HOWARD, RECEIVER, v. TURNER.

1893. 155 Pa. St. 349, 26 Atl. 753.82

OPINION by MR. CHIEF JUSTICE STERRETT.—

(The learned judge, after summarizing the evidence in the case, proceeded :)

The foregoing are the salient facts, as to the origin, consideration, etc., of the note in suit, leading up to the defense that was successfully interposed in the court below, viz.: that the agreement to take the stock, giving the original note in payment thereof, etc., was induced by the fraudulent misrepresentations of the cashier as agent of the bank in procuring subscriptions, etc.

Without referring to the alleged misrepresentations, but assuming, for argument's sake merely, that they were such as would have justified the defendant in rescinding the contract before the bank became insolvent or other rights attached, the controlling question, under all the evidence, is whether that defense was available at the time it was interposed.

As a general rule, it is well settled that a contract induced by fraud is not void, but voidable only at the option of the party defrauded. In other words, it is valid until rescinded, and it is for the defrauded party to elect whether he will be bound; but, if he affirm the contract, he must affirm it in all its terms. Pollock, Contracts, 536; Pearsoll v. Chapin, 44 Pa. 9. When, however, the fraud is of such a character as to involve a crime, ratification thereof is contrary to public policy and can not be permitted; but, where the transaction is merely contrary to good faith and fair dealing where it affects individual interests only either ratification or rescission, at the election of the party defrauded, is permissible: Shisler v. Vandike, 92 Pa. 447; Babcock v. Case, 61 Pa. 431; Leaming v. Wise, 73 Pa. 173. In the last case it is said if defendants were guilty of the alleged fraud, the plaintiffs, on discovering it, had an undoubted right to rescind the contract, and upon a tender of the stocks to demand back the price paid for them, but it was their duty to do so within a reasonable time. Omission to repudiate within a reasonable time is evidence, and may be conclusive evidence of an election to affirm the contract. Election to rescind must be communicated to the other party. One way of doing that is to institute proceedings to have the contract judicially set aside; or, if the other party is the first to sue on the contract, a debt enforcible at law, or in equity, by the corporation, or its legal representative."

Harrell v. Blount (1900) 112 Ga. 711, 38 S. E. 56 (semble) (not necessary to prosecute on behalf of other creditors); McBryan v. Universal Elevator Co. (1902) 130 Mich. 111, 89 N. W. 683; Cornell's Appeal (1886) 114 Pa. St. 153, 6 Atl. 258, accord.

Swearingen v. Sewickley Dairy Co. (1901) 198 Pa. St. 68, 47 Atl. 941 (all stockholders need not be made parties).-Eds.

32 Portion of the opinion omitted.-Eds.

the rescission, if not too late, may be set up as a defense. Where rescission is not declared in judicial proceedings, no further rule can be laid down than that there should be "prompt repudiation and restitution as far as possible."

A contract, to take and pay for stock in a corporation, made in consequence of a fraudulent prospectus, is voidable only, and not void, and can only be avoided subject to the rights of creditors, where there is a winding up order or a voluntary winding up: Bispham's Equity, § 472; 2 Addison, Cont., 8th ed., 774; Cook on Stock, etc., §§ 151 to 154. The intervening rights of creditors and other stockholders call for prompt action on the part of a subscriber who seeks to avoid his liability on the ground of fraud; Bispham's Equity, sec. 154.

In view of these principles, and the uncontradicted facts above referred to, it is impossible to see any ground on which a valid defense in this case could be based. The undisputed evidence is that prior to the failure of the bank and institution of their suit by the receiver, neither the defendant nor his wife took any steps to rescind or repudiate the contract of subscription or to surrender the certificate of stock, as to which he testified, "It was left on the table; I suppose I accepted it;" nor did he deny his liability on the note. On the contrary, up to the time suit was brought, they both indicated a willingness to join with other shareholders in their efforts to reorganize the bank. Mrs. Turner, as we have seen, wrote to the chairman of the reorganization committee: "I want or expect to pay my 50 per cent. towards reorganizing the bank; but do not wish to send the amount until I know positively that you are going to reorganize," etc. A few days thereafter defendant wrote to the same effect, saying his wife would likely pay the assessment "should the bank be reorganized," but she did not want to borrow the money for that purpose "unless it is a sure go." At that time, as the chairman wrote them in reply, the whole amount of the assessment, $100,000, except Mrs. Turner's and two others, was in, and one of those was on the way. Reorganization was then practically an accomplished fact. Everything, including the conduct of defendant and his wife, pointed to that conclusion; and doubtless the remittance would have been made if the receiver had not brought suit in the meantime. That, as Mrs. Turner wrote, "blocked matters for the present." In nothing that was said or done, from the beginning up to that time, was there anything that could be tortured into election to rescind on the part of the defendant. At that time, or rather prior thereto, the rights of the bank's creditors, to the extent of its assets, including the additional capital stock represented in part by defendant's note, had attached; the stockholders, with the exception of Mrs. Turner and one or two others, relying on obtaining possession of all the assets, had contributed nearly $100.000 for the purpose of reorganizing the bank, which of course included settlement and payment of all its liabilities. These facts were established by uncontroverted evidence. There was no testimony from which any jury could, or

