National Bank v. Texas Investment Co.

12 S.W. 101, 74 Tex. 421, 1889 Tex. LEXIS 956

• Court: Texas Supreme Court
• Decided: June 21, 1889
• Docket: No. 6068
• Status: Published

Opinion

Gaines, Associate Justice.

This suit is founded upon a promissory note for §10,000 executed by “Texas Investment Company” through its general manager, and payable to the firm of Fore, Morphy & Henderson. The note was endorsed by W. A. Garner, B. B. Paddock, and George B. Loving, and delivered to the payees, and was subsequently endorsed by the latter and by R. M. Henderson, both in his own name and that of J. W. Dabbs & Co., and was delivered to plaintiff.

The petition shows that in executing the note the maker, the “ Texas. Investment. Company," acted as a corporation, bu-t it is averred that in fact the company was not legally incorporated; first, because its charter-filed under the general law is not such as was authorized by the statute;, and second, because the capital stock was never subscribed and paid for. The petition therefore sought a recovery against the members composing the company as being merely partners in the enterprise and individually liable for the debts of the concern. A copy of the articles of incorporation are, however, annexed to the petition and made a part of it, and it is-prayed in the alternative that in the event that it should be held that the company was legally incorporated that the plaintiff have judgment against, it as such.

It is also averred in the petition that after the debt sued upon was created, a new corporation was attempted to be formed known as the “ Texas Investment Company, Limited;” that the old company being insolvent, transferred all its assets to the new, and that in consideration of such transfer the Texas Investment Company, Limited, assumed and promised to pay all the liabilities of the former company. It is also averred that, the assets of the old company were not applied to the payment of its debts, but were diverted by the managers and directors of the new company to other objects. It is claimed in the petition that by reason of the> facts so averred the new company held the assets of the old in trust for the payment of the debts of the latter, and on that ground a recovery is sought not only against the new company on its assumpsit, but also against its directors for the misapplication of these assets, and against sundry individuals and corporations who are alleged to have received and appropriated portions of the assets, having knowledge of the trust.

This brief statement of the case suggests several difficult questions which lie at the foundation of the action against several of the defendants, but we will first consider certain exceptions interposed to the petition by defendants on the grounds of multifariousness and inconsistency of allegations. Is the petition multifarious? “Multifariousness in equity pleading is the improperly joining in one bill distinct and independent matters, and thereby confounding them; as for example the uniting in one hill of several matters perfectly distinct and unconnected against one defendant, or the demand of several matters of a distinct and independent nature against several defendants in the same bill.” Whart. Law Die. The suit here in the main is for the recovery of one debt only, and a judgment is sought against several parties who have, as is alleged, made themselves successively liable for its payment. It is true as urged by counsel for appellees that numerous issues are presented, and that the labors of the court in disposing of the litigation are thereby greatly increased. We do not understand that this is an objection which can be successfully urged under our system of practice. From an early day our courts have encouraged the bringing of all parties interested in the subject matter of a litigation before the court, and determining their rights in one action. Clegg v. Varnell, 18 Texas, 294.

We are of opinion therefore that as to the maker and endorsers of the note the “ Texas Investment Company, Limited,” the directors of that company, and all parties who are alleged to have participated in the misapplication of the funds of the old company with a knowledge of the facts, the causes of action were properly joined in one suit. So far the suit is to collect a debt and to hold liable for its payment those who have converted property held in trust for its security. But on the other hand we think that so much of the petition as seeks a recovery against the directors of the old corporation on the ground that they falsely and fraudulently held out to the public that the capital stock of the corporation had been fully paid, and that thereby plaintiff was induced to discount the note sued on, presents a distinct cause of action. It is not a suit to collect the debt but to recover damages for having been wrongfully induced to purchase the obligation. This matter will be again referred to in another part of this opinion.

