Case Name: James B. Rathbone, as Trustee in Bankruptcy of Elmira Steel Company, a Bankrupt, Appellant, v. F. Wayland Ayer, Respondent, Impleaded with Frederick McOwen and Thomas De Q. Richardson, Defendants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1907-09-11
Citations: 121 A.D. 355
Docket Number: 
Parties: James B. Rathbone, as Trustee in Bankruptcy of Elmira Steel Company, a Bankrupt, Appellant, v. F. Wayland Ayer, Respondent, Impleaded with Frederick McOwen and Thomas De Q. Richardson, Defendants.
Judges: 
Reporter: Appellate Division Reports
Volume: 121
Pages: 355–366

Head Matter:
James B. Rathbone, as Trustee in Bankruptcy of Elmira Steel Company, a Bankrupt, Appellant, v. F. Wayland Ayer, Respondent, Impleaded with Frederick McOwen and Thomas De Q. Richardson, Defendants.
Third Department,
September 11, 1907.
Corporation — certificate as stock subscription—purchase price evidence of value — overvaluation of property purchased by directors — ■unauthorized division of corporate property— appeal — new trial.
A certificate of incorporation signed by all the directors and stockholders, which’ specifies the number of shares which each agreed to take, creates a legal liability on the part of .each subscriber to pay the corporation for the number of shares stated in the certificate.
The price paid for property on a Iona fide sale by one who took title in his own name for the benefit of others who shortly thereafter became directors of the corporation, is evidence of its real value, and such directors who have repur- ■ chased the property for the corporation at a far greater price are put to proof justifying their valuation.
Evidence of the actual price paid by the agent also bears upon the good faith of the directors who, with knowledge thereof, repurchased the- property for the corporation at a far greater price.
In an action by the trustee of a bankrupt corporation against a stockholder and director, it appeared that the capital stock stated in the Certificate was §500,000, all of which was subscribed for by the incorporators, among them the defendant. One of the directors had previously purchased a steel plant for §85,000, and’on the formation of the corporation a resolution was adopted authorizing the purchase of the plant for §500,000. To effect the purchase the subscription for the whole capital stock was called in, being paid by the Various stockholders, who were also directors, by personal checks which were deposited to the credit of the corporation.' Thereupon the corporation gave its check for $500,000 to the director holding title to the steel plant arid received from him ,a conveyance thereof. Thereafter the §500,000 was distributed by the seller to the stockholders who had paid the same to the corporation in the same proportions as paid-in.
jWeld, that there had been an unauthorized disposal of the assets for which the defendant'was liable.
When it appears from the opinion below that a nonsuit was erroneously granted on the theory that there was a question of fact and a question of law only was presented, the Appellate Division may grant a new trial although the plaintiff moved for a direction of a verdict and the defendant to dismiss the complaint on the plaintiff’s case. ,
Kellogg and Sewell, JJ., dissented, with opinion.
Appeal by the plaintiff, James B. Bathb'one, as trustee in bankruptcy, etc., from a judgment of the Supreme Court in favor of the defendant Ayer, entered in the office of the clerk of the county of Chemung’ on the 26th day of May, 1906, upon a nonsuit directed by the court after a trial at the Chemung Trial Term.
Frederick Collin and Edward G. Herendeen, for the appellant.
David B. Hill, O. U. Kellogg and H. H. Rockwell, for the respondent.

Opinion:
Cochrane, J.:
The complaint herein has heretofore been sustained by this court on a demurrer thereto for insufficiency. (Rathbone v. Ayer, No. 1, 84 App. Div. 184.) Keeping in view the determination then made the case on this appéál becomes much simplified and much discussion may be eliminated which might otherwise be pertinent. The inquiry is now narrowed to a consideration of the question as to whether the plaintiff has made sufficient proof of the allegations of liis complaint.
