Hinckley v. Pfister

Corporations : Equitv. (1) Illegal issue of bonds: Cancellation. (8, S) Invalid stock: Rights of holders: Pledge. (4, 5) Suretyship. (7, 8) Receivers: Dissolution of corporation: Who may maintain action. PRACTICE. (6) Consolidation of actions: Pleading. (0) Interpleader. 1. Where bonds of a corporation, pledged as security for its debt, were void under sec. 1753, R. S., because issued without its receiving seventy-five per cent, of their par value, no action for the surrender or cancellation thereof can be maintained by the corporation, or by a stockholder in its right, without a tender of the amount due to the pledgee. The plaintiffs in this case, the corporation and a stockholder who, as president, participated in the unlawful issue of the bonds, are in equal wrong with the party to whom they were issued, and are not entitled to relief. 3. Where all the stock of a corporation is void under sec. 1753, R. S., . because not fully paid for, none of the stockholders can make any claim by means of or through it to the aid or protection of a court of equity as against the others, based upon the rights of a stockholder. 3. But a holder of such void stock who has pledged it as security for a debt of the corporation, under an agreement that bonds pledged by the corporation for the same debt shall be first resorted to, may sue for a conversion of his stock by a sale in violation of such agreement. But where, by the terms of the pledge, the right to vote on the stock was transferred to the pledgee, the pledgor cannot ask a court of equity to,restore to him the.stock or the right to vote on it, until the purpose for which it was pledged has been satisfied. 4. An action by the pledgor m such a case, against the corporation, the pledgee, and others, to establish an indebtedness of the corporation to himself, for the appointment of a receiver, for the cancellation of the bonds pledged by the corporation on the ground that they were unlawfully issued, for an injunction against the transfer of stock or bonds, and for general relief, cannot be sustained as an action by a surety of a corporation (through the pledge of his stock for its debt) to compel the corporation to pay its debt to the pledgee, or to compel the latter to proceed against the property of the corporation and the bonds pledged to obtain payment, where no such specific relief is prayed and the complaint asserts the invalidity of the bonds pledged and that the corporation-has not property sufficient to pay its debts. 5. A surety cannot go into equity for relief against either the creditor or the debtor until after the debt is due. 6. Where actions brought by different parties are consolidated without change in the pleadings, the complaint of one plaintiff cannot aid that of another of which it is no part. 7. A creditor at large of a corporation, whose remedy at law has not been exhausted, cannot maintain an action in equity for the appointment of a receiver, etc. 8. Neither a stockholder as such nor the corporation itself can maintain an action in equity for the purpose of winding up the business of the corporation. 9. An action in the nature of an interpleader should not be brought except when there is no other way for plaintiff to protect himself from a litigation in which he has no interest; and, in order to maintain the action, plaintiff must show that he has not acted in a parti-' san manner as between the different claimants.

APPEAL from the Superior Court of Milwaukee County. The appellant Hinckley commenced an action against the Milwaukee Electric Railway Company,' Richard JBwrke, August II. Vogel, Charles F. Pfister, John A. Ilinsey, EE. II. Eield, Oscar D. Aeppli, G. "W. Hinckley, and A. M. Hinckley stating, in substance, the incorporation of the MilwauJeee Eleotrie Railway Company, December 17, 1889, for the purpose of operating a street railway in Milwaukee and adjoining towns, using electric or other motive- power, and empowered to acquire the property and franchises of the Milwaukee Cable Eailway Company; that the first-named company organized March 10, 1890, with a capital stock of $500,000, being 5,000 shares of $100 each; that the latter company transferred to the electric railway company all its property, rights, and franchises, and the entire capital stock of the electric railway company was issued to the plaintiff HmcJeley and the defendants Ilinsey, Aeppli, Field, and G. W. and A. M. Hinckley; that none of them paid anything of value for such stock except the plaintiff, but what he paid for his stock is not stated; that the only person having any actual interest in the electric railway company defendant, or in the cable railway company, is the plaintiff, but precisely what interest he