Rehfuss v. Moore

19 A. 756, 134 Pa. 462, 1890 Pa. LEXIS 724

• Court: Supreme Court of Pennsylvania
• Decided: May 5, 1890
• Docket: No. 176
• Status: Published

Opinion

Opinion,

Mr. Justice Clark:

The act of June 2, 1874, P. L. 271, requires persons desiring to form a limited partnership or association to file with the recorder of deeds a statement in writing, duly signed and acknowledged, in which shall he set forth: The full names of the persons associated, with the amount of capital subscribed by each; the total amount of the capital, and when and how to be paid; the character of the business, and the location of the same; the name of the association, with the word “Limited” added thereto; the contemplated duration of the association, not exceeding twenty years; and the names of the officers selected in conformity with the provisions of the act. This act contemplated that the subscriptions to the capital should be payable in cash: Maloney v. Bruce, 94 Pa. 249; but by the supplemental act of May 1, 1876, P. L. 89, it was provided that it should be lawful “ to make contributions to the capital thereof in real or personal estate, mines or other property, at a valuation to be approved by all the members subscribing to the capital of such association: provided, that in the statement, .... subscriptions to the capital, whether in cash or in property shall be certified in this respect according to the fact; arid, when property has been contributed as part of the capital, a schedule containing the names of the parties so contributing, with a description and valuation of the property so contributed, shall be inserted.”

The Automatic Overseaming Button-hole Machine Company, Limited, was organized under the act of 1874, and its supplements ; the statement filed is in due form, and sets forth in detail the various matters required. The capital is fixed at $500,000, of which $496,970 is contributed by Charles R. Deacon, “ in property, at a valuation approved by all the members of the association subscribing to the capital thereof; a schedule containing the name of the party contributing said property, with a description and valuation of the property so contributed,” being inserted, as follows:

“Property contributed by Charles R. Deacon, as follows :

“ Letters patent of the United States No. 286,989, for improvements in button-hole attachments for sewing-machines, dated October 23, 1883, granted to the Banks Button-hole Machine Company, Limited, assignee of Charles M. Banks.

“Letters patent of the United States No. 287,213, for improvements in button-hole sewing-machines, dated October 23,1883, granted to the Banks Button-hole Machine Company, Limited, assignee of Charles M. Banks.

“ Letters patent of the United States No. 305,657, for improvements in button-hole sewing-machines, dated September 23, 1884, granted to Charles M. Banks, and assigned to the Banks Button-hole Machine Company, Limited, October 12, 188-.

“ Right, title, and interest in three certain letters patent of the Dominion of Canada, for the same inventions, patented in the United States by letters patent No. 286,989, dated October 23, 1883, No. 287,213, dated October 23, 1883, and No. 305,657, dated September 23, 1884, and Canadian letters patent having been granted, but not delivered, owing to models not having ■been supplied.

“ And which letters patent, rights, and interests are valued at the sum of four hundred and ninety-six thousand six hundred and seventy dollars ($496,670) by all the members of the association subscribing to the capital stock thereof. The balance of said capital, to wit, three thousand and thirty dollars ($3,030), has been paid in cash by the members contributing the same.’"

It will be observed that these letters patent are scheduled and described by giving their respective numbers in the patent office of the United States, the name of the inventor, the date of the patent, and its title. The Canadian letters patent “for the same inventions,” not yet issued, were described for identification by their numbers in the United States patent office, and, as the right was not yet absolute, the schedule covered the right, title, and interest of the member contributing the same. No more complete, accurate, and definite description could have been made, as a reference to the several numbers in the patent office would disclose every particular respecting the .nature of the patents and validity of the same. These inventions, moreover, were considered valuable only in combination; one' of them, as we understand, covered the foundation principle of the invention, and the others were in aid of its practical operation. The patents, although distinct, were considered useful only as they united in the completion and operation of a single device embodying the principle of all three combined. In adjusting the valuation of these patents, therefore, they were properly considered and valued together. The contributor of these patents seems to have acted in trust for himself and others, hut no question is raised as to that. But it is objected, first, that patent-rights are not “ personal estate ” or “property,” within the meaning of the act of 1876 ; and, second, if they are, there was no proper valuation of these patents inserted in the schedule.

