Citation Numbers： 37 A.2d 835, 28 Del. Ch. 90
Judges： HARRINGTON, Chancellor.
Filed Date： 5/29/1944
Status： Precedential
Modified Date： 1/12/2023
1. A negative plea in equity can deny only one essential allegation of the bill, otherwise it is multifarious.
2. A negative plea in equity must be supported by an answer giving the real facts.
3. Where there is no replication to negative plea filed by defendant and legal sufficiency of plea is set down for argument, only such of the well-pleaded allegations of the bill as are not denied by the plea will be regarded as true. Rules of Court ofChancery, Rule 47.
4. A "plea in equity" is in nature of a special answer to all or some part of complainant's bill, but on a single issue.
5. The legal sufficiency of a plea in equity may be determined by setting it down for argument as on general demurrer. Rules ofCourt of Chancery, Rule 47.
6. Where plea in equity is set down for argument, facts therein alleged are admitted to be true. Rules of Court of Chancery,Rule 47.
7. The facts alleged in bill, and not denied by plea in equity, are regarded as true, and on all of those facts and on the issues raised thereby, court usually sustains or overrules the plea.Rules of Court of Chancery, Rule 47.
8. Where no replication to plea in equity is filed, situation is some-what same as though that phase of case were before court for determination on bill and answer.
9. When equity plea is filed, though there be no replication thereto, only one hearing is necessary for determination of all questions whether of law or fact, and if no replication is filed and sufficiency *Page 91
of plea is alone challenged, Chancellor may take such action as the circumstances demand, including entry of an order dismissing the bill should plea be sustained. Rules of Court of Chancery, Rule 47.
10. Rule 47 does not prohibit use of negative pleas but such pleas are permissible thereunder. Rules of Court of Chancery, Rule 47.
11. Where certificatcZof incorporation authorized corporation to issue stock from time to time for such consideration as directors might CF fix and provided that such action of directors should be conclusive as (1.... to adequacy of consideration, amount of consideration received for no par value stock issue would usually be of no moment, in absence of clear abuse of discretion by directors, provided quality of consideration is such as to meet constitutional requirements. Const. Art. 9, § 3.- 4
12. An unconditional license to use a patent right is "property', hence, ordinarily corporate stock may be issued therefor. Const. Art. 9, § 3.
13. In class suit by preferred stockholders to cancel all of corporation's no par common stock because issued without consideration, defendant's answers supporting negative pleas denying that such stock was issued without valid consideration and alleging that stock was issued in consideration of unconditional license to use a certain patent, were not defective because answers did not allege full performance of conditions under which license was issued, where license was not subject to forfeiture for failure to perform by licensee until at least six months thereafter. Rev. Code 1915, § 1919, subd. 4, as amended by
14. The mere fact that corporation may be required to expend money in future to protect its interests in property rights for which it has issued stock does not necessarily render consideration for such stock invalid. Rev. Code 1915, § 1919, subd. 4, as amended by 29 Del. Laws, e. 113, § 5.
15. The complainants, in setting down a plea in equity for argument, cannot reserve right to file a replication after the time fixed by chancery court rule and in disregard of provisions of such rule. Rules of Court of Chancery, Rule 47.
16. When only one cause of action is alleged in bill, and sufficiency of pleas in equity is set down for argument, every issuable fact alleged in bill, and not denied by pleas and by supporting answers must be regarded as true. Rules of Cou.rt of Chancery, Rule 47.
17. Where several causes of action are alleged in same bill, and pleas in equity are applicable to but one of them, defendants must *Page 92
respond in some manner to each of the various causes of action alleged. Rules of Court of Chancery, Rule 47.
18. In suit to cancel the no par common stock issue of corporation for lack of consideration therefor, general preliminary statement in pleas that pleas, in terms confined to denial of alleged lack of consideration, were addressed to all the relief prayed by bill could not broaden scope of language used therein. Rules of Court of Chancery, Rule 47; Rev. Code 1915, § 1919, subd. 4, as amended by
19. If a plea in equity purports to apply to the whole of a bill, but (loes not, it is bad as to the part not covered thereby.
