Court Opinion

ID: 9653232
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:41:41.184612+00
Date Added: 2024-06-11T18:12:57.219508
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
The Fredonia Cement Company of New Jersey will be referred to herein as the New Jersey Corporation, and the Fredonia Cement Company of Delaware as the Delaware Corporation.
Where two methods are available by -which a transfer of corporate property may he effected, one of which results in taxable gain to the corporation and one does not, and the property is transferred, the question of whether a tax liability is incurred by the corporation must be determined from the meth- ^ it actually employed rather than the methl0¿ j¡t intended should be employed. United states v. Phellis, 257 U. S. 156, 172; 42 S. Ct. 63, 66 L. Ed. 180; Weiss stearn, 265 U. S. 242, 254, 44 S. Ct. 490, 492, 68 L. Ed. 1001, 33 A. L. R. 520; Clemmons v. Commissioner (C. C. A. 5) 54 F.(2d) 209, 211.
T w . o* In Weiss v. Stearn, the court said:
, “Questions of taxation must be determined &y viewing what was actually done, rather than the declared purpose of the partici- , „ r r r ^
„ And in Clemmons v. Commissioner, supra, the court said:
“It is true that in tax matters the courts must regard the substance rather than the mere form of the transaction; but effect must be given to what persons have done ra-ther than what they say they intended.”
Here two methods were open, one a distri-button of the assets of the New Jersey Corporation to its stockholders and a transfer by them to the Delaware Corporation, under which no taxable gain would have been realized by the New Jersey Corporation; and the other a direct sale and transfer by the New Jersey Corporation to the Delaware Corporation.
Although Patterson, president of the New Jersey Corporation, testified that he intended to have the former method followed, it is plain that such method was not employed, Clearly, there was no distribution of the physical assets of the New Jersey Corporation to its stockholders, and no transfer by them to the Delaware Corporation.
There was either a sale by the New Jersey Corporation directly to the Delaware Corporation, or no sale at all. The title either passed directly from the New Jersey Corporation to the Delaware Corporation or it gtill remains in the former or its directors as trustees after its dissolution. See note 1.
*257Was there a sale and transfer by the New Jersey Corporation? The corporate records of the New Jersey Corporation recite that a meeting of its stockholders was held on July 3,1925; that a waiver of notice of such meeting was signed by all of its stockholders, They also recite that at such meeting a resolution was adopted by unanimous vote of all the stockholders authorizing-: (1) The om-cersof the New Jersey Corporation to sell all its physical properties and to make, exe-eute, and deliver any and all deeds of eon-veyanee, bills of sale, contracts, or other m-struments necessary to effect such sale; (2) its secretary to attest such instruments and affix the corporate seal thereto; and (3) its president or mce-prestdent to fix and determine the price and conditions of sale. (ItaLics mine.) Following the meeting of the stockholders the directors of the New Jersey Corporation met, executed a written waiver of notice of the meeting, and adopted the same resolution m substance.
On July 9, 1925, Patterson as president exeeuted, and Doggett as secretary attested a deed to certain real estate from the New Jersey Corporation to the Delaware Corpora-^on'
_ On July 10, 1925, Patterson as president executed, and Doggett as secretary attested a further deed to certain real estate, and a bill of sale of certain personal property, from the New Jersey Corporation to the Delaware Corporation.
The last three mentioned instruments were actually exeeuted by Doggett on July 9 and by Patterson on July 10, 1925.
On July 16, 1925, Patterson as president executed and Doggett as secretary attested a contract between the two corporations by which they agreed to a reduction in the price on account of certain defects in title and other matters. This contract contains the signifieant recital that “on the 23rd day of June, 1925, a certain contract was entered into between Frank H. Patterson on behalf of the party of the second part (the New Jersey Corporation) and Robert L. Cochrane for the sale and purchase of the physical properties of the party of the second part.” (Italics mine.) It also released the New Jersey Corporation and Patterson from any claim for damages on account of any misrepresentations made by Patterson, as an inducement to the contract of June 23, 1926.
