Gunderson v. Illinois Trust & Savings Bank

65 N.E. 326, 199 Ill. 422

Opinion

Mr, Justice Cartwright

delivered the opinion of the court:

The defendant in error, the Illinois Trust and Savings Bank, filed its bill May 17, 1897, in the circuit court of Cook county, against the Medinah Temple Company, a corporation, and its tenants occupying rooms and apartments in the Medinah Temple, to foreclose a trust deed executed March 1, 1894, by said Medinah Temple Company, pursuant to a resolution of its boaj-d of directors, to said Illinois Trust and Savings Bank, as trustee, conveying the said building and premises to secure bonds amounting to $400,000, with interest thereon. The Medinah Temple Company was defaulted and made no defense to the suit. All of the tenants were also defaulted, except the Ancient Arabic Order Nobles of the Mystic Shrine, which answered and filed a cross-bill claiming rights superior to the lien of the trust deed. The cross-bill was answered, and the cause was referred to a master in chancery to take the evidence and report the same, with his conclusions. The master proceeded on November 20, 1897, to take the evidence, and the hearing before him continued from time to time thereafter until it was completed. He filed his report November 24,1900, finding against the Ancient Arabic Order Nobles of the Mystic Shrine, and finding that there was due upon the bonds secured by the trust deed, for principal and. interest, $565,641.63. He recommended the court to grant the relief prayed for in the original bill. There were objections and exceptions to the report, and while they were pending the plaintiffs in error, Severt T. Gunderson and forty-six others, stockholders of the Medinah Temple Company, presented to the court, on May 16, 1901, their intervening petition and asked leave to file it. By the petition they charged the directors of the Medinah Temple Company with frauds and prayed that they might be made parties defendant; that the petition should be considered in the nature of a cross-bill and said directors should be made defendants thereto; that the petitioners should be decreed to be the only legal stockholders of the corporation, and that the court should cancel the trust deed and dismiss the foreclosure proceedings. The court refused leave to file the petition, and the petitioners excepted and sued out a writ of error from the Appellate Court for the First District. The record being brought into the Appellate Court for review, that court found no error in it and affirmed the order of the circuit court. The writ in this case was then sued out to review the judgment of the Appellate Court.

It is agreed by counsel that the stockholders of a corporation are not necessary parties to a foreclosure suit against the corporation, and that they can only intervene in its behalf by showing the existence of a defense which the corporation neglects and refuses to make. There is no doubt that stockholders suing in behalf of themselves and the other stockholders, for the benefit of the corporation, may bring their suit in equity to redress wrongs arising from the frauds, ultra vires acts or negligence of boards of directors, where the corporation is unable or unwilling to institute the suit, either because it is under the control of the guilty parties or otherwise. (Cook on Stock and Stockholders, sec. 645.) It is also the right of stockholders to intervene and make a defense which the corporation ought to have set up against an illegal claim, where the defense is not made on account of the fraud and collusion of the directors with the complainants in the suit. (Cook on Stock and Stockholders, sec. 659.) Of the various ways by which the assets of corporations are appropriated and the stockholders are defrauded of their legal rights, one of the most frequent is the mortgage on the corporate property and its foreclosure. It is the oldest and most common device of unscrupulous corporate officers to defraud the corporation and its stockholders, and the mortgage is generally expected to appear and be followed by a foreclosure, as a prelude to re-organization. Upon a showing that a fraud is being practiced by that method, it is the duty of a court of equity to permit stockholders to intervene on behalf of themselves and the other stockholders, and set up the defense that the corporation and its officers were in duty bound to make. The question in this case is as to the sufficiency of the facts alleged in the petition to show a defense to the foreclosure suit and to entitle the stockholders to appear and defend. In determining that question the facts alleged in the petition must be assumed to' be true and capable of being proved.

