Case Name: COMMONWEALTH BONDING & CASUALTY INS. CO. v. HOLLIFIELD
Court: Texas Courts of Civil Appeals
Jurisdiction: Texas
Decision Date: 1916-01-19
Citations: 184 S.W. 776
Docket Number: No. 904
Parties: COMMONWEALTH BONDING & CASUALTY INS. CO. v. HOLLIFIELD.
Judges: 
Reporter: South Western Reporter
Volume: 184
Pages: 776–785

Head Matter:
COMMONWEALTH BONDING & CASUALTY INS. CO. v. HOLLIFIELD.
(No. 904.)
(Court of Civil Appeals of Texas. Amarillo.
Jan. 19, 1916.
Rehearing Denied March 15, 1916.)
CORPORATIONS <§==>99(1) — CORPORATE STOCK— Purchase Price.
Where plaintiff entered into an agreement to buy the stock of a corporation to be organized with a capital and surplus, and to pay the purchase price in money or in satisfactory securities, and plaintiff gave notes for the purchase money, which notes were renewed and the amounts varied, held that, the stock issued for the notes being void because being issued in violation of Const, art. 12, § 6, prohibiting the issuance of corporate stock for notes, the notes should be canceled.
[Ed. Note. — For other cases, see Corporations, Cent. Dig. § 444; Dec. Dig. <§=>99(l).]
Huff, C. J., dissenting.
Appeal from District Court, Hall County; J. A. Nabers, Judge.
Action by I. P. Hollifield against tbe Commonwealth Bonding & Casualty Insurance Company. From a judgment for plaintiff, defendant appeals.
Affirmed.
Speer & Brown, of Ft. Worth, and Presler, Tborne & Hamilton, of Memphis, for appellant. Moss & Leak, of Memphis, for appellee.
Application for writ of error pending in Supreme Court.

Opinion:
HALL, J.
This was an action by appel-lee, Hollifield, against the appellant company, to recover certain money paid and to cancel three promissory notes in the sum of §562.50 each, executed by Hollifield, in favor of the defendant company. Appellee also prayed for the cancellation of a certain deed of trust, given by him to secure the notes. He alleges that the payment of the money and the execution of the notes were induced by fraudulent representations, and that the only consideration moving to him therefor was the issuance of a certain stock certificate, in violation of article 12, § 6, of the' Constitution of the state. Briefly stated, this is the history of the transaction: September 29, 1910, appellee executed a subscription contract, which is as follows:
"Commonwealth Bonding & Accident Insurance Company. -
"Capital §10.00 Surplus §30.00.
"Subscription to Capital Stock.
"No. 9S3.
"Whereas, Stuart, Harkrider & Co. of Fort Worth, Texas, are promoting the organization of a casualty, bonding and accident insurance company, to be incorporated in pursuance of the laws of the state of Texas, under the name of Commonwealth Bonding & Accident Insurance Company, with an authorized capital stock of three hundred thousand dollars, and a paid up capital of at least two hundred thousand dollars, paid up and free from organization expenses, all in accordance with a printed prospectus issued by them and delivered to me.
"And, whereas, by their acceptance of this subscription said Stuart, Harkrider & Co. agree to endeavor with all reasonable diligence to accomplish on or before December 31, 1910, the organization of said corporation with capital stock fully paid as aforesaid, they to defray all expenses of organization and incorporation.
"Now, therefore, I do hereby subscribe for 62% one-tenth shares of the par value of ten dollars each, of the capital stock of said Commonwealth Bonding & Accident Insurance Company, and agree with said company and with the said Stuart, Harkrider & Co. to pay therefor the sum of §2,500.00 as follows: The sum of §2,187.50 I agree to pay in money or securities satisfactory to the Insurance Department, with six per cent, interest, to said Commonwealth Bonding & Accident Insurance Company, or its trustees (which goes to capita] stock and surplus), at any time after September 1, 1910, immediately upon receipt of notice from said Stuart, Harkrider & Co., that its capital stock has been subscribed in good faith in amounts and at rates netting the company at least two hundred thousand dollars of capital in the aggregate when paid. The remaining sum of §312.50 I agree to pay, and do pay concurrently with this subscription, to the said Stuart, Harkrider & Co., in consideration of their agreement here-inbefore recited, and in lieu of any further or other contribution to expenses of organization and incorporating said company.
"No conditions, representations or agreements other than those printed herein shall be binding on Stuart, Harkrider & Co., or the, Commonwealth Bonding & Accident Insurance Company.
"Witness my hand, this the 29th day of September, 1910.
"I. P. Hollifield (name of subscriber) "Memphis, Texas (Post office address)
"Merchant and Ranchman (Occupation)."
"Witness: R. E. Bristol."
