Morgan v. Landstreet

72 A. 399, 109 Md. 558, 1909 Md. LEXIS 19

• Court: Court of Appeals of Maryland
• Decided: January 20, 1909
• Status: Published

Opinion

Pearce, J.,

delivered the opinion of the-.Court. -.

■ This action was brought'in the Circuit-Court -for Baltimore •County by John. II. Morgan and.Prank B. Smith,, receivers -of the Maryland Storage Company; a corporation- under -the laws:.of Maryland, duly.'adjudged'.to-be-insolvent, -against Pai-rfax'S. -Landstreet, -to recover the: sum of $30-,0.0.0, being -the amount of the defendant’s written', subscription made June 10, -1907, for 600 shares of the capital -stock o-f. said company’óf the. par valúe of’$50 per share. The .proceeding was by'way'.of attachment- against, the defendant'as .a- nonresident-; who -entered 'a voluntary appearance- in the' summons ease. ■' The short note' contained one count for money;due on ¡account -stated;-¡and'a.special 'coúmt on the' contract-of subscription.' 'The defendant-.filed the-‘two general -issue pleas in "assumpsit;.-and a "third.plea',, “that the subscription'mentioned in the plaintiffs’ declaration was subject to'aJconditibn precedent, -that said kibscription was-not to be binding on the ■defendant until all * of.- the original-capital stock , of -.the :said Maryland Storage Company was duly subscribed, and that subscriptions were never obtained for all of said original stock, and said condition precedent never complied with, whereby the defendant’s subscription never became effective or binding.” The plaintiffs joined issue on the defendant’s first and second pleas, and to .the third plea filed two replications—first, that said subscription was not subject to the condition precedent pleaded; and, second, that the defendant, by his acts, had waived any and all defense on account of the alleged fact that all of the original capital stock of the Maryland Storage Company was not subscribed.

The defendant joined issue on the first replication to the third plea, and as to the second replication, rejoined that he had not, by his acts, waived any defense on account of the alleged fact that all of the said original stock had not been subscribed. And the plaintiffs joined issue by way of surrejoinder on the defendant’s rejoinder to the plaintiffs’ second replication to the defendant’s third plea. It thus appears that the fact of the subscription was admitted, and also that no part of the same has been paid, and under.the pleadings two questions only were in issue—first, whether the contract of subscription was subject to the condition precedent pleaded ; and, second, if so-, whether such condition had been waived by tbo acts of the defendant. ' '

At the close of all the testimony on both sides of the case, the defendant moved to strike out certain items of testimony which had been admitted subject to exception, and the plaintiffs moved to strike all the testimony adduced at the trial which tends to qualify the written subscription,- whether contained in the defendant’s own statements or ín his letters offered in evidence, or in the testimony of the witnesses Tima-nus and Brady; also defendant’s statement of what he told Timanus as to-taking the last $30,000 of stock, when-he,Timanus, had secured (he balance, and also what he said either to Redwood or Brady, as to any subscription to be madé to- this stock by the Western Maryland Railroad Company.' Both these-requests were refused..' - ' ' • ■ • " • V

The plaintiffs then offered five prayers, all of which'were rejected, and the defendant offered three - prays, of which the second and third were rejected, and the first was granted, as follows: “The Court instructs the jury that by the uncontradicted evidence in the case the stock of the Maryland Storage Company authorized by its charter was never fully subscribed, and their verdict must be for the defendant, there being no evidence in the case legally sufficient to estop the defendant from setting up the defense of partial subscription to stock,” thus withdrawing the case from the jury. The rejected prayers will be set out by the Rejorter. The defendant excepted specially to the plaintiffs’ second prayer on the ground that there was no evidence that defendant subscribed to any increased capital stock of the storage company, and not its formative or original stock, and this special exception was sustained; all of these rulings being embraced in the single exception taken.

A brief statement of the history of the case will throw material light upon the situation, before going into the law appplicable to the case.

