Opinion
No. 25576
Decided May 20, 1936.
Banks and banking — Liquidation — Employee's agreement to purchase bank stock, not contingent subscription — Contract to repurchase stock not enforceable after insolvency — Payments upon subscription not general or preferred claim.
ERROR to the Court of Appeals of Cuyahoga county.
Plaintiff in error will hereinafter be referred to as the Superintendent of Banks, and defendant in error as plaintiff.
This is an action by a former employee of The Guardian Trust Company, now in liquidation, brought on behalf of himself and other employees of such bank similarly situated, against the Superintendent of Banks in charge of liquidation, for the allowance of his claim for preference, for money paid pursuant to the provisions of the following written instrument:
"$2000. Cleveland, Ohio, February 15, 1929.
"In monthly payments after date as stated below, for value received, I promise to pay to the order of
"THE GUARDIAN TRUST CO., "Cleveland, Ohio, "Two Thousand no/100 Dollars,at the office of said Company, with interest at the rate of six per cent, per annum, or such other rate as the Trustees hereinafter mentioned may be able to secure, payable quarterly on the 1st days of January, April, July and October.
"Said principal and interest is payable by deducting from my salary on the 15th day of each month an amount equal to Three ($3.00) Dollars per share, and I hereby authorize The Guardian Trust Company to make such deductions from my salary until said loan is paid in full.
"And as security for the re-payment of this loan, I hereby sell, assign, transfer and set over to said The Guardian Trust Company eight shares of the capital stock of said The Guardian Trust Company and all dividends declared or to be declared thereon, hereby authorizing said Company to apply all such dividends towards the payment of interest and principal of said loan, and I hereby assign and set over to said Company all such dividends for the uses and purposes aforesaid; hereby reserving to myself the right to make additional payments from time to time on the 15th day of any month if I so desire.
"And I hereby agree that in consideration of having secured said stock as an employee of said The Guardian Trust Company at the reduced price of Two Hundred and Fifty ($250.00) Dollars per share, that said stock shall be held for me in negotiable form for a period of five years from February 15, 1929, under the control of a Trustee, who shall be The President of The Guardian Trust Company and voted by said Trustee, and in the event of my ceasing to be an employee of said The Guardian Trust Company prior to February 15th, 1934, I or my estate shall receive back in cash from said Trustee the full aggregate amount by which this note has been reduced, whereupon my right, title and interest in said stock shall cease and said stock shall be thenceforth subject to control and disposition by the President for re-allotment.
"When and so soon as the loan evidenced hereby has been paid in full all dividends payable upon said stock shall be thenceforth payable to me; and upon the expiration of the five years aforesaid, I shall be entitled to delivery and possession of said stock upon full payment of this note.
"H.E. Rafferty."
The record discloses that:
On January 15, 1929, The Guardian Trust Company put into effect a plan permitting its employees to acquire capital stock in the bank, under which plan plaintiff purchased eight shares of stock at $250 per share, in connection with which he executed the above quoted instrument.
It appears that 175 or more employees had signed and executed like instruments, and that a total of 1302 shares were thus allotted to them and issued in the name of J.A. House, President of The Guardian Trust Company, who was in the instrument designated as trustee.
Following the execution of the above quoted instrument, there was deducted from the wages of plaintiff, and from those of each of the other employees executing similar instruments and remaining in the employ of The Guardian Trust Company, $3 per month for each share of stock allotted, respectively; that the amounts so deducted from the wages were transferred to a "Sundry Trust No. 1446" and entitled "Employees' Stock Purchase."
On June 29, 1929, four and one-half months following the execution of such instrument, 1302 shares, representing the total number of shares allotted to plaintiff and other employees who had signed like instruments, were issued in the name of J.A. House, without further designation. On July 1, 1929, J.A. House borrowed from the Bankers Trust Company of New York an amount of money sufficient to pay The Guardian Trust Company in full for these shares of stock, and delivered to the Bankers Trust Company of New York all of such stock certificates as collateral, and paid into The Guardian Trust Company the proceeds of such loan. The Guardian Trust Company, acting for the employees and the trustee, collected $3 per month per share and deposited the same in the Sundry Trust No. 1446, and remitted to the Bankers Trust Company of New York the amount thus collected, plus the dividends received on the stock to meet the interest and principal payments required under the loan. In the instrument executed by the employees they promised to pay interest at the rate of six per cent, or such other rate as the trustee may be able to secure in the procurement of the loan. The trustee paid first 6 per cent, then 5 1/2 per cent, and later 5 per cent, and the employees were given the benefit of the reduction.
