Case Name: Ella M. A. Stevens, as Executrix, etc., of Charles Ellis Stevens, Deceased, in Behalf of Herself and All Other Creditors of Episcopal Church History Company Who May Join in this Action and Share in the Expenses Thereof, Appellant, v. Episcopal Church History Company and Others, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1910-11-11
Citations: 140 A.D. 570
Docket Number: 
Parties: Ella M. A. Stevens, as Executrix, etc., of Charles Ellis Stevens, Deceased, in Behalf of Herself and All Other Creditors of Episcopal Church History Company Who May Join in this Action and Share in the Expenses Thereof, Appellant, v. Episcopal Church History Company and Others, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 140
Pages: 570–582

Head Matter:
Ella M. A. Stevens, as Executrix, etc., of Charles Ellis Stevens, Deceased, in Behalf of Herself and All Other Creditors of Episcopal Church History Company Who May Join in this Action and Share in the Expenses Thereof, Appellant, v. Episcopal Church History Company and Others, Respondents.
First Department,
November 11, 1910.
Corporation — liability of incorporators on unpaid subscriptions — effect of failure to file certificate of incorporation—-issuance of stock in exchange for contract rights prior to filing of certificate — issue of stock for purchase of executory contract for future services — contract not constituting property for which stock may be issued — liability of incorporators on filing certificates.
The mere execution of a certificate of incorporation pursuant to the Business Corporations Law does not create a de facto corporation if the incorporators have taken no steps to comply with the provisions oí section 5 of the General Corporation Law, requiring such certificate to be filed with the Secretary of State and a certified copy or duplicate original to be filed in the office of the clerk of the county in which the office of the corporation is to be located.
Hence, where the incorporators, prior to any attempt made in good faith to comply with section 5 of the General Corporation Law, transfer all the stock of the proposed corporation in exchange for certain rights accruing under an alleged contract owned by a third party, the issue is without consideration, irrespective of the good faith of the incorporators.
Under such circumstances, it is error to dismiss the complaint of a judgment creditor of such corporation seeking to sequestrate its property and to recover on the personal liability of the subscribers to the capital stock, and on the statutory liability imposed by section 56 of the Stock Corporation Law, even though the certificate of incorporation was filed after the issue of the stock, if no subsequent action was taken ratifying the unauthorized issue.
The stock of a corporation cannot be issued for the purchase of an executory contract for the performance of services in the future.'
Under section 55 of the Stock Corporation Law such stock can be issued only for labor theretofore performed, by actual payment in money, or by the purchase at what is in good faith deemed its fair and reasonable value of property of a substantial nature, having a pecuniary value capable of ascertainment and which the corporation may lawfully purchase as necessary to its business.
The agreement of a person to co-operate with a publisher to the extent of becoming an editor of a history and to suggest competent persons to write the same, does not constitute property for which stock may be issued, within the requirements of section 55 of the Stock Corporation Law.
The certificate incorporating a stock corporation, when filed, becomes binding on the subscribers, and their liability is fixed by their subscription, without the formal issuance of stock to them.
One who receives stock issued without consideration, so that it is not fully paid within "the provisions of the statute, is liable to the judgment creditors of the corporation.
The judgment creditors of a corporation are only entitled to recover against subscribers to the capital stock to the extent of the amount unpaid thereon, and although two or more defendants may be liable, only one satisfaction may be had as to the same stock or that issued in place thereof.
Appeal by plaintiff, Ella H. A. Stevens, as executrix, etc., from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 4th day of March, 1910, upon the decision of the court, rendered after a trial at the New York Special Term, dismissing the supplemental complaint.
Charles H. Ayres [Lawrason Riggs, Jr., with him on the brief], for the appellant.
