BARCUS et al. v. GATES et al., 89 F. 783

MORRIS, District Judge (after stating the facts as above). The ground of demurrer most strongly relied upon is that the appellants cannot be heard to complain of the frauds-by which they were induced to part with their money in the formation of the American Plant-Food Company and the purchase of the Yoi-tlibury tract of land, because the agreement, to which they were parties, for the subscriptions to the stock of the American Plant-Food Company, was contrary to the public policy of Virginia, and illegal under its laws, for the reason that the common stock was to he issued without being paid for.

The scheme was that the total capital stock should he $1,000,000, in shares of $100 each. Of this, $150,-000 were to he preferred shares, to be paid for in full. The remaining 8,500 shares were to be common stock, of Which $300,000 were to bo given to the subscribers to the preferred shares as a bonus: $300,000 of common stock were to be set aside to Henley and his associates as consideration for certain options on adjoining lands, and $250,000 of common stock to be set aside for Henley as consideration for his services.

The original agreement set: out in the bill of complaint was for an incorporation under the laws of West Virginia, but afterwards t'he company, by consent of all the parties, was incorporated under the general laws of the state of Virginia, on January 19, 1895.

The articles of incorporation named Huston as president and Henley as general manager, and x>rovided, among other things, that,, "when said capital stock has been fully subscribed, the said company may commence business”; and also provided that nothing but money should be received in payment of subscriptions to stock, except upon a fair estímale of actual value, to be agreed ux>on between the corporation and the stockholders previous to subscription. , With regard to payment for shares of stock, the Virginia Code of 1887 enacts: “Sec. 1107.

Upon every subscription for shares in any joint stock company, Hiere shall he paid upon each share two dollars at the time of subscribing-, and the residue thereof as required by the i»'esident and directors.” “Sec. 1124. Immediately after the election of president and directors, the books for receiving subscriptions shall be delivered to them. If the whole capital stock has not been subscribed, they shall take measures for obtaining subscriptions of the residue.

They shall not, to obtain such subscriptions, sell the stock at less than par, but may fix the price of such residue at a premium, which shall be for the benefit of all the stockholders ratably.” Sections 1127 and 1129 provide how the money to be paid for shares may be recovered, if not paid as required by the president and directors; and

section 1130 provides that, without the consent of the company, no stock may be transferred on its books until all the money payable thereon has been paid, and that on any assignment the assignee and the assignor shall be severally liable for any installments which have accrhed or may thereafter accrue.

An act approved December 19, 1895 (Acts Assem. 1895-96, p. 25), further provides a proceeding to recover unpaid subscriptions.

It will thus be seen that the statute law of Virginia is, in substance, merely declaratory of the general rule of law that the subscribing stockholders of a corporation cannot be relieved from payment of the subscription price.of their shares.- As between the corporation and the stockholders, there does not seem by the Virginia law to be anything to prevent an agreement that the payment may be by installments, and be postponed as long as they agree, provided, always, that, if creditors intervene, the unpaid installments may be required to be paid in to satisfy the debts of the corporation.

By the Virginia statute there is no prohibition enacted or penalty imposed, except that imposed by the general law, namely, that creditors may require the whole nominal value of the shares to be paid in, and that any agreement between the corporation and the stockholders, limiting their liability therefor, is void as against credit.ors. This is simply the general doctrine repeatedly declared by the supreme court of the United States and other courts.

There is no public policy with respect to the payment for shares by stockholders declared by Virginia statute different from other states, and, indeed, the Virginia statutes are not as rigorous as those of many other states. Handley v. Stutz, 139 U. S. 417-427, 11 Sup. Ct. 530.

In the absence of a statute inflicting a penalty of some sort for issuing or receiving, as fully paid and nonassessable, shares for which less than their face value had been paid, or prohibiting its being done, we are not aware of any general principle which holds such a transaction to be fraudulent, or of moral turpitude, so as to prevent a party to such

an act from having any standing in a court of equity. The penalty is that the stockholders to whom such shares are issued may be called upon, not, indeed, to pay their entire par value, but so much thereof as may be required to pay those creditors who had a right to look to the capital stock as a fund for the payment of their debts. .Agreements not to require payment for stocks issued have been regarded by the courts not as questions affected by public policy, but as questions between debtor and creditor, as to which each is controlled by the ordinary rules of law. Thus, in Martin v. Land Co. (1897) 26 S.