All dividends declared on the stock were credited to the accounts of the employees.
On June 15, 1933, the Superintendent of Banks for the state of Ohio took possession of all of the assets and property of The Guardian Trust Company and proceeded to liquidate the same in accordance with the statutes of the state of Ohio, and thereupon The Guardian Trust Company ceased to do business as a banking institution.
The assets and property of The Guardian Trust Company coming into the hands of the Superintendent of Banks included the "Sundry Trust No. 1446," aggregating $207,861.45, representing the aggregate amounts by which the various obligations of the bank's employees had been reduced under the written instrument above referred to.
Plaintiff, in his petition, alleged that:
"The assets and property of The Guardian Trust Company coming into the hands of this defendant as Superintendent of Banks, included the sum $207,861.45, which was the sum of the amounts by which the various obligations of its employees under the agreement above referred to had been reduced, after crediting upon each note the amount of $3 per share per month of employment and the amount of dividends payable upon the said shares of stock, less interest charged on said note. In this plaintiff's case the amount by which his note had been reduced was $1252.91, by which amount the cash and cash items passing into the hands of the defendant upon the taking over of the assets of the said Guardian Trust Company as aforesaid were increased."
Plaintiff further alleged that when "* * * The Guardian Trust Company ceased to do business as a banking institution, and this plaintiff and all other of the employees of The Guardian Trust Company similarly situated (excepting such as had theretofore ceased to be employees of said Guardian Trust Company) then ceased to be employees of The Guardian Trust Company."
Plaintiff further alleged that, "Upon cessation of the relationship of employee between this plaintiff and The Guardian Trust Company, the contingency upon which his agreement as to the said stock had been made ceased and failed, * * *. Plaintiff says that he has made demand upon The Guardian Trust Company and defendant, Ira J. Fulton [now S.H. Squire] Superintendent of Banks, for the said sum of $1252.91, with interest thereon from the 15th day of June, 1933, which demand has been refused."
In his prayer, plaintiff asked that "said sum of $1252.91 and interest as aforesaid be held and declared to be a valid claim in his favor against The Guardian Trust Company and the assets in the hands of the defendant, Ira J. Fulton, and be held and declared to be a preferred claim with preference over the claims of creditors of all other classes, and that the said Ira J. Fulton, as Superintendent of Banks liquidating the said Guardian Trust Company, be required to allow said claim and to allow it as a preferred claim, and upon liquidation to pay said amount to plaintiff in preference to the claims of all other classes of creditors."
In the Court of Common Pleas the claim of plaintiff was denied, both as a general and preferred claim. This was reversed by the Court of Appeals, and the cause comes into this court upon the allowance of a motion to certify.
Mr. John W. Bricker, attorney general, and Mr. Homer H. Marshman, for plaintiffs in error.
Messrs. Foote, Bushnell, Burgess Chandler, for defendant in error.
Plaintiff's contentions, reduced to their fundamentals, may be summarized thus: That upon the invitation and request of The Guardian Trust Company, plaintiff entered into a contingent agreement of subscription, which was not to become absolute and binding upon him except upon the contingency that he should continue in the employ of The Guardian Trust Company until February 15, 1934; that on June 15, 1933, the Superintendent of Banks took possession of the assets of The Guardian Trust Company for the purpose of liquidation; that thereupon The Guardian Trust Company ceased to do business as a banking institution and plaintiff ceased to be an employee; that the contingency upon which the agreement of subscription was based ceased and failed, and the agreement at no time became binding upon him; that all amounts of money deducted from his salary and applied on the stock subscription therefore never became the property of The Guardian Trust Company; that consequently he is entitled to its return.
The Superintendent of Banks contends, substantially, that the agreement of subscription was absolute; that its effectiveness was not made to depend upon any contingency; that the parties intended, the plan contemplated, and the instrument provided, substantially, that the subscription should be absolute; that it contained a provision that if plaintiff should cease to be an employee of The Guardian Trust Company — never contemplating the bank's failure — that his stock should be repurchased by The Guardian Trust Company for reallotment among its employees, and that plaintiff was to be repaid all monies deducted from his salary on account of such stock purchase; that the repurchase was to be made for reallotment only and did not contemplate repurchase subsequent to insolvency when no reallotment was possible.
