Duncan v. Brookview House, Inc. ( 1974 )

Moss, Chief Justice:

Brookview House, Inc., was issued a charter by the Secretary of State on May 18, 1967, pursuant to an application therefor made by I. Q. Anthony, Jr., now deceased, F. W. Sossamon, Jr., and Charles P. Stroup, to engage in the operation of a nursing home. The application recited that F. W. Sossamon, Jr., was President, Charles P. Stroup, Vice President, and I. Q. Anthony, Jr., Secretary and Treasurer. The application also recited that the three above named constituted the Board of Directors of the corporation. The record discloses that the three incorporators above named agreed to incorporate with a capital stock of $50,000 and to issue 500 shares of stock with a par vaue of $100.00 per share. Each of the incorporators was to own one-third of the 500 shares. F. W. Sossamon, Jr., being a general contractor, agreed to build the nursing home for $277,347, and he was paid this amount less $15,150, which was to be applied to his purchase of one-third of the stock in the corporation. Thereafter, Sossamon paid in cash $1,517, making a total of $16,667, this amount representing the payment for his one-third interest.

Charles P. Stroup was to have a one-third interest in the corporation. It appears that he partly paid in cash for such interest. We have been informed by the parties that he has made an amicable settlement with the parties to this action and is no longer concerned with the outcome thereof. Hence, we do not pursue his involvement any further.

It appears that I. Q. Anthony, Jr., as Secretary and Treasurer of the corporation, personally directed the operation of the nursing home.

The corporation began experiencing financial difficulties, and on May 9, 1969, I. Q. Anthony, Jr., as Secretary and Treasurer, negotiated a loan from the Citizens and Southern National Bank of South Carolina at Gaffney, in the amount of $15,000 and executed a note evidencing such a loan, including interest, in the amount of $16,215, payable one year from the date of execution with interest after maturity. As security for the payment of the loan Anthony pledged and hypothecated to the bank certain stocks which he personally owned. In addition to this security, Sossamon and Stroup personally signed an instrument unconditionally guaranteeing the payment of the note. The amount of the loan so made was credited to the account of the corporation.

The aforesaid note became due and was not paid in accordance with its terms and in order to prevent the sale of the stock which I. Q. Anthony, Jr., had pledged as security for the payment thereof, he having died in the meantime, his estate paid the note and took an assignment thereof. Martin A. Duncan and Mary Pat Anthony, executor and executrix, respectively, of the Last Will and Testament of I. Q. Anthony, Jr., the appellants herein, on September 12, 1970, commenced an action against Brookview House, Inc., F. W. Sossamon and Charles P. Stroup, the respondents herein, to recover the sum paid by the estate on the aforesaid obligation to the bank. The appellants maintain that as a result of having paid the note of the corporation and receiving an assignment thereof, they are entitled to recover from the corporation and the two guarantors the amount so paid.

The respondents, by way of answer and counterclaim, alleged that I. Q. Anthony, Jr., was one of the organizers, creators and incorporators of Brookview House, Inc., and that he was the Secretary and Treasurer thereof and actively participated in the operation of the nursing home and in conducting its affairs. It was further alleged that I. Q. Anthony, Jr., had contracted, promised and agreed to purchase a one-third interest in the corporation for the sum of $16,666.67, and that he had not paid this amount to the corporation and that his indebtedness to the corporation should be offset against the amount his estate seeks to recover in this action.

This case was referred to a Special Referee to take the testimony and to report the same to the court with his findings of fact and conclusions of law. In obedience to said order the testimony was taken and the Referee filed his findings and recommendations. The appellants served exceptions to the report. When such appeal was heard by the Honorable George Bell Timmerman, Jr., presiding judge, he issued an order referring the case back to the Special Referee for specific findings and conclusions on the issues raised by the pleadings. The supplemental report of the Special Referee was subsequently filed and the appellants duly excepted thereto. These exceptions came on to be heard before the Honorable John Grimball, presiding judge, and he issued his order confirming the report of the Special Referee. It is from this order that the appellants prosecute this appeal.