ought to be permitted to find a state of facts more favorable to the defendant.33

(2) Rights of Creditors Against Holders of Stock Issued for Money at Less Than Par.

CHRISTENSEN v. ENO.

1887. 106 N. Y. 97, 12 N. E. 648.

APPEAL by defendant Eno from judgment of the General Term of the Supreme Court in the First Judicial Department, entered upon an order made January 21, 1885, which affirmed a judgment in favor of plaintiff, entered upon a decision of the court on trial at Special Term.

This action was brought by plaintiff, as judgment creditor of defendant, the Illinois & St. Louis Bridge Company, against it and defendant Eno, among other things, to compel the latter to pay forty per cent. of the par of twenty-five shares of the stock of said company issued by it to him, upon which stock the forty per cent. was not paid, but was credited as paid when the stock was issued; also, to compel said defendant to account for and pay over, in satisfaction of plaintiff's judgment, the proceeds of the sale by him of certain second mortgage bonds gratuitously issued to said Eno as a stockholder by said corporation, upon payment by him of the remaining sixty per cent. of said stock.

ANDREWS, J. The judgment below proceeds on the ground that the forty per cent. credited as paid on the twenty-five shares of stock of the Illinois & St. Louis Bridge Co., issued to the defendant Eno, in 1871, but which was not in fact paid, and also the sum of $5,332.18, realized by him on the sale of second mortgage bonds of the company, received as his share on the distribution of the same among stockholders, pursuant to the resolution of the company of December 20, 1871, were equitable assets in the hands of the defendant Eno, applicable to the payment of the debts of the corporation, and which the plaintiff, as a judgment and execution creditor, may reach in this action and have applied to the satisfac

33 See People v. Cal. Safe Deposit & Tr. Co. (1913) 19 Cal. App. 414, 126 Pac. 516; Ramsey v. Thompson Mfg. Co. (1893) 116 Mo. 313, 22 S. W. 719; Hillard v. Allegheny Geometrical Wood Carving Co. (1895) 173 Pa. St. 1, 34 Atl. 231; Scott v. Deweese (1900) 181 U. S. 202, 45 L. ed. 822, 21 Sup. Ct. 585; Lantrey v. Wallace (1900) 182 U. S. 536, 45 L. ed. 1218, 21 Sup. Ct. 878; Brown v. Allebach (1908) 166 Fed. 488; note, 13 Col. Law Rev. 62.

In Scott v. Deweese, 181 U. S., at page 213, 45 L. ed. 822, 828, 21 Sup. Ct. 585; the court said: "If the subscriber became a stockholder in consequence of frauds practiced upon him by others, whether they be officers of the bank or officers of the Government, he must look to them for redress and is estopped as against creditors to deny that he is a shareholder, within the meaning of Section 5151, if at the time the rights of the creditors accrued, he occupied and was accorded the rights appertaining to that position."-Eds.

