Court Opinion

ID: 6650113
Source: CourtListenerOpinion
Date Created: 2022-07-20 20:53:24.387382+00
Date Added: 2024-06-11T15:59:38.685852
License: Public Domain

Ragan, C.,
dissenting.
This is a suit by some creditors of an insolvent private corporation against its stockholders. The creditors seek to recover their debts of the stockholders on the ground that the latter are indebted to the corporation on their stock subscription. This corporation was authorized by its charter *352to engage in the business of buying and selling lands in the states of Nebraska and Iowa; to plat and lay out real estate into lots, blocks, streets, and alleys for the purposes of cities, villages, and towns; to manufacture brick, terracotta, tiling, and other articles that could be made from fire clay; to pipe gas and to mine coal, etc. The authorized capital stock of the corporation was $300,000, of which the appellants Hoile and Cooley took $240,000, and paid for the same by deeding to the corporation 620 acres of land. The petition of the appellees filed in the court below charged that the appellants in payment for the stock subscribed by them fraudulently turned into said corporation certain real estate at a false and fictitious valuation, to their knowledge. The district court found that the act of the directors in accepting said real estate in full payment of said stock was a fraud in law as to the creditors of said corporation. The court also found that the value of the real estate transferred to the corporation by Cooley and Hoile was $20,000.
The decision df this court treats this conclusion of the district court as a finding that the transaction by which Cooley and Hoile transfered their real estate to the corporation in payment of their stock subscription was a fraud in fact. I do not think the district court found or meant to find that the transaction was a fraud in fact, but, assuming that it did, let us inquire on what evidence this finding was based. Briefly it is that Cooley and Hoile owned 620 acres of land and that they conveyed this land to the corporation in payment and satisfaction of their contract of subscription with it to take $240,000 of its capital stock; that this land at that time was worth only $20,000, and that the debts of the appellees were contracted long after this transaction. If this evidence stood alone — stood unexplained — it might support the finding, but it does not stand alone and unexplained. I quote the evidence given by appellee’s own witness.
*353Q. Do you know whether at that time there had been any prospecting for gas; that is, at the time the conveyance of the land was made to the corporation ?
A. Yes, sir; there had been considerable prospecting for gas and they might have incidentally prospected for coal at that time.
Q. Had gas been found ?
A. Yes, sir.
Q. How long had gas been found on this farm at this time? In what quantities; state what you can .as to the fact.
A. My recollection as to the time of first, striking gas there is that it was perhaps fifteen to eighteen months after gas was first struck there on this farm until the transfer to the Dawson Town & Gas Company. As to the quantity I would not feel qualified to state more than just what I could naturally see, not being a gas expert. .
Q,. Do you know how many of the gas wells were sunk prior to this time?
A. As to the number I could not definitely say, more than I know that there was one we called the “original well,” and I think that there were one or two others, but I am not sure whether they were sunk. If they were it was just previous to the time of the Dawson Town & Gas Company buying this.
•Q. What can you say as to the flow of the gas from the well or the continuity of it and the amount of it?
A. * * * I have been there a good many times and lived right there, and of course everybody had a natural curiosity to see them, and I have been there a time or two when there were excursions. I know when they were turned on and lighted up flames would flash up there twenty-five or thirty feet and higher.
Q. Was any use or attempted use ever made of this gas after this?
A. After they acquired it ?
*354Q. After they acquired it.
A. Yes, sir.
Q. You may state what use it was put to.
A. These wells are situate about a mile from the town of Dawson * * * and probably a mile and a quarter from what is known as the “brick plant,” and the company, after acquiring these wells, laid.pipes from the wells to the brick plant * * * up to the edge of the town or into where the town was planned, * * * and this gas was piped into our store, and we burned it one winter; 1 do not know but two winters.
Q,. Did they ever use it at the brick yard ?
A. They used it there and they piped it into the furnace under the engine, and they also piped it into the brick-kilns.
Q,. When were the developments of coal made there?
A. The first developments?
Q. Yes, sir.
A. The fall of 1886 and the winter of 1886 and 1887.
Q,. Do you know anything about in what quantities coal was taken from this land ?
A. At what time?
Q. Well, after it was developed, from 1887 on.
A. Up to what time?
Q. Well, any time.
A. Well, they sunk a shaft in the fall of 1886 and they took out coal that winter and they run the most of that winter there; they run from eight to fifteen miners and they would take out, oh, probably twenty tons a day. * * *
Q. How long did this continue ?
A. Well, this continued until the Dawson Coal Company bought. * * *
Q,. At the time this property was transferred to the Dawson Town & Gas Company was any of this land platted into a town site?
A. There had been a survey made. * * *
*355Q. Well, take it in the fall of 1889. How much of a town was there then ?
