J. K. Siphon Ventilator Co. v. Hutton

(.after stating the facts). (1) The first question to be considered is as to whether or not the transaction was a purchase of stock of the corporation or a loan of money to the corporation.

While the negotiations between the appellee and the parties representing the appellant culminated in a contract which recites that the $5,000 was “in consideration of the purchase for1 cash of 200 shares, of the capital stock,” and while there are other recitals which, unexplained, would tend to show that the transaction between the appellant and the appellee was a sale of .stock and not a loan, yet when the contract is' viewed in the light of the testimony of the witnesses who conducted the negotiations, we are of the opinion that the chancellor was correct in treating the transaction as a loan on the part of the appellee to the appellant.

The testimony of Peay, and the testimony of appellee himself, and of his attorney, leaves mo donbt of the fact that it was the intention of the parties to the contract that appellee should advance to the corporation, to be used for its purposes alone, the sum of $5,000. The testimony shows that appellee advanced this sum, and that it was received by the appellant amd used by it.

While J. K. Robinson testifies that it was his stock that was sold to the appellee, the contract itself and the testimony of the other witnesses and the minutes of the corporation which were drawn to reflect the proceedings of the meeting, show that the'200 shares of stock that were delivered to appellee were turned by Robinson into the treasury of the company. In other words, the effect of all the testimony, except that of Robinson, was to show that Robinson, in order to induce the appellee to advance the money for the corporation, donated 200 shares of his stock to the corporation to be given to appellee and to be held by him as security for the money he had advanced on behalf cf the corporation. The corporation, at the time the negotiations were pending, had no treasury stock; all its stock had been issued amd was paid up. That Robinson, himself considered the transaction as a loan to appellant is shown by the fact that he afterward signed appellant’s name to the note which included the $5,000 advanced by appellee.

As we view the contract, so far as the $5,000 is concerned, it creates a liability on the part of the appellant in favor of the appellee for this sum, with interest at the rate of 10 per cent per annum, payable to appellee upon demand, after reasonable notice, upon the appellee tendering back to the appellant the certificates of stock held by him. This construction clearly reflects the intention of the parties to the transaction, and the chancery court did not err in so holding.

The appellant contends that, even though the transaction be treated as a loan, that the contract was void because Guy Robinson, one of tbe directors, had no notice of tbe meeting when tbe contract was executed, and that there was therefore no legal meeting of tbe directors, and that it was also void because there was no legal meeting of tbe stockholders.

(2) Endorsed on tbe contract itself was a statement, signed by Robinson and Peay, to the effect that they constituted tbe stockholders of the company and consented to tbe contract. A clear preponderance, of tbe testimony shows that at the time the contract of February 25 was ■executed the stockholders of appellant were J. K. Robinson, Guy Robinson, bis son, and Nick Peay. J. .K. Robinson and Nick Peay owned all of tbe stock except one share held by Guy Robinson, and it is manifest that this one share was simply held by him in trust for tbe purpose of the organization. For J. K. Robinson, at tbe time of tbe meeting, treated this one share as bis own stock in making tbe negotiations with the appellee and permitted appellee to bold same in order to elect him secretary, and there was never any objection to this on tbe part of Guy Robinson. True, J. K. Robinson testified that at tbe time tbe contract was executed Doctor Bentley owned forty shares of tbe stock, but bis testimony in this respect is contradicted by bis own 'Statement in writing endorsed on tbe contract and by the testimony of tbe other witnesses who were present. At tbe time of tbe meeting, therefore, and when the contract was consummated all of the stockholders .and tbe directors were present or represented. But if Guy Robinson bad in fact any beneficial interest in the share of stock held by Mm, the evidence shows that be was notified of what was done, and it was not shown that be objected to tbe transaction. His testimony was not taken. The minutes recite that notice in writing was waived by each of tbe stockholders. It must be held, under these circumstances, that Guy Robinson bad notice of tbe meeting of the directors, or that if he did not have notice, when be was told -by bis father of the transaction and made no objection thereto, be acquiesced in and ratified the same. .See 1 Thomp., Corp., § § 824-25. He is estopped from gainsaying it. 10 Oye. 1066.

“Acquiescence by stockholders in the action taken by the directors separately and where such action was carried out by the corporation was held sufficient to render the acts valid.” 2 Thompson on Corporations, § 1074, and cases cited in note.

(3) But a conclusive answer (to the contention urged by counsel that the contract wias void because the board of directors was illegally convened is that the appellant was the beneficiary of the proceeds of the contract that was authorized at that meeting. Knowing the facts, it received the funds from the appellee and appropriated them (to its own use. It is therefore estopped from .setting up the invalidity of the contract.

(4) Estoppel- by written contract or in pais operates against corporations in like manner as natural persons. The law is accurately stated in 10 Cyc., pp. 1067, 1068, as follows: “If an officer of a corporation or other person 'assuming to have power to bind the corporation by a given contract enters into the contract for the corporation, and the corporation receives the fruits of the contract and retains them after acquiring knowledge of the circumstances attending the making of the contract, it will thereby become, estopped from afterward rescinding or undoing the contract.” See also pp. 1065-66.

The appellant contends that those paragraphs in the contract by which the appellant guarantees to appellee 10 per cent dividend on the stock held by him and to make him a director and pay him a salary as secretary, and to return to him his money at all hazards, render the contract void as against public policy. If the transaction under consideration were a sale and purchase of stock instead of a loan, then there would be ground for appellant’s contention. But, treating the transaction as a loan, it was within the power of the directors to make it in this form and to prescribe these or any other terms by way of inducement to appellee to enter into the contract and for his satisfaction and security after he had done so.