E. 591, in a case where the corporation had agreed that not more than 30 per cent, of the stock subscription should ever be called in, the supreme court of Virginia held that a creditor, who dealt with the company with full knowledge of this agreement, was estopped from calling upon stockholders to pay more than the 30 per cent. In the supreme court of the United States Clark v. Bever, 139 U. S. 96, 11 Sup. Ct. 468, Fogg v. Blair, 139 U. S. 118, 11 Sup. Ct. 476, and Handley v. Stutz, 139 U. S. 417, 11 Sup.

Ct. 530, are all cases in which the court, while recognizing the general principle that stockholders are bound to account for the face value of stock subscribed for, still held that the stockholder might exempt himself from full payment by showing that it was agreed that ho should not be called upon to pay, and that he acquired his stock under circumstances that did not give creditors and other stockholders just ground to complain of such an agreement. In Camden v. Stuart, 144 U. S. 104-113, 12 Sup.

Ct. 585, the supreme court again declared that, while it might be unavailing as against the claims of creditors, any settlement or satisfaction of the stock subscription might be good as between the corporation and stockholders. In Maryland, where the statute provides that unless capital stock sha, 11 be paid in within a prescribed time, the corporation may be dissolved, It was held in Brant v. Ehlen, 59 Md. 1, that the purchaser of shares issued as full paid in good faith cannot be held liable to a creditor of the corporation as for unpaid installments.

It is sometimes said that issuing full-paid stock without full payment is ultra vires, by which is meant, when not in excess of the number of shares fixed by the charter, not that the stock is invalid or that ihe holder is not a stockholder, but that the act is ineffectual as against, creditors of the company, and may be held in fraud of the rights of other stockholders. Sawyer v. Hoag, 17 Wall. 610. In Scovill v. Thayer, 105 U.

S. 143, while holding that stock issued in excess of the limit freed by the charter was void, Ihe court said (page 153) with regard to the stock not in excess of the limit: “The stock hold by the defendant was evidenced by certificates of fall-paid shaves. It is conceded to have been the contract between him and the company that he should never be called upon to pay any further assessments ■upon it. The same contract was made with all the other shareholders, mid ihe fact was known to all. As between them and the company, this was a perfectly valid agreement.

It was not forbidden by the charter or by any law or public policy, and. as between the company and tire stockholders, was just as binding as if it had been expressly authorized by the charier. ® * * The shares were issued as full paid, on a fair understanding, and tlmt bound the company.” “In fact, it lias been held in recent English ease's that not only is the company bound, but its creditors also are bound, by such a contract. * “ * Hut the doctrine of this court is that such a contract, though binding on the company, is a fraud in law on its creditors, which they can set aside; that when their rights intervene, and their claims are to be satisfied, the stockholders can be required to pay their stock in full.” The attitude of the four Indiana complainants in the present case is that they agreed to pay, and have paid, into the American Plant-Food Company, each the sum of $10,000 in money, for 100 shares each of the preferred shares of that corporation, and each received besides, as a bonus, 200 shares of the common stock.

In doing this they have done nothing prohibited by the "Virginia statute. What they have done is to make themselves liable to the extent of the unpaid shares accepted by them to such of the creditors of the company as may have trusted the company upon the faith of its nominal capital.

It seems to us that it would be new doctrine to hold that because a stockholder has not paid up in full for all the stock held by him, or because he had consented to an agreement by which stock was issued to him and others without payment, he could have no standing in court to assert any right he might have against the corporation or its other members, or those who promoted it.

It is to be noticed that the present suit is not to enforce any rights obtained by the supposed illegal act of the company in issuing unpaid stock as full paid, or the agreement, to which the complainants were parties, stipulating that stock shoúld be so issued, but, on the contrary, is in disaffirmance of that whole transaction. The bill seeks the dissolution and winding up of the American Plant-Food Company, and the canceling of all its stock as a corporation contrived by the promoters for a fraudulent purpose, into which the complainants were tricked by the defendants charged in the bill. In Central Transp.

Co. v. Pullman’s Palace-Car Co., 139 U. S. 24-60, 11 Sup.

Ct. 478, 488, the court said: “A contract ultra vires being unlawful and void, not because it is in itself immoral, but because tbe corporation, by tbe law of its creation, is incapable of making it, tbe courts, while refusing to maintain any action upon tbe unlawful contract, have always striven to do justice between tbe parties, so far as could be done consistently with tbe adherence to law, by permitting property or money parted with on tbe faith of tbe unlawful contract to be recovered back or compensation to be made for it. * * * To maintain such an action is not to affirm, but to disaffirm, tbe unlawful contract.” Parkersburg v.

