Culver v. Reno Real Estate Co.

91 Pa. 367, 1880 Pa. LEXIS 7

Opinion

Mr. Justice Trunkey

delivered the opinion of the court,

The Reno Real Estate Company was incorporated June 21st 1872, under the Act of April 21st 1854 and its supplements, with the .expressed object of doing everything allowed by the Acts of Assembly relating to mining companies. By Act of 1872, Pamph. L. 37, corporations are authorized to issue preferred stock, on which the holders may receive prescribed dividends, not exceeding 12 per cent., payable out of the net earnings of the company; and the Act of 1873, Pamph. L. 79, authorizes the issue of such preferred stock in classes, with preference in the rates, and in the order of payment, of dividends, or in the redemption of principal; with right to redeem on terms prescribed in the issue; and the company may specifically appropriate for payment of dividends, or for redemption of the principal, the revenues from any specific department of its business, or the proceeds of any specified portion of its assets or property : “ provided that no injustice shall thereby be done to the existing rights of other stockholders or creditors of the company.”

First preferred stock, limited to five thousand shares of .$100 each, was directed to be issued by The Reno Real Estate Company, with right to the holder to dividends not exceeding 5 per cent, semi-annually, as the profits of the company may warrant, payable out of the net earnings of the company, and the company Was bound at all'times to apply any funds remaining in its treasury, or resulting from sale of real estate, to the redemption at par of any portion of the stock upon demand of the holder.

On September 24th 1873, the plaintiff loaned the sum of $20,000 to O. V. Culver, who was vice-president and a director of The Reno Real Estate Company. An agreement was made between the company, C. V. Culver and L. H. Culver, reciting that C. V. Culver is the holder of more than $25,000 of the first preferred stock, and by its terms he is entitled to demand payment of the same; that it is inconvenient for the operations of the company that said stock should be now presented and paid, and C. V. Culver wants a large amount of money; that for the purpose of obviating demand and present payment of said stock, L. H. Culver, at the joint request of O. V. Culver and the company, agreed to loan to C. V. Culver $20,000, for which C. V. Culver has executed his promissory note, and transferred to L. II. Culver, as collateral security therefor, $25,000 of said stock ; and as inducement for making said loan, and in consideration of the same, the said C. V. Culver and the company each agree that L. II. Oulver may, at any time before the maturity of the note, elect to receive payment of the same in oil, and thereupon the note shall be cancelled and C. Y. Culver and the company shall be bound, jointly and severally, to deliver to L. H. Cuflver the number of barrels of oil into which the amount of the note shall have been liquidated, the delivery to be completed within ninety days from the time they are notified of the readiness of L. PI. Culver to receive the same. From time to time, as any payments are made on the note, or oil delivered under the contract, proportionate amounts of the stock collateral shall be surrendered. C. V. Culver and the company agreed, L. H. Culver not a party thereto, that if the company shall furnish any oil to L. H. Culver, it shall be entitled to receive from him stock at par to value of the oil so delivered.

By a supplemental contract, dated November 8th 1873, said note was cancelled, and in lieu thereof O. Y. Culver and the company, each for themselves, agreed to deliver to L. H. Culver twenty-two thousand two hundred and twenty-two barrels of oil, according to the terms of the contract of September 24th 1873.

March 13th 1875, the parties made another agreement, reciting that said company and C. Y. Culver are bound by written contract to deliver to L. H. Culver twenty-two thousand two hundred and twenty-two barrels of oil, and that he holds as collateral security for the performance of the said contract two hundred and fifty shares of said first preferred stock, and at request of the company and C. Y. Culver the said L. H. Culver surrenders the said collateral security, waives present right of demanding the oil, and the parties contract anew for delivering of the full amount of said twenty-two thousand two hundred and twenty-two barrels of oil at times and on calls particularly set forth; or they may pay in money the highest price of the oil at the date of a call, the parties of the first part being jointly and severally liable, and notice to one shall be notice to both; and as collateral security for their performance the said first parties transferred to L. H. Culver one thousand shares of the preferred stock of The Reno Company. At the date of this contract, as appears by their minutes, the executive committee authorized its execution; and April 10th 1875, the directors, as shown by their minutes, approved the action of the executive committee. C. V. Culver was one of the committee, also a director, and was present when said authority was given, and at its approval. J. P. Brinton, as president, executed each contract for the company.

The several contracts — successive links of a chain — in their natural order, have been brought into view, as from the whole the true character of the transaction is plain. The consideration of the first is a loan to C. Y. Culver — the company received nothing. The second states the number of barrels of oil that shall be delivered in payment of that loan. The last refers to the existing contract for delivery of the oil, and binds anew for delivery of the same quantity of oil, without any new consideration of value to the company; but the contract is made to look more as if the debt was owing by the company than by C. Y. Culver. To take the last alone is to shut the eyes against the fact that the company was merely surety for payment of the debt.

