matter. The promoter is in such case held liable not because he took the shares in fraud of the rights of the corporation or its subscribers, but because the shares were issued to him without consideration, in violation of the statute, and in fraud of the rights of the creditors of the corporation. The promoter's liability for secret profits and his liability as the holder of unpaid shares are quite distinct. The promoter might, though his shares were full paid because actually issued for property equal to the face value thereof, still be liable to account therefor to the corporation; for the fact that the property conveyed by the promoter was actually worth the price which the corporation was made to pay therefor, does not affect the promoter's liability for secret profits.34 A situation might on the other hand arise in which the promoter would be liable to the creditors because of the issue to him of shares for less than the face value thereof, but could not be made to account for secret profits, either because his profits were fully disclosed,35 or because there were no innocent subscribers, 36 or because he did not, in fact, make any profit. 33 In Arnold v. Searing,37 the promoters had received $400,000 in bonds and $3,000,000 in stock, under such circumstances that the court held the securities so received to represent an unlawful profit. The court, considering the value at which the shares were to be charged to the promoters, said: "It would not be just or reasonable to charge any of the defendants with the par value of the share capital taken by them, for the reason that all the syndicate subscribers who became shareholders in the new com 33. Bigelow v. Old Dominion Copper, etc., Co., 74 N. J. Eq. 457, 503, 71 Atl. 153; Carling's Case, L. R. 1 Ch. Div. 115. And see post, § 270, see also ante, § 100. 34. See ante, § 100. 35. See ante, §§ 109-116. 36. See ante, §§ 120-130. See for example, Spangler Brewing Co. v. 37. 78 N. J. Eq. 146, 163, 78 Atl. 762, 769. Cf. Richard Hanlon Millinery Co. V. Mississippi Valley Trust Co., 251 Mo. 553, 158 S. W. pany considered the stock to have no actual value, and that it was purely and simply a bonus in which all the stockholders participated. The shareholders who are complainants in this suit, received their shares upon this basis. As syndicate subscribers, they were entitled to bonds at ninety-five per cent. This amount they put in in cash, and the stock was a mere gratuity. All the stock stands on this footing. The complainants and the company are thus estopped from asserting the invalidity of the stock, and inasmuch as there do not appear to be any creditors, the receivers are estopped also.38 I, therefore, think that there should be no accounting for any of the stock profits which were made by the promoters." The actual decision of this case was no doubt correct upon the particular facts, as the shares in question apparently never had any value, and the company was, at the time of the trial, insolvent and in the hands of a receiver. If, however, the court meant to lay down a rule that a promoter cannot be called to account for a secret profit taken in the shares of the corporation if the remainder of the share capital was issued as a bonus to the subscribers for the bonds, such a rule is wrong in principle and cannot be approved.39 The fact that the shares were used to make the bonds salable, does not prove that the shares were considered valueless, and the fact, if it were a fact, that the shares were wholly valueless, would not justify their taking by the promoter.40 § 166. Remedies when promoter's profit is taken in bonds, or other obligations of the corporation. If the unlawful profit of the promoter is taken in the bonds, 38. Citing 2 Clark & Marshall on Corporations, § 398; Knoop V. Bohmrich, 49 N. J. Eq. 82, 23 Atl. 118, affirmed, sub nom. Bohmrich v. Knoop, 50 N. J. Eq. 485, 27 Atl. 636; Breslin v. Fries-Breslin Co., 70 N. J Law 274, 58 Atl. 313. 39. See ante, § 133, and see Krohn v. Williamson, 62 Fed. Rep. 869, 877 affirmed, sub nom. Williamson v. Krohn, 66 Fed. Rep. 655, 13 C. C. A. 668, 31 U. S. App. 325. See also post, § 245. 40. See ante, § 133. notes, mortgages, or other obligations of the corporation, a court of equity will at the suit of the corporation cancel the same, unless the obligations sought to be cancelled are securities of a negotiable character and in the hands of bona fide holders.41 If obligations of the corporation wrongfully taken by the promoter have come into the hands of bona fide purchasers for value, a court of equity may, even though the obligations are non-negotiable in character, refuse a cancellation in toto if the guilty promoters would, as stockholders of the corporation, be the principal beneficiaries of the cancellation.42 The corporation may, instead of bringing suit for the cancellation of its obligations, remain passive and resist the payment thereof on the ground of fraud or lack of consideration.48 41. Ex-Mission Land & Water Co. v. Flash, 97 Cal. 610, 32 Pac. 600; California-Calaveras Mining Co. v. Walls, Cal. 149 Pac. 595; Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 51, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1133-1134; Colton Improvement Co. v. Richter, 26 N. Y. Misc. 26, 55 Supp. 486; See v. Heppenheimer, 55 N. J. Eq. 240, 36 Atl. 966, affirmed, sub nom. Naumberg v. See, 56 N. J. Eq. 453, 41 Atl. 1116. If the bonds are not negotiable, a bona fide purchaser stands in no better position than his transferor. Midwood Park