The'Elmira Steel Company was organized as a domestic corporation by a certificate of incorporation filed July 10, 1899. Such certificate was signed by the defendant Ayer and others, who were the directors and, the only stockholders. It stated the amount of capital with which the corporation would begin business as $500,000- and specified the number of shares of stock which each subscriber agreed to take. This certificate constituted a legal liability on the part of each subscriber to pay the corporation for the number of shares of stock which it was "stated in such certificate that he would take. (Phœnix Warehousing Company v. Badger, 67 N. Y. 294; Dayton v. Borst, 31 id. 435.)
On July 13, 1899, the directors met in Philadelphia, where some of them resided. A resolution was adopted authorizing the purchase at a price not exceeding $500,000 of all real and personal property formerly belonging to the Elmira Iron and Steel Bolling Mill Company. This property is referred to in the case as a steel plant. The title thereto had been acquired May- 27, 1899, by Mr. Baird, who subsequently became one- of the incorporators and directors of the Elmira Steel Company, and he held such title for the benefit of himself and the other directors, and for which they paid $85,000. It was also resolved at said meeting "that the treasurer call for the immediate full payment of subscriptions to the capital stock." The defendant Mr. Ayer was not present at such meeting, but .he and all the other stockholders, who were also directors, gave to the corporation their checks for the several amounts of their respective stock subscriptions, aggregating $500,000, and took back from the corporation receipts for such payments, which receipts specified that they were entitled to certificates for the number of shares of stock subscribed for by them. These checks ' were deposited to the credit of the corporation. Thereupon the corporation gave its check to Mr. Baird for $500,000 and received from him a conveyance of the steel plant, and the $500,000 thus paid to Mr. Baird was ostensibly redistributed to the same persons who had paid the same to the corporation and in the same amounts. At no other time have the stockholders paid anything on account of their stock subscriptions. The complaint alleges substantially that the delivery of the checks to the corporation, the conveyance thereto of the ¡property and the redistribution to the stockholders of the checks, were parts of the same transaction, and such allegation is in conformity with the proof. Proof was also given as to the subsequent indebtedness of the corporation, its bankruptcy, the appointment of plaintiff as trustee in bankruptcy and the other facts alleged in the complaint. Evezy statement of fact contained in the complaint seems to have beén substantiated by evidence.
The learned trial justice seems to have been of the opinion that the corporate assets had been applied in payment of the steel plant, but thought there was not sufficient evidence of an intentional and wrongful overvaluation of such plant in transferring it to the corporation for the price of $500,000.
It is in evidence that on May 31, 1899, the proposition to organize the corporation for the purpose of. taking over and operating the steel plant was discussed and considered. Four days prior thereto "title to the steel plant had been acquired by Mr. Baird in behalf of himself and. his associates by the payment of $85,000. That was an actual bona fide sale. That the price paid for property is evidence of its value is too well settled to admit of discussion. (Hoffman, v. Conner, 76 N. Y. 124; Campbell v. Woodworth, 20 id. 499; Dixon v. Buck, 42 Barb. 74; Gill v. McNamee, 42 N. Y. 44; Knickerbocker Life Ins. Co. v. Nelson, 78 id. 145; Parmenter v. Fitzpatrick, 135 id. 190; Matter of Johnston, 144 id. 563.) The case of People ex rel. Mayor, etc., v. McCarthy (102 N. Y. 630) has been cited as holding a contrary doctrine. The court there had under consideration the price named in deeds as evidence of value. The distinction was pointed out by this court in People ex rel. Batt v. Rushford (81 App. Div. 301).
The trial' justice considered that the price paid was competent both as to the good faith of the defendant and) as a circumstance in determining the value of the plant, but that standing alone it was insufficient to put the defendant to his proof and cited on such proposition the case of Hawver v. Bell (141 N. Y. 140). All that case decides is that the price paid for personal property is not sufficient- evidence' of its value several years thereafter, such property in the meantime having deteriorated.. On the other hand, in Parmenter v. Fitzpatrick (135 N. Y. 196), Judge Beckham, in discussing the competency of evidence of the price property sold for at private sale as bearing on the question of the value thereof, said: "If there were no other evidence .upon the subject, it certainly would be sufficient for the jury to base a verdict upon, and if there were other and contradictory" evidence, then it should be placed before the. jury for its consideration upon the question of value." And in Matter of Johnston (144 N. Y. 563) an administrator was. held liable, for improvidehtly selling at public auction an undivided, interest in leasehold property and was charged with the value thereof based solely on the price which he had paid at private sale for a corresponding undivided interest in the -same property, and it was held by Judge BEaigi-it that the price paid at private sale was sufficient to sustain the finding as to value, although as in this case there was another sale which was under criticism, and there was the additional fact that the entire leasehold had been, sold at'a partition sale for an amount, corresponding to about one-half of. what the administrator had been charged.