It is not recited in the agreement of March 13th 1875, that the stock held as collateral was surrendered to the company, and no legitimate construction would make it a surrender to any one but its owner. As collateral security the company gave one thousand shares of stock in The Reno Company, and this appears to have been done without reference to the stock surrendered to Culver. It is unnecessary to say whether the property of a corporation may be given away by recitals in such contracts, for it is noticeable that Brinton, with the vice-president, director and borrower in the person of C. V. Culver at his side, did not recite that any money was in the treasury of the company applicable to redemption of said preferred stock, and did recite that it would be inconvenient for its .operations that said stock should be paid. The writings do not show a present duty of the company to redeem said stock, nor that it was surrendered to it. By the Act of 1873 the clause in the issue of first preferred stock must be interpreted, and, therefore, no holder had right to its redemption out of any specific assets other than proceeds of sales of real estate, nor out of moneys in the treasury when such payments would work injustice to creditors and stockholders. No argument or authority is required to prove the gross injustice to creditors and stockholders that must inevitably ensue, if preferred stock is allowed to take all the money from the treasury, and thereby cripple or break down the business of the corporation. If light were needed it may be found in the opinion in Lockhart v. Van Alstyne, 14 Am. Law Reg., N. S. 180. Though that case arose out of a claim for dividends, the reasoning is suggestive of the ruin of a corporation, and injury to its creditors and shareholders, in case preferred stockholders exhaust the funds necessary to carry on its ordinary operations. The statute authorizes no such thing; and the phrase, “ any funds remaining in the treasury,” aside from moneys received on sales of real estate, can only mean such funds as are not necessary for the usual, current and proper business of the company. The contracts show no money in the treasury of the company in excess of the requirements for its current business, or arising from sale of real estate; and a consideration cannot be based on the agreement not to demand redemption of the stock.

Coming to the testimony adduced by the plaintiff, is it sufficient, in connection with the contract and minutes, to establish his case ? If so, it should have been submitted; for the court, in directing a verdict for the company, could not consider the disputed testimony offered in its behalf. Ogelvie testifies that certificate No. 68, issued to L. H. Culver, was presented to the office of the Union Trust Company in New York city, for transfer by C. V. Culver, who made the transfer to The Reno Real Estate Company, and a new certificate for a larger amount, but embracing that of No. 68, was made to The Reno Real Estate Company, and delivered to C. Y. Culver in person. L. Ii. Culver was a witness in his own behalf, and a careful one. He does not know who owned the stock mentioned in the contract of September 24th 1873, but remembers that he returned the certificate for it to the company, and procured the one in his own name, which he held till March 13th 1875, when he surrendered it to the company. He says: “ I surrendered that certificate to Col. Brinton in exchange for one thousand shares of Reno stock.” “ Q. This one thousand shares of stock of The Reno Company was the property of The Reno Real Estate Company ? A. I so understood it; yes, sir. Q. Then The Reno Real Estate Company paid you a thousand shares in the old company for this $25,000 of stock ? A. I so understood it. Q. That is what you meant by surrender ? A. Certainly; I do not mean to be understood I gave it up for nothing; I exchanged it. Q. They bought it; paid for it? A. Yes, sir.” Thus he testified, in chief and in cross-examination. He was recalled in his own behalf, and said he “ did not mean that the sole consideration of surrendering this Reno real estate first preferred stock was the Reno stock; but, that in accordance with that contract, it was all one thing.” While he held C. V. Culver’s stock as collateral, a dividend was declared which both claimed, and he agreed to forego the dividends, on Brinton’s and O. V. Culver’s promise to deliver one thousand two hundred barrels of oil on the contract. He says: “ I accordingly receipted against the dividend.” “ I waived the dividend. I never got it.” The oil was not delivered. It was argued that the dividend entered into the consideration of the contract, but neither writing nor witness proves this. There is no evidence that the company was released from payment thereof to the owner of the stock. If released, it would be only $1250 which passed to the company, and to that extent it might be answerable, but not for the whole debt, many times larger.

Literally there is no evidence of any money of the company which was applicable to redemption of the preferred stock, nor of acquiescence of the stockholders in the contracts, nor that it was usual for the company to agree to pay the private debts of its officers. L. H. Culver is presumed to know the law. He did not deny knowledge that his brother was vice president and director, although he was on the witness stand after Brinton had testified to this fact. He knew he was lending the money to C. Y. Culver for his individual use, and that the corporation received neither money nor other valuable thing for its undertaking.

It was not contended by the plaintiff’s counsel that the officers had power to bind the company as surety for another’s debt. That a contract for that purpose is wholly beyond the powers of the corporation, expressly granted, or implied, by the statutes relating to mining companies, is so clear as not to be gainsaid. The attempt was to show that the corporation executed the contracts as a prin cipal, discharging its own obligation as a principal debtor represented by its preferred stock, and no right of subrogation would or could exist. That the lender and borrower designed to put the surety in that position may be quite certain, but the writings show the relation of the parties to each other, and, without comment on the other testimony, we think it insufficient to warrant a finding that the company had received such consideration as would make it liable for the debt. Even on the strong ground taken by Com-stock, C. J., in Bissell v. Railroad Cos., 22 N. Y. 258, in his opinion, not the court’s, the plaintiff cannot recover, for he allows the plea of ultra vires to avail in many cases, tie says : “ And I do not deny the validity of this excuse in many bases, I may say in all cases where it can be received without doing greater injustice to others. If the person dealing with the corporation knows of the wrong done or contemplated, and he cannot show the acquiescence of the shareholders, he ought not to complain if he cannot enforce the contract. Aside from the law of corporations, agreements which involve or propose a violation of trust will not be enforced by the courts where no greater equities demand it.”

The expressed consideration of the contract, dated March 13th 1875, was the obligation of the one then existing, of prior date, which, not having been performed, was continued. Whether the invalidity of the contract be put on the ground of illegality, or of want of power merely, the case of Swan v. Scott, 11 S. & R. 164, and others which adopt its ruling, do not apply. In Swan v. Scott, the suit was “ on a bond, the consideration of which was the judgment,” which had been satisfied by the bond; and, of course, the defendant could not prove the illegal contract on which the judgment was obtained. Here the contracts have all been executory, none executed, between same parties, and on same consideration.

I am instructed to say that we are agreed that no error was committed in the answers to the points submitted.

Judgment affirmed.