Property is corporeal or incorporeal; one may he said, with equal propriety, to have property in a farm or a horse, or in an easement, a franchise, or in letters patent. A patent-right is the subject of assignment, sale, and inheritance. It may not, perhaps, be liable to a sale on a common-law execution, as it has no visible and tangible existence, and is a species of property which is incapable of manual seizure; but the highest courts in New York and California have affirmed the power upon a creditors’ bill to order the assignment and sale of a patent-right for the payment of the patentee’s judgment debts: See Gillett v. Bate, 86 N. Y. 87; Pacific Bank v. Robinson, 67 Cal. 620; and the same power was sustained in Ager v. Murray, 21 Amer. Law Reg., N. S., 469, [105 U. S. 126?] in the Supreme Court of the United States, where Mr. Justice Gray, in delivering the opinion of the court, said: “ A patent or a copyright, which vests the sole and exclusive right of making, using, and vending an invention, or of publishing and selling a book, in the person to whom it has been granted by the government, as against all persons not deriving title through him, is property, capable of being assigned by him at his pleasure, although his assignment, unless recorded in the proper office, is void against subsequent purchasers or mortgagees for a valuable consideration without notice.” In England, it has long been held that a patent-right would pass by assignment in bankruptcy, even without express words to that effect in the bankrupt act: Hesse v. Stevenson, 3 B. & P. 565. See, also, Curtis on Pat., § 174, and Ager v. Murray, supra, and cases there cited. We think there can be no question that a patent-right is such property as may be contributed to the capital of a limited partnership association, within the meaning of the •act of 1876. All property thus contributed is to go into the capital “ at a valuation to be approved by all the members subscribing to the capital,” and the valuation so made is to be inserted in the statement. In Maloney v. Bruce, 94 Pa. 249, it Avas held that, if parties seek to have all the advantages of a partnership, and yet limit their liability to creditors, they must comply strictly Avith the act of June 2,1874. The object of .the act of May 1,1876, requiring a schedule of the property contributed, it was said Avas to enable creditors to ascertain precisely of what the property consists, and to judge of its value, and that where property has not been scheduled and valued there is no payment of the capital. In that case, the property contributed was a “ contract with the Pennsylvania Gas-Light Company, at the valuation of $2,500; merchandise, ,-consisting of iron, steel, tin, and copper wire, gas-pipes;..... all the goods, tools, and chattels now on the premises, 209 Lackawanna avenue, Scranton City,” etc. “ This,” says the court in that case, “ is not the kind of schedule contemplated by the act of 1876. The-description is too general to enable any one to form a correct estimate of the extent of the property, and-the lumping valuation renders it equally difficult to judge of the values. The property contributed was intended as the equivalent of the cash capital, .and the plain object of the provision in the act of 1876, requiring a schedule, was to enable creditors to ascertain precisely of what the property consisted, and to judge of its value.” In Vanhorn v. Corcoran, 127 Pa. 255, we held that, where property is contributed, it must be property valuable for the business of the company, and for the payment of its creditors, and the certificate.must set forth in its statement such a description of the property contributed as will “ enable creditors to ascertain precisely of what the property consisted, and to judge of its value.” In that case, the statement showed a subscription of propertjq “ paid in merchandise, lumber, book-accounts, and bills receivable, transferred to this association, §21,609.18; and in cash, §3,390.82 ; making a total subscription, §25,000.” It appeared that the §21,609.18 represented the difference between the estimated assets and liabilities of the firm subscribing to the capital of the association, and if the statement had certified, in this respect, correctly, ■“ according to the fact,” the organization would have been defective; and the certificate was held to be insufficient. In Sheble v. Strong, 128 Pa. 315, the subscription was of “ machinery to be valued and accepted,” but there was no schedule, and it was held that the recorded statement must show a schedule, with a detailed description and valuation of the machinery, as required by the act of 1876, otherwise the members will be held as general partners. “ The question,” says our Brother Sterrett, in delivering the opinion of the court, “ is not one of good faith on the part of the defendants, or of notice to the creditors, but whether, in their attempt to form a limited partnership, they conformed to the law; if they did not, their attempt was abortive, and it is no difference that creditors had actual knowledge of the facts required to be set out in the recorded statement.”

But where, as here, the statement is in due form, and contains all the essential requirements of the statute, but the valuation is alleged to be unconscionable, and inserted in the statement without any proper consideration of the inherent or intrinsic worth of the property contributed, the question is one of good faith. All property contributed under'the act of 1876 is to go into the capital “ at the valuation to be approved by all the members subscribing to the capital,” and the subscribers would not be justified, perhaps, in fixing á grossly fictitious and fraudulent valuation to mislead and defraud creditors. But if their estimate is made honestly and in good faith, it must be accepted, although mistaken, and even grossly excessive. Their motives must be considered as of the time when the valuation was made; it will not do to condemn their estimate of the property because it afterwards proved worthless, and the enterprise resulted in a disastrous failure. In this case there is no evidence of fraud. The members of the association seem to have believed these patents to have been of extremely great value. One fifth interest in the original invention cost $10,000; the remaining four fifths were held by Mintzer and Banks, and the entire patent was thus contributed to the association.