The corporate minutes and the instruments of transfer were prepared jointly by Cooper? attorney for the New Jersey Cor-p0ra£j[011) and Morrison, attorney for the Del-awar0 Corporation. Do?gett secured the signatures 0f the directors and stockholders of tbe Ngw Jersey Corporation to the waiv-0rs o£ notíc0 and tb0 corporate minutes. Cooper caused tbe instrum6nte 0f transfer to be ex0euted by Pattersoll and Doggett. Tber0 ig n0 proof tbat Morrison had any ]£n(>w¡e3ge 0f Patterson’s secret instructions to Boggett There is nothing in the contract between Patterson and Cochrane to indicate ^ metbod o£ trailsfer wbÍ6b PatterSon intended should he followed. The blame for the failure to follow Patterson’s instructions falls squarely on Doggett and Cooper, and not on the Delaware Corporation or its representatives.
On July 16, 1925, the Delaware Corporation deiivered to Doggett as treasurer of the T^rew Jersey Corporation, a check payable to the New Jersey Corporation for the purchase iess the agreed reduction, and the ingtruments of transfer were delivered to the Delaware Corporation. It took possession of the properties thereunder, and ever since has been in possession thereof. Doggett as troasurer of the New Jersey Corporation endorsed sue^ cllec^ witl1 the corporate name and dePos^e<^ ^ account of Patterson, Thereafter Patterson distributed the proceeds thereof among the stockholders of the New Jersey Corporation.
On November 24, 1925, the stockholders of the New Jersey Corporation took the necessary legal steps to dissolve that eorporation.
On December 2, 1925, the former stockholders of the New Jersey Corporation passed a resolution undertaking to rescind ,, , t ± t ¿ m j j.i , « j, , sale and to distribute the assets of that corporation among its former stockholders, Tvn]Qwr>T,0 fWrYnvafW) fhn+ ancl actvlfaecl ^ -Delaware Corporation tiiat Such stockholders Were ready and willing to make proper transfers of the assets of the t. x ~ i New Jersey Corporation to- the Delaware Corporation,
It was no fault of the Delaware Corpora-£jon £ba£ £be i\rew jersey Corporation did not , . _ „ .Í f T. . , , retain the proceeds of the sale. It had dehv-*258ered a cheek payable to the New Jersey Corporation to its treasurer, the proper officer to receive it. What that officer thereafter did with the cheek was a matter solely between the officer and his corporation.
j
.... The majority opinion says there was no meeting of the minds of the two corporations on a contract of sale.
Whether there has been a meeting of the minds of the parties on the formation of a , , . , , ■ ■, , , . , • contract is determined by applying an objee-tive rather than a subjective test; that is, by ascertaining whether there has been an ex-nressed mutual assent rather than an actual pressed mutual assent rattier tlian an actual mental assent.
^ , ... On this question, Mr. Williston in lus work on Contracts has this to say:
Sec. 20. “If there has been an expression of mutual assent, the fact that the expression was made under a mistake or induced by fraud, duress, or under undue influence, will not prevent the formation of a contract if there was assent, however induced, to make the expression in question.”
Sec. 94. “It follows from the principle that expressed mutual assent rather than actual mental assent is the essential element in the formation of contracts, that a mistaken idea of one or both parties in regard to the meaning of an offer or acceptance will not prevent the formation of a contract. Such a mistake may, under certain circumstances be ground for relief from the enforcement of the contract. But this relief is in its origin equitable and is in its nature a defense to the enforcement of the contract of which advantage may or may not be taken, rather than a defect in the formation of the contract. It follows that the test of the true construetion of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.”
Sec. 1536. “Under the guise of conclusive presumptions of mental assent from ex-temal acts, the law has been so built up that it can be now expressed accurately only by saying that the elements requisite for the formation of a contract are exclusively ex-temal ”
In O’Donnell v. Town of Clinton, 145 Mass. 461, 14 N. E. 747, 751, the court said:
“Assent, in the sense of the law, is a matter of overt acts, not of inward unanimity in motives, design, or the interpretation of words.” .
In Hotchkiss v. National City Bank (D. C. N. Y.) 200 F. 287, 293, the court said:
“A contract has, strictly speaking, noth-jng to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a 1rTlowrl intent.”
