Hill v. Atoka Coal & Mining Co.

Maceaklane, J. This was a suit to recover $3,000, the same being dividends on one hundred shares of stock in the defendant corporation, which stock had been issued to E. J. Crandall and by him assigned to the plaintiff, James A. Hill. The defendant filed a long answer setting up various matters as an equitable defense, with a prayer that the one hundred shares be adjudged to be the property of the defendant, and for other and further relief. As to this answer, it is sufficient to say that it is broad and comprehensive enough to give the defendant the benefit of whatever rights may flow from the following facts. The defendant, the Atoka Coal and Mining Company, is a corporation organized in 1881, under the laws of the state of Illinois, with a capital stock of $500,000 divided into five thousand shares of $100 each. At the time of the organization of the company, the directors purchased certain coal leases and mining claims in the Indian Territory, and caused the entire stock of the corporation to be issued as full paid up stock in the payment for such property. Shortly thereafter the directors, with the consent of the persons to whom the stock had been issued, passed a resolution setting apart $250,000 of their full paid stock to be used for carrying on the work and purposes of the association. That amount of stock was transferred to the plaintiff Hill to be by him sold. He sold two thousand shares to various persons at $30 per share and it seems he sold the same as “paid up stock.” The money thus raised constituted the only means with which.the company commenced business. The other three'thousand shares were held by James Hill, E. J. — 160 — Crandall, R. S. Hays, A. A. Talmage, and a Mr. Folsom. Hill and Crandall and probably Folsom held their shares in their own right, but the other persons represented the Missouri Pacific Railway in their holdings. According to the evidence of Crandall, the leases and mining claims had some real and substantial value, but it is evident, even from his evidence, that the value of these claims was small as compared with $500,000. He says he does not know how much the stockholders paid-for their stock. Mr. Hill testified that he paid nothing for his stock, “not one iota, not one cent.” Crandall conducted and carried on the business of the corporation for about one year. At the expiration of that time the company was indebted to the extent of $40,000, so that it became necessary to raise money to pay these debts and to enable the company to proceed with its business. The evidence shows that Hill and the representatives of the Missouri Pacific Railway Company had several consultations as the best way to raise the money, but it does not appear by any direct evidence that Crandall was a party to any of these consultations. Hill insisted that the persons to whom he had sold the two thousand shares at $30 per share ought not to be called upon to make contribution, and that he and the persons who held the three thousand shares, for which they had paid little or nothing, should raise the desired amount of money. On the thirteenth of May, 1882, the directors passed a resolution making an assessment of sixteen and two thirds per cent, “on three thousand shares of the capital stock of the company, being one thousand, five hundred shares held by the Missouri Pacific Railway Company, and one thousand, five hundred shares held by E. J. Crandall and associates.” The record of this meeting of the directors shows — 161 — that Hill, Talmage, Crandall and Hays were present, but it does not state how these directors or any of them voted on this resolution. At a meeting of the directors held on the sixth of October, 1882, another resolution was passed levying an additional assessment of eight and one eighth per cent, on the same three thousand shares. Hill, Hoxie, Talmage and Hays were present at this meeting, but the record made by the directors does not show that Crandall was present. On the date of the last mentioned resolution Crandall sent the following communication to the secretary of the defendant: “St. Louis, Mo., Dec. 6th, 1882. “Charles M. Rayes, Esq., Secretary. “Deab Sib:—I hand you herewith certificate of stock in Atoka Coal and Mining Company, number 15, for one hundred shares held by me, and certificate number 43, for fifty-eight shares held by W. E. Crandall, which I surrender to the company as requested by Capt. E. S. Hays. There is one certificate, number 14, for one hundred shares still held by me, which I have hypothecated for a temporary loan that I can not control just at present; but will have it in my possession within sixty days, and will surrender it also. “Yours truly, “E. J. Cbanball.” It is the one hundred shares mentioned in the above letter that constitutes the basis of the present suit. Hill was elected president of the company in May, 1882. Crandall testified for the plaintiff to the following effect: “I surrendered the one hundred and fifty-eight shares to Capt. E. S. Hays. I received a notice from him or somebody that the stock was to be assessed, and I did not have any money and was not in a condition to pay it and thought the easiest way — 162 — was the best. I do not know how the stock came to be assessed. I was not connected with the company then. I thought it was assessed for the purpose of freezing me out. I sold the remaining one hundred shares to Hill, and made the transfer at Rochester, New York.” On cross-examination he says he presumes he was a director in May, 1882; that he knew nothing about the assessment until they wanted him to pay. Says he does not know whether he was or was not present at the meeting held on the thirteenth of May, 1882, or the one held on the sixth of October, 1882. Asked why he did not return the one hundred shares as he said he would in the letter, he answered: “Because I after-wards took the matter under consideration by advice and found that I had as good a right to it as anybody; had paid for it and he (Hays) had no right to ask me to surrender my property.” Hill testified that he had one or more conversations with Hoxie and Hays in which he said: “If Crandall don’t pay let him give up the stock; he got us into this boat. I says bluff him and make him give up the stock or pay the $30; we are going to pay as much as my friends did when they bought the stock. I kept insisting on Hays getting the other, and if he had worked it right he would have got it, but