The design of the association was to manufacture extensively a device attachable to the ordinary sewing-machine, for working button-holes, which, it was believed, would come into universal use, not only for factory, but for family uses. Banks’s invention worked the button-hole, but did not cut the cloth; a cutter attachment was afterwards perfected and turned in to the association, and then the device not only cut the cloth, but worked the button-hole in a very perfect manner. When this device was attached to the sewing-machine, however, the needle had to be lengthened, and the operation of the machine was impaired somewhat from the vibration of the needle. Maj. Moore was asked: “ What were those patents worth at that time, independent of your patent and your improvements ? A. That is a very indefinite question; no man can tell the value of a patent until it is tried. Mr. Banks’s patent involved what I regarded as of very great value, — a slide that moves straight forward, stops, a disc turns and moves that again in the same direction, — a thing that had never been done before, and for which he holds the bottom patent. That I regarded as very valuable.” “ Q. Did you ever have an idea yourself that those patents were worth any such sum of money? A. Yes, sir; I did. If you want to know the reason, I will tell you. Q. I would like to have it. A. A patent, as I said, is worth just what it will be able to earn. That patent, which was the ground-floor patent, contemplated in its construction of going into every household in this country, if it could have been made to do it; and I believed at the time it could have been done; and when you contemplate what a country this is, and other countries besides, if you could produce a machine of that kind, by which a woman could change, and by removing four screws, make her button-holes, then change it back into a plain sewing-machine, we thought that would be a very valuable patent. Mr. Rehfuss tried it years before. It was the making of the American Sewing-Machine Company, and we believed it was valuable. Otherwise we would not have stepped up and put down our money. Q. The reason why you believed those patents were worth that enormous sum of money was because you expected in the future to perfect that improvement, and to put, as you say, the machine in every house in the country? A. We did. Q. It was the expectation of being able to do that, that made the patents, in your judgment, valuable? A. Yes, sir. It is the earning capacity of that machine that made it valuable. I have never sold a share- of stock in that company, from the time it was organized under Banks up to the present time, and I think I have $20,000 in it. That shows what my faith has been in it. I never offered a share of stock for sale. No man ever bought a share of stock from me, and I am still spending money on it. Q. You are the proprietor of the patents now? A. Yes,sir; and I have still the same faith I had before. I want to say, further, with reference to these patents, what my experience has been. The earning capacity of a patent, if you can get it right, is very great. The first button-hole machine that I wás in was not a success, although a contract was made with the Singer Company to put it on all their machines. That company transferred the principle it had in that button-hole machine into a company. The device on it does not cost $10, and yet it has been earning the interest of a million dollars. We went out of that company, and organized another company, for which we paid $2,000, three of us, and four of us went into it, and organized a company on the basis of $50,000. I have taken out of that in the last four years about $12,000. It is not what you think a thing is worth, to look at it; it is what you think it will earn. You would not give me a five cent piece for that to look at it. That cost ten dollars to put on a sewing-machine; yet, I tell you, that under the control of two companies, a combination was formed to put that on a sewing-machine, and yet it has earned the interest of a million dollars. I do not know whether it has not paid more than that, — two million dollars; because, on one side, I cannot tell how much they get. The other side has paid ten per cent on $800,000. That patent did not cost ten dollars to make. Q. Then you got together with those other gentlemen, Mr. Long, Mr. Gray, Mr. Shipley, Mr. Deacon and Mr. Williamson, and signed an agreement, agreeing that that patent was worth $496,970? A. We did. Q. How did you get just that amount of money? How did you fix that? A. I do not know how it was done. The original value was fixed by Dr. Mintzer and Banks, and we accepted the situation as they made it.”

This testimony illustrates the great degree of confidence which the members of the association had in the success of their enterprise, and of the value of these patents. It appears that the same patents had previously been put into what was known as the Banks Button-hole Machine Company at the valuation of $500,000. This valuation was made by Dr. Mintzer and Charles M. Banks, the owners of the patents. That company, whilst endeavoring to perfect the action of this device, had some differences to arise between its members, and went into liquidation, and the reorganization was effected under the name of the Automatic Overseaming Button-hole Company, Limited, the patents being put in at the same price, less the amount of cash contributed.

Dr. Mintzer testifies that when Banks sold his patents the device worked quite satisfactorily. He says; “We most clearly defined satisfactorily a principle, but oftentimes it wants close adjustment before it will do practical work. Such was the position when Mr. Banks sold his patents.” He says, further, that he regarded the Banks patent as involving an exceedingly valuable principle, out of which he expected a very large sum of money would be realized; that their counsel was Mr. Connolly, a patent lawyer of very large experience, and, in fixing the valuation, he deferred to the opinion of his counsel, but he joined in the certificate, believing that it was all right and proper. Mr. Deacon testifies that the members of the association agreed to accept the valuation that had been placed upon the patents in the old company; that the capital was $500,000, and they decided to deduct the cash contributed, and the balance Vras agreed upon as the value of the patents. He says : “ I believed the patents to be very valuable. I had considerable experience in the sewing-machine business, and I thought it was the best button-hole I had seen, and on the strength of it I invested the money in the old company.” Charles B. Lee says he thought the patents were worth the amount of their valuation, or he would not have signed the papers or paid his money.

The case depends upon this testimony; there is practically nothing to support a charge of fraud. The testimony clearly shows that this enterprise was undertaken in good faith, and that the members had the utmost confidence in its final success. They paid in the cash capital, and contributed as much more in aid of the enterprise. The whole trouble was, that, although the invention was valuable in mechanical conception, and was a pioneer invention in its line, yet others, who were active in the same direction, relieved its imperfections, and reaped the reward. The plaintiffs were not deceived. They knew the nature and character of the several contributions made to the association, for these contributions were certified upon the record according to the fact, and they had, besides, actual, personal, and intimate knowledge of the resources of the company. We are of opinion that this was a good-faith transaction, and the judgment should be affirmed.

Judgment affirmed.