It appears from the evidence that Brookview House, Inc. obtained a loan of $299,900.00 through Southern Mortgage Company which loan was insured by the Federal Housing Administration. One of the regulations of the Federal Housing Administration required the corporation to have $47,000.00 in assets. In support of the application for the loan and to comply with Federal Housing Administration regulations, I. Q. Anthony, who was a contractor engaged in plumbing, heating and electrical wiring, did, on April 30, 1969, in writing, certify that he owned a one-third interest in the corporation. The certificate was as follows:

“To comply with certification required to accompany FHA Form No. 3378A, this is to certify that there is an identity of interest as following:

“Sub-Contractor, Anthony’s, has an interest in Brook-view House, Inc. I. Q. Anthony, owner of Anthony’s owns one-third interest in Brookview House, Inc.”

An officer of the Citizens and Southern National Bank was called as a witness by the appellants for the purpose of showing that the bank had assigned the Brookview House, Inc. note and the guaranty agreement heretofore referred to as the estate of I. Q. Anthony. He testified that I. Q. Anthony told him that he, F. W. Sossamon, Jr., and Charles P. Stroup were the sole owners, stockholders and officers of the corporation.

A certified public accountant testified that he prepared financial statements and balance sheets for the corporation. This witness testified that Anthony told him that he had a one-third ownership interest in the corporation. He also said that he conferred with Anthony, Sossamon and Stroup, and they told him that each one owned a one-third interest in the corporation and that there was no record of the payment to the corporation by I. Q. Anthony for his one-third interest. This accountant set up in his balance sheet that I. Q. Anthony owed on his stock subscription $16,666.67. There was attached to this financial statement this note: “the three stockholders, Charles P. Stroup, I. Q. Anthony, and F. W. Sossamon, Jr., each owe balances on their shares of the common stock representing their interest in the corporation.”

A representative of an insurance agency that wrote the contractor’s bond for the corporation when the nursing home was constructed testified that I. Q. Anthony told him that he was going to be a one-third interest owner and that he was going to do a major portion of the work at the nursing home.

A representative of a hospital supply and equipment company entered into a contract to furnish such for the nursing home. He testified that during the negotiations I. Q. Anthony told him that he, Sossamon and Stroup were the owners of the nursing home, and that Anthony led him to believe that he owned a one-third interest.

A plastering contractor who installed the partitions, walls, ceiling and floors in the nursing home testified that I. Q. Anthony told him that he had a one-third interest in the nursing home. He further testified that he saw a stock or a stock subscription in Sossamon’s office which he believed to be signed by Anthony.

The appellants offered no testimony refuting or denying that I. Q. Anthony owned a one-third interest in the corporation. There was no denial that Anthony, Sossamon and Stroup entered into a preincorporation agreement to obtain a charter for Brookview House, Inc. and that the three of them were to be the officers and directors of the corporation.

Based upon the testimony and the record in this case, the Special Referee found that I. Q. Anthony was one of the organizers, creators and incorporators of Brookview House, Inc.; that after the corporation was formed he was a director and Secretary and Treasurer thereof and actively participated in the operation of the nursing home. Anthony asserted in writing to the Federal Housing Administration that he owned a one-third interest in the corporation and he also so stated to numerous other persons. The Special Referee recommended that the amount owing by I. Q. Anthony for his stock in the corporation be offset against the amount alleged to be due on the corporation note which was assigned to the appellants. The Special Referee further recommended judgment in favor of the appellants against Sossamon and Stroup under the guaranty agreement for one-third each of the difference between the amount paid the bank by Anthony’s estate and the sum due by Anthony’s estate to the corporation. The trial judge thereafter found that Anthony’s estate was entitled to receive 166 shares of the common stock of the corporation, this representing a one-third interest ownership in the corporation.