The storage company was incorporated under the laws of Maryland, Nov. 18th, 1904, to carry on a forwarding and warehouse business, there being seven directors, and the authorized stock being 3,000 shares of the par value of $50 each. Mr. Timanus was then President of the storage company, and Mr. Landstreet was then Vice-President of the Western Md. R. R. Co. This company had recently established a tidewater terminus at Port Covington, and one of the principal objects of the organization of the storage company was to secure the storage business incidental to the new tidewater terminus. This appears in Mr. Timanus’ letter of July 1st, 1904, to Mr. Landstreet as Vice-President of the railroad company. On November-lYth, 1904, Timanus, learning that the railroad company was about to acquire the possession of Brown’s wharf, on the north side of the harbor of Baltimore City, proposed to Landstreet to take a lease of the warehouse then on that wharf. This permitted, without further cost for building, a small active business, requiring nine or ten clerks and laborers and doing a business of about $1,800 a month. He testified they were trying to get the railroad company or Landstreet interested in the storage company. Ho agreement was reached in the matter of the lease until June 12, 1906, when a lease of Brown’s wharf was executed for five years, containing a covenant on the part of the storage company to erect a storage house on York Street, to be completed, if possible, by January 1st, 1907. At that time there was no actual subscription by Landstreet, either for the railroad company, in his own name, or for any other individual. In May, 1905, the charter was duly amended, so as to increase the number of directors from seven to nine. In July, 1906, a stockholders’ meeting was called for the purpose of increasing the capital stock from $150,000 to $250,-000 and the number of directors from nine to twelve. It appears from the minutes of that meeting that stockholders were present representing sixty-five shares of stock, that being more than two-thirds of the whole number of shares then issued, and that these voted to increase the amount of capital stock and the number of directors as above proposed. These proceedings, however, were abortive, both because the requisits notice was not properly addresed to the stockholders, and because the proposed amendment was not acknowledged and recorded as required by secs. 51, 52 and 55 of Art. 23 of the Code.

In May, 1907, Landstreet resigned as Vice-President of the railroad company, and Brady, Vice-President of the storage company, testifies that at that time he asked him when he would sign a subscription, as some who had subscribed would not pay until they felt sure of his subscription, as he had resigned from the railroad company, and he said he would let him hear in a few days. Later he told Landstreet they wanted him as a director. On June 10, 1907, he signed the subscription and consented to be elected a director. At that time there were ten directors elected and serving, being one more than the charter allowed. Landstreet never quali fiecl as director, and never attended any stockholders’ or directors’ meeting.

At the date of his subscription, Brady testifies there were subscriptions, including Landstreet’s, of about $101,000, and no greater amount was ever subscribed.

Mr. Morgan, one of the receivers, testified from the books and papers that came into his hands as receiver, that at that timé $40,000 had been paid in on subscriptions, about $36,-000 unconditional subscriptions, unpaid, including Band-street’s $30,000, and some conditional subscriptions, unpaid, the whole- amounting to about $101,000, as stated by Brady.

On July 1, 1907, there being then only $76,000 unconditionally' subscribed, including the $30,000 of Landstreet, the directors resolved'to build the York Street storage house at a cost not to exceed $145,000. ■ The York Street lot was subject to two mortgages aggregating $51,000, and the building contract called for- an expenditure of $136,000. The lot sold for barely enough to cover these mortgages. Brady in the latter part óf July, 1907, tried to induce Landstreet to go to see the building, then started, but he declined to go. In September. 1907, he asked Landstreet for a payment on the subscription, and he told Brady that, under the business and financial conditions’-existing they ought to hold off the work, and Brady explained they had gone too far to stop. Later, and early in October, Landstreet did go with Timanus and Brady and-examine the’work in progress, and he said he thought it was a good building. Brady did not then ask for any payment- and’'1 did not hear Timanus ask for any; and Brady never afterwards saw him on that subject. ’

Timanus' testified that he asked Landstreet .several times in the summer and fall of-1907 for payments on'account, and his-answer was that nloney was hard to get, and once, in September, 1907, he said he was not liable and would not pay it at all. ■ ’ ' ’

’ He also -testified that Landstreet told him that’when he subscribed-Brady told him that-all the stock had been either subscribed or promised. Brady, however, denied this, and said, that he told Landstreet that his binding subscription would enable them to get many others, but did not say they could complete the total - authorized capital. Landstreet testified that when the organization of the storage company was under duseussion. between Timanus and himself, he said that if. he won cl get a strong management and have the finances in Unquestionable form before undertaking the enterprise, the railroad company would co-operate with him and would take tlu\ last $30,000 of its stock of $150,000, and that in all the negotiations throughout he acted in behalf of the railroad company, and at no tinie and in no way as an individual, and • that it was so understood by all concerned. ' He states .that as early-as January, 1907, when informed by Brady of their plan to acquire property ow the south side of the harbor that he advised against any- additional enterprises, and that after his resignation as Vice-President of the railroad company he remained one of its directors, and told both Timamos and Brady they would have to- take up the'subscription of the railroad company with other officials and that if the storage company complied with the previous understanding, he saw no reason why the matter should not be concluded'. 1 That shortly after this Brady came to see him, and said that he had responsible men in Baltimore, mentioning a number of them, who were only- waiting for the signature 'of the railroad company,-and who would then sign subscriptions- to the full amount of the authorized capital stock of the company, and urged him to sign personally for this $30,-000, .which he' did upon, those assurances, and the further assurance that their finances were in condition to- meet any undeifaking entered into. -

