Court Opinion

ID: 3611219
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:55:20.452402+00
Date Added: 2024-06-11T13:46:56.256246
License: Public Domain

The questions in this case arise under the provisions of the manufacturing act of 1848, chapter 40, and amendatory acts, relative to subscriptions for, and the increase of, capital stock. The fourteenth section of the act asserts that nothing but money shall be considered as payment of any part of the capital stock. The eleventh section provides that where the original stock is made and paid in, a certificate to that effect is to be made. The tenth section declares that the stockholders shall be, severally, individually liable to creditors, till the wholeamount of capital stock fixed by the company shall be paid in. The twenty-second section provides a mode of increasing the capital stock, and requires that a certificate shall be filed showing a compliance with the provisions of the act, the amount of capital actually paid in, the amount to which the capital stock shall be increased or diminished, and the business to which the capital is to be applied. When this is done, the company is entitled to the privileges and benefits and subject to the liabilities of the act. Collating all the provisions of the statute, it is manifest that it was the intent of the legislature, both as to the originally subscribed stock and as to its increase, that the whole amount should be paid in, and that it should all be paid in cash, except so far as such payment is dispensed with under the terms of chapter 333, of the Laws of 1853 where there is a purchase made by means of stock of mines, manufactories and other property necessary for the company's business.
Notwithstanding these provisions, the trustees of the company, defendant in the present case, resolved January 11th, 1866, that its capital stock be increased $200,000, for the purpose of building a glass factory to make bottles to be used in their business, and for a working capital, and that each stockholder be allowed to take one share of stock for every five shares he then held, and that when he paid eighty dollars on each share of $100, the defendant would issue him a certificate for full paid stock. This resolution was ratified at a meeting of stockholders, held February 8, 1866, by a *Page 541 
very large majority. The board of trustees on the same day made a call of twenty per cent, giving the privilege to each stockholder to take his proportionate part of the stock on or before February twentieth, provided that he paid twenty dollars on each share — otherwise his claim to the stock should be forfeited. Another resolution was passed on the same day allotting such stock as was not taken by any shareholder under the former resolution, to such other shareholder as might take it and pay a specified sum within a prescribed time.
A subscription agreement was also drawn, bearing the same date (February eighth), binding subscribers to take stock and pay eighty dollars per share, in installments as called for by the directors, and on failure to pay for sixty days, to submit to a forfeiture. The defendant, in turn, agreed to pay interest on sums paid to February 1, 1867, and whenever eighty dollars a share had been paid to issue a certificate for full paid stock, and the holder of that stock was to be treated in all respects as though he was a holder of full paid stock. Under this agreement, one C. Sheehan subscribed for 699 shares of this stock, for the plaintiff's benefit. The latter paid, in a mode to be hereafter considered, the first call of twenty per cent, and received from the defendant's secretary a receipt, dated February twentieth, stating that this sum had been paid, amounting to $13,980, on 699 shares of stock standing in plaintiff's name, as being the first installment of twenty per cent.
Under this state of facts, it is claimed by the plaintiff that this transaction was illegal, as subverting the policy of the statute already considered, and that as the contract had not been fully performed, it was still executory in its nature. There was thus a locus penitentiae on the part of the plaintiff, and he might recover back his money. It may be that this is true; but the more correct principle seems to be, that it is a contractultra vires, or beyond the capacity of the corporation to make. In other words, it is no contract. The rule that illegality is a defence to an action on a contract, *Page 542 
presupposes that without that element it is a contract, or made by parties capable of contracting. Where there is no capacity to contract, a party may recover back money paid on the bare ground of failure of consideration.
