Barclay, J.
This case came to the court in banc from the second division, after an opinion for reversal had been rendered (27 S. W. Rep. 334).
A motion for rehearing was made in that division, but was not decided, except inferentially by the transfer of the cause to the court in bam. It has been fully reconsidered here, with the aid of able arguments by counsel.
The litigation arises from the facts which appear in the statement preceding this opinion.
The action was, at the outset, an ordinary one at law, by plaintiff, as personal representative of the old firm of George Knapp & Company, against the corporation, “Publishers George Knapp & Co.,” to recover $5,400 and interest, as dividends on three hundred shares of stock in the defendant company.
The answer was a general denial, except as to the allegation of the incorporation of defendant, which was admitted.
Afterward a stipulation of all the counsel was filed to the effect that the sole issue to be tried was, as to which of the adverse parties was the beneficial owner of the stock mentioned in the petition. It was further agreed that “in proving or disproving the fact of such ownership of said stock, or any of it, plaintiff or defendant may introduce any kind of competent evidence whether in the shape of estoppel in pais or otherwise as either may desire.”
The amount of dividends recoverable (in event of a finding for plaintiff as to any part of the stock) was also stipulated.
The cause was then referred by consent to Mr. [70]*70Arba N. Orane to try all the issues. He did so, and as a result found for the plaintiff, after hearing considerable evidence.
His statement of facts we have adopted, and direct that it be published as an introduction to this opinion in the report of the case in banc. We also acknowledge our obligations to his interesting report upon the questions of law in the case, as we have availed ourselves of much of the materials furnished therein.
After judgment by the circuit court, approving his findings and decision, the defendant brought the present appeal, its exceptions to the report having been first duly submitted and overruled.
1. The stipulation of counsel on the circuit in regard to the real issue effectually transformed the proceeding from an action at law for the dividends, into a suit in equity to determine the beneficial ownership of the stock. The partiqs tried the cause before the referee on the basis of that stipulation, and hence as (in substance) an issue in equity.
Such being the state of the case, the fact that the pleadings originally presented only an issue as to the legal title to the stock should not preclude this court from reviewing the cause from the standpoint taken by the parties in the trial court as shown by the whole course of the proceedings there.
Parties must generally be held bound on appeal by the positions they have taken in the trial court touching the actual issues involved.
.We, therefore, do not regard the findings of fact of the referee as conclusive in this court, but open to review upon this appeal as in all cases of equitable cognizance. We, however, agree with the learned referee in his judgment upon the facts, and shall proceed to apply thereto the rules of law which we believe should control the result.
[71]*712. The pivotal point in the controversy is in the proper construction to be given to the resolutions of January 6, 1868, which are quoted at large in the statement of facts. The question upon those resolutions is whether their effect was to vest in the Old Firm • or in the defendant corporation the beneficial ownership of the stock, which was then “placed to the credit of the Old Firm.”
It should be borne in mind that the case at bar requires no discussion of the rights of creditors, or other strangers to the act to be construed. The dispute is merely between the immediate parties, then composing the firm, and the corporation, and persons in privity to them. Its solution depends, at last, upon a judicial view of the true intent of the parties, exhibited by the forms which they have used to express that intent, and enlightened by the surrounding facts. Towler v. Towler (1894), 142 N. Y. 371.
It may be well, at this point, to note some elemental considerations touching the mutual relations of a corporation and its stockholders.
