Burke v. Smith

⁶²⁵ Briscoe, J., delivered the opinion of the Court. The decision of this case turns upon the validity vel non, of certain promissory notes, dated January 6th, 1908, and payable to the plaintiff, Edward F. Burke, for $5,500. The notes were executed by the Fitzgerald-Wedge Company, and signed by its president J. J. Smith, and by its secretary and treasurer, William L. Horton. They were endorsed by J. J. Smith and Robert H. Shriver, the defendants, and by William L. Horton, now deceased.

The suit was bought by the plaintiff as payee of the notes, to recover of the defendants as individual endorsers. The Fitzgerald-Wedge Company was a corporation organized under the laws of the State of Delaware, on the 25th of August, 1905, and carried on business in the City of Baltimore. The defendant Joseph J. Smith was the president of' the company, and the plaintiff E. F. Burke was its vice-president, a director and a large stockholder. The defendant Shriver was an employee of the company.

William L. Horton, since deceased, was its secretary and treasurer. The appellant was the owner of 145 shares of the capital stock of the company; its entire capital stock amounted to 800 shares^ at the par value of $100 each. It appears that on or about the 2nd of January, 1908, the appellant agreed to sell his shares to the company at the reduced sum of $7,500. The sum of $2,000 was paid in cash by the company, and the residue of $5,500 was secured by the promissory notes here sued on.

These notes were executed by the Fitzgerald-Wedge Company in part payment for the appellant’s shares of the stock of the company, of the par value of $14,500.00, and it is admitted that this stock was purchased by the company for the purpose of reducing the capital stock of the company. It also appears that at the date of the ineffectual attempt to reduce the capital stock of the company, for the purpose of purchasing the stock of the appellant, the corporation was insolvent, and was unable to meet its obligation in the usual course of business. On or about the 28th of January, 1908, ⁶²⁶ the company went into the hands of receivers, and subsequently the appellee Smith was appointed ancillary receiver. It is therefore quite clear under the facts of this case, that the appellant as vice-president, one of the directors and a large stockholder of the company, must have known the actual financial condition of the company at the date of the alleged sale of his stock.

At least as one of the original parties to the notes and one of the principal officers of the company, the evidence is sufficient to charge him in law with such knowledge. But it is admitted on the record that the reduction of the stock did not take place in accordance with the requirements of the Delaware Statute, and it will be seen that this statute does not permit a corporation to purchase its own capital stock for the purpose of reducing the same, until all the creditors of the corporation have been secured or paid in full. The alleged reduction of the capital stock of the corporation in this case then by the purchase of the shares of the appellant by the corporation, was manifestly an illegal and unenforceable transaction, because of a failure to comply with the Delaware statute, and must be so declared. Act 1903, Ch. 392, sec. 28, Laws of Delaware; Smith on Delaware Corpora tions, 69-101.

It cannot be doubted, at this date, since the decision of this Court in the case of Maryland Trust Company v. Mechanics Bank, 102 Md. 608 , that in the absence of express authority, a corporation in this State, the amount of whose capital stock is fixed in its charter, has no power to purchase its own shares, either for the purpose of holding or selling them, or for the purpose of cancelling and retiring them; and that the amount of the capital stock of a corporation cannot lawfully be diminished in any other