W. E. Kisselburgh, Jr., for the respondents.

Opinion:
Laughlin, J.:
On the 23d day of January, 1908, the plaintiff recovered a judgment against the defendant company, a domestic corporation, for the sum of $6,740.50 for services rendered to it by Charles Ellis Stevens, deceased. Execution was duly issued on the judgment on the 28th day of January, 19Ó8, and returned wholly unsatisfied on the third day of March thereafter. This is a representative action for sequestration of the property of the corporation and to recover on the personal liability of the subscribers to the capital stock, which appears to be authorized in such an action (Beals v. Buffalo Const. Co., 49 App. Div. 589) and on the statutory liability imposed by section 54 of the former Stock Corporation Law (Gen. Laxys, chap. 36 [Laws of 1892, chap., 688], as amd. by Laws of 1901, chap. 354;. now Stock Corp. Law [Consol. Laws, chap. 59; Laws of 1909, chap. 61], § 56).
The trial court found that the entire capital stock was, pursuant to an agreement between the subscribers therefor and the defendant Wilson, made prior to such subscriptions, issued in good faith to defendant Wilson in consideration of the assignment by him to the company of certain contracts which the directors, who were the subscribers for the capital stock, believed. to be, and which the court found were, in fact, worth the par value of the stock.
The learned counsel for the appellant contends that the defendant company was neither a de jure nor a defacto corporation at the time the agreement to transfer the capital stock to Wilson was made, and at the time of the assignment of the contracts by him .to the company and the issuance of the capital stock therefor, and that, therefore, there could be no valid assignment of the contracts to the corporation which would furnish a consideration for the capital stock, even though the contracts constituted property within the provisions of section 42 of the former Stock Corporation Law, as amended by chapter 354 of the Laws of 1901 (now section 55 of the Stock Corporation Law), and he further contends that the alleged contracts, if valid, were not property within the requirements of the statute, for they were not even contracts.
Prior to the 7th day of April, 1904, the defendant Wilson, who was a stockbroker, conceived the idea of publishing a history of the Protestant Episcopal Church in America, and with a view to furthering the project and obtaining the good will _and co-operation, to an extent, of the ecclesiastical authorities, according to his testimony, interviewed Bishop Satterlee of Washington, D. C., and thereafter, and on the 25th day of March, 1904, pursuant to that interview, made a formal proposition to the bishop by letter, as follows:
" In my forthcoming history of the Clmrcli in this country it is my purpose to have an associate editor in each and evei'y diocese. In order to insure accuracy I propose to submit to each Bishop that portion of the history which appertains to his own diocese. In this way I believe that I shall preserve the Church unity, so far as my work is concerned, that will equally appeal to all parts of the country. The work will thus become essentially a national literary monument to the Church.
" Inasmuch as there is a well-defined movement in the United States to recognize Washington as the natural center of religious thought and influence, and as the Cathedral of SS. Peter and Paul is to be a national monument to the Ohui'ch, and inasmuch as my work, being of a national character, will emanate from Washington as the natural center; therefore, as a fitting tribute, I offer as a gratuity and benefit for your Cathedral Fund, the sum of twenty per centum of the gross receipts accruing from all sources from my history, both during and after its publication."
Having received no reply to his letter, he again wrote to the bishop on the twenty-eighth day of the same month, as follows:
" In connection with the offer I made you in my letter of March 25, I beg to state that as a guaranty of good faith I shall deposit all moneys accruing from all sources, from the publication of my Church history, with the American Security and Trust Company of Washington, and shall so state on all my subscription orders.
"As all moneys are received twenty per centum of the gross receipts shall be deducted for the Cathedral Fund and pass absolutely from my control.
" Iii addition, I shall leave on deposit with the American Security and Trust Company a second twenty per centum of the gross receipts, as a fixed contingent fund, which, in addition to the guaranty of twenty-five, thousand dollars I have submitted, establishes a financial basis commensurate with the dignity and scope of the work."
Under date of the thirtieth of the same month he received a letter from the bishop, as follows :
" In reply to your letter of March 25tli, and also of March 28th, in which after describing your proposed history of the Protestant Episcopal Church, with an Associate Editor in each Diocese, you offer' twenty per cent (20$) of the gross receipts, accruing from all sources, during and after the publication of the said History, for the benefit of the building fund of the Cathedral of St. Peter and St. Paul, in Washington, and also that you will deposit with the American Security and Trust Co., of Washington, D. C., the total receipts received from the History, twenty per cent of the gross amount, to be immediately deducted for the purpose above mentioned, I would say, that I hereby accept with thanks, your generous offer.: with' the understanding that the Protestant Episcopal Cathedral Foundation of the District of Columbia, will not incur any financial liability thereby."