We are also of opinion that it is permissible for a plaintiff in our courts to state the facts upon which he relies for a recovery and to pray for alternative relief. In this case the plaintiff alleges the manner in which the “Texas Investment Company” was organized, and claims as a matter of law that the attempted incorporation was not in compliance with the statute and that therefore it remained a mere partnership, and prays for judgment against its stockholders as individuals. But the petitioner prays that in the event it is mistaken in its legal conclusions, then that it have judgment against the company as a corporation. The pleader must state the issuable facts upon which he relies for a recovery. It being the duty of the court to draw the legal conclusion, he is not bound by his averment of the law deducible from the facts as pleaded by him.

This case is distinguishable from that of Oglesby’s Sureties v. The State, 73 Texas, 658. That was an action upon two successive bonds of a tax collector with different sureties, and the petition alleged that there had been a default upon either the one or other bond, but did not allege an unconditional default upon either. It was there held that the pleading was bad, and that there being no privity between the sureties upon the two bonds the two causes of action should pot have been joined. The' petition did not aver the facts which showed the unconditional liability of the obligors on either bond. It did not allege that the default had occurred either during the first or the second term of office, but did aver that there had been a default and that if it did not occur during the one term it. occurred during the other. The pleading failed to allege positively and directly the facts upon which a recovery was sought, and in that respect was essentially different from the case now before us.

This brings us to the question whether the Texas Investment Company was legally incorporated or not. The copies of its charter and amended charter, which are made a part of the petition, show that they were duly filed in the office of the Secretary of State. At the time the note sued on was executed the company was acting under the amended charter, which stated the purpose of its organization as follows: “This corporation is formed for the purpose of buying, selling, and dealing in real estate, live stock, bonds, securities, and other properties of all kinds, on its own account and for commission in the United States and elsewhere.” _ This charter was filed in the office of the Secretary of State on the 18th day of May, 1883. At that time the original article 566 of the Revised Statutes, which defined the purposes for which corporations could be formed under title 20, was in force. That article, after enumerating twenty-six special purposes for which corporations could be organized, contained a twenty-seventh subdivision which read as follows: “For any other purpose intended for mutual profit or benefit, not otherwise specially provided for and not inconsistent with the Constitution and laws of this State.” It seems to us that this provision is sufficiently comprehensive to embrace the purpose designated in the charter of the company. It was evidently intended that the business of this corporation was to be carried on for the mutual profit and benefit of its shareholders, and we know of no provision of the Constitution which prohibits the formation of a corporation for the purpose named. It is not inconsistent with any law of the State then existing unless it be some provision of the same article of the Revised Statutes.

We find no inconsistency between the purpose expressed in the charter and the special purposes provided for in the previous subdivisions of that article. It can not be claimed that all the purposes for which a corporation can be formed were designated in the first twenty-six subdivisions. We must presume that the language of the twenty-seventh subdivision was intended to mean something, and we think it should be construed to mean what it says, and to authorize a corporation for carrying on any business intended for profit which was not expressly or impliedly prohibited by the Constitution or some other law. The evident intent was to attract capital and to encourage its combination for the pursuit of any lawful business.

Counsel for appellant cite the case Navigation Company v. Galveston County, 45 Texas, 272, in opposition to the view we have expressed. We confess that to our minds the principle upon which that case was decided does not very clearly appear-in the opinion. We understand, however, that it is held that since "canals for the purpose of irrigation and manufacturing purposes ” were mentioned in the next preceding section of the article it indicated an intention that a corporation should not be formed for the construction and operation of a canal for the purposes of navigation. If, as some expressions in the opinion would seem to indicate, it was intended to hold that corporations could not be organized except for the special objects mentioned, and hénce that section 27 meant nothing, wé should feel constrained to withhold our assent to the doctrine.

But it is also insisted that the company was never legally incorporated because the capital stock was not subscribed and paid for by the promoters of the enterprise. That the Legislature contemplated that corporations organized under the statute under consideration should be conducted as stock companies, having their capital stock divided into shares, we think there can be no doubt. The law requires that the articles of incorporation shall show "the amount of capital stock, if any, and the number of shares into which is divided.” Rev. Stats., art. 567; see also arts. 590, et seq. Article 591 provides that the stock subscribed for shall be paid in such manner and in such installments as the board of directors may order. But we find no provision in the law making the existence of the corporation dependent upon the subscription to its stock or the payment therefor. On the contrary it is expressly provided that "the existence of the corporation shall date from the filing of the charter in the office of the Secretary of State.” Rev. Stats., art. 570.