had is not stated; that the plaintiff and defendant Ilinsey were the promoters of the corporation defendant, and the other defendants named, to whom stock was issued, were brought in and given certificates of stock merely for the purpose of completing and forming a corporate organization, except the defendant Mcunsehott, who claimed some stock under the defendant Hinsey; that the stock of the electric company was, at the date aforesaid, issued to the plaintiff and Ilinsey and such persons as they selected, in the proportion of three fifths to plaintiff or his order, and two fifths to Ilinsey or his order, but the same was issued to said Ilinsey gratuitously, without any good or valuable consideration, and contrary to law; and for a part of the stock of said plaintiff in the electric railway company he paid no money or value, but what part thereof is not stated; that for the greater portion the plaintiff did pay moneys, property, and services, but what amount is not alleged. On the same day a mortgage or deed of trust was executed by the plaintiff as president, and the defendant Aep-pli as secretary, of the electric railway company, in its name, to the defendant the Northern Trust Company, as trustee, the same being an Illinois corporation, to secure an issue of a series of 500 coupon bonds of the sum of $1,000 each, to mature April 1, 1910, bearing interest at the rate of six per cent, per annum, payable semi-annually. This was the first mortgage on the property of the company, and was recorded. It contained a provision that the bonds therein described should not be valid until certified by the trustee, who, it is alleged, accepted his trust and certified and delivered to the electric railway company 250 of said bonds of $1,000 each, and that it issued said bonds to the defendant Pfister as collateral security of a loan of $125,000 made by him to said company on its note, and for no other purpose, which contained a power of sale authorizing Pfister, in case of default in the payment of the note, to sell the bonds at private sale; that the electric railway company had no means sufficient for the payment of its debts, and Pfister was thereby enabled to take advantage of it, and sell $100,000 of said bonds to the defendant Vogel for $50,000, retaining $150,000 of said bonds and the note of the electric railway company for $125,000, on which he claims there is still due to him the sum of $70,000’; that at the time Pfister made said loan the plaintiff and defendant Hinsey pledged to him to secure its payment certain stock of the company, namely, Smsey pledging 1,001 shares, and the plaintiff 1,501 shares; that Pfister knew that the plaintiff was a mere surety, through his stock, on the note, and it was expressly agreed in a separate writing “ that no sale of plaintiff’s pledged stock should take place until after the property of the electric railway company, namely, its said bonds, were exhausted on said power of sale.” It is alleged that “ all money expended in creating or constructing or purchasing said street railway company, and all the corporate assets of tbe said street railway company, and also all of the assets of the Milwaukee Cable Railway Company, aforesaid, except such as was acquired from the proceeds of the said $125,000 loan, and such as said defendant street railway company is still indebted for, have been furnished by the plaintiff,” and no other of the stockholders of said company paid or furnished any portion thereof; and that said plaintiff furnished said money and paid the same, under an agreement with said street railway company that he should be cmd remain a creditor of the defendant street railway company to the amount of the money and property so advanced by him, and that the same should be repaid to him from the proceeds of the sale of said corporate bonds, or that, in lieu thereof, he should have such bonds for the same at not less than seventy-five cents on the dollar; and that by virtue of such advances and said agreement the plaintiff is a creditor of said corporation to an amount exceeding $100,000, for money actually advanced, materials and supplies furnished, and labor performed, for said corporation, for which, by said agreement, he was to le paid as aforesaid. That certain officers of the defendant company, without plaintiff’s consent, after the pledge of said $250,000 of bonds to Pfister, ordered the trustee in the mortgage to issue and certify no more bonds, so that the plaintiff is unable to procure any bonds in payment of his advances, and the defendant is unable to pay its existing debts. That plaintiff is a director and the president of the company, and 'the defendants G-. W. Hinckley, A. M. Hinckley, H. H. Field, Oscar H. Aep-pli, John