It is a general rule of corporation law that payment for original stock on a subscription must be made in money only. (Pittsburg and Connellsville R.R. Co. v. Stewart, 41 Penn. St., 54.) So it cannot issue such stock below par. (Neuse RiverNav. Co. v. Comrs. of Newbern, 7 Jones' Law [N.C.], 275; 1 Redf. on Railways, 221, 222.) Much more must this be so if the plain language of the statute requires full payment in money as in the present case. To make a subscription valid there must be mutuality. The criterion of the liability of a subscriber is whether any act has been done by which the company could beforced to receive him as stockholder. (Angell  Ames on Corporations, §§ 255, 527.) The case of Union Turnpike Company
v. Jenkins (1 Caines, 381; S.C., 1 Caines' Cases in Error, 86) is much in point. In that case the act, so far as it affected the mode of taking subscriptions, was not complied with, and the court held that there was no consideration for the promise to take the stock. There was, in fact, no contract. This rule was followed in Hibernia Turnpike Company v. Henderson (8 Serg. 
Rawle, 219). The company could introduce no one as a member, except in accordance with the act of incorporation. If the subscriber got no right which he could have enforced as against the will of the plaintiff, he incurred no responsibility. Unless the corporation is bound the subscriber is not. (Pittsburg,etc., R.R. v. Stewart, 41 Penn. St., 54.) Where money has been paid on a contract that is merely void as distinguished from one that is illegal, it can be recovered back. (Jaques v.Golightly [per Sir W. BLACKSTONE], 2 W. Black., 1073; Eno v.Woodworth, 4 N.Y., 249.)
The fact that the whole act of the corporation is ultra vires
may be shown from another point of view. As soon as the money of the plaintiff was paid over to the defendant it held it in the character of trustee. The ordinary relation of debtor *Page 543 
and creditor was not created, but that of trustee and cestui quetrust. The defendant could only use the money as increasing its capital stock. It is now settled that a corporation cannot use corporate property considered as trust funds in a manner not authorized by law, even with the consent of the cestui quetrust, and that the court will still enforce the trust as against the corporation. (Great Eastern R.R. Co. v. Turner,
L.R. [8 Ch. App.], 149.)
There is a class of cases where the courts have held that a subscriber to stock should not, so as to affect the rights of third persons, be allowed to make a defence as against the company that there were special arrangements made as to taking stock which the company had no right or power to enter into and thus make his subscription void. These, however, are cases where the transaction, on its face, appeared to comply with the law, and there was a secret understanding between the corporation and the subscriber that his subscription should not have the effect which it appeared to have. Though such an arrangement might be a fraud on other subscribers, and even relieve them if they desired (New York Exchange Co. v. De Wolf, 31 N.Y., 273; 1 Redf. on Railways, 173), yet it could not be claimed by the party who participated with the corporation in the secret and wrongful act that he should be relieved. (Preston v. Grand Collier DockCo., 11 Sim., 327; Mangles v. Same, 10 id., 519; Blodgett
v. Morrill, 20 Vt., 509; Henry v. Vermillion R.R. Co.,17 Ohio, 187; White Mountains R.R. Co. v. Eastman, 34 N.H., 124;North Shields Quarry Co. v. Davidson, 4 Kay  Johns., 688.) These cases are governed by the general doctrines of estoppel inpais. They are, in the main, cases of sham or colorable subscriptions, fraudulent as to other subscribers and the public at large.
Nothing of this kind can be urged in the present case, as the whole transaction appeared on the face of the subscription paper, and all the stockholders were made aware of it. No claim is made on behalf of creditors. Wherever a contract of a corporation isultra vires it is only binding in favor of *Page 544 
persons who may base action on the faith of it. Thus it has been said, if a railway company were to contract for 1,000 gross of green spectacles the contract would be necessarily void, but if it were to buy iron rails that it did not need the contract might be binding in favor of persons not cognizant of the true state of facts. (Fry on Specific Performance, 152, and cases cited.)
