Court Opinion

ID: 5194376
Source: CourtListenerOpinion
Date Created: 2022-01-06 15:41:04.46858+00
Date Added: 2024-06-11T08:27:00.485561
License: Public Domain

Laughlin, J. (dissenting):
Two causes of action áre alleged in the complaint, but the appeal only involves a consideration of the first which is for the recovery of $8,000, a balance alleged to be due and owing on a demand note for $10,000 given by the defendant to the plaintiff on the 1st day of January, 1897. The plaintiff had for several years been in the employ of the defendant as' a traveling salesman, and the note was given for a balance due for services and moneys loaned. It is ' alleged in the complaint that the note was surrendered to the defendant on the 13th day of Hay, 1899, at its request, and. that the plaintiff was induced by the president of the defendant to accept therefor eight shares of the capital stock of the defendant of the par value of $1,000 each, with a guaranty in writing that the defendant would pay six per cent dividends on the stock annually, and a new note of the defendant for $3,000, representing $2,000 of the indebtedness covered by the $10,000 note and a further indebtedness for a' subsequent loan of $1,000; that the president of the defendant represented that the stock had been lawfully issued and *120that “ the defendant had power and authority by its charter to issue such stock and guarantee dividends thereon,” and that the plaintiff believed these representations and relied thereon ; that the defendant-paid dividends on the stock at the rate of six per cent per annum until the 1st day of October, 1901, and the further sum of $20, and then declined to pay dividends on the grounds - that the earnings of the company would not justify it and that the guaranty was void; that the plaintiff tendered a return of the stock and demanded a return of the note for $10,000 and offered to credit defendant thereon the $2,000 represented by the other note and, as interest; the amounts paid as dividends and that the note for $10,000 is not now in possession of the plaintiff. The defendant in its answer denies the guaranty and denies that the president of the defendant had authority to execute the same and'alleges that the guaranty if executed was void and that plaintiff had either actual or constructive notice thereof. The other material allegations of the complaint are admitted.
The defendant was incorporated on the 8th day of February 1878, pursuant to an act of the Legislature of the State of Ohio passed on the 1st day of May, 1852, and the acts supplementary and amendatory thereto. The purpose of its incorporation, as stated in the -certificate, was “ buying and selling foreign and domestic woods in the log or otherwise and of manufacturing the same into planks, boards and veneers, and of disposing of the same, and doing a general lumber*business, and holding such real and personal estate as may be deemed necessary and convenient to carry into effect the object of the-incorporation.” It was stipulated upon the trial that the General Statutes of Ohio show that no corporation incorporated under the laws -of that State since the 1st day of May, 1852, “lias had at any time power to guarantee dividends on its capital stock.” It also appears by those statutes that dividends may be lawfully paid only from the surplus profits arising from the business of the corporation and the method of calculating profits is therein regulated. The plaintiff testified that in April, 1899, he wrote the defendant asking payment of $5,000 on its note for $10,000 which he held; that on the twenty-second day of the same month he received a letter in the name of the company signed by its president, saying that the stockholders of the company preferred to pay the note in full and *121that the company was ready to hand him a check for the face oi the note, but, since he only desired $5,000, the stockholders joined in the suggestion, for his interest and not for theirs, that he take $5,000 in cash and purchase five shares of the company’s stock upon which six per cent dividends annually would be guaranteed and that the company would agree, or two of its stockholders named in the letter would jointly agree, to buy his stock at the end of three years at the same price although the company would prefer to pay the note in cash and was not anxious to sell stock as it was expected that greater dividends than six per cent would