Court Opinion

ID: 6997379
Source: CourtListenerOpinion
Date Created: 2022-07-24 03:35:50.138427+00
Date Added: 2024-06-11T16:09:49.112684
License: Public Domain

Me. Justice Wateeman dissenting. The capital stock of a corporation is a trust fund. With reference to payments of subscriptions for stock, the rule in this State as laid down in Coleman v. Howe, 154 Ill. 458-467, is as follows: “ If a stockholder has not paid his subscription in full he is liable for the debts of the corporation to the extent of the unpaid portion of his subscription. It is the duty of the directors of a corporation to manage its capital stock as a trust fund for the benefit of its shareholders while it exists, and of its creditors in case of its dissolution. This trust fund consists not only of the capital paid in, but also of that which the shareholder has promised to pay in. The unpaid stock is as much a part of the corporate assets, as the money which has been paid upon the stock. The obligation of a subscriber to pay his subscription can not be released or surrendered to him by the trustees of the corporation. Mor will stockholders be permitted to agree among themselves, that their shares shall be taken at a nominal value, or be non-assessable, when such agreement operates to the injury of creditors. Upton v. Tribilcock, 91 U S. 45; Sanger v. Upton, 91 Id. 56. ‘ Any device by which the members of a corporation seek to avoid the liability which the law imposes upon them is void as to creditors, whether binding or not as between themselves. Of this character is an agreement among the members that the shares of the capital stock of the corporation shall be regarded as fully paid up,’ wrhen, in fact, they are not fully paid. Union Ins. Co., v. Frear Stone Mfg. Co., 97 Ill. 537. The question presents itself in this case, whether the stock held by the appellants was stock which had been in good faith fully paid up, or whether it must be regarded as stock upon which fifty per cent remained unpaid, as a fund liable to be subjected by the appellees to the payment of their judgments. It is held, that stock may be paid for in property as well as in money. 2 Morawetz on Priv. Corp., Sec. 825; 23 Am. & Eng. Enc. of Law, page 794. In the present case, the capital stock wras paid for in property alone. Property worth not more than $75,000 was conveyed in exchange for capital stock amounting to $300,000. There was here an over-valuation of the property which formed the consideration for the issue of the stock. Cases may arise where stock is issued for property taken at an over-valuation, which will justify the courts in compelling the stockholders to respond to the creditors for the par value of the stock, less the actual value of the property taken in exchange for it. Such will not be the case where there is entire good faith in making the valuation. But if the property contributed is not valued in good faith, the shares of stock will not be fully paid up, either in law or fact, by the contribution of such property. A declaration by the corporation that the shares are paid up will not avail against the creditors in case of insolvency. 2 Morawetz on Priv. Corp., Sec. 825. ‘ The courts have inflexibly enforced the rule that payment of stock subscriptions is good as against creditors only where payment has been made in monej^, or what may be fairly considered as money’s worth.’ Wetherbee v. Baker, 35 N. J. Ex. 501. Some of the cases hold that over-valuation will not render the stockholder liable for the difference between the actual and accepted values unless there is affirmative proof for fraud aliunde. But other cases hold what we regard as the better view, namely, that where property, whose value is well known or can be easily learned, is taken at an exaggerated estimate, a strong presumption is raised that the valuation is not in good faith and is made for a fraudulent purpose. This presumption will be conclusive unless rebutted by satisfactory evidence explanatory of the apparent fraud. 'Where the over-valuation is so great that the fraudulent intent appears on its face, and is not explained, the court will hold it,to be fraudulent as a matter of law. 1 Cook on Stock, etc., Sec. 47; 23 Am. & Eng. Enc. of Law, pages 859, 860; Douglas v. Ireland, 73 N. Y. 104; Boynton v. Andrews, 63 Id. 93; Boynton v. Hatch, 47 Id. 232; Osgood v. King, 42 Iowa, 478. In Boynton v. Andrews, supra, stock for $100,000 was issued 'for property worth $50,000, and it was held that there was a gross over-valuation, and that the transaction was fraudulent in law on its face.” From this it follows that when, as between a corporation and a subscriber' for its stock, the subscription has been paid in full, a creditor who attacks such payment, insisting that the subscription has not in good faith been fully paid, and that he, as a creditor of the corporation, is entitled to recover the unpaid amount subscribed, is bound to show that the apparent or agreed payment as between the corporation and the subscriber, was fraudulent; consequently the burden of proof to show fraud is upon the creditor. This cause was, on November 24, 1891, referred to the master by the following order : “It appearing that this cause is at issue as to defendants J. G. McWilliams, Allison V. Armour, E. T. Cushing, E. Foote, Jr., George A. Armour and Allison V. Armour, trustees for Mary G. Armour, Barbara Armour, L. L. Coburn, C. H. Morse, O. S. Swan, E. G. Hamilton, M. A. Ryerson, D. F. Morgan, M. A. Bellas, John S. Kirk, Simon Florsheim, Chas. B. White, Wm. F. Morgan and D. Percy Morgan, trustees for L. H. and C. F. Morgan, James C. King, John B. Kirk, J. J. Mitchell, James Houghteling, John C. Grant, Edward T. Cushing, W. W. Farnam, Mrs. Alice M. Farnam, C. B. Coy, E. F. Spence, S. C. Hub bell, E. F. Hurlbut, J. F. Crank, I. W. Heilman, William Alvord, Louise Smith, F. 0.Weeks, Mrs.W. S. Hawk, A. B. Chapman, and C. 0. Cuyler, on motion of complainant’s solicitors it is ordered that said cause, as to the defendants above named, be referred to I. K. Boyesen, master in chancery, for proof, and said master is hereby directed to inquire, take proof and report the number of shares of capital stock of Pacific Bail way Company held by defendants, or either of them, at and prior to the filing of the bill of complaint herein; also the