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Raymond, Trustee, v. Railway Co.


of such subscriptions being set forth; that upon the same day that the subscriptions were made, no part of the same being paid, the directors were elected, and forthwith resolved that the company proceed to issue bonds in the sum of $1,000,000, to be secured by a mortgage upon the property of the company, of which it is alleged that the company then possessed none other than the said subscriptions to its capital stock; that by the terms of the resolution it was provided that the bonds should bear date as of the first day of July aster the passage thereof; but before that time proceedings were had and certified to the secretary of state whereby the capital stock of the company was reduced to $50,000, no part of which was ever paid, and that notwithstanding such reduction they proceeded to and did issue bonds to the amount of $1,000,000, bearing date as of the day fixed by the original resolution and in pursuance of the terms thereof, and thereafter transferred all of said bonds to the Northern Railway Company, to which also a perpetual lease of the line of the Spring Grove Company was made, the former agreeing to complete the line in consideration of thie bonds so transferred, wlich were secured by a mortgage on all the property of the Spring Grove Co.; that the Northern Co. sold $750,000 of the bonds of which the sum of $400,000 was used in constructing the Spring Grove Road, and the remainder in paying the debts of the Northern Company. That thereafter both roads defaulted in the payment of interest upon their bonded indebtedness, and the mort. gages thereon were foreclosed, and the roads sold; that the holders of the bonds of the Spring Grove Company realized out three per cent. of the face value thereof, and that both the companies are totally insolvent. Plaintiff further alleges that he is the holder as trustee of two hundred and eighty of said bonds, of the face value of $1,000 each, no part of which has been paid, except the thiree per cent. above mentioned.

For a second cause of action, plaintiff repeating the allegations of his first cause of action says that, the defendant caused an unusual clause to be inserted in the mortgage made to secure the bonds, to the effect that the holders of such bonds should have no recourse to the private liability of any stockholders of the company for the payment of the bonds or interest; that this clause was unknown to the plaintiff or the parties for whom he holds said bonds at the time they were purchased, and no allusion is made to the same, and no similar provision is contained in the bonds, a copy of one of which is given, in which appears a reserence to the mortgage and the terms and conditions therein contained.

At the end of each cause of action, plaintiff alleges that neither he nor those from whom he received the bonds in trust had any kuowledge of the facts in the petition set forth until within six months of the date thereof, and that the same had all come to their knowledge within that time. Throughout the petition, in both causes of action, it is alleged that all the proceedings of the stockholders and directors of the two companies, were part of a scheme of fraud, and a recovery of the amount of the bonds and interest is sought against the individual stockholders of the two companies, all of whom are made defendants. PECK, J.

It is obvious that this action cannot be maintained by this trustee as an action of deceit. If such cause of action accrued to the purchasers of the boods, they are the parties in interest who alone can maintain an action upon it. Such a cause of action is not assignable, and if it were,

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Superior Court of Cincinnati.


the transfer of ihe bonds would not transfer the cause of action, for an action of that sort could not be brought upon the contract contained in the bond, but to recover that which was lost by reason of the deceit.

This proposition also appears to dispose of the claim that recovery may be had in this as an equitable action on the ground that the bondholders have been defrauded by the conduct of the defendant stockholders. In every such case the person defrauded is the proper party plaintiff. Bigelow on Fraud, 2d ed., 214; Dickinson v. Seaver, 44 Mich., 624; Foster v. Wightman, 123 Mass., 100. The bond was the bond of the corporation, and no action can be maintained upon the bonds against the defendants, unless it appears that they were pretending to act in behalf of a corporation which did not exist. In such cases, the persons so conducting themselves may be treated as principals to the transaction. Medill v. Collier, 16 Ohio St., 599; Fay v. Noble, 7 Cush., 188, 194. It is claimed that this is a case of that sort, because the stockholders did not pay in ten per cent. of their subscriptions before organizing, or at any other time, and secs. 3243, 3244, 3245, Rev. Stat., are relied upon in support of that claim.

Section 3243 provides that ten per cent. of each share of stock shall be payable at the time of making the subscription, and the rest in installments as fixed by the directors. Section 3244 formerly provided that as soon as fifty per cent. of the stock was subscribed, and ten per cent. paid, the subscribers should so certify to the secretary of state, and call a meeting for the election of directors, but that section was amended in the year 1880, 77 O. L., 266, so as to do away with the necessity of paying the ten per cent. before calling the meeting. Section 3245, which is the one especially relied upon, provides that at the time and place designated in the notice, a meeting of the subscribers shall be held and directors elected, “but no person shall vote on any share on which any installment is due and unpaid.” The words last quoted should, it is claimed, have prevented the election of any directors, because none of the subscribers had paid anything upon their subscriptions; but assuming that proposition to be correct, directors were chosen, and they accepted and acted as such without objection on the part of any one connected with the company. From and after the filing of the articles of incorporation, there was a body corporate, (sec. 3239) with power to elect directors, and perform all other corporate acts, which this class of corporation is authorized to do and perform. The casting of illegal votes at an election for directors does not so far avoid the election as to permit it to be questioned collaterally. Morawitz on Corporations, sec. 639. The statute does not prohibit the holding of an election, but only forbids voting by those who have not paid. The directors were de facto officers of the corporation, and as such their acts are entitled to the same respect as if they were lawfully elected, unless called in question in a direct proceeding instituted by the state or some authorized person, for that purpose. Chamberlain v. Painesville R. Co., 15 Ohio St., 225; First Presb. Soc, v. First Presb. Soc., 25 Id., 128; State v. Taylor, 25 Id., 279; Ehrman v. Insurance Company, 35 Id., 339.

