Livesey v. Omaha Hotel Co.

5 Neb. 50

• Court: Nebraska Supreme Court
• Decided: July 15, 1876
• Status: Published

Opinion

Gantt, J.

The defendant in error claims to be a corporation incorporated under the general incorporation laws of the state, and brought this action to recover assessments levied on shares of stock subscribed by plaintiff in error to the capital stock of the company. It is alleged that the plaintiff in error subscribed for and agreed to take ten shares of the capital stock of the company. A meeting was held on the 19th day of January, 1870, when articles of association and incorporation were adopted, which provide that the amount of the capital stock of the company shall be two hundred thousand dollars, divided into shares of one hundred dollars each, and that an installment of ten per cent shall be paid on each share, at the time of making the subscription, and the residue thereof in such installments, at such times and places, as may be required by the directors. As shown by the evidence, an aggregate of one hundred and twenty-six thousand dollars of capital stock was subscribed, leaving a deficiency of seventy-four thousand dollars of the capital required by the charter. About the last of February, 1870, the parties voted on a location for the hotel, and elected directors, who held their first meeting on the eighth day of March, 1870, and then elected the officers of the company. The articles being filed in the office of the county clerk on the 21st day of January, 1870, the company now became organized, and notwithstanding it appears by the petition as well as by the evidence that the capital required by the charter had not been fully subscribed, yet the corporation was put into a condition to transact some business, if it were not legally authorized to proceed with the accomplishment of its main design. It seems that when the articles are agreed on and adopted and properly filed as is required by the law, the parties to the undertaking, unless prohibited by the charter or positive law, may employ agents to secure the full amount of capital required, to procure information in regard to the enterprise, and may contribute money to pay the expenses incurred in all the necessai’y preliminary steps in perfecting the organization of the company, without first having secured a full subscription of the capital required by the subscription contract or the charter; but all such and similar acts will afford no satisfactory proof that they intended to proceed with the main design of the corporation, until all the capital stock required shall have been fully secured by subscription to the. stock. Oldtown & Lincoln R. R. Co. v. Veazie, 3D Maine, 571.

But the first inquiry suggested by the record is — does the petition state all the facts necessary to show a cause of action against the plaintiff in error? The defendant in error sets forth in its petition as matter of fact that the persons subscribing to the stock, on the 19th., day of January, 1870, “assembled together and entered into articles of association and incorporation, and thereby agreed ” among others that the capital stock should be two hundred thousand dollars, and “that the total amount subscribed to said capital stock was one hundred and twenty-five thousand and five hundred dollars, exclusive of the grounds donated,” which it is alleged were of the value of fifty thousand dollars and composed a part of the capital stock. Now if the value of the ground donated to the company be considered as part of the capital, still as shown by the petition there is a large deficiency in the capital required, and therefore there is a non-compliance of the condition precedent, contained in the charter. No reason is given for the non-performance of the condition precedent, and no fact is averred to fix the liability of the plaintiff in error to pay assessments, without performance on the part of the defendant in error. Can the action be maintained on such a showing? In the Case of Fry’s Ex’r v. The Lexington & Big Sandy R. R. Co., 2 Met. (Ky.), 323-4, it is said that “ where a given amount of stock is required to be subscribed before the corporation is authorized to go into operation, this requisition must be regarded as an indispensable condition precedent. Each subscriber undertakes to pay the amount of his subscription only in the event, and upon the condition, that the whole amount of the capital stock, required by the charter to enable the company to organize and commence operation in its corporate capacity, shall be subscribed.” In reference to the pleading in such case, it is said that “ it is a well settled rule of pleading that the plaintiff must aver performance of all the conditions precedent in the contract, when the liability of the defendant is dependent on their performance. In this case the liability of the defendant depends upon the fact whether a subscription of one hundred thousand dollars had been obtained, when his intestate was called on to make payment on his stock. Unless a subscription to that amount had been obtained, he was not, according to the implied terms upon which he became a stockholder, liable upon his subscription. As the petition must state all the facts necessary to show a cause of action against the defendant, and as the fact that stock to the amount of one hundred thousand dollars had been subscribed, is one that is indispensable for that purpose, the failure to aver it renders the plaintiff’s petition fatally defective.” The case at bar, in respect to the condition precedent, is similar to the one above cited, and involves the same principle. Therefore if the defendant in error cannot aver performance of this condition precedent, and if the action can be maintained without such averment, must not the petition contain all the necessary averments which will take the case out of the rule of pleading above stated? Must not facts be averred which will show a liability without all the capital required by the charter being first subscribed? It seems to me as the pleading now stands, it is difficult to escape the conclusion that the petition is fatally defective in this regard.

