Rhoades v. McDowell

The parties stand in this court in an order the reverse of that held in the trial court, but for convenience will be referred to in this opinion as plaintiff and defendant, as they were in that court.

The plaintiff is the duly appointed, qualified, and acting receiver of the Akron Prospect Company, a corporation duly organized and existing under the laws of the state of Ohio; said receiver having been appointed by the court of common pleas of said county in another suit.

The action which we have under review was submitted to the trial court upon the amended petition of the plaintiff, the amended answer and cross-petition of the defendant, and the reply of the plaintiff, and was one at law to recover from the defendant the balance alleged to be due upon a stock subscription made by him for 100 shares of the capital stock of said company, for which he had agreed to pay $100 per share and had paid at the time his subscription was made the sum of $3,000. The plaintiff alleged said company to be insolvent, that its assets consisted only of the plaintiff's and others' unpaid stock subscriptions, and that it was necessary to collect the amount due upon said subscriptions to pay the indebtedness of the company. The plaintiff further alleged that the company's directors had made calls upon the defendant and other subscribers for the balance due upon their subscriptions, and that notice was given thereof. The plaintiff also alleged that he as receiver made demand upon the defendant for payment of said subscription, and that the court of common pleas made an order calling for the recovery of the same.

In his amended answer the defendant set up several defenses, including a general denial, and specific denials, but in this opinion we will consider only three of the defenses, to wit, the fourth and sixth, which are that the alleged stock subscription was obtained from defendant by fraudulent representations, which were by him unknown to be untrue and upon which he relied, and the fifth, which is that the subscription which he signed contained the following provision:

"Damages accruing upon a breach of this contract by the subscriber being difficult of ascertainment, it is agreed that 20 per cent. of the subscription shall upon default of the subscriber be retained by the company as liquidated damages, and that the stock covered by the said subscription may be issued and sold at public or private sale and the proceeds applied to the payment of any balance due upon said subscription or said note; any overplus after defraying all expenses of said sale to be returned to the subscriber."

The defendant claims that having paid more than 20 per cent. of his stock subscription, he is released from any further liability by the terms of said subscription. The defendant filed a cross-petition, also, and for a cause of action against the receiver, and numerous others who were subscribers to the capital stock of said company, and who had been made defendants upon the application of said defendant, he alleged that said company had been unable to complete the objects for which its organization had been attempted, and except for unpaid stock subscriptions it had no assets and is wholly insolvent. He then prayed that a master commissioner be appointed, amounts due determined, an account taken, etc.

The plaintiff filed a reply, in which he denied the allegations of the answer and cross-petition, except such as were admissions of plaintiff's amended petition. He then alleged in the reply:

"By way of further reply to the several socalled defenses of the said defendant, plaintiff says that after said defendant entered into the contract set up in plaintiff's petition, said corporation, the Akron Prospect Company, contracted debts with various persons and in large amounts, upon the faith and credit of the stock subscriptions of the said defendant and others, which said debts are still unpaid, and plaintiff alleges that thereby defendant is estopped from pleading as a defense to plaintiff's debts the several allegations of fraud set up in defendant's answer, and is estopped from alleging that said the Akron Prospect Company is not a corporation as set up in the petition."

Before the case came on for trial, the proceedings started by the court upon said cross-petition had been abandoned by order of the court, the master commissioner who had been appointed discharged, and the defendants who had been made such upon the application of defendant dismissed, and the case remained one at law between the original parties. When the case did come on for trial upon the pleadings as hereinbefore indicated, motions were made by both plaintiff and defendant for a judgment on the pleadings. The court, upon consideration of said motions, overruled the defendant's and sustained that of the plaintiff, and gave the plaintiff a judgment for the amount sued for, with interest. The defendant in this court complains of the judgment and asks its reversal.

It should be remembered at the outset that there is a well-recognized distinction between the avoidance of liability upon a subscription for stock conditionally delivered and the avoidance of liability upon a stock subscription obtained by fraud — which distinction is clearly pointed out in the case ofMartin, Trustee, v. Steinke, 22 Ohio App. 146, 154 N.E. 47. In that case, the defense was based upon a conditional delivery of a stock subscription, and there was no evidence that any liabilities were created by the company after the date of the subscription, in reliance thereon. In the case of a conditional delivery of a stock subscription, there is no contract until the happening of a future event, whereas in cases where the stock subscription is obtained by fraud, the subscription is valid until rescinded and repudiated by the subscriber.

In arriving at a proper conclusion in this case, it must be remembered that the judgment which was rendered in the trial court was upon the pleadings, and that the motion which was made for said purpose bears a close resemblance to and is in the nature of a general demurrer; in fact, it is in substance both a demurrer and a motion. This motion, like a demurrer, raises only questions of law, and is aimed directly at the substance and not at the form of the pleadings. In considering this motion, the pleadings should be liberally construed in favor of said defendant, and every reasonable inference in favor of the sufficiency of the defendant's pleading should be indulged, for a judgment rendered on the pleadings is a judgment on the merits, and, when sustained in favor of the one who makes the motion, results in a final judgment in his behalf.