See, also, Bijur Motor L. Co. v. Eclipse Mach. Co. (C. C. A. 2) 243 F. 600, 603; C. H. Pope & Co. v. Bibb Mfg. Co. (C. C. A. 2) 290 F. 586, 587; Det Forenede Dampskibs-Selskab Aktieselkab v. C. F. & G. W. Eddy (D. C. Mass.) 293 F. 82, 87; Washingston Shoe Mfg. Co. Duke, 126 Wash. 510, 218 P. 232, 37 A. L. R. 611; Allen v. Bissinger & Co., 62 Utah, 226, 219 P. 539, 31 A. L. R. 376; Davern v. American Mut. Liab. I. Co., 241 N. Y. 318, 150 N. E. 129, 43 A. L. R. 522; Eleftherion v. Great Falls Mfg. Co., 84 N. H. 32, 146 A. 172; McConnell v. Lamontagne, 82 N. H. 423, 134 A. 718; Seavy & Flarsheim Brokerage Co. v. Monarch Peanut Co. (St. Louis Ct. of App.) 241 S. W. 643.
Applying the principle to offer and ac-eeptanee, Mr. Williston, at section 35 of his work on Contracts, says:
/‘Throughout the formation of contracts lt; ls to be observed that not assent, but what bbe okber Party is justified as regarding as ass?nt 13 essential. Accordingly if an offeree 111 ignorance of the terms of an offer so acts OT ^Presses himself as to justify the other Par^y inferring assent, and this action or expression was of such a character that a rearsonable man in the position of the offeree should have known it was calculated to deeeive tbe offeror into the belief that his offer ba<^ heen accepted, a contract will be formed in spite of the offeree’s ignorance ^ of the terms of the offer. The commonest illustra^ion of this principle is where one is ignorant of the language in which a document is ’ 01’wh° is iU/terate scutes, under a misíake f * ^ contents, a muting proposed ?s a contact. ' A similar principle ^applicable to.the offeror’s conduct as to the offeree^- offer°r prepared the wntmd faded the^,em to exPress waning, no more ^aari acceptor c-ould evade its effect ^
The rule is stated in Restatement, Conbrac^s § ^0, as follows.
“Mutual assent to the formation of informal contracts is operative only to the extent that it is manifested. Moreover, if the *259manifestation is at variance with the mental intent, subject to the slight exception stated in Sec. 7.1, it is the expression which is controlling. Not mutual assent but a manifestation indicating such assent is what the law requires. Nor is it essential that the parties are conscious of the legal relations which their words or acts give rise to. It is essential, however, that the acts manifesting assent shall be done intentionally. That is, there must be a conscious will to do those acts; but it is not material what induces the will. Even insane persons may so act; but a somnambulist could not.”
The proffer of the deeds and the bill of sale by the New Jersey Corporation to the Delaware Corporation was an offer. Their receipt, and the payment of the purchase price by the Delaware Corporation, was an acceptance of the offer by it. Thereupon a binding contract was consummated, although one of the officers of the New Jersey Corporation, who executed the instruments, did not understand the import of the offer.
Furthermore the other officers of the New Jersey Corporation, empowered by the corporate action of July 3, 1925, to act in the premises, fully understood the import of such instruments.
Tested by the foregoing principles there was the requisite manifestation of mutual assent to a contract of sale between the two corporations and such contract was fully executed.
The fact that neither the stockholders nor directors actually met and adopted the resolutions above referred to, is not important. They all signed the corporate minutes of the meetings and are bound thereby. Where a contract of sale has been fully executed on the part of the purchaser, who has acted in good faith, the selling corporation is estopped to deny the validity of the sale on account of informalities, irregularities, or illegalities in the corporate meetings authorizing such sale, or in the action of the corporate officers. This is especially true where the selling corporation cannot restore the status quo ante. Fletcher Cyc. Corporations (Perm. Ed.) § 430; Morris v. Y. and B. Corporation, 198 N. C. 705, 153 S. E. 327; Painter v. Brainard-Cedar Realty Co., 29 Ohio App. 123, 163 N. E. 57; Colcord v. Granzow, 137 Okl. 194, 278 P. 654; Defanti v. Allen Clark Co., 45 Nev. 120, 198 P. 549; Ashley Wire Co. v. Illinois Steel Co., 164 Ill. 149, 45 N. E. 410, 56 Am. St. Rep. 187.