But assuming that the averments in the petition are sufficient to constitute a cause of action against the plaintiff in error, I will now consider the main grounds of defense to the action urged by the plaintiff in error, and in doing so it will be necessary to recur to some facts as shown by the record. The subscription paper fixed the cost of the hotel at not less than one hundred and fifty thousand dollars, and the articles of incorporation provide that “the capital stock of said company shall be two hnmdred thousand dollars, divided into shares of one hundred dollars each.” But it is stated as matter of fact in the third paragraph of the petition “that the total amount subscribed to said capital stock was $125,-500,” and it is alleged that the ground on which to erect the hotel was donated to the company, an’d that the same is of the value of fifty thousand dollars and became a part of the capital of the company. Suppose this value of the ground should be added to the amount raised by subscription to the stock, it would still leave a deficiency in the capital required of twenty-four thousand and five hundred dollars, as shown by the petition; and if the right to proceed with the main design of the company is based on the subscription contract, it certainly excludes the ground from the capital and still leaves a deficiency of the same amount. But, however this may be, it is clear by the defendant’s own showing that the assessments were made without having first secured all the capital required by the subscription contract or the charter of the corporation. Can the action be maintained for the recovery of the assessments on the shares of the capital stock before the amount of capital required is fully subscribed? When the amount of stock is subscribed and the company is authorized to proceed in the execution of its main design, it becomes a body corporate, a distinct and independent existence from all its members, and being thus in law a distinct party competent to contract, the rules of law in relation to contracts apply to the contract of these parties, and, hence, the rights of each subscriber to the contract are as fully protected by law from the corporate action as if he were a stranger. The corporation has no power to invade or impair the rights of individuals.

And now, in answer to the above question, it need only be stated that the rule seems to be well established that when the charter or subscription contract specifically fixes the capital stock at a certain amount, divided into shares of a certain amount each, the whole amount of capital so fixed and required for the accomplishment of the main design of the company must be fully secured by a bona fide subscription before an action will lie upon the personal contract of subscribers to stock to recover an assessment levied on the shares of stock, unless there is some clear provision in the contract to proceed in the execution of the main design with a less subscription than the whole amount of capital specified. This rule seems to be founded on the principle that by the terms of the grant to the corporation, it is essential to the power of assessment for the general objects and purposes of the institution that the whole capital stock required by the condition precedent must be represented and acted upon by the. assessment. This doctrine has underwent an exhaustive discussion in many cases, and it is not deemed necessary to bring into review the arguments in support of it. Salem Mill-dam Co. v. Ropes, 6 Pick., 23. Id., 9 Pick., 195. Cabot & West Springfield Bridge v. Chapin, 6 Cush., 53. Schurz v. The S, & T. R. R., 9 Mich., 269. Topeka Bridge v. Cummings, 3 Kan., 76. Somerset Railroad Company v. Clarke, 61 Me., 384. N. H. Central Railroad v. Johnson, 30 N. H., 404. Peoria & Rock Island R. R. v. Preston, 35 Iowa, 118. And the rule is the same in England. Fox v. Clifford, 6 Bing., 776. Pitchford v. Davis, 5 M. & W., 2. 4 Moody & M., 151.

The case under consideration comes within the rule above stated, and the action cannot be maintained, or the judgment of the court below be sustained, unless some fact or circumstance is shown which takes it out of the general rule.

It is however contended on the part of the defendant in error that the plaintiff in error has waived his rights under the contract, and by his own acts has become estopped from denying his liability to pay the assessments. What are the facts in this regard ? The record shows that it contains all the testimony introduced or offered to be introduced, by either plaintiff or defendant, on the trial of the cause; and upon a careful examination of this record, I find that the plaintiff in error participated in the transactions of the company as follows: He subscribed for ten shares of stock and at the same time paid ten per cent of the amonnt, to-wit: one hundred dollars, which the articles of incorporation required to be paid at the time of making the subscription, and without this payment the subscription would not be complete ; again, his proxy was voted at a meeting of the stockholders on the .... day of February, 1870, and his name is sighed to a written assent that the company may pay a deficiency in the collection of donors’ subscriptions to purchase a site for the proposed hotel. This paper was presented to the directors, April 18, 1870. These acts might have occurred in the preliminary steps taken by the company, and up to'this time the record shows only such preliminary action as relates to the adoption of the articles of incorporation, the procuring a site for the proposed hotel, the investigation of the title to the property, donations by individuals, and a proposition whether the company should enter upon the execution of the main design, or whether it should be passed over into the hands of aprivateindividual. All, this might have taken place as preliminary measures without intention on the part of any subscriber to the stock to proceed with the accomplishment of the main design, until all the capital stock required by the charter should first be secured by subscription.

