Case ID: ny-st-rep_16/html/0380-01.html
Source: Caselaw Access Project
Author: {"author": "Andrews, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Christopher Meyer, App’lt, v. Thomas S. Blair et al, . Resp’ts.
    
    
      (Court of Appeals,
    
    
      Filed June 5, 1888.)
    
    1. Subscription to stock corporation—Contract to assume risk of SUBSCRIBER.
    A subscriber to the stock of a company can enter into an agreement with third persons at the time of the subscription to the effect that the latter shall assume the risk of the enterprise, there being no actual fraud and the relations between the subscriber and the company remaining unchanged.
    2. Same—What contract to assume risk valid as to co-subscribers.
    At the time of subscribing to the stock of a certain company an agreement was entered into which was in form a contract by the defendant to buy from the plaintiff, one year from the date of the contract, certain shares of stock purchased by him of said company in case the plaintiff shall desire to sell the sanie, and to pay therefor the price paid by the plaintiff on his purchase of the same stock from the company. The ■ plaintiff, at the request of the defendants, the principal promoters of the company and the owners of most of the shares, concurrently with the making of the contract in question, became one of several subscribers for 6,000 shares owned by the company, and which it offered for sale under the terms of a prospectus and subscription. The prospectus which accompanied the subscription set forth that 9,000 shares of stock had been placed in the hands of a trustee for the company, the proceeds of which, except §50,000, were to be “used as working capital,” and that the trustees had ordered the sale < f 6,000 shares for that purpose, * * * at the minimum price of fifty dollars per share, etc. The subscription appended thereto was, “We, the undersign d, hereby subscribe to the number of shares of the above 6,000 shares set opposite to our names, respectively, to be paid for according to the terms set forth; but this subscription not to be binding until the whole 6,000 shares shall have been reliably subscribed. There were sixteen subscribers for shares aggregating the whole number, or 6,000 shares, of whom the plaintiff was the sixth subscriber, he subscribing for 600 slares. Held, that the contract in question was not fraudulent as to co-subscribers with the plaintiff for the 6,000 shares sold by the company; that it did not violate any expressed or implied obligation existing between them. Cases distinguished.
    
      Appeal from a judgment of the supreme court, general term, first department, affirming a judgment in favor of defendant entered upon the decision rendered at the trial of the case at special term.
    
      Wm. H. Williams, for appl’t; Elial E. Hall, for resp’ts.
    
      
       Reversing 40 Hun, 631, mem.
      
    
   Andrews, J.

The defense set up by the defendants to escape from the plain obligation assumed by them under the agreement of April 4, 1873, is founded upon no equity in their favor, and, if allowed to prevail, will defeat a contract which, on its face, was perfectly legal and valid, and one which the parties had a right to make. ¡Nor is it claimed that the contract is void for fraud, mistake, or want of consideration as between the parties. The defendants fully understood the contract into which they entered; they in fact tendered it to the plaintiff as an inducement to him to become a subscriber to the stock of the Blair Iron and Steel Company, and as between the parties, and considering their relations only, there can be no doubt that the plaintiff is entitled to enforce it. But the defendants assert that by reason of extrinsic facts the contract was tainted with illegality, and they invoke for their defense the settled principle of public policy frequently acted upon and applied, that “ no court will lend its aid to a man who founds his cause of action upon a fraudulent or illegal act.” Lord Mansfield in Holman v. Johnson, Cowp. R., 343.

The contract in form is a contract by the defendants to buy from the plaintiff within one year from the date of the contract certain shares of stock purchased by him of the Blair Iron and Steel Company, in case the plaintiff shall desire to sell the same, and to pay therefor the price paid by the plaintiff on his purchase of the same stock from the company. The supposed vice of the contract resides in the fact that the plaintiff, at the request of the defendants, the principal promoters of the company, and the owners of most of the shares, concurrently with the making of the contract in question, became one of several subscribers for 6,000 shares of the Blair Iron and Steel Company, owned by the company, and which it offered for sale under the terms of a prospectus and subscription, which are set forth at large in the case.

In substance, the claim is that the agreement of the plaintiff with the defendant operated as a fraud on the other subscribers to the stock, because his capital was not put at risk during the year in which he could exercise the option given by the contract, and that this was a secret advantage, the securing of which was inconsistent with good faith on the part of the plaintiff towards the other subscribers. The prospectus which accompanied the subscription set forth, in substance, that nine thousand shares of the stock had been placed by the defendants and one Foster in the hands of a trustee for the company, the proceeds of which, except $50,000, were to be “used as working capital,” and that the trustees had ordered the sale of six thousand shares for that purpose, and to pay the prior' lien of $50,000, at the minimum price of fifty dollars per share, payable one-third as soon as the whole was subscribed for, and the balance as called for by the trustees, the certificates to be delivered when the whole subscription should be paid. The subscription, which was appended to the prospectus, was as follows: “We, the undersigned,hereby subscribe to the number of shares of the above six thousand shares set opposite to our names respectively to be paid for according to the terms above set forth; but this subscription not to be binding until the whole six thousand shares shall have been reliably subscribed.” Sixteen or more persons and firms severally subscribed for shares, aggregating the whole number, or six thousand shares, of whom the plaintiff was the sixth subscriber, he subscribing for 600 shares.

We are unable to concur in the conclusion reached in the courts below, that the contract in question was fraudulent as to co-subscribers with the plaintiff for the six thousand shares sold by the company, or that it was in violation of any express or implied obligation existing between them.