II. Manschott, John A. Ilinsey, Charles F. Pfister, Riohard Burke, and August H. Yogel have-or hold in their name stock of said defendant company, sold by said Pfister to Vogel under said power of sale for the sum of $5,000, but in disregard of Pfistefs agreement not'to sell the same until the bonds of defendant so issued- were all sold. That the sale of said stock and bonds to Vogel was formal or colorable, and no consideration was paid therefor, but they were bid in by him as trustee for Pfister, in pursuance of an arrangement or combination between the defendants Pfister, Vogel, Bicrlee, and Hinsey, which is charged to have been collusive and entered into for the purpose of creating fictitious liens against the corporation by virtue of the bonds and obtaining control of its stock, so as to control corporate action with reference to said bonds, and to enable Pfister to occupy the position of creditor for a large amount under the said bonds, and at the same time control corporate action with reference thereto. That, after bidding in the stock, Vogel transferred “ part of the same” back to Pfis-ter, and “ part to the defendant Burltefi and that Pfister and Burlee claimed the right to vote such corporate stock at the corporate meetings, and the plaintiff also claims the right to vote the same stock, and to be the owner thereof, and to be the owner of his proportion of that held by the defendant Vogel; and that Pfister, Vogel, Hinsey, and Bv/rlee threaten and intend to vote out the plaintiff from all trusteeship or office in the corporation, the defendant Pfister being enabled to control a majority of the stock of the corporation, and at the same time to hold against it the bonds so alleged to be illegally acquired, and the note, on which he claims there is still due $70,000. There is no allegation to show what part of the stock is so held in the name of Pfis-ter or Bnrlce or Vogel, nor whether, when the same was pledged, any transfer or evidence of the pledgee’s right was entered on the stock register, nor whether the transfer to the said several defendants of the stock claimed to be held. by them respectively has been entered thereon. ' It is alleged that the defendants Field, Aeppli, and Hin-sey are a majority of the present board of directors, and the interest of Field is merely nominal, and Aeppli is the clerk or secretary of IHnsey, and all said persons are controlled by the defendant JImsey. That Vogel, Burlte, and Pfister are not purchasers of said stock for value, but took the same with knowledge and notice of the defects in such stock and in the title thereto and right of Pfister to sell it; and that he took the bonds purchased by him with full knowledge of their invalidity and illegality. That the property of the electric railway company has been sold for taxes of two years last past, and tax certificates thereon have been issued to the defendant Pfister, and a large number of suits at law have been commenced and are pending against the company, and judgments are liable to be rendered against it. That the property of the defendant is liable to attachment by its creditors, and Pfister is interested in rival and competing lines of street railway in Milwaukee. That Pfister, Burlte, Vogel, and JImsey claim the right to vote on the stock so acquired by them at the corporate meetings, and to gain control of the corporation, and are combining to carry out such intention by virtue of their holdmg such certificates, for which no money has been paid “ except such certificates as are in their hands and belong to the plaintiff, and not to Vogel and Burlte.” That it is important that the street railway should be kept in operation, and no attachment be levied thereon, and no forfeiture of its franchises be incurred. That its gross income is not over $10,000 per month. That the semi-annual interest for October, 1890, upon said bonds, is past due, and, by the terms of the mortgage, default in its payment makes the whole principal sum of the bonds due, at the option of the owner. That the Iona fide debts of the railway company defendant, including the claim of the plaintiff, exceed $250,000, and that it is without means or property to pay the same. The plaintiff asks judgment (1) that the amount due to him from the street railway corporation defendant be ascertained and adjudged, and he be declared to have a lien on its corporate property therefor; (2) that an account be taken of all the property, credits, effects, and indebtedness of the corporation; (3) that a receiver be appointed of.such property, and that it be sold under the direction of the court to pay plaintiff and other creditors, and after the payment of such debts the residue be brought into court to be disposed of according