Fey v. Peoria Watch Co.

Lacey, J.

This was a suit in assumpsit by the appellee against the appellant to recover from the latter the sum of $1,000 and interest on his subscription to the capital stock of the former, it being a corporation organized for the purpose of carrying on the manufacturing and sale of watches in the city of Peoria, with a capital stock of $250,000, consisting of 2,500 shares of $100 each, with a duration of ninety-nine years. The subscription paper which was signed by appellant bore date December 1,1885, which he signed for ten shares. This subscription was preparatory to organization, which took place in December, 1885. There was a trial by the court, a jury being waived, and finding and judgment for appellee for $1,120. The main and chief error assigned and relied upon by appellant for reversal, was the action of the court in sustaining appellee’s demurrer to his 4th, 5th, 6th, 7th and 8th pleas, and in not allowing the same defense set up in them to be made on the plea of the general issue. The substance of the special pleas is that the agents of the appellee prior to its organization (those who were obtaining the subscription), preparatory thereto, for the purpose of effecting organization, made a secret agreement with one Johnson Cole, a subscriber to the capital stock of 200 shares, that he should not be called upon to pay the amount of the subscription or any part thereof, and that said subscription so fraudulently written and signed was shown to appellant as genuine, and he subscribed in faith of it, and that the appellee released Cole from the payment of any part of his said subscription in pursuance of the agreement, without 'the payment of any money; that the release was made of Cole’s and other subscriptions without consideration to appellee and with intent to give such released subscribers an unfair advantage. There are other points of defense urged by the appellant, which will be noticed hereafter.' The main point of the defense relied on, the supposed release by the directors of the subscription, we will notice first and more at large. Besides the errors assigned as to the sustaining of the demurrer to the pleas, the appellant also claims that the court ruled out certain evidence offered by him tending to show, and in fact showing, that the directors released as far as was in their power, the said Cole from his subscription without consideration.

We will consider both of ° these assigned errors together as the .supposed defenses of appellant are governed by the same principle of law. The appellant, in his brief, disclaims any intention of insisting that any secret agreement to release, as charged in the plea, made by the parties procuring the subscription of Cole antecedent to or at the time of taking it, would have the effect to release his own. It is admitted that such agreement would not have that effect. It is well to make such admission, for such is the general tenor of all the decisions, and the point was expressly held in Melvin v. The Lamar Insurance Co., 80 Ill. 446. That question being at rest we will not further allude to it in this opinion. The next question arising is, did the release by the directors, so far as it could be done by them, have the effect to release the other subscribers to the capital stock, not agreeing to such release, the appellant among them, from their subscription.

It is most strenuously urged by the appellant that it did, and-that in law such action of the directors of a corporation does have that effect. We are referred to the following authorities in support of this doctrine. Rutz v. The Esler & Ropiequet Mfg. Co., 3 Ill. App. 83, in which the court says that “the courts of this country with few exceptions have held that a release of a portion of the subscribers to the capital stock releases all the subscribers who do not assent to that release or in some way give their sanction to it,” etc. We are also cited to Bouton v. Dement, 123 Ill. 142; also Gelpcke, Winslow & Co. v. Blake, 19 Ia. 263; Angell and Ames on Corporations, 10th Ed., Sec. 531; and P. & C. R. R. Co. v. McCarty, 32 Pa. St. 31; Miller v. S. J. B. Asso., 50 Penn. St. 32. The case of Rutz v. The E. & R. Mfg. Co., 3 Ill. App., supra, seems to support the claim, but we are inclined to think the learned judge who wrote the opinion has fallen into error in the statement he makes in regard to the weight of authorities and also the decision. It is not necessary for ns to go to other States and other courts to find authority for the doctrine that the releasing of a subscription to the capital stock of a corporation without the consent of the stockholders does not release the other subscribers. We have it in the decisions of our own Supreme Court. In Melvin v. The Lamar Ins. Co., 80 Ill., supra, it was expressly held that as against any stockholder not assenting, a subscriber to the capital stock could not be released from his subscription thereto by action of the directors where such release was made without full payment. In the above case one of the stockholders filed a bill in equity to compel Cushman & Hardin to refund certain money of the company withdrawn by them in pursuance of an agreement between them and the directors without consent of the stockholders, whereby they wore released from their subscription to 5,500 shares of their capital stock, and certain money refunded to them which they had paid in on their subscription, and the court held, that notwithstanding such release, they must repay the money and also be compelled to occupy the position of stockholders in reference to their 5,500 shares; that the action of the directors was ultra vires and void as to such attempted release. The court in the above case holds that, “each stockholder has a vested right in the contract of subscription of every other stockholder,” citing Chandler v. Brown, 77 Ill. 335.