tion of his judgment. It is very plain upon the facts, that the plaintiff in asserting this claim can not stand upon any right existing in the corporation itself to proceed against the defendant Eno. The transactions by which he acquired the shares as paid-up shares to the extent of forty per cent. of their nominal amount, and received the bonds, created no obligation as between him and the company to pay the amount unpaid on the stock or to account to the company for the bonds or their proceeds. As between Eno and the company it was not intended that the former should be accountable to the company for the amount unpaid on the stock or for the bonds. Viewing the transactions in the light most favorable to the plaintiff, the credit on the stock and the transfer of the bonds were intended as a gratuity to the stockholders who had been called upon to pay calls upon their original subscriptions in excess of what was expected and of what was represented would be necessary at the commencement of the enterprise. There can be no doubt that as between the corporation and its stockholders these transactions were binding according to the actual intention. The corporation itself would have no standing to demand that the defendant Eno should pay the forty per cent. on the stock which it acknowledged had been paid, or that he should account for the proceeds of the bonds. The claim of the plaintiff, therefore, must be maintained, if at all, not in right of the corporation, or by way of equitable subrogation to any right of the corporation against Eno, but in hostility to the arrangement between them, under which he received. the stock and bonds. The plaintiff, to entitle himself to the relief demanded, is compelled to maintain that, as a creditor of the corporation, he has rights superior to those of the corporation itself and may hold the defendant to account for the unpaid forty per cent. on the stock as though he had been a subscriber therefor, and for the proceeds of the bonds as though he had purchased them of the corporation, or had sold them on its account. So far as respects the claim to recover the forty per cent. unpaid on the twenty-five shares of stock, we understand it is placed, by the learned counsel for the plaintiff, mainly on the proposition that the capital stock of a corporation is a trust fund for the security of creditors, which can not be given away or distributed among stockholders so long as debts of the corporation remain unpaid, and that the transaction in question was a violation of this principle. The general principle asserted is, doubtless, well founded, but if it had an appropriate application in the present case, the plaintiff would encounter some difficulty under the authorities in this state, in maintaining a separate action as an individual creditor of the corporation, to reach assets which constitute a trust fund, not for the protection of one creditor only, but equally for all the creditors of the corporation. Griffith v. Mangam, 73 N. Y. 611, and cases cited. But passing this, we are of opinion that the forty per cent. credited on the twenty-five shares of stock issued to the defendant Eno can not be considered as, and does not constitute, a trust fund applicable to the payment of creditors. The capital of a corporation consists of its funds,

securities, credits and property of whatever kind which it possesses. The word "capital" applied to corporations is often used interchangeably with the words "capital stock," and both are frequently used to express the same thing-the property and assets of the corporation. Strictly, the capital stock of a corporation is the money contributed by the corporators to the capital, and is usually represented by shares issued to subscribers to the stock on the initiation of the corporate enterprise. See Burrall v. Bushwick R. R. C. Co., 75 N. Y. 211, 212, and cases cited. It may be admitted that the liability of subscribers on unpaid stock subscriptions constitutes an asset of the corporation, which can not be surrendered or given up by the corporation without consideration to the prejudice of creditors. It is not claimed that there is any express prohibition in the charter of the bridge company against issuing shares purporting to be fully paid without actual payment. The charter authorizes books of subscription to the stock to be opened. The most that could be claimed from this provision is that by implication it prohibits the issue of stock except to actual subscribers who should undertake to pay the nominal amount of the shares when required. There is no pretense that the defendant Eno ever subscribed for the twenty-five shares of bonus stock (so called), or entered into any engagement to pay the forty per cent. credited thereon. This was distinctly contrary to the intention of all parties. The plaintiff seeks to charge him as though he had subscribed for the stock and entered into a contract obligation with the company to pay the forty per cent. We can see no ground upon which he can be made to respond to the creditors of the company as upon an unpaid subscription. Assuming that the transaction as to the company was ultra vires, or that it could not give away its shares, the transaction in that view was simply a nullity, and Eno got nothing as against any one entitled to question the transaction. But it did not convert him into a debtor of the company for the forty per cent. He entered into no contract to pay it. He has received nothing on account of the twenty-five shares, and it is not claimed that the charter in terms imposes the liability claimed. The unissued shares of a corporation are not assets. When issued they represent a proportionate interest of the shareholder in the corporate property-an interest, however, subordinate to the claims of creditors. There are unquestioned public evils growing out of the creation and multiplication of shares of stock in corporations not based upon corporate property. The remedy is with the legislature. But the liability of a shareholder to pay for stock does not arise out of his relation, but depends upon his contract, express or implied, or upon some statute, and in the absence of either of these grounds of liability, we do not perceive how a person to whom shares have been issued as a gratuity has, by accepting them, committed any wrong upon creditors, or made himself liable to pay the nominal face of the shares as upon a subscription or contract. Seymour v. Sturgess, 26 N. Y. 134; In re Western Canada Oil Co., L. R. 1 Ch. Div. 115; Waterhouse v. Jamieson, 2 L. R. H. L. (Sc.)