But, even if it be conceded that there is an element of illegality in the case, it does not follow, for that reason, that the plaintiff is, necessarily, precluded from recovery. It is undoubtedly true, that wherever the recovery of the money requires the enforcement by the court of any of the unexecuted provisions of the illegal contract, no action can be maintained. (Woodworth v. Bennett, 43 N.Y., 273; Gray v. Hook,
4 id., 449.) But where the action is brought on the theory of disaffirmance of a contract that is not yet fully executed, there is a locus penitentiae, and the money paid under the contract may be recovered back. The rule is well stated in 2 Comyn on Contracts, 109: "Where money has been paid under an illegal contract, it is a general rule that, if the contract be executed, and both parties are in pari delicto, neither of them can recover from the other the money so paid; but if the contract continues executory, and the party paying the money be desirous of rescinding it, he may do so, and recover back his deposit. And this distinction is taken in the books, namely, where the action is in affirmance of an illegal contract; and, clearly, such an action can in no case be maintained, but where the action proceeds in disaffirmance of such a contract, and instead of endeavoring to enforce it, presumes it to be void, and seeks to prevent the defendant from retaining the benefit which he derived from an unlawful act, there it is consonant to the spirit and policy of the law that the plaintiff should recover." (Jaques
v. Withy, 1 H. Black., 67.) In accordance with this view, Lord MANSFIELD said, in Walker v. Chapman (Lofft, 342): "There is a great difference where a party comes to overturn an illegal contract and to be relieved against it. He shall not *Page 545 
be relieved if he comes to take the benefit of an illegal contract; there he never shall be relieved, because, to relieve him the court must affirm the contract." (P. 345; see, also,Tappenden v. Randall, 2 Bos.  Pull., 467; Chitty on Contracts, p. 533; White v. Franklin Bank, 22 Pick., 184;Aubert v. Walsh, 3 Taunt., 277; Busk v. Walsh,
4 id., 290; Williams v. Hedley, 8 East, 380, n.; Hastelow v.Jackson, 8 B.  C., 224.) The principle was recognized and approved in the case of Utica Insurance Company v. Kip (8 Cowen, 20), though the decision of the case did not turn upon it.
The ground of the doctrine is that the party, before the contract is wholly executed, elects to rescind it. (Busk v.Walsh, supra; Hastelow v. Jackson, 8 B.  C., p. 224, per BAYLEY, J.) LITTLEDALE, J., said: "If two parties enter into an illegal contract, and money is paid upon it by one to the other, that may be recovered back before the execution of the contract, but not afterward." (P. 226.)
In the present case the contract remained in part unexecuted. It was, in the sense of the cases above cited, "executory." There remained something to be done both on the part of the plaintiff and defendant. The plaintiff was still to pay additional installments, and the defendant was to give a certificate of stock when the eighty per cent was paid. A contract may be partly executed and still remain in part executory, as where a part is entirely performed and a portion of the price paid, and another portion remains to be completed and its equivalent consideration to be paid. So, it may be executed on one side and executory on the other, as where one of the parties, for the sum received, agrees to do some future act. (Story on Contracts, §§ 18, 19, 20.) In White v. Franklin Bank (supra) the contract was regarded as executory, because a sum of money to be paid by one of the parties was not yet due. (P. 190.) Here an act remained to be done — the giving of the certificate. No demand was necessary prior to recovery. (Same case.)
The case of Perkins v. Savage (15 Wend., 414) is not opposed to these views. The head-note of the reporter is *Page 546 
inaccurate. A short statement of the facts is, that the plaintiff gave the defendant $3,000 in furtherance of a scheme to obtain allotments of stock in a projected railway company, in fraud of the policy of the statute. The allotments were made, the stock paid for, and the certificates made over to the plaintiff. Nothing whatever remained to be done by the defendant or plaintiff. The former simply had a surplus in his hands of $500, a portion of the $3,000 which remained unexpended. The action to recover this $500 was plainly in affirmance of the illegal contract. If the contract had been legal, it would clearly have been collectible under the contract. That was wholly executed. This was the ground of the decision as stated by NELSON, Ch. J., on pages 414 and 415 of the report: "This is not an attempt by the plaintiff to avail himself of a locus penitentiae to retrace his steps, and disaffirm an unlawful proceeding while it is yet executory; the illegal purpose or act has been executed, and the effect of a recovery is to enable him to realize a part of the fruits of it by enforcing a performance by the defendant." The action being thus brought in disaffirmance of the original contract, the plaintiff may recover. Even where the illegal contract is executed, money may be recovered back on a ground which does not involve reliance on the contract. Thus, in Catts
