1. The original holder of stock in a corporation is liable for
unpaid installments of stock, without an express promise to pay
them, and a contract between a corporation or its agents and him
limiting his liability therefor is void both as to the creditors of
the company and its assignee in bankruptcy.
2. Representations by the agent of a corporation as to the
nonassessability of its stock beyond a certain percentage of its
value, constitute no defense to an action against the holder of the
stock to enforce payment of the entire amount subscribed where he
has failed to use due diligence to ascertain the truth or falsity
of such representations.
3. The word "nonassessable" upon the certificate of stock does
not cancel or impair the obligation to pay the amount due upon the
shares created by the acceptance and holding of such certificate.
At most, its legal effect is a stipulation against liability from
further assessment or taxation after the entire subscription of one
hundred percent shall have been paid.
4. Assuming the representations of the agent of the company as
to the nonassessment of the stock to be a fraud which would avoid
the contract, the question arises whether the defendant discharged
his duty in discovering the fraud and repudiating the contract on
that account, and not on account of another fraud not in issue.
Held that the plaintiff was entitled to the opinion of the
jury on that precise question.
The facts are stated in the opinion of the Court.
MR. JUSTICE HUNT delivered the opinion of the Court.
Two points are presented in this case. Upon the first point, the
facts are as follows:
The plaintiff, as assignee of the Great Western Insurance
Company, a corporation organized under the statute of the State of
Illinois, brought his action against the defendant, alleging that
he was a stockholder of said corporation to the amount of ten
thousand dollars; that twenty percent only had been paid upon his
stock, alleging also the bankruptcy of the company, the appointment
of the plaintiff as assignee, and the demand of the amount claimed,
and seeking to recover the eight thousand dollars remaining unpaid.
The complaint averred that the defendant did verbally agree to
become such stockholder, and, with intent to become such, did
accept a certificate for the
Page 91 U. S. 46
same, whereby he became bound to pay the full amount thereof, as
follows: five percent upon delivery of the certificates; five
percent in three months; five percent in six months; five percent
in nine months; and the residue whenever called for by the company,
according to the charter of the company and the laws of the State
of Illinois.
The defense is that the subscription was obtained by the
fraudulent representations of the agent of the company to the
effect that the defendant would only be responsible for twenty
percent of the subscription made by him; that afterwards he
executed his promissory note for the twenty percent, and secured
the same by a mortgage of real estate; "and that thereupon (in the
language of the answer), and pursuant to agreement, said
subscription contract was surrendered and delivered up to
defendant," and also in the language of the answer,
"that said note was a full payment and discharge of all
obligations and personal liabilities of all kinds whatsoever by
reason of his contract so made and the relations created by the
delivery to him of said certificate, and said note was received in
full payment."
In his third amended answer, the defendant avers that he did
subscribe for stock on the conditions mentioned; that after that
contract was made, and before a certificate was delivered to him,
and before executing his note, an agreement was made with Overton
on behalf of the company to the effect before stated; and thereupon
he made and delivered the note and mortgage which was received by
Overton in full discharge and payment of the amount due on his said
subscription.
The evidence contained in the bill of exceptions leaves the case
substantially as is averred in the pleadings. The defendant offered
evidence tending to prove representations that twenty percent only
was required to be paid; that eighty percent was nonassessable, and
created no personal liability; that the agent, Overton, exhibited a
blank form of certificate with the word "nonassessable" printed
across the face, "being a copy similar to that subsequently filled
up and delivered to defendant by Overton." It appears that before
the defendant made his subscription, a copy of the charter and
bylaws had been furnished to him by Overton, and that, in returns
made
Page 91 U. S. 47
by the company to the Auditor of the State of Illinois of the
amount of "unpaid subscribed capital for which the subscribers were
liable," the amount of the defendant's note was included.
The case standing in this position upon the pleadings and the
evidence, the plaintiff requested the court to charge the jury as
follows:
"2d. That any contract between the company or its agents and the
stockholders, limiting their liability as to unpaid installments of
stock, is void as to creditors of the company, and as to the rights
of the assignee who represents the creditors in this action."
"3d. That if the jury find from the evidence that the defendant,
J. D. Tribilcock, became a stockholder of the Great Western
Insurance Company in the month of August, 1870, and that he
continued to own and hold said stock until after the insolvency of
the company in February, 1873, that any representations by any
agent of the company at the time defendant became such stockholder
as to the matter of his liability for eighty percent of the stock,
or any endorsement on the stock of the word 'nonassessable,' are
wholly immaterial, and constitute no defense to this action."