The material statements of fact contained in the petition are as follows: That in the spring of 1892 John A. May, William A. Stiles, George W. Powell, Frank M. Luce, William M. Knight and Chester T. Drake combined with the object of securing the erection of a home for the Shrine, a mystic organization known as the Ancient Arabic Order Nobles of the Mystic Shrine, and made application to the Secretary of State for a license to open books of subscription to the capital stock of the Medinah Temple Company, a corporation to be organized for that purpose; that such capital stock was fixed at $500,000, and a license to open books was granted to the said parties, who were designated as commissioners; that 11,168 shares were subscribed for, amounting to $116,800; that in addition thereto said May, Stiles, Powell and Luce each subscribed for 458 shares and John Eason subscribed for 2000 shares; that said parties so subscribing for said additional shares were wholly unable to pay the amount subscribed or any material portion thereof, and had no intention of doing so; that the subscribers for capital stock were convened, and by means of the fictitious subscriptions said May, Stiles, Powell and Luce were elected directors, together with Albert M. Eddy, John R. True and Canute R. Matson; that May was elected president, Powell vice-president, Stiles secretary and Luce treasurer; that the commissioners made their report to the Secretary of State, who issued to them a certificate of the organization of the corporation on August 25, 1892; that when the certificate was received the board held a meeting on August 29,1892, at which May, Stiles, Powell and Luce surrendered the stock subscribed by them, alleging their utter inability to pay for the same and that they had subscribed merely for the purpose of organization, and John Eason afterward surrendered his stock, and all said subscriptions were canceled; that said board of directors entered into contracts for the construction of the building and proceeded to collect the dona fide subscriptions to the capital stock; that in February, 1894, the walls of the building had been erected as high as the tenth story, and the dona fide subscriptions had been consumed and the contractors only partially paid; that at a meeting of the board of directors on February 15, 1894, May, as president, reported that the company was entirely without means of completing the building, and the resolution authorizing the bonds and trust deed was passed; that the trust deed and bonds were executed, and the payment of the bona fide subscriptions furnished the only security for the bonds; that the bonds were taken by contractors and persons supplying material, for less than par, and in most cases for less than fifty cents on the dollar, in addition to receiving large bonuses of capital stock never paid for, amounting to more than §225,000 at par value; that Samuel I. Pope, George M. Moulton, Adrian Vanderkloot, Robert S. Halderman, John R. True and Minard L. Beers, who participated in the scheme, were elected directors by means of the bonus stock, and that the directors had entire charge and control of the company’s assets, amounting to a large sum, and made no provision to pay interest on the bonds.

. These are the allegations of fact contained in the petition, and in addition there are general charges which cannot be regarded as statements of fact, to the effect that there was a scheme to purchase the bonds at a low figure, for cash, and obtain control of the corporation by means of the bonus stock given without charge to the holders of the bonds; that the directors agreed , with capitalists that they should supply the building at such high rates as to obtain great profits, and that petitioners are informed and believe that capitalists and speculators in the combination are the owners of nearly all the bonds and bonus stock, although the bonds, in many instances, were left in the hands of original owners for better concealment of a fraudulent scheme. The petition contains general charges of an attempt on the part of the officers to bring about a foreclosure, and that they are in reality allies and confederates of the bondholders, and the corporation is characterized throughout as a pretended organization and the directors as pretended directors.

Section 18 of the act concerning corporations is as follows: “If any person or persons being, or pretending to be, an officer or agent, or board of directors, of any stock corporation, or pretended stock corporation, shall assume to exercise corporate powers, or use the name of any such corporation, or pretended corporation, without complying with the provisions of this act, before all stock named in the articles of incorporation shall be subscribed in good faith, then they shall be jointly and severally liable for all debts and liabilities made by them, and contracted in the name of such corporation, or pretended corporation.” (Hurd’s Stat. 1899, p. 436.)

The petition alleges that in the organization of the Medinah Temple Company as a corporation the stock was not all subscribed in good faith, but that out of the capital stock of §500,000, subscriptions to the amount of §383,200 were fictitious, made by persons wholly unable to pay their subscriptions and for the mere purpose of organization, and that the same were surrendered after the certificate was obtained. The officers and board of directors assumed to exercise corporate powers and to use the name of the corporation before all the stock was subscribed in good faith, and these facts bring them, within the provisions of said section. According to the petition they became liable, jointly and severally, for all the debts and liabilities made by them and contracted in the name of the corporation, and plaintiffs in error therefore contend that the trust deed could not be foreclosed against the property of the corporation. It is insisted that the remedy given by the statute is exclusive; that the Medinah Temple Company was a merely pretended corporation, without power to execute the bonds and trust deed, and that creditors must avail themselves of the remedies given by that section.

