Court Opinion

ID: 5220664
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:33:11.142043+00
Date Added: 2024-06-11T08:27:30.662424
License: Public Domain

Ingraham, P. J.
(dissenting):
I do not concur in the affirmance of this judgment.
The plaintiff undertook to subscribe for 100 shares of the six per cent stock of the defendant,, a domestic corporation, and finally made an agreement with the secretary of the' corporation which was contained in a letter dated October 24, 1908, by which the agreement that had been made between the-plaintiff and the corporation was stated as follows: Plaintiff was to subscribe for 100 shares of the six per cent preferred stocky par value $100, at the price of $10,000.. Plaintiff agreed to pay not less than $3,000 immediately, $1,000 at the time of signing the contract, and $2,000 on or before November 10, 1908; not less than $5,000 within six months from date, and the balance within three months thereafter, i. e., nine months from date. In consideration of this subscription the defendant agreed to employ plaintiff in defendant’s business at a salary of $50 per week and a commission on all new business that plaintiff brought to the corporation. If, however, plaintiff should fail to pay the second installment of $5,000, the corpora*357tion to have the option to discontinue plaintiff’s employment, “and if in this case you should not want to have the first installment paid by you considered as the purchase price in full for 30 shares of our preferred stock, then we [defendant] shall repurchase these 30 shares of stock from you at par within 6 months thereafter.” This condition, according to the facts as found by the jury, .having happened, plaintiff tendered the thirty shares of stock to the defendant and demanded the $3,000 therefor which was refused and this action was brought to recover that amount. The main question presented on this appeal is whether this was a contract which the defendant had power to make or whether it was prohibited by law and, therefore, invalid. '
In discussing this question it must be noted that the contract is absolute and if sustainable it bound the defendant to pay not out of surplus earnings but absolutely out of any property belonging to the corporation which'could be reached by execution upon a judgment being obtained. So that a corporation although having capital stock subscribed and paid for might by a contract of this kind render the whole subscription nugatory and. impose upon the corporation a liability to those who had subscribed for the capital stock for the amount that-they had subscribed, thus leaving the corporation without funds to carry on its ordinary, operations or to secure its creditors.
A subscription to the capital stock of a corporation is regulated by article 4 of the Stock Corporation Law (Consol. Laws, chap. 59; Laws of 1909, chap. 61), which revised article 3 of the former Stock Corporation Law (Gren. Laws, chap. 36; Laws of 1892, chap. 688, as amd.). Section 53 (former section 41) of that act provides that if the whole capital stock shall not have been subscribed at the time of filing the certificate of incorporation, the directors named in the.certificate may open books, of subscription to fill up the capital stock; that at the time of subscribing every subscriber whose subscription is payable in money shall pay to the directors ten per centum upon the amount subscribed byhim in cash, and no such subscription shall be received 'or taken without such payment. This provision apparently contemplates an absolute subscription upon which ten per cent of the amount subscribed must be paid by *358the subscriber in cash and no such subscription could be received or taken without such payment. Section 54 (former section 43) provides for the payment of the subscription and for a forfeiture for the use of the corporation in case default should be made in the payment of any installment as required by á resolution of the board of directors, with a further provision that the stock if forfeited may be reissued or subscriptions therefor may be .received as in the case of stock not. issued or subscribed for. If such stock, however, be not sold for its par value., or subscribed for within six months after- such forfeiture, it shall be canceled and deducted from the amount of the capital stock, and if by such cancellation the amount of the capital stock is reduced below- the minimum' required by law the capital stock shall be increased to the required amount within three months thereafter or the business of the corporation maybe closed as in the case of ah insolvent corporation." Section 55 (former section 42, as amd. by Laws of 1901, chap. 354) provides that no 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. Section 56 (former section 54, as amd. by Laws of Í901, chap. 354) provides that every holder of capital stock not fully paid'shall be personally, liable to its creditors to an amount equal to the amount unpaid on the stock held by him for debts of the corporation contracted while such stock was held by him.