to law; (4) that the $250,000 of bonds in the hands of Vogel and Pfister be canceled and set aside; (5) that an account be taken of all the stock of the plaintiff that was issued without consideration, and void under the statute for that cause, and that all stock so issued be set aside and canceled, and that the ownership of the valid portion of the stock of the defendant the electric railway company be determined and declared, so as to determine the rights of the parties in the surplus, if any, arising from the sale of its property; that its bona fide indebtedness be declared a lien on the corporate property at its true amount; that the defendant Pfister be charged with the amount of any stock or bonds which he may have unlawfully disposed of by reason of the same having passed into the hands of other persons, and that he be allowed no more than the actual indebtedness due him, namely, $125,000 and interest, as agreed; and, after payment of the just debts, costs, etc., the proceeds of such sale be divided among its bona fide stockholders in proportion to their respective interests. An injunction against Rinsey, Burlce, Pfister, and Vogel was prayed for, and general relief. Subsequently the Milwaulcee Electric Railway OompaAiy brought its action against Pfister, Vogel^ Burlce, Rinsey, Manschott, Field, Aeppli, the Northern Trust Company, G. "W. Hinckley, A. M. Hinckley, and Francis E. Rinclcley, the plaintiff in this action. Its allegations are, in the main, substantially the same as in Rvnclcley’s suit against Pfister and others. It charges that the plaintiff company was organized, among other things, with reference to acquiring the franchises and property of the Milwaukee Cable Railway Company, and that prior thereto it had been agreed between the persons composing the latter company that the plaintiff should be organized, and for that purpose. It alleges the transfer to it of the property, rights, and franchises “for a consideration, as stated,.to the plaintiff.” That its whole capital stock was issued to the defendants Hmckley, Hinsey, Aeppli, and Field, none of said persons paying anything of value for said stock, except the defendant Hinckley; but there is no allegation of what amount he paid for his stock. It is charged that in the cable railway company and in the plaintiff company the only persons, having any actual interest therein were the defendants F. E. Hmckley and Hinsey, and that “some agreement” existed between them and the plaintiff and the defendants Aeppli and Field, by which the defendant F. F. Hinckley was to advance money to the plaintiff as its creditor for corporate purposes, but what the terms of that agreement were is not stated. It is four times asserted in this complaint that Hinsey paid no money, property, or anything of value whatever for the stock of the plaintiff company;, and there is no allegation to show what interest he really had, if any, in either of said companies. The complaint further states the issue of the stock of' the company, the execution of the trust deed or mortgage, the certification of $280,000 of the bonds secured by it, the delivery thereof to the defendant Pfister as collateral security for the payment of the note of the plaintiff for $125,000, and the power of sale contained in the note, as in Hinckley’s complaint ; and alleges that the said disposition of the bonds and power of sale were unauthorized and illegal, to the knowledge of Pfister; the deposit, as security, with Pfister,. by the defendants Hinckley and Hinsey, of 2,502 shares of the capital stock, — 1,001 issued to the defendant Hinsey,, and 1,501 issued to the defendant Hinckley/ and that no other bonds were ever delivered, certified, or issued. It charges that Pfister, Vogel, JEEinsey, and Burke colluded together for- the purpose of creating fictitious liens-against the corporation by virtue of said bonds, and obtaining control of its stock at the same time, so as to control corporate action with reference thereto, and occupying the position of creditor for a large amount under the said bonds so unlawfully issued. It alleges the sale of 100 of said bonds by Pfister to the defendant Yogel for $50,000, and the retention of 150 thereof, and also of the note of the plaintiff for $125,000, substantially as in the other complaint; and that, after the sale, Pfister sold at private sale the 2,502 shares of the capital stock so obtained as security under the power of sale, or pretended to, sell the same, to Yogel for $5,000. That the power of sale did not include the right to sell said 'stock until after the whole of said bonds had been sold by him, and that not only was such power of sale unauthorized, but it was not complied with in the sale of the stock. That