He also says, that in signing he expressly stated to Brady that.he was not signing his name as an individual that would engage him in any financial obligation, and that Brády replied nothing was to he paid on that subscription until business conditions would warrant-it. 11 He also says that when he visited the building in October, 1907, no reference was-made, to his subscription, hut Messrs.1 Timanus and Brady stated that they wished to arrange with the Western Md. R. R. Go. to take over this building, and some of the officials advised them to get him to examine it, so that he could report thereon to the executive board.

We have thus condensed the most material testimony in the case, and will now consider the propriety of the granted instruction, which constitutes the principal and controlling question in this appeal.

We could not expect, and do not understand the appellants to deny the general rule, that where the capital stock and the number of shares are fixed by the act, or certificate, of incorporation as in the present case, no assessment can be lawfully made on the share of any subscriber until the whole number of shax-es has been taken. This principle was eaxdy adopted both in England and in this country, and is now fix-xnly established as a rule of law. Two of the earliest cases in this country are Salem Mill Dam v. Ropes, 6 Pick. 23, and Stoneham v. Gould, 2 Gray, 277, in both of which the reasons for the- rule were given by eminent Chief Judges of the Supreme Coux’t of Massachusetts, Parker and Shaw. No xnox-e convincing reasons could be given than those stated by Chief Judge Shaw in 2 Gray, supra. He says: “This is no ai’bitrary x*ule. It is founded on the plain dictate of justice and the strict principles regulating the obligation of contract. When a man subscribes for a share of stock, consisting of one thousand shax’es, in order to camy on some designated enterprise, he binds himself to pay one-thousandth part of the cost of such enterpxise. If only five hundred ax*e subscribed for, and he can have no assurance which he is hound to accept, that the remainder will be taken, he would be held, if liable to an assessment, to pay one-five hundredth part of the enterprise, besides incuxning the risk of the entire failure of the enterprise itself, and the loss of the amount advanced towards it.”

This rule, with the reasons which led to it, were adopted in this State in Hughes v. Antietam, 34 Md. 331, and has been laid down consistently since in Cleveland v. Hager, 36 Md. 476; Garling v. Baechtel, 41 Md. 305; Dougherty v. Gilman, 44 Md. 380; Morrison v. Dorsey, 48 Md. 472; Musgrave v. Morrison, 54 Md. 164, and Gettysburg Bank v. Brown, 95 Md. 367. In the last-mentioned, the latest case upon the point in this State, Judge .'Page said: “These rules apply to subscriptions made before and after the company is chartered. They are founded upon the theory that the subscription is made upon the implied understanding that the entire amount of stock fixed by the charter is necessary for the successful prosecution of the business for which the company was incorporated. It is not to be supposed that a reasonably prudent person will invest in a corporation which is not to be supplied with sufficient capital with which to prosecute its affairs; and therefore it is that a presumption arises that the amount fixed in the charter shall be raised before the corporation creates any liabilities.”

There are substantial differences, it is true, in this regard between “original or formative” stock and “increased” stock, but that question does not arise here, because the attempt to increase the stock was not operative.

It is sufficient that the Maryland rule is as stated, but, as indicating its soundness and universality, it may be stated that it prevails in Mew York, Missouri, Connecticut, Mew Hampshire, Wisconsin, Iowa, Georgia, California, Illinois, Maine, Tennessee, Ohio and generally throughout the United States.

It will bo observed that it is spoken of generally as an implied rule, but it may of course be expressed, and in this case the uncontradicted testimony of Mr. Landstreet is that he expressly agreed to take only the last $30,000 of the whole amount of $150,000, so that his subscription was upon the express condition that the whole residue of the stock should be taken before his subscription became binding. This condition not having been incorporated in the written subscription, might, perhaps, not have been available as a defense, if the residue had been fully and unconditionally subscribed; but the uncontradicted evidence in this case shows that there were,never, over $76,000 unconditional subscriptions, and the cases are uniform that for this purpose there can be counted only unconditional subscriptions,' joayable in ’ cash. Troy. v. R. R. Co,. 8 Gray, 596; Oscaloosa v. Parkhurst, 54 Iowa, 357; Brand v. Lawrenceville R. R., 77 Geo. 506; Cal. Southern Hotel Co. v. Russell, 83 Cal. 277.