One leading proposition (which, we apprehend, .must have a very influential bearing upon the rights of the parties) has been stated with such clearness by the learned referee that we prefer to quote his exact language, viz.:
“It appears that the increase in the .capital stock in this case was authorized by the articles of incorporation, and was not made to add anything to the capital, but was based on the original property of the corporation with its additions and enhanced value as it then existed. This fact has an important relation to the question of who owned the stock in dispute when created and before being disposed of by the credit to the Old Firm; * * * Ordinarily, stock belongs to the stockholders, while the capital represented by the [72]*72stock belongs to the corporation. This controversy relates to the stock. Where capital stock is increased by a corporation for the purpose of increasing its capital by a sale of the stock, the latter belongs to the corporation until disposed of. ' But where the object is, not to increase the capital, but the additional shares are created on account of the existing capital or property of the corporation, the entire stock, as then increased, represents no more capital than the original shares had done, and the new shares are not owned by the corporation, but, as soon as created, become the individual property of the owners of the old shares, in proportion to their holdings. Gibbons v. Mahon, 4 Mackey, 136; 136 U. S. 549.
“The corporation has no power to deprive the shareholders of this right. Even where stock is increased for sale, the old shareholders have a prior right to purchase a like proportion of the new shares, which they may enforce against the corporation to obtain the shares, or recover damages if the shares have been otherwise disposed of. Eidman v. Bowman, 58 Ill. 444; Gray v. Portland Bank, 3 Mass. 364; Jones v. Morrison, 31 Minn. 140, pp. 152, 153.”
The three persons named in the resolutions under construction were all the stockholders of the corporation. They were also the sole and equal members of the Old Firm. So that, when the increase of stock was made, those individuals (as between themselves and the corporation) were entitled to claim the increased stock, as a matter of right, not of grace or of gift, inasmuch as it represented the same property owned by the corporation before increasing the number of its shares. The five hundred shares, which were placed to the credit of “Old Firm,” therefore belonged, at that time, to the individual incorporators (who happened, also, to constitute the Old Firm), unless they [73]*73parted with their interest by the terms of the resolutions to which they assented.
Free access — add to your briefcase to read the full text and ask questions with AI
Barclay, J.
This case came to the court in banc from the second division, after an opinion for reversal had been rendered (27 S. W. Rep. 334).
A motion for rehearing was made in that division, but was not decided, except inferentially by the transfer of the cause to the court in bam. It has been fully reconsidered here, with the aid of able arguments by counsel.
The litigation arises from the facts which appear in the statement preceding this opinion.
The action was, at the outset, an ordinary one at law, by plaintiff, as personal representative of the old firm of George Knapp & Company, against the corporation, “Publishers George Knapp & Co.,” to recover $5,400 and interest, as dividends on three hundred shares of stock in the defendant company.
The answer was a general denial, except as to the allegation of the incorporation of defendant, which was admitted.
Afterward a stipulation of all the counsel was filed to the effect that the sole issue to be tried was, as to which of the adverse parties was the beneficial owner of the stock mentioned in the petition. It was further agreed that “in proving or disproving the fact of such ownership of said stock, or any of it, plaintiff or defendant may introduce any kind of competent evidence whether in the shape of estoppel in pais or otherwise as either may desire.”
The amount of dividends recoverable (in event of a finding for plaintiff as to any part of the stock) was also stipulated.
The cause was then referred by consent to Mr. [70]*70Arba N. Orane to try all the issues. He did so, and as a result found for the plaintiff, after hearing considerable evidence.
His statement of facts we have adopted, and direct that it be published as an introduction to this opinion in the report of the case in banc. We also acknowledge our obligations to his interesting report upon the questions of law in the case, as we have availed ourselves of much of the materials furnished therein.
After judgment by the circuit court, approving his findings and decision, the defendant brought the present appeal, its exceptions to the report having been first duly submitted and overruled.
1. The stipulation of counsel on the circuit in regard to the real issue effectually transformed the proceeding from an action at law for the dividends, into a suit in equity to determine the beneficial ownership of the stock. The partiqs tried the cause before the referee on the basis of that stipulation, and hence as (in substance) an issue in equity.
Such being the state of the case, the fact that the pleadings originally presented only an issue as to the legal title to the stock should not preclude this court from reviewing the cause from the standpoint taken by the parties in the trial court as shown by the whole course of the proceedings there.