The appellants timely appealed from the recommendations contained in the report of the Special Referee. The appeal was heard by the Honorable John Grimball, presiding judge, and he issued his order in which he concluded that the Special Referee had properly decided the issues involved. The appellants contended that the Anthony estate could not be held liable for the purchase of a one-third interest in the corporation on the ground that any alleged stock subscription by I. Q. Anthony, not being in writing, could not be enforced by reason of Section 12-15.5(b). The trial judge found no merit in this contention and held that I. Q. Anthony, and now his estate, was estopped to assert such a defense in view of his action, representations and transactions as an officer, director and owner of a one-third interest in the corporation. We agree.

The promoters of a corporation occupy a relation of trust and confidence towards the corporation which they are calling into existence as well as to each other, and the law requires of them the same good faith it exacts from directors and other fiduciaries. Wilson v. McClenny, 262 N. C. 121, 136 S. E. (2d) 569. In the cited case there is an applicable quotation from Fletcher, Private Corporations, Sections 191 and 208, as follows:

“No public policy forbids contracts for promoting and managing a corporation according to law and for lawful purposes, or for determining among themselves (the promoters) what the stock shall be and how it shall be divided, or for election of themselves as officers and employment by the corporation when formed.”

The rights and liabilities of promoters inter se are determined by the terms of the agreement which they have made between themselves and the fiduciary relationship which they bear to each other. An agreement or contract between promoters of a corporation is governed by the general principles of the law of contracts. Such an agreement is as valid and binding as any other contract if the essential elements of an enforceable agreement are present. The presumption is that a promoter’s contract is valid and legal; the law will not assume an intention to violate it and, if possible, will so construe it as to uphold and validate it. 18 Am. Jur. (2d), Corporations, Sections 135 and 136.

Under the evidence here, there can be no question but that it was the intention of Anthony to become a one-third owner of the corporation. Anthony was a promoter, organizer and incorporator of Brookview House, Inc. He was elected a director and Secretary and Treasurer and thereafter was general manager of the corporate operations. The circumstances surrounding a subscription for stock in a corporation, and the subscriber’s subsequent conduct, may be such that the subscriber is estopped to deny his liability on the subscription. In Shiffer v. Akenbrook, 75 Ind. App. 149, 130 N. E. 241, it was held that a subscriber who participates in the organization of the corporation, and asserts the rights of a stockholder after the formation of the corporation, and makes no effort to withdraw his subscription, cannot deny that he is a stockholder and is liable on his subscription. In the cited case there is a quotation from Cook on Corporations (4th Ed.) Section 52, discussing the question of estoppel and is as follows:

“When one accepts or assumes the position and duties and claims the rights and privileges and emoluments of a stockholder, and the corporation accepts and acquiesces therein, such person is estopped to deny that he is a subscriber, even though there may have been something irregular or defective in the form or manner of his subscription, or there may have been no formal subscription at all.”

We conclude from a careful review of the record in this case that there was a mutual enforceable agreement among I. Q. Anthony, F. W. Sossamon, Jr. and Charles P. Stroup to organize and form a corporation to be known as Brook-view House, Inc., each contracting to own one-third of the shares of stock therein. In view of our conclusion that I. Q. Anthony and now his estate are estopped to deny that he was a subscriber for a one-third interest in the shares of the corporation, Section 12-15.5(b) has no application.

The appellants objected to the testimony of F. W. Sossamon, Jr. on the ground that it was a violation of the Dead Man’s Statute, Section 26-402 of the Code, and allege here that it was error to admit such. The Special Referee excluded this testimony from consideration in arriving at his conclusions. It follows that the question sought to be raised is without merit.

The exceptions of the appellants are overruled and the judgment below is,

Affirmed.

Lewis and Littlejohn, JJ., concur. Bussey and Brailsford, JJ., dissent.