CENTRAL LIFE SECURITIES CO. et al. v. SMITH et al., 236 F. 170

EVANS, Circuit Judge (after stating the facts as above). The appellant Thomas Rhodus complains because the master disallowed his claim for moneys alleged to have been paid for preferred stock of the Central Life Securities Company. Whether any money was so paid by tlie appellant Thomas Rhodus for preferred stock was purely a matter of fact. The report of the master in this respect was con-finned by the judge, and we are convinced that the evidence justifies the conclusion that Thomas Rhodus paid nothing for the preferred stock held by him.

He is therefore not entitled as a holder of said preferred s.fock to participate in the funds in the hands of the receivers. The Central Rife Securities Company attacks the order made in the Supreme Judicial Court of the state of Maine, and also made in these proceedings, wherein receivers were appointed to wind up the affairs of said appellant, contending that the bill originally filed in the Maine court was subsequently amended so that the allegations originally appearing were disputed and disproven by the allegations appearing in the amended bill.

Appellant contends that these facts clearly establish a plan to wreck said company, and such conduct constituted a fraud upon the court. In other words, it is claimed a temporary receiver was appointed upon a bill proven false by the allegations in the amended bill. Without inquiring in detail into the difference between the original bill and the amended bill, it is sufficient to say that the decree appointing the receivers in these proceedings, was entered upon the consent of the said Central Rife Securities Company.

The .decree appointing the receiver in the Maine court was upon the answer of the said Central Rife Securities Company, and without objection from the duly authorized representatives of said company. We are therefore constrained to hold that the said appellant is in no position to attack the validity of either decree.

It appears that the order, appointing the receivers to wind up the affairs of the company, contained the following provisions: “It is further ordered and decreed that this decree shall be, and it is hereby, entered without prejudice to the determination of any of the issues presented by the bill of complaint herein, as amended and supplemented and without prejudice to the claims and assertions of any .purchaser of stock as to rights existing, or that may exist, by reason of any fraud or illegality that may be hereafter found or adjudged to have existed in the organization of said corporation, or the sale of its stock; and without prejudice to the determination of the relative rights and demands of any and all persons or corporations whether as creditors or as stockholders, etc.” The appellant contends that this reservation conclusively establishes its right to contest the sufficiency of the proof to support the allegations in the bill for the appointment of a receiver.

We think otherwise. The decree appointing the receivers was upon consent of said appellant. Other grounds than fraud, recognized by the statutes of Maine as sufficient justification for the winding up of a corporation, clearly appear in complainants’ bill, and are admitted in the answer. See

chapter 85, Raws of 1905. The decree appointing the receivers can be sustained without any reference to, or consideration of, the allegations of fraud and misrepresentation contained in the original bill. The reservation above quoted merely preserves the right of claimants to litigate the question of fraud so far as that question became relevant to the determination of the issue of priority of claims when final distribution was ordered. Clearly no other effect was intended, and none can be given to the reservation in this decree.- The claims of the agency companies are all of similar character.

Each filed its claim with the receivers pursuant to the order of the court, directing all claimants to present their claims within a designated time. Each of said agency companies .claimed a right to participate in said fund because of the ownership of common stock of the Central Rife Securities Company of the par value of $250,000. Together the five agency companies owned all of the common stock of said company. The precise question presented is whether the holders of the common stock shall be permitted to share pro rata with the holders of the preferred stock of said company.

The holders of preferred stock predicate their claim upon a dis-affirmance of the contract by which such stock was issued. Acting upon the theory that the scheme of incorporation and the plan of the promoters was fraudulent, it is claimed that the corporate entity is not even that of a de facto corporation. The holders of preferred stock, therefore, make claim to the fund on hand which they alone produced, and ask it to be apportioned in accordance with the amount actually paid into said fund rather than on the basis of the par value of the preferred stock so held.

All holders of preferred stock who filed claims consented to the entry of the decree, directing distribution upon this basis. The preferred stockholders further contend that the holders of common stock paid nothing therefor, and on this theory are not entitled to participate in the balance now in .the hands of the receiver. The court correctly denied the holders of the common stock all right to participate in the funds of the defunct company. The agency companies paid nothing for the common stock of the Central Rife Securities Company.