It follows, we think, that when the company filed its articles of incorporation with the Secretary of State, it became a corporation in law, and that the owners of its stock and the managers of its business can not be held liable as partners for debts contracted by it. This ruling is supported by authority. Laflin & Rand Powder Co. v. Sinsheimer, 46 Md., 315;. Society Purim v. Cleaveland, 43 Ohio St., 481; First Nat. Bank v. Almy, 117 Mass., 476. It may be doubted whether the plaintiff is in a position to question the existence of the corporation if in fact it did not legally exist. Its allegations show that in discounting the note sued on it relied upon the representation that it was a corporation with a paid up capital of $100,000. But that question we need not determine.

We come next to the question of the effect of the alleged transfer of the property of the “Texas Investment Company” to the new corporation known as the “Texas Investment Company, Limited.” It is alleged that the former company, being insolvent, transferred to the latter all its: property, the latter agreeing in consideration of the transfer to pay the former’s debts. That by such an agreement the “Texas Investment Company, Limited,” became bound to pay the debt of plaintiff there can be no doubt. According to the rule in the American courts when one person for' a valuable consideration agrees to pay a sum due from the second to the third, the third party can sue directly upon the promise. 2 Whart. on Con., sec. 785, et seq.

But did the latter corporation take the property of the former charged with a trust in favor of the former’s creditors? In support of the affirmative of the proposition we are cited to the case of Wallace v. Beauchamp, 15 Texas, 304. There a father conveyed to his son certain property upon, consideration of the latter’s promise to sppport his father and mother and pay his father’s just debts. It was held a trust existed upon the property conveyed in favor of the father’s creditors. While this may be good lawr as applied to the facts of that case, we do not think it can be affirmeas a general principle that when a party purchases personal property of another, and in consideration of the sale agrees to pay the seller’s debt, a trust exists upon the property in favor of the creditor in the absence of an agreement to that effect. The doctrine is, however, reasserted in the case of Montgomery v. Culton, 18 Texas, 736. That was a case in which the holder of an allowed and approved claim against an estate brought suit against the heir who had received the property at the hands of the executor and had promised to hold him harmless against the debts of the estate. This statement is sufficient to show that the question was not necessarily involved in that case.

But this is a case óf a transfer by an insolvent corporation of all its. property to another, which assumed to pay its debts. In Sawyer v. Hoag, 17 Wallace, 620, Mr. Justice Miller says: “Though it is a doctrine of modern date we think it now well established that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the general creditors of the corporation; and when we consider the rapid development of corporations as instrumentalities of the commercial and business world in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exigencies of this business, it is no solid objection to such a principle that it is modern, for the occasion for it could not sooner have arisen. The principle is fully asserted in two recent cases in this court, namely, Burke v. Smith, 16 Wallace, 390, and in New Albany v. Burke, 11 Wallace, 96.”

In Sanger v. Upton, 91 United States, 60, Mr. Justice Swayne uses this language: “The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which exists in private copartnerships. When debts are incurred a contract arises with the creditors that it shall not be withdrawn or applied otherwise than upon their demands until such demands are satisfied. The creditors have a lien upon it in equity. If diverted they may follow it as far as it can be traced and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration. It is publicly pledged to those who deal with the corporation for their security. Unpaid stock is as much a part of this pledge and as much a part of the assets of the company as cash which has been paid into it.” To the same effect are the following cases: Clapp v. Peterson, 104 Ill., 26; Hastings v. Drew, 76 N. Y., 9; Bartlett v. Dunn, 57 N. Y., 587; Gill v. Bales, 72 Mo., 424.

