Case ID: ohio-st_46/html/0001-01.html
Source: Caselaw Access Project
Author: {"author": "Owen, C. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Morgan v. Lewis.
    
      Corporations — Stockholders—Liability of — In what cases judgment not necessary— Transfer of stock — Evidence—Admissibility.
    1. In an action by creditors to enforce tbe statutory liability of stockholders for .debts contracted by a corporation, where it is alleged that the company is insolvent; that it has entirely ceased to do business ; and that it has made an assignment for the benefit of creditors, having neither money, credit nor materials with which to transact business, it is not necessary further to allege that the plaintiff had recovered a judgment against the corporation upon which an execution had been returned unsatisfied.
    2. Upon the trial of the action, one of the defendants, an alleged stockholder, offered to prove that he originally became a stockholder by receiving from the corporation its stock in» exchange for his interest in a furnace of which he was principal owner; that thereafter, the furnace not proving as successful and profitable as had been expected, some of the stockholders were dissatisfied with the purchase, and contentions arose among them; that defendant was blamed by many of them for having induced the company to make the purchase and was requested to take the furnace back and transfer to the company the stock he had received for it; that to settle such eouteutiou and dissatisfaction he complied with this request, transferred his stock to the company and accepted therefor a deed for the furnace. Held: The evidence was admissible.
    (Decided June 26, 1888.)
    Reserved from the District Court of Stark County.
    The action below was commenced by Lewis, one of the defendants in error, against the Alliance Rolling Mill Company and other defendants alleged to be stockholders in, or creditors of, the company, for the purpose of enforcing the statutory liability of the stockholders to contribute to the payment of the debts of the corporation, which was alleged to be insolvent, and to have assigned its property and ceased to do business.
    The case was referred; there was a trial before the referee, and Morgan, the plaintiff in error, was held as a stockholder. He excepted, and had a bill of exceptions signed by the referee. On hearing, the court of common pleas affirmed the referee’s report, Morgan excepting. He then presented a jaetition in error in the district court where the case was reserved for decision in this court.
    In Morgan’s answer he says:
    “That many years ago, to-wit: About the year 1870, he owned about two-hundred shares of stock in said company and no more. That soon thereafter, to-wit: On or about January 1st, 1871, he sold and disposed of all his stock in said company and ceased to be a stockholder therein. * * * He denies that the indebtedness described in the petition, or any portion thereof, was contracted while he was a stockholder in said company, and he denies that any indebtedness held by the defendants who claim to be creditors of said company, or by any other person making claims in this action to be a creditor or creditors of said company, was contracted during the time that he was a stockholder in said company, or until many years after he had ceased to be such stockholder. He alleges the fact to be that all debts existing against said company, during the whole time that he was a stockholder therein, have long since been fully paid.” * * * * Issue was joined with these averments.
    
      Upon the trial before the referee, Morgan offered to prove that prior to the time the Alliance Rolling Mill Company acquired title to the furnace property, the property was principally owned by the defendant, Morgan, and that for his interest in the furnace property the Alliance Rolling Mill Company issued to the defendant, Morgan, stock in the Rolling Mill Company,which stock was the same stock which was afterwards transferred by the defendant, Morgan, to the Alliance Rolling Mill Company in consideration of the re-transfer to him of the furnace property. And further offered to prove, that after the Alliance Rolling Mill Company acquired title to the furnace property, the furnace not proving as successful and profitable as had been expected, some of the stockholders were dissatisfied with the purchase from Morgan, and contentions arose among them, and the defendant, Morgan, was blamed by many of them for having gotten the company into the purchase and was requested to take the property off their hands and pay for it in stock of the company ; and that Morgan, for the sake of settling such contentions and dissatisfaction, did purchase the furnace and pay for it in stock which had been issued to him as shown by the record. And thereupon the referee sustained the objection to the evidence so offered, and defendant, Morgan, excepted.
    It was testified to before the referee, and not contradicted, that Morgan tránsferred his stock to the company and the latter deeded to him the furnace property, of which he took immediate possession, and which he continued to hold and use as his own.
    No action has been taken looking to the subjection of this furnace property to the payment of the claims of any creditors, but all parties have treated it as if it were the property of Morgan since it was so deeded to him.
    In his report the referee finds that between February 5, 1867, and January 2, 1871, Morgan became the legal owner and holder of $116.583 worth (at par value) of stock in the company. That on the 17th of January, 1872, “ by a resolution of the said board of directors, the president of said corporation, by deed duly executed, deeded the furnace property mentioned in said proposition to said David Morgan, and on the same day said David Morgan signed powers of attorney in blank, transferring said stock, and delivered up the certificates of the same to the secretary of the corporation, who wrote the word “ cancelled ” on the face of each certificate, and inserted said certificates in the stock certificate book of the corporation, as surrendered stock.
    “ That at the time of said delivery of said certificates of stock to said corporation said David Morgan was the legal owner of said stock represented thereby.
    “ That said stock so delivered and intended to be surrendered to said corporation, was never afterwards represented, and the same was completely merged in said corporation, and the capital stock of said corporation was treated by the directors as reduced by the amount of $116,583.
    “ Said transaction was with the directors of said corporation alone, and without any submission of the same to, or vote on the same by, the general stockholders of said corporation, and without any knowledge or assent of the general stockholders, and that no certificate of decrease was filed with the Secretary of State as required by statute, nor was any notice of the action of the directors ever given.
    “ That at the time of said attempted surrender said corporation was reported to be solvent.
    “ That said David Morgan bought said property from, and intended to transfer said stock to, said corporation in good faith and without fraudulent intent.
    CONCLUSIONS OF LAW.
    “ The transfer of this stock to the corporation had the effect of reducing the capital stock of the corporation; the directors of the corporation did not have the power to thus reduce the capital stock, and such transfer is void and of no effect, and left the title to said $116,583 of stock precisely where it had been, and' the same as if no effort had been made to transfer the same.
    “Unless the power to buy its own stock is expressly conferred in its charter, a corporation can not deal in its own stock, and such transactions are void.
    
