Taylor v. Lounsbury-Soule Co. , 106 Conn. 41 ( 1927 )

The appellant claims that the finding should be corrected by striking out several paragraphs as found without evidence, but these, aside from a few inconsequential details, are either supported by evidence or are permissible inferences from other facts. The general finding as to the nature and extent of Zork's authority was elsewhere limited in the only respect which is of moment to the defendant — that he was not authorized to execute Exhibit A. It would have been more accurate to state that Zork agreed or consented to put Exhibit A in writing than that he "represented" that he would do so, but his conduct in this regard is not included in those representations (stated in paragraphs seventeen and twenty-two) which are found to have been relied upon by the plaintiff. The finding, in paragraph twenty-three, that the plaintiff relied upon "some or all" of these representations is justifiably criticized. The court should have found which, if not all, of the representations constituted the inducements moving the plaintiff, but, as will subsequently appear, the evidence does not warrant the correction requested by the defendant, to the effect that the plaintiff was induced solely by three specific representations.

The essence of many of the numerous paragraphs of the draft-finding which are sought to be added is already included in the finding. It appears to be undisputed that the first notice to the defendant of the existence of Exhibit A was given by the plaintiff; that Mr. Winston, president of the corporation, disavowed the instrument and refused to cancel Exhibit B or return the amount paid; also, that the plaintiff has not offered to return the dividends received by her. These facts are added to the finding. Other claimed corrections will be noticed later.

The defendant conceded that the complaint set forth a cause of action for rescission of Exhibit B, as having been induced by fraudulent representations, and claimed that it also set forth issues sounding in contract, for breach of Exhibit A, but contends that the allegations do not embrace a cause of action or support a judgment based upon a right of rescission because of inability of the defendant to perform Exhibit B in that it was not at the time and never has been in a position to issue or deliver the units of stock which were the subject of the contract.

In addition to allegations appropriate to the facts above stated as having been found, the complaint contained the following paragraphs: "9. In October of 1923, and at the time of the execution and delivery of the instrument of which Exhibit B is a copy, the authorized capital stock was not in excess of thirty-five hundred shares of cumulative preferred stock, having a par value of $100 per share, the dividend on which was to be seven per cent, which preferred stock was not redeemable, and thirty-four hundred shares of common stock, having a par value of $25 per share. . . . 11. Neither at the time of the execution and delivery of the instrument of which Exhibit B is a copy, nor at any time thereafter, has defendant been authorized to issue any common stock having no par value."

The prayers for relief were: (1) $15,000 damages; (2) a decree directing defendant to deliver to the plaintiff her notes which remain unpaid; (3) cancellation of the instrument of which Exhibit B is a copy; (4) if defendant is unable to deliver the notes, $18,000 additional damages. These claims are clearly appropriate to rescission and return of the consideration, i.e. the $13,000 already paid and the notes for the balance.

The allegations in paragraphs nine and eleven are not, it is true, elaborated by setting out the failure to file with the Secretary of State the required certificates of increase of capital stock and change in par value of common stock upon which the results alleged are predicated and, at least to that extent, "do not fully disclose the ground of claim." In this respect the complaint was, very likely, open to motion for more specific statement (General Statutes, § 5637) but, lacking this, the general statement was a sufficient foundation for evidence of the contributing facts and after judgment is sufficient to support it. Sprague v. Taylor,58 Conn. 542, 548, 20 A. 612. Furthermore, the obvious inference from the allegations of these paragraphs was that any issue of preferred stock beyond the amount therein stated and any issue of common stock of no par value, were unauthorized, thereby putting the defendant on notice of claimed defects in the attempted amendment rendering the increase and change invalid. Misjoinder or combination of distinct causes of action in one count was waived by failure to make seasonable attack on that ground. Maisenbacker v. Society Concordia, 71 Conn. 369, 376,42 A. 67.

In paragraphs twenty-seven and twenty-nine of the finding, the court finds all the facts as alleged in paragraphs nine and eleven of the complaint, except that the dividend rate on preferred stock was nine instead of seven per cent. For the reasons above indicated, the plaintiff's claim that these paragraphs should be stricken from the finding as based upon evidence not admissible under the pleadings is not assented to.

