Trent Import Co. v. Wheelwright

²⁵¹ Urner, J., delivered the opinion of the 'Court. This is an action by a Hew York corporation to recover from the defendant upon his subscription for certain shares of its capital stock, and the defense is that the plaintiff is unable to perform its part of the contract without violating the law under which it was created. It is alleged in the declaration that Gustav Eggena, being the sole agent for the sale and delivery in the United States of the ales, stouts and other products of the establishment of Samuel Allsopp and Sons, Limited, of England, proposed to procure a new contract for the agency and have it made assignable to a corporation to be organized under the laws of Hew York. It is averred that $150,000 of the preferred slock of the projected corporation was offered for subscription at its par value of $100 per share, and the defendant subscribed for one hundred and fifty shares under an undated agreement between Eggena and the defendant and other subscribers providing, so far as it need be stated, that the company be organized with an authorized capital of $175,000 of seven per cent, cumulative non-voting preferred stock, and $175,000 of common stock, that the proceeds of the preferred stock offered for salo should be paid over to the corporation for the purposes of its business, that each of the subscribers should receive in addition to the preferred stock covered by his subscription fifty per cent, of the amount in common stock, that payments for the stock should be made to the Trust Company of America in Hew York City and upon the organization of the corporation certificates for its preferred and common stock should'be issued to the Trust Company for delivery to the respective subscribers upon the completion of their payments under the terms of the agreement, that when the corporation should be formed and the further agency obtained, and in the event that a minimum of $75,000 of the preferred stock was subscribed for, Eggena should transfer the agency to the corporation under an agreement between the company and himself for its purchase.

The ²⁵² subscriptions actually obtained equalled but did not exceed the minimum amount of $75,000, fixed by the agreement. The declaration then sets forth a later agreement between the same parties, dated October 1, 1907, which recited * * * that Eggena had then procured a contract from Allsopp and Sons, Limited, to constitute the proposed corporation the exclusive agent in the Hnited States for the ales, stouts and other products referred to, and had performed all the conditions for the organization of the corporation prescribed by the prior agreement, and provided that the subscribers should pay to the Trust Company of America twenty pe^ cent, of the amount of their subscriptions on or before October 31, 1907, the remaining amounts to be paid as previously stipulated. It is alleged that Eggenga thereupon organized the corporation as the Trent Import Company, the plaintiff in this suit, and that on October 25, 1907, the plaintiff and defendant entered into an agreement, in which the other subscribers and Eggena also joined, further modifying the agreement of subscription. The last dated agreement stated that the Trent Import Company had organized in accordance with the original agreement as later modified, that Eggena vested in the company the agency contract in question, and had performed- all of his other agreements in the premises, except the delivery to the Trust Company of the preferred and common stock which that company was to deliver to the subscribers, and that the Trent Import Company had ratified and accepted all of the provisions of the two preceding agreements and had authorized the issuance of its capital stock accordingly.

It then provided that each of the subscribers should on or before October 31, 1907, pay to the Trent Import Company, instead of the Trust Company, twenty per cent, of their subscriptions, and that upon such payment the plaintiff corporation should issue to each subscriber making 'the payment preferred stock of the company at par in the amount paid and- fifty per cent, of the amount in common stock, and that upon payment of the succeeding calls by the ²⁵³ directors corresponding amounts of preferred and common stock should he issued. The declaration concludes with the allegation that the plaintiff had performed all the conditions on its part provided in the agreement as finally modified, but the defendant failed and refused to make the payments when due. There were further counts charging separately the failure and refusal of the defendant to pay the second and later calls, he having in fact duly made the first twenty per cent, payment of $3,000 on his subscription. These allegations were met by a plea which avers among other things that the plaintiff corporation was formed subject to the stock corporation law of New York by which it is provided, in section 42, that: “No such corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation.