A. There were about three hundred inhabitants.
Q,. Do you know how many of these gas wells there were there?
A. At the present time?
Q. Well.
A. Well, they were all there that was. They were all either sunk in 1889 or previous to that. I think there are five wells, four of these that they have houses over and use, and the fifth one is what we call a gurgle ánd that is filled with $ater and they have trouble with it, but there is more or less gas in it. * * * I think there is only four that is piped that I spoke of.
The lands conveyed to the corporation by Cooley and Hoile are contiguous, all situate in the state of Iowa, and one tract of about 300 acres had been purchased by Cooley from the Tolle estate. Tolle in his lifetime had leased to-certain parties the right to mine coal on forty acres of the lands conveyed to Cooley, the lessees paying Tolle a royalty of ten cents per ton. Now let us hear once more the appellee’s witness:
Q,. Now, there has been some other leases spoken of. Under what particular portion of the lands were those leases?
A. Those were under the lands acquired by Mr. Cooley.
Q,. In the transfer to Cooley, who acquired the right to those leases, did he?
A. Yes. * * *
Q,. So that whatever would accrue on those leases would belong to Mr. Cooley instead of the Tolle heirs?
A. Yes, on those leases, that is right. * * * Mr. Tolle died in February, 1888. In the spring of 1887 * * * Mr. Tolle requested me to make a measurement, to take the measurement on coal and estimate how much royalty he would receive at ten cents per ton on the coal. *356I made the measurements in the first bank or clay shaft that was sunk. * * * I made- those measurements, and on the figures that Mr. Tolle gave me three cubic feet per ton of solid coal, and if the veins were the same it would net him about $400 per acre if the veins were the same on the other forties as they were on this forty where I made the measurements. * * *
Q,. What was the thickness of the vein where you made the measurement?
A. The one vein was three feet ten inches, I believe. These veins vary, however, in different parts of the mine, and they would run from two feet and one-half to fo’ur feet and one-half.
Q. Is this village of Dawson situate on a part of this land?
A. Yes; * * * about a mile and a quarter from the gas well. * * *
Q,. It is the coal land ?
A. Yes, sir.
Q,. Has coal been mined there continuously from that time on?
A. No, sir; coal has not been mined continuously, that is, if you mean by that taken out all the time, because there was a time for nearly a year there was no coal taken out.
Q,. The mines were not worked?
A. No, sir.
Q. When was that?
A. That was previous to this last fall. * * *
Q. When was it first discovered on the York farm; part of the land conveyed by Cooley?
A. It must have been in 1888.
Q,. Prior to the development and discovery of gas and the development of coal there, how much of a town was Dawson ?
A. Well, in January, 1887, there wasn’t only four or five houses in Dawson. * * *
*357Q. How many houses were there in January, 1888?
A. Well, I should say, just estimating from my recollection, about fifty.
Q. After the purchase of this land * * * was there any town platted known as the town of Dawson, by the Dawson Town & Gas Company?
A. Yes, sir.
Q. How many acres?
A. One hundred and sixty.
Q. Did you sell any of these lots?
A. A few; yes.
Q. At what price?
A. They varied in price.
Q,. What did the business lots sell for?
A. From $125 to $266.
Q,. How many miners worked there?
A. All the way from one hundred and fifty down at different times.
Q,. How large a brick plant was started there after the gas was used?
A. The main part of the building was about sixty by sixty-five or seventy-five and the drying room was about fifty by probably one hundred and fifty.
Q. Do you know anything about the fire clay there under that ground?
A. I know there is fire clay there.
Q. To what extent?
A. I do not know.
Q. Did you ever make an examination?
A. No, sir; no personal examination. I have been in the mines where fire clay was and asked miners about it.
Q. Out of what was brick manufactured?
A. Brick was manufactured out of shale and fire clay.
Q. Where was that latter to be obtained?
A. Out of the coal mines, and I think some little surface clay was used, but not very much.
*358Q. And that was all understood and known to exist there at the time of this sale by the Tolle heirs to Cooley?