While the appellants, as we have said, do not deny the general rule- invoked, .they do contend, that “if the corporation is already a going concern at, the time of the subscription; .and is continuing to create liabilities to- the knowledge of. the subscriber, and the subscriber also knows that its stock fixed in its charter is not fully subscribed,” then the presumption which this Court, in Gettysburg Bank v. Brown, 95 Md. 386, said arises, “that the. amount fixed in the. charter shall- - be raised before the corporation creates liabilities,” cannot arise, and the rule has no application. This contention seems to us to confound the general rule with the subsidiary rule, equally well settled, that- this defense may. be waived, or' the- subscriber, be estopped from setting it up. The appellants cite in support of their contention what they concede to be a dictum of this Court in Musgrove v. Morrison, 54 Md. 161, in which Judge Robinson said: “We do not mean to say that this rule applies to corporations of every kind without regard to the objects'and purposes-for which they are chartered. * * * • In this case, the company was chartered for the purpose of buying, selling and leasing property and also as a homestead and building association, and at the time of the appellant’s subscription was engaged in the prosecution of its business, and he knew at the same time that its whole capital slock had not been taken, and under these circumstances it niight.well.be argued that his subesription was not made upon the condition that the company was not to organize until the whole number' of shares had been taken.” But the learned Judge, nevertheless, placed the'decision squarely on. the ground that during, three years that he was a member, he not only regularly paid his weekly -dues, but accepted his proportion of the profits earned, and through an attorney voted liis stock at. all meetings, whether for the election of directors or the transaction of other business, and the Court expressly states that all this time he knew the whole capital stock had not been taken.

Another case cited for their contention is Arkadelphia Mills v. Trimble, 54 Ark. 519, in which the Court said: “The fact was that the corporation began business as soon as the $14,500 was subscribed, and after that Trimble agreed to take and pay for the $500 subscribed by him. From this it is evident that there was and could be no implied condition in his agreement that the corporation should not begin business until all the capital stock was taken. The corporation was engaged in business when he subscribed. It was evident it would need money in the prosecution of its enterprise, for if it would not, there was no necessity for his subscription. lie was not to be an honorary member.” A little further examination of that case will show, however, that far from supporting the appellants’ contention as applied to the facts of this case, it bears out the application of the general rule as inherent in the appellee’s subscription, and shows it as avoidable only by waiver or estoppel. The articles of association in that case which were subscribed by Trimble contained the following provision: “The amount of capital stock of said association shall be $50,000, of which $14,500 have been subscribed by corporators aforesaid, and the residue may be/issued ancl disposed of as Hie board of directors may from time lo time order and direct;” and the Court said: “No impliealion arises from this provision that the corporation was to .postpone its enterprise until all the capital stock had been subscribed. The most reasonable inference to be drawn from it is that the $14,500 was all the money needed for the purpose. The fact was that it began business as soon as the $14,-500 was subscribed, and after that Trimble agreed to take liis stock.” These articles of association could well be construed as fixing the formative or original stock at $14,500, with power to increase the same from time to. time as the directors should see fit, up to $50,000, and this is precisely what it is fair to presume Judge Robinson meant in Musgrave v. Morrison, supra, when he said, on page 164: “It may be obvious from the face of the charter itself, that the whole capital stock is not in any manner necessary to the organization of the company, and that the subscriber knew, or had reason to know, this at the time of subscription.”