said sale of bonds and stock to Yogel was colorable, and no consideration wras paid therefor by Vogel, but they were bid in by him as trustee for Pfister, in pursuance of ,said agreement or combination between Pfister, Vogel, Burke, and Ilinsey. That thereafter Vogel transferred part of said stock to Burke, and he claims the right to vote thereon at the coi’-porate meetings of the plaintiff, and the defendant Ilinek-ley also claims the right to vote the same stock, and to be the owner thereof. That he lays claim to be the owner of the stock held by the defendant Vogel, and Vogel claims to be the owner thereof, and that the plaintiff is unable to determine who is the ovmer, or entitled to vote thereon, or liable thereon; but does not show what part of said stock has been registered, if any. That the plaintiff has no other interest in the question of the ownership of said shares, but is impartial therein. That when the stock was issued there was some agreement, but what it was is not stated, by and between Ilincldey and Hinsey, that Hineldey should be a creditor of the plaintiff, and be repaid by it for certain moneys advanced by him for corporate purposes, and that the stock of the plaintiff should be issued to Hinsey gratuitously, and to F. E. Hmeldey in part gratuitously and in part for value, in certain proportions, but what proportions is not stated; and that they had it in mind and intended thereby to provide for a sale of the street railway, and that it was agreed in such case that Hineldey should be first repaid his cash advances and other payments made by him out of the proceeds of sale, and the other corporate debts to be paid out of the proceeds of such sale, and the residue to be divided between Hmeldey and Hinsey “ in a certain proportion agreed upon,” but what proportion is not stated; and that the stock was issued accordingly. That Hineldey has an action pending in this court against the plaintiff company, in which he claims to be its creditor for upwards of $100,000, and asks to have a lien declared in his favor on its1 property, and the same foreclosed, and a receiver appointed. The complaint contains substantially the same allegations as Ilincldefs in respect to pending suits against the plaintiff, and the liability of its property to be seized on execution or attachment, to its serious damage, and those for whom it is trustee; and also as to the necessity that its railway should be kept in operation and no forfeiture of its franchises be incurred. That Pfister is interested in competing and rival lines, for the building of which he has procured an ordinance, and is in collusion with Vogel, Burlte, and Hinsey to gain control of the property and franchises of the plaintiff, and so impair its value, or to create fictitious or unlawful claims against it; and that Hinsey now controls a majority of the board of directors. The plaintiff asks judgment that said $250,000 of bonds be canceled and set aside; that an account be taken of the stock of plaintiff issued without consideration, and void under the statute for that reason; that all such stock be canceled and set aside; that the valid portions of plaintiff’s stock be determined and declared, and for that purpose that the defendants Hinckley, Burke, and Vogel be required to interplead, and that the amount due from the plaintiff to IiineTdey and any other of its creditors be ascertained and be declared a lien on its corporate property; that, if necessary, the prop: erty of the plaintiff be sold, and the proceeds applied to the payment of its debts and costs and expenses of the action, and the residue divided among the bona fide stockholders; and for an injunction, etc. On application of the plaintiffs, these actions were consolidated by order of the court, and directed “ to proceed to trial under and upon the pleadings then filed and served, or such other pleadings as the parties opposing the consolidation might choose to make or serve pursuant to law; ” and prescribing that the title of said action should be the same as specified in the order. When the consolidated action came on for trial, the defendants Pfister, Vogel, Burke, and Hinsey objected to the reception of any evidence under either complaint, on the ground that neither of them stated facts sufficient to constitute a cause of action. The court sustained the objection, and dismissed the complaints, with costs, from which the plaintiffs Hi/nckley and the electric railway company appealed. They contended, inter alia, that the complaint of the corporation, either alone or consolidated with Hinckley's, states a good cause of action. It shows an unlawful issue of bonds for less than seventy-five cents on the dollar, in contravention of the statute. N. S. sec. 