be paid; that about-the tenth of May thereafter the president of the company called at the plaintiff’s house with, reference to the note and correspondence, and spoke of the prosperity of the company and of its good prospects, saying that it expected to pay ten per cent dividends, if not more, and that the stockholders with whom plaintiff was acquainted were all anxious that he should take stock, and “ offered to me that if I would take stock of the Albro Co. that they would guarantee a dividend of six per cent per annum in exchange for my note. I then asked him if that would be preferred stock. He answered me by saying that it would be stock guaranteed by the Albro Co., which they had a right to do; ” that plaintiff replied that he did not desire to buy stock, and would prefer to let the note run or have it paid in full; that the president of the company then said that it was not convenient to pay cash on the note at that time, to which plaintiff replied that he would think the matter over and see the president of the company again; that he was well acquainted with the president of the defendant and believed all that he said ; that he had another conversation with the president of the company a day or two later; that the president then informed him that this was the only note of the kind outstanding on the books of the company, and that,.they . wished to .get it off. the books as a liability, and that the company would sell to him eight shares of stock and guarantee a dividend of six per cent per annum, payable quarterly, and the balance of $2,000 would be paid in cash in exchange for the $10,000 note, and, as an additional advantage to him, would pay interest on the note to the first of July, and would pay the first dividend on the stock on the first of July; that plaintiff then informed the president that he would accept the offer; that about *122the first or second week in June thé stock was delivered to thé plaintiff by the president of the company, together with the following letter:
“ Hew Y oek, May 13, 1899:
“Mr. Jas. S. MoVitt
“Dear Sir. — You hold the note of The E. D. Albro Co. for $10,000.00 bearing Int. at Qf0. If as proposed you will buy 8 shares of The E. D. Albro Co. stock we will guarantee you a dividend on same payable quarterly, and the remaining $2,000.00 we can arrange as you may desire.
“ This is the arrangement proposed by Mr. McDougall, and he and Mr. Justice will agree to purchase back the stock át par within 2 to 3 years if you wish to sell, and you are guaranteed a dividend of dfo per annum in the meanwhile;
“Yours truly,
“THE E. D. ALBRO CO.,
“ W. H. Justice

“Prest.”

The plaintiff received dividends on the stock down to the 1st day of October, 1901, as alleged. About that time the management of the company changed, and the condition of its business did not justify the payment of dividends thereafter. On the 3d day of December, 1901, the plaintiff received a letter from the company, written by its secretary, inclosing a draft to apply on the $3,000 note of the company, which he then held, and informing him that some of the stockholders had entered a protest against the payment of dividends, and that as the company was not earning dividends it would be an ultra vires act to pay them and the protest would have to be heeded. Qn the fifteenth of the same month he wrote the company, saying that he was not aware at the time that the agreement to pay dividends was unlawful, but that if it was, he ought not to hold the company and had no desire to do so, that if in the judgment of the company and its legal advisers it was beyond its power to issue the stock with the guaranty, he offered to return the stock properly indorsed for surrender or transfer and the guaranty alsd in exchange for the notes which he surrendered to the company on which he authorized the. indorsement of payments, as interest, of the amounts he had received as dividends, together with $2,000 on *123account of the principal. On the following day the attorneys for the company, to whom the plaintiff’s letter had been referred, wrote the plaintiff, saying that the guaranty was made without the authority of the company, but that it would have been ultra vires, even if authorized, and that the company could not receive back the stock or return the note. It does not otherwise appear that the company authorized its attorneys to write this letter. The plaintiff then brought this action.