We can perceive nothing in the case before us in the nature or kind of business for which the storage company was incorporated (if that can in any case be a proper subject of inquiry), nor in the time when, or the circumstances under which, the appellee made the subscription in suit which should take this case out of the general rule. It appears from the subscription blank that the capital stock was then designed to be $250,000, presumably upon the supposition that the attempted increase from $150,000, as fixed by the certificate, to $250,000 was regular and effective. The original stock, however, was $150,000, and there is no evidence, as in the Arkansas case, supra, that the charter authorized the organization of its main enterprise before the full amount was subscribed. The subscription in this case was made June 10; 1907. Prior to June 12th, 1906, the company was doing a small business, principally in towing and lighterage, requiring comparatively small capital. In July, 1906, it leased Brown’s wharf and began a storage business there, but at that time it contemplated the expenditure of a large amount in the erection of a modern storage warehouse, to which it bound itself in that lease in pursuance of negotiations with the appellee representing the railroad company. The erection of that warehouse, for that purpose, then became and continued to be its main enterprise. The appellee’s subscription was made June 10, 1907, and the building contract, made in July, 1907, called for an expenditure of $136,000, nearly the whole of the authorized capital. In addition to this, the storage company purchased ground on which to erect the warehouse, and mortgaged the same for $50,000. All this was done without the concurrence of the appellee, who at the time of making the subscription advised against undertaking any construction un der existing business conditions, and continued so to advise. In considering this situation it must not be forgotten, as said in Hager v. Cleveland, 36 Aid. 487, that “there is a wide difference between the existence of the company as a corporate body, and the liability of parties for their subscriptions to its capital stockand, as repeated in Gettysburg Bank v. Brown, 95 Md. 385, that “this rule applies to subscriptions made before and after the company is chartered.” The fact that the appellee knew that the storage company was about to involve its stockholders in this large financial undertaking is conclusive that he was entitled to the benefit of the rule he now invokes. We cannot imagine a situation in which this rule could apply with more peculiar force if the reasons so forcibly assigned by Judge Shaw in 2 Gray, supra, and so fully approved by this and other Courts, are in themselves sound and satisfactory.

But it remains to enquire whether this defense has been waived, or the appellee estopped to claim its benefit.

In considering this question it must he kept in mind that there is not only no evidence to show that Landstreet did not know all the stock was not subscribed, but that he subscribed in reliance upon Brady’s assurance that it was all either actually subscribed or promised to be subscribed immediately upon his subscription being made, as indicating the co-operation of the railroad company. Technical estoppel, it may be conceded, is not required, and any acts which constitute waiver will be sufficient.

It is uncontradicted that Landstreet never qualified as a director, and never attended any directors’ or stockholders’ meeting, nor participated in any way in the incurring of any obligation or the transaction of any business of the company.

In Garling v. Baechtel, 41 Md. 305, it was held that where a stockholder attends meetings of the company, knowing the whole capital stock has not been taken, and votes for the expenditure of money for the purchase of property and materials to carry on the business of the company, he will not be permitted to set -up- the defense that the capital 'stock- had not all been taken. And to the same effect is Hager v. Cleveland, 36 Md. 476; Stillman v. Dougherty, 44 Md. 380. But in Garling v, Baechtel, 41 Md., supra, which was a suit to recover of Garling as a stockholder-a debt dne Baechtel by- the company, Judge RoBiErsojsr also said: “The mere-fact that he paid'his subscription, knowing that the whole capital stock ■had not been- paid in, and that the company was incurring debts for property and material, were not such acts of partió i-pation as to estop him from setting up in this action the partial subscription of the capital stock.” And this was held -also in Bray v. Farwell, 81 N. Y. 600, in a similar case, where defendant never attended a stocholders’ meeting or assented in any way to the commencement of the enterprise before all the shares, were taken.

In Ridgefield R. R. v. Reynolds, 46 Conn. 375, Reynolds attended stockholders’ meeting to elect directors and was himself elected- a -director and accepted. He .was present at a meeting of, directors when an assessment of forty.per cent, was-laid, and when a report was made'by. the President of a contract-for. construction,, and work actually begun; but it did not appear- he participated in any action taken at the meeting. • It-was. held none of these things constituted a waiver. Ohiee Justice Pabk said: “The case is silent as to Jais conduct. . .IBs simple presence is.as.much in accord with ,one supposition as the other. The burden of proof is on the appellees.” ■ •

,. In Masonic Temple v. Channell, 43 Minn. 353, the Court •said: “It is to be' regretted -that there has been any relaxation of this rule. .The acts as stockholder which will constitute a .waiver are those which constitute a part of the business for which the corporation is formeji, and which evince a willingness. to enter upon that business with the • stock already subscribed.”. ■ This -is a- clear and plain.statement of the principle upon which, all such questions should be resolved. ■

•• • In that case the defendant was a director, attended meetings -as such,' and was chairman of a committee to select a building site, and only' resisted payment when the' site he favored was not selected. This was held a waiver. The facts in this case do not, in our opinion, bring it within any well-considered decision under which a waiver could be found, and we think the learned Judge below correctly granted the defendant’s first prayer.

As this necessarily requires the affirmance of the judgment, there is no occasion to consider the other prayers, nor the disposition of the motions to strike out evidence, all of which were refused.

Judgment affirmed with costs to the appellee above and below.