Prior to the trial of the issues herein both Bishop Satterlee and Bishop Potter died. • It is claimed in behalf of the respondents on the testimony of Wilson that the arrangement he had with Bishop Satterlee was not fully embraced in the correspondence quoted. He testified that the bishop agreed to become supervising editor for his own diocese and suggested Bev. C. Ernest Smith as editor to write the history of that diocese, and also suggested that he call on Bishop Potter of Hew York, who on being interviewed agreed to become associate editor of the history provided the deceased, Stevens, was employed to write the history of the diocese of Hew York'. As will be seen presently, there was no claim on the part of the defendants when the action was commenced and issue was originally'joined, nor until after the death'of Bishop Potter, that there was any agreement with Bishop Potter prior to the actual incorporation of the company, or that it afforded any part of the consideration for the issuance of the capital stock to Wilson.
Wilson was without means to finance his enterprise and he dis closed his project to the defendants Kisselburgh and Kemp and to the deceased Richard H. Van Alstyne, whose executor is a defendant, with a view to obtaining financial assistance. The trial court found that it was subsequently agreed between them that a corporation should be organized with a capital of $25,000 and that all of the capital stock should be issued to Wilson for certain agreements which he had with Bishop Satterlee and Bishop Potter and Rev. C. Ernest Smith, and that Wilson was then to transfer one-lialf of the capital stock to Kemp, Van Alstyne and Kisselburgh, and that the defendants Kemp and Van Alstyne agreed to finance the enterprise until sufficient subscriptions were received to make it self-supporting.
On the 7th day of April, 1904, the defendants Kemp and Kisselburgh and the deceased Van Alstyne signed and acknowledged a certificate for the incorporation in due form of the Episcopal Church History Company under the Business Corporations Law of the State of New York (Gen. Laws, chap. 41 [Laws of 1892, chap. 691], as amd.). The purpose of the incorporation was stated in the certificate to be " the writing, manufacturing and publication of a history of the Protestant Episcopal Church in America." The amount of the capital stock was stated to be $25,000, consisting of 250 shares of the par value of $100 each, of. which Kemp and Van Alstyne were each to take .100 shares, and the defendant Kisselburgh was to take 49 shares. It appears that the certificate was also signed by Wilson, the original intention evidently being that he was to take the remaining share, but his name was subsequently erased therefrom. The amount of the capital with which the corporation was to commence business was stated to be $1,000. The board of directors was to be three, and the incorporators were designated the directors for the first year. The certificate was filed in the office of the Secretary of State on the 1st day of July, 1904, and in the office of the county clerk on the fourteenth'. of the same month. There is no evidence that any effort was made by the incorporators, or by any one in their behalf, to file it in either office before that time. It appears that the individuals who signed the certificate of incorporation assumed to act as directors, and caused subscriptions to the history to be solicited in the name of the company as if incorporated. They held a meeting on the 20th day of April, 1904, the minutes of which show that Van Alstyne was nominated and elected president, and Kemp secretary and treasurer. It appears by these minutes that Wilson was present and was invited to address the board, and that he said " that he had secured an agreement with Bishop Satterlee and others interested in the erection of a national cathedral at Washington, D. 0., for the publication of a history of the Episcopal Church in America, and he desired to transfer such agreement to the company for twenty-five thousand dollars."
