Court Opinion

ID: 6232076
Source: CourtListenerOpinion
Date Created: 2022-02-17 20:24:15.593157+00
Date Added: 2024-06-11T08:57:54.414149
License: Public Domain

The opinion of the court was delivered by
Lowrie, C. J.
The plaintiffs sold goods to the Conestoga Steam Mills, a self-incorporated company, and now' sue the stockholders individually, and assert their right to do so, because, first, the capital stock has not been paid up in full; and second, the charter was obtained by filing an essentially false certificate. The offer to prove these facts was rejected, and this is the matter complained of as error.
The company was incorporated under the Act of 7th April 1849, to encourage manufacturing operations; section 9 of which makes the stockholders personally liable, to the amount of their unpaid stock, for all debts due by the company, and therefore it appears to us very clear that the plaintiffs ought to have been allowed to prove that the capital stock had not been fully paid up ; and we do not perceive that any part of the history of the company offered in evidence was entirely irrelevant to the fact to be proved. It seems to us to show affirmatively, that no share of the stock has been paid up in full. If this offer be proved, and not avoided by other facts, the plaintiffs would seem to be entitled to recover against the several defendants, according to their *414respective legal liabilities for unpaid stock. See McHose v. Wheeler, ante, p. 32.
And why may not the plaintiffs show the certificate, required by law in order to obtain the charter of incorporation, was essentially false ? The answer given is, that the charter is conclusive evidence of corporate capacity and rights until it is annulled in regular form by quo warranto or scire facias at the suit of the state.
Well, let us assume, for the present, that this is so. Then it is conclusive evidence that one-fourth of the capital stock has been paid in full, for this is essential to the granting of the charter. The rule asserted requires us to take as true all that is essential to the granting of the charter, but it requires no more. Therefore, it does not forbid proof that the other three-fourths of the stock was not actually paid in money according to law, and the evidence offered was competent in this aspect, for it recognises the charter, and seeks to recover according to the law that governs it. But the plaintiffs have no count in their declaration for this form of their claim, and therefore, for this purpose the evidence is inadmissible. The offer of evidence must be taken as made for the purpose of evading the charter altogether, and charging the defendants, according to the declaration, as copartners, and not as corporators, under the manufacturing law; and we must, therefore, consider it in this aspect. Here, the argument that the charter cannot be attacked, indirectly, and that it is conclusive that all its essential preliminaries have been properly observed, comes in with more apparent force; for in this way of presenting the case, the plaintiffs seek to recover against and not under the charter : they assert that as against creditors, the organization of the corporation was not legally and validly conducted.
They admit that the charter is, as among the members of the corporation, the law of their association, and that no debtor of the company can assail it, and that the company has a right to continue its business as a corporation until the state shall arrest its action by a quo warranto. But they argue that it is not inconsistent with these admissions, that they should aver that the charter was obtained by means of a certificate that falsely represents the amount of capital stock paid in, and that consequently it is void as against creditors; and in making this distinction, they are manifestly right.
They admit, further, that when any company is organized by the state, by a direct Act of Assembly, or by means of officers or commissioners designated by the legislature, then the act of organization is the work of the state, and that the charter is conclusive evidence of its validity as against all persons dealing with it. But they argue, that when the act of organization is *415not conducted bj the state, but by the associating members themselves, under a general law authorizing them thus to associate, then they are chargeable with their own faults of organization, and cannot shield themselves behind any act of the state. When the state conducts the act of organization, the charter is its declaration that the incorporation is complete. When the parties themselves conduct it, the charter is merely the ministerial ratification of their act, founded on the assumption that the actual organization has been conducted according to law. When the state creates the corporation, there is no previous law to judge it by; but when it is self-constituted, it is done under law.
It seems to us that the distinction thus taken between these two. forms of organization, is well taken, and that it requires the distinction in the consequences, just as it has been stated. We think that when the associates organize themselves, and manufacture false papers so as to seem to come under the law, when it is in fact otherwise, and thus procure a charter, such a charter is no cover of the fraud in procuring it, and their creditors may •show their fraud in order to set aside the immunity or shelter which a fairly-obtained charter is intended to furnish. Of course, we do not judge the fact of fraud, but only that the plaintiffs have a right to prove it if they can.
The Act of Assembly requires all the stock of such self-organized corporations to be paid in money, and it seems to us very plain that the law was in substance and in fact violated, if the associates did value the effects which they owned before as an unincorporated company, and did certify the amount of that as capital stock actually paid in under this law, and did thereby obtain their charter. The law intends to secure their creditors by a corporate cash capital actually paid in or subscribed; and a charter procured in violation of this intent, is no shield against the claims of creditors.
But it is argued, on the other hand, that such a rule will do great injustice to the successors of the original corporators or stockholders, if they also are to be charged with this vice in the charter. This is undoubtedly true, so far as the successors have bought their shares without knowing of the violation of' law by which the charter was procured. If they knew of it, we know of no way of saving them from the consequences that usually follow from their being voluntary participators in the wrong. What will be sufficient evidence of such knowledge, we cannot now consider.
Are the successors chargeable with this vice in the charter, if they did not know of it when they purchased their stock ? We think not. It is in favour of the voluntary participators in the violation of the law, that the charter fails to furnish immunity as against creditors. It is void as against creditors for all who *416are parties to the wrong done. The law makes the stock transferable as stock usually is, and the purchasers are constructively chargeable with no vice in it, if it appear fair on its face and no vice is known to them. If the charter fails any one of them as a protection against individual liability, it must be because of some fraud or violation of law in preferring it that is properly chargeable to him, not by succession merely, but by his own voluntary participation in it and acceptance of it. Whether the plaintiffs will be able to maintain this position against so many defendants, or to withdraw their claim on this ground, as against those who have not participated in the alleged violation of the law, we are not now called upon to decide.
It has been argued that the plaintiffs cannot first give in evidence the fact of incorporation and the certificate on which it was founded, and then attack this evidence by showing that the certificate is false. But this is a wrong way of viewing the offer. The whole theory of the case assumes the fact of incorporation, and, therefore, admits the charter and certificate, and then proposes to show that the certificate is false as to the real parties and as to the amount actually paid in. This cannot possibly be shown without first giving the certificate in evidence. It is not offered to prove the facts stated in it, but to prove what statement it makes; and this is a necessary preliminary to the proof of the actual facts that show its falsity. In all cases where misrepresentations are to be proved, we must first show the representations actually made before we can proceed to prove that they are misrepresentations. On the first point debated in the argument, but not raised by the declaration, we all agree. A bare majority of us concur in the decision of the second point.
It seems to us, therefore, that the evidence offered ought not to have been rejected.
Judgment reversed, and a new trial awarded.