It is further claimed that granting the lawful organization of the company, there was no power to issue the bonds because the statute, sec. 3287, limits the amount of such issue to the amount of the capital stock, and that persons who act in behalf of a corporation without the power to do that which they undertake to do in its behalf, are liable Raymond, Trustee, v. Railway Co.


individually to as great an extent as if they were pretended agents without a principal.

The power to borrow money and issue bonds is within the scope of the general powers of the corporation, and in such cases a disregard of the limitations upon the exercise of the power does not render the act void to all intents and purposes. The distinction is very clearly stated by Judge White in Ehrman v. Insurance Company, supra, as follows: "Where there is an absolute or total want of power in a corporation to deal in respect to a given subject, it may be that acts done in the name of the corporation, in regard to such subject, would, as corporate acts, be void for all purposes and as against all persons. But there is an obvious distinction between such a case, and one where the corporation deals with a subject within the scope of its granted powers, but for a purpose or in a mode not authorized by its charter." In the case at bar it is alleged that bonds were issued for illegal purposes and to an amount in excess of the limit fixed by the statute, which facts seem to show that the action was not so entirely void as to render the stockholders individually liable as principals in the transaction, or to deprive the holders of a remedy against the company. Hays v. Galion Gas Co., 29 Ohio St., 330, 339.

The cases of Bartholomew v. Bentley, 15 Ohio, 659, and 1 Ohio St., 37, and Medell y. Collier, 16 Ohio St., 599, do not militate against this view. The first was a special action on the case to recover damages sustained by reason of a fraud. The second of the Bartholomew-Bentley cases, (for although between the same parties they were different actions), was an action of debt brought under a statute authorizing a recovery in that form against individuals issuing bank notes without authority, 2 Chase, 904. The case of Medell v. Collier is nearer to the doctrines contended for by plaintiff than others, but there is a plain distinction between that case and this. The ground of that decision is stated at page 613 thus: “Without undertaking to determine how far the principle may be extended, it is decisive of this case to hold as we do, that where the entire business carried on by persons in the name of a corporation, is such that the corporation is prohibited by law from doing, they can not interpose the corporate privileges between them and the liabilities which the law imposes upon individuals in the transaction of similar business without the use of the corporate name.” And it is elsewhere stated that the “plaintiff had no information as to whether they were doing business as a corporation, or as private bankers. He seems to have trusted them in the latter capacity.” So it was held that those of the stockholders who engaged in the business of receiving deposits, or authorized, or sanctioned it, were individually liable upon a certificate of deposit issued in the name of the bank. In this case there was no room for any purchaser of bonds to suppose that he was dealing with the individual members of the company. The nature of the transaction and the language of the bond preclude any such idea. Nor is the transaction one of a sort in which individuals engage. The construction and operation of railways is confided by our statutes to corporations. And finally, the corporation was authorized to issue bonds, though not to the amount determined upon by the resolution. For these reasons I am unable to perceive any such relation between the individual stockholders of this company and the purchasers of the bonds as will support an action by the latter against the former upon the bonds. This of course relates only to the form of action, for if the bondholders have been defrauded by

Superior Court of Cincinnati.


defendant stockholders by the abuse of corporate powers or otherwise, there is undoubtedly a remedy against them but such a cause of action can not be transferred to a trustee and maintained by him in behalf of others.

Is there any aspect of the petition from which a cause of action in behalf of this plaintiff appears? It is sufficiently alleged that plaintiff as trustee is a creditor of the corporation to a large amount; that his claim is unpaid, the corporation insolvent, and its assets exhausted. The petition further sets forth the names of all its stockholders, the amount of their subscriptions, and the fact that they are unpaid. If the reduction of stock be conceded to be valid, there remains $50,000 of undisputed subscriptions, applicable to the claim of creditors of the company. Gaff v. Flesher, 33 Ohio St., 107. Nor is the liability of the subscribers affected by the clause in the mortgage set forth in the second cause of action, that the bondholders shall have no recourse to the individual liability of the stockholders. The liability there referred to is not that arising upon their stock subscriptions. Without payment of the subscriptions, there would be no lawful stockholders. They constituted debts due to the corporation which might and should have been collected by it, and clearly this clause in the mortgage would have been no defense to an action by the corporation upon the subscriptions. The bondholders as creditors of the corporation have the right to have the debts due the corporation collected, and the proceeds applied to their claims. In this respect, at least, the petition states a good cause of action, and to it the four years' limitation to actions for relief on the ground of fraud, does not apply. It is unnecessary to express any opinion as to whether or not defendant stockholders may be held to the full amount of their original subscriptions, but it is sufficient to dispose of the general demurrer to find that the petition states a cause of action, and such demurrer to the first cause of action is therefore overruled.