Parties must generally be held bound on appeal by the positions they have taken in the trial court touching the actual issues involved.
.We, therefore, do not regard the findings of fact of the referee as conclusive in this court, but open to review upon this appeal as in all cases of equitable cognizance. We, however, agree with the learned referee in his judgment upon the facts, and shall proceed to apply thereto the rules of law which we believe should control the result.
[71]*712. The pivotal point in the controversy is in the proper construction to be given to the resolutions of January 6, 1868, which are quoted at large in the statement of facts. The question upon those resolutions is whether their effect was to vest in the Old Firm • or in the defendant corporation the beneficial ownership of the stock, which was then “placed to the credit of the Old Firm.”
It should be borne in mind that the case at bar requires no discussion of the rights of creditors, or other strangers to the act to be construed. The dispute is merely between the immediate parties, then composing the firm, and the corporation, and persons in privity to them. Its solution depends, at last, upon a judicial view of the true intent of the parties, exhibited by the forms which they have used to express that intent, and enlightened by the surrounding facts. Towler v. Towler (1894), 142 N. Y. 371.
It may be well, at this point, to note some elemental considerations touching the mutual relations of a corporation and its stockholders.
One leading proposition (which, we apprehend, .must have a very influential bearing upon the rights of the parties) has been stated with such clearness by the learned referee that we prefer to quote his exact language, viz.:
“It appears that the increase in the .capital stock in this case was authorized by the articles of incorporation, and was not made to add anything to the capital, but was based on the original property of the corporation with its additions and enhanced value as it then existed. This fact has an important relation to the question of who owned the stock in dispute when created and before being disposed of by the credit to the Old Firm; * * * Ordinarily, stock belongs to the stockholders, while the capital represented by the [72]*72stock belongs to the corporation. This controversy relates to the stock. Where capital stock is increased by a corporation for the purpose of increasing its capital by a sale of the stock, the latter belongs to the corporation until disposed of. ' But where the object is, not to increase the capital, but the additional shares are created on account of the existing capital or property of the corporation, the entire stock, as then increased, represents no more capital than the original shares had done, and the new shares are not owned by the corporation, but, as soon as created, become the individual property of the owners of the old shares, in proportion to their holdings. Gibbons v. Mahon, 4 Mackey, 136; 136 U. S. 549.
“The corporation has no power to deprive the shareholders of this right. Even where stock is increased for sale, the old shareholders have a prior right to purchase a like proportion of the new shares, which they may enforce against the corporation to obtain the shares, or recover damages if the shares have been otherwise disposed of. Eidman v. Bowman, 58 Ill. 444; Gray v. Portland Bank, 3 Mass. 364; Jones v. Morrison, 31 Minn. 140, pp. 152, 153.”
The three persons named in the resolutions under construction were all the stockholders of the corporation. They were also the sole and equal members of the Old Firm. So that, when the increase of stock was made, those individuals (as between themselves and the corporation) were entitled to claim the increased stock, as a matter of right, not of grace or of gift, inasmuch as it represented the same property owned by the corporation before increasing the number of its shares. The five hundred shares, which were placed to the credit of “Old Firm,” therefore belonged, at that time, to the individual incorporators (who happened, also, to constitute the Old Firm), unless they [73]*73parted with their interest by the terms of the resolutions to which they assented. The effect of applying the rule of law declared by the learned referee to the facts in view at the time the resolutions were adopted, gives the case a different aspect from that which it seems to have had to the learned judge who prepared the opinion delivered in the second division (27 S. W. Rep. 334).
The real question is not whether “the stock was intended as a gift to the Old Firm.” The question is rather this: Whether the Old Firm can properly be held to have made a gift to the corporation or a declaration of trust for it, as to the five hundred shares (representing $50,000), which equitably belonged to the members of the Old Firm as owners of the original stock.
