Court Opinion

ID: 6816985
Source: CourtListenerOpinion
Date Created: 2022-07-23 19:02:34.0869+00
Date Added: 2024-06-11T08:44:21.275773
License: Public Domain

Christian, J.,
dissenting:
I wrote the opinion in this case originally, but my brethren would not concur in my views. They believe there was no authority found in the books for my position, while I claimed there was no authority needed but the conscience of the chancellor to stamp the purposes of the promoters of this corporation and its organization with the disapproval and condemnation of this ■court. The reason of the law is the life of the law, and because a proposition of law is written in a book, does not make it just or right, as justice and righteousness ■can only be written in the conscience of men.-
Therefore, in my humble judgment, no authority can be found when rightly construed which warrants our holding the appellants stockholders of a corporation ■organized for fraudulent purposes, and after organization conducted by the promoters so dishonestly that the majority opinion states that it was properly the subject for the criminal courts, until Frasea disclosed the fraud and misrepresentation of Jackson, East, and Spence and Company, by which the stockholders were induced to purchase stock, and as a result of his disclosures the court took possession of what remained and in the receivership suit the sinister purpose of the promoters from the beginning was disclosed. The opinion says on this subject that a court of equity cannot enforce the criminal law.
This is true, but it is also true that a court of equity *734cannot rehabilitate a fraudulent contract or give validity to an illegal organization.
Here I want to say that the considerations and reasons upon which I based my opinion that this corporation be dissolved, were not called to the attention of the learned chancellor of the trial court by his commissioner nor counsel on either side of the case, nor was it argued before this court, but the facts of the illegal and fraudulent organization of the corporation appeared upon the face of the record and are uneontradicted, and it is my judgment that it is the duty of this court “ex mero motu” to declare that a corporation promoted, for dishonest purposes and organized in fraud has no existence in equity.
Here is the line of difference between my brethren and me. They cite in their opinion numerous authorities to sustain their view, and as applied to a proper state of facts they are undoubtedly sound law. But every case in which the principle of law was enunciated, will be found to be based upon a valid and legal incorporation. The reason upon which the law is based, as stated in most of the decisions, is that each stockholder agrees when he subscribes to the stock of a, corporation (or when he purchases properly issued stock) that its affairs shall be controlled by the majority. Therein is involved the axiom of the law, that it is the function of courts to enforce contracts not. make contracts for people, nor rehabilitate invalid ones.
It is a basic principle of corporation law that its stockholders become members of the corporation by contract, and that there is no privity of contract among-the stockholders inter se.
In the trial court the question of the jurisdiction of courts of equity to dissolve corporations was debated, *735but that such jurisdiction exists in Virginia is admitted before us. The majority opinion would lead to the belief that there is only one cause for dissolution by the court, that is, impossibility of accomplishment of the purposes of its organization. Hence it is proper to state the reasons for the exercise of the visitorial powers of courts of equity over corporations.
In this era of industrial development corporations have so grown that they own and control most of the wealth of the country and conduct most of its business. The American talent for organization and executive management is very largely engaged in the development and management of corporate enterprises — -its accomplishments have been wonderful. For the most part this work has been done honestly, efficiently and creditably. But not always has this been the case. These companies have been found to be efficient instruments of fraud, speculation, plunder and illegal gain. The ingenuity and fruitful cunning of adroit, ■experienced and unscrupulous talent have plundered and robbed the corporations, the stockholders and investing public, so that a system of jurisprudence has grown up to remedy the frauds of corporate directors, corporate agents, corporate organizers, and unscrupulous majorities. Besides, all the States have prescribed more or less laws for the organization, supervision and reporting of corporations for the purpose of protecting the stockholders and the public from these abuses.
As set forth in the majority opinion, F. M. Jackson and Edgar P. East secured the charter of the investment company and controlled its operations until the •court took charge thereof. But in order to disclose their sinister motives to plunder the public and the stockholders, it will be necessary to set forth in detail, *736as briefly as possible the facts as disclosed by the record.
They secured from the Corporation Commission the charter. Its principal office was in the city of Richmond, but it immediately, to escape supervision of the Commission, became domesticated in the State of New York.
The charter conferred power upon the incorporators “to establish a corporation under and by virtue of the provisions of the Code of Virginia.” Jackson and East presumed that they were the corporation by virtue of the charter. No subscriptions for stock were taken as required by section 3778, if any very few, but almost all of the stock was sold in the open market, as duly subscribed for and issued stock of an existing corporation, nor was any organization meeting ever held as required by law.