This request was refused.
It is hardly necessary to argue the proposition, that if the
defendant became a holder of shares of the capital of this
insurance company to the amount of $10,000, and had paid but twenty
percent thereof, its creditors were entitled to require of him the
payment of the eighty percent remaining unpaid. The acceptance and
holding of a certificate of shares in an incorporation makes the
holder liable to the responsibilities of a shareholder.
Brigham
v. Mead, 10 Allen 245;
Buff. City R. Co. v. Douglass,
14 N.Y. 336;
Seymour v. Sturges, 26
id. 134. The
capital stock of a moneyed corporation is a fund for the payment of
its debts. It is a trust fund, of which the directors are the
trustees. It is a trust to be managed for the benefit of its
shareholders during its life, and for the benefit of its creditors
in the event of its dissolution. This duty is a sacred one, and
cannot be disregarded. Its violation will not be undertaken by any
just-minded man, and will not be permitted
Page 91 U. S. 48
by the courts. The idea that the capital of a corporation is a
football to be thrown into the market for the purposes of
speculation, that its value may be elevated or depressed to advance
the interests of its managers, is a modern and wicked invention.
Equally unsound is the opinion that the obligation of a subscriber
to pay his subscription may be released or surrendered to him by
the trustees of the company. This has been often attempted, but
never successfully. The capital paid in, and promised to be paid
in, is a fund which the trustees cannot squander or give away. They
are bound to call in what is unpaid, and carefully to husband it
when received.
Sawyer v.
Hoag, 17 Wall. 610;
Tuckerman v. Brown, 33
N.Y. 297;
Ogilvie v. Knox Ins.
Co., 22 How. 380;
Osgood v. Laytin, 3
Keys, 521; 37 How.Pr. 63,
aff'g 48 Barb. 463; Gross,
Ill.Stat., p. 356 ยง 16.
We are of the opinion that the alleged representation of the
nonassessability of the stock held by him was quite immaterial. It
was so held in
Ogilvie v. Knox Ins.
Co., 22 How. 380.
Again, if full effect is given to the evidence of the defendant
and to his claim in this respect, it shows this, and nothing more:
he became a stockholder under a certificate signed by the president
and secretary that he was entitled to one hundred shares of the
stock of $100 each, payable five percent on receipt of the
certificate; five percent in three months; five percent in six
months; five percent in nine months from date; the time or manner
of the payment of the residue not being specified. Upon the face of
this certificate were stamped in red ink the figures "$100," and in
another place was stamped the word "nonassessable." This
certificate he held until the insolvency of the company in 1873 was
known to him.
The legal effect of this instrument was to make the remaining
eighty percent payable upon the demand of the company. We see no
qualification of this result in the word "nonassessable," assuming
it to be incorporated into and to form a part of the contract. It
is quite extravagant to allege that this word operates as a waiver
of the obligation created by the acceptance and holding of a
certificate to pay the amount due upon his shares. A promise to
take shares of stock or a promise to pay for them. The same effect
results from
Page 91 U. S. 49
an acceptance and holding of a certificate.
Palmer v.
Lawrence, 3 Sand.S.C. 761;
Brigham v. Mead, 10 Allen
245. At the most, the legal effect of the word in question is a
stipulation against liability to further taxation or assessment
after the holder shall have fulfilled his contract to pay the one
hundred percent in the manner and at the times indicated. We cannot
give to it the consequence of destroying the legal effect of the
certificate.
Still, again, the representations relied upon as a defense, it
will be noticed, were as to the legal effect of the defendant's
subscription and certificate. It is alleged that the agent
represented that by the laws of the State of Illinois and by the
charter of this company, the defendant might become a subscriber to
the amount of $10,000, and, by means of a certificate to be given
to him like that exhibited, he would really be liable only to the
extent of one-fifth of his said subscription, and that good lawyers
had given their advice to this effect.
There was here no error, mistake, or misrepresentation of any
fact. The defendant made the subscription he intended to make, and
received the certificate he had stipulated for, and, as there is no
evidence to the contrary, it is to be presumed the good lawyers
advised as was stated; but in law the defendant incurred a larger
liability than he anticipated.