In the decision, in making further comments, the court says: “ Holding, as we do, that this option to surrender these shares of stock and take back the money and securities was invalid and to be disregarded, as a fraud against the other stockholders, the transaction of the directors of the company in the cancellation of the stock and in the payment of the money and securities, must be held here as of no effect. * * * The authority to collect and distribute does not embrace the power to release without payment. The courts have separately held that an attorney intrusted with a claim for collection has no power to discharge it without payment in full, and that to compromise a claim under such circumstances requires a special authority from the principal. Nolan v. Jackson, 16 Ill. 272; Viking v. McClellan, 61 Ill. 311.”

The court cites the above extract in regard to the duty of an attorney to his client as being analogous to the position of the directors of a corporation in respect to their duties in the collection of the subscription to the capital stock. They, no more than an attorney, can release or give away the assets of the company. They stand in the same relation. The appellant insists that there is a distinction between a stockholder asking relief against the acts of the directors in an attempted release of subscription, and a creditor; that as to the former the directors represent them and can release the subscription without consideration, but as to the latter they can not without the consent of the creditors. The case of Bouton v. Dement, 123 Ill. 142, is cited as a case in point, where it was held that the assignee of a corporation could not question the release of a subscription of a certain party which had been fraudulently made by the directors, but that the creditors might. As we understand that decision it was based on the ground that the stockholder had ratified the action of the directors, and as to the assignee of the corporation and the stockholders the release was binding, but not so as to the complaining creditors. The court in that case holds this language: “As the transaction of the substitution of the note of Page in the place of that of Bouton and the cancellation and surrender up of Bouton’s note was approved and ratified by the directors and stockholders of the Empire Insurance Company of Wheaton, and the company afterward used the Page note and hypothecated it with a bank to raise money, it is insisted that the transaction was a valid one and binding upon the company. This might be so as to the company, but yet be otherwise as against creditors. We are of the opinion that the transaction above referred to was valid as against the insurance company but not so as against creditors.”

It will be seen, then, that the-release of the insurance company was put in that case on the ground that the stockholders had ratified the release of the subscriptions to the capital stock.

In the case above cited of Melvin v. The Lamar Ins. Co., 80 Ill., supra, the only relief sought was by a stockholder, on the ground that the release of a subscriber to the capital stock by the directors, without consideration and. without consent of the stockholders, was void, which claim the court sustained and granted the relief, holding the attempted release ultra vires. We find abundance of authority for this ruling of the court in the text books and adjudged cases. In Morawetz on Private Corporations, Sec. 117, we find this passage, to wit: “So if the directors of a corporation attempt to release a portion of the shareholders and cancel their shares, this will not discharge other shareholders from the obligation of their contracts, for such release and cancellation being unauthorized, would not bind the corporation, and would be wholly void.” The authorities cited in the note in support of the text are numerous. Whittlesy v. Frantz, 74 N. Y. 456; Jewett v. Valley Ry. Co., 34 Ohio St. p. 601; Agricultural College In. Co. v. Fitzgerald, 15 Jus. 489; Compose Remsbon, etc., Plank Road Co. v. Witzel, 21 Barb. 56; Phillips v. Covington Bridge Co., 2 Metc. (Ky.) 219, 223; Macon, etc., R. R. Co. v. Vasan, 57 Ga. 314; Litle v. O’Brien, 9 Mass. 423.