Said stock, amounting to 17,335 shares of preferred stock of the par value of $100.00 for which the company received $1,735,500.00; and Í9,364 shares of no par value common stock at ten cents per share, or a total of $1,956.40, was sold and issued, for the most part under a so-called three-cornered agreement between the company, said Jackson and East, and E. H. Spence and Company, a New York brokerage firm. It was in fact nothing but fraudulent conspiracy to> swindle the public, as the working out of the scheme discloses. The stock was issued upon order of Jackson and East in blocks of two (2) shares of preferred, two (2) shares of common, the company to receive the sum of two hundred dollars and ten cents per block, after which it appears that Spence sold the stock in blocks of two shares of preferred and one (1) of common, for from two hundred and fifty.dollars ($250.00) to three hundred dollars ($300.00) per block, Jackson and East-*737retaining the extra share of common stock originally issued, and they and Spence dividing the premiums thus received. Frasea and Hatch, leaders of the contending groups of stockholders, salesmen of Spence and Company, sold large blocks of this stock and received ten per cent commission therefor and were in pari delicto. Frasca sold $50,000.00 worth of the stock for which he received $5,000.00. Hatch sold $200,000.00 and at the same commission received $20,000.00. Thus by a little calculation will be seen the large sum that Jackson and East and Spence divided among themselves.
The fraud and misrepresentation by which this stock was sold to the public was that the company was well established and had prospects and surplus sufficient to pay the eight per cent preferred dividend for five years, when the corporation had never been organized. If this had taken place in Virginia under our statute all the parties would have been sent to jail.
The primary purpose and object of the investment coihpany was the small loan business or quasi banking business. Acts 1919, page 75, section 1 (Virginia Code G. L. 1923, section 3848, book 1), forbids organizations of this character from issuing no par value stock. But this was so essential to their scheme to get control of all the money of the stockholders, that they perpetrated a fraud upon the State statute, and were thus enabled to misappropriate and embezzle more than $900,000.00 of the money of the company, through their no par value stock.
Frasca disclosed the fraud and misrepresentations by which the stock was sold. Several hundreds of stockholders sued in the court of New York and New Jersey to have their subscriptions cancelled. Practically the only defense made to these suits was that the stock was *738purchased in the open market from Spence & Company. The stockholders did not know until the evidence was taken in this cause that the investment company was never legally organized, and that said stock was fraudulently issued.
Jackson and East had the finance company organized and had transferred, without consent of the stockholders, all the stock of the small loan companies to the finance company for its stock that was valueless. This was illegal and not binding upon any of the stockholders.
It is true that men of high standing and character are now the directors of the company, but what assurance has any stockholder that they will be continued in office any longer than the court has control? They were elected by proxies held by Hatch, and he will no doubt oust them and take control as soon as he can. But can the character and standing of the present directors purge the investment company of fraud and make legal a corporation conceived in fraud, and organized for plunder?
It is a principle of law and common justice that needs no citation of authority that where a corporation is organized for fraudulent purposes, and stockholders are induced to purchase • stock or subscribe for same by fraud and misrepresentation, there is no legal corporation and any stockholder may sue and have the company dissolved and the assets distributed.
But even conceding that the corporation is legally existent, still the character of the business is such that it can never be a success. Several years of preferred dividends are due and are prior liens upon the earnings. There is over $900,000.00 of impaired capital to be made up in addition, by usurious interest of three and one-half per cent per month out of the necessities of the poorest .class of our citizens.
*739In the preamble to “Uniform Small Loan Law” (Acts 1922, page 502, section 1), and which is found in General Laws of Virginia, section 4168-1, the General Assembly sets forth its object to be to get rid of the “loan shark” and says: “It is not intended to provide additional interest compensation for loans of money or necessarily an interest rate higher than the conventional rate in this State,” but to recognize the expenses of such business, and the great losses, therein, so that those who pay are made to pay losses of those who do not pay. According to the workings of the law as disclosed in this case, a corporate loan shark has been substituted for the individual ones. It was plainly never the intention of the General Assembly that these small loan companies should make thirty per cent net dividend per annum out of the poor, and when such unconscionable profits are shown, it is safe to say that such companies will cease to exist. Such profits out of the needy are a fraud upon the law, and shocking to our sense of justice.
Some great jurist has said that a dissenting opinion “is like the voice of one crying in the wilderness,” but while my dissent may be vain, yet I owe to myself, and the profession and public, to express my views upon the subject of this kind of high finance, and the attitude the courts should take towards it.