Opinion
01-08-1908
CENTRAL CONSUMERS' WINE & LIQUOR CO. v. MADDEN. SAME v. FALLAIIEE.
John M. Enright, for complainant in each cause. William D. Edwards and M. T. Rosenberg, for defendants.
Bills by the Central Consumers' Wine & Liquor Company against John F. Madden and against Richard J. Fallahee. Decree for complainant.
John M. Enright, for complainant in each cause. William D. Edwards and M. T. Rosenberg, for defendants.
PITNEY, Advisory Master. The object of these two bills is (1) to set aside and avoid two several contractual resolutions adopted by the board of directors of the complainant on the 24th day of July, 1002; and (2) to cancel and declare void certain shares of stock issued to the defendants above named severally in pursuance of those resolutions. The principal facts in the case are not disputed, though the evidence, both oral and documentary, is quite voluminous. I shall endeavor to condense and abbreviate the facts as I find them as much as practicable, all of which I find set forth with commendable accuracy and clearness in the written argument of the counsel for the complainant.
The complainant is a corporation of the state of New York, and the transactions involved must be determined by the laws of that state. Jurisdiction over the individual defendants was acquired by service of process upon them, they being apparently residents of this state. Prior to the fall of 1901 one Max Levy was a wholesale liquor dealer in the city of New York, and seems to have conceived the Idea of forming a corporation whose stockholders should be composed exclusively of retail liquor dealers, for the purpose of co-operation among the stockholders in the purchase of their liquors. For that purpose he induced eight other retail liquor dealers to unite with himself in forming the complainant corporation. Of those eight, six were engaged in business in Jersey City in this state and two in New York. The latter were brothers, named, respectively, Stephen and Michael McFarland. Of the six in New Jersey the defendant Fallahee was one; the names of the others are unimportant. The certificate provided for a capital of $25,000. The essential element in the success of the project was the procuration of subscriptions to the capital stock by retail liquor dealers, and this was a matter of canvassing. The original projectors were not very successful. As an inducement to stockholders the vicious and indefensible plan was adopted of issuing a share of stock with a par value of $100 for $50 paid in cash. Besides this, 5 per cent. on the share of stock—10 per cent. on the amount of cash paid in—was allowed to the canvasser who procured the subscription; and in addition thereto for every 10 shares that the canvasser procured he was to have 1 share issued to himself. A few thousand shares of stock were procured in this way, and some money paid into the treasury, but not sufficient to warrant the launching of the business by the opening of a store and undertaking to sell. In this state of affairs in the spring of 1902 Mr. Levy was introduced by one Colahan to the defendant Madden, who was an extensive and influential retail liquor dealer in Jersey City, owning and operating two or three retail saloons in that city, and also being an influential member of the retail liquor dealers' association of New Jersey. About the time that the introduction to Madden took place, Levy swears that, at a meeting of the then board of directors, he was authorized by a regular resolution to offer Mr. Madden $5,000 for his influence and assistance in promoting and launching the corporation. The authorization thus put forward by the defendants is denied by the complainant and the minutes of the corporation are produced and no such entry is there found. The minutes were in fact kept and written out by Mr. Levy's clerk and salesman Mr. Loutney. The making of any such resolution is positivelydenied by several of the directors, and especially Mr. Stephen McFarland, who was the secretary, and signed the minutes. In this, and in several other less important matters, Mr. Levy and the defendant Madden, on the one hand, and Stephen McFarland, on the other, conflict in their evidence, and I may as well here say, once for all, that I find the evidence of McFarland more nearly to correspond with the documentary evidence in the cause and the admitted circumstances than that of Mr. Levy and Mr. Madden. Moreover, McFarland's manner on the stand was such as to impress me with his intention to testify truly, while Mr. Levy's manner was that of an interested witness inclined to exaggerate. However, as to the particular question