David v. B. L. Fry Manufacturing Co.

Plaintiff's petition is in three counts. The first count states a cause in equity, its object being the reformation of the contract on which the action is based, which contract in effect was the employment of the plaintiff by the defendant as assistant superintendent of its factory, upon consideration of the plaintiff purchasing twenty-five shares of the capital stock of the defendant company for the price of $2500. Plaintiff alleged that the written agreement entered into omitted by mutual mistake of the parties, one of the terms agreed upon to the effect that plaintiff at his option, within the first six months of his employment under the agreement, was to have the right to resign his position as assistant superintendent, return the twenty-five shares of stock, and receive back his purchase money.

Upon the hearing of the case a decree resulted which reformed the said contract as prayed in plaintiff's first count. The action of the learned trial court in this regard is not questioned here.

Plaintiff's second and third counts in fact set up but one cause of action at law in two counts. By the second count plaintiff seeks to enforce the contract as reformed, alleging that plaintiff had within six months after he had entered the employment of the defendant under the said written contract, resigned his position, tendered back his twenty-five shares of stock to the defendant, and requested the return of the purchase money, which defendant however refused to do.

The third count seeks to recover of the defendant the money paid by the plaintiff as the purchase price of the stock, as for money had and received, and without enforcement of the contract, as a contract, on the theory that the defendant, through its officers, had wrongfully obtained plaintiff's money and should be obliged to repay it.

The judgment entered below, in addition to reforming the contract as prayed in the first count of plaintiff's petition, rendered judgment for the plaintiff on the third count for the sum of $2500 as for money had and received, on condition, however, that the plaintiff "forthwith and before entry of judgment," deliver the certificate of stock for twenty-five shares, properly endorsed by the plaintiff in blank, to the clerk of the court or to the defendant. Thereupon in due course defendant appeals.

It appears that the defendant company inserted the following advertisement in one of the St. Louis daily newspapers: "Wanted — settled man, capable of filling a position as assistant superintendent in St. Louis manufacturing corporation. Must furnish good local references and must invest at least $2500. . . ."

Plaintiff answered this advertisement and after several conferences with the president and the secretary and treasurer of the defendant company, entered into a written contract with the defendant company whereby he was employed as assistant superintendent, upon his purchasing twenty-five shares of the stock of the company, for which he paid the sum of $2500 (and for the purposes of this case, since no objection thereto is made here, we will consider the said contract as reformed by the judgment) with the right reserved in plaintiff, within six months after the date of his entering such employment, to resign this said position and return the said stock, whereupon the defendant would repay him the said purchase money. It is conceded that plaintiff did so resign and tender back the stock but that defendant refused to repay the purchase money.

The record discloses that the contract in question was signed in the name of the defendant company "by H.A. St. Clair, Secretary and Treasurer," but that St. Clair however signed at the direction of B.L. Fry, the president of the said company.

The said contract was made and executed on the 30th day of July, 1917, on which date, as a part payment, plaintiff gave a check for $1000, payable not to the order of the B.L. Fry Manufacturing Company, but to H.A. St. Clair, and thereafter, on August 9, 1917, gave St. Clair another check in the sum of $1500, also made payable to him. The plaintiff however did not receive a certificate for twenty-five shares of stock on the day the contract was signed but was given a receipt for the $1000 paid by check on that day, the said receipt, instead of being signed in the name of the company, was signed by H.A. St. Clair. Some days later the plaintiff was given four or five certificates aggregating twenty-five shares of the capital stock of the defendant company. Several of the certificates were in the name of B.L. Fry and at least one in the name of H.A. St. Clair. These certificates were duly indorsed in blank. It was perhaps a month later that the plaintiff, upon surrendering these said certificates, obtained one certificate for twenty-five shares of the capital stock of the defendant company made out in his own name.

The defendant company did not receive any of the proceeds of the two checks given by the plaintiff in payment of his stock, and of the stock which plaintiff obtained by the transaction twenty shares were the individual stock of B.L. Fry, who got $2000 in payment therefor, and five shares were the individual stock of St. Clair, who got $500 therefor, out of the proceeds of the checks given by plaintiff as aforesaid. Plaintiff at all times thought he was purchasing stock of and from the defendant company though in fact the stock delivered to plaintiff was not treasury stock of, nor stock owned by the company at all.