True, there was an interchange of common stock, but there was nothing back of the stock of the agency companies when they transferred a portion of their common stock for all of the common stock of the Central Rife Securities Company. Under all of the evidence in this case we conclude there was a total failure of consideration for the issuance of the common stock of the Central Rife Securities Company to the agency companies. The preferred stock of the Central Rife Securities Company was all illegally issued. An actual fraud on the corporation laws of Maine and Illinois was committed.

The charter issued to the agency companies by the state of Arizona was not authorized by. the corporation laws of said state. The Central Rife Securities Company was organized under

chapter 47 of the Revised Statutes of Maine.

Section 6 of said

chapter 47 provides that: “Three or more persons may assodate themselves together by written articles of agreement, for the purpose of forming a corporation to carry on any lawful business, * * * and excepting corporations for banking, insurance, the construction and operation of railroads or aiding in the construction thereof, and the business of savings banks, trust companies,” etc. While

section 51 of

chapter 47 of the Revised Statutes of Maine provides that: “Any corporation organized under this

chapter * * * may purchase, hold, sell, assign, transfer * * * or otherwise dispose of the shares of the capital stock * * * created by any other corporation or corporations of this or any other state” —we conclude that the appellant Central Rife Securities Company was not authorized to purchase stock in a corporation organized to conduct an insurance business, much less, as in this case, to purchase all of, or the controlling interest in, an insurance company. We conclude that

section 51 of said

chapter 47 authorized the purchase of stock in companies that followed any line of business authorized by said

chapter 47, but did not authorize the purchase of stock in companies that transacted a business which was not permitted by said

chapter 47. Franklin Co. v. L. S. Bank, 68 Me. 43-47, 28 Am. Rep. 9; 1 Cook on Corporations, § 236. While the Central Rife Securities Company was authorized to conduct various kinds of business, its chief business, as advertised and as actually conducted, was to secure control of the Republic Rife Insurance Company, and thereby indirectly engage in the life insurance business.. All the agency companies were organized under the laws of Arizona. An examination of the statutes of this state fails to disclose any express authority for a corporation organized under its laws to hold or vote stock of other corporations.

With the statutes of the state silent on this subject the power of a corporation to hold stock of another corporation is clearly restricted. First National Bank v. Converse, 200 U. S. 425, 26 Sup. Ct. 306, 50 L. Ed. 537; People v. Chicago Trust Co., 130 Ill. 268, 22 N. E. 798, 8 L. R. A. 497, 17 Am. St. Rep. 319; People v. Union Gas Co., 254 Ill. 359, 409, 98 N. E. 768, Ann. Cas. 1916B, 201; 7 Ruling Case Raw, § 528; Irvine v. Chicago, Wilmington & Vermillion Coal Co., 200 Fed. 953, 119 C. C. A. 333.

The laws of the state of Illinois likewise do not permit, except for a very limited purpose not present in this case, the holding of stock by one corporation in another. Converse v. Emerson Co., 242 Ill. 619, 90 N. E. 269; Converse v. Gardner Co., 174 Fed. 30, 98 C. C. A. 16. In the present case the Maine corporation, not only bought stock in an Illinois corporation, but it practically owned the entire stock of said Illinois corporation. This being unlawful in Illinois, the pui-pose was not a lawful purpose in the state of Maine.

It is only for the purpose of carrying on a lawful business that a corporation in the state of Maine may be organized under

chapter 47. The Central Rife Securities Company in holding the stock of the Republic Rife Insurance Company was doing business in Illinois. Col. Trust Co. v. M. B. Works, 172 Fed. 313, 97 C. C. A. 144; Dittman v. Dist. Co. of Am., 64 N. J. Eq. 537, 54 Atl. 576; Martin v. Ohio Stove Co., 78 Ill. App. 105. The purpose and plan of the promoters was clear. They sought to do indirectly what they could not do directly. The entire scheme was illegal. It affirmatively appears that the holders of the preferred stock, whose claims were allowed in this court, were not active participants in this illegal scheme.

It further appears that when the true facts were disclosed they acted promptly in repudiating the scheme. Where the illegal scheme is thus promptly repudiated by the stockholders, they may recover the moneys by them paid to the company, and if the assets are insufficient to pay them in full, they are permitted to share pro rata in the fund on hand. Pullman’s Palace Car Co. v. Central Transportation Co., 171 U. S. 138, 18 Sup. Ct. 808, 43 L. Ed. 108; Central Transportation Co. v. Pullman’s Palace Car Co., 139 U. S. 24, 60, 11 Sup. Ct. 478, 35 L. Ed. 55. The decree is therefore affirmed.