Although separate motions for judgment were made by the plaintiff and the defendant, and were pending before the trial court at the same time for decision, the admissions thereby made by the defendant could not be considered by the court in passing upon the motion made by the plaintiff, nor could the admissions thereby made by the plaintiff be considered in favor of the defendant, when the court was passing upon defendant's motion, and, the court having overruled the motion of said defendant, the admissions made by him for that purpose could no longer be considered by the court for any purpose.

The plaintiff claims that some of the denials contained in the answer of the defendant are, in fact, admitted in the cross-petition filed by him, in which he attempts to start an equitable proceeding and have an account taken and a proper adjustment made of the amounts due from all of the stock subscribers to said corporation who have not paid the balance due on their subscriptions. But it must be remembered that the answer of the defendant contained denials in detail of several allegations of plaintiff's amended petition, and also affirmative allegations that the subscription was obtained by fraud. If these affirmative allegations were proved before the jury, a complete defense to the action of the plaintiff would be established, unless the defendant was estopped from setting up said claim against the plaintiff in his representative capacity as receiver of said corporation for the benefit of its creditors. These allegations of fraud, for the purposes of the motion, were admitted to be true by the plaintiff, and the allegations of the cross-petition did not militate against or modify them in any way. This, then, presented a question of fact to be determined by the jury upon evidence offered, which question of fact the court was incompetent to determine.

The plaintiff in his amended petition did not allege that said company had contracted debts or incurred liabilities upon the faith and credit of the stock subscription of said defendant. Of course, it was not necessary for him to do so to state a cause of action in his petition, as he was not required to anticipate that the defendant would allege that the stock subscription was procured from him by fraud, which might be a good defense as against the plaintiff representing the corporation as such.

In drafting his amended petition, the plaintiff might have prepared it in the form it is, and, if the defendant alleged fraud, or any facts which, if proved, would vitiate his subscription and make it unenforceable, the plaintiff might meet it by a reply containing allegations tending to establish an estoppel, as he did in this case; or the plaintiff in preparing his amended petition might have anticipated the defense of fraud, as set up by the defendant, and alleged facts which, if proved, would estop the defendant from the benefit thereof. It was not necessary for the defendant in his answer to make affirmative allegations that credit was not extended or liabilities incurred upon the strength of his subscription, as he was not required to anticipate that the plaintiff would rely upon an estoppel to deprive him of his defense of fraud. Metropolitan Life Ins.Co. v. Howle, 68 Ohio St., at page 618, 68 N.E. 4. The affirmative facts of alleged estoppel set up and relied upon in the reply were, as a matter of law, denied, and, being denied, the court, of course, could not pass upon them over the objection of said defendant, for it is a well-recognized rule that where issue is joined upon a single material proposition a judgment upon the pleadings cannot be rendered.

For the reasons stated, the judgment of the trial court in favor of the plaintiff is reversed.

But the defendant claims that he was entitled to a final judgment in his favor upon the pleadings in the court of common pleas, and bases his claim upon the terms of the subscription hereinbefore set forth — claiming that, as hereinbefore stated, he is not liable for any further amount thereon. With this claim we do not agree. The subscription signed by the defendant was an express contract by which he agreed to buy and pay for 100 shares of the capital stock of said company at $100 per share. It is true that the contract provided that 20 per cent. of the subscription might be retained by the company as liquidated damages in case of default by the defendant, but it does not provide that he shall be relieved of further liability for the balance due. It is also true that said subscription calls the 20 per cent. liquidated damages; but this, in our opinion, is not liquidated damages, but was put in the contract as a penalty, attempted to be imposed upon the subscriber as a stimulant and incentive to pay and not default.

At the time this subscription was made, the laws of this state (Sections 8674 and 8675, General Code) provided that the directors of the corporation could enforce the payment of stock subscriptions either by suit or sale of the stock. Another Section (8676) provides that if a sale be made and a balance remain after paying the amount due upon said subscription, the overplus shall be paid to the subscriber. It further provides that if the stock does not sell for enough to pay the balance due on the subscription, the same may be recovered by suit instituted against the subscriber. By the terms of this subscription it is apparent to us that it was the intention to give to said company the right to collect from a subscriber, in addition to the balance due upon a subscription, damages to the amount of 20 per cent. of the subscription, and not to give an option to the subscriber to default and limit his liability on the subscription to 20 per cent. of the same. Of course, it is very doubtful whether the company under any circumstances could retain this 20 per cent. in addition to the amount stipulated in the subscription.

There are many other questions argued in the briefs, but we do not think it will serve any useful purpose to pass upon them, as we are confident that they will be disposed of upon the trial without difficulty.

Judgment reversed and cause remanded.

WASHBURN, P.J., and FUNK, J., concur.