A completed gift of the stock to the corporation the transaction certainly was not (Flanders v. Blandy, Í887, 45 Ohio St. 108). But defendant’s counsel seek to reach substantially the same result by their claim that a trust for the corporation was thereby created.
Placing the five hundred shares of new stock “to the credit of the Old Firm” was obviously a plain expression of intent to pass the title to that firm, if that language stood alone.
No certificates of stock at that time were issued to any of the stockholders; nor had any been issued for their former holdings.- The membership was small, and those formal steps were not attended to until later.
There is no pretense, however, that the title did not pass to the Old Firm. The question is whether the words which qualify the credit to the Old Firm divested that title in law or equity. Those words are these: “To be disposed of as thought proper by the present directors of the company, and when disposi[74]*74ticm is made of any portion of said stock the same to be specially noted in the record of the proceedings at the next meeting of the board of directors.”
Did this language destroy the beneficial interest of the Old Firm in this stock? Or can it be justly construed as carrying an intention on the part of the Old Firm to give that block of stock in any manner to the corporation?
The defendant’s counsel insist on affirmative answers to these questions. Their chief contention is that the words above quoted (in connection with other parts of the resolutions) created a trust in favor of the corporation as beneficiary, the Old Firm being merely a trustee (as to those shares) for the purposes intimated in the opening lines of the resolutions. Those lines declared that “whereas, it is considered necessary in order to secure the services of new parties in the working department of the corporation of George Knapp & Co. to increase the capital stock,” etc. But the resolutions then proceeded to announce the increase of the capital stock to $500,000, “and that disposition of said increase be made as follows:” Then blocks of $50,000 of the new stock were allotted to George Knapp, John Knapp and the estate of Nathaniel Pasehall, respectively.
We do not suppose that defendant’s counsel would claim that these dispositions of the new stock to those individuals are to be regarded as in trust for the benefit of the corporation on account of the previous announcement of the general object of the increase, by the preamble of the resolutions. But if such a claim were made, it would be a sufficient answer to say-that the specific and absolute apportionment of stock to those persons controlled the general and vague purpose expressed at the outset of the document.
Yet they claim that that expression of purpose [75]*75should nevertheless affect with a trust the allotment to the Old Firm. The supposed “trust,” or limitation of ownership of the stock, is extracted from the same preamble, coupled with the nearer words, “to be disposed of as thought proper by the present directors of the company,” etc. Those directors constituted the Old Firm at that time. So that this form of disposition of the stock amounted to nothing more than a declaration that the new stock, which was placed to the credit of the Old Firm, might be disposed of by the latter in order to bring desirable outsiders into the service of the common enterprise.
It must be remembered (and that fact casts much light on the meaning of the resolutions) that this was a very close corporation.' The two Messrs. Knapp and the elder Mr. Paschall had for many years composed the Old Firm; and, later, they formed the corporation. On the death of Mr. Paschall, his son, Henry, representing his father’s estate, took his place for the purpose of managing the interests owned by the family in the firm and in the corporation. No outsiders had been admitted to the enterprise. These resolutions indicate that it was then thought advisable to admit some, with a view “to secure the services of new parties in the working department of the corporation.” But such admission was to be carefully guarded by the original owners. Hence the closing statement in the resolutions, viz.: “When disposition is made of any portion of "said stock, the same to be specially noted in the records of the proceedings at the next meeting of the board of directors.” These words accompanied the power of disposition of the Old Firm stock. The latter was to be disposed of “as thought proper,” by the then directors, who were also the Old Firm.
Probably one idea of this special-form of transfer [76]*76to the Old Eirm was to express a formal sanction, by the parties in interest, to the proposed admission of new persons to the corporation. Those admissions were to be controlled (as to persons and terms) by the discretion of the members of the Old Eirm, who were to retain the power to dispose of that block of stock (or of such parts of it as they desired) upon such terms as they — the real and beneficial owners of the stock— saw fit to make.
The parties engaged in the transaction were men of affairs and experience. No doubt they had reasons, sufficient and satisfactory to themselves, for that arrangement.