whether any such resolutions as that asserted by Levy of authority to him to offer Madden $5,000 for his influence and assistance in promoting the company is involved, I am by no means sure that the matter may not have been talked over between Levy and some of the directors, but I find, as a matter of fact, that no formal or binding resolution of that kind was ever passed. Returning to the interview or interviews with Mr. Madden previously referred to, I find that Madden did interest himself to some extent in the way of promoting the growth of this corporation. He did talk it up where occasion presented itself, but not to the extent, as testified to by himself and Mr. Levy, and which I may have occasion to refer to again. Madden became a stockholder for a small amount, and on the 1st day of July, 1902, a meeting of the stockholders was called, and was adjourned over to the 10th day of July, which was attended by Madden and, apparently, by all of the stockholders. At that meeting the capital stock was formally increased to $.100,000, and certain by-laws were adopted. One was that no stockholder should own more than 50 shares of stock, and another one was that stock should not be transferred to any new stockholder without the consent of the company. At that meeting the old board of directors resigned, and a new board was elected as follows: Madden, Kelaher, Fallahee, S. McFarland, M. McFarland, O'Melia, Boller, Doutney and Levy. At the meeting of this board of directors, held on the same day Madden was elected president; Kelaher and M. McFarland, vice presidents; Fallahee, treasurer; and Doutney, secretary. The next meeting was on July 24, 1902, at which the nine directors were present, and at this meeting the obnoxious resolutions were passed. They were undoubtedly prepared in advance by counsel employed by Mr. Levy. It is quite manifest that all of these gentlemen were somewhat illiterate and incapable of preparing such a set of resolutions.
The president, Mr. Madden, stated "that the meeting was called for the purpose of transacting special business, and principally to make a change in the condition of disposing of the stock." Then, after debating the matter, Levy made the following motion, and Fallahee seconded it: "Thereafter all stock subscribed for must be paid in full at par, but stock already issued at fifty cents on the dollar could stand." Then comes a motion by McFarland. seconded by Boiler, as follows: "That $50,000 of the capital stock be placed at the disposal of a committee of three, to be used for such purposes as may be in the interest of the corporation, and that part of this $50,000 shall be used as a bonus to the subscribers of the first $50,000 of stock, excluding from this amount the capital stock subscribed for before this meeting." The result of the adoption of these resolutions was to give in substance to new subscribers the same bonus that had been given to previous subscribers up to the extent of $50,000. Then Madden, Kelaher, and Levy were appointed a committee to dispose of this $50,000 of stock, and the trust was accepted by them.
Now come the resolutions aimed at by the bill, as follows: "On motion of Max Levy, seconded by Messrs. Boiler and Stephen McFarland, it was unanimously adopted to pay to Messrs. John F. Madden, Philip Kelaher, B. J. Fallahee, and Wm. Doutney, each the sum of $5,000 for their services rendered in organizing and promoting the Central Consumers' Wine & Liquor Co. with the condition that this amount will not be paid out, only after the first $100,000 of the capital stock of the Central Consumers' Wine & Liquor Co. will have been subscribed for, and that Messrs. Madden, Kelaher, Fallahee, and Doutney will each subscribe for $5,000 of the capital stock of the Central Consumers' Wine & Liquor Co. immediately after the first $100,000 of the capital stock will have been subscribed for." "On motion of Philip Kelaher, seconded by Messrs. Fallahee and Doutney, and unanimously adopted, it was resolved to pay to Messrs. O'Melia, M. McFarland, S. McFarland, F. Boiler, and Max Levy each the sum of $5,000 for their services in organizing and promoting the Central Consumers' Wine & Liquor Co., with the condition that this amount will not be paid out, only after the first $100,000 of the capital stock of the Central Consumers' Wine & Liquor Co. will have been subscribed for, and that Messrs. O'Melia, M. McFarland, S. McFarland, F. Boiler, and Max Levy will each subscribe for $5,000 of the capital stock of the Central Consumers' Wine & Liquor Co. immediately after the first $100,000 of the capital stock will have been subscribed for."