175j3; Wood v. Union Oospel Asso. 63 Wis. 9; New Castle N. B. Co. v. Simpson, 21 Fed. Rep. 533; Chicago v. Cameron, 120 Ill. 417. It shows an attempt by the pledgee of its bonds, Pfister, through the medium of a col-orable and fictitious sale to Vogel, to create a debt of $100,000 against the corporation, for which the corporation received only a consideration of $50,000 by a credit of the last named sum on Pfister's note. Jesvp v. City BamLc, 14 Wis. 359; Aelcerson v. Lodi B. P. Co. 28 N. J. Eq. 542; Bichcurdson v. Oreen, 133 U. S. 30. It shows the issue of a large part of the stock of the corporation gratuitously, contrary to statute, by means of which the corporation is no longer able to raise money by the usual mode and the corporate affairs are managed by directors who owe their election to such void stock and have no pecuniary interest or responsibility in such affairs. Wood v. Union Gospel Asso. 63 Wis. 9; New Castle N. B. Co„ v. Simpson, 21 Fed. Rep. 533; Fosdich v. Sparges, 1 Biss. 258; Perry v. Tuskaloosa C. S. O. M. Co. 93 Ala. 364; Cla/rke v. Lincoln L. Co. 59 Wis. 655. The stock bid in by Vogel and redistributed to Pfist&r and Burlce is also claimed by ILinckley, who contends that the colorable or fictitious sale did not divest his title; and the corporation is entitled to know who its true stockholders are., Salisbury Mills v. Townsend, 109 Mass. 115; Providence Banhv. Wilkinson, 4 R. I. 507; Cady v. Potter, 55 Barb. 463; Cheever v. .LLodgson, 9 Mo. App. 565. A bill in the nature of an interpleader may be maintained where other equitable relief is sought in addition to the interpleader. Bedell v. LLoffmam, 2 Paige, 199; Mohawk c& IL. B. Co. v. Cl/ate, 4 id. 391, 392. Courts will interfere to restrain any acts' on the part of directors or officers constituting a breach of trust. Podge v. Wool-sey, 18 How. 341; Pearson v. Concord B. Co. 62 N. H. 537; Bambmcm v. Empire Mills, 12 Barb. 341; People v. Ballard, 3 N. T. Supp. 845. Stock issued contrary to law without consideration should be canceled at the suit of the corporation. Scovill v. Thayer, 105 U. S. 143. No matter what relief is demanded, if the corporation is entitled to be heard in a court of equity upon éither of the foregoing-propositions, the demurrer was improperly sustained. Hiles v. Johnson, 67 Wis. 517; /Scheibe v. Kennedy, 64 id. 564. The complaint of the plaintiff Llmckley states facts which entitle him to maintain an action in equity, as a surety of whose pledge a wrongful and fraudulent sale has been made, to disregard such sale or have it set aside and have the property of the principal debtor sold and applied in payment of the debt and in discharge of the property of the surety. Karris v. Newell, 42 Wis. 691; Neimcewicz v. Gahn, 3 Paige, 648; Irick v. Black,, 17 N. J. Eq. 189; Philadelphia & P. P. Go. v. Little, 41 id. 519; Moore v. Topliff, 107 Ill. 241; Norton v. Peid, 11 S. C. 593; Bishop v. Bay, 13 Yt. 81; Morse v. La/rkin, 46 id. 371; Saylors v. Saylors, 3 ITeisk. 525; Keel v. Levy, 19 Oreg. 450; Smith v. Smith, 8 Ired. Eq. (N. C.), 34; Ilellams v. Abercrombie, 15 S. C. 110; Whit/ridge v. Durkee, 2 Md. Ch. 442; McDaniel v. Austin, 32 S. C. 601; Meader v. Meader, 88 Ky. 217; Morrison v. Poyntz, 7 Dana, 307; 1 Drandt, Suretyship (2d ed.), secs, 34, 223-225, 237-239; 1 Story, Eq. Jur. secs. 327, 730; 2 id. sec. 849; Nwyes v. Ward, 4 Johns. Ch. 123-132; Man'sh v. Pike, 1 Sandf. Ch. 210; Jones, Pledges, secs. 685, 686; 2 Jones, Mortgages, sec. 1380; Jenkins v. Gunnison, 50 Wis. 388; Beckham v. Dunca/n, 9 S. E. Eep. (Ya.), 1002; Ballew v. Poler, 124 Ind. 557; McOonnell v. Scott, 15 Ohio, 401; Pratt v. Thornton, 28 Me. 355. They argued, among other things, that the facts stated do not warrant the appointment of a receiver. Re Argus Printing Oo. 1 N. Dak. 431; Boyd v. Sims, 87 Tenn. 779; Cook, Stock (2d ed.), secs. 745, 746 ; 2 High, Inj. secs. 1203-1210; Eschweiler v. Stowell, 78 Wis. 316; Haywood v. Lincoln L. Oo. 64 id. 639-645; High, Deceivers, sec. 288, note; Beach, Deceivers, sec. 403; Balter v. L. P. R. Go. 34 La. Ann. 757; French v. Gifford, 30 Iowa, 148; JLeall v. Hill, 16 Cal. 146; French Bamlc Gase, 53 Cal. 495-551; La Grange v. State Treas. 24 Mich. 469-471; Talbot v. Scripps, 31 id. 268; Gluck & Becker, Deceivers, secs. 22-24; .Ward v. Salem St. R. Oo. 108 Mass. 332. The complaint of Himchley will not bear the aspect of a bill by a surety. Shields v. Barrow, 17 How. 130-143; Harris v. Hewell, 42 Wis. 687-691; Wright v. Simpson, 6 Yes. Jr. 714-734; Philadelphia <& R. R. Oo. v. Little, 41 N. J. Eq. 519-529; Moore v. Top-liff, 107 Ill. 241-250; Stamford Bank v. Benedict, 15 Conn. 437-446; 1 White & Tudor, L. Cas. 136; 3 Pom. Eq. Jur. sec. 1417, n. 2; Ga/ry v. Gannon, 3 Ired. Eq. 64-68.