It is not claimed that the plaintiff in error gave any actual assent to enter upon the main object and purpose of the company, without first securing a subscription of the amount of capital required; and surely a constructive consent, urged from the common law principle that all the corporators are presumed to assent to what is done at regular meetings of the corporation, will not be admitted to deprive one of his rights, for the presumption is that corporations will do none but legal acts; and, hence, the doctrine of presumptive assent to corporate acts applies only to acts which are legally done in the exercise of the powers conferred by the grant; the charter creates the artificial being, invests it with its powers, is its fundamental law and prescribes its mode of operation.

Now, the corporation with full knowledge of the condition precedent, contained in the subscription contract and of that in the charter, and in violation of this condition in the contract, has proceeded to assess the shares of stock, and it is insisted that the plaintiff in error by his acts has waived his immunity from liability to pay such assessments. In other words, the proposition contended for is in effect that these acts of the plaintiff in error are equivalent to an assent by him to the unauthorized proceedings of the corporation, and therefore he is estopped from claiming the rights he had under the contract. It is said that “a waiver is the intentional relinquishment of a known right, and there must be both knowledge of the existence of the right, and an intention to relinquish it.” There is a total failure of proof showing that the plaintiff in error acted with knowledge of the fact that a deficiency remained in the capital required by the charter and the facts shown by the record are not sufficient to show an intention to waive the rights of the party. Pitchford v. Davis, 5 M. & W., 4. It seems clear that the proposition contended for in this case cannot be maintained either by the facts or the law, and that the authorities do not support it. The Atlantic Cotton Mills v. Abbott, 9 Cush., 425. The Oldtown & Lincoln R. R. v. Veazie, 39 Me., 571. Macedon & Bristol Plank Road Co. v. Lapham, 18 Barb., 313.

Of tlie cases cited in the argument for defendant in error, that of Cabot & West Springfield Bridge v. Chapin, 6 Cush., 51, perhaps approaches the nearest to his purpose. In that case it is said that “ if the subscriber knowing that the requisite subscription had not been made to fill up the capital, had attended meetings of the corporation and had co-operated in the votes of expending money and for making contracts, and in other acts which could only be properly done upon the presumption that the subscribers intended to proceed with the stock partially taken up, such subscriber might be estopped from setting up the defense.” The principle enunciated in this case will not be questioned although it is an obiter dictum, as the decision was wholly upon other grounds, and not upon the question of waiver; and the series of acts mentioned do not apply to the case at bar.

In the case of the Trustees of Farmington Academy v. Allen, 14 Mass., 172, the defendant and others, as subscribers, agreed to be accountable for the payment of the respective sums by each one subscribed as a fund to be apjfiied in the establishment of an academy, as necessary to obtain assistance from the legislature; held, that an action would lie for money paid, laid out and expended. It was not a subscription to take shares of stock in a corporation with a fixed capital, and, therefore, the case is not analogous to the one at bar.

In Railway v. Lacey, 3 Younge & Jervis, 85, the defense was on the ground that a misrecital in an act of parliament rendered the act invalid, and could not be enforced. The defendant concurred in the application to the legislature, he was named as a proprietor, and paid his calls so long as the concern was prosperous; held, that by his conduct he held himself forth to the world as a proprietor, and by so doing he took advantage of the act, and, therefore, could not object to the validity of the statute.

In the case of the Kansas City Hotel v. Harris, 51 Mo., 464, the defendant was a stockholder and a director of the company. The action was brought for the fifth and last call, and it is said by the court that “ the defendant liming participated in all the proceedings creating the corporation, and in increasing the stock and making the calls both as stock holder and director, he is now estopped from raising any, question in this action as to their validity.” The question of deficiency in the subscription to the stock was not raised in this case. The main defense was that there were two subscriptions, and the petition only counts for one.