II.
There was evidence that Patterson, at the time he executed the deeds and the bill of sale, because of illness, was temporarily incapable of comprehending the import thereof. Tt was not shown that he was so incapacitated when he signed the corporate minutes of July 3, 1925, and the contract of July 16,1925.
Assuming, but not admitting, that Patterson’s mental condition affected the contract of sale between the two corporations, it at most rendered the contract voidable.
The contract of an insane person, who has not been so adjudged, is voidable but not void. Ash v. Wulf, 127 Kan. 301, 273 P. 432; Doris v. McFarland, 113 Conn. 594, 156 A. 52; Haddock v. Callahan Grocery Co., 163 Ga. 204, 135 S. E. 747; Dean v. Estate of Atwood (Iowa) 212 N. W. 371; Wadford v. Gillette, 193 N. C. 413, 137 S. E. 314; Feild v. Koonee, 178 Ark. 862, 12 S.W.(2d) 772, 68 A. L. R. 1303; Czyrson v. Roseau County Nat. Bank, 172 Minn. 420, 216 N. W. 224; Cawby v. Kurtz, 209 Ky. 275, 272 S. W. 746. This is the rule iu Missouri where the deeds and the bill of sale were delivered and the purchase price paid. Brann v. Missouri State L. I. Co. (Mo. App.) 226 S. W. 48; Hill-Dodge Bank. Co. v. Loomis, 140 Mo. App. 62, 119 S. W. 967.
The contract being voidable merely, no ratification was necessary to.give it validity. Caldwell v. Ruddy, 2 Idaho (Hasb.) 1, 1 P. 339; Blinn v. Schwarz, 377 N. Y. 252, 69 N. E. 542, 101 Am. St. Rep. 806. On the other hand, a disaffirmance was necessary in order to nullify the contract. Ætna Life I. Co. v. Sellers, 154 Ind. 370, 56 N. E. 97, 77 Am. St. Rep. 481; Skinner v. Schwab, 188 App. Div. 457, 177 N. Y. S. 143.
The action which the former stockholders attempted to take on December 2, 1925, was wholly ineffectual. The power to act was in the directors as successor trustees, not in the former stockholders. See note 1, supra.
Where a contract has been entered into with an insane person not so judicially adjudicated, upon an adequate consideration, and the other party has entered into the contract in good faith without knowledge of or reason to suspect such insanity, and no undue influence or fraud has been practiced on the insane person, and he has received and enjoyed the full benefit of the contract and is unable to place the other party in statu quo-, neither the insane person nor *260his representatives can avoid the contract. Doty v. Mumma, 305 Mo. 188, 264 S. W. 656, 657, 34 A. L. R. 1399; Flach v. Gottschalk Co., 88 Md. 368, 41 A. 908, 42 L. R. A. 745, 71 Am. St. Rep. 418; Rhoades v. Fuller, 139 Mo. 179, 40 S. W. 760, 762; Gwinn v. Hobbs, 83 Ind. App. 263, 141 N. E. 812, 817, 144 N. E. 648; Dowlin v. Boyd (Tex. Civ. App.) 284 S. W. 636, 641; Fitzpatrick’s Adm’r v. Citizens’ Bank & T. Co., 231 Ky. 202, 21 S.W.(2d) 254, 257; Scott v. Hay, 90 Minn. 304, 97 N. W. 106, 109; Wadford v. Gillette, supra; Czyrson v. Roseau County Nat. Bank, supra; Molton v. Camroux, 2 Exch. 487, 502, 154 Reprint 584; 32 C. J. p. 733.
The Delaware Corporation had neither knowledge nor reason to suspect that Patterson did not read and understand the import of the deeds and the bill of sale. Acting in good faith, it paid the purchase price, accepted the deeds and the bill of sale, went into possession of the property thereunder, _ and has since operated the plant. The contract has been fully executed. The New Jersey Corporation has received the benefits thereof, has distributed its assets to its stockholders, and has effected its dissolution. Neither it, its directors as trustees, nor its former stockholders can now place the Delaware Corporation in statu quo, and the contract may not now be avoided.
