Beitman v. Steiner Bros. , 98 Ala. 241 ( 1893 )

McCLELLAN, J.

This is an action by Steiner Bros, against Beitman. The complaint as amended contains a count on a note executed by defendant to plaintiffs and common counts for money paid, &c., for money due by account, and for money due by account stated. Of these, only the first count is important as the questions reserved for our consideration arose on the sufficiency of certain pleas which went to the cause of action laid specially therein.

The main question is presented on the following facts which are set up in the pleas and relied on as showing the absence of consideration for the promise sued on : The defendant purchased from the plaintiffs fifty-three shares of the capital stock of the Birmingham, Powderly and Bessemer Street Bailroad Company, of the par value of fifty dollars ¡ser share and executed to them the note sued on for the price thereof which appears to have been about 50 per cent, of the face value of the shares. The authorized capital stock of the company was one hundred thousand ($100,000) dollars, and this amount was subscribed by plaintiffs and others, but before the certificates were issued the stockholders met and resolved to increase the capital stock of the concern to two hundred thousand ($200,000) dollars and to divide out the additional shares among the original subscribers so that each subscriber to the original capital of $100,-000 would receive double the number of shares he had subscribed, and (presumably) paid for, the increase being in the nature of a bonus for which nobody paid anything. The certificates issued to plaintiffs and sold to defendant by them were of this, the only, issue of stock made by the company. Plaintiffs knew the foregoing facts, indeed had participated in the proceedings by which the certificates of shares had been doubled without any increase in the capital of the corporation, when they sold their shares to the defendant; and the latter also, it is to be presumed, from the absence of any negation of knowledge in the plea, knew that the stock he purchased of the par value of $2650, represented only half that sum in actual capital. There can, of course, be no doubt that the fictitious increase of the capital stoch of the corporation, adding as it did not one penny to its capital could not under our laws afford a predicate or basis for the issuance of certificates of shares beyond the capital actually subscribed and paid or to be paid in; and that in so far as the certificates which were issued are rested upon or purport to represent capital beyond the $100,000 actually subscribed and paid, they are utterly void. But where there has been an excess of stock certificates over the real capital of a corporation, attempted to be authorized, and issued, our laws do not avoid the entire issue. The vitiating operation of the constitutional provision is confined to the fictitious excess; the language is: “All fictitious increase of stock or indebtedness shall be void.” — Consts. Art. XIV, § 6. Where the excess of certificates beyond the actual capital is issued separately from the certificates which truly represent that capital, where, in other words, subsequent to the issuance of certificates which are authorized, the stock is increased without a corresponding increase of the capital itself, and certificates thereof are issued, such certificates are void, but the original certificates are as valid for all purposes as if the fictitious increase had not been attempted at all; and the holders of them are entitled to share in the business and assets of the concern accordingly. Nor can it be material that such holders have also subscribed for and taken worthless certificates — the viciousness of the one would not impair the validity or value of the other. Where, however, as on this case, the fictitious increase is formally authorized before any stock is issued and all of the certificates are issued and delivered to the subscribers at the same time and purport to represent and rest on a gross capital equal in amount to the actual and fictitious capital combined, it is, of course, impracticable to separate the good from the void certificates or to say that any particular certificate of stock is solely based on actual capital, or on feigned capital only, and therefore is wholly good or wholly bad. Yet while in such case no certificate can be said to represent its face value, or to entitle the holder to share in the incomes and assets of the corporation to the full extent of the amount it purports to evidence, on the other hand, it is equally clear that such certificate is in part based upon actual property and represents in some amount actual capital in which the holder has a right to share in the proportions his certificate sustains'to the whole issue and tbe whole issue sustains to the actual capital. It is certain on the facts disclosed in these pleas that $100,000 had been paid in and was held by the corporation as its capital. It is equally clear that this fund belonged to the holders of the $200,000 of shares to the same extent and in the same sense it would have belonged to them had no fictitious increase of shares been attempted to be authorized and actually issued. It is manifest too that the several interests of the stockholders in this fund is determinable by reference to the number of shares of stock they respectively hold just as if the whole issue was in all respects valid; the sum of the shares held by each marks the extent of his interest and is his muniment of title. Precisely double the number of authorized certificates having been issued to each subscriber-for the stock, the relative share of each subscriber in the corporate capital is neither increased nor diminished by the duplication. Each has the interest he controlled and paid for, albeit it may appear by the face of the paper evidencing his interest that the fund is twice what it really is, and hence nominally that his aliquot share thereof is double liis real interest. In other words, each subscriber agreed to receive and did receive two shares worth 50 per cent, of their face value instead of one share at par. It was so with the plaintiffs. The defendant knew all the facts relative to the fictitious increase of shares. He knew that the certificates plaintiffs offered to sell him were based on an actual capital amounting to only 50 per cent, of the nominal capital represented in part by those certificates, and in view of these facts he purchased plaintiff’s stock at fifty cents on the dollar. There was no concealment, no misrepresentation. He received precisely what he contracted for and agreed to pay for; and the certificates which were transferred or were to be transferred to him entitled him to exactly the same interest in the corporate capital as between himself and the other stockholders and the company as if there had been no duplication of shares and he had paid the sum of money he agreed to pay for one-half the shares of stock he received. The facts alleged fall far short of showing that there has been any want or failure of consideration in whole or in part for the note sued on. Possibly the fictitious increase might afford grounds for a writ of quo warrcurdo against the persons purporting to form and constitute this company, but even in that event the defendant would be entitled to the share in its property which is represented by the certificates he purchased. Possibly, also, creditors of, the corporation might call upon the stockholders to make good the difference between the actual capital and that represented by the fictitious increase of its stock; but, if so; this is a liability wbicli tlie defendant voluntarily and knowingly assumed, and exemption or freedom from it constituted no part of the consideration for the promise upon which this action is based. In any aspect' of the facts and in every contingency, which may arise upon the whole consideration for defendants promise has moved to him, and he must pay therefor unless, notwithstanding he has received what he bought, it would be against public policy to enforce his obligation to pay for it.