Leavitt v. Palmer, 3 N.Y.
19.
He had received, several days before this time, a copy of the
charter and bylaws of the company, and then had them in his
possession. The twenty-fifth section of the bylaws was as
follows:
"Every person who shall subscribe for $10,000 of stock and pay
twenty percent thereof shall be constituted a director of this
company and shall continue such director so long as he shall retain
of such stock an amount equal to $10,000; but such $10,000 shall
not be reckoned in the election of other directors."
It was under this section and the succeeding one, authorizing
the establishment of a branch in any place where such subscription
was made, and by which the defendant became a director and might be
president thereof, that the transaction took place.
Page 91 U. S. 50
That the defendant did not read the charter and bylaws, if such
were the fact, was his own fault. It will not do for a man to enter
into a contract, and, when called upon to respond to its
obligations, to say that he did not read it when he signed it, or
did not know what it contained. If this were permitted, contracts
would not be worth the paper on which they are written. But such is
not the law. A contractor must stand by the words of his contract;
and, if he will not read what he signs, he alone is responsible for
his omission.
Jackson v. Croy, 12 Johns. 427;
Leis v.
Stubbs, 6 Watts, 48;
Farly v. Bryant, 32 Me. 474;
Coffing v. Taylor, 16 Ill. 457;
Slafyton v.
Scott, 13 Ves. 427;
Alvanly v. Kinnaid, 2 Mac. &
G. 7; 29 Beav. 490.
That a misrepresentation or misunderstanding of the law will not
vitiate a contract, where there is no misunderstanding of the
facts, is well settled.
In
Fish v. Clelland, 33 Ill. 243, the principle is
expressed in these words:
"A representation of what the law will or will not permit to be
done is one on which the party to whom it is made has no right to
rely; and if he does so it is his folly, and he cannot ask the law
to relieve him from the consequences. The truth or falsehood of
such a representation can be tested by ordinary vigilance and
attention. It is an opinion in regard to the law, and is always
understood as such."
See Star v. Bennett, 5 Hill 303;
Lewis v.
Jones, 4 B. & C. 506;
Rashall v. Ford, Law Rep. 2
Eq. 750.
The law is presumed to be equally within the knowledge of all
parties.
That a stockholder may relieve himself from his liability by
proof that he was misinformed as to the effect of his contract when
he made it would be a disastrous doctrine.
That a defendant, who could not by contract lawfully relieve
himself from liability as a stockholder, can accomplish that result
by proof that it was fraudulently represented to him that he could
so relieve himself, would be strange indeed.
Ogilvie v.
Knox Ins. Co., 22 How. 380.
The rule, that a mistake of law does not avail, prevails in
equity as well as at common law.
Bank of the
United States v. Daniel, 12 Pet. 32;
Hunt v. Rousman,
1 Pet. 1;
21 U. S. 8 Wheat.
174;
Mellech v. Robertson, 25 Vt. 603;
Leant v.
Palmer, 3 Comst. 19.
Page 91 U. S. 51
"If ignorance of law was admitted as a ground of exemption, the
court would be involved in questions which it were scarcely
possible to solve, and which would render the administration of
justice next to impossible; for in almost every case ignorance of
law would be alleged, and the court would, for the purpose of
determining this point, be often compelled to enter upon questions
of fact insoluble and interminable."
Austin's Jour., vol. ii. p. 172; Kerr 397.
A statement that the insurance company had consulted with good
lawyers, and that their opinion was as stated, should have been
clear proof to the defendant that a representation of the law was a
matter of opinion only.
We think the judge erred in not charging as was requested.
The facts upon which the second point arises are these: assuming
that fraudulent representations had been made to the defendant
respecting his nonliability for the eighty percent, and that they
were of a character that might relieve him from his contract, it
was objected that he had not used proper diligence in discovering
the fraud and in repudiating his contract. The transaction took
place in August, 1870, and the defendant himself gave evidence
"that he never suspected any liability as to said eighty
percent, or that the said representation as to the laws of Illinois
were false, until the agent of the assignee made a demand upon him
for the eighty percent in the year 1873; and that, as no claim had
been made upon him, he never made any investigation as to the truth
of such representations until after said demand in 1873."
