Dozier v. Sangamon Loan & Trust Co.

MACK, Circuit Judge (after stating the facts as above). The relations between Dozier and the Desnoyers Shoe Company, in our judgment, are' to be determined from the written agreement of January 24th. The testimony establishes that this document was intended to embody, and was regarded by the parties as covering, their entire agreement. Claimant correctly alleges that it was ratified by the board of directors, so that we are not now concerned with any question of Desnoyers’ lack of authority to enter into this kind of an agreement on behalf of the company. It is to be observed, too, that the document purports to be executed, not only by Desnoyers as president of the company, but also by him in his individual capacity. The consideration for the $50,000, as expressed in the agreement, was, first, to issue stock to that amount to Dozier, as part of a larger increase of stock to be voted after July 1st; second, to pay Dozier an amount equal to any dividend that might be declared on a similar amount of stock after January 1, 1911; third, to pay, in addition; interest at the rate of 6 per cent, until July 1st (subsequently, by implication resulting from the actual payment and receipt, extended to- September 1st); fourth, to give the son an opportunity to learn the business. [1] While both the president and the board of directors of- an Illinois corporation are without authority to sell a prospective, but unauthorized, increased issue of stock, and while, therefore, payment made in advance under such a contract could be recovered (Wolf v. Chicago S. P. Co., 233 Ill. 501, 84 N. E. 614, 13 Ann. Cas. 369), the present contract does not fall within the principle of the Wolf Case for several reasons. ' ' Unless the statement that the $50,000 “is to become special capital until such time as we are able to merge it into the general capital stock” is to be entirely disregarded as meaningless, the money cannot be said to have been paid merely as an advance payment on account of the stock to be issued. Even if these words were to be interpreted as indicating a loan to the company until July 1st and such reasonable time thereafter as might be necessary to effectuate the increase of the stock (an interpretation to be hereafter considered), the implied obligation of the company to repay the loan, with the interest thereon, would be an enforceable counter promise for the payment, and, notwithstanding the lack of enforceability of the additional promise to issue the unauthorized stock, would bar a rescission of the agreement on the part of the lender. [2] Appellant, however, contends that he has a right to rescind, not only under the principle of the Wolf Case, but also because of a total failure of consideration received by him for his $50,000. Inasmuch as the engagement of Dozier, Jr., in the business was deemed by the parties to be a real, and, indeed, an important, element in the transaction, and, as the promise to employ him was an actual-partial consideration for the money deal, the failure of consideration is at best but partial, and therefore gives no right of rescission; this remains true, even though Dozier, Jr., may have derived but little, if any, benefit through his employment in a business concern whose condition was so far different from that which his father believed it to be at the time of the [377] employment and the investment. Moreover, the promise to pay, in addition to interest, a sum equal to dividends on a similar amount of stock was a valuable part consideration for the money payment; and that, too, despite the fact that the company’s condition, unknown to Dozier, made it extremely improbable that dividends could be declared. We need not consider what Dozier’s rights would be if he had relied upon fraud or fraudulent misrepresentations as a ground of rescission of the entire contract, inasmuch as no such contention is made. Whatever claim, therefore, Dozier may have against the bankrupt because of the $50,000 advanced by him, the basis thereof is not money had and received and equitably due the plaintiff after a rescission based either on illegality, total failure, or total lack of consideration. The claim as filed was, therefore, properly rejected. [3] Inasmuch, however, as an amendment of the claim would be allowable, we proceed to consider whether, in any aspect, Dozier has a standing as a creditor of the bankrupt. The document of January 24th discloses clearly that Dozier intended, by handing over the $50,-000, not merely to make an advance payment for the stock to be thereafter issued, but also to give the company the absolute right to use the money for its business until the stock should be -issued. Compensation for this use was specifically provided for. Unless there be something contrary thereto in the agreement, such a transaction would be a loan to the company until the issuance of stock, with the right to cancel the indebtedness on the issuance and in payment thereof. If this were the true construction of the agreement, whatever other rights he might have, Dozier would, in any event, be a creditor of the company for the entire $50,000 on a claim for money loaned. The parties, however, agreed that this $50,000, from the time of payment until it could be "merged into the general capital stock,” should become “special capital”; that Dozier should receive therefor, in addition to interest, exactly the same compensation that a stockholder to the extent of $50,000 would receive, namely, dividends. The capital of a stock company or of a business has a well-defined meaning. It is the fund intended to be subject to the risks of the business, the fund contributed to meet the obligations of the business, and to be repaid to the contributors only after all of the other obligations should have been satisfied. While the phrase “special capital,” in reference to a corporation, has no established legal meaning, it would seem to be clear that what thq parties had in mind was that the $50,000 should be subject to the risks of the business and should enjoy the profits thereof in exactly the same way as the actual capital of the business until such time as it could be legally exchanged for capital stock. In other words, something in the nature of a joint venture was entered upon by Dozier and the company. If, as between Dozier and the stockholders of the company, the former would be entitled to priority in the distribution of the funds as if he were a lender, by his express agreement he has subjected any-such claim to the prior rights of creditors. Advances to individuals and corporations for the very purpose of bettering their financial condition by increasing their assets without correspondingly increasing their liabilities as against other creditors are not uncommon, and there [378] would seem to be no reason, irrespective of any question of estoppel, for refusing to enforce the agreed subordination of the rights of such a lender to those of other creditors. Wallerstein v. Ervin, 112 Fed. 124, 50 C. C. A. 129. The claim of Dozier was, therefore, properly rejected as against all the other creditors, and, as- it is apparent that the assets are insufficient to pay such creditors in full, we need not consider the rights inter sese of Dozier and the stockholders of the company. [4] While these considerations dispose of the case, it may be well to point out that Dozier would, in any event, be estopped, as against many of the largest creditors; for, while he did not expressly authorize any part of the financial statement in reliance upon which they gave additional credit or refrained from enforcing their demands, the sentence therein that his $50,000 was to be “special capital until the 1st of July” was in exact accordance with the document of January 24th, and was therefore impliedly authorized by him. The order appealed from will therefore be affirmed.