Case ID: ohio-np-ns_23/html/0077-01.html
Source: Caselaw Access Project
Author: {"author": "Snediker, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

ADEQUACY OF THE CONSIDERATION PAID BY A CORPORATION TO A LICENSEE OR OWNER OF A SECRET PROCESS.
    Common Pleas Court of Montgomery County.
    Jacob Oldham vs. The Munitions Manufacturing Company et al.
    Decided, August 5, 1920.
    
      Corporations—Right of Creditors to Recover Difference Between the Actual and Alleged Inflated Value of Property—Purchased by a Corporation with Fully Paid-up Stock.
    
    1. The allegation in the petition of a creditor of a corporation that the purchase by the board of directors of a patent right which had “no market value” and the utility of which had not been demonstrated but was “entirely speculative, uncertain and problematical,” for which the consideration was fully paid-up shares of the defendant company, does not state a case of constructive fraud against the creditors of the company by the directors and stockholders thereof.
    2. In such a case a court will not substitute their judgment as to the ■adequacy of the consideration for that of the contract of the parties, but- will uphold the contract.
   Snediker, J.

This ease for alleged unpaid stock subscription is before us on a general demurrer to the petition. The claims of the plaintiff disclose that he heretofore recovered a judgment against the defendant, the Munitions Manufacturing Company, and that upon an issuance of an execution on that judgment the execution was returned unsatisfied. The defendants other than the Munitions Manufacturing Company, were stockholders in that corporation, and it appears that before the organization thereof and before they subscribed for their shares in the company, one P. J. Mitten who was by assignment from the Alloy Products Company, the owner of the exclusive right as licensee in the United States of a secret process of alloy to manufacture fuses, fuse parts, detonators and primers and the right to use machines and apparatus in the manufacture of the same and so forth, entered into an arrangement with the defendant stockholders whereby he agreed that if they would form' a corporation and would subscribe for 110 shares of stock in that corporation and would pay the full par value of the stock by them so subscribed at the rate of one hundred dollars a share, and would cause the corporation to issue him $117,000 stock fully paid up for the transfer by him to the corporation of his rights and interest ns such licensee, he would, out of the stock received 'by him give them two shares of stock for each share they subscribed and paid for; and it appears that this arrangement was verbal and that there is no memorandum thereof on the records of the defendant corporation. Subsequently the corporation was organized and on April 21, 1916, at the first meeting of the stockholders Mitten made the proposition to sell to the company his property and righ£ as such licensee “for the sum of $117,000, payable in stcok of your company, the same to be received in full payment of the subscription to the capital stock of your company heretofore made by me, said stock to be issued to me as fully paid.”

We gather from this that before this offer was made by. Mitten he had subscribed for $117,000 stock. It appears that the stockholders resolved to accept Mitten’s proposition, and they requested the board of directors to accept this offer and issue stock to him in accordance with his proposition. At the first meeting of the directors held on May first, 1918, Mitten’s proposition was accepted and there was issued to him as a. consideration for the assignment of his rights as licensee 1170 shares of the stock of the Munitions Manufacturing Company fully paid. It may here be interpolated that, whether the action of the stockholders recommending to the board of directors the contract with Mitten, which was subsequently made, was before or after the election and organization of the board, it may not be said to have been mandatory. The stockholders cannot. control the board of directors in its management of the corporate affairs. The corporate powers, business and property of corporations must be exercised, conducted and controlled by the board of directors. Section 8660, General Code. 68 O. S., 442.

The claim of plaintiff with respect to this transaction is that the secret proeéss, the right to which was transferred by Mitten to the company, had no market value, that its utility had not been demonstrated at the time of the sale and transfer and its utility for the purpose for which the company intended to use it had not been demonstrated, and further that its utility was then and still is wholly speculative, uncertain and problematical. There is found in the 57 O. S., page 60, the case of Gates, Admr. vs. Tippecanoe Stone Co., et al., in which at page 78 Judge Bradbury lays down a rule which has since been followed in this state and has not by the Supreme Court 'been in any way modified. In speaking of the ease before him Judge Bradbury says:

“This attempt by McLane and his associates to dispose of their property at a fictitious or inflated value to a corporation of their own creation * * * one designed and brought into existence eheifly for that purpose * * * should be regarded as a fraud upon subseauent creditors of the concern, although no evil intent accompanied the transaction, and the difference between the actual and inflated value of the property so conveyed should be deemed unpaid subscription upon the stock issued in this way whenever necessary to protect the rights of the corporate creditors.”

It will be observed from a careful reading of this excerpt that the holding of the Supreme Court is to the effect that if such a transaction is tainted bv constructive fraud, that is by “such acts as, although not originating in any actual evil design or contrivance to perpetuate a positive fraud or injury upon other persons, are yet by their tendenev to deceive or mislead other persons, deemed equally reprehensible without positive fr^ud”. the rule applies.

But in order that we .may gather from this petition that these defendants have been guiltv of constructive, fraud, it is necessary for us to discover in its language that there has been such a gross inadequacy of consideration that a court of equity will be moved to grant relief on that account. The allegations of’the plaintiff are as heretofore quoted. The secret process as we have said is claimed to have been without market value and without demonstrated utility and its usefulness is declared to be speculative, uncertain and problematical. In the exercise of its powers under the law a board of directors acting for and on behalf of the corporation—and we must keep in mind that this was a contract between the board of directors and Mitten—saw fit to accept the process at the offer Mitten made. The rule is that where parties agree upon a consideration and it is one of indeterminate value, the courts will not substitute their judgment for that of the contracting parties but will uphold the contract. 171 Ind., p 323, 343. It avails the plaintiff nothing that, after making the allegations he does with respect to the uncertainty of the value of the process in question, he subsequently says: “If the said contract for the use of said secret process might 'be said to have any actual value such value was not in excess of $95,000.” This is no more than his opinion with respect to an uncertainty which he has before declared and is an unwarranted conclusion of fact. The further complaint of the plaintiff that Mitten did not receive the stock which was afterwards transferred to the stockholders, in good faith as part of the consideration for the transfer to the corporation of his contract with the Alloys Products Company, but that the corporation issued the stock and Mitten received it for the purpose of transferring it to the defendant stockholders in pursuance of the agreement between them and Mitten, is not helpful to the plaintiff, for the reason that we are unable to find that there was an inadequacy of consideration. The agreement made by Mitten with these stockholders, prior to the organization of the company, was the agreement of Mitten and the individuals; and the corporation was in no way involved, unless it could be found from the allegations of the petition that it has not received adequate value.

'Ll view of the foregoing wé are- constrained to find that this petition does not state a cause of action against these defendants. The demurrer is, therefore, sustained.