The cases mainly relied upon to support the claim that the contract was illegal and fraudulent, are of two classes —cases of stock subscriptions to the stock of corporations, accompanied by a secret agreement between the company and the subscriber that the latter should not be bound by his subscription, or changing in some other respect its ostensible terms—and cases of composition between a debtor and his creditors, where a creditor joining in the composition by a secret arrangement with the debtor, secures an advantage over other creditors in violation of the understanding implied in all cases of compositions that the settlement with the creditors joining in the composition proceeds exclusively upon the terms of the common agreement.

In both classes of cases mentioned, the collateral agreement is held to be void. In the first, the courts hold the subscriber to the ostensible contract, and permit it to be enforced in an action by the company as the only means of preventing the consummation of the fraudulent scheme and protecting the other subscriber. White Mountains R. R. Co. v. Eastman, 34 N. H., 124. In the other class, the court refuses to enforce the secret bargain, and confines the creditor, who is a party to the fraud, to a remedy to recover the sum which, by the terms of the. composition he agreed to accept. White v. Kuntz, 107 N. Y., 518; 12 N Y, State Rep. 297.

The case of The White Mountains R. R. Co. v. Eastman (supra), is a leading case, illustrating the class of cases first mentioned. The doctrine that an agreement between one subscriber to the stock of a corporation and the company, made concurrently with the making of the subscription, which purports to annul its obligation, or materially limit and change the liability of the subscriber, to the detriment of the company, is invalid and void, is founded upon the construction that a subscription to the stock of a corporation whose stock is open for general subscription, is not only an undertaking between each subscriber and the company, but between him and all other subscribers to the common enterprise, and that each subscriber has the right to suppose that the subscription of every other subscriber is a bona fide undertaking, according to its terms. Their respective subscriptions,” say the court in the case of The White Mountains R.R. Co. v. Eastman, “ are contributions or advances for a common object. The action of each in his subscription, may be supposed to be influenced by that of the others, and every subscription to be based on the ground that the others are what upon their face they purport to be.” See also Graff v. The Pittsburgh and Steubenville R. R. Co., 7 Casey, 489; Miller v. Hanover Junction and Susquehanna R. R. Co., 6 Norris, 95; Melvin v. Lamar Ins. Co., 80 I11., 446.

The illegality of secret agreements in case of composition between debtor and creditor has been established by a uniform course of decision upon the plainest principles of morality and justice. A composition agreement still more than a stock subscription is an agreement as well between the creditors themselves as between the debtor and his creditors. Secret agreements in fraud of the composition are usually extorted by the creditor as a consideration of his entering into the composition. They are a direct fraud upon the other creditors. They contradict the representation which the composition imports that the compromise is accepted by each creditor in full satisfaction of his debt. Moreover, where the composition provides for giving credit to the debtor for the amount to be paid on the composition, such secret agreements take, or may take from him the very means to meet the composition engagements.

It is unnecessary to cite authorities to sustain a doctrine so well-settled. We refer to some cases showing that the courts in these transactions exact the most scrupulous good faith from all parties. Russell v. Rogers, 10 Wend., 474; Solinger v. Earle, 82 N. Y., 393; Knight v. Hunt, 5 Bing., 432; Leicester v. Rose, 4 East, 372.

The present case is not, we think, within the principle of the stock subscription cases and the cases of composition, to which reference has been made. The main object of the company in offering the stock for sale, was to secure ‘ ‘ working capital, ” as is shown by the prospectus. This object was known to the subscribers. If the subscription of the plaintiff was a pretence merely, or if the subscription had been accompanied by a secret agreement between the plaintiff and the company, that he should be relieved from the subscription, or by which the terms of the purchase were materially changed to the disadvantage of the company and for the advantage of the plaintiff, there might be ground for applying the rule declared in the subscription cases, and declaring the transaction to be a fraud on the other subscribers. By the terms of the subscription the subscribers were not to be bound unless the whole 6,000 shares were “reliably subscribed,” and a subscription not available to the company by reason of a secret agreement accompanying it, would not be a.rehable subscription within the meaning of the condition.

But there was no agreement between the company and the plaintiff, secret or otherwise, direct or indirect, except the agreement contained on the face of his subscription. The plaintiff by his subscription became bound to the company to take the shares subscribed for, and this agreement has never been discharged or in any way impaired. The plaintiff remained bound by his subscription, notwithstanding the agreement with the defendants, as fully and completely as though the agreement with the defendants had never been made. Nothing has occurred to change, qualify, or limit his obligation to the company. The company sold the shares to secure “working capital.” The subscription of the defendant entered with the other subscriptions, secured the accomplishment of the object. The condition of the subscriptions, that the whole 6,000 shares should be ‘ ‘reliably subscribed,” was fulfilled. It was so conceded on the trial. The defendants were interested in setting the company afoot. They were the principal holders of its stock. Presumably they had confidence in the value of the new process for manufacturing iron and steel, covered by their invention. They sought out the plaintiff. On his declining at first to subscribe to the stock of the company, they offered him the inducement that they would take the stock off his hands within a year, at cost price, if he desired it. It appears that the same inducement was offered to other subscribers but not to all. We think there was nothing illegal in this agreement. There was no community of action between the subscribers. Each subscribed for such reasons as satisfied him. It is supposable that some subscribers may have been influenced by the fact that other persons known to them, in whose business judgment they had confidence, had also subscribed. But we think it would greatly interfere with the freedom of contract to hold that for this reason a subscriber could not enter into an agreement with third persons at the time of the subscription, to the effect that the latter should assume the risk of the ■enterprise, their being no actual fraud, and the relations between the subscriber and the company remaining unchanged.

The contract in the case of Adams v. Outhouse (45 N. Y., 318), was in its very nature fraudulent and dishonest. It was the price of a fraudulent concealment by one of several' distributees of an estate, of assets in which all the distributees were equally interested.

We think the judgment is erroneous and it should therefore be reversed.

All concur.