20. Where bill, in preferred stockholders' representative suit for cancellation of all the no par common stock as having been issued without consideration, purported to set out pertinent provisions of corporate charter and other material facts relating to cause of action relied on, truth of such allegations was not admittea by pleas in terms which were confined to denial of alleged lack of consideration for no par common stock. Rev. Code 1915, § 1919, subd. 4, as amended by
21. Sepai'ate counts covering the several causes of action are not required in bill, but facts impliedly admitted by plea filed to one cause of action, though pertinent, are not applicable to another cause of action to which no plea has been filed. Rules of Court of Chancery, Rule 47.
BILL FOR THE CANCELLATION of the entire no par common stock issue of the Sirian Lamp Company, a corporation of this State.
The complainants were holders of preferred stock, and sued as representatives of a class of shareholders on behalf of the corporation, which was a party defendant. —Z The individual defendants were holders of 184, 175 shares of the total common stock issue of 300, 000 shares, and were likewise sued as representatives of a class; they were nonresidents of the State, but four of them appeared and filed substantially the same pleas to the complainants' bill. Donald R. McLennan and Clement Orville Miniger, the two remaining individual defendants, were served by pub- *Page 93 lication pursuant to the provisions of the statute, but did not appear. The corporation was served personally.
The material allegations of the bill, to which a copy of the corporate charter was attached, will appear in the opinion of the court.
In addition to the appropriate prayers for the primary relief sought, and as auxiliary and incidental thereto, the complainants prayed:
(1) That a receiver pendente lite be appointed for the Sirian Lamp Company, in order that its assets might be preserved from further waste; and
(2) That an election of directors of that corporation be ordered, at which time the holders of the preferred stock should alone be permitted to vote.
The pleas filed, respectively, by the Sirian Lamp Company, H. B. Securities Corporation, Chester H. Braselton, William G. Urmson, and by Adam Hamm, who was sued as Adam Hamin, were of a negative character, and each alleged:
"This defendant denies that the thirty thousand (30,000) shares of common or voting stock of no par value of the Universal Lamp and Wire Company were issued without any legal or valid consideration therefor, as alleged in * * * the bill of complaint, and on the contrary, this defendant avers as follows,
"That the entire thirty thousand (30,000) shares of common or voting stock of no par value of Universal Lamp and Wire Company, as authorized by paragraph Fourth of its Certificate of Incorporation, pursuant to the statute in such case made and provided, were heretofore, to-wit, on the 9th day of May, 1922, pursuant to a resolution of the board of directors of Universal Lamp and Wire Company, lawfully issued as fully paid and non-assessable to a certain John Allen Heany of New Haven, Connecticut, pursuant to the terms of a certain agreement in writing between the said John Allen Heany and Universal Lamp and Wire Company bearing date of 9th day of May, 1922, a true and correct copy of which said agreement is attached hereto and marked `Exhibit 1' and made a part hereof, and that as consideration *Page 94 for the issuance to the said John Allen Heany of said thirty thousand (30,000) shares of common or voting stock of no par value of Universal Lamp and Wire Company, the said Universal Lamp and Wire Company did forthwith, upon issuance of said stock and heretofore, to-wit, on the 9th day of May, 1922, receive of and from the said John Allen Heany the exclusive license to make, use and sell in the United States and Canada, without the payment of royalty, Filament Type Incandescent Electric Lamps specially designed for lighting purposes, embodying any or all inventions of the following United States Letters Patent and the following then pending Applications for United States Letters Patent; * * *." This is a class bill filed by preferred stockholders on behalf of Sirian Lamp Company, one of the defendants, seeking to have this court cancel the whole of the no par common stock issue of that corporation, consisting of 300,000 shares.
The bill alleges:
(1) That the Sirian Lamp Company was organized in May of 1922 under the name of Universal Lamp and Wire Company. Article IV of its original certificate of incorporation provided: *Page 95
"The total authorized capital stock of this corporation is Five Hundred Thousand Dollars ($500,000.) divided into five thousand (5000) shares of the par value of One Hundred ($100.) Dollars each of non-voting, preferred stock and thirty thousand (30,000) shares of Common or voting stock of no par value. The Common stock is to be fully paid and non-assessable and is the only stock having any voting power or rights."