Brown, 106 U. S. 487-503, 1 Sup. Ct. 442, is to the same effect. In Du Puy v. Terminal Co., 82 Md. 408, 33 Atl. 889, and 34 Atl. 910, the complainant had been induced by fraudulent representations of the promoters of a corporation to pay $60,000 for 800 shares of preferred stock of the par value of $80,000, together with 800 shares of common stock of the same par value, and a bill in equity was sustained to unravel the frauds by which the promoters had deceived and cheated the other stockholders.

It was not considered that the stockholder was under anv disability because he had the stock issued to him for about one-third of its par value, although, as has been already stated, the Maryland statutes are more exacting with regard to payment of the full par value of stock than those of Virginia. If there be no reason on the ground of public policy, and Ave think there is none, to prevent the complainants asserting their rights, there can be no question of the jurisdiction in equity.

In Cook on Stock and Stockholders the author, in discussing the five different remedies which are open to a subscriber induced to subscribe to stock by fraud, states (section 155) that the remedy by hill in equity is the fairest, safest, and most complete remedy the subscriber has; that it is a customary remedy in England, and has been clearly upheld in this country. It was the remedy pursued in Tyler v. Savage, 143 U. S. 79, 12 Sup. Ct. 340. In Motor Co. v.

Purnell, 75 Md. 113, 23 Atl. 134, at page 120, 75 Md., and page 136, 23 Atl., the court said: “It is now settled tliat, where a subscriber to stock has been deceived and induced to enter into a contract of subscription by misrepresentation and fraud of an agent acting for the corporation, such contract, while not absolutely void, is voidable at the election of the party deceived, and he will be entitled to have The contract of subscription rescinded and declared void, and to have restituí ion made of all money paid thereon, provided he elects to repudiate the contract at once upon discovery of the fraud, and he is guilty of no unnecessary delay in coming to a court of equity for relief.

This relief will be afforded even after the complete execution of the contract, if the rights of creditors or of innocent third parties do not intervene and give rise to equities superior to those of the stockholder alleging himself to have been defrauded.” • Exit even if, under a proper bill of complaint, equity might have jurisdiction, the appellees contend that this bill is multifarious, in that it embraces inconsistent causes of action and inconsistent prayers for relief.

The inconsistent causes of action are said to be that, while these complainants allege that their subscriptions were obtained by fraud, they affirm those subscriptions by contending that the American PÍant-Food Company was defrauded in, the purchase of the Vorthbxxry tract, and asking to have that purchase canceled and the purchase money refunded; that they are attempting to assert rights as stockholders and also as creditors of the American Plant-Food Company; and the inconsistexit prayers for relief are said to be a recovery agaixxst the Virginia Marl Phosphate Compaiiy and those persons, who, co-operating with it, deceived the complainants, axxd also a prayer as against the American Plant-Food Company (o have their subscriptions rescinded.

Multifariousnoss arises from the fact either that the transactions which form the sxibject-matter of the suit are so separate and dissimilar that they cannot conveniently he tried in one record, or that some defendant is able to say that as to a large pari of the transaction set out in the hill he has no interest or connection whatever. A bill is not multifarious because there are several causes of action, if they grow out of ilxe same transaction, and if all the defendants are interested in the same rights, and the relief against each is of the same general character, the hill may be sustained. Brown v.

Safe-Deposit Co., 128 U. S. 403, 9 Sup. Ct. 127.

In this case (he allegation is that the individual defendants owning and controlling the Virginia Marl Phosphate Company, and knowing the Northbxiry tract of land to be worthless as a deposit of phosphate fertilizer, and having abandoned its operation because they had found it to be worthless, constituted Henley their agent to exploit a scheme by which the tract should be soid to a new company, at an excessive valuation, by means of fraudulent representation as to its character; that Henley carried out his employment by substituting doctored samples of the soil, and imposing upon the chemists who certified as to the character of the soil, and in pursuance of the scheme the individual defendants appropriated to their own use the money paid in by the complainants, while they themselves, by a trick, escaped from paying anything for their own stock which they received in the American Plant-Food Company, and that they improperly reserved a lien for $27,-000, part of the purchase money, in the deed from the Virginia Marl Phosphate Company to the American Plant-Food Company.

The complainants allege that this was all one scheme, of which the incorporating of the American Plant-Food Company was part. The allegations make it one continuous transaction, having one purpose. The case of Ashmead v. Colby, 26 Conn. 287, was similar in its facts to those alleged in the present bill. It was a “salted” gold mine in Virginia, to purchase which the complainants had been fraudulently induced to form a Virginia corporation and subscribe for stock.

The bill sought the cancellation of the stock subscriptions, the cancellation of the notes given for the purchase of the supposed mine, and a decree for the repayment of the money paid to the parties who conspired to effect the fraudulent sale.