And in this connection it is insisted that inasmuch as the stock which constituted the consideration for the note was issued in violation of the constitution It was an illegal consideration, and though of the precise actual value contemplated by both parties to this transaction, it can not support defendant’s promise to pay. The position is not well taken. The contract sued on neither in itself or in its completest effectuation involved any illegal act on the part of the plaintiffs or the defendant. The excessive issue of stock, which is the only illegal act brought to light in these pleas, was fully accomplished before this sale to the defendant. The plaintiff’s right to enforce defendant’s obligation to pay for the property sold to him does not depend upon proof of this excessive issue or any other illegal transaction. The right is wholly apart from the alleged illegality. In such case the rule is that notwithstanding the prior consummated illegal transaction out of which may have resulted an infirmity in the subject-matter of the sale going to lessen its value though even that is not true as between these parties, the contract of sale and purchase will be enforced since the right to do so does not rest upon the original illegality and may be effectuated without proof of the previous transaction which the law forbade. The case is clearly within the test declared by this court- for determining whether a contract attacked for illegality is capable of enforcement, of which it is said that the inquiry “is whether the plaintiff requires the aid of an illegal transaction to support his case. If he does not — if he has rights originating in a transaction not offensive to law — and has a right of recovery independent of an illegal transaction, such transaction, though he may have participated in it can not be employed to defeat him.”—Ware v. Curry, 67 Ala. 274, 283; Smith v. Dinkelspiel, 91 Ala. 528, 531. And the same doctrine is thus declared by Judge Story: “If any act in violation of either statute or comfhon law be already committed, and a subsequent agreement be entered into, which, though founded thereupon, constitutes no part of the original inducement or consideration of the illegal act, such an agreement is valid.” — Story on Const. § 760. And to the same effect and illustrative of the principle are the following authorities.—2 Kent’s Com. 588; Buck v. Albu, 26 U. S. 184; Randon v. Toby, 11 How. 493; Thornbury v. Harris, 3 Cold. (Tenn.) 163. This case is clearly distinguishable in the matter under consideration from that of Williams v. Evans, 87 Ala. 725. The enforcement of the contract there sued on necessitated and involved the doing of an illegal act. The plaintiff had subscribed for stock in a corporation which undertook to issue five dollars of stock for every dollar of its actual capital. Before the stock was issued, however, “plaintiff sold $1,000 (or ten shares) of the original stock and gave the defendant an order on the corporation to issue to defendant fifty shares of said company’s stock which was the amount called for by the $1,000 of original subscription, and to transfer the same to the defendant on the books of the company.” The sale of this stock to be issued, the illegal issuance being necessary to a consummation of the contract of sale, was held invalid, the decision being expressly put on this ground, and the court saying: “A contract which contemplates the violation of a statute, or a constitution, as a mode of executing such contract, is illegal and void. It is based on an unlawful consideration, and, if executory, can not be enforced.” In the case at bar, the contract is not executory — the defendant has received the certificates of stock which he bought; 'it did not contemplate the violation of any law as a inode of its execution, and no law was violated in its execution. It differs from the contract involved in the case referred to in the two matters upon which that case was decided, that is it is not based on any unlawful consideration and it was not dependent upon any act subsequent to its being entered into for consummation. The demurrers to the pleas which set up want and failure of consideration and illegality of consideration were properly sustained.

These pleas and the demurrers to them presented the main, if not the only real issue which arose on the pleadings. Little need be said of the rulings on demurrers to other pleas. The first plea was patently bad in failing to sufficiently aver a damnifying breach of the contract it attempts to set up. The seventh plea was bad in that it does not appear from its averments that the agreement upon which reliance is had was an illegal agreement. It is not jier se unlawful for a number of persons by previous agreement to buy shares of the stock of a corporation for the purpose of controlling its policy, electing its officers, &c. The carrying out of such agreement may indeed be most advantageous to tbe corporation and all its stockholders; and it does not appear by this plea but that such was tbe effect of this agreement.

Tbe eigbtb and last plea is bad in that notwithstanding tbe stock plaintiff purchased may have been originally issued to Lesser and Loveless by the company without consideration, it may yet have not been fictitious stock in whole or indeed to any extent, but to the contrary may have represented in some amount actual capital, and therefore have been of some real value — sufficient at' least to support defendant’s promise to pay for it, made, it is to be assumed since there is nothing in the plea to the contrary, with full knowledge of all the infirmative facts alleged in the plea.

We find no error in the second, and the judgment must be affirmed.

Affirmed.