time or date at which said certificates of shares of stock were issued by said defendant, the Pacific Bailway Company, to the above named defendants, or either of them, and what consideration, if any, the said defendants respectively paid therefor; also what amount, if any, of the principal sum of said certificates or shares remained unpaid at the date of filing said bill of complaint; and the said master is further directed to ascertain, take proof and report all sums of money due complainant and intervening petitioners in said case, and other creditors of the Pacific Bailway Com-party similarly situated, who may become parties complainant by intervention or otherwise; all of which evidence the said master is directed to report to this court, together with his findings thereon.” On December 24, 1891, a similar order in respect to defendants W. S. Hawk et al., was made, and on December 31, 1891, a similar order as to M. E. Dayton, defendant, was entered. On the 26th day of June, 1893, it was ordered that the references herein be transferred to George Bass, Esq., and that the testimony already taken stand. It is insisted by counsel for appellant that the references to the master were not references of the issues of the case at all, but merely references upon certain questions upon which the master was to take evidence and state the facts, not the law. As to what consideration, if any, the defendants respectively paid for the certificates of stock of the Pacific Kailway Company to them severally issued, the master was directed to inquire, take proof and report, and also what amount, if any, of the number of said certificates or shares remained unpaid at the date of the filing of the bill in this cause. Counsel for appellants further say that there was a final hearing of the case before the chancellor, upon which evidence was heard without objection, in fact, upon an express mutual understanding as to the nature of the several references; that the master made up a report as if upon a full reference, but objections and exceptions upon it's consideration as such were filed, and that there was a hearing of the cause before the court, and that this hearing and trial by the court was upon evidence introduced before it and depositions filed in the case, and the evidence taken before the master. When a cause is referred to a master to take testimony and report his findings thereon, if the evidence before him consists in whole or in part of the testimony of witnesses who personally appear before him and testify in his presence, his report goes to the chancellor with the force and effect of the verdict of a jury. In the present case, some of the testimony taken by the master was by way of depositions, and .some was that of witnesses who personally testified before him. It was the duty of the master, under the references, to report his conclusion as to the consideration, if any, paid by the holders of certificates of the Pacific Railway Company stock, and also the amount, if any, due from such holders; and so he did. The court, it would seem, upon consideration of all the evidence reported by the master, and also of some heard by the court, came to the same conclusion in respect to the consideration paid for the certificates of the Pacific Railway stock that did the master,, so that the cause comes to this court with clearly the conclusion of both the chancellor and the master that the complainant has not shown that there was any over-valuation or fraudulent dealing in respect to the payment for the certificates of stock issued by the Pacific Railway Company. If it could be said that at the time the certificates of stock were issued by the Pacific Railway Company, the value of the property given therefor was well known to have been, or might easily have been learned to have been, taken by the company at an exaggerated estimate, then a presumption would be raised that the valuation put upon the property received by said Pacific Railway Company for such certificates was not made in good faith, but was made for a fraudulent purpose; and it is urged by appellants that such was the case, because, not long previous, such property had been sold at a rate equivalent to $32 upon the shares of the Pacific Railway Company. If the railway property under consideration, instead of being what it was, had been a piece of ordinary real estate? or had consisted of merchandise of a kind .frequently sold, and which had a well known value, the contention of appellants might be unanswerable. It is well known, however that the value of railroad property, and especially street rail, road property, depends very largely upon the men in control - thereof. If, in the city of Chicago at the present time, it should become known that Mr. Yerkes had' sold all of his holdings in certain street railroad property, while in a certain sense it might be said that it would not affect the intrinsic value, it would very seriously affect the market value, and might in various ways affect the earning or dividend-paying capacity of such property. So, in the present case, . it is apparent that the parties who purchased the Los Angeles railway lines did not do so with any thought of letting them remain in the condition they found them, but contemplated enlarging and extending them, thus increasing the intrinsic value and their dividend-paying capacity. And it appears that, after making such purchase of the Los Angeles lines, they proceeded to obtain additional licenses frpin the city of Los Angeles, and did a large amount of work in the improvement of the railroad system. What the value of such licenses at the time of the issuing of the certificates of stock by the Pacific Railway Company was, and to what extent the value of the Los Angeles property had by such licenses and by the work and improvements done thereon, been increased, there is nothing to show. It appears to me that, with the burden resting upon appellants to show that the property received by the Pacific Railway Company for which its certificates of stock were given, was fraudulently received at an excessive and well known over-valuation, appellants should have shown what its value was at the time such certificates were issued, and that it was not sufficient for them to show that at some time ' previous a purchase thereof had