In the cases from which we have quoted and in many of those cited "the effort was to recover of stockholders unpaid subscriptions upon stock nr to recover property which had been withdrawn by stockholders in exchange for stock already paid. It can not be claimed that the creditors have any lien upon the property of a solvent corporation which it disposes of in the usual course of its business. But when one corporation transfers all its assets to another corporation and thus practically ceases to exist, without having paid its debts, the latter corporation takes the property subject to a lien in favor of the creditors of the old company. This doctrine is distinctly asserted in 1 Jones on Liens, sec. 85, et seq., and is supported by the following cases: Brum v. Ins. Co., 16 Fed. Rep., 140; Hibernia Ins. Co. v. Transportation Co., 13 Fed. Rep., 516; Harrison v. Ry. Co., 13 Fed. Rep., 522; Henson v. Britton, 88 Mo., 549; Blair v. Ry. Co., 24 Fed Rep., 148; Fogg v. Ry. Co., 17 Fed. Rep., 871.

The principle seems to have been recognized in part at least in the old English case of Carson v. African Company, 1 Vernon, 121, which is similar to the case under consideration. There a corporation known as the Old African Company became insolvent, being indebted to plaintiff. A new African Company was formed for the purpose of carrying on the same business pursued by the old. The old corporation without being formally dissolved transferred its assets to the new, the latter agreeing to apply the purchase money to the debts of the former. The suit was by a creditor against the new company only, and a question was raised whether or not the old company should not have been made a party. An agreed decree was rendered in favor of the plaintiff, and it seems not to have been questioned but that for want of proper parties the suit was properly brought. When it is remembered that by the rule of decision in the English courts, a third party for whose benefit a contract has been made by two others and to which he has not agreed, can not sue alone for it either at law or equity, it will be seen that the case recognizes the existence of a trust. See Pollock’s Principles of Contracts, p. 200, et seq.; also Empress Engineering Co., 16 Ch. Div., 125.

We next proceed to apply the principles announced to the assignments of error in the order in which they are presented in appellant’s brief. We will dispose of the questions separately as presented in the propositions under the assignments.

First it is insisted that the court erred in sustaining the demurrer of the “Texas Investment Company, Limited.” It appears, however, that-after the demurrer was sustained to the plaintiff’s petition it filed a trial amendment, alleging that that company was duly incorporated, and it also appears that upon this amendment a final judgment was given against it. Consequently the ruling of the court in this particular could not have operated to the prejudice of appellant.

It is next complained that the court erred in sustaining the demurrers-of the Traders National Bank and of H. C. Edrington. In so far we think the assignment is well taken. The petition averred that the “Texas Investment Company,” being insolvent, transferred its assets to the “Texas Investment Company, Limited;” that in consideration thereof the latter agreed to pay the debts of the former; that among the assets-so transferred were 228 shares of the capital stock of the New Mexico' Land and Cattle Company, and that the Traders National Bank and Edrington, with a full knowledge of the facts, had possessed themselves of' said property, and that it had been pledged to the bank for borrowed money; that by reason of the premises the bank had made itself a trustee of the stock for the benefit of the creditors of the “ Texas Investment Company,” and that with the assistance of Edrington it had made some kind of transfer of the stock without applying the proceeds to the purposes of the trust. It follows from what we have heretofore said that if these facts be true that Edrington and the bank have made themselves liable to account to the creditors of the Texas Investment Company for the value of the shares so appropriated.

As to the .City National Bank we think the demurrer was properly sustained. It is alleged that the Texas Investment Company became the owner of the property of the Fort Worth Publishing Company, and that this was. transferred to the Texas Investment Company, Limited; that the latter company caused shares of stock to be issued to certain persons. to enable them to become directors of the publishing company, and had them elected as such directors; that the directors so elected issued bonds of the last named company, which were secured by a mortgage and were pledged to the City National Bank, and that the bank caused the mortgaged property to be sold in satisfaction of the indebtedness for which they were so pledged. We do not think that these allegations show any liability of the bank to this plaintiff or to other creditors of the Texas Investment Company.