III.
A person by the acceptance of. benefits may be estopped to deny the existence, validity, and effect of a contract. Ford v. Ford, 24 S. D. 644, 124 N. W. 1108; Adamstown C. & S. Co. v. Baltimore & O. R. Co., 137 Md. 199, 112 A. 286, 289; 21 C. J. § 211, p. 1209.
The New Jersey Corporation received the benefits of the contract and in turn transferred them to Patterson, who here asserts the non-existence of the contract. Patterson by distributing the purchase price to himself and the other stockholders, and by joining in the dissolution of the corporation, has disabled the corporation from returning .such benefits. After acquiring full knowledge of the facts, neither the New Jersey Corporation, its directors as successor trustees, nor its former stockholders tendered back the benefits received from the sale. Under these circumstances that corporation, its directors as successor trustees, its stockholders, and Patterson ratified the transaction, and are estopped to deny the existence and validity of the deeds and the bill of sale. Warner v. Hill, 153 Ga. 510, 112 S. E. 478, 480; Johnson v. Milwaukee & W. Inv. Co., 49 Neb. 68, 68 N. W. 383; Ford v. Ford, supra; Adamstown Co. v. Railroad Co., supra; Ormsby v. Johnson, 24 S. D. 494, 124 N. W. 436, 437; Huffaker v. Town of Fairfax, 115 Okl. 73, 242 P. 254, 255; Beasley v. Assets Conservation Co., 131 Wash. 439, 230 P. 411, 413; New Hampshire Land Co. v. Tilton (C. C. N. H.) 19 F. 73, 77; Kansas Life Ins. Co. v. Harroun, 44 Idaho, 643, 258 P. 929, 930; City of Belfast v. Belfast Water Co., 115 Me. 234, 98 A. 738, 740, L. R. A. 1917B, 908; Bacich v. Northland Transp. Co., 185 Minn. 544, 242 N. W. 379, 387; Green v. Lidberg, 181 Minn. 361, 232 N. W. 511; White v. Moales, 147 Miss. 558, 113 So. 341.
IV.
It is not essential for the government to assert the estoppel. The New Jersey Corporation delivered the deeds and the bill of sale of its property, and received the purchase price therefor. The contract was not void, but at most voidable. The 'title to the property passed thereunder. Ash v. Wulf, supra; Ætna Life I. Co. v. Sellers, supra. The purchase price represents a profit received by the New Jersey Corporation. It has not returned that purchase price, but has distributed it to its stockholders through Patterson. That is the existing status. The question of estoppel only becomes material in determining whether the New Jersey Corporation or its successor trustees can now change that status. The New Jersey Corporation and its successor trustees have not, and by principles of estoppel cannot now change that status. By accepting and retaining the benefits after acquiring knowledge of the facts, the New Jersey Corporation, and its directors as successor trustees, have ratified and cured any defect in the original contract.
Surely, the New Jersey Corporation may not receive and retain a profit from a transaction and escape a tax thereon by asserting that the transaction in its inception was voidable, when it has not avoided, and by reason of what has since transpired cannot now avoid, the legal import of tfie transaction.
It is my conclusion that a tax liability has arisen against the New Jersey Corporation, and that Patterson is liable therefor as transferee. t
For these reasons I respectfully dissent.

Note 1.
“Upon the dissolution in any manner of any corporation, the directors shall be trustees thereof, with *257full power to settle the affairs, collect the outstanding debts, sell and convey the property and divide the moneys and other property among the stockholders, after paying its debts, as far as such moneys and property shall enable them. They shall have power to meet and act under the by-laws of the corporation, and, under regulations to be made by a majority of said trustees, to prescribe the terms and conditions of the sale of such property, and may sell all or any part for cash, or partly on credit, or take mortgages and bonds for part of the purchase price for all or any part of said property.” P. L. N. J. 1896, c. 295 §54, as amended by L. N. J. 1910, c. 36, p. 51, § 1. 2 Comp. St. N. J. 1910, p. 1635, § 54.