In February, 1871, the defendant did ask for a rescission of his
contract, on the untenable ground that it had been fraudulently
represented to him that his note should be retained and held in
Bloomfield, Iowa; which representation had been violated by a sale
of the same, and a removal thereof to the City of Chicago. The
defendant is explicit and emphatic in his evidence that this
attempted repudiation "was based wholly on what was represented" as
to the intended disposition of the notes and mortgage.
The plaintiff thereupon requested the court to charge the jury
as follows:
"7. That if he, defendant, offered to surrender his stock to the
officers of the company, but not upon the ground that he had
been
Page 91 U. S. 52
induced to subscribe for the stock upon a fraudulent
representation as to his liability for the eighty percent, but upon
another ground -- to-wit, that the company had sold and assigned
his note and mortgages -- then such offer is immaterial, and the
evidence of fraud in such misrepresentations as to his liability
for the eighty percent cannot be made available in this suit, and
constitutes no defense in this action."
"12. That if defendant was induced, in August, 1870, to become a
stockholder of the Great Western Insurance Company by a
representation of the agent of the company that eighty percent of
the stock was nonassessable, and that the laws of the State of
Illinois allowed the company to make such contract with those who
took stock, then it was the duty of the defendant to use reasonable
diligence to ascertain the truth of such representations, and to
ascertain what the law of Illinois was on that subject; that if he
did not do so within a reasonable time, and did not ascertain the
truth of said matter until after the insolvency of the company in
1873, then he cannot, as to the creditors of the company, maintain
any defense by means of such representations. The court instructs
you as matter of law that the defendant could have ascertained the
truth of such representations within a few months from the time
they were made, and that not doing so is negligence on the part of
the defendant that bars such defense as to the assignee."
The defense arising from the alleged promissory representations
that the note and mortgage of the defendant should not be removed
from Bloomfield, but should be retained in charge of the branch of
the company at that place, was frivolous, and was practically
abandoned on the trial. The case was submitted to the jury solely
on the question arising upon the representations of the
nonassessability of the eighty percent. The attempted rescission on
account of the representation as to nonremoval and its violation
was, however, unfortunately introduced into the charge in a manner
that prejudiced the right of the plaintiff.
The requests as above stated were declined, but the judge
charged the jury as follows: that
"as respects creditors, the law requires of one who has been
drawn by fraud into the purchase of stock that he shall be guilty
of no negligence or want of reasonable care in discovering the
fraud and, on discovering it, promptly repudiating the purchase. If
you find from the
Page 91 U. S. 53
evidence that within a few months after receiving the stock
certificate, the defendant, discovering that he had been deceived
in some respects, procured the agent who had obtained his
certificate to go to Chicago, delivering to such agent his stock
certificate, and instructed the agent to surrender up the stock and
demand back the note for twenty percent, and if the agent
accordingly went to Chicago, and offered to the company to
surrender the stock and rescind the contract, which the company
refused; and if you find that the defendant never afterwards
acquiesced in being a member of the company; that in September,
1871, he brought an action of replevin for the note, based on the
ground of fraud; and if afterwards he refused to receive any
dividend; and if all this took place before bankruptcy or
insolvency of the company -- I instruct that in point of law this
is a sufficient repudiation of the contract to become a stockholder
to enable defendant, living in another state, to resist an action
for the payment of the eighty percent, provided you find that
defendant was induced to become a stockholder by fraud, as before
explained, and also further find, in view of all the circumstances,
that defendant was not unreasonably negligent in discovering the
fraud, and was guilty of no want of reasonable diligence in taking
steps to repudiate the transaction."
To this charge the plaintiff excepted.
The general principles set forth in this charge are no doubt
sound. If the alleged promissory representation as to the
nonremoval of the note had been available, and had the question
been submitted to the jury, the charge would have been well enough.
But that question was not before them. The questions submitted to
them related exclusively to the representations that the eighty
percent should not be required to be paid. That was the fraud
before the jury, and the question involved in the seventh and
twelfth requests was this: assuming that representation to be a
fraud which would avoid the contract, had the defendant discharged
his duty in discovering that fraud, and repudiating the contract on
account of that fraud, and not on account of another fraud not now
in question? We think the plaintiff was entitled to the opinion of
the jury on that precise question. The charge refused him this
right.
Page 91 U. S. 54
The jury were charged that if within a few months after
receiving the certificate the defendant, discovering that he had
been deceived in some respects, sent an agent to Chicago to
surrender his certificate and demand his note, if he never
afterwards acquiesced in being a member of the company, if he
brought an action of replevin for the note, and if he refused to
receive a dividend, this was sufficient evidence of repudiation.