The further minutes of the meeting are as.follows: " Some discussion followed), in which it was shown that this arrangment would leave no working capital. To meet this condition it was finally proposed by Mr. Wilson that he would transfer such agreement to the company for its entire capital stock, and would transfer to Messrs. Van Alstyne, Kemp and Kisselburgh one-half thereof upon their agreement with him to advance sufficient money to finance the company until subscriptions should begin to be received, stating that in his opinion the amount necessary therefor would not exceed ten thousand dollars." It was thereupon unanimously resolved " that in the opinion of the directors the agreement between Arthur E. Wilson and Bishop Satterlee and others for the publication of the Episcopal Church History is reasonably worth upwards of twenty-five thousand .dollars," and " that the entire capital stock of the corporation issue to Arthur E. Wilson in consideration of the transfer by him to the corporation of his entire interest in said agreement." Wilson at that time signed and delivered an agreement to the secretary which, with the letters thereto attached, were kept with the minutes and subsequently delivered to the receiver of the corporation. The agreement was as follows :
" In consideration of the issuance and delivery to me of the entire capital stock of the Episcopal Church History Company, the receipt whereof is hereby acknowledged, I hereby transfer, sell and assign all my interest in and to a certain contract or agreement, embodied in the annexed letters, and in whatever proceeds may accrue therefrom, unto the said Episcopal Church History Company.
" In witness whereof I have subscribed my name this 20th day of April, 1904."
The letters annexed to the agreement were the two letters written by Wilson to Bishop Satterlee and the bishop's letter to him already quoted. At the same time a certificate of stock in due form was executed by the president and by the treasurer of the company, marked Ho. 1, for the entire capital stock of 250 shares to the defendant Wilson. The stub of the certificate contains the recital, " Issued for contract, etc., as per minutes," and shows that it was issued to Wilson and bears date the same day. When received in .evidence it bore'the signature of Wilson, above which was the following: "Received the above Certificate Hov. 25, 1904," and a further indorsement showing that it was canceled on said Hovember twenty-fifth, and that certificates 2, 3, 4 and 5' were on that day issued in its place. Those certificates were as follows : One for 125 shares issued to the defendant Wilson; another for 42 shares issued to the deceased Van Alstyne, and another for 42 shares issued to the defendant Kemp, and another for 41 shares issued to the defendant Kisselburgh.
The journal of the corporation contained an entry as follows: " 1904
" Apl. 29 1 To Contract acct. A.
E. Wilson, Dr......... $25,000
2 To capital stock.............'....... $25,000 "
The ledger of the corporation contained the following entry:
" Contract With Bishop Satterlee. "1904 .
" Apl. 29 — Acct. A. E. Wilson.................. 1 $25,000 "
On said 20th day of April, 1904, the directors adopted by-laws, but no other meeting of the directors was shown to have been held until the twenty-sixth day of September thereafter. A formal agreement in writing appears to have been made between the defendants Wilson, Kemp and Kisselburgh and the deceased, Van Alstyne, on the 20th day of April, 1904, which recites that Wilson was.the owner of an agreement between himself and Bishop Satterlee " and others interested in the erection of the Cathedral of Saints Peter and Paul at Washington, D. C., for the publication of a history of the Episcopal Church in America," and recites their agreement as herein stated, with respect to financing the publication, and that pursuant thereto the sum of $4,500 had been advanced, and that Wilson " has assigned his said agreement with the said Bishop and others" to the company for the entire capital stock transferred to the other parties to the agreement. The agreement also limits the amount that was to be advanced pending the receipt of funds from subscriptions for the history.