We repeat that the rights of no outside persons come into consideration in determining the validity of the course they saw proper to take.
Whatever their purposes may have been in setting this block of stock apart to the credit of the old firm, it seems to us that the terms of the resolutions did not impose upon the Old Eirm the duty to dispose of all of that stock for the benefit of the corporation, nor did it amount to a declaration of a trust wherein the corporation was to be beneficiary.
Whatever conjecture may be indulged as to what the parties interested meant to do, in respect of the exercise of the power of disposition of the stock, we consider it clear that the resolutions fall short of expressing any purpose or intent to give back the beneficial interest in that stock to the company, or to declare the Old Eirm trustees of it for the corporation, in any wise.
Expressing a power in the owner to dispose of property “as thought proper” (which is the language under review) is a somewhat feeble and ineffective way to manifest an intent of the owner to hold, or to dispose of, that property as trustee for some other person as [77]*77beneficiary. It rather indicates a strong affirmance of the right of absolute disposal which usually appertains to ownership.
The power of disposal mentioned . was not to be exerted by the directors of the corporation generally; but by the “present” directors who were also the Old Firm, and the owners of the stock — the parties whose corporate property was represented by the new stock as well as .by the old stock, as already explained.
We take it that language should be fairly and reasonably plain in its meaning to justify an inference that the owners of this block of $50,000 worth of stock intended voluntarily to give up its beneficial ownership to the corporation.
It is a well recognized rule that to establish a trust there must be evidence of a clear intention of the settlor to become an accounting party. Gfodefrois, Trusts [2 Ed.], p. 85. ■
“All the cases agree that, even in the case of a trust created or continued in the party from whom the bounty emanates, the transaction must show that the entire equitable interest is parted with. ’; Lane v. Ewing (1860), 31 Mo. 87.
Equity can not successfully be invoked to perfect an imperfect gift by creating a trust where the words employed are insufficient of themselves to have such effect. Richards v. Delbridge (1874), L. R. 18 Eq. Case 11.
The credit to the Old Firm does not declare or imply that the stock shall be disposed of for the use, benefit or profit of the corporation. It is to be disposed of “as thought proper,” by the same persons who received and owned the stock, though described otherwise in the power of disposition.
Such a discretionary power of disposal furnishes [78]*78no solid ground on which to found the theory of a trust. Hahn v. Hutchinson (1893), 159 Pa. St. 133.
Even that discretionary power ceased upon the death of Mr. Oeorge Knapp, in 1883, and only part of that block of Old Firm stock had, at that time, been disposed of. The beneficial title then remained where the resolution placed it, namely, to the credit of the Old Firm.
We consider that the remainder of that stock belonged to the Old Firm, beneficially, and that no trust in favor of the corporation existed, or exists, in respect of it.
3. Whether further valid objections to holding the allotment of stock to the Old Firm as a trust for, or gift to, the corporation, may not be found in other principles governing voluntary gifts and trusts for volunteers, we need not pause to inquire, since what has been said is sufficient, we think, to support the judgment we shall announce.
4. The foregoing views as to the proper meaning and effect of the resolutions of January 6, 1868, relieve us of discussing the inferences to be drawn from the subsequent acts of the corporation or its officers in aid of our interpretation of those resolutions. We do not consider that there is anything in those later acts militating against that interpretation in any way.
There may be some difficulties in that branch of the case, in applying those acts to support our view of the intent of the parties (expressed in the resolutions), growing out of the then relations of the members of the Old Firm to the corporation. We need not attempt to solve those difficulties.
From what has been already said it is clear that the referee and the learned circuit judge were correct in their conclusions, Accordingly we recommend an [79]*79affirmance of the judgment. It is so ordered.
Brace, 0. J., and Oantt, Macparlane, Sherwood and.RoBiN-son, JJ., concur. Burgess, J., dissents.