[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 135
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 136 The learned judge who tried this action was mistaken in the statement made in his charge to the jury as to the questions that had been decided by the Court of Appeals in this action or in another case referred to by him.
The question before that court on the former appeal in the *Page 137 present suit arose on a demurrer by the plaintiffs to the defendant's answer, upon the ground that the facts stated therein do not constitute any defence to the action; the demurrer was sustained by the City Court, and its judgment was, on the former appeal, held to be erroneous, and was reversed. The opinion therein, as reported in 46 New York, 589, was given by Judge GROVER; and it is referred to by him, as not reported, in his opinion in Boynton v. Hatch (47 N.Y., 225), also commenced in the City Court of Brooklyn (being the other case to which the learned judge who tried this had, it is conceded, reference in his charge). The statement of the facts in Boynton v. Hatch, as set forth in the report of the case, shows that testimony, as to the value of the property in payment for which the whole stock of the company was issued to the defendant, was taken at the trial; the defendant objecting on the ground that such testimony was immaterial. The referee, before whom the issues were tried, reserved his decision, but in deciding the case he excluded the testimony, holding that the question of value was not in any way material. The defendant, as is also shown by the same statement, claimed exemption from liability under chapter 333 of the Laws of 1853, on the ground that the capital stock was fully paid in by the purchase of the property mentioned in the certificate thereof referred to in the answer of the defendant therein, as that filed on the 30th day of July, 1868, and the issue of stock therefor, in which he was sustained by the referee who decided that the defendant was entitled to judgment, which was accordingly entered. An appeal therefrom was taken to the Supreme Court and it was reversed by the General Term in the second judicial district, who ordered a new trial and the case came before the Court of Appeals on an appeal by the defendant from that order, which was there affirmed. Two opinions were read for the affirmance of the order, but on different grounds: one by Judge ALLEN and the other by Judge GROVER. The order was unanimously affirmed, CHURCH, Ch. J., and RAPALLO, J., concurring in the decision for reasons assigned by Judge *Page 138 ALLEN, and PECKHAM and FOLGER, JJ., concurring therein for reasons assigned in the opinion of Judge GROVER.
It appears, by reference to the opinions, that Judge ALLEN placed his conclusion on the ground that the evidence excluded, as above stated, was competent to show that the purchase of the property and the issue of the stock therefor were fraudulent, and an evasion of the law requiring an actual payment of the capital stock of the company in money or its equivalent, in value, in property necessary for its business. In his consideration of the question he said: "While a difference of opinion as to the value of the property might not alone be sufficient to impeach the transaction, the actual value of the property is an important item of evidence, and with other circumstances may be sufficient to establish fraud; while without some evidence as to the value it would ordinarily be difficult to show fraud." He then refers to other matters and circumstances to show that in connection with them, the evidence of value was material in that case.
The general tenor of the opinion of Judge GROVER is to the effect that proof of the inadequacy of value, irrespective of the question of fraud and an intention to evade the statute, was competent. He, after saying that the plaintiff's evidence tended strongly to show that the property purchased of the defendant was worth only forty per cent of the price paid for it, added: "The referee erred in holding this evidence immaterial, and refusing to pass upon the question as to the value of the property." It is evident, from the examinations of those opinions, that the only question actually decided in the case was, that the evidence of value given was competent and was erroneously excluded by the referee. It appears to be proper, in this connection, to state that Judge GROVER concluded his opinion given on the question of the sufficiency of the answer in the present case, on the former appeal, with these remarks: "Whether the property purchased was necessary to the business of the company, and whether the price paid therefor was no more than its fair value, are questions of fact to be determined like other questions, *Page 139 if controverted. The certificate of these facts filed, etc., pursuant to the act is not made conclusive evidence of the facts in question. In the present case, the demurrer admits them to be true, and, if true, the defendant is not liable to the creditors of the company under section 10 of the act of 1848." The last paragraph shows what the true and only point decided on that appeal was, and that the previous part of the statement was not involved in the decision actually made.
