Cramer v. Burnham

This is an action brought to the City Court of Hartford by the receiver of the Connecticut Agricultural Exchange, Incorporated, upon a note for $75 given by the defendant in payment of the balance of a subscription for four shares of the capital stock of that corporation, of the par value of $25 each.

Prior to the defendant's subscription, a certificate of incorporation had been filed with and approved by the Secretary of the State, but the certificate of organization was never filed and the plan to do so was definitely abandoned. Other subscriptions were made, and some paid in cash, some in notes, and some in both. The present defendant paid $25 in cash and gave the note of $75 here in question for the balance.

The finding discloses that out of the funds in his hands the receiver has paid expenses of administration of the receivership, and that at the time of the trial of this action there were no outstanding claims of creditors except certain contested claims against which the receiver has reserved sufficient for settlement in full. It further appears that the receiver has paid two dividends, aggregating twenty-five per cent of their subscriptions, to those stockholders who had theretofore paid in full, and there is likely to be available sufficient funds to pay further dividends. There has never been an organization of the company, no officers have been elected or by-laws adopted, and no stock has ever been issued.

Save as may be implied by law, the defendant has never consented to the payment of any claims of the promoters of the company nor of any bills incurred by them or by the company.

The City Court of Hartford gave judgment for the plaintiff for the full amount of the note, with interest and costs, overruling the contentions of the defendant in his answer and counterclaim, and the questions thus raised are now brought before this court by appeal. His claims may be briefly summarized as follows: (1) that the incorporators were not authorized to incur liabilities which must be paid by the subscribers; (2) that there is no liability on the defendant in this suit to pay any debts incurred by the incorporators; (3) that the corporate venture having failed, the defendant subscriber is freed from obligation upon the note in question; (4) that the failure to organize and issue stock, and the conclusive inability now to do so, is a complete defense in a suit to collect the amount of the subscription note; (5) that it must be shown that the subscriber consented to the incurring of debts by the incorporators, in order to recover upon a subscription; (6) that, there being no such evidence in this case, judgment should have been rendered for the defendant; (7) that the court erred in refusing to correct the finding in two particulars.

The record does not contain the draft-finding and we are therefore unable to pass upon the last claimed error.

The complaint sets up that the plaintiff is the bona fide holder of this note for value. One of the defenses is that the consideration has failed, thus freeing the maker from liability to pay the note. This issue is a controlling one, and if the defense be valid, the present action cannot be maintained.

Upon approval of the certificate of incorporation, the Connecticut Agricultural Exchange became in legal contemplation, an existing corporation, but with limited rights and liabilities only. General Statutes, § 3514; Chieppo v. Chieppo, 88 Conn. 233, 90 A. 940.

The statute expressly denied it the right to perform any of the business contemplated by the charter, this right being reserved for the completed organization in charge of the officers and directors. General Statutes, § 3514.

Contracts made in the name of this inchoate corporation would not be void ab initio, but only enforceable after the organization had been completed, and that, on the principle of ratification or estoppel.Chieppo v. Chieppo, supra, p. 239. So that before final organization the corporation remained without power to enforce contracts in its name. NaugatuckWater Co. v. Nichols, 58 Conn. 403, 408, 20 A. 315.

The approval of the certificate of incorporation put this corporate entity into the hands and under the exclusive control of the incorporators, who were the agents of the corporation and of the subscribers who composed it. These incorporators were expressly authorized by statute to take such steps as were necessary and proper to obtain further subscriptions to the capital stock. This was manifestly necessary to ensure the raising of the capital named in the certificate of incorporation as the amount with which the corporation would begin business. The right to file the certificate of organization and to enable the corporation to go forward with its charter purposes, could not be obtained till this was done. General Statutes, § 3514. It will be presumed that this work involved some expense, and the authority to incur this in a reasonable and proper manner, is necessarily implied by the statute granting them the power to proceed. There may be two distinct classes of corporate indebtedness — those obligations entered into before organization and after incorporation, and those incurred after organization.Naugatuck Water Co. v. Nichols, 58 Conn. 403,408, 20 A. 315.

Subscribers, by the terms of their agreement, ordinarily become liable to pay their subscriptions only at such times as legal "calls" are made upon them by the directors. These provisions for calls are held to be conditions precedent to the obligation to pay, and the corporation cannot compel payment except upon the performance of the condition. 2 Morawetz on Corporations (2d Ed.) p. 791; 2 Clark Marshall on Corporations, p. 1526.

In conformity to this rule, our statute authorizes only the directors of a corporation, or its receiver, to make legal calls for the payment of stock subscriptions. General Statutes, §§ 3432, 3435. The incorporators are not, for obvious reasons, so authorized, and it results that the payment of a stock subscription cannot be enforced by act of the incorporators.