A. Yes, sir.
The evidence quoted above stands absolutely uncontradicted, and is the evidence introduced by the appellee itself. This evidence does not show that the appellants intentionally overvalued the lands which they conveyed to the corporation in payment of their stock subscription. Granted that subsequent events have proved that the appellants erred in their judgment as to the valuation put on their lands, will the evidence that the appellants erred in their judgment support a finding of fraud? I think that this evidence shows that at the time these lands were deeded to the corporation for its stock it was honestly believed and reasonably believed by the appellants that they were coal, gas, and fire clay lands. Shafts had been sunk, coal had been mined on part of the lands, on other parts of the lands wells had been drilled and inflammable gas had been found, and the existence of these facts led to the organization of this corporation. The evidence further shows what appellants did after they became stockholders of this corporation, and this is important here in determining with what intention they made the transfer and took the stock; and the evidence shows that these appellants expended thousands of dollars of their money in efforts to develop these lands believed to be coal and gas lands, and had these proved to be what they appeared, if their development had disclosed valuable coal and oil deposits, who can estimate their value? Yet the transaction by which the corporation became possessed of these lands and the intent with which they were conveyed by the appellants would have been the same transaction and the same intent. A transaction cannot be said to be in good faith simply because successful, nor can a fraudulent intent be inferred because the transaction proved unsuccessful. Fraud will never be imputed when the circumstances and facts upon *359which it is predicated may consist with honesty and purity of purpose. (Clemens v. Brillhart, 17 Neb., 335.) Is it not clear that this evidence is entirely consistent with the theory of honesty of purpose on the part of these' appellants? Overvaluation of property will not of itself support a finding that the transaction was fraudulent, but the proof must show that such overvaluation was made intentionally and with a sinister motive. (Schenck v. Andrews, 57 N. Y., 133; Boynton v. Andrews, 63 N. Y., 93; Lake Superior Iron Co. v. Drexel, 90 N. Y., 87.) An overvaluation of property affords no ground of com-' plaint to creditors of the corporation, provided such pay-ment is made and accepted in good faith. (Young v. Erie Iron Co., 65 Mich., 111.) While the contract stands unsmpeached as fraudulent, the courts, even where the rights of creditors are involved, will treat that as a payment which the parties have agreed should be a payment (Phelan v. Hazard, 5 Dill. [U. S.], 45); and the fraud must be an' actual fraud in the sense of a dishonest purpose, not a theoretical fraud (Bank of Fort Madison v. Alden, 129 U. S., 372). If these appellants have not paid in full their stock subscription, they are indebted to the corporation; but the appellee has no greater rights against the appellants than the corporation has; and how can it be said under this evidence that this corporation could impeach this transaction between it and Cooley and Hoile for fraud ? If the corporation cannot impeach the contract, the creditors cannot do it. There is no evidence in this record that Cooley and Hoile, or either of them, in anything that they did in and by which they became stockholders of this corporation, were actuated by other than the purest motives. In Coit v. Cold Amalgamating Co., 119 U. S., 344, the capital stock of the corporation was fixed at $100,000. Previous to the organization of the corporation the incorporators had been engaged in mining operations, and when the corporation was organized they turned in their mining property to *360the corporation in payment of the full amount of the capital stock taken by them. The corporation became insolvent,- and a creditor having obtained a judgment against it had execution issued, and it being returned no property found, he sued the stockholders to recover his debt, the ground of his action being that the property turned in by the stockholders to the corporation in payment of the stock subscribed was turned in at a fictitious valuation. The evidence disclosed that the property, when turned into the corporation, was of small value as compared to the amount of stock given for it, but that the stockholders, the nature of the property considered, had good reason to believe that it was of as great value as that put upon it by them and that the entire transaction was in good faith and not entered into for the purpose of putting the stock on the market, selling it, and keeping the proceeds and thus victimizing the public, but with a view on the part of the stockholders to develop the mines supposed to be on the property. The argument was that the transaction should be held fraudulent solely on the overvaluation of the property transferred to the corporation. The court said: “If it were proved that actual fraud was committed in the payment of the stock, and that the complainant had given credit to the company from a belief that its stock was fully paid, there would undoubtedly be substantial ground for the relief asked. But where * * * the shareholders honestly and in good faith put in property instead of money in payment of their subscription, third parties have no ground of complaint. * * * Where full paid stock is issued for property received, there must be actual fraud in the transaction to enable creditors of the corporation to call the stockholders to account.” To the same effect see Peck v. Coalfield Coal Co., 11 Ill. App., 88; Coalfield Coal Co. v. Peck, 98 Ill., 139. They believed, and the evidence shows that they believed, and they had good reason to believe, and the evidence shows that they had such reason to *361believe, that these properties were worth at the time they transferred them to this corporation four or five hundred dollars au acre. They proved their faith by what they did. They paid thousands of dollars for these lands and they spent thousands of dollars in their efforts to develop them after they became the property of the corporation. The evidence does not show, it does not tend to show, that they organized this corporation for the purpose of victimizing the public; they did not organize it for the purpose of putting this stock upon the market and selling it and pocketing the proceeds. The finding of a district court is entitled to serious consideration and great weight, but if the learned district court found in this action that the act of the appellants in paying for their, stock in the land conveyed to the corporation was fraudulent, the finding has no evidence upon which to rest. The effect of this finding is to stamp the intention with which an act is done fraudulent or not as it may finally turn out that the party in doing the act did or did not err in his judgment; and where the act is a part of a commercial venture, whether or not it is fraudulent is made, to depend upon the success or failure of such venture. To this I cannot agree.