Harrison v. Armour

California Supreme Court Apr 5, 1915 No. L.A. No. 3360.Published

Before: Sloss

AI Brief

AI-generated · verify before citing

Holding. The court held that when corporate stock is issued in exchange for property of unascertained value, the property is presumed to be full payment for the stock unless evidence proves the parties knowingly overvalued the property to defraud creditors.

Issues

Whether stock issued in exchange for property of unascertained value is deemed fully paid in the absence of evidence of fraudulent overvaluation.
Whether the sale of other stock for cash at a discount establishes the value of property exchanged for different shares of stock.

Disposition. reversed and remanded

Quotations verified verbatim against the opinion

“The rule is that where the corporation and stockholder have agreed upon a given valuation for the property transferred, such valuation is binding and conclusive unless it is fraudulent in purpose or effect.”

“The natural and ordinary interpretation of such a transaction is that the property is taken in payment for the given number of shares, and, in the absence of anything showing the fixing of a smaller valuation upon the property, it must be deemed to be transferred and taken as payment of the par value of the shares.”

Synopsis

Corporation—Stock Issued Without Being Fully Paid—Liability op Stockholders to Creditors.—Where the stock of a corporation is issued without being fully paid up, the amount remaining unpaid is, so far as its creditors are concerned, deemed to be money due to the corporation from its stockholders, and resort to such fund may be had by such creditors.

Id.—Liability When Stock is Sold por Money or Property—Fictitious Valuation—Constructive Fraud.—Where the stock was sold for money and the purchase price was less than the par value of the stock, the difference between the par value and the amount actually paid is the measure of the stockholder’s liability. In eases, however, where the stock is not sold for cash, but is issued in return for real or personal property having no defined value, the rule is that where the corporation and stockholder have agreed upon a given valuation for the property transferred, such valuation is binding and conclusive unless it is fraudulent in purpose or effect. But if the parties have put upon the property a valuation in excess of what they knew or believed to be its true value, this is a constructive fraud upon the creditors and the stock will be deemed paid only to the extent of the actual value of the property received in exchange for it.

Id.—Exchange op Stock por Patent Eights—Unascertained Value —Presumption That Stock was Issued as Fully Paid.—Where certain patent rights, of unascertained value, are turned over to a corporation in exchange for a specified number of shares of its stock, the natural and ordinary interpretation of the transaction is that the property is taken in payment of the given number of shares, and, in the absence of anything showing the fixing of a smaller valuation upon the property, it must be deemed to be transferred and taken as payment of the par value of the shares. It is immaterial that neither the corporate resolution authorizing the exchange, nor the contract of exchange itself, nor the certificates for the stock, described the stock as fully paid.

Id.—Sales op Stock por Cash at Less Than Par.—The fact that cash sales of the stock were made at less than par is not proof that the issue of the stock in exchange for the patent rights was intended to be or was at the same rate.

SLOSS, J.

This is an action by a judgment creditor of a corporation, to subject to the payment of his claim the unpaid subscriptions of various stockholders.

The complaint alleged the incorporation, in June, 1907, of Marine Power and Electric Company, the recovery by the plaintiff on July 7, 1911, of a judgment against said corporation for $1,127.35 and costs, the return of the execution unsatisfied and the nonpayment of the judgment. It alleged further that the capital stock of the corporation was divided into shares of the par value of one dollar each and that the various defendants had subscribed for and were the owners of certain numbers of shares for which no more than twenty-five cents per share had been paid, the balance of seventy-five cents per share being still unpaid and subject to the payment of plaintiff’s judgment. Of the various defendants, R. M. Armour was alleged to be the owner of eleven thousand shares and R. W. Kemp of six thousand shares. The judgment went in favor of the plaintiff against all the defendants. Armour and Kemp appeal from the judgment. As they are the only appellants, the situation of the other defendants need not engage our further attention.

The two appellants answered jointly. They denied, among other things, that any sum remained unpaid on account of their stock. The court found in favor of the plaintiff on all the issues, the finding on the immediate point-just referred to being that Armour was the owner of eleven thousand shares of stock, for which no more than twenty-five cents per share had been paid, and upon which there was unpaid and subject to the payment of the corporate debts and of plaintiff’s judgment the sum of eight thousand two hundred and fifty dollars. With respect to Kemp the finding is similar except that the number of shares owned by him was

[789]

six thousand shares and the balance of the subscription price found to be unpaid was four thousand five hundred dollars. These findings, so far as they relate to the amount paid in on the stock, are attacked as unsustained by the evidence. We think the objection is well founded.

The Marine Power and Electric Company was organized in June, 1907, with a nominal capital stock of one million dollars, divided into one million shares of the par value of one dollar each. Some two months theretofore a corporation known as the Bancroft-Compton Realty Company had been organized. The last named corporation had secured from the government of the United States and other governments patents for a device to utilize the power of ocean waves. On June 8,1907, its directors, at a meeeting regularly held, adopted a resolution that the Bancroft-Compton Realty Company enter into negotiations with the Marine Power and Electric Company “whereby they receive sixty thousand shares of the Marine Power and Electric Company’s stock, in payment for the sole rights to use the said Bancroft-Compton Realty Company’s wave motor in the five counties, viz., Los Angeles, Orange, San Diego, San Bernardino and Riverside, and furthermore that they receive five per cent of the gross income of all plants erected by the said Marine Power and Electric Company within the five above-named counties.” This proposal was made to the directors of the Marine Power and Electric Company, and was by them accepted. Pursuant thereto a written contract between the two corporations was executed on July 10, 1907. This agreement provides that Bancroft-Compton Realty Company “in consideration of the transfer to it of sixty thousand shares of the capital stock of the said Marine Power and Electric Company, and in consideration of the said Marine Power and Electric Company agreeing with the said Bancroft-Compton Realty Company to pay to the said Bancroft-Compton Realty Company five per cent of the gross income of any plant or plants that may be erected under the said patents by the said Marine Power and Electric Company” agrees to assign, sell and transfer to the Marine Power and Electric Company the exclusive right to use the said patents in the five counties above mentioned.

Harrison v. Armour

AI Brief

Synopsis

SLOSS, J.

More from California Supreme Court

Related research

AI Brief