Court Opinion

ID: 6216072
Source: CourtListenerOpinion
Date Created: 2022-02-08 17:36:47.215926+00
Date Added: 2024-06-11T08:57:07.771759
License: Public Domain

Hall, J.
[Concurring.]—The authorities seem to me to make a clear distinction between the position and rights of a receiver of a corporation as against an original subscriber to the capital stock of such corporation, and one who merely purchases stock after the organization. As regards the first class, the receiver represents the creditors as well as the corporation; the creditors being supposed to give credit upon the strength of the amount of stock subscribed and paid in. In the latter case he only represents the corporation and has no higher rights. It is clear in this case that the defendant was not an original subscriber to the stock, but merely a purchaser, and in view of the admitted fraud, the corporation could not have recovered against him. The fraud being admitted, the burden of proof was changed, and the plaintiff was bound to prove knowledge of the fraud in defendant, or such loches upon his part as would charge him in law with knowledge, and then some act ratifying the same or electing still to hold his contract. I don’t think his issuing or signing the circular in evidence alters his position. If he has committed a wrong he can be held liable in a proper action.
Liability of original subscribers.
“ When a person subscribes to the capital stock of a corporation, he must be held to contemplate and intend that the corporation shall incur debts and pledge its capital, including the subscriptions of its members, as security. Creditors who, in good faith, trust the corporation upon the faith of this security, stand in the position of innocent purchasers for value to the extent of their equitable lien; and it would be most unjust to permit a stock subscriber to disaffirm his contract and refuse to pay his share of the capital, after it has thus been pledged, with his knowledge and consent, to innocent third parties. It has accordingly been settled that, if a corporation is insolvent, a shareholder whose contract of subscription was obtained by the fraud of the company’s agents, cannot diminish the security of bona fide creditors, by rescinding his contract to contribute the amount of capital subscribed by him ”... (Morawitz on Corporations, § 596.) “In the absence of a statutory provision, the rule seems to be that a *36shareholder whose contract of subscription was procured by fraud would be liable to contribute his share of capital, upon the insolvency of the corporation, so far as this may be necesswry in order to satisfy those creditors whose claims attached before he elected to disaffirm, his contract, but creditors who contracted with the corporation after the shareholder elected to cancel his contract and sever his connection with the corporation have no lien upon the unpaid stock subscription ” (lb.'1.
In case of subscription after organization, the corporation must issue the stock.
If the corporation is fully organized at the time of the subscription, it does not stand upon the same footing as a subscription made prior to, and for the purpose of effecting the organization. A subscription prior to organization gives to the subscriber an interest in the corporation, and the right to take part in organizing it, and this interest and right are a sufficient consideration to support his promisei But the subscription in this case (in the language of the case cited), does not appear to have been to the original stock; on the contrary, it appears that, after the company was fully organized, its board of directors and directed the issuance of what, in the amended complaint is called “preferred capital stock ” and also directed that the company’s books should be opened to receive subscriptions for the same. The mere subscription for this stock, while it constitutes a valid contract on the part of the company to issue the stock to the defendant upon his paying for it, and, on his part, to receive and pay or it, does not give him an interest in the company, nor vest in him the title to the stock.. It can be sustained as a contract only on the implied promise of the company to issue the stock to him. No time is appointed in the writing subscribed, for the payment of the money or the issuance of the stock, except that the subscription should not be valid until $65,000 of the stock should be subscribed for. We regard the two promises as concurrent and dependent, and that neither party could require the other to perform, without performing or offering to perform the promise on his part. As the plaintiff has neither issued the stock, nor offered to issue it, the action is prematurely brought (St. Paul, Stillwater & T. F. R. Co. v. Robbins, 23 Minn. 439; Minneapolis Harvester Works v. Libby, 24 Id. 327).
Where persons subscribe for a future organization, their mutual agreements for a common enterprise may operate as mutual considerations till the enterprise becomes organized, and thereby the common interest is carried into its proposed form. But where the corporation is already in existence, a stock subscription is a transaction between the subscriber and the company, and the obligation of one can only *37be sustained by the corresponding obligation of the other. If both are not bound, neither is bound and the transaction is a nullity (Carlisle v. Saginaw Valley & St. Louis R. Co., 27 Mich, at p. 319).
“It is submitted that the right to sue the company, for the fraud of the directors, is not destroyed by their insolvency, and by the voluntary winding up; possibly the plaintiff may be liable to contribute to the assets and to pay further calls, and if they obtain judgments in those actions they may not be able to enforce them until all the creditors shall have been satisfied; but they have vested rights of action which can be taken away only by the provisions of some statute, and no statute deprives a defrauded stockholder of the means of obtaining redress from the company A great distinction exists between a winding up by the court and a voluntary winding up; a winding up by the court is a proceeding intended to reach the property of the company for the benefit of the creditors; and hence no suit can be carried on which is likely to diminish the amount of the assets ” (Stone v. City & Co. Bk., L. R. 3 Com. P. D. at p. 301).
Effect of fraud where rights of creditors intervene.
Whenever the rights of other parties intervene, a contract to take shares, though induced by fraud, cannot be rescinded (Henderson v. Royal British Bk., 7 El. & Bl. 356; Dorsett v. Harding, 1 C. B. N. S. 524; Porvis v. Harding, Id. 533; Dainell v. Official Manager of Royal British Bk., 1 H. & N. 681; Reese, &c. Mining Co. v. Smith, L. R. 4 H. L. 65; Ætna Ins., &c. Co., 6 Ir. Rep. Eq. 298; McNeill’s Case, I. R. 10 Eq. 503; Houldsworth v. City of Glasgow Bk., L. R. 5 App. Cas. 317).