Avon Springs Sanitarium Co. v. Weed

McLennan, P. J.,

(dissenting):

- The question presented -by this appeal is a simple one, and,, as it seems- to me, has been decided -adversely, to respondent by the'courts of this State, and that it is only necessary to- appreciate the precise.. ■ facts in order to reach ,a conclusion in harmony with- such decisions.

If a cause of action exists in plaintiff's favor-against the. defendant, it must result because of the alleged contract set out in full in the complaint and in the prevailing opinion,-and which need not be repeated-here. Its provisions, so far as material, áre': “ I - (the defendant)' hereby subscribe for 10 shares of . 7 per cent preferred stock * * .* in a new company to be formed for the purpose * * ■ *. I agree to pay for the above-number of shares of stock as soon-as the company is.- incorporated and upon delivery of stock to me.”... .If such alleged contract does not.impose an obligation upon the defendant which the plaintiff may enforce, the complaint- fails to state a cause'of action, and it is idle to ■ consider what inferences might be drawn from theother allegations of such-complaint, because the- terms of such alleged- contract are not ambiguous, and, therefore, may not be varied, changed or given greater scope by parol evidence.

So- far as- appears there was no person- other than the defendant a party to-such alleged agreement. ISTo one is suggested who was under obligation to or could return any advantage or consideration to the defendant for the- obligation which it is claimed he assumed. It .is said that the plaintiff became the beneficiary of such obligation, but if -so it would seem essential that some one should be authorized to confer., such rights upon it. So far as appears, persons who were .utter strangers to tlie defendant may have organized the corporation by the name and for the purposes contemplated by ■ him but we cannot imagine'that such persons, without the knowledge or.consent of the defendant, would be competent to form such, corporation and then-through it to enforce defendant’s alleged agreement.. With whom the defendant contracted, if at all, does not appear. There is. no .party of the second, part named in the alleged agreement; no one upon whom he could call to perform the covenants or agreements', which formed the only, consideration for his alleged obligation. The defendant did not agree to form the plaintiff corporation, nor did he authorize any one to form it for him or on his behalf.

*567It is well settled that if two or more persons mutually agree to organize a' corporation and each subscribes for stock therein to be paid for after its incorporation, such agreement is valid and may be enforced by any of the parties thereto or by the corporation after its formation. In such case the' corporation represents and acts for the parties, to the agreement, is their agent. But, we think, it has . never been held by the courts of this State that a subscription to , the stock of a .corporation could be enforced where there was no agreement to incorporate and where' there were no parties between whom mutuality of agreement existed.

In Woods Motor Vehicle Co. v. Brady (181 N. Y. 145) the .agreement which was sought to be enforced was as follows : “We, the undersigned, in consideration of the mutual covenants and 'agreements hereinafter contained, hereby, subscribe for the number of shares set opposite our respective names, of the seven per cent . preferred, non-cumulative capital stock of a- corporation to be organized under the laws of the State of New York, for the purpose ■ of dealing in automobiles and motor vehicles, which corporation is to have a capital stock of three hundred thousand dollars ($300,000), of which one hundred thousand dollars ($100,000) shall be seven per cent (7f0) preferred, non-cumulative stock, and two hundred thousand dollars ($200,000) common stock, and we further agree to pay for the said stock so subscribed, whenever payment of the same may be called for by the Board of Directors of said corporation.” Judge Vann, in delivering the opinion of the court, said (p. 152): The plaintiff was not a party to the subscription. paper which was signed by eight persons and which, if capable of enforcement at all, could be enforced only by one of the contracting parties against another.” In that case it was pointed out that the paper could not be enforced at all for other reasons which it is unnecessary to consider here.

In Yonkers Gazette Co. v. Taylor (30 App. Div. 334) it is said that in order to give validity to such subscription paper there must be an agreement to form a corporation. Mr. Justice Hatch, in writing the opinion for the court in that case, said (p.. 336):' “ The law is fairly well settled that where parties propose to form a corporation and become shareholders therein, and such parties intend to become such shareholders without further act upon their part, upon the incorporation of the company, and the agreement remains open- and *568is tinrevoked and the corporation is formed in pursuance of it and thereafter acts upon it by accepting the same, such agreement is valid and binding as a subscription to the capital stock of such corporation. * * * There are agreements of a somewhat similar character which do not admit of enforcement and are not binding as a common-law agreement. It is quite easy to confuse the ■ two ■ classes, although there is a clear distinction between them. In the first class it is to be. noticed that the agreement is to form a corporation and subscribe to its stock. The latter class are mutual agreements tó subscribe for stock in a corporation thereafter to be formed. In the first the agreement is unconditional and absolute to form the corporation and take the stock,. and when acted upon by the corporation is binding, as that is all that is needful to make the contract of force.”