The demurrer to the second cause of action is overruled. The clause in the mortgage complained of, was not pertinent to the subjectmatter of that instrument. The purpose of the mortgage was to give to the holders of the bouds a lien upon the property of the company as security for the debt due upon the bond. The bond was the contract of the company, containing the terms of its obligation, and anything affecting those terms properly belonged to it. That which affected the lien of the mortgage was the proper subject-matter of that instrument, and the "terms and conditions" of the mortgage referred to in the bond would properly be assumed by anyone reading the bond, to be terms and conditions affecting the security, and not the contract. An action at law might be brought upon the bond without regard to the mortgage, and to such an action the defense that the terms of the bond were modified by the language in the mortgage, could hardly prevail, unless it was shown that the bondholders had actual knowledge of the language relied upon. To a claim of implied notice arising from a reference to the mortgage in the bond, the holder of the latter might well say: "I regarded the

, mortgage as security only for the bond, and had no reason to expect that you would place it in terms derogatory to the contract expressed in the bond." The force of this proposition may perhaps be better appreciated by supposing the case of an ordinary promissory note secured by mortgage. The purchaser of sucli a note could hardly be held bound by conditions in the mortgage limiting the liability of the maker of the note, unless the purchaser had knowledge of such conditions? We are not


Raymond, Trustee, v. Railway Co.


without authority on the point. The case of Mueller v. Engeler, 12

. Bush, 445, was one where the purchaser of a farm and the chattels thereon received a deed which referred to another deed in his chain of title which contained a reservation of a lien upon the chattels to the maker thereof. The court of appeals held that the purchaser was not to be held to have had notice of the lien upon the chattels because his deed contained a reference to the deed setting forth the lien, as a deed of real estate was an unusual place in which to insert a lien upon chattels, and such a lien had no connection with the purpose of the deed. Certain English cases have been cited in which it was held that one having notice of a lease was presumed to know of the covenants therein contained even if unusual, but those cases will be found to be cases where the covenants, though unusual, affected the title of the property or the conditions of its tenure by the lessee, and do not bear upon the point in question. See also Wade on Nocice, sec. 314, 315-336.

To an action to collect the stock subscriptions the Northern Company is not a proper or necessary party, and its demurrer is therefore, sustained.

Healy & Brannan, for plaintiff.

Kittredge & Wilby, Matthews & Greve, Perry & Jenney, Harmon, Colston, Goldsmith & Headly, Black & Rockhold, and Avery & Holmes, for defendants.


106 [Logan Common Pleas.) JAMES W. WRIGHT v. LEVI H. KAUFFMAN AND DAVID D. SMUcker. 1. When a "stranger” to a promissory note, for a valuable consideration, signs the

note as an apparent maker, and there is no inadvertence or mistake as to any fact relative to or connected with such siguing, he is liable as a maker of such pote, although he may be mistaken as to the legal effect of his act. Avd, in such case, if the signature is added with the knowledge and consent of the holder of the note, and without the knowledige or consent of thie original maker,

it is a material alteration of the note which releases him from liability thereon. 2. In such case, when the person thus signing disclaims signing tie note as maker,

and also disclaims signing it in any other character or capacity, he must be held to sustain the relation to the note which the position of his name upon it indicates.

OPINION on motion for a new trial.


This cause is before the court on a motion to set aside the verdict heretofore ren. dereil, and to grant a new trial lierein. The original petition in the case charges that the defendant. Levi H. Kauffman, on the twenty-seventh of July, 1885, executed and delivered his promissory note of that date to one W. B. Smith, for the sum of 3750.00, payable on the first day of October, 1886, with six per cent. interest from date. It further avers that afterwards, to-wit: on the first day of August, 1897, the lefeudant, David D Smucker, in consideration of the sun of $50.00 paid to him, agree to and did guarantee the payment of said note by contract not in writing; and that he, Suncker, then and tiere signed said note by his initial signature of D. D. Smucker, placing his name ihereon under the signature thereon of sail Levi H. Kauffman. After trial and verdict of the jury the plaintiff, by leave of court, filed an amended petition, which contains the averment that Smucker “signed said

Judgment affirmed by the circuit court; opinion 2 Circ. Dec., 360.

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