      
      “ The fund arising from the individual liability of stockholders is a trust fund set apart under our constitution and statutes for the benefit of creditors, and the directors by no arrangement or dealing whatever can affect or impair this fund.
    “ I find David Morgan liable on account of said stock, to contribute to the payment of the claims of the creditors of said corporation, to the amount of $116,583.”
    The referee finds in another connection, that the capital stock of the company was increased from time to time, until in December, 1870, when it was increased to $450,000.
    The fact that Morgan took immediate possession of the furnace property upon its conveyance to him, is not found by the referee, and does not seem to have entered into the consideration of the case by him, or by the court of common pleas.
    It also appeared in the case that the claims of creditors all accrued after the transfer by Morgan of his stock to the company, and of the furnace property, by the latter, to him.
    
      Stevenson BurTce and William B. Sanders, for plaintiff in error.
    
      W. A. Walden and J. F. Hoffman, for defendant in error.
   Owen, C. J.

I. The theory upon which the referee and the court of common pleas must have proceeded, was that the entire transaction by which Morgan acquired the furnace, and the company acquired his stock, was void; that it was beyond the power of the company to engage in the transaction, and that consequently the company acquired no title to the stock, and Morgan acquired none to the furnace property. If this conclusion is sound, the inevitable consequence is, that the company still owns the furnace, and it is assets in the hands of the assignee for the payment of the company’s debts. It is an absurdity to assume that Morgan is still the owner of both the furnace and the stock. If he is still liable to creditors as a holder of this stock, the company*, by the same reasoning, is owner of the furnace. It is conceded that the proceeding to subject the liability of stockholders to the satisfaction of the claims of creditors, has throughout ignored this property. It does not appear but that this property alone would satisfy creditors, nor to what extent it would exonerate stockholders from the liability which it is now sought to subject to the satisfaction of creditors’ claims. If we were in accord with the referee and court of common pleas, upon the main proposition of the case, still it would be our duty to send the case back for proceedings to subject this property of the company to the satisfaction, pro tanto, of its debts.

II. We are of opinion, however, that the referee erred in excluding the evidence which Morgan offered, to throw light upon the transaction by which he assumed to acquire the furnace, and transfer his stock to the company.

The contention of Morgan, in this respect, is not answered by the proposition that the only purpose of offering the rejected proof was to show that the transaction was in good faith, and that this already sufficiently appeared. We have no disposition to call in question the general and well recognized principle that a corporation cannot buy its own stock. It is conceded that this principle proceeds upon a want of power, rather than upon any express prohibition in its charter. With this general principle conceded, however, the right of a corporation to take its own stock in satisfaction of a debt due to it, has long been recognized in this state.

This has been recognized as an exception supposed to rest upon the necessity of avoiding loss. Coppin v. Greenlees, 38 Ohio St. 279. It is, nevertheless, a relaxation of the general rule. It is, of course, because of the necessity of avoiding loss, and not because it is for the satisfaction of a debt, that the exception is recognized. If the same or a like necessity of avoiding loss should arise in any of the transactions of the company, it could not, with any show of reason, be contended that the application of this principle of necessity should be limited by any iron rule to the case of taking stock for an otherwise hopeless debt.