after awhile Crandall had a relative down there, the mines commenced making money; he heard of it and made up his mind not to do it; that is about all there is of it.” Crandall ceased to be an officer of the corporation at or about the date of his letter to secretary Hays, and thereafter paid no attention to company affairs. Hill and others who held the three thousand shares, Crandall excepted, paid the two assessments. The one hundred and fifty-eight shares actually surrendered by Crandall were sold to the Missouri Pacific Railway — 163 — Company, at $25 per share, the amount of the two assessments. Some six years after the date of the surrender of the one hundred and fifty-eight shares by Crandall,there was a further correspondence between him and the secretary of the company, in which the latter demanded a surrender of the one hundred shares. Crandall offered to leave it to a Mr. Ridgley to say what he should do, but the company declined the offer. ' It was at this time, 1887, that Crandall says he made up his mind that he owned the stock. Between 1882 and 1888 Hill and the Missouri Pacific railway people had differences over this and other mining enterprises, and he was turned out of the directory. In an unsuccessful effort to reinstate himself, he procured Crandall’s proxy and voted the one hundred shares for directors in May, 1888. On the fourteenth of December of that year he purchased these shares, and took an assignment of the certificate. On the sixth of December, 1889, the directors divided the $30 per share on all stock, “saving and excepting one hundred shares of stock in the name of E. J. Crandall, which stock has heretofore been forfeited to this company for nonpayment of calls thereon as evidenced by letter of said E. J. Crandall, of date December 6, 1882, and addressed to Chas. M. Hays, secretary.” This was the first dividend ever declared. On the foregoing evidence the trial court gave judgment for the plaintiff for $3,000 and interest, but upon the condition that plaintiff pay to the defendant $2,500 and interest, being the amount of the two assessments on the one hundred shares. Prom this judgment the defendant appealed. Any other necessary facts will appear in the opinion. — 164 — I. The ruling questions in this case are whether there was a sufficient consideration to uphold the agreement among the stockholders that they would advance to the corporation, or pay an assessment, equal to twenty-five per cent, of the stock held by them, and whether the agreement if valid between the parties, was such as the corporation could enforce; and, if so, whether Crandall agreed to a surrender of the-stock in question in consideration of a release from the-assignment. While there has been some diversity of opinion as. to the liability of a stockholder who has paid for his stock by property transferred to the corporation or for labor or other services done for it, at over valuation,, there is no doubt expressed by any of the courts that, as to creditors, a liability of some character does exist. Some of the decisions are to the effect that courts, should not undertake to make new contracts between the corporation and those to whom it has issued stock, and all that can be done is to treat the purchase as-void and undo the transaction. These cases require-that fraud in over estimating property or .services be proved. 1 Cook on Stock and Stockholders,, etc. [3 Ed.], secs. 46, 47, and authorities cited in notes. Other decisions hold that a stockholder, who has-acquired his stock from the corporation, under such circumstances, becomes liable to creditors for the difference between the par value of the stock and the-actual value of the property or services given for it-without regard to whether the transaction was in good faith or fraudulent. This is the view taken by this-court in the case of Shickle v. Watts, 94 Mo. 417, in which Sherwood, J., speaking for the court, says: “Where an agreement is entered into between a contractor and a corporation, whereby the former is to-perform work for, or furnish material to, the latter,. — 165 — and to take unpaid stock in part or in full payment, that, suck contractor, whether for labor or material, can only charge therefor the reasonable market value for such labor or material thus given in exchange; and that all agreements by the corporation to pay more than such reasonable compensation will be disregarded and held for naught by the courts when the rights of creditors intervene. And this is the case, even though no fraud be proved.” Osgood v. King, 42 Iowa, 478. It may be said, we think, that there is a substantial unanimity in the authorities that officers of a corporation, who issue to themselves stock, without paying therefor or at an under valuation may be compelled to account for the stock actually received. It is said, with good reason, that they may be required to account to the corporation itself. “This liability arises from the principle of law that a director must account to his corporation for any secret gift that may be made. to him by persons contracting with the corporation; and must account also for profits made by his secret participation in contracts between the corporation and third persons. In such cases the director is liable to the corporation or its creditors, not for the par value of the stock received by him, but for the actual value of the stock, or for the profit or price which he received therefor.” i Cook on Stock and Stockholders, etc. [3 Ed.], sec. 48, and cases cited. If, then, Crandall, while a director of the corporation, issued to himself the stock in dispute and paid therefor with property at a manifestly over-valuation, and, at the time the alleged agreement was made, liabilities of the company existed for the payment of which its assets were insufficient, there can be no doubt that he could have been compelled to either pay the excess on his stock, or to cancel the whole trans — 166 — action under which it was obtained, and return the shares to the corporation. That liability existing, there can be no doubt that there would be a sufficient consideration to support an agreement to do what the law could require of him. The agreement was really a compromise of an existing liability. But it is said that the contract was among the stockholders and could not be enforced by the corporation or set up by it in this defense. It is true that there could be no liability on the part of the corporation, as such, for