Whitlock v. Alexander

160 N.C. 465

Opinion

Hoke, J.,

after stating the case: The decisions of this State are to the effect, and the position is in accord with doctrine prevailing in other jurisdictions, that the capital stock of a corporation, including unpaid indebtedness for stock issued and held by the stockholders, shall, if required, be considered a trust fund for the creditors; that, under ordinary conditions, persons having business dealings with the companies have a right to suppose that this capital stock has been paid in, in money or in money’s worth, and in case, of insolvency any unpaid balance may, by proper proceedings, be made available to the extent required for the settlement of outstanding claims. Pender v. Speight, 159 N. C., 612; McIver v. Hardware Co., 144 N. C., 478; Hobgood v. Ehlen, 141 N. C., 344; Bank v. Cotton Mills. 115 N. C., 507; Hill v. Lumber Co., 113 N. C., 174; Clayton v. Ore Knob Co., 109 N. C., 385; Foundry Co. v. Killian, 99 N. C., 501; Fogg v. Blair, 139 U. S., 118; Handley v. Stultz, 139 U. S., 417; Sawyer v. Hoag, 84 U. S., 610.

In applying the doctrine, where payment in property is permissible and has been attempted, the question frequently occurs as to the principle upon which the liability of the stockholder may be made to rest. Some of the courts administer what is not inaptly termed the “true value” doctrine, and hold the stockholder to the difference between the par value of the stock and the true value of the property in money, and this regardless of the question of fraud (10 Cyc., p. 473), while others have maintained .the “good faith doctrine,” referring the question primarily and very largely to the decision of the corporate authorities having charge of the matter when they have exercised their honest judgment in making the valuation. "Whatever may have been the leanings of our former decisions, this view must now prevail with us, our statute making provision on the subject as follows:

“Nothing but money shall be considered as payment of any part of the capital stock of any corporation organized under this chapter, except as herein provided in ease of the purchase of property or labor performed, and no loan of money shall be made to a stockholder or officer thereof; and if any such loan be made, the officers who make it, or assent thereto,, shall be jointly and severally liable, to the extent of such loan and interest, for all the debts of the corporation until the repayment of the sum so loaned.

“1161. Any corporation formed under this chapter may purchase mines, manufactories, or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full-paid stock, and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this chapter; and in the absence of a'ctual fraud the judgment of the directors as to the value of the property shall be conclusive; and in all statements and reports of the corpo-rátion to be published or filed, this stock shall not be stated or reported as being issued for cash paid to the corporation, but shall be reported in this respect according to the facts.”

While some of the courts, sustaining the position that actual fraud is required to charge a stockholder who has paid for his stock in property, "have held that a “gross and obvious overvaluation of property” is strong evidence of fraud (Coit v. Amalgamating Co., 119 U. S., 343), and our own Court, going further, has held that a valuation grossly excessive and knowingly made may be conclusive on this subject (Hobgood v. Ehlen, supra, a decision made since the enactment of the statute and well supported by authority, 2 Clark and Marshall on Corporations, p. 1215; Coleman v. Howe, 154 Ill., 458; Land Co. v. Birmingham, 92 Ala., 407), we think that the principles embodied in the statute, by correct interpretation, are against the rulings of the 'lower court as presented in the record. On the bearing it was made to appear tbat Casper W. Miles was tbe patentee and owner of two letters patent for improvements in “compressors for ice machines,” and tbat, on or about 30 June, 1908, tbe Carolina Ice Machine Company was formed by defendant, C. L. Alexander, J. Reed Curry, and S. S. Miles, brother of tbe patentee, for tbe purpose of manufacturing- and selling ice and refrigerating machines, with a capital stock of $25,000, $12,500 of which was preferred and $12,500 of which was common stock at par value of $100 per share; that 62% shares of. common stock was issued to S. S. Miles, 34% to J. Reed Curry,' and 31% to defendant C. L. Alexander; that shortly thereafter S. S. Miles, acting under a power of attorney from Casper W. Miles, assigned said patents to the corporation, and' the manufacturing and sale of the machines in the States of North and South Carolina were entered upon and conducted until 28 September, 1910, when, on proceedings instituted, the corporation was placed in the hands of receivers, the plaintiffs in the present suit; that on or about 11 February, 1909, pursuant to a resolution of the company, reciting adequate profits, a stock dividend was declared, and under the same there was issued to the defendant O. L. Alexander 31% additional shares of stock, etc.