This subscription contract was at once delivered. to Stuart, Harkrider & Co., a partnership, which was afterwards incorporated and known as the Organization Company. Thereafter, on December 1, 1910, upon the promise that stock would be issued to him as soon as the defendant company was organized, appel-lee executed and delivered to the Organization Company four notes, payable to said company, and also a deed of trust conveying certain lands as security for said notes. The first of these notes was in the sum of §687.50; the other three were in the sum of §500 each. Prior to December 1, 1912, the first note was paid by appellee, and on that date he renewed the remaining three notes, including some unpaid interest which had accrued thereon in the face of the' renewals.- The new notes aggregated §562.50 each. On the same day he executed a second deed of trust to secure the payment of the renewal notes. Twenty days thereafter the deed of trust securing the original notes was released by appellant.
Appellee alleged that it was fraudulently represented to him by the promoters, as an inducement to secure his subscription to the stock, that appellant company, when organized, would lend him money; that the representations were relied on, were untrue, etc. Among other things, appellant company alleged that it was incorporated under the laws of Arizona, where there was neither statute, constitutional provision, nor rule of law prohibiting the execution and delivery of notes in payment for certificates of stock; that in such case the laws of Texas, forbidding the payment for stock with negotiable notes, is in violation of the Constitution of the United States.
The case was tried before the court without a jury and resulted in a judgment in favor of plaintiff, canceling the three notes and' deed of trust, but denying plaintiff a judgment for the money already paid. In the findings of fact and conclusions of law, the trial judge states that the defendant corporation was chartered under the laws of Arizona in March, 1911, and was granted a permit to do business in Texas, in June of the sarnie year; that upon solicitation of R. T. Stuart, and because of promises made by him that the company, when organized, would lend plaintiff money, plaintiff subscribed for 62% shares of its capital stock; that Stuart and one Harkrider composed a partnership known as the Organization Company, which promoted the defendant company; that, in accordance with the subscription contract, the .Organization Company took plaintiff's notes for §2,187.50, in payment for the 62% shares of stock to be issued by the defendant company; that after the defendant company had obtained a permit to do business in Texas, and plaintiff had paid $687.50 on his subscription, the promoting company released the deed of trust and the defendant company took from plaintiff three notes for $562.50 each, the renewals of which are sought to be canceled, together with the deed of trust securing the same; and that said notes were taken in payment of the stock which was then issued to plaintiff at Et. Worth, Texas. The court concludes that no fraud was shown in the case; that the certificate of stock under the Constitution, as well as article 1146 of the Revised Statutes, was absolutely void and constituted no consideration for the notes and deed of trust; that plaintiff was not in pari delicto, but was not entitled to recover of the appellant company the money paid. Appellee filed no cross-assignments.
By the first assignment of error, this proposition is urged: After said defendant company had been organized and chartered and had its permit to do business in Texas, and plaintiff had paid $687.50 of its said subscription, said promoting company released the deed of trust securing said' subscription, and the defendant company took from plaintiff the three $562.50 notes, which, and the renewals of which, so sought to be canceled and the deed of trust herein sought to be canceled, in payment of the stock which they then issued to plaintiff; that is, the 62y2 one-tenth shares of stock in controversy.
The first assignment is that the court's conclusions of fact are not supported by the evidence. We think, when appellee executed the notes and the deed of trust securing them, the subscription contract as an obligation became functus officio as to him; he had, by complying with its terms, merged tne obligation evidenced by it and resting upon him, in the notes themselves. His indebtedness, evidenced by the subscription contract, was satisfied and thereafter was evidenced by the notes which he had executed. The contract ¡bound the promoters to organize a company with reasonable diligence,, having its capital stock fully paid up and free of organization expenses. It bound appellee to pay in cash $312.50 to the promoters as compensation for their services. This has been done. It further bound him to pay to the company the balance of the $2,500 subscribed, viz., $2,187.50 "in money or securities satisfactory to the Insurance Department, with 6 per cent, interest, at any time after September 1, 1910, immediately upon receipt of notice from Stuart, Harkrider & Co.; that its capital stock had been subscribed in good faith in amounts and at rates netting the company at least $200,000." The parenthetical clause provides that this amount shall go to capital stock and surplus. It must be borne in mind,-in the construction of this contract; that appellant .is a corporation, organized for bonding and casualty insurance purposes. This court said, in General Bonding & Casualty Insurance Co. v. Mosely, 174 S. W. 1034, quoting from Words & Phrases:
" 'Capital stock' has been defined as follows: When applied to the amount subscribed towards the stock of a corporation, 'capital stock of a corporation, in its primary sense, means the fund, property, or other means contributed or agreed to 'be contributed by the share ownei's as the financial basis of the corporation's business, either directly through stock subscriptions or indirectly through the declaration of stock dividends. The term signifies those resources the dedication of which to the uses of the corporation is made the foundation for the issuance of certificates of capital stock, and which, as the result of the dedication, becomes irrevocably devoted to the satisfaction of all obligations of the corporation. ' 'Capital stock of a corporation consists of the property and money subscribed and paid in for the purpose of carrying on its 'business. ' 'The term "capital stock" has a definite meaning, and designates the amount of capital contributed by the stockholders for the use of the company.