The final conclusion of the trial court, that the plaintiff is entitled to the relief demanded, and the resulting judgment, are based upon the conclusions that: "1. The plaintiff was induced to execute Exhibit B by false and fraudulent representations made by the defendant through its authorized agent, Zork. 2. In Exhibit B the plaintiff agreed to purchase ``as and when issued one hundred units of stock . . . consisting of two shares of nine per cent cumulative preferred stock par $100, and one share of no par value common stock'; neither at the time of the execution of Exhibit B nor at any time since then has the defendant been in a position to issue or deliver the units subscribed for." Either of these grounds, if adequately supported, is sufficient to justify the judgment rendered.

The parties agree necessarily, that in order to obtain a return of the consideration paid, on the ground of fraudulent representations, the plaintiff must establish that the representations were made as to an existing state of fact, that they were authorized or approved by the defendant, and that they were relied on by the plaintiff. The finding that the representations were false and, except those pertaining to repurchase reduced to writing in Exhibit A, authorized, is not questioned on appeal. The defendant's main contention in this connection is that none of these representations except that which related to the election of Dr. Griffin to the board of directors, that the investment would be a good one, and the unauthorized promise that the defendant would repurchase the stock, were causes inducing the plaintiff to subscribe to the stock. The trial court refused the requested correction of the finding to this effect, and was justified in so doing in view of all the evidence, notwithstanding, as stated in the memorandum on motion to correct, certain statements elicited from the plaintiff on cross-examination. Furthermore, it is not necessary that the false representations should have been the sole inducement. Sprague v. Taylor, supra, p. 551; 12 Rawle C. L. p. 358, § 112. Even if the unauthorized undertaking to repurchase, evidenced by Exhibit A, was an inducement moving the plaintiff to subscribe, that will not avail the defendant if one or more other false representations were material inducing causes. It is not only evident, but apparently is conceded, that the representation concerning Dr. Griffin's election as a director was not only an inducement, but a powerful one, and the failure to so elect him appears to have been the immediate cause for the plaintiff's decision to terminate relations with the defendant. The finding is that the representation was that defendant "had arranged to elect" Griffin a director. A representation that an arrangement has been made, when it has not been and there is no present intention to do so, is fraudulent. Bitondi v. Sheketoff,91 Conn. 123, 99 A. 505; Dowd v. Tucker,41 Conn. 197; Garry v. Garry, 187 Mass. 62, 72 N.E. 335;Luchow v. Kansas City Breweries Co., 183 S.W. (Mo.App.) 1123, 1125; Buena Vista Co. v. Billmyer,48 W. Va. 382, 37 S.E. 583. The conclusion that the plaintiff was induced by fraudulent representations obtains adequate support from this one consideration. Other material inducements disclosed by the finding serve to confirm and reinforce its correctness.