The object of splitting the resolution into two parts is manifest. The first resolution benefited only four of the nine directors and left five apparently disinterested to vote for it; and Madden and Levy's clerk Doutney were included in it. The second resolution covered the other five directors, including thetwo McFarlands and Levy, and could only be voted for by four who were apparently disinterested. But it is easy to infer that Levy felt safe in the amount awarded to his clerk Doutney by the first resolution. The object of the resolution is quite plain. It was not to create an indebtedness of $5,000 to each of those men, but to give them a bonus in stock in case the company succeeded in acquiring the competent number of stockholders, who should be retail liquor dealers, to insure its success, and warrant it in incurring the expense of starting actual business. It is hardly necessary to cite any of the numerous authorities in the state of New York cited by counsel for the complainant to sustain the proposition that these resolutions were absolutely void, and without any contractual force whatever or value for any purpose. There is not the least evidence that they were made known to any of the large number of persons who afterwards became stockholders in good faith in this company. They were a palpable and indefensible fraud on each and every one of those future stockholders, which it would be monstrous for this court to give the least countenance to. The shares of stock at which the bills are aimed were issued by virtue of these resolutions, but not until after the conditions had been performed.
Counsel for the defendants, in their very ingenious argument, hardly attempted to sustain the resolutions, but rested their defense on a suggestion made by the court during the production of the evidence, to wit, that the complainant was here asking equity, and it must do equity; and if the defendants herein had really rendered any valuable services to the complainant for which they were entitled to payment, and had not been paid, it might be that although the resolutions as originally adopted were at that time absolutely void, yet that the court would not grant relief except on the terms of the just compensation to the defendants. Acting upon that suggestion, the defendant Madden attempted to sustain the grant of the stock to him, and he put forward two classes of services that he rendered.
First, services in canvassing and commending the enterprise privately and publicly. The services in canvassing for stockholders, it seems to me, were greatly exaggerated by the testimony of Madden and his witness Levy.
Second, his services as president of the company for two years or more. With regard to his services as canvasser—the complainant replies and proves that provision was made for an accurate account to be kept, and an accurate account was kept, of the parties who procured subscriptions for new stockholders and the stockholders procured by each, and this account was produced, and shows, in detail, just what persons did produce stockholders and the numbers and amount of the subscriptions of each; and that the amount of stock and number of stockholders procured by Mr. Madden were duly credited to him, and he was paid therefor according to the rule of compensation adopted at the beginning of the enterprise. These accounts of stockholders secured appear to have been criticised by the several canvassers, and changes made and errors corrected, and the amount due to Madden seems to have been ascertained with care. The check of the company to his order dated the 30th day of June, 1904, for $205, indorsed by him, with the bank's cancellation mark upon it, was produced as proof that he did receive pay for his services in canvassing for subscribers to the stock, precisely as the other canvassers were paid. And this is not denied by the defendant. Besides, it abundantly appears that the number secured by him was quite small in comparison with the number secured by other canvassers. To account for this difference it was alleged and argued that many of those whom he accosted and argued with and advised to become stockholders, but who did not subscribe through his personal action, nevertheless, as a result of his persuasion, finally became stockholders at the personal solicitation of other canvassers. I am unable to find any sufficient support of this position in the evidence. Madden seems to have been sufficiently alert in securing his commissions on the individual subscribers which he did bring in, and the time to make claim to any others has long since passed. In fact, I do not find that he named any individuals whom he influenced, and the percentage on whose subscription was credited to some other canvasser.
The simple truth with regard to this aspect of the case is that Madden may have been, as he claims to have been, a prominent man in the liquor trade in Jersey City, and he may have had a wide influence, and the fact that he had become a stockholder in this company and president of the board of directors, and that he approved of the enterprise, may have had a strong influence in promoting its success. But I am not ready to admit that such influence and such use of his name constituted any consideration for the issue of stock to him. No authority was produced for the position that a man of influence in the business world—or as in England in the social world—may sell for a pecuniary consideration the benefit of his good name and his approval of an enterprise to any corporation. I find, then, no consideration for the issue of this stock in special services rendered by Madden in the promotion and organization of the company.