The par value of each one-tenth, share of stock is stated in the subscription contract to be $10. "Par value," as there used, means simply the face value of the stock. 6 Words and Phrases, 5136; 3 Words and Phrases (2d Series) 866. The amount due, according to the recital of the contract, for the 62i/(¡ one-tenth shares, at $10 each, is $625, or one-fourth of the entire amount subscribed; yet no separate obligation was made as was done in providing for organization expenses for the price of the stock at the stated sum per share. After the payment of the $312.50, as organization expenses, a note was executed for $687.50, and the remaining amount of the total subscription, viz., $1,500, was .divided into three separate notes. After the payment of the first note, the shares of stock were issued. These facts show a practical construction of the contract, which to our minds is inconsistent with the idea that the price to be paid for the stock, and the sum to be paid in as surplus, were independent and distinct obligations. The subscription contract bound appellee to execute his obligations in the sum of $2,187.50, evidencing an agreement to pay for the stock in installments.
It has been frequently held that a subscription contract binding the subscriber to pay for his stock in installments is not inhibited by article 12, § 6, of the Constitution; but it has also ¡been uniformly held that, when the stock is issued before the installments are fully paid, the transaction is void. When the subscription contract was drawn it is apparent that this article of the Constitution, and the decisions which have construed it, were not in the mind of the party who wrote it. We further said, in General Bonding & Casualty Ins. Co. v. Mosely, supra:
"But the plaintiff in error company is engaged in a business requiring ready cash to meet demands arising at unexpected times in uncertain amounts. An insurance company, in the very nature of things, should have on hand, ei ther in cash or in available securities, sufficient funds with which to meet extraordinary emergencies. This it could not do, at least for a time, if the subscribers paid for stock with labor or with property other than cash or securities easily convertible into cash."
That provision in the contract with reference to the approval by the Insurance Department shows that it was drawn under the act of 1909, specially relating to insurance companies. We have given our views with reference to this law and its application in the Mosely Case, and they will not be repeated here. Suppose, in the instant case, appellee had agreed to pay only $1 each for his shares of stock, and the balance of the $2,187.50 should have been represented by his promissory notes, and'this course had been pursued with reference to all other subscribers: The result would have been the organization of a $300,000 bonding and insurance company, with less than 1/4 0 of that amount in its treasury to secure policy holders and creditors. Under the construction contended for by appellant, the entire subscription contract would he void. However, if we construe it to mean that the whole amount subscribed, less organization expenses, rather than $625 constitutes the consideration for the stock, the contract would be valid and enforceable. The vice in the transaction rests in the fact that the stock was issued and delivered to appellee, thus enabling him to enjoy all the privileges of a bona fide stockholder without having "fully paid up" the amount of his subscription. As has been frequently decided, both the stock and the notes were absolutely void. Irrigation Co. v. Deutschmann, 102 Tex. 201, 105 S. W. 486, 114 S. W. 1174; McCarthy v. Loan Co., 142 S. W. 96; Sturdevant v. Falvey, 176 S. W. 908; Bonding & Casualty Ins. Co. v. Mosely, supra.
Under the third assignment, it is insisted that because the appellant company was organized under the laws of Arizona, and the evidence shows that there is neither constitutional provision nor statute of Arizona prohibiting the payment of shares of stock with a promissory note, the transaction in question is valid. Article 1146 of the Revised Statutes 1911 provides that no foreign corporation, domestic or foreign, doing business in this state, shall issue any stock whatever except for money paid, etc.' The record shows that the home office of appellant company was at Ft. Worth; that the subscription contract was executed in Texas; and that the notes, together with the deed of trust, were executed and renewed in this state. The contract itself provides that the company "is to be incorporated in pursuance of the laws of the state of Texas." Under the provisions of the above statute, these facts render the transaction subject to the laws of Texas. State Bank v. Falvey, 175 S. W. 833; Sturdevant v. Falvey, supra; Fowler v. Bell, 90 Tex. 150, 37 S. W. 1058, 39 L. R. A. 254, 59 Am. St. Rep. 788; Loan Ass'n v. Griffin, 90 Tex. 487, 39 S. W. 056.
AVhat has been said disposes of the fourth assignment.
The fifth assignment insists that the court erred in holding that the notes were without consideration because the evidence shows that, relying upon plaintiff's subscription contract and his promise to pay for his stock, defendant and the public generally dealt with plaintiff as a stockholder, and that the defendant company has incurred liabilities and created obligations on the strength of plaintiff's subscription; find further, by reason of the fact that plaintiff had participated by proxy in the management and conduct of the-affairs of the company, he was estopped to-assert the invalidity of the transaction. This is not a suit by a creditor of the corporation, seeking to hold appellee upon his subscription, and it is not necessary to consider that question.
The stock being declared invalid by the constitutional and statutory provisions, ap-pellee is not estopped by participation as a stockholder in the meetings of the company from asserting the invalidity of the notes.
We think the record warranted the court in finding, in accordance with the testimony of appellee, that the whole amount of his subscription, as evidenced by his original notes, was the consideration for the stock issued to him; and the judgment is therefore affirmed.
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