(2) That when the corporation was organized, paragraph 4 ofSection 5 of the General Corporation Law, Rev. Code 1915, § 1919, subd. 4, as amended by Volume 29 Laws of Delaware,Chapter 113, § 5, provided:
"The amount of the total authorized capital stock of the corporation, which shall not be less than two thousand dollars, the number of shares into which the same is divided and the par value of each share; the amount of capital stock with which it will commence business, which shall not be less than one thousand dollars; in the case of a corporation without nominal or par value to its stock or any class thereof, the Certificate of Incorporation, with respect to such stock, in lieu of the above shall state the total number of shares authorized and that they are without nominal or par value, and the number of shares with which it will commence business, which shall not be less than ten shares; and if there be more than one class of stock created by the certificate of incorporation, a description of the different classes with the terms on which the respective classes of stock are created. Provided, however, that the provisions of this paragraph shall not apply to corporations not for profit, for which it is desired to have no capital stock; in case any such corporation desires to have no capital stock it shall be so stated, and the conditions of membership shall be also stated."
(3) That immediately after the organization of the corporation in 1922, 115 shares of preferred stock and 30,000 shares of purported no par common stock were issued.
(4) That in February of 1923, the name of the corporation was changed from Universal Lamp and Wire Company to Sirian Lamp Company; at the same time Article IV, of the original certificate of incorporation was stricken out, and the following article substituted therefor:
"Article Fourth: The total authorized capital stock of this corporation *Page 96 is twenty thousand (20,000) shares of preferred stock of the par value of One Hundred Dollars ($100.00) per share amounting in the aggregate to Two Million Dollars ($2,000,000) and three hundred thousand (300,000) shares of common stock without nominal or par value. The common stock is to be fully paid and non-assessable and has the exclusive voting rights and is all to be issued in exchange for all of the present issued and outstanding Common stock."
The Same Article provided:
"The holders of the preferred stock shall be entitled to receive out of the surplus or net profits of the business of the corporation, dividends at the rate of eight per cent (8%) per annum and no more, payable semi-annually on such dates as the Board of Directors may determine. Such dividends on the preferred stock shall be payable before any dividends shall be paid or set apart on the Common stock and shall be cumulative."
(5) That the original total authorized capital stock of the Sirian Lamp Company was, therefore, "Five Hundred Thousand Dollars ($500,000), divided into five thousand (5000) shares of the par value of One Hundred ($100) Dollars each of non voting preferred stock and Thirty Thousand (30,000) shares of common or voting stock, of no par value"; that, by the amended certificate, the authorized capital stock was fixed at 20,000 shares of preferred stock of the par value of $100.00 per share, amounting in the aggregate to $2,000,000, and 300,000 shares of common stock, without nominal or par value; that the 300,000 shares of common stock were to be fully paid and nonassessable; were to have the exclusive voting rights, and were to be issued "in exchange for" all of the then issued and outstanding 30,000 shares of no par common stock.
(6) That the exchange of stock was made, and no other consideration was paid for the 300,000 shares of no par common stock then issued.
(7) That the total authorized capital stock of the Sirian Lamp Company was limited to $500,000 (the aggregate par value of the 5,000 shares of preferred stock at $100 per share), and the issuance of the original 30,000 shares *Page 97 of no par common capital stock was unauthorized and void, both under its corporate charter and the General Corporation Law.
(8) That the said 30,000 shares of no par common stock "were issued without any legal or valid consideration."
(9) That all of the 300,000 shares of no par common stock, subsequently issued "in exchange for" the said 30,000 shares of no par common stock, "were issued without valid or legal consideration, are illegal and void, and should be cancelled."
