Molina v. Largosa , 51 Haw. 507 ( 1970 )

OPINION OF THE COURT BY

WONG, CIRCUIT J.UDGE.

Plaintiff bought stock in a newly formed corporation which failed. He sued the promoter of the corporation seeking to recover his investment. The trial court held that the promoter of the corporation was not personally liable. We affirm.

On April 15, 1963, plaintiff Henry Molina attended a meeting to discuss the formation of a corporation, Direct Selling Corporation, of Hawaii. The corporation was to engage in selling stereo equipment under the trade name “Specialties Unlimited.” The promoter of the corporation, defendant Rudy Largosa, was already selling stereo equipment under that trade name which he had registered on January 9, 1963.

At the meeting, Molina signed a “subscription form” for the purchase of $2000 worth of stock (40 shares at $50 per share) in the proposed corporation. The subscription form states, inter alia, that “said corporation will engage in the business of wholesale and retail merchandising.” The form, however, does not set forth the capital of the proposed corporation or the extent of Molina’s proportionate interest therein.

On May 3, 1963, Molina paid Largosa $2000, which Largosa deposited in a bank account under the name Specialties Unlimited.

On June 25, 1963, the officers of the corporation (including Largosa as president) filed the corporation’s Articles of Association, and an affidavit as required by R.L.H. § 172-13 (HRS § 416-15). The affidavit lists Henry Molina as having subscribed 40 shares and paid $2000, and a total subscription price for all subscribers of $11,750. Thereafter the corporation failed.

Plaintiff contends that because the subscription form did not set out the total capital of the proposed corporation and his proportionate interest in it, there was no valid subscription contract. As a general proposition, in the absence of any statutory requirement (and the Hawaii statute is silent in this respect), no particular form is required if the intent of the parties can be collected from the writing. As one court put it in Duplee v. Chicago Horse Shoe Co., 117 F. 40, 43 (7th Cir. 1902), cert. denied, 188 U.S. 740: “The real question is, Was such paper intended and accepted as a subscription?”

In this case the trial court reached an affirmative answer to that question, which conclusion is supported by the record. Although the subscription form did not state the total capital and Molina’s interest, these were ascertainable by merely adding up the investments of all subscribers. This information is also obtainable from the affidavit filed with the corporation’s Articles, which, listed all subscribers and the respective amounts invested. The interest of any subscriber would then be the amount of his investment divided by the total investment in the corporation.

Upon filing of the said Articles and affidavit, the corporation came into existence. Hitchcock v. Hustace, 14 Haw. 232 (1902). In this jurisdiction, however, the mere fact of incorporation does not amount to an acceptance by the corporation of a subscriber’s offer. There must be an expressed or implied acceptance of that offer. Gillespie v. Camacho, 28 Haw. 32 (1924). After payment of the subscription price by Molina, not only was his name listed as a stockholder in the affidavit filed with the corporation’s Articles, but Molina himself on different occasions, made inquiries concerning his stock certificate, and from time to time requested Largosa to sell his shares of stock. Thé acceptance by the corporation of Molina’s offer and Molina’s acknowledgment of such acceptance are, therefore, clearly supported by the record.

Molina may not now rescind his contract. In Buffalo & J.R.R. v. Gifford, 87 N.Y. 294 (1882), a subscriber made two installment payments pursuant to a subscription agreement, the corporation was formed and his name was placed on the corporation’s stock ledger. It was held that the corporation could enforce the stock subscription agreement, recovering the balance due thereunder. A fortiori, Molina,, who has paid the full amount provided in his stock subscription agreement, has no right to get his money back. See 61 A.L.R. 1463, 1501-4. It should be noted, in passing, that even if he were entitled to rescission, his action, should be against the corporation and not the. promoter.

The promoter may be discharged from liability to a third party (creditor) on a preincorporation contract by a novation, if the corporation assumes the contract, and the other contracting party assents to the substitution of the corporation for the promoter. Marconi’s Wireless Telegraph Co. v. Cross, 16 Haw. 390, 395 (1905).

In the case of a subscription contract, however, the objective is a valid incorporation pursuant to the terms of the contract. Once that is accomplished, the contract has been performed. There is no need for a discharge by novation of the promoter from liability as the promoter is liable only if there is failure of such incorporation. Johnson v. Hulse, 83 Cal. App. 111, 256 P. 551 (1957); 41 A.L.R. 2d 477, 519-523.

Largosa promised to form a corporation, and he performed this promise. Plaintiff Molina got just what he paid for: stock in a corporation. There was no failure of consideration in the contract; only a failure of a corporation in which Molina had purchased stock. Clearly, if the corporation had succeeded, Molina would have been entitled to his share of the stock appreciation and any dividends declared.

Molina complains that shareholders’ meetings were not held, and that his certificate of 40 shares was never delivered. A certificate is not necessary to make him a stockholder. Hawley v. Upton, 102 U.S. 314 (1880). His remedy for this complaint was to compel such meetings and delivery. These are not adequate grounds to support his claim that there was no contract with the corporation.

Molina complains that the affidavit of incorporation states the total capitalization as $12,000, while the. certificate made out (but never delivered) to him states total capitalization at $60,000. His remedy for this evident error was reformation of his certificate.

Molina complains that the $2000 he paid Largosa was put in the bank account of Specialties Unlimited, and that Largosa never transferred this trade name to the corporation. The trial court found that this account was used by Largosa as a corporate account, and this finding is supported by the record.

It has been brought to our attention that the subscription form signed by Molina specifies “non-voting shares”, while the Articles provide for “full and equal voting rights”. The plaintiff did not raise this discrepancy at the trial (nor was it mentioned in plaintiff’s briefs before this court), and it therefore cannot now properly be the subject of appeal. State v. Robinson, 50 Haw. 501, 443 P.2d 140 (1968); Kauwa v. Dowsett, 3 Haw. 625 (1875); Hawaii Supreme Court Rule 3(b)(4). The reasons for his failure then to raise this issue, we think, are fairly obvious. The parties had either intended that voting stock be issued to the plaintiff but had inadvertently used the wrong printed form; or the plaintiff was not concerned with whether he got voting or non-voting stock, so long as he had full rights to participation in the profits. In the highly improbable event that he had really intended to contract for non-voting stock, it is now too late for him to complain that when he got more than he bargained for, there was a failure of consideration. Further, since there was no showing that the parties had intended that the corporation to be formed was to issue more than one class of stock, the shares actually issued had to be voting common stock.

Affirmed.

Frank D. Padgett (Padgett, Greeley, Marumoto <& Akinaka of counsel) for plaintiff-appellant. . John W. K. Chang (Ronald Y. G. Yee, General Counsel of Legal Aid Society of Hawaii, with him on the brief) for defendant-appellee..