Co. v. Baker, 128 N. Y. Supp. 954, affirmed, 144 N. Y. App. Div. 939, 129 Supp. 1135, affirmed, 207 N. Y. 675, 100 N. E. 1130. But see following note. 42. In Hyde Park Terrace Co. v. Jackson Bros. Realty Co., 161 N. Y. App. Div. 699, 146 Supp. 1037, a mortgage had, without the knowledge of the subscribers, been given to the promoters to enable them to reap secret profits. The corporation, upon discovering the fraud, brought suit for the cancellation of the mortgage which had, in the meantime, come into the hands of bona fide purchasers for value. The stock of the corporation was, to the extent of $67,000, held by persons who were privey to the fraud, and to the extent of not more than $48,000 by defrauded subscribers. A cancellation of the mortgage would have inured largely to the benefit of the tort feasors. The court said that such a result was abhorrent to every conception of equity, and adjudged that the cancellation of the mortgage should be refused if the holders thereof would pay to the corporation for distribution to the innocent subscribers an amount equal to the subscriptions paid by such subscribers. That in the event that such sum should not be paid to the plaintiff within six months, the mortgage would be cancelled. 43. Federal.-In re Wyoming Val The burden is upon a person holding the securities by assignment from the promoters, to prove that he is a bona fide holder for value.44 45 In Ex-Mission Land & Water Co. v. Flash," a mortgage held by the promoters and constituting a part of their illegal profits was foreclosed, the mortgaged property bought in by the promotors and a deficiency judgment entered against the corporation before it discovered the facts. The court, in an action brought by the corporation, set aside the decree of foreclosure and the deficiency judgment, and cancelled the notes and mortgage upon which the decree and judgment were founded. In See v. Heppenheimer,46 the receiver of a corporation was allowed to maintain an action against the bondholders to determine which of the bonds that had been issued to the promoters ley Ice Co., 153 Fed. Rep. 787, affirmed, sub nom. Wiegand v. Albert Lewis Lumber & Mfg. Co., 158 Fed. Rep. 608, 85 C. C. A. 430. Arkansas. Tegarden Brothers v. Big Star Zinc Co., 71 Ark. 277, 72 S. W. 989. New York.-Campbell v. Cypress Hills Cemetery, 41 N. Y. 34; Midwood Park Co. v. Baker, 128 N. Y. Supp. 954, affirmed, 144 N. Y. App. Div. 939, 129 Supp. 1135, affirmed, 207 N. Y. 675, 100 N. E. 1130. Oregon.-Johnson V. Sheridan Lumber Co., 51 Or. 35, 93 Pac. 470. Pennsylvania.-Rice's Appeal, 79 Pa. 168, 203-204. United Kingdom and Colonies.In re Imperial Land Co. of Marseilles, L. R. 4 Ch. Div. 566. 453, 41 Atl. 1116; Baker v. Guarantee Trust & Safe Deposit Co., 31 Atl. 174; Colton Improvement Co. V. Richter, 26 N. Y. Misc. 26, 32, 55 Supp. 486, citing Jewett v. Palmer, 7 Johns. Ch. (N. Y.) 65, 11 Am. Dec. 401; Jackson v. McChesney, 7 Cow. (N. Y.) 360; Weaver v. Barden, 49 N. Y. 286, 297-299; Seymour v. McKinstry, 106 N. Y. 230, 239-242, 12 N. E. 348, 14 N. E. 94; Duffus v. Howard Furnace Co., 8 N. Y. App. Div. 567, 572, 57 St. Rep. 320, 4 Supp. 925; McGuire v. Hartford Fire Ins. Co., 7 N. Y. App. Div. 575, 591, 592, 40 Supp. 300. 45. 97 Cal. 610, 32 Pac. 600. 46. 55 N. J. Eq. 240, 36 Atl. 966, affirmed, sub nom. Naumberg v. See, 56 N. J. Eq. 453, 41 Atl. 1116. See also See v. Heppenheimer, 69 N. J. Eq. 36, 61 Atl. 843, and compare Hyde Park Terrace Co. v. Jackson Bros. Realty Co., discussed in note 42, supra. without consideration were held by bona fide holders for value, so that it might be ascertained upon how many bonds the company was actually liable. In Dickerman v. Northern Trust Co., the Supreme Court of the United States, considering the same transaction, held that the fact that some of the bonds were owned by promoters claimed to be liable to the debtor corporation for secret profits received, was not a ground for refusing a decree of foreclosure of the trust mortgage by which the bonds were secured, a large part of the bonds being in the hands of bona fide holders. The court said that there might, when the bonds were presented for redemption from the proceeds of sale, be an inquiry as to their validity in the hands of the then holders. The fact that a promoter has been guilty of taking a secret profit upon the promotion, does not prevent him, except in so far as subject to a set-off, from enforcing his lawful claims against the company. § 167. Remedy of rescission. The one remedy against promoters guilty of selling their property to the corporation without a sufficient disclosure of the facts, the existence of which has never been questioned, is the remedy of rescission. Whether the property sold to the corporation was owned by the promoters before the fiduciary relation was assumed, or whether it was acquired by them after they had entered upon the organization of the company, the sale thereof to the corporation without a proper disclosure of the facts 49 is in either case a fraud and subject to rescission at the election of the corporation. The cases in which the remedy of rescission has been resorted to are, for the most part, cases in which the promoters ac 47. 176 U. S. 181, 206, 20 Sup. Ct. 311, 44 L. Ed. 423. 48. Jordan v. Annex Corporation, 109 Va. 625, 631, 64 S. E. 1050, 1052, 17 Am. & Eng. Ann. Cas. 267; Lomita Land & Water Co. v. Robinson, 154 Cal. 36, 51-52, 97 Pac. 10, 18 L. R. A. N. S. 1106, 1133–1134. 49. As to the disclosure to be made, see ante, §§ 112-116. |