The learned counsel for the respondents contends that the execution of the certificate of incorporation constituted the defendant a corporation defacto, and that it was then competent for it to enter into the agreement with Wilson to transfer the capital stock in consideration of the contract. This becomes an important question, for there is no evidence that any new agreement was made on the subject when or after the certificate of incorporation was filed, or upon which even a ratification could be predicated. . Therefore, according to this record the agreement was made before incorporation or not at all. Section 5 of the former General Corporation Law (Gen. Laws, chap. 35"; Laws of 1892, chap. 687), as amended by chapter 285 of the Laws of 1902, which is now section 5 of the General Corporation Law (Consol. Laws, chap. 23; Laws of 1909, chap. 28), required that the certificate of incorporation should be filed in the office of the Secretary of State, and should be by him duly recorded and indexed, and that a certified copy thereof or a duplicate original should be filed and similarly recorded and indexed in the office of the clerk of the county in which the office of the corporation was to be located, and further provided as follows : " All taxes required by law to be paid before or upon incorporation and the fees for filing and recording such certificate must be paid before filing. Ho corporation shall exercise any corporate powers or privileges until such taxes and fees have been paid." The execution of the certifi-cate without any action directing or authorizing the filing thereof and without the filing thereof did not even constitute an attempt to comply with the requirements of the statute and created no liability and imposed no obligation on the parties who signed it to perfect the incorporation. At most it merely constituted an agreement among themselves, and in transacting business in the name of the corporation they doubtless became liable as copartners ; but in no view of the case can it be maintained that the mere execution of the certificate created a corporation defacto. Of course, where there has been an attempt in good faith to comply with the requirements of the law with respect to filing a certificate of incorporation and a certificate lias been filed in one or more of the places required by law and there has been user of the corporate name, the corporation will be deemed a corporation defacto, and no one other than the People of the State can question the validity of its existence; but some of the statutory steps must be taken in an attempt to comply with the requirements of the law, and the mere execution of a paper which is not filed and does not become a public record is insufficient and this may be inquired into collaterally by any person whose interests are affected thereby. (McLennan v. Hophins, 2 Kan. App. 260; Jones v. Aspen Hardware Co., 21 Colo. 263 ; Van Buren v. Reformed Church of Gansevoort, 62 Barb. 495; Lamming v. Galusha, 81 Hun, 247; affd., 151 N. Y. 648 ; Card v. Moore, 68 App. Div. 327; affd., 173 N. Y. 598; Eaton v. Aspinwall, 19 id. 119 ; Childs v. Smith, 55 Barb. 45; revd. on another point, 46 N. Y. 34.)
If we are right in this view of the case, then it is manifest that the capital stock has been issued without any consideration and the good faith of the individual defendants is of no avail.
Moreover, we are of opinion that the alleged contracts did not property within the requirements of said section 42 of the former Stock Corporation Law (as amd. by Laws of 1901, chap. 354), which provided as follows: "Ho corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation. Any corporation may purchase any property authorized by its certificate of incorporation, or necessary for the use and lawful purposes of such corporation, and may 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 act; and in the absence of fraud in the transaction the judgment of the directors as to the value of the property purchased shall be conclusive ; and in all statements and reports of the corporation, by law required 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 as issued for property purchased."
At most the alleged contracts as now claimed on the testimony of Wilson showed that the two bishops looked upon the project with favor and were willing to co-operate to the extent of becoming supervising editors and of suggesting competent editors to write the history of their respective dioceses. This understanding was had with Wilson personally. It does not appear that at the time of the alleged assignment of the contract to the corporation either Bishop Satterlee or Bishop Potter consented to the organization of this corporation or was aware that it was to be organized, or that the alleged contracts be transferred to it; nor does it appear that the corporation assumed Wilson's obligation to pay to the cathedral fund twenty per cent of the gross receipts. The understanding between Wilson and the bishops had no binding force. Nothing had been done at that time by either party on the faith of it. It was founded on no consideration. He volunteered as a gratuity to give twenty per cent of the gross receipts to the cathedral fund. Nothing had been paid on the agreement, and the correspondence clearly sho,ws that what was expected of Bishop Satterlee and what he promised to do was not conditioned • upon the payment of the twenty per cent. The company's agents in soliciting subscriptions represented that tliey came from or represented Bishop Satterlee and later on he published a statement showing that the only connection he had with the publications was to supervise the history of his diocese and after that the