Any corporation may purchase any property authorized by its certificate of incorporation, or necessary for the use or lawful purposes of such corporation, and may issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payments under any of the provisions of this Act; and in the absence of fraud in the transaction the judgment of the directors as to the value of the property purchased shall be conclusive.” The plea then proceeds to charge that the plaintiff corporation was promoted and organized solely by Gustav Eggena and other persons associated with and acting for him and under his control, and that, at the times of issuing or authorizing the issue of stock as mentioned in the declaration the directors of the corporation were persons acting in the interest and under the control of Eggena, and that the plaintiff corporation has never had under its ownership or control, so as to be able to issue or cause to be issued to the defendant, in performance of the subscription contract, any shares of its common stock for which the par value has at any time been paid in money ²⁵⁴ or in labor done, or property received, either of an actual value equal to not less than par, or at a Valuation not less than par made in good faith by the directors of the corporation, but that all the common stock proposed to be issued to the defendant under the contract has been, or will be attempted to be issued either for no consideration whatever or else for alleged labor or property at a valuation by the corporation or its directors not fixed in good faith, but known by the corporation and its directors to be excessive and beyond any fair valuation of such labor or property. A demurrer to the plea having been overruled the plaintiff filed a replication alleging that all the shares of common stock which the defendant was to receive under the contract upon payment for the preferred stock mentioned in the subscription were a part of the common stock which had been issued by the plaintiff corporation for property or services or both at a valuation fixed in good faith by the directors of the plaintiff equal to the full par value of the stock. The pleadings thus led to the issue whether the corporation had received for the common stock, which it was to deliver under the agreement to the defendant, property or services really worth the par value of the stock or so valued by the directors in good faith. This was made the determinative issue of fact in the case upon the theory, which the Court adopted and upon which it overruled the demurrer to the plea, that unless the common stock intended for the defendant represents, actually or in the bona fide determination of the directors, value received by the corporation equal to the par value of the stock, the contract of subscription is illegal and unenforceable.

In the course of the trial it was proved that the whole of the common stock of the company, and one thousand shares of its preferred stock had been issued to Eggena by the corporation as the purchase price of the agency mentioned in the subscription agreement. This was.in pursuance of a contract in writing between the corporation and Eggena, dated October 25, 1901, which provided that the stock thus issued ²⁵⁵ should be deemed full paid and non-assessablo. There was a provision, however, that seven hundred and fifty shares of the preferred stock should be re-transferred by Eggena to the company as its absolute property for the purpose of raising money for working capital. It was thus established as a fact that the common stock which the company agreed on October 25, 1907, to issue to the defendant was a part of that which it had already agreed to issue to Eggena as full paid stock in consideration of the transfer of the Allsopp agency.

The directors, with the exception of one who was returned non est, were summoned as witnesses in the ease, and each one testified in effect that he had no knowledge of the value of the agency contract purchased by the company, and that he made no investigation to ascertain its value. There was evidence tending to show that the directors made the agreement with Eggena and authorized the issuance of preferred and common stock to him in pursuance of his proposal without discussing among themselves the value of the agency or the terms of the purchase. None of the directors who testified had invested any money in the stock of the corporation. All stated (hat they became directors at the request of Mr. Eggena, and we can have no doubt upon the record that they acted in the matter simply for his accommodation and without the exercise of any independent judgment.

The proof strongly tends to show that the agency contract was in fact valueless. It required the annual purchase by the company for a period of twenty years of Allsopp products in quantities which could not, according to the evidence, be marketed except at an expense that would probably absorb all the profits. The agency lapsed long before the trial as the result of the failure of the company to comply with its terms. It does not appear that the company ever received any payments of money on account of its capital stock except the twenty per cent, installment paid by the defendant.

The case was submitted to the jury under instructions proposed by both the plaintiff and defendant. Those granted at the instance of the plaintiff were to the general effect that ²⁵⁶ the verdict should depend upon a finding whether or not the common stock of the plaintiff corporation and one thousand shares of its preferred stock were issued for property or services or both, at a valuation not fixed in good faith by the directors of the company equal to the full par value of the stock, but fixed by them at a valuation known by them to be excessive and beyond any fair valuation of such labor or property. The instructions given at the request of the defendant prescribed as the basis for the plaintiff’s recovery a finding either that the corporation received for the preferred and common stock issued to Eggena property and services which were in fact equal to the par value of the stock so issued, or were bona fide valued at that amount by the directors; and the absence of good faith in that connection was defined to be the issuance of the stock by the directors for property and services not worth its par amount, without an honest belief and determination that such property and services had the requisite value, or without any knowledge on the subject and in reckless disregard of their real worth. In order to pursue consistently the objection, raised primarily by the demurrer, to the theory of the defense, an exception was reserved by the plaintiff to the granting of the instructions proposed by the defendant, but it is not suggested that they are otherwise objectionable.

The verdict and judgment being in the defendant’s favor the plaintiff has appealed. The first inquiry is whether the law of New York, under which the plaintiff was incorporated, prohibits the issuance of its stock for property or services at less than the par value. In our judgment this is the clear effect of the statute quoted in the plea and offered in evidence. The rational construction of a provision that stock may be issued in the purchase of property to the amount of its value, and that the stock so issued shall