been made at a certain price, and to pay no attention to what additional value had been imparted thereto by the change of management and ownership, by the additional licenses obtained from the city of Los Angeles, and by the improvements made upon such railway system. The mere cost of a street railway is often but little indication of its value. The street railways of Chicago are probably to-day worth at least five times the actual cost thereof. In respect to the acceptance of this railway property in payment for the stock of the Pacific Company, if it was fraudulently received, there is absent from the transaction that concealment which almost always accompanies fraud; indeed, it may be said that actual, fraud, distinguishing it from constructive fraud, is always accompanied by deception. Misrepresentation is of the .very essence of actual fraud. An action for deceit can not be maintained by one who has not been deceived, whatever misrepresentations may have been made to him. If a man represented that his house was three stories high, and the vendee before purchasing goes over the house and plainly sees that it is but one story in height, he can not recover damages for such misrepresentation made by the vendor to him. All that was clone in respect to payment for stock issued by the Pacific Railway Company was open and above board. " Every one who dealt with the company seems to have known in just what way and' manner its stock had been paid for. The report of the master upon this subject is as follows: “ When the seventeen thousand and odd shares of stock of the Cable Railway Company were purchased by gentlemen here in Chicago, a committee was sent to Los Angeles, California; Mr. Holmes was on that committee, and was the only one of the committee whom the evidence shows to have been an experienced horse railroad man. I think the general inference is, from the evidence, that the stockholders were influenced by the recommendations and judgment of Mr. Holmes; and when the bonds were negotiated it would seem from the testimony that some of the bondholders relied entirely upon the judgment of Mr. Holmes in taking the bonds as security for the company’s notes. The statement of Mr. Holmes that the bonds were good security was sufficient for many of the bondholders, while others wanted in addition to that that he should indorse the notes. I think that the evidence shows plainly that had it not been for the fact of the paralleling of the tracks of the Pacific Railway Company, by the Electric Railway Company, that the Pacific Railway Company would be a paying investment. The evidence shows the earnings of the two roads, for a portion of 1894, exceed the earnings which Mr. Holmes’ representations called for. The evidence also shows that the Cable Railway Company would do ninety-five per cent of the business now done by the Electric Railway Company if the latter company was not there. As regards the actual value of the property and rights of the Los Angeles Cable Railway at the time of the sale to •the Pacific Railway Company, there is no evidence, except the price paid for the stock of the Cable Railway. I do not regard the price paid as the actual value at the time of the conveyance to the Pacific Railway Company; additional licenses had been obtained from the city, and a large amount of work had been done to improve the system, in various ways. I think it would be difficult to find two men who would place the same value on the road. I think the value placed on such property would vary, just in proportion to the favor the person had for horse railroads. 1 think most men would ask what the road could earn, and determine its value from the net earnings. I think the income of the electric and cable roads in 1894, as shown by the evidence, justifies the parties in believing the cable road to have been worth two millions and a half, but the item which no one considered and could not have been foreseen (the California legislature), ruined the property. Under such facts and circumstances I do not think the stockholders of the Pacific Railway Company owe anything on account of their stock to any of the creditors in this suit; in other words, I do not think the stockholders are liable for any further payment on their stock to the creditors in this suit. The creditors were given all the infprmation they asked for; there is nothing in the evidence which shows that any creditor asked for any information which was not given him, or that any facts were misstated to him, and further, he knew where the property was; and he was at entire liberty to make any examination he pleased. I can see no reason why they could not have ascertained the actual value of the property of the Pacific Railway Company. Briefly, I find that the consideration which the defendant, to which the stock of the Pacific Railway Company was originally issued, paid for the same, was all the stock of the Los Angeles Cable Railway Company, and all the property, assets and rights of the said Los Angeles Cable Railway Company. That all of said creditors of the Pacific Railway Company, at the time they first gave credit to the Pacific Railway Company, either knew that the stock of the Pacific Railway Company had been issued or was to be issued as full paid stock in payment for the stock of the Los Angeles Cable Railway Company, and the convexmnce and transfer to it of the property and assets of said Los Angeles Cable Railway Company, and that there was no further liability on the part of the persons to whom such stock was issued to pay any thing • thereon; or are not in a position to claim in this case, that any of the defendant stockholders are liable to pay anything further on the stock held by them respectively. That none of the said creditors in fact placed any reliance on the professed capital of the Pacific Railway Company or extended credit to the said company from the belief that its stock was fully paid, or that there was any liability on the part of any of the stockholders to pay anything further for their stock. That all the stock of the Pacific Railway Company was fully paid by the property given to the company therefor, as hereinbefore stated, and that there was no fraud or fraudulent intent in the transaction by which said stock was made full paid as aforesaid.” Reversed and remanded.