It appears from the preceding views that the question presented by the exception to the judge's charge, above set forth, has not been decided by the Court of Appeals; it is, therefore, properly open to examination and review. I will proceed to examine it on that assumption. In doing this, it is proper to refer to the provision of law under which it is sought to charge the defendant with liability. The general act authorizing the formation of corporations for manufacturing, mining, mechanical or chemical purposes, passed February 17, 1848, chapter 40 of the Laws of that year, under which the company in which the defendant was a stockholder was incorporated, provides by section 10 thereof that all the stockholders of every company incorporated under it shall be severally, individually liable to its creditors to an amount equal to the amount of the stock held by them respectively, for all debts and contracts by such company, "until the whole amount of the capital stock fixed and limited by such company shall have been paid in and a certificate thereof shall have been made and recorded, as prescribed by the following section (§ 11)," which prescribes as follows: "The president and a majority of the trustees, within thirty days after the payment of the last installment of the capital stock, so fixed and limited by the company, shall make a certificate stating the amount of the capital so fixed and paid in; which certificate shall be signed and sworn to by the president and a majority of the trustees, and they shall within the said thirty days, record the same in the office of the county clerk of the county wherein the business of the said *Page 140 company is carried on."It is then provided and declared by section 14 of the act, that "nothing but money shall be considered as payment of any part of the capital stock." That continued to be the law until June 7th, 1853, when an amendatory act was passed (chapter 333 of the Laws of that year), the second section of which is in the following terms, viz.: "The trustees of such company may purchase mines, manufactories and other property necessary for their business, and issue stock to the amount of the value thereof in payment therefor; and the stock so issued shall be declared and taken to be full stock and not liable to any further calls; neither shall the holders thereof be liable to any further payments under the provisions of the tenth section of the said act; but in all statements and reports of the company, to be published, this stock shall not be stated or reported as being issued for cash paid into the company, but shall be reported in this respect, according to the fact." It was held and decided by the Court of Appeals, on the former appeal in this case, that this amendment applied to the original capital stock of the company, as well as to any increase thereof authorized by the original act, and, that the holder of such stock was relieved from liability to creditors, to the same extent as if it had been issued for money, paid therefor. (SeeSchenck v. Andrews, 46 N.Y., 589.)
The provisions to which I have referred clearly show that, under the original act, stockholders in a corporation formed under it, were liable to its creditors until the whole of its capital stock was paid in cash, and a certificate of the fact was recorded as required by the act; but the amendatory act authorized other property to be substituted in place of money, as therein specified; and the defendant's liability in the present action is to be determined by the construction to be given to that act. It is conceded that no portion of the capital stock of the company in question (which was fixed at $100,000 divided into 200 shares of $500 each) has been paid in money, but property was purchased by its trustees, for which full stock had been issued to the vendor thereof, part of which was *Page 141 subsequently transferred by him to the defendant. A certificate of the fact of such purchase was made and recorded, which (no question being raised on the trial as to its sufficiency) must now be assumed to have been executed in compliance with the requirement of the statute.
Proof was given, with the object of showing that five mortgages on real estate, of $2,000 each, included in the purchase, were not necessary for the business of the company, and that the value of the whole of the property bought was less than the amount of the stock so issued in payment therefor. Thereupon the jury were instructed by the court that the decision of the case involved the consideration of these two questions: First, "Whether those mortgages were necessary for the company in the carrying on of its business," and, second, "Was the property transferred of the fair value of the stock issued in payment therefor," adding that the Court of Appeals had decided that the statute in relation to the issuing of stock, in payment for property, provides for its issue "to the amount of the value of the property, and not simply the amount agreed upon between the parties;" and if they found those two issues in favor of the defendant, then he was entitled to a general verdict, but if against him, then the plaintiff was entitled to recover the amount of his claim, with interest.
