Sibley v. Crawford Cotton Mills Co.

Gilbert, J.

Crawford Cotton Mills had outstanding bonds and stocks, and also owed debts evidenced by notes indorsed by the officers personally. Maryland Trust Company was trustee for the bond issue. Part of the bonds were in default, and the Trust Company was threatening foreclosure. Sibley was a stockholder, but held no bonds. At a meeting of the stockholders, held on December 28, 1927, the following plan of reorganization was submitted and adopted: The Mills was to amend its charter and issue $125,000 of preferred stock. This stock was to be bought for cash at par by the old stockholders, who were to surrender their old stock and receive the new preferred and a bonus of non-par common stock. The $125,000 was to be used to retire the bonds, and the overplus was to be invested in machinery. Nothing was said about using this overplus to pay the notes indorsed by the officers, nor was anything said about forming a new corporation. Sibley agreed to the plan. A few weeks later he was notified that the charter had been amended, and accordingly surrendered his 40 shares of old stock, paid in $4000, and received 40 shares of the new preferred and his bonus in common stock. He “did not consent and would never have consented to buy any preferred stock with the bond issue outstanding and the company in its then condition.” He supposed the money had been so used and the plan agreed to carried out, until January, 1931. He then saw a statement of the company which showed that the original plan had never been completed, that only $29,800 of new preferred stock had been issued, and that $80,000 of the bonds were still outstanding. He made complaint to the corporation, and was told that many stockholders had failed to take their quota of new preferred stock, but that the plan would be carried out, and that if the old stockholders did not complete it the preferred stock would be sold elsewhere. Sibley again remained quiet for about sixteen months, being a part of the time away from Georgia. In May, 1932, he learned that the Trust Company had foreclosed the bond mortgage and sold the property under power to one Eager, who in turn had conveyed it to a new corporation, the Crawford Cotton Mills Co. All the bonds and stock of the old corporation had been wiped out, and the new preferred which Sibley had received when he paid his $4000 was worthless. The new corporation had been organized by the bondholders of the old corporation, and the stock of the new company had been prorated among them. Sibley made demand on the old corporation for a return of his $4000, and tendered his preferred and non-par common, but was told that the old corporation had no money, its plant was gone, and all its assets had been exhausted by repaying the money which had been borrowed on the indorsement of the officers. The statement was also made that the bonds which had been taken up with his $4000 had been destroyed.

Sibley sued the old corporation, the Trust Company, and the new corporation. He asserted a right of subrogation on the ground that $4000 of bonds had been retired with his money. He prayed also fox the declaration of a trust in the corporate property to the extent of four eighty-fourths. The petition ."was dismissed as to the Trust Company and the new Crawford Cotton Mills Company, on the specific ground, that the petition failed to set out a cause of action. The judge expressly refused to pass upon any other ground of the demurrer. Our decision is restricted to the judgment rendered and the assignment of error thereon.

The court erred in dismissing the petition on the ground that it failed to set out a cause of action. According to the allegations, Sibley entered into a definite agreement, paid to the old Crawford Cotton Mills $4000, and received shares in the old company on the basis of the contract made. This was done on the express condition that the contract had been or would be executed. He would not have performed his part of the contract without reliance upon the Crawford Cotton Mills to fully comply with the contract. A full compliance with the contract required the subscription for at least enough of new shares to acquire enough cash to retire all of the outstanding bonds, not a portion of the bonds. So long as a portion of the bonds were outstanding, the investment of new money for new shares could not be safe; at any time the Trust Company could foreclose and sell out the property of the Cotton Mills. That is exactly what occurred. There was a breach of the contract, a breach of trust reposed by Sibley in the officials of the Mills. The entire outstanding bonds were not retired. The money of Sibley was used to acquire $4000 out of the $84,000 of bonds. This was not Sibley’s contract, andfit was not done with his knowledge or consent. He was not bound thereby. Not having agreed to the purchase, with his money, of such bonds, the cancellation or destruction was not done by his consent. The result as to Sibley is the same as if the Mills still held the bonds, pending Sibley’s acceptance of them, in lieu of his formal agreement. Maryland Trust Company represented the bondholders, including the bonds purchased with Sibley’s money. Eager represented the bondholders, including Sibley. Therefore no question of innocent purchasers is involved. Sibley elects to accept the equitable ownership of the $4000 of bonds, and to demand his proportionate share in the ownership of the new Crawford Cotton Mills Company along with others who owned bonds. Eor this purpose the petition set out an equitable cause of action for the issue to him by that company of such shares, or for the payment to him of the proportionate value thereof. Judgment reversed.

All the Justices concur.