McLeod v. Lincoln Medical College of Cotner University

Oldham, C.

The Lincoln Medical College of Cotner University was organized and incorporated in 1896, under the provisions of section 15, chapter 16, Compiled Statutes (Annotated Statutes, 4168). The object of the corporation, set forth in its articles, was to “carry on the Medical Department of Cotner University in the city of Lincoln, Lancaster county, Nebraska; and to establish schools of dentistry and pharmacy in connection- therewith.” The organization had a theoretical capital stock of $50,000, of which $5,000 was treated as having been fully paid at the time of the incorporation of the school. It appears, however, from the testimony contained in the bill of exceptions, that the school was incorporated by a number of physicians, who were allied with the school of medicine known as the eclectic school; that as a matter of fact, no part of the capital stock was actually paid up at the time the articles of incorporation were filed, but that each of the incorporators and stockholders of the institution undertook and agreed to lecture and give instruction to the students of the school at the rate of $6 per hour, $1 of which was to he paid in cash and $5 in stock. The dollar that was to be'paid in cash Avas procured by delivering scholarships of the value of $125 to each instructor when he had earned that amount, and permitting him to sell the same to the students; consequently, under this arrangement the amount of the capital stock owned by "each of the faculty of the institution stood for so many hours’ service as lecturer and instructor in the institution at the rate of $5 per hour. The affairs of the institution were conducted in this manner until 1901, at Avhich time three of the instructors and stockholders of the institution seem to have apostatized from some doctrinal points of the faith taught by the eclectic school of medicine, and to have become impregnated with certain heretical theories taught by the allopathic or regular school. This caused trouble and dissension in the faculty, and, as the result, two or three of the professors were dropped from the roll of instructors. The dissension increased after this until August, 1901, when, by a three-fourths vote of the board of directors of the incorporation, it 'was dissolved.

In the meantime, the Lincoln Medical College, a new coiporation, Avas formed under the same provisions of the statute and for the same purpose as that of the original corporation. This corporation Avas composed of all the members and officers of the original coiporation, except the three dissenters; when the original association Avas dissolved, a committee AAras appointed by the board of directors to appraise and Amine the tangible assets and good will of the defunct corporation. This they did, and valued the tangible assets at about $1,400 and the good will at $500, and, by a unanimous vote of the board of directors, transferred these assets to the neAV corporation, which also assumed and agreed to give instruction to the students owning scholarships purchased from the old institution. The new coiporation entered into a contract with Cotner University to continue its course of instruction as an adjunct to that institution, and opened its school at the usual time in the year 1901. Thereafter the plaintiffs, tivo of the stockholders of the original corporation, instituted this action against the new corporation and its officers and stockholders, alleging that the transfer of the assets and good will of the original corporation Avere fraudulently made by a majority of the officers and agents of such corporation to the nenv corporation, of which they themselves Avere the stockholders and persons beneficially interested, and that such transfer was made for an inadequate consideration, and for the fraudulent purpose of excluding these plaintiffs from participating in the affairs of the corporation, and for the purpose of destroying the value of the stock held by them. They asked that the sale from the original corporation to the new corporation be set aside; that a receiver be appointed to sell the tangible assets and good will of the original corporation, and that the new corporation be enjoined and restrained from proceeding to give instruction in Cotner University under the name of the Lincoln Medical College. Defendant, Reynolds, another minority stockholder of the original corporation, filed a cross-petition, alleging substantially the same matters set up in plaintiffs’ petition, and joined in their prayer for relief. The defendant, the Lincoln Medical- College, and the individual stockholders and faculty thereof, filed answers alleging that the transfer from the original corporation to the new corporation was made in good faith, for a valuable consideration, by a three-fourths vote of the board of directors of the original corporation; that such transfer was necessitated because of a conspiracy entered into by plaintiffs and cross-petitioner, Reynolds, for the purpose of defeating the object for which the original corporation was instituted.. Twenty-one students of the institution, who had purchased scholarships from the original corporation, filed a cross-petition on their own behalf and on behalf of forty others similarly 'situated, alleging that they had purchased scholarships which entitled them to a four-years’ course of instruction, while the plaintiffs and cross-petitioner, Reynolds, were stockholders of the original corporation, and that the new corporation was performing the conditions of the contract entered into by the old corporation with them, and giving them proper and orthodox instruction, 'and also alleging that it would work an irreparable injury upon them, if plaintiffs’ petition were granted and the Lincoln Medical College was restrained from giving them further instruction. On issues thus joined, the trial court found the transfer from the old to the neAV corporation was made in perfect good faith and for an adequate consideration, and dismissed the petition of plaintiffs and of cross-petitioner, Reynolds, and from this order and judgment an appeal is taken to this court.

The character of a corporation is determined from its articles of incorporation and the statute authorizing its formation. In- this case it is apparent from both the articles of incorporation and the provisions of section 15, chapter 16, Compiled Statutes, that this organization is an educational and not a “business” or “trading corporation” for the pecuniary profit of its .members. While incorporated educational institutions may be authorized to hold all kinds of property acquired by purchase, donation, devise or otherwise, and to convey the same at their pleasure, they may only do this for the purpose of accomplishing the legitimate ends of the corporation, and the fact that such an institution may charge tuition for instruction, does not change its nature and make it an incorporation for pecuniary benefit. 1 Clark & Marshall, Private Corporations, p. 84; Santa Clara Female Academy v. Sullivan, 116 Ill. 375. It would, therefore, follow that the transfer of the assets from the old to the new corporation in the instant case, and also the change of the name of the school, was not a departure in any sense from the' original intent and purpose of the old organization. In fact, the power to make such a change, when done in good faith, is anticipated and authorized by section 172, chapter 16, Compiled Statutes (Annotated Statutes, 4188).

An examination of the testimony of the physicians and instructors connected with each of the institutions, as well as a comparison of the articles of incorporation of each, show that the new is but a reincarnation of the old; the only change being that extra precautions have been taken in the by-laws of the new to protect its faculty from the invasion of the schismatics and heretics to its established medical faith. No question is raised in this case as to the right of plaintiffs to exchange their ]>roportionate share of stock in the original corporation for a like share of capital stock of the new organization. They have not asked for the enforcement of this right, if it does exist. It is virtually conceded, that the tangible property of the old institution was sold to the new for its actual cash value. The only contention is that the good will of the old institution should have brought a greater price than $500. Without determining whether or not the good will of a corporation of this character-should be treated as a commercial asset, it is sufficient to say that all the testimony showed that the institution had been run at a loss to its incorporators and stockholders, with the exception of such benefit as they received from their association and investigation of scientific questions in connection with their students. Hence if the good will of this institution was treated as an asset, its commercial value would have to be indicated by a minus quantity.

1. Corporation: Contract. The directors of a corporation can not bind it by contract with another corporation of which they are also directors, and which they represent in making such contract. 2. Powers of Majority Stockholders. The majority stockholders of a corporation have no power to exclude the minority stockholders therefrom, by organizing a new corporation and transferring all the property and good will of the old to the new corporation, without the consent of the minority stockholders. 3. Action: Illegal Transfer. The minority stockholders can maintain an action in their own names to set aside an illegal transfer of all property and good will of the corporation, when such transfer is made by the board of directors of the corporation pursuant to instructions of the majority of the stockholders.

From a careful examination of the entire record, Ave are fully satisfied with the judgment and findings of the learned trial court, and we therefore recommend that the judgment be affirmed.

Hastings and Ames, CC., concur.

By the Court:

For the reasons stated in the foregoing opinion, the judgment of the district court is

Affirmed.