These facts having been shown, the defendant offered evidence tending to prove that the original stock held by him should be properly considered and dealt with as paid-up stock, the same having been issued and applied in the purchase of the patents, assigned by Miles to the company and under which the business had been carried on.

The evidence in question, by parol and by entries in the corporation journals, was to the effect that the common stock to the full amount of $12,500 was issued and applied, as stated, for the patents in question, and that 31% shares had been issued to defendant Alexander, under an arrangement for value with the owner, and that this had been done by corporate action in which the patents had been formally valued and resolutions passed directing that the patents be purchased for the full amount of the common stock, and that if such action and resolution were not on the books of the company, 'it should have been; a witness stating bis recollection of tbe resolution as follows : “Resolved, That tbe Carolina Ice Machine Company purchase patent rights for North and South Carolina from S. S. Miles and give him therefor $12,500 of common stock for the patent.” There was also evidence tending to show that, at the time of this purchase, the patent was fully worth the amount paid for it, $12,500, and was now a right of considerable value.

The plaintiff having offered the minute-book of the company, purporting to give the minutes of the first meeting of the stockholders and board of directors, and which failed to disclose or make any reference to the transaction, as claimed by plaintiff, the evidence referred to was excluded by the court or held to be of no effect upon the issue, and in this we think there was error. There does not seem to be requirement that any memorandum as to the formal valuation should be made and entered on the minutes, and, if it were otherwise, there could hardly be a more formal expression given than a resolution of the company that the patents be purchased for the full amount of the common stock. Undoubtedly, a transaction of this character should be pursuant to corporate action, but, if such action was held, it would not be rendered invalid because it was, by inadvertence, omitted from the minutes. Handley v. Stultz, supra.

It was further contended that “patent rights for North and South Carolina were not worth the par value of the $12,500 of stock and could not be treated as payment for the same.” There are, assuredly, well-considered cases to the effect that an untried and worthless patent may not be considered as a valid payment for a stock subscription, but these will be found in jurisdictions which hold to the “true value” doctrine, or to have been rendered on facts widely variant from those presented here.' As the case goes back for a new trial of the issue, it is not desirable to dwell upon the evidence at any great length, but, while there is testimony tending to support plaintiff’s position, there are also facts in evidence tending to show that these patents, made the basis of the enterprise, were of real value, and, at the time of the transaction, the business gave good promise of substantial returns. There was further testimony on the part of the defendant tending to show that the embarrassments which attended the effort and wbicb resulted in insolvency could well be attributed to the use of poor material in the manufacture and to mismanagement in the conduct of the business, particularly on the part of the agents intrusted with the sales, rather than to any defect in the device or the process by wbicb it was protected, and tbat the patent was and is now a very valuable one. In sucb case the authorities favor the position tbat the patent should be considered as property and the facts concerning it should be beard by the jury. Kimball v. Brick Co., 119 Fed., 102; Nail Co. v. Spring Co., 142 Mass., 349; Whitehill v. Jacobs, 75 Wis., 474.

Again, it was insisted tbat no rights were acquired by tbe company, because S. S. Miles, acting under a power of attorney from bis brother, tbe patentee, bad no right to sell' for stock, and tbat be was acting in capacity of dual agent, etc. These considerations might be given weight if Casper Miles, tbe owner of tbe patent, were moving in the matter, but cannot avail in this transaction, where tbe patents were formally assigned and have been used by tbe company since, and are now held as part of its assets.