It seems to us that it is not the purpose of the statute to deal only with organizations which are not corporations for any purpose. If the Medinah Temple Company was not a corporate body it was a partnership of individuals independently of the statute, and the individuals would be liable, as partners, for its debts. The section purports to deal both with corporations and pretended corporations, and the act in other sections imposes liabilities upon directors and officers, even where the corporation is regularly and legally organized. A corporation may be one defacto, although not completely organized in accordance with the provisions of the statute. (Bushnell v. Consolidated Ice Machine Co. 138 Ill. 67.) A corporation must be organized in compliance with the general law providing for its creation. There can be no corporation de jure without complying with the requirements of the statute, but if an association is in the exercise and use of corporate franchises under color of a legal organization, in pursuance of the general law, it is a corporation de facto as to third persons dealing with it, and subject to the same liabilities as a corporation regularly and legally organized. Section 27 of the act in question provides that a certified copy of the articles of incorporation shall be taken and received in all courts and places as prima facie evidence of the facts therein stated. The production of the certificate of the Secretary of State of the complete organization of the corporation, with' a copy of the papers filed in his office, authenticated under his hand and the seal of State and recorded in the office of the recorder of deeds where the principal office of the company is located, is prima facie evidence of the existence of the corporation. The evidence which is sufficient in law to prove that the corporation is one in fact as well as in name. and authorized to proceed to business, should be sufficient for the general public dealing with the corporation, and it would be unreasonable to say that its officers could not create a liability against it, or charge its property and assets, if it should appear, upon an investigation of its affairs, that some subscription to its capital stock was fraudulent and fictitious. The necessities of business, the protection of the general public and the requirements of justice would forbid a different rule. If there is, in fact, no corporation, so that no liability can be created against it, the only liability is that of the individuals as partners; but it would be imposing an unreasonable burden upon contractors not chargeable with any notice of the internal affairs of a corporation, to require them to make an investigation, and at their own hazard decide whether any of the subscriptions to the capital stock were made in bad faith. There is no claim in the petition that the steps required by the statute were not apparently taken, but the charge was that a wrong was committed in the fraudulent subscription for stock. The facts stated in the petition are such as to create a personal liability against those who engaged in the fraudulent organization, but it does not follow that the corporation was not one defacto, or that the contractors who dealt with it and took its bonds have no other remedy than the personal liability of the officers. There may be a liability of both. A creditor is not estopped, by dealing with a corporation de facto, from asserting liability of the officers on the ground that the statute was not complied with. The fact that he has dealt with the corporation, or that he files a claim against it, does not act as an estoppel to charge the directors with the debts, (Loverin v. McLaughlin, 161 Ill. 417,) and the mere existence of a liability against the directors certainly would not destroy a right ag'ainst the de facto corporation. The fact that there was -such personal liability would not constitute a defense to the foreclosure suit, and was not ground for permitting the intervention of stockholders.

It is not claimed that the issuing of bonds, and making the trust deed to secure them, was beyond the scope ■of the powers of the corporation or the business which it was organized to transact. The act was not ultra vires the corporation, if the contractors had a right to deal with it as a corporation. The question is not whether the bona fide subscribers can have a remedy against officers and directors who perpetrated a fraud, but whether the bonds and trust deed can be enforced as a corporate obligation.

The averments of the petition relate almost wholly to frauds of the officers in giving away capital stock as a bonus with the bonds and by fraudulent schemes securing control of the corporation and its assets, but those allegations have nothing to do with the validity of the bonds or the trust deed. They are frauds which, if proved, would entitle the petitioners to relief in a suit instituted for the purpose against those guilty of the wrongs, but they have no connection with the foreclosure of the mortgage. The only thing alleged against the holders of the bonds is not even in the form of a statement of fact, but consists of a general charge that the directors agreed with capitalists that they should supply the building with materials at such high rates as to make large profits, and that the bonds were received by contractors at a large discount. The petition names no contractor or bondholder and gives no facts, and does not aver that the bonds were sold at less than their actual value. The averments that the capitalists and speculators are now the owners of the bonds are in-like manner made as a general charge and only on information and belief. The petition is insufficient to show any valid defense to the foreclosure suit. Whatever rights the petitioners may have against the parties charged with the frauds set forth in the petition, we are satisfied the court was right in refusing to allow them to intervene and defend for the corporation in the foreclosure suit.

The judgment of the Appellate Court is affirmed.

Judgment affirmed.