(10) That no dividends have ever been declared or paid on the preferred stock of the Sirian Lamp Company, and, since its organization, it has been under the exclusive management and control of directors elected by the holders of the pretended outstanding common stock and by officers selected by them; that the present outstanding preferred stock consists of 17,818 shares, from the sale of which the corporation received $1,781,800, more than two-thirds of which has been dissipated and lost by the payment of exorbitant salaries to the officers of the corporation and to officers of affiliated companies, and also through losses sustained by unauthorized, illegal and unsound investments in shares of affiliated companies.
Some detailed allegations also appear with respect to various investments made by the Sirian Lamp Company, which resulted in losses, but it seems unnecessary to set them out.
(11) That unless the entire 300,000 shares of pretended no par common capital stock of the Sirian Lamp Company, so issued without authority and without valid consideration, are cancelled, and a receiver or receivers pendente lite be appointed for that corporation, as auxiliary and preventive relief, there is great danger that its assets *Page 98 will be further dissipated, to the detriment of the corporation and the holders of its preferred stock.
The complainants, therefore, seek to cancel the entire no par common stock issue of the Sirian Lamp Company on two grounds:
(1) Because the original 30,000 shares of no par common stock exchanged for the present issue, were not authorized by the pertinent provisions of the General Corporation Law or by the corporate charter of the Sirian Lamp Company, and were, therefore, void; and
(2) Because the original stock issue of 30,000 shares, so exchanged for the present common stock, was wholly without consideration, and also void on that ground.
The first cause of action is based on the complainants' construction of the pertinent provisions of the General Corporation Law and of the corporate charter of the Sirian Lamp Company. The supposed charter provisions and other material facts are alleged in the bill. The same facts are also pertinent to the alleged lack of consideration, on which the second cause of action is based. That allegation is specifically denied by the defendants' pleas, and the supporting answers purport to state the true facts; no other facts are expressly pleaded.
The sufficiency of the pleas as a defense to the second cause of action, will be considered first. The defendants recognize the rule that a negative plea can deny only one essential allegation of the bill; and that otherwise it would be multifarious.Langdell, Sum. Eq. Pl., § 108. They also recognize that such a plea must be supported by an answer giving the real facts.Sanders v. King, 6 Madd. 61; Langdell, supra, § 102. So, in addition to a denial of any lack of consideration, they allege that the 30,000 shares of no par common stock were originally issued by the corporation to one John Allen Heany on May 9, 1922, pursuant to a contract *Page 99 between them of that date, in consideration for the grant of an exclusive license to the corporation to make, use and sell in the United States and Canada certain filament type incandescent electric lamps, specially designed for lighting purposes, without the payment of any royalties therefor. The rights given by that contract embodied any and all inventions relating to such filament type incandescent electric lamps, protected by certain letters patent and any patents pertaining thereto that might be granted prior to May 9, 1922. A list of the existing patents is attached to the answers.
No replications were filed by the complainants to the defendants' pleas, and their legal sufficiency was set down for argument under Rule 47 of this court. That rule provides:
"When a plea is filed, a copy thereof shall be forthwith served by the Register upon the complainant's solicitor, and the date of such service entered of record. The complainant within fifteen days thereafter shall file a declaration whether he will set the plea down for a hearing as to its sufficiency in law; or else he shall file a replication to the plea, putting in issue the facts alleged in the plea. In either case the plea shall, upon application of either the complainant or defendant, be tried at such time and in such manner as the Chancellor shall fix, the well pleaded allegations of the bill being taken to be true for the purpose of trying the plea.
"If within fifteen days after service of such notice a replication to the plea be not filed, the plea shall be taken to be true in fact, and shall stand for argument upon the question of its sufficiency, and be heard as ordered by the Chancellor.
"If the plea be sustained, then after fifteen days the bill shall stand dismissed with costs on the complainant, provided within said fifteen days leave to amend the bill be not asked by the complainant in writing, or such leave be denied by the Chancellor."
Under Rule 47, within fifteen days after service of a copy of a plea on complainant's solicitor, he must, therefore, (1) "file a declaration whether he will set the plea down for a hearing as to its sufficiency in law"; or (2) "file a *Page 100 replication to the plea, putting in issue the facts alleged" in it. (3) "In either case", upon application of either party, the plea shall be tried "in such manner as the Chancellor shall fix, the well pleaded allegations of the bill being taken to be true for the purpose of trying the plea." (4) The next paragraph provides, however, if within fifteen days after "service of such notice a replication to the plea be not filed, the plea shall be taken to be true in fact, and shall stand for argument upon the question of its sufficiency, * * *."