the issue of its stock as fully paid when, as a matter of fact, it had not been fully paid, nor could it levy assessments upon stock which had been fully paid, without statutory authority. But we do not think it follows upon these considerations that it could not enforce an agreement made among its stockholders for its benefit. The corporation holds its assets and is responsible for its debts. When it issues stock as fully paid it can not afterwards assert the contrary, though only a small per cent, of the value was, in fact, paid. But the stockholder who receives the stock at less than its par value does so under an implied agreement that “when the necessity arose and the amount required was ascertained” he would “make such additional payment on the stock as the satisfaction of the claims of creditors required. Scovill v. Thayer, 105 U. S. 154. The liability of such stockholder would constitute a reserve fund for the payment of creditors of the company, should the necessity arise. A voluntary agreement among the stockholders to pay a certain per cent, on the then unpaid shares for the satisfaction of creditors would inure to the benefit of the corporation, and could be enforced by it on the same principle that authorizes a corporation to enforce a valid agreement to subscribe for stock made before the organization is — 167 — effected. Schaeffer v. Ins. Co., 46 Mo. 249; Haskell v. Worthington, 94 Mo. 564. A stockholder who, while a director, had issued to himself stock without paying therefor might well prefer to surrender the stock to the corporation rather than incur the liability for which he would be bound' in case of a failure of the enterprise. An agreement to do so, made with other stockholders who were in like situation, should bind him as effectually as an agreement to pay the corporation an assessment on his unpaid stock, and no reason can be seen why such a contract could not be enforced by the corporation as well. It is true that a corporation has no right, outside a statutory or charter provision, to declare or enforce a forfeiture of the shares of a stockholder against his consent. 1 Cook on Stock and Stockholders, etc. [3 Ed.], sec. 121, et seg. This is on the ground that he acquires rights by virtue of his stock that he can not be compelled to surrender. A voluntary surrender of stock stands upon a different footing, and, if assented to by the corporation and others interested, it will be effectual. 1 Beach on Private Corp., sec. 101. Such a surrender will release the withdrawing member from liability upon debts thereafter created. 1 Beach on Private Corp., see. 113. Nor is it necessary that the consent to a withdrawal be expressed. It may be implied from circumstances. 1 Beach on Private Corp., sec. 101. And “it may be received as sufficient evidence of a cancellation without any record of a cancellation having been made upon the books of the corporation, that neither the subscriber nor the company regarded the subscriber as,a stockholder.” Stuart v. Railroad, 32 Gratt. — 168 — 146. Or from long acquiescence. Evans v. Smallcombe, L. R. 3, H. L. 249. Now, applying these principles to the facts as shown by this record, Crandall and Hill, his assignee, were original promoters of the corporation and were directors upon its organization. Both were allotted stock, for which nothing substantial was paid. They issued to themselves this stock as fully paid. Of this stock Crandall received two hundred and fifty-eight shares. Both continued in the directory for some time, Crandall managing the coal mining business of the corporation. After the directors had divided among themselves a large portion of the stock, for which they paid but a small per cent., if anything, the balance (two thousand shares) was sold to outsiders at $30 per share. The business did not prosper, and at the end of Crandall’s management it was found to be in debt to the amount of about $40,000. In this condition of affairs it Was manifest that, in order to pay the debts and to continue the enterprise, money would have to be raised. It appears that consultations were had among those of the stockholders who had paid nothing for their stock, and an agreement was reached that each of such stockholders should bear an assessment of twenty-five per cent, on the par value of their stock. The evidence tended to prove that Crandall assented to this arrangement. Under authority of this arrangement, two assessments were regularly made upon this stock by the corporation. The evidence tended-to prove that Crandall was present and assented to the first of these assessments. The evidence also tended to prove that Crandall was wholly insolvent and unable to pay these calls, and that he agreed, instead of paying the assessments, to surrender to the corporation his stock. Crandall dis — 169 — puted that he assented to either the assessment or the surrender. He did, however, surrender one hundred and fifty-eight shares, and notified the company that he would soon forward to it the remaining one hundred shares. That was December 6,1882. The other stockholders paid the assessments, and, with the money so paid, the enterprise was pushed forward. In 1888 plaintiff, with full knowledge of all the facts, purchased from Crandall said one hundred shares for the sum of $750. At that time the business had begun to prosper, and in December, 1889, was able to declare a dividend of $30 per share, from which the said one hundred shares were expressly excluded. During that time, while he held the stock, Crandall took no part and manifested no interest in the affairs of the company, except on one occasion; at the request of plaintiff, he gave him his proxy to vote at a stockholders’ . meeting. I am of the opinion that the evidence of the original agreement, taken in connection with the surrender of the one hundred and fifty-eight shares and his promise to return the remaining one hundred shares and his subsequent conduct very conclusively establishes the agreement to surrender this stock. Under the principles of law heretofore announced I am of the opinion that there was sufficient consideration for the promise, and, being for the benefit of the corporation, it had the power to cancel the stock, as between itself and Crandall or plaintiff, his assignee, with notice. The equitable relief prayed for by defendant should have been granted. Judgment reversed. Brace, Barclay and Sherwood, JJ., cpncur. Black, C. J., and Burgess, J., dissent.