Equity looks upon the subscribers as having a definite relation to creditors of the corporation, and as having an obligation to contribute to the capital of the company as a fund for their security. When they become stockholders, which they do only after the completed organization, equity treats them as the real parties in interest, carrying on the business of the organization and incurring debts, under a corporate name, and the officers of the company as the stockholders' agents for that purpose. Equity therefore considers these stockholders unconditionally liable to the company's creditors to the amount of their holdings and not subject to the precedent condition that a call must be made in order to bring the obligation to pay into effect. "The fact must be recognized that the shareholders are the real parties in interest, who carry on business and incur debts in the corporate name, and that the directors are really the agents and nominees." "In equity, therefore, the shareholders of an insolvent corporation are held to be unconditionally liable to its creditors to contribute the amount of capital subscribed by them, although their subscriptions were conditional, as between themselves and the company, upon a regular call or assessment by the board of directors." 2 Morawetz on Corporations (2d Ed.) pp. 791, 792. The subscription is treated as an irrevocable dedication of the sum named therein, to the payment of all the valid debts of the corporation.Stamford Trust Co. v. Yale Towne Mfg. Co.,83 Conn. 43, 75 A. 80.

Decisions in different jurisdictions are not in accord as to the status of subscriptions made before the corporation is organized. Where there is no statute making the corporation a distinct entity before the certificate of organization is filed, the subscription is generally held to be a revocable offer to take stock, and not a contract. In such cases there is considered to be but one party to the transaction, and the subscription does not take on the elements of a legal contract till the organization is completed by the filing of the certificate of organization. But where the subscription is one of the steps specifically authorized by the statute in the process of forming the corporation, as in this State by General Statutes, § 3510, by which the corporation comes into existence upon the filing of the certificate of incorporation, it becomes immediately a valid and binding contract and irrevocable. In such cases the subscriber is held to have contracted with the corporation, and the consideration for his undertaking is the agreement of the corporation to furnish him with the stock when the organization is completed. 1 Thompson on Corporations (3d Ed.) pp. 822, 838; 2 Clark Marshall on Corporations, pp. 1368, 1369; 1 Cook on Corporations (8th Ed.) p. 373; 1 Morawetz on Corporations (2d Ed.) § 55.

The defendant's subscription thus has the status of a contract, and the note now in suit is accessory to it, and if the defendant is liable in the present action, it is because he is liable on the contract of subscription for which the note stands. Howe v. Raymond,74 Conn. 68, 70, 49 A. 854.

The consideration for his contract was the promise of the corporation to furnish him the stock, and the definite inability of the corporation to do so, by reason of the abandonment of the enterprise, results in a failure of the consideration, and the payment of the subscription as such cannot be enforced.

To make a subscription contract binding, there must be mutuality of obligation. The subscription is for stock, to be legally issued. "A failure to form the projected company on terms named in the subscription paper . . . will constitute a failure of consideration, so that the subscriber will not be liable on his subscription, and may recover back money which he has paid; and the same must be true where the enterprise has been wholly abandoned; . . . and a refusal or failure to issue the stock subscribed for or inability to issue it, will constitute a failure of consideration." 14 Corpus Juris, p. 526, § 786, p. 528, § 791, and cases cited; 1 Cook on Corporations (8th Ed.) p. 354; 2 Clark Marshall on Corporations, pp. 1509, 1510;Manistee Lumber Co. v. Union National Bank,143 Ill. 490, 502, 32 N.E. 449; Bradford v. Harris andBirckhead, 77 Md. 153, 26 A. 126; Minor v. Gordon,170 Ky. 609, 186 S.W. 480.

On recognized legal principles, it also follows that a note given in payment for such a subscription is subject to the same defenses and cannot be enforced as between the original parties to the contract.Pulsifer v. Hotchkiss, 12 Conn. 234, 241; Bunnell v.Butler, 23 Conn. 65, 68; Howe v. Raymond, 74 Conn. 68,49 A. 854; Tice v. Moore, 82 Conn. 244,73 A. 133.

As we have indicated, a subscriber to stock is liable to the extent of his share in the enterprise, measured by his subscription contract, for proper expenses incurred by the incorporators — his agents — in forming the corporation, but this is a liability altogether separate and distinct from the liability to pay for stock under the terms of his stock subscription. This obligation to pay his pro rata share of debts properly incurred arises from the principles of agency and not from the terms of the contract for stock which he signed. This liability can be judicially determined and enforced by the receiver by a proper proceeding in the court of his appointment.

The present action, however, is one at law to recover the full amount of the defendant's note given for the balance of a stock subscription. His defense, that the consideration has failed, would be a complete legal defense to an action on the contract itself; and the principle has equal application whether the action is upon the subscription or upon a note given in payment therefor. It is apparent that upon the issues joined, the facts found, and the legal principles which have been discussed, the plaintiff cannot recover in this action, either on the ground that the contract of subscription is still good, or that part or all the amount of the note is needed to pay valid claims of creditors. The issue framed by the pleadings is strictly limited to liability to pay for stock which can now never be issued, and the trial court was in error in holding that the consideration for the note had not failed and in rendering judgment for the plaintiff.

In view of this conclusion, it becomes unnecessary to discuss other reasons of appeal.

There is error; the judgment is reversed and the City Court of Hartford is directed to render judgment for the defendant for costs.

In this opinion MALTBIE and MARVIN, Js., concurred.