v. Phalen (2 How. [U.S.], 376) it was held, that though a lottery ticket had been sold contrary to law, and a prize had been awarded to a purchaser, yet as he had obtained the prize through fraud, the money might be recovered back by the lottery dealers. In that case, the fraud annulled the contract, and left the case one simply of payment without consideration. So in the case at bar, the party, by his own act, before performance, rescinds the contract, and leaves the matter as though the contract had never existed, and recovers on a similar principle. In other words, illegality is a good ground for a party to rescind a contract, while it remains executory. This rule is peculiarly applicable to the case of fiduciary relations, such as the present, or to the cognate case of partnership. Thus it is laid down in Lindley *Page 547 
on Partnership, page 155, "that, although the subscribers to an illegal company have not a right to an account of the dealings and transactions of the company, and of the profits made thereby, they have a right to have their subscriptions returned; and even though the moneys subscribed have been laid out in the purchase of land and other things for the purpose of the company, they have a right to have that land and those things reconverted into money, and to have it applied, as far as it will go, in payment of the debts and liabilities of the concern, and then in repayment of the subscriptions. In such cases no illegalcontract is sought to be enforced, but, on the contrary, thecontinuance of what is illegal is sought to be prevented." Citing Harvey v. Callett (15 Sim., 332); Butt v. Monteaux
(1 K.  J., 98); Sheppard v. Oxenford (id., 491). In the last case the court said, that the defendant, having raised the question of illegality, could not dispute the trust on which he had received the property. This case was one of a joint stock company, and, in its principles, closely resembles that at bar.
There is still another reason why the defendant is liable, even though there was in the transaction an element of illegality. It, by its own act, rescinded the whole scheme, under which the plaintiff subscribed for its stock. It cannot be supposed that he or Sheehan would simply have taken 699 shares of stock on the hypothesis that no more was to be in existence. It was only as a part of a larger plan, whereby "working capital" was to be supplied. When the defendant rescinded its scheme for the increase of stock, its action related back to its inception. Finding that the increase was irregular and unauthorized, it wisely determined to retrace its steps, and to treat the whole transaction as nugatory and void. Accordingly, there never was any stock. When a corporate project is thus abandoned, the consideration on which any money has been paid wholly fails, and, on general principles of law, the owner must be entitled to recover it. It is immaterial that the so-called stock was forfeited for the non-payment of calls. That forfeiture was based on the *Page 548 
theory that there was stock in existence. When the plan for increase was abandoned, the result was that there had been no stock issued, and the defendant held the plaintiff's money without consideration. It is true that, at a meeting of stockholders held August 7th, 1867, it was resolved to "reduce" the capital stock to the original amount of $1,000,000. The whole transaction, however, shows that there was no true reduction, since the resolution simply retired the specified stock, which had appeared to be added. If there had been an actual increase of stock, the new would have been mingled with the old, and the one would have been reduced as much as the other. The fact that the new stock was taken solely for the purposes of reduction, shows that, in the minds of the stockholders, it had never been really added to the capital, and that instead of a reduction of stock, there was simply an abandonment of an unsuccessful project.
There is nothing in the point that the plaintiff participated in the increase of stock as a trustee or stockholder and is, therefore, precluded from questioning its validity in any manner. The defendant is now acting adversely to him, and cannot claim the benefit of his acts, except by taking them with all their qualifications. It seeks to hold him as a contracting party, and the transaction must have, as in other cases, all the elements of a contract.
The defendant, finally, objects that there was nothing paid by the plaintiff, It is urged that the dividend was a fictitious one, not being based on values in possession of the defendant. The plaintiff bought the dividend of Sheehan, paying its full value. The defendant recognized the plaintiff's title, and treated him as owner. Moreover, other stockholders received from the defendant equivalents for their dividends in the company's bonds, which were subsequently paid. It is now too late to question the fact, that the dividend belonging to the plaintiff must be regarded as money in the possession of the defendant for the plaintiff's use. *Page 549 
The judgment of the court below should be affirmed.
All concur for reversal, except DWIGHT, C., dissenting.
Judgment reversed.