This was well enough as to the abandoned fraud which was not before
the jury, but was entirely inapplicable to the fraud that was
before them. As to that fraud, the defendant testified that he had
no knowledge or suspicion of its existence until after the demand
made upon him in 1873 by the assignee, and that he never made any
investigation as to the truth of the representation as to the
eighty percent liability until after said demand in 1873. On this
point there was no contradictory evidence. It should have been
ruled as a question of law.
Pettibone v. Stevens, 15 Conn.
19;
Beers v. Bottsford, 13
id. 146. The
submission should have been made, if not ruled as a question of
law, on these facts only, as requested, and the failure to do so,
and the introduction of the facts tending to show a repudiation on
the ground of another fraud, could not fail to confuse the jury,
and was error on the part of the judge.
Wright's Case, Law Rep. 12 Eq. 1871, pp. 331-351, is an
authority on this point. It was there held first that under the
English act, a surrender and cancellation of shares did not relieve
the holder from his liability to creditors of the bank, and second
that a surrender by Wright of his shares in November on the ground
of an apprehended difficulty in the affairs of the bank, did not
enable him to claim a rescission of his subscription on account of
a fraudulent representation in the prospectus of the company, which
fraud was then unknown to him.
Henderson v. Royal British
Bank, 7 E. & B. 356;
Parris v. Harding, 1
C.B.N.S. 533;
Oates v. Turquand, L.R. 2 App.Cas. 325.
The principle laid down in the charge of the judge that one who
claims to have been drawn into a fraudulent purchase must exercise
care and vigilance to discover the fraud and must be prompt in
repudiating his contract on the ground
Page 91 U. S. 55
of such fraud is a sound one.
Thomas v. Barton, 48 N.Y.
193.
The defendant sought to become a member of a corporation of the
State of Illinois and to obtain the benefits and advantages of its
special privileges. If he is not held to be bound to know and
accept all the consequences of this connection, he certainly is
bound to use care and attention to ascertain his position, and
promptly to make his choice of retaining it with its advantages and
responsibilities or of abandoning it. To subscribe for stock in a
corporation in August, 1870, to rest quietly until the year 1873,
never making any investigation as to the position in which he stood
until that time and until after the assignee in bankruptcy had made
a demand upon him, falls very far short of what the law requires.
Especially is this the case when it is shown that he lived in an
adjoining state; that he sent an agent to Chicago, and himself went
to that city in 1871 to obtain his note and mortgage from that very
company for an alleged misconduct in another respect. It was his
plain duty to have inquired and to have ascertained his position
long before he did. "A party must use reasonable diligence to
ascertain the facts."
Buford v. Brown, 6 B.Mon. 553.
Mere lapse of time, where a party has not asserted his claim
with reasonable diligence, is a bar to relief. Relief is not given
to those who sleep on their rights.
Beckford v. Wade, 17
Ves. 87-97;
Jones v. Tuberville, 2 Ves.Jr. 11.
Equity will not assist a man whose condition is attributable
only to that want of diligence which may be fairly expected from a
reasonable person.
Duke of Beaufort v. Neald, 2 Cl. &
F. 248, 286.
Parties who are shareholders and claim to be relieved on the
ground of fraud must act with the utmost diligence and promptitude.
Smith's Case, L.R. 2 Ch.App. 613;
Denton v.
MacNeil, L.R. 2 Eq. 532;
Peel's Case, L.R. 2 Ch.Ap.
684.
The judgment must be reversed and a new trial had.
MR. JUSTICE MILLER, with whom concurred MR. CHIEF JUSTICE WAITE
and MR. JUSTICE BRADLEY, dissenting.
I am of opinion that where an agent of an existing corporation
procures a subscription of additional stock in it by fraudulent
Page 91 U. S. 56
representations, the fraud can be relied on as a defense to a
suit for the unpaid installments when suit is brought by the
corporation, and that if the stockholder has in reasonable time
repudiated the contract, and offered to rescind before the
insolvency or bankruptcy of the corporation, the defense is valid
against the assignee of the corporation.
I also think there was evidence of such fraud in this case, and
that the question of reasonable diligence in the offer to rescind
was fairly put to the jury by the circuit court.