If, in agreeing to sell and deliver to the plaintiff one hundred units of its stock, each unit to consist of two shares of preferred stock, par $100, and one share of no par value common stock, the defendant contracted to do something which it had no power to do, its contract was void, and the plaintiff was entitled to so treat it and to reclaim the consideration with which she parted. Litchfield Savings Society v. Dibble,80 Conn. 128, 67 A. 476; Stevens v. Lippman, 85 Misc. (N.Y.) 347, 350; Union Ry. v. Sneed, 99 Tenn. 1,41 S.W. 364, 47 id. 89; American Tube Works v. BostonMachine Co., 139 Mass. 5, 12, 29 N.E. 63; Anthony v.Household Sewing Machine Co., 16 R.I. 571,18 A. 176, 5 L.R.A. 575; 1 Cook on Corporations (8th Ed.) p. 605, § 192; 5 Fletcher, Cyc. Corporations, § 3469. Hence the second ground of judgment depends on the validity of the conclusion that defendant was not, at the time the contract was made, and has not since been, in a position to issue or deliver the units subscribed for. The defendant concedes that any overissue beyond the authorized amount of each class of stock would be void. Scovill v. Thayer, 105 U.S. 143. But it claims that no overissue of its preferred stock was required in order to comply with its contract with the plaintiff, because at least $350,000 of this stock was authorized prior to the attempted increase of September, 1923, and not more than $139,000 was then issued and outstanding. The finding (paragraphs four, twenty-seven and twenty-eight) is to this effect, but states further (paragraph six), "defendant never filed with the Secretary of State any certificate or certificates setting forth the facts relating to the issuance of any stock other than the original issue of $50,000 of common stock as required by General Statutes, 1918, Section 3516." We do not deem it necessary to present purposes to determine the effect, if any, of such failure, upon the defendant's right to issue stock under the successive amendments made prior to 1923, nor the effect of the change as to dividends on and retirement of the preferred stock, which was attempted to be made. Exhibit B calls for a unit of performance embracing both preferred stock, par $100, and common stock of no par value; the consideration is single and not expressly or by implication apportioned; the contract is, therefore, not severable but entire. Bridgeport v. Scott Co., 94 Conn. 461, 466, 109 A. 162, and cases cited. If the defendant was not authorized to issue common stock of no par value, even if it could have delivered the preferred stock stipulated for, it lacked power to perform its contract, and the plaintiff had the right to rescind, on that ground, since "it is impossible to affirm that the party making the contract would have consented to do so unless he had supposed that the rights to be acquired thereunder would extend to all the things in question." 7 R.C.L. § 246, p. 859;Trent Import Co. v. Wheelwright, 118 Md. 249, 260,84 A. 543. The decisive inquiry as to this phase of the case is, therefore, whether the defendant was authorized to issue the common stock contracted for.

The action of the defendant corporation with reference to a change of its par value common stock to stock having no par value was taken under § 2 of Chapter 168 of the Public Acts of 1923, which provides that any corporation organized under the provisions of Part III of Chapter 188 of the General Statutes "may change any of its stock, common or preferred, having a par value to an equal, greater or less number of shares of stock having no par value and, in connection therewith, may fix the amount of capital stock represented by such shares of stock without par value, . . .; but, except as provided in section 3430 of the General Statutes, no such corporate action shall be valid unless approved by a vote of two-thirds of all outstanding stock of each class at a meeting of stockholders warned and held for that purpose nor unless a majority of the directors shall make, sign and swear to and file in the office of the secretary of the state a certificate stating that such corporate action has been duly approved by the stockholders and setting forth a copy of the vote of the stockholders, which vote shall show the details as to such corporate action." No such certificate was filed with reference to the attempted change, and the plaintiff claimed, and the trial court held, that, in consequence, the defendant possessed no valid authority to issue the common stock contracted for by the plaintiff.

The defendant maintains that the stock subscription of the plaintiff was not invalidated by this omission, but that, as between these parties and under the circumstances disclosed by the finding, it was a mere irregularity having no effect upon their respective rights and liabilities. For support of this contention the defendant relies mainly upon Barrows v. NatchaugSilk Co., 72 Conn. 658, 45 A. 951. In that action a receiver for the defendant company was appointed on April 1st, 1895. One Bevin presented to the receiver a claim for the amount paid to the corporation for shares of its capital stock which shares he claimed were void because the certificate of the increase of stock, of which the shares in question were a part, was not made and filed as required by § 1954 of the General Statutes, Revision of 1888. The fifty shares subscribed for by Bevin were issued to him in April, 1889, and he paid therefor $3,750 in cash, and gave notes for $1,250, which he never paid. At that time the corporation was not indebted to any who were creditors under the receivership. Bevin received his certificates of stock, attended several meetings of the stockholders, voted for its directors, and received semiannual dividends until about the time the company went into liquidation.

The disallowance of his claim by the receiver was sustained, this court holding (p. 664): "The certificate prescribed by this section [1954] as well as the certificates prescribed in other sections in the same chapter of the statutes, are required to be made and filed with the Secretary of the State and with the town clerk, primarily for the benefit of the public; that is, of persons who may desire to do business with the corporation. . . . There is nothing in any of these sections to show that failure to file these notices, or any of them, makes the stock void. As between the shareholders and the corporation the shares, so far as this omission is concerned, may be good, and the shareholders be compelled to pay. These omissions are doubtless irregularities. The statutes, however, provide no penalty for them other than that the directors are made personally liable for all the debts of the corporation. Such irregularities do not exempt the subscriber, after he has acted as a stockholder, as he did here, from paying for his stock."