. ■ The same rule is stated in Morawetz on Corporations (2d ed. § 47) where it is said : If a number of persons mutually agree to become . shareholders in a corporation to be formed Toy them subsequently, either under a special charter or under some general law, the agreement between the parties is originally made up of a series of ordinary. common-law contracts,” and the author says that such agreements may be enforced by the corporation after its formation.

In Lake Ontario Shore R. R. Co. v. Curtiss (80 N. Y. 219) the agreement- which was being considered was as follows“ We the undersigned, citizens of Unionville and vicinity, pledge ourselves to subscribe for and take stock in and for the construction of . the Lake Ontario Shore Railroad to the amount set opposite- our names respectively, on condition said road be located and built through or north of the village of Unionville in Parma.” In an action brought to enforce such agreement it was held that it was not a subscription to plaintiff’s capital stock; that it (the plaintiff) was in no sense a party to the agreement and could not maintain an action thereon. It was further held that when two persons for a consideration sufficient as between themselves, covenant to do some act which, if done, would incidentally result in the benefit of a mere . stranger, that stranger has not a right to enforce the covenant, although one of the contracting parties might enforce it’ as against the ocher. ■ I

The ease of Buffalo & Jamestown R. R. Co. v. Gifford (87 N. Y. *569294) is not authority for respondent’s contention. In that case the defendant with other persons signed an agreement in writing by which they each agreed to take the-number of shares “of the capital stock of said company set opposite our respective riaihes, and agree to pay therefor in such time and manner as required by said company.” In that case the court said (p. 299): “ While the subscription was not valid and binding before the complete formation of the corporation, because there was no party with whom the defendant could then contract, yet after the corporation was formed, it accepted the subscription and recognized the defendant as a stockholder, and he recognized himself as a stockholder and ratified and confirmed his subscription by payments thereon. He thus, within all the authorities, upon general principles, became a stockholder in the company, liable to pay the full amount of his subscription.”

In the case at bar if the defendant had ratified the acts of the parties who formed the plaintiff corporation, no one would pretend that the payment of his subscription could not be compelled by such corporation.

In Buffalo & N. Y. City R. R. Co. v. Dudley (14 N. Y. 336) the defendant with others signed the following: “We, the subscribers, agree-to take the number of shares by us. subscribed of the capital stock of the Attica and Hornellsville Kailroad Oonrpany, subject to all the liabilities and penalties of the charter and by-laws of the said corporation.” The defendant at the time of signing such agreement paid five per cent upon the amount of stock subscribed for by him and took the receipt of one of the commissioners therefor. It was held that when the defendant had thus subscribed his name and had paid his five per cent and took his receipt therefor it had the effect of making him a stockholder and the owner of the shares subscribed for by him.

In the case of Schenectady & Saratoga Plank Road Co. v. Thatcher (11 N. Y. 102) it appeared that the defendant and eight other persons who had subscribed for stock had been duly elected directors of the company for the first year, and that the defendant was present at such election, and acted as superintendent of the compány ; that he paid five per cent at tlie time of subscribing" for his stock and later an additional installment of ten per cent. .And it also appeared that he had transferred fifty shares of his stock to *570others, who had'paid him for the same. It was held in that case and for all those reasons that payment for the stock subscribed for by him could be enforced by the corporation.' ■. .

It is concluded that in order to make a present subscription for stock' in a. corporation thereafter to be formed valid there must he an agreement between two or more parties to form such corporation,- and that only after its. formation by such' parties or by some, one authorized to act for them in that regard can their, subscriptions' to its capital stock he enforced by such corporation.

'We think such rule is reasonable and will prevent the anomalous situation of strangers to a .subscription agreement for stock in a corporation to be formed and to the party or parties thereto, organizing such corporation perchance without the knowledge or consent of such subscribers for its stock and then by action brought, in its name compel payment of their' subscriptions. ;

The interlocutory judgment should be reversed arid the demurrer to the complaint sustained, with costs.

Interlocutory judgment'affirmed, with costs, with leave to the defendant to plead over upon payment of the costs of the demurrer and of this appeal.