It therefore becomes material to inquire into the nature and legal effect of the written instrument in question, especially that portion thereof reading: " * * * in the event of my ceasing to be an employee of said The Guardian Trust Company prior to February 15, 1934, I or my estate shall receive back in cash from said Trustee the full aggregate amount by which this note has been reduced, whereupon my right, title and interest in said stock shall cease and said stock shall be thenceforth subject to control and disposition by the President for reallotment."
The above quoted provision cannot be regarded as a condition precedent to plaintiff's liability upon his subscription agreement. His promise to pay the purchase price for the stock was absolute and not made contingent upon continuity of his employment with The Guardian Trust Company to February 15, 1934. Such provision was not a condition of payment, and the instrument was not a continuing offer by the subscriber to purchase stock in the future, but constituted a present valid and binding obligation.
"A person who purchases corporate stock from a corporation under an agreement giving him an option to resell the stock to the corporation within a specified time at the price paid therefor, does not make a conditional purchase of the stock, but becomes the absolute and unconditional owner thereof." 7 Ruling Case Law, 237, Section 210.
A conditional subscription is one on which payments cannot be enforced by the corporation until after the occurrence or performance of conditions specified therein. 10 Ohio Jurisprudence, 325, Section 225.
In a conditional subscription, the corporation binds itself "to do something before the subscription becomes obligatory, the subscription being a continuing offer by the subscriber, which becomes binding when accepted by the corporation by the performance of the condition imposed." 10 Ohio Jurisprudence, 326, Section 225.
It must be noted that the stock subscribed for had been issued, true, not to the subscriber personally, but to a person by the instrument designated as trustee. Payments were made upon the subscription and dividends were paid upon the stock. It is apparent that plaintiff was to enjoy the rights and privileges of a stockholder from the time of subscription.
"* * * if it appears to have been the intention that the subscriber should have the rights and enjoy the privileges of a stockholder from the time the subscription was made," then the "subscription is deemed absolute, and the condition an independent or special term." 1 Thompson on Corporations (3rd Ed.), 988, Section 714.
"Where a subscription was on the condition that the subscriber should be given a position in the company, and on failure to comply the subscription should be null and void, it was held not to be on a condition precedent, as it clearly contemplated that the subscriber should become a stockholder before he should be employed." Supra.
Can the promise to pay back to plaintiff his money be enforced, as against the Superintendent of Banks in charge of liquidation? We must bear in mind that the trust company is insolvent and in liquidation and the rights of creditors have intervened, and authority exists for the proposition that a stockholder who holds the promise of the corporation to buy his stock at his option cannot exercise the option and enforce the promise after the corporation has become insolvent. McIntyre v. E. Bement's Sons, 146 Mich. 74, 109 N.W. 45, 10 Ann. Cas., 143.
The weight of authority is that " a contract by a corporation to purchase shares of its own stock will not be enforced by the courts after the corporation has become insolvent. The reason for this holding is placed not upon the ground that a corporation has no power to buy its own stock, but on the ground that when the rights of creditors intervene it would amount to a fraud on the creditors to enforce the contract." 10 Ann. Cas., 145, note, and authorities there cited.
In the McIntyre case, supra, at page 78, the court said: "The contention of counsel for plaintiff that if the promise when given was valid, subsequent insolvency of the maker would not make it invalid, is, as to the usual and ordinary contracts of corporations and individuals, sound. But the promise of such a corporation to buy its own stock, if under any circumstances valid, must be considered as made, and accepted with the understanding that the shareholder may not, in face of insolvency of the company, change his relation from that of shareholder to that of creditor, escaping the responsibilities of the one and receiving the benefits of the other. To this rule there appears to be no exception."
The right to enforce such provision is not denied as between the parties where rights of creditors have not intervened. It is this intervention that affects enforcement.
We hold that the instrument in question constituted an unconditional and absolute agreement of subscription and is in no manner affected by plaintiff's inability to enforce that stipulation in the agreement providing for the repurchase of the stock and reimbursement of the money paid in.
It follows that the judgment of the Court of Appeals must be reversed and that of the Court of Common Pleas affirmed.
Judgment reversed.
WEYGANDT, C.J., STEPHENSON, WILLIAMS, JONES, MATTHIAS, DAY and ZIMMERMAN, JJ., concur.