appeal from an order overruling the demurrers. It is contended by plaintiff that the act of issuing the increased stock to Kortgaard was an absolute nullity. 1878 Gf. S. ch. 38, § 18, as amended by Laws 1881, ch. 77, § 3, provides that “no increase of capital stock shall be valid until the whole amount of the increase proposed is paid in cash.” Whether or not, under this statute, increase stock issued on credit or paid for by promissory notes, instead of cash, would be not merely voidable, but absolutely void, even in the hands of innocent purchasers for value, it is not necessary here to decide. We are of the opinion that such rule is not applicable to this case. Kortgaard did not buy this stock on credit. The fact that he paid for the stock with stolen funds would only make Ms title voidable at the election of the bank, and he could convey a good title to an innocent purchaser. If plaintiff is, as he alleges, an innocent purchaser for value, without notice, he is protected and his title is good. Neither the bank nor its assignee is in any manner responsible for Kortgaard’s false representations to plaintiff when he sold plaintiff the stock. It is claimed by plaintiff that the complaint alleges that the bank was insolvent, and knew it was, when it attempted to increase its stock, and when it issued the increase stock. It can hardly be spelled out of the complaint that the bank was then insolvent or knew it was. But conceding that the complaint does so allege, and [228] •that it sufficiently appears, that increasing its stock and issuing such increase stock was a fraud on the persons purchasing that stock, including this plaintiff, does this entitle plaintiff to maintain this action to have his stock canceled? We are of the opinion that it does not; that, as against creditors, it is now too late for plaintiff to avoid his status as a stockholder. It appears from the complaint that the corporation is insolvent, and is only nominally in-, terested in such status; that the real parties in interest are the. creditors. Substantially, the only object of canceling such status is to avoid the personal or double liability to creditors, and for the purpo'se of this liability the assignee, Hahn, does not represent creditors. Olson v. Cook, 57 Minn. 552, (59 N. W. 635.) The plaintiff has not made the creditors parties to this suit; but the defendants appealing make no objection on this ground. But, even if the defendants waive that objection by failing to raise it by demurrer or .answer, it does not follow that the courts should in this suit regard plaintiff’s status as though there were no creditors, and proceed as. though it were a case where the corporation was a solvent going concern, and destroy the evidence of the rights of creditors by canceling the stock certificate, and thus cloud and complicate those rights. The courts have refused to cancel records where it appeared that merely a nominal party, and not the real party in interest, was made defendant in the suit. See Pom. Rem. (2d Ed.) § 381. But conceding, for the purposes of this case, that plaintiff is entitled to maintain this action against the defendants appealing, if he is entitled to maintain it against the creditors, do the facts alleged entitle him to have his status as a stockholder canceled? We are of the opinion that they do not. It is not necessary here to determine whether or not the stock-bolder who has been induced to become such by false and fraudulent representations, and who has remained such until the corporation has become insolvent, and creditors have acquired rights, is absolutely bound, as between him and the creditors, whether he is guilty of laches or not, as would seem to be the English rule (Henderson v. Bank, 7 El. & B1. 356; Oakes v. Turquand, L. R. 2 H. L. 325; Thomp. Liab. Stockh. §§ 146-150), or whether he is bound only when he has been guilty of laches as would seem to be the rule adopted by some of the American courts (Thomp. Liab. Stockh. § [229] 148). Under neither rule is plaintiff entitled to the relief he demands. If it is conceded that he is entitled to relief unless he has. been guilty of laches, it sufficiently appears that he has been guilty.. To say the least, a very different rule of diligence is required as between him and the creditors than is required as between him and the corporation. While there is no privity of contract between him , and the creditors, and, as a mere stockholder, he is not an agent of' the corporation, still he is to a considerable extent a member of the-corporate family. He has a right, while it is a going concern, to-inspect the books and investigate the affairs of the corporation. Helias visitorial powers and duties which the creditor has not. He-held himself out as a stockholder, and it is to be presumed after-the lapse of time that creditors became such on the faith of his liability as a stockholder. Under these circumstances, it is, to say the least, his duty to use-a high degree of care and diligence to see that creditors are not misled and deceived by his conduct. What would constitute laches, as between him and the creditors would not as between him and the-corporation itself. But it does not appear that plaintiff exercised any such high degree of care or diligence. He purchased his stock on the 13th of January, 1893, and the bank stopped payment June 22d, following.. For more than five months while it was a going concern, presumably incurring debts, he held this stock without, so far as appears,, having- made any attempt to ascertain the condition of the bank. But his assignor, Kortgaard, had already held this same stock since-the 7th of July, 1892, more than six months before he assigned it to plaintiff. As between him and the creditors, we do not see -why plaintiff is not chargeable for laches as to these six months, also, making eleven months from the time the stock was subscribed.' for until the concern stopped payment and closed its doors. It is. not necessary to decide whether for every purpose he took the stock cum onere, and is chargeable, as between him and the creditors, with Kortgaard’s participation in the fraud. He is at least chargeable with the laches of an innocent subscriber for eleven, months. While the corporation is a solvent, going concern, the rights of creditors are inchoate or in abeyance, and they- are neither neces [230] sary nor proper parties to such an action as tbis; but, when the concern becomes insolvent, the rights of creditors become vested, or they then come into a position to assert those rig'hts. Plaintiff can scarcely have any object in bringing this suit at this time, except to evade, cloud, or complicate those rights. Until those rights are satisfied, plaintiff is not entitled to any relief; and, when those rights are satisfied, he may not need any, as the corporation itself may then have been wound up and ceased to exist. The order appealed from should be reversed, and the demurrers sustained. So ordered; G-tlfiijlan, O. J., absent on account of sickness; took no part. (Opinion published 01 N. W. 27.)