I am of opinion that the action cannot be maintained and that the judgment in favor of plaintiff should be reversed. The theory of the plaintiff seems to be that the guaranty of dividends was void, and that it was such an essential part of the consideration that when the company defaulted in paying dividends he was at liberty to rescind the contract by which he received the stock and to recover upon the original note which he had surrendered to the defendant and which was in its possession. There was no allegation or proof of fraud or mutual mistake and the plaintiff does not ask to have the contract set aside upon either ground, but .claims the right of his volition and without the consent of the defendant to rescind it. The contract was fully performed on the part of the plaintiff unless it can be said that it undertook to give a valid guaranty which manifestly it could not do. The defendant did all that it agreed to do at the time, and paid the dividends according' to the guaranty for more than two years. During all that time the plaintiff was a stockholder of record of the defendant company and it was not in default. It may be assumed that others became stockholders and third parties dealt with the company on the faith of its financial condition with this obligation to the extent of $8,000 apparently canceled. After this lapse of time upon the failure of the company to pay a dividend which, according to the guaranty, did not become due for more than two and one-lialf years after the -agreement had become consummated, the plaintiff asserts the right to terminate of his own volition all his liability as a stockholder and to reinstate the company’s original indebtedness to him. This I think he may not do. Doubtless the plaintiff relied on this guaranty and if he knew it was invalid perhaps he would not have surrendered the note and have accepted the stock; but whether so or not it was not a conditional sale. The sale was consummated. The guaranty if valid *124was a covenant for the performance of obligations at future times, and its breach was, therefore, a breach of a condition subsequent and 'would afford no grouhd for rescinding the purchase of the stock. (De Kay v. Bliss, 120 N. Y. 91; Lamson Consolidated Store Service Co. v. Conyngham, 11 Misc. Rep. 428; 32 N. Y. Supp. 129 ; Fairbank Canning Co. v. Metzger, 118 N. Y. 260; Goldsborough v. Orr, 8 Wheat. 217; Railroad v. Parks, 86 Tenn. 554; Morrow v. Iron & Steel Co., 87 id. 262; Hoffman v. King, 70 Wis. 372; Tufts v. Weinfeld, 88 id. 647; Patterson v. Donner, 48 Cal. 369.) Moreover, I think that if this guaranty is to be construed as an absolute undertaking on the part of the company .to pay dividends regardless of whether they are earned or not, the plaintiff is chargeable with knowledge of its invalidity and cannot rescind upon that ground. Such a contract would be contrary to public policy as it would be in fraud of the rights of creditors and of the stockholders, and it is not conceivable that it, would be valid anywhere. (Lockhart v. Van Alstyne, 31 Mich. 76 ; Miller v. Ratterman, 47 Ohio St; 141.) Furthermore, I think the principle that all persons dealing with a corporation are chargeable with notice of its corporate powers and that its charter, being the law of its existence, is carried wherever the corporation transacts business, is certainly applicable to. the purchase of the capital stock of a corporation wherever made. (Morawetz Corp. [2d ed.], § 96 ; Oil City Land & Improvement Co. v. Porter, 99 Ky. 254.) In an action in the courts of this State between individuals and a foreign corporation, which pleaded that the contract upon which the action was based was ultra vires, the Court of Appeals applied this rule. (Jemison v. Citizens' Savings Bank, 122 N. Y. 135.) The plaintiff intended to become a stockholder of the corporation. He obtained all the stock that he bargained for and there is no question but that it is valid. The corporation of which he was becoming a stockholder at most agreed to pay six per cent dividend upon the stock. As has been observed, there is no question of bad faith. Undoubtedly this agreement was made in the confident expectation that the earnings would justify the payment, of such dividends, but if it was intended to undertake absolutely for the payment of the dividends regardless of the earnings of the cor poration, this at most was an innocent misapprehension on the part of the directors dr managing officers as to their authority. Public policy *125requires, I think, that in these circumstances, a purchaser of stock should not be at liberty years later to rescind his contract because the guaranty was an ultra vires contract. It is just and necessary to the protection of the rights of others that knowledge of the invalidity of the contract should be imputed to him.
There is room for argument that the true construction of this guaranty does not render it void, and there is authority for the construction, that it was an undertaking. to pay dividends on this stock as might be lawfully done from the earnings, instead of accumulating a surplus or in preference to other stockholders who had knowledge of the plaintiff’s rights (Lockhart v. Van Alstyne, supra), but this is not an action upon the guaranty and that question cannot be decided now.
• The judgment and order should be reversed and a new trial granted, with costs to appellant to abide the event.
Van Brunt, P. J., concurred.
Judgment and order affirmed, with costs.