We have then left to deal with his services as president. It is quite clear, and it was admitted by the defendants, that no salary was ever named for those services either by the board of directors or by the stockholders. The general understanding undoubtedly was that he was serving without compensation. Under those circumstances counsel for the defendantsadvances and produces abundant authority to support the position that there can be no recovery on a quantum meruit. Here, again, I have to remark that the amount of the services rendered by Madden were greatly exaggerated by his witness. He met occasionally with the directors in New York City and advised with them about the conduct of their business; assisted them perhaps at the start in procuring credit to purchase goods; signed checks and other documents which were usually brought over to him in his place in Jersey City. He never neglected his own business for the performance of his duties as president. He never set aside any particular part of his time to be devoted to it. The enterprise did not become successful until the early part of the year 1903. From that time on it was successful, and in the summer of 1903 three additional or new directors were introduced. These were told that they should receive this $5,000 bonus as soon as the original nine should receive it; and stock was actually issued to them. Here, again, a palpable fraud was practiced on the general stockholders.
Later on, the exact period is not fixed, some of the directors to whom stock under those old resolutions had been recently issued after, of course, the conditions therein named had been fulfilled, began to feel that they were not justified in accepting it and holding it, and after several casual talks about it among themselves they consulted counsel, a Mr. Hudson, and stated to him the circumstances. He expressed the opinion that the issue of stock under those resolutions was undoubtedly invalid. The result was that at a meeting of the board of directors on the 21st day of July, 1904, with Madden in the chair, the opinion of Mr. Hudson was made known, and a resolution was adopted as follows: "On motion of H. Wuifers (a new director) duly seconded by M. Finnegan, that the thirty shares of stock which has been illegally issued to the following named directors be returned by them"—and then follows the name of each director, 11 in number, including the defendants Madden and Fallahee, with the numbers of shares of each—"and that the same returned stock be properly placed on the books of the company as assets of the company, and to be considered as treasury stock of the company." Carried. Madden, who presided, swears that no such resolution was put or adopted, and in this he is supported by Levy, who, however, was not present, and who evidently confounds this meeting with a subsequent meeting in which the return of these shares of stock was discussed, but no action taken thereon. Now Madden's denial is neutralized not only by the minutes themselves in writing on the books of the company, but by the evidence of several other directors who were present. In pursuance of that resolution the majority of the directors surrendered their certificates of stock covered by it, but the defendants declined so to do, and on October 12th an awkward resolution was passed in these words: "Moved, seconded, and carried that the stock held by Martin O'Melia, Max Levy, Frank Boiler, Richard J. Fallahee, and John F. Madden an injunction be placed restraining these gentlemen from making any use of said stock." Shortly after that date difficulty arose between the corporation and Madden and O'Melia on account of Madden accepting the presidency of a rival corporation, and O'Melia accepting a directorship in said corporation, which resulted in the resignation of Madden.
I have, as before stated, come to the conelusion that granting these defendants' right in this case to the benefit of the maxim that he who seeks equity must do equity, yet the defendants had not made out a case against the complainant based on meritorious and valuable services.
But another consideration here intervenes, and that is this: Granting that valuable services were rendered, were they rendered under such circumstances as to give the defendant a footing in this court? I conceive that the claim set up by a defendant under the maxim invoked must in itself be equitable and free from taint of fraud or other inequitable element. Such was the case of Gardner v. Butler, 30 N. J. Rq. 702. There, the services were rendered in good faith in the regular course of business, and were not only valuable, but necessary for the actual and regular business of the corporation, and the transaction was untainted by any actual fraud. The sole defect in the contract under which they were rendered was that it was made between the directors themselves, and therefore Illegal. Here the contract was not only technically illegal, but inherently fraudulent and dishonest. Hence, it seems to me that whatever was done in pursuance of it cannot avail the defendant, although it may have been in some respects beneficial to the company.
For all these reasons, I think that the complainant must have a decree substantially as prayed for in its bill in each cause.