The supreme court of Connecticut held that the bill was not multifarious, saying: “The defendants prepetrated the fraud by means of inducing the individuals who are plaintiffs to take capital stock of the corporation and advance their money for it, that the money might be immediately withdrawn from the corporation for the benefit of the defendants under the form of a purchase of a valuable property suited to the objects of ilio corporation, but in fact of very little value for any purpose compared with the price for which it- was sold, and of none whatever for the purpose for which it was purchased.

The corporation was used, therefore, as a more instrument by which to accomplish the design, and it was to defraud both it and the individuals induced to take its stock that the whole series of fraudulent representations were made. It is therefore substantially a ease where certain individuals, together with a corporation, are all defrauded by one act or series of acts designed to accomplish the same fraud, and this fraud operates very much in tlie same way both upon the individuals and the corporation.

It takes the money of the individuals to fill the stock of the corporation, and then withdraws it from the corporation for the benefit of the parties perpetrating the fraud.” In Bosher v. Land Co., 89 Va, 455, 16 S.

E. 360, it was held by the. supreme court of Virginia that all the stockholders who hail been induced to subscribe to stock by fraudulent representations of the promoters of the corporation could file a bill on their own behalf, and on behalf of all others similarly deceived, to rescind their subscriptions as against the corporation, and against the promoters to'have the amounts paid on their stock repaid.

It was held that the bill was not multifarious, that the complainants were properly joined, and that parties who fraudulently received the proceeds of the sale to the corporation could be decreed to make restitution to the parties whose money they obtained. The rule stated in Salvige v.

Hyde, 5 Mass. 146, is: “If the object of the suit be single, but it happens that different persons have separate interests in distinct questions which arise out of that single object it necessarily follows that' such different persons mnst be brought before the court, in order that the snit may conclude the whole object.” It is true that in Brown v. Improvement Co., 91 Va. 31, 20 S. E. 968, in a case similar in its facts to Bosher v. Land Co., 89 Va. 453, 16 S.

E. 360, above died, the supreme court of Virginia held that where the deluded stockholders filed their bill on their own behalf, and also on behalf of such creditors of the corporation who should conn; in and join in the suit, the bill was multifarious, for the reason that the interests of the complaining stockholders seeking a rescission of their subscriptions would be opposed to the interests of the complaining creditors. This technical difficulty does not attach to this case, as creditors are not made parties.

It is true that, as was just and equitable, the complainants asked as part of the relief prayed that any indebtedness of the American Plant-Food Company might be ascertained and paid, and the corporation be decreed to be insolvent, and that a receiver of the land sold to the American Plant-Food Company be appointed. But this relief, as well as the other relief asked, was required to do full equity in the case.

In any proceeding the result of which must involve dissolution of a corporation, and the practical winding up of its affairs, »ho court usually calls before it the various claimants having ini crests in its assets, and adjudicates their various claims and priorities. It is the peculiar office of equity to deal with suits of this character, and iis machinery is a dap led to settle conflicts between different sets of claimants without embarrassment.

It is only in equity, and in a case in which creditors may assert their claims as well as stockholders, that the rights of defrauded stockholders can be worked out without injustice to creditors when the corporation is insolvent. As was said in Oliver v. Piatt, 3 How. 333-411, it is generally an answer to the objection of multifariousness in a case of clear equitable jurisdiction that the transactions had so mingled the interests of the defendants that entire justice cannot conveniently be done, and a final aud conclusive decree touching all their interests could not be made, without joining them all.

We think this is peculiarly such a case. It is further urged in support of the demurrer that the complainants have failed to comply with the ninety-fourth rule iu equity with regard to stockholders’ bills founded upon rights which may be properly asserted by the corporation. This is a case in which the claim of the complainants to he refunded by the individual defendants the amounts paid for their stock could not be assented by the corporation.

It is not a case contemplated by rule 94, in which a minority of stockholders proceed to enforce a right which the corporation might enforce, or in which there could be a collusive agreement to give the federal court jurisdiction.

Here the coinplainauts, citizens of Indiana, allege that they were original subscribers; that they are the only stockholders who have contributed anything of value to the corporation; who alleged that the corporation was fraudulently chartered to accomplish a fraudulent purpose; that it cannot continue a going concern for any honest object, but that it ought to be dissolved, its debts paid, aud its .existence terminated. In such a case it would be nugatory to say that a suit could not be instituted without first calling upon its directors to take action in the premises.

The judgment is reversed, and the case remanded, with directions to overrule the demurrer.