That case, however, exhibits several important differences, both of statute law and of fact, from those obtaining here. Section 1948 of the General Statutes of 1888 provided for the filing and recording of a certificate, setting forth the articles of association and other details, in the office of the Secretary of State and a duplicate in the office of the town clerk, and § 1954 for a similar filing and recording of certificates of increase of capital stock; but no disability or penalty, other than personal liability of directors (§ 1959), was imposed for failure to comply therewith, and no supervisory function was required of the Secretary of State except to see that the certificate stated that twenty per cent or more of the stock had been paid for in cash. The Corporation Act of 1901 and amendments thereto worked radical changes in these and many other respects. It was provided by § 60 of Chapter 194 of the Public Acts of 1903, now § 3505 of the General Statutes of 1918, that every certificate shall be filed in the office of the Secretary of the State, "who shall examine the same, and, if he shall find that it conforms to law and that all taxes" (on capital stock imposed by § 3506) "have been paid," shall approve and record the same. No act required to be set forth in any such certificate shall be valid until such certificate has been approved as aforesaid, but this provision shall not relieve the corporation, its officers, directors, and stockholders from any liability which might otherwise be enforcible against them or any of them, or invalidate any of the stock of such corporation in the hands of bona fide holders without notice." Section 25 of Chapter 157 of the Public Acts of 1901 (now § 3519 of the General Statutes of 1918), concerning changes in certificates of incorporation, provided that "no such amendment shall be valid" unless a certificate, setting forth such amendment, shall be made and filed in the office of the Secretary of the State in the same manner as required by § 3505, and a certified copy filed in the office of the town clerk. This repeated imposition of invalidity as a penalty for failure to file the required certificate, made by legislation enacted shortly subsequent to the decision in the NatchaugSilk Co. case, is significant of an intention to change the law in that respect. Blodgett v. Union New Haven Trust Co., 97 Conn. 405, 116 A. 908; Lewis' Sutherland on Statutory Construction, § 499. The provision to the same effect in § 2 of Chapter 168 of the Public Acts of 1923 is clearly analogous to that in § 3519 and should be given the same effect. There is no express warrant in this Act for application of the exception mentioned in § 3505, and even if it might, by implication, be held to be applicable, it would not put the plaintiff in a position where she is bound to take stock which is invalid and consequently unmarketable. As the plaintiff suggests, "this proviso is designed as a shield for the innocent, not as a weapon of offense for use against one in the plaintiff's position."

Another important distinction is that here, as the finding shows, we are concerned with a solvent corporation, while Barrows v. Natchaug Silk Co. and the other cases cited in which informalities or omissions in the procedure for increase of capital stock have been held unavailable as a defense to liability upon subscriptions thereto, involved the rights of creditors who had dealt with the corporation presumptively on the faith of the stock in question. Handley v. Stutz,139 U.S. 417, 11 Sup. Ct. 530, was a creditors' suit on a stock subscription; Scott v. Deweese, 181 U.S. 202,21 Sup. Ct. 585, an action by the receiver of a national bank upon an assessment upon shareholders. And in the latter case the court suggests (p. 212): "It may be . . . that the defendant, by proper proceedings instituted in good faith and in due time before the suspension of the bank, could have had his subscription cancelled. . . . But immediately upon the failure of the bank the rights of creditors attached, . . . and a shareholder who was such when the failure occurred could not escape . . . liability . . . upon the ground that the bank had issued to him a certificate . . . before, strictly speaking, it had authority to do so." In all of these cases, too, the element of estoppel by conduct was strongly present; the stock had been issued and delivered and the holders had unequivocally claimed, been accorded, and exercised, the rights of shareholders for a considerable time.