The evidence which Morgan offered, and the referee rejected, tended to establish, in substance, that Morgan had traded to the company this furnace property for stock. That the furnace promised to prove a failure, or, at best, a disappointing and unsatisfactory venture. Contentions arose over the transaction, between Morgan and some of the stockholders. Many of them blamed him for having induced the company to make the purchase. Thereupon they — “many stockholders”— simply proposed a rescission of the contract of purchase; that Morgan take back the furnace and restore to the company the stock he had received for it. The company was out of debt. Nobody could possibly be hurt by a rescission of this contract which had caused so much discontent and' contention, and which promised to be a losing venture for the company and Morgan’s fellow stockholders. This proof would have established something beyond the mere good faith of the transaction. It would have tended to establish the fact that Morgan yielded to the importunities of many stockholders to rescind a bargain and set at rest an unfortunate controversy which was rapidly breeding discord among the stockholders.

The finding of the referee, that this transaction itself worked a reduction of the capital stock of the company, is not tenable. There was nothing in the way of the company re-issuing this stock or its equivalent to others who may have desired it. There was nothing in the fact that these certificates were marked <c cancelled ” on the face, by the secretary of the company, and by him treated as surrendered stock, to authorize the finding that the capital stock of the company was reduced. This was no part of the' transaction with Morgan, and there was nothing in the fact of the re-exchange of the stock for the furnace which called upon the officers of the company to treat the stock as cancelled, or the capital pro tanto reduced. Green’s Brice’s Ultra Ñires, 2d ed., 191, 192. This conclusion is not, in principle, qualified by the fact that the stock was not in fact thereafter represented. Then, we should not lose sight of the fact that there was an executed transaction. The exchange— or the re-exchange, rather — had been made, possession of the furnace taken by Morgan, and retained by him for years before the transaction was questioned by any one. To this day it has remained free from direct attack. Certainly, the pos-

session by Morgan of this property which had theretofore been in the possession of the comjxany, was a circumstance proper to be considered with other facts in the case. It at least helps us to distinguish it from the case of Coppin v. Greenlees, 38 Ohio St. 275, relied upon by defendants in error. In that case it was held that: “ An executory agreement between a manufacturing corporation of this state and one of the stockholders, for the purchase of the stock of such corporation, by the former from the latter, cannot be enforced, either by action for specific performance or for damages.” That this presents a very different case from one of an executed contract is emphasized by the following language of Mcllvaixxe, J., by whom the opinion was prepared: “ If it were averred that the plaintiff had purchased this stock from the defendant, or from others, under an agreement with the company that it buy the same from him when he quit its employment,- or if the contract of purchase by the defendant had been executed, very different questions would arise.” In State v. Building Association, 35 Ohio St. 263, the general px’inciple that a corporation may xxot tx'affic iix its own stock is recognized. Yet in the same connection it is said: “Me do xxot

deny that a corporation has power to receive shares of its stock as security for a debt or other similar purposes.” 26 Ga. 28; 84 Ill. 145; 17 N. Y. 507; 114 Mass. 37; 18 Vt. 131. It is apparent from the foregoing that no inflexible rule has been recognized by this court, that a corporation may not in any case, nor for any purpose, receive its owxx stock. On the contrary, the way is left open for the application of exceptions to the general rule in proper cases. It is one of the established facts in the case that all the debts which are sought to be satisfied by this proceeding were contracted subsequently to the transaction which is assailed. The transfer of the furnace property from the possession of the company to that of Mox’gan was a fact to which persons giving credit to the coxxxpany could not safely close their eyes. The inquiry which it would naturally excite would have led to the information that the tx’ade by which the company secured the furnace, and Mox’gan the stock, had simply been rescinded and the px’operty — stock and furnace — re-exchanged. It being the law of onr state that there are exceptions to the general rule, that corporations may not deal in their own stock; all persons dealing with this company must be held to have done so in the light of this state of the law. All persons are as much presumed to know of exceptions to a principle as of the principle itself. The slightest inquiry would have revealed the fact, that, as between himself' and the company, Morgan did not sustain the relation of stockholder, at the time these debts were contracted.

In the light of this-state of adjudication in this court, we do not hesitate to say that the peculiar state of circumstances, which Morgan offered to prove before the referee, ought to have been received in evidence and considered in the light of' other facts which did appear, in order that the referee and courts could have had anmpportunity to say whether they did not bring the case within some of the well founded exceptions to the wise and well established general rule.

III. The facts alleged in the petition, concerning the insolvency, etc., of the company, were sufficient to dispense with an averment of the recovery of a judgment against it as a prerequisite to the proceeding to subject the liability of the stockholders to the satisfaction of the corporate debts.

Judgment reversed and cause remanded.

Spear, J., dissents from the second proposition of the syllabus, and the judgment of reversal.