(5) In the absence of express limitations a corporation has the implied power to borrow money to carry out the purposes of its. organization and to execute evidences of its indebtedness, and to give security therefor. It may bind itself by any form of obligation not forbidden by its charter. iSee 10 Oye., pp. 1102-1104; 3 Thompson on Corporations, § § 2165-7.

Concerning the validity of the contract under review it must not be overlooked that the naked question before us is as to whether or hot that contract makes appellant liable to the appellee. While the complaint alleges the insolvency of the appellant, the answer denied it, and by the agreement of counsel this question was not submitted, and as to whether or not there were other creditors of appellant besides the appellee, or as to what effect the contract would have on the rights of creditors generally was not involved.

(6) The appellant contends that the clause in the contract guaranteeing appellee a dividend of 10 per cent on the stock held by him was -a fraud' upon the minority stockholders. This is not well taken, for another clause in th© contract gives to 'all the stockholders the same dividend. Moreover, treating the transaction as a loan, this was but a provision whereby appellee was to receive 10 per cent per annum .on his loan. Besides, at the time this transaction was entered into there were no minority stockholders who were not present or represented in the meeting and consenting to this provisión. They are therefore bound by it. The testimony of J. K. Robinson that Bentley was a stockholder at this time is. contrary to the clear preponderance of the evidence.

As to whether or not demand was made upon the appellant for a return of the money .a reasonable time before the institution of the suit was a question of fact for the chancellor, and his finding to the effect-that appellant had reasonable notice is correct. See 10 Cyc., pp. 1077-1078.

(7) There was error in the matter of interest. It is admitted by the appellant in its answer that the appellee was entitled to the amount which he claimed as salary. The has-is for the amount of the judgment was the note for $5,193 executed by the appellant, • through its president, cn May 30, 1914. This should be taken as an admission of the amount due on the contract up to that date, including the salary.

The court’s decree, however, was erroneous in making this entire sum bear interest from May 30,1914. Only the sum of $5,000, under the terms of the loan agreement, should bear 10 per cent interest from May 30, 1914. The amount included in the judgment as salary, which has not been -shown, and which the clerk may ascertain, .should only bear interest at the rate of 6 per cent from May 30, 1914. The ■ decree will be modified to this extent, and, with -such modification, affirmed.

DISSENTING OPINION.

It is well that the court has so plainly labeled the contract in this case as one for the lending of money, otherwise it would never be recognized as such. The plain English of it is for the sale -of stock of a corporation. It not only provides for the sale of the stock to appeliee, but stipulates that he is to be made a director and the secretary and to receive a salary as such. He does not fail in his complaint to sue for his salary as secretary, and it appears that he has actually been drawing a salary, yet his attitude now is one purely of lender of money to the corporation. The contract is very plain in its terms and is one that was dictated by appellee himself and written by his own attorney. I am unable to -see how it can be treated as a contract for the loan of money. It does provide that appellee “shall have the right at any time to withdraw the amount invested by him, if he sees fit to do so, upon tendering back the certificates of stock held by him,” but that clause, instead of making it a contract for the loan of money, clearly characterizes it as one for the sale of shares of stock, with the guaranty that the dividends should amount to as much as 10 per cent, and that the shares would be repurchased by the corporation if the purchaser so elected. No amount of testimony -with respect to what the parties actually intended can alter the express language of the contract, for it must be judged by what was written down and not by what the parties thought they were writing. The rule that contemporary or antecedent negotiations are merged into the writing is so elemental that it is unnecessary to cite authorities. Parol evidence of such negotiations is inadmissible to contradict the express terms .of the contract.

Treating the contract as one for the sale and repurchase of the stock at a guaranteed price, it was clearly ultra vires and void. If the corporation could make a valid contract of that kind with appellee, it could make the same with every other stockholder, .and in that way could denude itself of all of its assets, leaving innocent stockholders and creditors without anything but the empty shell. The case of Boley v. Sonora Development Co., 126 Mo. App. 116, 103 S. W. 975, is precisely in point, and it was there held that “a corporation has no power to sell stock .and agree with the purchaser to buy it back within a given time at the price paid, upon his election to sell, thus releasing him from his responsibility as a stockholder.” To the same effect see Chrisman-Sawyer Banking Co. v. Independence Wool Mfg. Co., 168 Mo. 634, 68 S. W. 1026, and Wilson v. Torchon Lace & Mercantile Co. (Mo.), 149 S. W. 1156. The reasons are so clearly stated in those opinions, it is unnecessary to go into the subject further, for the injustice oif permitting* such conduct is obvious.

Now, if Robinson and Peay, the persons who negotiated this contract with appellee, were the only ones interested in 'the corporation, the contract might be upheld as their own and they would be estopped, as sole owners of the corporation, to raise the question of ultra vires. But such is not the facts of this case. It is true, there is evidence tending to show that 'they were the only two at the time the contract was made, except Robinson’s son, who owned one qualifying .share. The evidence shows, however, that at the time this suit was brought there was another stockholder owning eighty shares of stock, and that there, were creditors, and that both Robinson and Peay had hypothecated their own .stock to .other persons. Subsequent purchasers of stock .and subsequent creditors of the corporation are entitled to protection from the effects of such a contract .as this and they are not chargeable with notice .of its provisions. The policy of the law is to facilitate the negotiability of corporate stock ¡by treating it as free from .all equities and liens except such as are created under statutes. Bankers Trust Co. v. McCloy, 109 Ark. 160. The same principle would seem to forbid the making of such a contract .as this which gives a preference to a stockholder thus favored.

Appellee shows in his complaint that the corporation is insolvent and is tottering toward the doors of the bankruptcy court, and yet the decision in this case permits him, after having speculated upon the contingencies of the investment, to hold the corporation liable at the expense of other stockholders and creditors who doubtless dealt with it on the faith that it is assets would not be ■spent in retiring any of its stock.