The purchase of an idle plant like; this in its entirety is not an unusual event. It distinctly appears -from, the evidence that It was a. part of Hr. Baird's business, to make such' purchases and . sales and that he frequently- did so. The argument that the property when bought was the idle plant of a defunct corporation and when sold to the new. corporation had become reanimated and thereby possessed' of additional value is specious, and unsound. When bought it had the same elements and possibilities of value as when turned over to the corporation. That argument would apply to many purchases, particularly at auctions,' where property is frequently and openly bought for speculative purposes. It has never been held, however, that the price paid was not evidence of value simply because the purchaser expected to make a profit. The answer to-this and similar arguments is that the purchase price is sufficient evidence of value to put to his proof one who does not desire to be bound thereby. In the consideration of this question it should not be overlooked that this corporation did not create a demand or market for the plant. It was not the intention or expectation that the corporation should bring to the venture any additional capital, energy or ability beyond what these individuals possessed, and it is too plain for argument that under such circumstances the property was worth no more to them as a corporation than it would have been worth to them as individuals had they not covered themselves with the mantle of corporate protection.
The property was purchased of Eeid & Boler of Cleveland, Ohio, who were dealers in such properties, and who held an option therefor, the defendant and others loaning the money for such purchase. This was not a forced sale. The manner of sale was such as to imply a fair price for the property voluntarily sold. While Baird upon the purchase thereof took title in his own name, it is evident that the defendant and his associates had such an interest therein that when they as directors of the corporation bought it they bought it of themselves, and as against themselves the price paid by Baird is sufficient evidence of value in the absence of other evidence. With the value of the property shown to be $85,000, its purchase by the directors for $500,000 was harmful to the corporation. It is immaterial whether we regard the directors as having paid $500,000 for the property or as having compromised their stock subscriptions of that amount by payment of property of the value of only $85,000.- In either event they have knowingly violated their trust and are answerable to the plaintiff.
It is urged by the defendant that he and his associates were at liberty to make a profit on the property, and that they had a right to sell it to their corporation at such a price as they might reasonably have supposed it was fairly worth to the corporation. That is probably true, but their good faith and the' price at which they might reasonably have supposed the property to be fairly worth to the corporation were matters of inference to be drawn from the evidence and circumstances disclosed by the evidence. (Gamble v. Queens County Water Company, 123 N. Y. 104; Douglass v. Ireland, 73 id. 100; Brockway v. Ireland, 61 How. Pr. 372, 376; National Tube Works Company v. Gilfillan, 124 N. Y. 302, 306; White Corbin & Company v. Jones, 86 Hun, 57.) The actual value. of the plant when it was turned over to the corporation was an important element as bearing on that question. .
In Huntington v. Attrill (118 N. Y. 365) it was held that the question was as to the fair value of the property at the time of its sale to the corporation not " dependent upon subsequent success or failure of the investment further than such result may have been legitimately within evidential contemplation at the time of the sale in view of the uses for which it may have had available advantages within itself."
In Douglass v. Ireland (73 N. Y. 104) it is said that all that is necessary " is to prove two facts: 1st. That the stock issued exceeded in amount the value of the property in exchange for which it was issued; and, 2d. That the trustees deliberately, arid with knowledge of the real value of the property, overvalued it, and paid in stock for it an amount which they knew was in excess of its actual value. The" value must be determined in any action in which the question arises upon such evidence as may be given, having respect to the circumstances and the' nature of the property, and the Scienter and guilty action of the trustees may be proved either directly or inferred from circumstances." In the same case it is said that " the seller of the' property may well be presumed to know its value."