On perusal of tbe record, we are clearly of opinion tbat tbe evidence offered should be received and submitted to tbe jury on the ^question whether tbe 31% shares of original issue are held by defendant as paid-up stock.

In reference to tbe dividend stock, 31% shares of wbicb are also held by defendant, this is a method not infrequently resorted to for tbe purpose of distributing tbe profits of a corporation among its stockholders, and, where tbe total -amount of stock is kept within tbe charter limits and tbe profits have been really earned, it is considered in this country as legitimate and, at times, not undesirable. 2 Cook on Corporations (6 Ed.), sec. 536; Thompson on Corporations, sec. 5274. As shown in Trust Co. v. Mason, 152 N. C., 660, a bolder of sucb stock has withdrawn nothing from tbe corporation nor in any way depleted its assets, and accordingly, being issued as paid-up stock, tbe transaction cannot be assailed by an existent creditor nor by one who has been informed of tbe circumstances. Handley v. Stultz, supra; Clark on Corporations, pp. 368-369. It is, bow- ever, properly regarded as an increase of tbe capital stock, and, as to subsequent creditors, tbe bolder of sucb stock may be beld accountable, and very mueb on tbe principle wbicb obtains bere in regard to stock of original issue. If issued in good faitb, it may not afterwards, as a rule, be successfully questioned. In tbis connection, it should be borne in mind tbat a recognition of tbe good faitb rule does not at all mean tbat tbe matter is referred absolutely to tbe action of tbe directorate or other managing agents of tbe company. These officers are supposed and are beld to act with good sense and reasonable business prudence. In 10 Cyc. tbe author, speaking to tbis question, has said: “It has been beld tbat tbe belief tbat a prudent and sensible business man would bold in tbe ordinary conduct of bis own business affairs is what constitutes good faitb in tbe valuation of property for wbicb tbe stock of a corporation is issued”; and, if they have declared a dividend and issued stock for it by an excessive overvaluation of property or by an excessive and entirely unwarranted estimate of tbe profits or tbe unearned increment, tbis would be evidence from wbicb fraud could be inferred, and, in extreme cases, it might, as we have seen, be regarded as conclusive. While tbe good faitb rule will be administered bere in tbe light of these principles, tbe fact remains tbat, under our statute and according to well-considered decisions, obtaining bere and elsewhere, in order to charge a stockholder with further liability, who has received bis issue by way of a dividend as paid-up stock, actual fraud must be estaKUs'hp.d. and, in consideration of all tbe facts in evidence, we are of opinion tbat tbe question of defendant’s liability as to tbis dividend stock must also be referred to tbe jury.

It may be well to note tbat we are considering tbe ease of a corporation embarrassed with debt and where tbe stockholders have taken stock dividends with notice and even knowledge of all tbe circumstances, and tbe question of an increase of capital stock issued by a corporation wbicb is a going concern, and apparently prosperous, is in no way presented. In sucb case it has been beld that within its chartered limits a company may, under some circumstances, issue stock as paid up “at its market value instead of its par value, and, if tbe transaction is in good faith, the holdel’s will not be held further liable to creditors.” Great Western, etc. v. Harress, 128 Fed., 321; Handley v. Stultz, supra; Clark on Corporations, 368; 2 Purdy’s Beach on Corporations, pp. 654-655.

It was contended for defendant that he was entitled to insist on a counterclaim by reason of an indebtedness existent in his favor against the company at the time of proceedings instituted, but, under our decisions and on the insolvency of the company and the appointment of receivers, the defendant’s claim is lacking in one of the essentials of a valid counterclaim, that the parties, debtor and creditor, must claim in the same right. The receivers now claim for creditors, and defendants are only entitled to an offset to the extent of the dividend declared, and this was awarded him in the judgment 'as now rendered. Smith v. French, 141 N. C., 1-7; Pate v. Oliver, 104 N. C., 458. For the reasons heretofore stated, we are of opinion that defendants are entitled to a new trial of the issues, and it is so ordered.

New trial.