company could not obtain subscriptions and it failed. It is now claimed on. Wilson's testimony that the decedent Stevens was hired pursuant to the agreement between Wilson and Bishop Potter and that Bishop Potter's agreement to become an associate editor was conditioned upon the employment of Stevens. The testimony of Wilson in this regard is wholly discredited by his own testimony and by other evidence. Bishop Potter at most merely consented to do as Bishop Satterlee had agreed to do, to suggest a competent man to write the history of his diocese and to supervise that part of the work. The bishops were at liberty at any moment to withdraw from the project and no action for specific performance or for damages could have been successfully maintained against either of them. Moreover, when the original answer of the defend- ant Wilson was served it was therein expressly admitted as follows: " That the defendants.named in said complaint agreed that all the stock in said corporation should be issued to this defendant as fully paid in consideration of the trcmsfer by this defendant to said corporation of his rights in a contract contained in certain letters between this defendant and Bishop Satterlee, and that this defendant agreed to transfer to the defendants Van Alstyhe, Kemp and Kisselburgh one-half of the stock so to be issued to him as fully paid; that after the incorporation of the defendant corporation, pursuant to such agreement, a certificate for 250 shares of the capital stock of said corporation was issued to this defendant, which certificate was surrendered and new certificates issued in place thereof, one for 125 shares to this defendant, one for 42 shares to defendant Van Alstyne, and one for 42 shares to defendant Kemp, and one for 41 shares to defendant Kisselburgh, all purporting to represent fully-paid stock," and, as already observed, it was not until after the death of Bishop Potter that it was claimed that there was any contract or agreement with him on the 20th day of April, 1904, or that any agreement or contract constituted any part of the consideration for the transfer of- the capital stock to Wilson other than the letters from Wilson to Bishop Satterlee and the bishop's reply thereto.
The requirements of the statute with respect to the payment to be made for the capital stock of a corporation which were designed for the benefit and protection of creditors can only be satisfied as to creditors by labor theretofore performed, by actual payment in money or by the purchase, at what is in good faith deemed its fair and reasonable value, of property of a substantial nature having a pecuniary value capable of ascertainment and which the corporation might lawfully purchase as necessary to its business. (Camden v. Stuart, 144 U. S. 104; Powell v. Murray, 3 App. Div. 273 ; Savings Bank v. Stove Polish Co., 105 Mich. 535 ; Thomp. Liab. Stockli. § 134.) It is manifest that this requirement cannot be satisfied by the purchase of an executory contract for the performance of services in future. At most the only express agreement which in any view of the evidence can be claimed to have been made by the bishops is to render personal services in editing the history for the publication of which the corporation was organized. Although, as already observed, we do not think that there was any binding contract between Wilson and either Bishop Satterlee or Bishop Potter, yet if there were and it were assignable, it could be of no greater value and have no more effect than if negotiated and made by and between the corporation and the bishops without the intervention of Wilson. It seems to me that if the stock had been issued to Bishops Satterlee and Potter for their influence or good will and agreement to act as supervising editors either for their respective diocese or of the entire work, such contract while- perhaps very valuable would not constitute property within the requirements of the statute in question, any more than an agreement on the part of an individual to become manager for a period at a given salary. The' only work or service for which the issuance, of capital stock is authorized is work or services performed before the stock is issued and it has been held that this does not embrace services in promoting the corporation. (Herbert v. Duryea, 34 App. Div. 478; affd., 164 N. Y. 595, 596.) It has reference to labor performed for the corporation after its incorporation. Here no work or services had been performed by either Bishop Satterlee or Bishop Potter when the alleged contract was assigned to the corporation and the capital stock was issued therefor.
The certificate, of course, when filed became binding on the subscribers, and their liability is fixed by their -subscriptions without the formal issuance of stock to them. (United Growers Co. v. Eisner, 22 App. Div. 1; Beals v. Buffalo Const. Co., 49 id. 589.) The liability of Wilson accrued when he received the stock which was issued without consideration and, therefore, was " not fully paid " within the provisions of said section 54 of the former Stock Corporation Law. (Flour City Nat. Bank v. Shire, 88 App. Div. 401; affd., 179 N. Y. 587.) Of course the creditors are only entitled to collect so far as necessary the amount unpaid, on the capital stock and although as to them two or more defendants may be liable only one satisfaction may be had as to the same stock or that issued in place thereof.
It follows, therefore, that the judgment should be reversed and a new trial granted, with costs to the appellant to abide the event.
Ingraham, P. J., McLaughlin, Miller and Dowling, JJ., concurred.
Judgment reversed and new trial ordered, with costs to appellant to abide event.