Opinion
11-24-1906
HONEYMAN v. HAUGHEY et al.
E. Q. & G. M. Keasbey, for complainant. Frank H. Hall, for defendant Louis C. Haughey.
Bill by A. Van Doren Honeyman, receiver, etc., against Louis C. Haughey and others. Decree for complainant.
E. Q. & G. M. Keasbey, for complainant. Frank H. Hall, for defendant Louis C. Haughey.
BERGEN, V. C. Being so well satisfied that the complainant is entitled to a decree in this cause, I will not call upon counsel for the complainant to make any argument. The situation, as it appears to me, is this: A large plant had been erected near Bound Brook, in this state, for the manufacture of gelatine, under some foreign patent which had been reissued in the United States. It had been exploited for three or four years, by different companies and parties, without any success. The property was incumbered by a mortgage amounting to $125,000, and, that mortgage being foreclosed, the property was sold and purchased, presumably by the mortgagee, for about $125,000 or $130,000. In some way which does not appear in this cause, the title to the property became vested in a Mr. Wallace, who, it appears from the evidence, was a clerk or partner of some law firm in New York City which represented the persons interested in the mortgagee company. While matters were in that situation, the present company, the New Jersey Gelatine Company, was organized, and Mr. Wallace in writing offered to sell the property to that company. The price which he fixed was $1,125,000. The $125,000, manifestly, was added to represent the amount due on the mortgage or the value of the real estate. The $1,000,000 is supposed to take the place of the patent, and it is argued here that the patent was worth the $1,000,000.
I am not satisfied, from the evidence in this cause, that it was worth any such sum of money. It was a patent, which, after years of exploitation, had proven unsuccessful, atleast none of these parties had ever been able to keep the plant in the shape of what we would call a "going concern," and this was manifestly a scheme devised to have this stock issued and divided among these stockholders, because Mr. Haughey, the leading defendant, the only one who has answered here, and on whose behalf it has been strongly argued that it was worth a great sum of money, and that $1,000,000 was not an excessive valuation, turned over to the company nearly one-half of the capital stock issued to him, which he would not have done if the patent had belonged to him and was of the value which he said it was. It is in evidence that this stock was turned back to the treasury according to some understanding or agreement, which understanding or agreement has not been developed by the defendants in this cause; none except Mr. Haughey having answered, and he not being present. If a proceeding of this kind can be sanctioned by the court, it would be a very simple matter for all stockholders to avoid payment for capital stock issued to them. The principle is well established that the capital stock of all these companies is a trust fund for the payment of creditors. The creditor who deals with the company has no knowledge of nonpayment of stock subscriptions, and deals with the company upon the assumption that this company had valuable assets amounting to $1,125,000, which in this case is not true. They did not have any such property, and the persons who trusted them on that understanding trusted them upon the theory that the officers of the corporation had done their whole duty, had collected the assessments on the stock, and they are now entitled to call upon these stockholders, who had not paid for the stock, to contribute a sufficient sum to liquidate the indebtedness of the company. In the Court of Errors and Appeals, in Volney v. Nixon, 60 Atl. 189, 68 N. J. Eq. 605, Judge Dixon discusses this subject very thoroughly. That was a case where stock was issued for patents, and he held that, as there was no such value to the patent as the parties ascribed to it, it was a mere scheme to procure the issuing of stock, without the payment of money. The corporation laws of this state are liberal, just as liberal I think as they should be, and the courts of the state are not disposed to add to the scope of the corporation act. When parties incorporate, and take stock in corporations, they must either pay money or give money's worth therefor.
In this case, there was not a single stockholder or director of this company that would have been willing to have bought this patent at a quarter of what they now say the stock was issued for it. To my mind, it is a perfectly clear case of the overissue of stock, or rather the issuing of stock for property at a gross overvaluation. You may take a decree in this cause, declaring the contract between the company and the stockholders, that this stock was issued as fully paid stock, set aside, because it was a fraudulent contract; it never was fully paid. And in the decree there shall be a direction to the receiver to collect a sufficient sum of money to pay the debts, and the expenses of the administration of the estate; that amount must be fixed in the decree. I understand, from the evidence produced before me, that there is $48,156.03 of unpaid indebtedness. You may add to that amount, for the expense of the administration of the estate, $1,000, which amount will probably be sufficient to cover the costs and to pay the receiver, perhaps not a very large, but partial, compensation.
I will advise a decree drawn on the lines suggested.