We are of the opinion that if, as alleged, the directors of the Texas Investment Company, Limited, misapplied the assets conveyed to it by the old company, they rendered themselves individually liable to the creditors of the latter to the extent of the assets so misapplied. It follows that the demurrer should not have been sustained as to Boaz, Martin, Brown, and Huffman.

We also think that the court erred in sustaining the defendant Brit-ton’s third, fourth, and sixth exceptions to the petition. The fifth we think was properly sustained.

We have already determined that the Texas Investment Company was legally incorporated by its amended charter filed May 18, 1883, in the office of the Secretary of State. It follows that the court did not err in charging that the members of that company were not personally liable for its debts.

Nor did the court err in refusing to charge the jury that the charter of the Texas Investment Company, Limited, was insufficient to create a private corporation under the laws of Texas. The plaintiff, after a demurrer was sustained to its third amended original petition, filed a trial amendment in which it was distinctly alleged that that company was legally incorporated. Under this pleading it would have been clearly erroneous to have given the charge. By the trial amendment the plaintiff abandoned all its previous allegations by which it sought to charge as partners the persons composing the company. If it desired to revise the court’s riding upon the sufficiency of the allegations to hold them individually liable for the company’s-debt, the plaintiff should have stood upon its pleadings and excepted to the ruling of the court. Its trial amendment was in effect the voluntary abandonment of all previous pleadings inconsistent therewith.

The last assignment presented in appellant’s • brief is that the court erred in refusing to give the following instruction:

“You are instructed that persons can not enter into or form a corporation and go forward and do business unless they have in good faith subscribed the amount of the capital provided for by their charter. In this case the capital provided for by the charter of the Texas Investment Company was one hundred thousand dollars, and before said parties who composed said firm could lawfully do business the said capital should have been subscribed in good faith, and if you believe that said capital was not so subscribed, then you are instructed that the persons who composed said company had no authority to pretend to act as a corporation; and if you believe from the evidence that said George B. Loving, A. M. Britton, B. B. Paddock, J. W. Zook, Jerome Harris, and W. A. Garner, or either of them, on the 25th day of July, 1883, at the time of the execution of the note sued upon, so' held themselves out as being stockholders in and possessed of franchises for the corporation known as the Texas Investment Company, with a paid up capital stock of $100,000, and so pretended to act as a corporation, executed the note sued upon, and that said capital stock had never in fact been subscribed and no part thereof, and that said pretension upon the part of the said defendants was fraudulent and intended to deceive the public, and if you further believe that it did deceive the said Fore, Morphy & Henderson and the said plaintiff in this case, and induced the said Fore, Morphy &' Henderson and the said plaintiff to accept the said note, then you will find a verdict for 'plaintiff for the full amount of said note, interest, and attorney fees as against the said persons so connected with said company, and who so pretended to act for said company, and participated in the purchase of said cattle, pretending that said company was a corporation with a paid up capital of $100,000.”

We have already expressed the opinion that neither the subscription nor the payment of the capital stock of an association is essential to call into existence a corporation under our general laws. If the capital stock of the corporation was not paid, and if the directors held out to the world that it was operating upon a full paid capital stock of $100,000, and if plaintiff relied upon such representation when it purchased the note of the corporation, then it may be that the directors rendered themselves liable to respond in damages for any loss that was thereby occasioned. But if so they were liable in action of deceit sounding purely in damages—that is to say, not in an action for a breach of a contract, but in an action for fraudulent representations by which the plaintiff was induced to make the contract. This was a distinct cause of action, and should not we think have been joined in a suit to recover of the makers and endorsers of the note and of others who had rendered themselves liable for its payment by misappropriating property upon which the holder of the obligation had a lien for its payment. In so far as a recovery was sought for the alleged fraud of the directors of the old corporation in representing that its capital had been previously paid, we think as has been previously intimated that the petition was subject to exception for multifariousness. It follows that appellant was not prejudiced by the refusal of the court to give the instruction requested.

For the errors pointed out the judgment is reversed and the cause remanded.

Reversed and remanded.

Delivered June 21, 1889.

Associate Justice Henry not sitting.