Again, it is insisted that by authority of the general incorporation act, the company may “enter upon the main and ultimate object of its organization as soon as its articles are recorded ” in the county clerks office, and that the provisions of the act taken together, show such to be the legislative intention, without any regard to the amount of shares subscribed. If the statute must receive such a construction, then the corporation might commence operations in the execution of its main design without a single valid subscription to the capital stock, notwithstanding a certain amount of capital, divided into shares of a certain amount, is required by the charter. Now, as all the powers and duties of a corporation result from the statute, it seems very clear that an organization of the institution, even with officers, a capital paid up and articles filed as required by law, would be powerless to do one corporate act without a legislative grant to do so; and therefore, it seems clear that sections 124 and 137 of the general statute, were intended simply to define and grant the general powers which may be exercised when the corporation is legally organized. There is no legislative intent expressed in these sections, giving a inore extended effect to them, and none can be inferred by implication from the language used or the general principles of law. It is said that “ statutes are to be construed in reference to the principles of the common law; for it is not to be presumed that the legislature intended to make any invasion upon the common law, further than the case absolutely required.” 1 Kent Com. 514. Section 138, I think is only declaratory of the common law rule, for in legal contemplation the corporation as a body politic, is a distinct and independent existence or party from all its members, and may contract with and sue any of its members, and any member may contract with and sue the corporation; and, hence, at common law, the corporation is vested with the right of action to recover arrears, debts and demands against any of its members, and any member has the same right of action to recover any debt, claim or demand, he may have against the corporation. This doctrine is founded on the general grant of power to the corporation to sue and be sued. Therefore, this section leaves the legal status of the company the same as it was at common law. In view, therefore, of the purpose for which these sections were enacted, it seems clear that there is nothing in them to justify an inference that they were intended to confer the right of any corporate action, in respect to the main enterprise of the company, before its capital stock is secured by subscription.

But it is more earnestly contended that sections 126 and 132 grant the right of proceeding with the “ main and ultimate object ” of the company, regardless of the fact whether all or any of the capital required by the charter has been first subscribed. Section 126 provides that “every corporation, previous to commencement, of any business, * * *• must adopt articles of incorporation and have them recorded in the office of the county clerk of the county, or counties, in which the business is to be transacted;” and section 132 provides that the corporation “ may commence business as soon as its articles of incorporation are filed by the county clerk, as required by this sub-division, and shall be valid, if a copy of its articles be filed in the office of the secretary of state, and the notice required be published within four months from the time of filing such articles in the clerk’s office.” The latter section modifies the former by what may be considered as an explanatory clause, providing that the corporation “ may commence business as soon as the articles of incorporation are filed in the county clerk’s office,” instead of waiting until they are recorded, and by making the validity of the corporation depend on filing a copy of the articles with the secretary of state, and upon publication of the notice required. These two sections point to the same subject matter, and must be considered together as one. It is true that the words, “ may commence business,” taken in a literal sense by themselves, would seem to indicate a departure from the general rule of law in regard to the necessary qualifications of a corporation to enable it to commence business in its corporate capacity. But in the interpretation of the general incorporation act, it must be borne in mind that the sole object of the statute was to provide a system for the incorporation of companies, without the granting of charters by special legislation, and not to unsettle well established principles of law in regard to the qualifications of corporations to enable them to commence business. The rule is, “Scire leges non hoc est verba earum tenere, sed vim ac potestatem, and the reason and intention of the law giver will control the strict letter of the law, when the latter would lead to palpable injustice, contradiction and absurdity.” 1 Kent Com., 510. Now, in the organization of a company, to enter upon an enterprise involving large expense and varioirs business transactions, it will hardly be supposed that the legislature intended to make the mare filing of the articles of incorporation a sufficient qualification to proceed in the execution of its main design, to enter into contracts for that purpose, to create debts and transact business generally. On the contrary, the legislative intention surely must have been to simply fix the time when the company may commence business, when otherwise qualified; and this interpretation of the law, is supported by the fact that the section does not define any of the qualifications necessary to put the corporation into operation, except the filing of the articles. There is no express provision in the law authorizing it .to enter upon the execution of its main object without the performance of a condition precedent contained in its charter; and no such authority is to be inferred from the words “commence business.” The members of the company are not prohibited from defining what shall be the qualifications of the corporation to enable it to go into operation, and therefore, when the contract is that a fixed amount of capital, divided into shares of a certain amount each, shall be a necessary qualification, such requisite is a condition precedent, and a fundamental law of the corporation. The general statute and the articles are considered in the nature of a grant from the state and taken together constitute the charter.

Again, at the time the act was passed, it was the settled rule of law that a corporation having a fixed amount of capital, divided into shares of a certain amount each, could not proceed with the execution of its main object, until all its capital was subscribed, unless it was clearly provided that it might do so with a less subscription than the amount of capital fixed by the charter. The presumption is that the legislature had in their minds this common law doctrine then so well established and understood, and that they intended to leave the determination of all the necessary qualifications to enable the corporation to go into operation, except the filing of the articles, to be provided by the charter, and to be governed by the principles of the common law in force. The conclusion is, that the incorporation act was not intended to nullify the settled rules of law in respect to the qualifications of a corporation, to enable it to commence business, and therefore does not dispense with a subscription of all the capital stock, when the charter makes such subscription a condition precedent to be performed before proceeding with the accomplishment of its main design.

The judgment of the district court must be reversed and the cause remanded with leave to amend the petition if desired so to do.

Beversed and remanded.