The Washington times. [volume] (Washington [D.C.]) 1902-1939, 1923-05-17
ORP0RA TIONS
HIT. BY STOCK
DECISION
D. C. Court Holds Purchases
Made With Notes Voidable
Under Constitution.
international News Service.


Fiftv thousand American BUSH
ness concerns, representing a total
investment of at least 81
500, 100000, are effected by a
court decision here holding void
the purchase of stock through
personal notes in all corporations
organized under the laws of the
State of Delaware, international
News Service learned today.
The decision, handed down by
Judge Robert E. Mattingly in a
test case, was based on clause
in the Delaware State constitution
which prohibits the use of per-
sonal notes in purchasing stock
from Delaware corporations.
Decision Retroactive.
Revelation of this clause in the
Delaware constitution, according to
corporation experts here, will have
far-reaching effect, and may lead
to the institution of thousands of
suits to recover funds paid by in
vestors using personal notes in
corporations. Lawyers also predict
ed it might lead to the collapse OF
many corporations as result oftthe
recovery suits.
The decision was retroactive and
applies to all stock subscriptions
which included a personal note OF
the investor, even though the note
has long since been paid Suits to
throw out such transactions, it was
established, may be filed not only by
the investor who gave the note, bll;
by any other stakeholder in the
corporation
Double Test Case.
Judge Mattingly's decision was
rendered in a double test case init
ated between Henry H. Byrne, ar
assistant attorney general, and tat
Stock Exchange Security Corpora
| ton. Byrne had purchased $3.50.
| in the corporation stock, paying
$500 in cash and giving a note fol
ST 600. Byrne sued to recover thc
cash and the corporation sued Il
| make him pay his note, long over
| due; Judge Mattingly- threw on
| the corporations case and in ad
dition upheld Byrne's claim for lie
covery Of the $500 cash.
| The prohibitive clause in th'
Delaware constitution was revealed
in court by William G. Sull van
attorney for Byrne. 1t read IN
corporation shall issue stock ex
cept for money paid, labor done
personal property or real estate o
leases thereof actually acquired b,
| said corporation.
/ Sullivan also cited decision b
State Judge Charles M. Curtis, o
| Delaware, in the State Court
of chancery. hold ng that "a per
sonal note is not property Mat
| tingly's decision established thi
opinion as Federal court precr
dent.
Effect To Be Widespread.
| With one-half of all America
corporations estimated to be Of
ganized under Delaware laws. tn
decis on will be far-reaching. Amoni
the gigantic financial interests al
| fected are the DUPONT powder con-
panies and the Capitol Hotel Coz
poration, owning the New Willar
in Washington, the Bellevue
Stratford in Philadelph an
the Waldorf-Astoria in New Yori
Corporation lawyers here wer
agreed today that the decision
| would cause:
Elimination of most so-calle
wild cat" corporations which too
| advantage of the loose Delawar
| laws to incorporate.
| A flood of suits by big" stocl
holders to drive out small holders,
who used personal notes in purchas
| ing stock from Delaware corpors
| tions whose stock valuation ha
since been sharply increased.
| Other suits by stockholders, VIII
| gave notes, to recover their invest
| ments from Delaware corporation
| whose stock valuation has sharpl
| declined
Additional suits by investors. t
| recover cash paid into unstabl
| Delaware corporations along wit
| which have not yet matured.
! A barrier to Delaware corpora
tons against collecting on unpai
notes given for the purchase o
| stock.
1.-THE decision not only voids a.
stock transactions where persona
notes were given by the purchase
where stock subscriptions wer
made based on the delivery of tn
stock before it's full payment,
said Attorney Sullivan. who "dis
covered" the constitutional clause
1.-The court has held that the is
| suance of such stock was a frau
upon all other stockholders, becaus
| it violated the State constitution o
/ n1o