Majority
p. 292JOHN N. DORRIS, Receiver, etc., Plaintiff, v. EDWARD F. FRENCH, Defendant.
Headnote
Stockholder of corporation — when Hable for subscription for slock —fraud of directors — no defense to stockholder.The defendant with others signed an agreement to unite in the formation of a company, and to take a number of shares of stock therein specified; subsequently he, with others, signed a certificate of incorporation as required by the act of 1848. In an action brought by the receiver of the company to recover the amount due upon the shares subscribed for by the defendant, held (1), that the defendant was estopped from denying that the company was legally incorporated; (2), that he was liable for the number of shares subscribed for by him.
Dorris v. Sweeney ( 64 Barb., 636 ) distinguished.
The fact that the promoters of a corporation have purchased for it a patent right,
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of which they were the owners, at an exorbitant price, furnishes no defense to a stockholder in an action brought by the corporation to recover the amount due upon the stock held by him.
Motion for a new trial on exceptions ordered to be heard in the first instance at the General Term, after a verdict directed in favor of the plaintiff.
This action was brought to recover from the defendant the amount claimed to be due from him on certain shares of stock in The Buffalo Fruit Preserving Company.
In the latter part of October, 1865, the defendant and others signed a paper whereby they agreed to unite in the formation of a company for the purpose of purchasing the exclusive right to make, use and vend Nyce’s patent for preserving fruit, the paper designating the number of shares to be subscribed for by each. Subsequently, the defendant and nine others executed and acknowledged the certificate of incorporation required by the act of 1848, authorizing the formation of corporations for manufacturing purposes. Subsequently the plaintiff was appointed receiver of the corporation, which had been dissolved for failing to exercise its privileges for one year. The defendant set up, as a defense, that he was not a stockholder ; that the company was never legally incorporated; and that his subscription was procured through fraud.
G. A. Scroggs, for the plaintiff.
The second exception, namely, “ that the plaintiff has failed to show that the defendant was a stockholder in said corporation,” is not well taken, because the plaintiff has shown that the defendant was a stockholder in said corporation. The defendant by subscribing the instrument, in which he agreed to unite with those who signed the same instrument, in forming an incorporate company, and mutually agreed with them to pay the amount set opposite his name, which is $3,000, to said company for stock therein, and the certificate of incorporation prescribed by the act providing for the organization of manufacturing and other companies, became a stockholder in said corporation, and liable to pay his subscription. (Stanton v. Wilson, 2 Hill, 153 ; Spear v. Crawford, 14 Wend., 20 ; Hamilton, etc., P. R. Co. v. Rice, 7 Barb., 157 ; Buffalo and N. Y. C. R. R. v. Dudley, 14 N. Y., 336 ; Lake Ontario, etc., R.
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Co. v. Mason, 16 id., 451 ; Rensselaer and W. P. R. Co. v. Barton, id., 457 , note; Buffalo and P. R. Co. v. Hatch, 20 id., 157, per Grover, 161, close of opinion; Trustees, etc., v. Allen, 14 Mass., 172 ; Burr v. Wilcox, 22 N. Y., 551 ; Mechanics' Bank v. N. Y. R. Co., 13 id., 599 , opinion of Judge Comstock, 627; Stewart v. Hamilton, 2 Denio, 417 , opinion of chancellor ; Andrews v. Pontue, 24 Wend., 285 ; Poughkeepsie, etc., v. Griffin, 24 N. Y., 150 ; Angell & Ames on Corp. [9th ed.], §§ 517, 523.) The preliminary agreement signed by the defendant was authorized and valid. (Angell & Ames on Corp. [9th ed.], § 523; Stanton v. Wilson, 2 Hill, 153 ; The Buffalo, etc., v. Dudley, 14 N. Y., 336 ; Lake Ontario v. Mason, 16 id., 451 ; Buffalo and P. R. Co. v. Hatch, 20 id., 157, see Grover, close of opinion; Hamilton and P. R. Co. v. Rice, 7 Barb., 157 .) The defendant cannot question the legal existence of the corporation, or the right it has to its franchises. (Code, § 430; The People v. Trustees of Geneva College, 5 Wend., 211 -220; McFarlan v. The Triton Ins. Co., 4 Denio, 392 -397; Eaton v. Aspinwall, 19 N. Y., 119 ; The People v. Utica Ins. Co., 15 Johns., 358 ; Methodist E. U. Church v. Picket, 19 N. Y., 482 ; Thompson v. N. Y. R. Co., 3 Sandf. Ch., 625 ; Buffalo, etc., R. Co. v. Cary, 26 N. Y., 75 ; Trustees of Vernon v. Hills, 5 Cow., 23 -26 ; Schenectady and S. P. R. Co. v. Thatcher, 11 N. Y., 102 -113.)