The complainants claim that if both the allegations of the bill and the allegations of the plea are to be taken as true when the sufficiency of the plea is questioned, the filing of negative pleas could not have been contemplated by the rule. When, however, its provisions are considered, in connection with the early equity practice, the only reasonable conclusion as to its intended meaning is that if a plea be filed by the defendant, but there is no replication thereto, and the legal sufficiency of the plea is set down for argument, only such of the well pleaded allegations of the bill as are not denied by the plea will be regarded as true.
A plea in equity is in the nature of a special answer to all, or some part, of the complainant's bill, but on a single issue.Electrical Research Products Corp. v. Vitaphone Corp., 20 Del.Ch. 417, 171 A. 738. Under the ancient practice, the legal sufficiency of a plea could always be determined by setting it down for argument, as on general demurrer. Electrical ResearchProducts Corp. v. Vitaphone Corp., supra; 16 Encyc. Pl. Pr. 618, 619. In that procedure, the truth of the facts alleged in the plea was, therefore, admitted. Electrical Research ProductsCorp. v. Vitaphone Corp., supra; Fletcher, Eq. Pl. Pr., § 280; 16 Ency-Pl. Pr. 620. The facts alleged in the bill, and not denied by the plea, were also regarded as true (Fletcher,supra); and on all of those facts and on the issues raised thereby, *Page 101
the court usually, sustained or overruled the plea. Fletcher,supra, § 280; 16 Encyc. Pl. Pr. 620. The same procedure has been recognized in this State since Rule 47 was adopted.Electrical Research Products Corp. v. Vitaphone Corp., supra;Trounstine v. Remington Rand, Inc., 22 Del. Ch. 122,194 A. 95. When no replication is filed, the situation is somewhat the same as though that phase of the case were before the court for determination on bill and answer. 16 Ency. Pl. Pr. 620;Simons v. Millman, 57 Eng. Rep. 779. Under the early equity practice, even if the plea were sustained, the truth of the facts alleged in it could be denied by a subsequent replication.Fletcher, supra, § 281; Story's Eq. Pl., § 697. Moreover, when a plea was filed, for practical reasons there were usually two hearings: the first, on its legal sufficiency, and the second, on the truth of the facts alleged. This was because the sufficiency of a plea could not be questioned under a replication denying its factual allegations. Id. Evidently, Rule 47 was largely intended to simplify this cumbersome practice; under it, when a plea is filed, though there be a replication thereto, only one hearing is necessary for the determination of all questions, whether of law or fact. If no replication is filed, and the sufficiency of the plea is alone challenged, as the Chancellor will have before him the uncontroverted facts of the bill and the facts alleged in the plea, he may take such action as the circumstances demand, including the entry of an order dismissing the bill, should the plea be sustained. See Rule 47 (par. 3).
Originally, there was some hesitation about permitting the use of negative pleas (Milligan v. Milledge, 3 Cranch 220,
*Page 102Professor Langdell, in discussing their function, points out:
"* * * It would often happen, however, that a defendant would have no affirmative defence to a bill, and yet the bill could not be supported because of the falsity of some material allegation contained in it; and, if the defendant could deny this false allegation by a negative plea, he would thereby avoid giving discovery as to all other parts of the bill. * * *" Langdell'sSum. Eq. Pl., supra.
Nor was Rule 47 intended to prohibit their use. Since its promulgation, this court has not only assumed that such pleas were permissible (Trounstine v. Remington Rand, Inc., 22 Del.Ch. 122, 194 A. 95; MacKenzie Oil Corp. v. Omar Oil Corp., 14 Del. Ch. 36, 120 A. 852; Wampum Oil Corp. v. Lago Petrol.Corp., 19 Del. Ch. 124, 163 A. 622), but a note of Chancellor Curtis, appended to the rules when they were adopted by him, expressly stated:
"A procedure is provided for the trial of the issues raised by a plea, the practice as established being crystallized into concrete rules."