We think it would be a dangerous doctrine to hold that the directors of a private corporation could by their wholly unauthorized act release, without the consent of the stockholders, any of its debts, and give away its assets, and still more dangerous and contrary to all the rights of the other stockholders, if by the release of one of its subscribers without consideration, they could dissolve the corporation itself; for the effects of such release might be, that enough of the shareholders would be absolved to entirely dissolve the corporation, to the great detriment of other shareholders. We think the law could never sanction such a rule. It was one or two years after the supposed release of Cole before the bringing of this suit, and hence before this attempt on the part of the appellant to obtain release from his subscription. And we are inclined to think that he should be estopped now from insisting on the defense he makes. He should at once or within a reasonable time, have taken steps to have his subscription canceled, and not wait and speculate on the success or non-success of the enterprise. In re London & Staffordshire Fire Ins. Co., reported in Chancery Division Law Reports, 1883, Vol. 24, page 194, it was said a party who claims to be released because of some fraud in inducing him to become a member of an incorporation, must claim his release at the soonest possible moment, and the burden o ' proof is on him, if much time elapses, to show that he had no notice. “He can not be allowed to play fast and loose, and be a stockholder if things turn out favorable, and not so, if unfavorable.”

Neither in the appellant’s pleas nor in his offer to prove the release has any allegation or offer to show that he had no notice of this release of Cole in time to have made his election, whether he would be bound by his subscription or not, been made. Having failed to do so under the authority of the above ruling, he would be presumed to have known about the release of Cole at the time it was done, and not having taken any steps to release himself from the subscription, be bound, even if he could have never claimed a release. See also authorities to the same point. Morawetz on Private Corporations, Sec. 108, and cases cited; Upton v. Trebblecock, 91 U. S. 45, and cases cited.

The appellant makes the point that it was error to compu' e interest on his subscription. We think not. The subscription was a written instrument and under our statute after it became due, as the installments were called for, such installment would draw interest. The last and final installment was called for November 18, 1886, more than two years prior to the date of the judgment in June, 1889.

The objection is made that the directors are not stockholders. We do not understand that such an objection as that could be made in this case, and our statute does not require it, and in the absence of such requirement one not a stockholder may be a director. Ex parte Stock, N. J. Chan. 73; Stahl v. McDaniel, 21 Ohio St. 354, 367; Wright v. R. E. Co., 117 Mass. 226; In re Steamboat Co., 44 N. J. Law, 529; Dispatch Line v. Ballamy Mfg. Co., 12 N. H. 205.

We can not see what the subscription paper has to do with this case; the company has been organized and received its charter, and it is not necessary to show any subscription paper, to show organization. Besides, appellant in this action can not question the organization. Rice v. R. R. I. & A. R. R. Co., 21 Ill. 93; Ill. G. T. R. R. Co. v. Cook, 29 Ill. 237. At least, if the corporation is de facto, the burden is on him to rebut by showing want of organization.

The objection raised that the appellant is released because the appellee accepted the subscription of C. M. and E. D. Howard in the Fredonia Watch Company, is not well taken. “A subscriber for stock in a corporation can not defeat an action to collect such subscription by the defense that the directors or corporation itself have done corporate acts which are beyond the corporate powers. There are other remedies open to the subscriber.” Cook on Stockholders, Sec. 187; People v. Barnett, 91 Ill. 422; People v. Logan Co., 63 Ill. 74. We think the call is sufficient to authorize recovery. They call for payment of all subscriptions except that of E. D. Howard, trustee of the Fredonia Watch Company, which had been settled for in another way. It had been exchanged for the property of the Fredonia Watch Company with Howard, its trustee, and at least prima facie Howard had already paid it.

Seeing no error in the record, the judgment is affirmed.

Judgment affirmed.