If the rights of creditors are not involved, the general rule is that the omission of essential steps prescribed by the statute authorizing an increase of capital stock will entitle subscribers for the increased stock to avoid their subscriptions and recover what they have paid, unless they are estopped. 5 Fletcher, Cyc. Corporations, § 3468; Anthony v. Household SewingMachine Co., supra; Congress Empire SpringCo. v. Knowlton, 103 U.S. 49, 57; Atlantic Const. Co. v. Kreusler, 40 N.Y. App. Div. 268, 57 N.Y.S. 983;American Tube Works v. Boston Machine Co., supra;Union Ry. v. Sneed, supra; Wood v. Union GospelChurch Bldg. Asso., 63 Wis. 9, 22 N.W. 756; Lincoln v.New Orleans Express Co., Ltd., 45 La.Ann. 729, 12 So. 937; 1 Cook on Corporations (8th Ed.) §§ 288, 290. In order to deprive the plaintiff of the benefit of this rule, she must have so assumed the position and exercised the rights of a stockholder, and manifested such acquiescence as to amount to a ratification and estoppel, or been guilty of laches. 5 Fletcher, Cyc. Corporations, § 3469. Her situation in this respect is essentially different from that of Bevin, in Barrows v.Natchaug Silk Co.; he had acquiesced and acted and participated fully as a stockholder for about six years, until the insolvency of the corporation, which continued acquiescence was held (p. 665) to be sufficient to deprive him of a right to question the validity of his shares. The plaintiff never received certificates of stock nor acted as a stockholder; within less than six months after subscribing she unequivocally disavowed relations with the corporation other than as a claimant for return of her money and notes, paid no more notes as they came due, and negotiated no more dividend checks. The defendant could not have misunderstood or been misled as to her attitude. Elements which are essential to constitute an estoppel are absent.Crawford v. Bridgeport, 92 Conn. 431, 103 A. 125.

The finding discloses that on December 6th, 1924, the plaintiff brought an action against the defendant in the courts of the State of New York, based upon, and seeking a return of the purchase price of the stock in question in accordance with, the agreement Exhibit A. The defendant interposed, as special defenses, that this instrument was neither authorized nor ratified by the corporation, and that it was illegal and void under the New York statutes because the defendant had no surplus out of which to repurchase the stock. The defendant admits, in its brief, that shortly after the filing of this answer the plaintiff brought the present suit and thereafter discontinued the New York action, but contends that the commencement of the suit in New York constituted an election to rely on Exhibit A and a waiver of or equitable estoppel against any claim for relief except upon that agreement. The plaintiff, it is found, had no knowledge of the provisions of the Connecticut statutes on the subject of corporations and there was no evidence as to when she learned of the defendant's failure to comply therewith. Zork's lack of authority to bind the defendant by Exhibit A, and the facts upon which the defense of illegality were based, were matters exclusively within the knowledge of the defendant. The plaintiff's reasons for abandoning sole reliance upon Exhibit A, in the face of these defenses, and resorting to other grounds for relief, appear to have been both obvious and well advised, especially in the light of the court's finding, in this case, that the agreement was, in fact, unauthorized. There is nothing to indicate that the defendant changed its position or was otherwise misled to its prejudice by the course pursued by the plaintiff, and so there is no estoppel on this ground. Webb v. Moeller,87 Conn. 138, 141, 87 A. 277; Townsend SavingsBank v. Todd, 47 Conn. 190, 219. It does not constitute a waiver — the intentional relinquishment of a known right. Lee v. Casualty Co., 90 Conn. 202, 209,96 A. 952. Her mistaken attempt to secure a remedy upon Exhibit A to which, it developed, she had no enforceable right, was not an election precluding her from seeking relief on other grounds. Abbadessa v.Puglisi, 101 Conn. 1, 124 A. 838. Neither is there manifested any such "inexcusable delay" as would amount to laches. Allis v. Hall, 76 Conn. 322, 334,56 A. 637.

The failure of the plaintiff to allege or prove an offer to return to the defendant the amount of the dividend checks received and realized upon by her, affords no ground for complaint. If she failed in this action, she would be entitled to retain the proceeds of these checks. If she succeeded, the amount of such proceeds was less than she would, in any event, be entitled to recover. The trial court, in computing the damages awarded, has given the defendant full credit therefor. Kley v. Healy, 127 N.Y. 555, 561,28 N.E. 593; American Tube Works v. Boston Machine Co.,supra. We have accorded due deliberation to the other suggestions advanced in the able and voluminous briefs, but find therein no occasion for further comment.

There is no error.

In this opinion the other judges concurred.