The above charge presents the question whether a stockholder in a company, organized under the act referred to, can be charged with a debt due to a creditor, on the opinion of a jury, based and formed on the testimony of others (conflicting it may be) that a portion of the property purchased by its trustees, for which stock was issued in payment, was not indispensable for carrying on its business, or that it was not fairly worth the price or sum paid or allowed therefor; or, presenting the subject in another form, whether a mere mistake or error of judgment by the trustees, either as to the necessity or value of property, purchased by them in good faith, and not in evasion of the original act requiring payment *Page 142 of the whole capital in money, will subject a stockholder to such a liability. I think not. The original and the amendatory acts are to be read and construed together. While the former required all the capital to be paid in money, the latter so far changed that requirement as to permit the whole, or a portion thereof, to be paid by a transfer of such property, equivalent in value, and necessary for the business of the company, as the trustees deemed advisable. It gave them the right and power, in the exercise of their discretion, to take property and issue stock therefor, for which money, paid in for stock, would have been appropriated. Its effect, which was consistent with theobject of the original act, was to dispense with the payment of money where mines, manufactories, or other necessary property could be beneficially received for the use of a company, on the issue of stock therefor, to the amount of its value. The authority given to the trustees (using the language of the act), "to purchase mines, manufactories and other property necessary for their business, and issue stock to the amount of the value thereof in payment therefor," implied that they were to be the judges, both as to the necessity and value of the property to be purchased. They were the agents, on behalf of the company, for that purpose, and the discharge of their duty called for the exercise of their discretion and judgment (having reference and due regard to the interests of those represented by them) in determining what should be bought, and the price to be paid therefor. It cannot be properly claimed, in giving a construction to the power conferred on them by the amendatory act, that the property purchased, and every part thereof, should be indispensable for the prosecution of the business of the company, or that the sum allowed therefor should be its precise, actual, intrinsic value (and that to be determined by the verdict of a jury), for the exemption of a stockholder from the liability which the original act imposed, in case the whole capital was not actually paid in cash. Such a construction would defeat the evident object of the law, which clearly was to encourage the formation of companies, by the *Page 143 appropriation of manufactories, mines and other property, proper for their business, and at a fair valuation, instead of money, as a capital therefor. No person could be expected to become a stockholder, and pay his money or appropriate his property, and he, nevertheless, be held liable to a contribution in favor of creditors, to the extent of the stock issued for such property, if a jury should, subsequently, and at an indefinite and unlimited period thereafter, find that the trustees had, under a mistake, but in an honest exercise of their judgment, concluded, erroneously, either that the property was in fact, as disclosed by subsequent events, not absolutely indispensable, oractually worth the full sum allowed for it. There are many circumstances that affect values. The time of the purchase, the demand for the article sought for, a limited supply, the credit given, a panic in the money market, and various other matters, have their influence and effect, and which cannot be properly appreciated, at a remote day, after these causes have ceased to operate. An illustration may be given by reference to the difference in prices of articles needed during the late war and the present time. Indeed, our experience shows that prices are more or less fluctuating, even at short intervals of time, and different juries would be very likely to disagree, on the same evidence, as to the value of an article on a specified day, two or three years previous to the time they were called to pass on the question.
The construction given to the act by the court below, in its effect, imposes a penalty on the stockholder in a company for a mistake and erroneous judgment of its trustees in the faithful and honest discharge of their duties. There is nothing in the language of the law that requires such an interpretation to be given to it; nor does the protection of creditors of the company require it. Every person who deals with it has the means of ascertaining whether its capital has been paid, in money or in property, and he is under no obligation to sell it any goods, if he finds that it or any portion thereof, has been paid in property. Due prudence and care on his part, will enable him to ascertain its *Page 144 nature and value, and if he should be induced to hazard a sale of goods on credit, instead of money paid down, by high profits, he has no right to ask a court for relief from the consequence of his avarice or folly, in making a sale without payment at the time of the price agreed upon.
It appears by the opinion given by Judge GROVER in Boynton v.Hatch (supra), that there was a dissenting opinion by one of the judges of the Supreme Court at General Term, in that case, in which he stated that, the rule of liability declared by that court (and also maintained by Judge GROVER himself), would "prevent sales of stock by its holders, as the purchasers, to protect themselves from liability for the debts of the corporation, will be bound to prove that the property purchased, in payment for which the stock was issued, was worth the amount of the stock so issued." The learned judge did not deny or attempt to refute the statement or proposition. It was clearly undeniable and incapable of refutation, but he disposed of it summarily, by saying: "The answer to this is, that the statute provides for legitimate business enterprises and not for the sale of the stock of fraudulent corporations; had the latter been the design, the statute should have read: to issue stock in payment to the amount agreed to be paid for the property, instead of to the value of the property." I agree with him, as to the object of the statute, but do not concur in what his answer implies, that an agreement by trustees, to pay for property, made and entered into in good faith, and in the exercise of a proper discretion and honest judgment as to its value, but as to which they formed an erroneous opinion, necessarily shows that the transaction was not a "legitimate business enterprise," or that the corporation, issuing its stock for such property was a "fraudulent corporation."
The judge who tried the case under review, acting on an erroneous assumption as to what the Court of Appeals had decided, gave the instructions which have been the subject of the previous examination by me, and the views, above expressed thereon, show that he erred in giving them. *Page 145
It follows that the judgment entered on the verdict, and that in affirmance thereof, must both be reversed and a new trial ordered, costs to abide the event.