While "it is the law generally, and certainly so in this State, that a business corporation cannot make a valid agreement on the sale of and subscription to its original capital stock to repurchase such stock at any time such original purchaser desires to have it do so," Inter-State Grocer Co. v. Taylor,200 Mo. App. 205, 204 S.W. 408 (see also St. Louis Rawhide Co. v. Hill,72 Mo. App. 142; Boley v. Sonora Dev. Co., 126 Mo. App. 116, 103 S.W. 975; Wilson v. Mercantile Co., 167 Mo. App. 305, 149 S.W. 1156; Sexton v. Ry. Co., 194 S.W. 1081), yet "it seems that where a corporation buys in its stock for the purpose of saving a debt and with a view of re-issueing the same, or under circumstances where the transaction is fair on its face, is not tainted with fraud and is clearly to the interest of the corporation, the transaction will be upheld, unless prohibited by its charter. [2 Thompson on Corporations, secs. 2062, 2068 and 2069, and cases cited in note 2; Chitland v. Ins. Co., 86 Ill. 220; Eggman v. Blanke,40 Mo. App. 318 (under laws of Illinois); 1 Morawetz on Private Corporations, secs. 114 and 434.]" [St. Louis Rawhide Co. v. Hill, supra.]

One of the principal reasons underlying the general rule that a corporation cannot buy its own stock is that "if the incorporators or stockholders be allowed, as soon as incorporation was completed, to sell out their stock to the company, and thereby escape liability for unpaid subscriptions, or in case the stock was fully paid, to receive back from the company the amount paid in, and turn back to the company the stock subscribed, the doors for great fraud upon creditors would be thrown wide open and consequently would not only be disastrous to the creditors but also to the corporations themselves inasmuch as no one would deal with corporations under such conditions." [Chrisman-Sawyer Banking Co. v. Independent Wool Mfg. Co.,168 Mo. App. 643, 68 S.W. 1026.]

And this court, in an opinion by ROMBAUR, J., holding that a corporation has no power to repurchase its own stock, said: "It is not simply a question between the State and the corporation, or between the corporation and its creditors, as the defendant assumes, but a question affecting the validity of the contract itself."

Section 937, Revised Statutes (now section 10159, R.S. of Mo. 1919) prescribes in what manner manufacturing and business corporations may diminish their capital stock and the method therein prescribed is a limitation of the power to diminish it in any other way. . . ." [St. Louis Carriage Mfg. Co. v. Bilbert,24 Mo. App. 338.]

According to the record before us there are several circumstances which should have put plaintiff upon inquiry. One of these was that when plaintiff asked St. Clair in whose name plaintiff should make out the checks in payment of the stock, he was told that if he "made them out in his (St. Clair's) name, it would be more convenient" for him. Plaintiff acquiesced and made the checks payable to St. Clair. Another, that when plaintiff made his first payment by giving St. Clair his check for $1000 he accepted a receipt therefor signed by "H.S. St. Clair" as an individual and not signed by the company.

In our view in light of these facts plaintiff should have been put upon inquiry as to whether or not he was in fact dealing with the corporation and buying treasury stock from it.

Though it clearly appears that the treasury of the defendant company did not in fact receive a single dollar of the purchase price paid by plaintiff for the stock, the learned trial court below permitted plaintiff to recover against the defendant as for money had and received. We do not, however, agree with the learned trial judge that the defendant should in equity and good conscience be made to repay the plaintiff the $2500 he paid for his twenty-five shares of the capital stock of the defendant company. To permit plaintiff to recover as for money had and received would but in effect (under the facts and circumstances here shown) be doing by indirection that which the courts have clearly held cannot be done directly, namely, permit the defendant corporation to purchase its own stock when as a result of such purchase the capital stock of the corporation would be diminished in the amount that the corporation paid therefor. Whatever rights or recourse plaintiff may have as against St. Clair or Fry as individuals is a matter not before us.

The judgment for plaintiff on his third count should be and the same is hereby reversed. Allen, P.J., and Daues, J., concur.