• By these provisions regulating the subscription . to the stock of a corporation it was intended that a fund should be provided to enable the corporation to transact its business and to secure the payment of its debts. No subscription could be received until .ten per cent Of the stock subscribed for was .paid in at the time of making the subscription and that payment, must be one absolutely for the benefit of the' corporation. The remaining amount of the subscription must be. paid in within the time fixed by the board of directors, and in the event that the installments were not paid by the subscribers the stock was to be -forfeited for the benefit- of the ■ corporation; and such stock so forfeited must be sold or subscribed' for within six months after the forfeiture or the stock should be canceled and the amount of the capital stock reduced by the amount of the *359canceled stock, if by cancellation of stock the capital stock of the corporation was reduced below the minimum required by law the capital stock must be increased to such a minimum amount within three months thereafter or the corporation may be wound up as an insolvent corporation. These careful provisions seem to me to be entirely inconsistent with a subscription upon any other terms than that prescribed by the statute, and a contract for such subscription upon other .terms than that prescribed or a conditional subscription by which not only the sub • scription itself should be canceled but the subscriber after he had failed to pay the additional installment should have a cause of action against the corporation for the amount that he had paid upon his uncompleted subscription would be a violation of the statute.
By the contract here sought to be enforced the plaintiff subscribed for 100 shares of stock of the par value of $10,000, and paid therefor the sum of ten per cent of the amount. It was a cash subscription, and the only valid subscription that the company could receive was one by which the subscriber was to pay for the stock its par value in cash, but at the same time the corporation made, a contract by which at the option of the subscriber after the payment of $3,000 the company would buy back from him the stock for which he had subscribed and pay therefor the amount that the plaintiff had subscribed for it — a contract which it seems to me violates the express provisions, of the statute regulating such subscriptions and which, if such a contract was authorized,, would make the subscription to the stock of the corporation a sham and fraud upon the other stockholders and the creditors of the corporation.
And in addition, by section 664 of the Penal Law (formerly section 594 of the Penal Code) it is made a misdemeanor for a director of a stock corporation to concur in any .vote or act of the directors of such corporation or any of them by which it is intended to apply any portion of the funds of such corporation except' suiplus profits directly or indirectly to the purchase of shares of its own stock. This provision, it seems to me, clearly emphasizes thé intention of the Legislature to prevent any such contract as that here attempted by which a corporation should purchase from a subscriber to its *360' stock the stock so subscribed for unless the corporation should hare net earnings which could he applied to that purpose. Reading these provisions of the statute together it seems to me that any such arrangement as was attempted to be made in this case was one expressly prohibited by the. laws of the State and one that could not be enforced.
It is said in the prevailing opinion that the burden was on the defendant to show that it had no net earnings applicable to the payment to the plaintiff of the amount which he had subscribed for the stock. But this contract ■ in terms provides that the corporation shall purchase the thirty shares of stock for which the $3,000 was to be considered as the full purchase price. There was no restriction as to the source from which the funds required for this repurchase of the plaintiff’s stock was to be provided, but it became an absolute contract of the corporation to pay to the plaintiff the $3,000 that- he had subscribed for the 30 shares of stock or the $3,000 which he had paid upon the subscription to the 100 shares of stock. It was illegal for the directors to make any contract by which an absolute obligation was imposed upon the corporation which was not to be satisfied from surplus earnings. Thus, although the corporation may have had surplus earnings, if at the time the payment contemplated by the contract came to be complied with there .were no surplus earnings from .which the amount could be paid, undoubtedly the directors would be guilty of a misdemeanor under the provisión of the Penal Law. And so it seems to me that a contract made under which there was a legal liability of the company to pay a Ssum of money for the purpose of purchasing its own stock, not out of surplus earnings but generally out of its property, would be a contract within the prohibition contained in these provisions - of law, as the only contract which the directors could make which would not make them guilty of a misdemeanor was a contract to pay for the stock out of surplus earnings. Reading all these provisions of the statute together it seems to me that this was a contract that the corporation had’no power to make, and one that could not be enforced. If, however, the burden was on the defendant to establish the fact that neither at the time the contract was made nor at the time it was to be performed *361there were not earnings from which this payment conld be made, I think there was evidence which the court excluded which was competent to show that there were no net earnings. An officer of the company was called who testified that he had knowledge of all the business affairs of the corporation; had knowledge of its resources and liabilities; and was asked whethei there were net earnings of the company in existence at the time the contract was made or at the time it was to be performed. On objection of the- plaintiff he was not allowed to answer those questions and to that the defendant excepted.
I do not think, therefore, the judgment can stand and it should be reversed.
McLaughlin, J., concurred.
Judgment and order affirmed, with costs.