In Lake Superior Ice Company v. Drexel (90 N. Y. 91) it seems to have been held that trustees might testify directly to their good faith in the transaction and to their belief as to the value of the property, an opportunity of which this defendant failed to avail himself. It must not be overlooked that these directors who are charged with having im.providently wasted the corporate assets by purchasing their individual property constituted the full board of directors, and the circumstances affecting their motives and the value of the property were peculiarly within their own knowledge, and it is not a harsh rule that in such a case slight evidence and few circumstances be deemed sufficient to put them to their proof.
There was also such a remarkable disparity between the price paid by the defendant and his associates and the price at which they as individuals sold to themselves as directors the same property as to naturally suggest the necessity of an explanation not only as to this marvelously enhanced value but also as to the rectitude of their motives and their good faith in selling the property to themselves as directors and in making such an extremely large profit out of the treasury of the corporation of which they were officers. In Boynton v. Andrews (63 N. Y. 93) it was said: " While a disparity as to value might not establish fraud of itself, cases may arise where the acknowledged difference between the price allowed or agreed upon and the actual value is so erroneous as to bear upon its face clear and unmistakable indicia) that a fraud was intended to be perpetrated. It cannot be questioned that where property, the value of which is well known and understood, or capable of being easily ascertained, is taken at a most exorbitant estimate; far beyond any intrinsic and real value, it raises a strong presumption that the valuation is not in good faith and was made for a fraudulent purpose. This presumption will be conclusive unless it is. rebutted by. evidence which fully explains the apparent bad faith." (See, also, to the same effect, Douglass v. Ireland, supra)
All the circumstances surrounding the formation of the corporation and the transfer of the property to it were in evidence. It appeared what the nature and condition of the property was; for what purpose it had. been used; for what purpose the directors intended that it should be used; there was some evidence as to its expected earning capacity; as to what was to be expended in improvements; how and in what manner it was to be managed; and how and by whom it was to be financed; and there were the opinions of experts as to what it would probably accomplish. It also appears that the pretended payments of the stock subscriptions to the corporation by the directors, the payment to Baird for the steel plant and. the. pretended redistribution of the proceeds of the sale of such plant to the corporation back to the several directors was merely a check transaction; constituting an exchange of checks and that for the most part such checks of the directors to the corporation were given without corresponding funds to the credit of the makers of such checks in the bank on which such checks were-drawn. From all of these circumstances and the enormous profit made and from the evidence of market, value there was sufficient to form an estimate as to what the directors in the exercise of good faith might, reasonably have assumed this property to be fairly worth to the corporation. '
When the plaintiff rested his case the defendant without offering further evidence- also rested and moved for a dismissal of the com- • plaint and the plaintiff moved for á direction of a verdict in his favor. It is insisted that by such, motions the parties are deemed ' to have submitted to the court for its determination all questions of fact ás- well as of law, no request to go to the jury having been subsequently made. That is generally so. It is apparent, however, from the opinion of the learned trial justice that he did not assume to determine any question of fact but erroneously' held as matter of . law that the evidence of the prior purchase and sale of. the property was insufficient to raise a question of fact for determination. This court in the exercise of its. plenary, power to grant new trials where justice requires may examine the opinion of the court below to ascertain the grounds of the decision. (Bryant v. Allen, 54 App. Div. 504; Crossman v. Wyckoff, 64 id. 554, 558; Tenoza v. Golliek, 80 id. 638; Fox v. Metropolitan Street Railway Company, 93 id. 231; Hall v. Lanza, 97 id. 492.) We think, therefore, that a new trial should be granted in order .that the question of fact. presented by the evidence may be determined.
The judgment should be .reversed on the law arid facts, and a new trial granted, with costs to the appellant to abide the event.
All concurred, except Kellogg^ J., who dissented in an opinion in which Sewell, J., concurred. \