The complainants do not deny that negative pleas were permissible prior to that time, and the reasonable conclusion is that the next to the last line of the first paragraph of Rule 47 must, therefore, be read as though the words "except as denied by the plea" were inserted between the word "bill" and the word "being".
The certificate of incorporation, a copy of which is attached to the complainants' bill, specifically provides:
"The stock of the corporation may be issued by the corporation from time to time for such consideration as may be fixed from time to time by the Board of Directors thereof, and such action of the Board of Directors shall be accepted as conclusive and binding as to the adequacy of such consideration."
So, in the absence of a clear abuse of discretion by the board of directors, the amount of the consideration received for a no par common stock issue is usually of no moment, provided its quality is such as to meet the constitutional requirements.Finch v. Warrior Cement Co., 16 Del. Ch. 44, 141 A. 54;Bodell, et al., v. General Gas Elect. Corp., 15 Del. Ch.
119, 132 A. 442. No abuse of discretion appears *Page 103
here. Apparently, the complainants do not deny that an unconditional license to use a patent right is property within the meaning of Section 3 of Article IX of the Constitution, and that ordinarily, corporate stock may be issued therefor.Fletcher, Encyc. Corp., § 5189; Robbins, et al., v. IdealWheel Tire Co.,
(1) To give Sirian Lamp Company the exclusive patent licenses mentioned in the pleas; and (2) To obtain for Sirian Lamp Company the consulting services of one John Allen Heany for the term of three years.
The real pertinent provisions were:
"First: Second Party (the corporation) agrees that it will provide the necessary working capital to exploit First Party's inventions relating to Filament Type Incandescent Electric Lamps in the United States and Canada, and will within the next six (6) months from the date of this instrument provide in its treasury the sum of One Hundred and Fifty Thousand Dollars ($150,000.00) to be used in the development of a lamp manufacturing business based upon First Party's inventions.
The complainants claim that the defendants should have alleged performance of the provisions of the "First" paragraph of the contract; but the license to use the patent rights was definitely granted to the corporation, and no forfeiture *Page 104 by failure to perform its part of the agreement could take effect until at least six months thereafter. The mere fact that the corporation may be required to expend money in the future to protect its interests in property rights acquired, and for which it has issued stock, does not necessarily render the consideration invalid. The fact that the defendant corporation "has not at any time engaged in manufacturing or conducting laboratories on a commercial basis," as alleged in the bill is therefore unimportant in determining the complainants' rights. Nor was it necessary for the defendants to allege how long Heany held the stock so issued to him. The necessary conclusion is that the defendants' pleas and the supporting answers set up a valid defense for the alleged lack of consideration for the issuance of the no par common stock of the Sirian Lamp Company. Moreover, the complainants, in setting down a plea for argument, cannot disregard the express provisions of the rule and reserve the right to file a replication after the time fixed thereby.
But the defendants' pleas neither require nor permit a determination of the complainants' rights under the other cause of action alleged in the bill.
When only one cause of action is alleged, and the sufficiency of the pleas is set down for argument, every issuable fact alleged in the bill, and not denied by the pleas and by the supporting answers, must be regarded as true. Langdell, supra, §§ 102, 106; 1 Daniell's Ch. Pl. Pr. (. . . . Ed.) 694; Simsv. Lyle, Fed. Cas. No. 12891, 4 Wash. C.C. 301. A different rule applies when several causes of action are alleged in the same bill and the pleas are applicable to but one of them (Langdell, supra, §§ 103, 105); the defendants must then respond in some manner to each of the various causes of action so alleged. Id; 19 Am. Jur. § 199; Livingston v. Story., 9How. 632,
It is not contended that the alleged mismanagement of the corporation has any bearing on these questions.
The bill will be dismissed, as to the alleged lack of consideration, unless it be amended pursuant to Rule 47; further proceedings will be necessary with respect to the other cause of action alleged.
*Page 254An appropriate decree and order will be entered accordingly.