H. E. Day, for the defendant.
This case is unlike that of Dorris v. Sweeney,[6] in this, namely, that the defendant subscribed and acknowledged the certificate of incorporation. The statute authorizing the formation of manufacturing companies,[7] provides that the persons who shall have signed and acknowledged the certificate, and their successors, shall be a body politic and corporate. It requires that the aggregate amount of the capital stock of the company, and the number of shares of which it consists, shall be stated. But it does not require that the interest of the subscribers to the tiertificate, respectively, shall be set forth. That must, therefore, necessarily be fixed by some agreement separate from the certificate. Such an agreement,
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consummated by signing the certificate, amounts to the same thing as subscribing formal articles of association, preliminary to organizing a corporation. The agreement and the certificate constitute but one transaction, having a single object, namely, the formation of the corporation. It has long been held, and never, I believe, disputed, that the corporation, when formed, may enforce payment of the subscriptions to its capital stock against persons who subscribed its articles of association before the corporate body had a legal existence.[6] It was with this rule of law in view, probably, that the legislature omitted any specific provision regulating the manner of becoming stockholders, while at the same time they authorized the capital stock to be paid in — one-half thereof within one year, and the other half within two years, and made the stockholders severally liable for the debts of the corporation, to an amount equal to the amount of stock held by them respectively, until the whole amount of capital stock should have been paid in,[7] and authorized the corporation to demand from the stockholders, respectively, payment of their subscriptions, on pain of a forfeiture of their stock.[5] It is very evident from these provisions, that the design of the legislature was to provide protection to creditors, by devolving personal liability on the stockholders, and to give to the corporation, for the indemnity of the latter, the power of coercing payment of subscriptions.. But neither of these objects could be accomplished, unless there were some means of ascertaining who had become stockholders, and the amount of stock held by them, besides the certificate of incorporation; for that might not show the names of all the stockholders, or the amount of stock held by any of them. These facts might be established by proof of payments on account of stock, and the taking of the usual stock certificates ; but that kind of proof would not be as satisfactory as the ordinary mode of subscribing which was adopted in this case. We are of opinion, therefore, that the original liability of the defendant as a subscriber to the stock was established. Stockholders are estopped to deny the lawful existence of corporations which they have helped to create.
‡ ‡ Sec. 6.
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These views would require us to direct a judgment in 'favor of the plaintiff. But there are other facts which demand consideration. Among the defenses pleaded, one was that some of the promoters of the company, who signed the certificate of incorporation and were named therein as trustees, were intrusted with the duty of purchasing the patent right, under which the business of the company was conducted; that they purchased it, in fact, of themselves and their associates, for the corporation, for the price of $50,000, whereas the real price was $16,000, and that the difference was divided between them and their associates. This, if true, was a gross fraud, and no proof of an actual intent to cheat, beside the matter itself, in such a case, is requisite to invalidate the transaction. The persons who undertook the duty of purchasing the patent, thereby became agents of the corporation for that purpose. The same principles are applicable to them, as govern the relation of trustee and cestui que trust. They were bound not to do anything which could place them in a position inconsistent with the interest of their principal. Agents are not permitted to become secret vendors of property which they are authorized to buy for their principals, or indeed to deal validly with their principals in any case, except where there is the most entire good faith and full disclosure of all facts and circumstances, and an absence of all undue influence, advantage or imposition. Nor will an agent, employed to purchase, be permitted, unless by plain and express consent of his principal, to make any profit out of the transaction.[6] If those who made the purchase for $16,000 were at the time acting as projectors or promoters of the company, they can make no profit at the company’s expense by a purchase and resale,[7] The injury occasioned' by the alleged fraud, however, was done to the corporation, and not to the defendant. It constitutes no defense to an action at law, brought by the corporation or its receiver, to recover his subscription to the capital stock. The only mode of making it available to the defendant
* Story Eq. Jur., § 315; Dally v. Wonham, 33 Beav., 154; Bentley v. Craven, 18 id., 75; Tyrrell v. Bank of London, 10 H.L. Cas., 26; Beck v. Kantorowitz, 3 K. & J., 230.
† † Foss v. Harbottle, 2 Hare, 489; Densmore Oil Co. v. Densmore, 14 P. F. Smith, 49; McElhenny’s Appeal, 11 id., 188.
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would be by a bill in equity, in which the persons accused of the fraud, as well as the corporation, would be necessary parties. The learned judge, however, entertained the defense, and in submitting the case to the jury, charged them, “that the fact that the patent was owned by the promoters of the company at the time the defendant was induced to make his subscription, was not a sufficient defense, unless there was evidence that it was suppressed with intent to cheat and defraud.” This, we think, was erroneous, and, if the defense was before the court, the error was material.
We are also of opinion that the learned judge erred in refusing to submit to the jury the question, whether the company had not, with the assent of the defendant, issued the stock for which he subscribed, to other parties, who had received the same and paid the company for it. There is evidence in the case -which would have warranted the jury in finding that fact in favor of the defendant ; and we have no doubt that if so found, it would constitute a complete bar to this action.
The motion for a new trial must be granted, with costs to abide the event.
Present — Mullin, P. J., Smith and Gilbert, JJ.
New trial granted, costs to abide event.
Footnotes
- * 64 Barb., 636 .
- † † 3 Edm. Stat., 733.
- * Buff., etc., R. R. v. Hatch, 20 N. Y., 161 ; Burr v. Wilcox, 22 id., 551; Strong v. Wheaton, 38 Barb., 622 ; Ang. & A. Corp., § 517 et seq.
- † † Sec. 10.