Opinion
Decided March 6, 1900.
ERROR to the Circuit Court of Jackson County.
The suit below was brought by the plaintiff against the defendant, assignee of the Franklin Milling Company an insolvent corporation, to compel the allowance of a claim held by him against the Company.
The claim was for the amount due on a promissory note of $1,000 made January 1, 1896, due six months after date with interest, signed as follows:
"RUFUS PETERS.
Franklin Milling Company,
"Per J. A. Long."
It was presented to the assignee and rejected. The gist of the answer is, that it is the note of Peters, and the name of the Company was signed thereto by Long, who was its general manager, without authority, and that there is no consideration for the note as to it.
The plaintiff had judgment in the common pleas and the assignee appealed. It was there tried to the court, and, on request, it found and stated its conclusions of fact and law separately, and rendered judgment thereon for the defendant. The plaintiff in error claims that the conclusions of law are erroneous, and asks the reversal of the judgment and for judgment in his favor on the findings of fact. The findings of fact and law are as follows:
"1. That for many years prior to April 9th, 1889, a partnership, known as the "Franklin Mill Company," existed, composed of Rufus Peters who owned a one-fourth interest, Henry Hunsinger, who owned a one-fourth interest, Rufus Hunsinger, who owned a one-eighth interest, Thomas P. Sutherland, who owned a one-eighth interest, and Jacob A. Long, who owned one-eighth. The other one-eighth interest having been acquired by the partnership and owned by it.
2. That on April 9th, 1889, a corporation composed of the members of the partnership was organiezd under the name of the "Franklin Milling Company," in which each partner took stock in proportion to the interest he had owned in the partnership, with the addition of M. L. Sternberger, who not having been a member of the partnership subscribed for the one-eighth that had been owned in common by the members of the partnership amounting to $5,000.00.
The interest in the partnership of each subscriber of stock was turned over to said corporation in payment for the stock subscribed.
3. At the date of the organization of the corporation, the partnership conveyed all of its property, both real and personal to the corporation, including a "Flouring Mill," "Woolen Factory," two houses and lots adjoining the same and two lots in the city of Wellston, Ohio; that said corporation was formed for the purpose of continuing the business in which the partnership had before that time been engaged.
4. The stock subscribed by M. L. Sternberger was held by him one year when he elected to and did surrender the same to the corporation which afterwards held the same as company property until the assignment was made.
5. At the time of the reorganization, April 9th, 1889, the partnership was indebted in the sum of about $20,000, among its creditors of which was the plaintiff, Eliza Burk, Gershom David, James Hatton and others.
A short time previous to organization of the corporation an assessment was made among the members of the firm of $1,000.00 to the share of one-eighth, aggregating $7,000.00, to be applied upon the indebtedness. The balance of the indebtedness was over and above this $7,000.00 was carried by the corporation and renewed from year to year, and a large portion of it comprised the indebtedness at the time of the assignment.
At the time of the assignment of the $7,000.00 upon the members of the partnership, Rufus Peters, who owned one-fourth interest in the partnership, was assessed the sum of $2,000. He not having the money to pay his part of the assessment agreed with the other members of the partnership to assume the payment of the debt to the plaintiff amounting to $2,000.00, and that subsequent to the reorganization, plaintiff sent his note to the Iron Bank of Jackson, Ohio, for payment of principal and interest, and that the interest was paid annually and portions of the principal by said corporation which immediately charged such payments to said Rufus Peters and deducted the same from his salary due him from said corporation; that said payments reduced the plaintiff's claim to the sum of $1,000.00, which was evidenced by a promissory note payable to the order of the plaintiff, bearing the signatures of Rufus Peters and the "Franklin Milling Company," which upon the payment of accruing interest was renewed from time to time in the same form until the execution of the note set forth in the petition which, last named note remains unpaid.
7. That Thomas P. Sutherland was president of the corporation for a portion of the time that the renewals of the indebtedness to the plaintiff were being made, and J. A. Long was the secretary thereof, and that said Sutherland was the financial agent and manager of said corporation at all times till his death, which occurred in March, 1896, that said renewals were made by J. A. Long as secretary of said corporation at the request and order of said Sutherland down to and including the note in suit, but that no resolution of the board of directors of said corporation or by-laws of the same in any way authorized the signing of commercial paper of any kind or character by the officers or agents of said corporation.
8. That the notes as renewed from time to time were sent by plaintiff to Thomas P. Sutherland who was president of the Iron Bank of Jackson for collection of the interest and for such portions of the principal as were paid thereon, and said Sutherland paid the interest thereon acting for the corporation, the "Franklin Milling Company," together with the sums by which the principal was reduced, and sent to the plaintiff from time to time renewals for the amount still due said plaintiff. Said renewals being signed as heretofore found, and charged such amounts upon the books of the corporation against the salary of Rufus Peters.
9. At the time, or shortly after the organization of the corporation, J. Ellis Evans became a member of the corporation, having purchased a portion of the stock of Rufus Peters, for which he paid the sum of $500.00, he still owing the said Peters the sum of $500.00 thereon at the time of the assignment.
10. That the liabilities of the partnership were treated by the corporation as debts of the corporation and in renewing the partnership liabilities the corporation treated them in the same way as liabilities of the corporation made after the incorporation; and that the transactions of Sutherland with the plaintiff in causing the notes to be renewed were well known to all the stockholders of the corporation save M. L. Sternberger.
The renewal notes having been signed by the partnership name during the time he was a subscriber to the stock of the corpration. The plaintiff, Jacob S. Andres had not been for twenty years in the county of Jackson, nor did he have any knowledge whatever of the incorporation of the "Franklin Milling Company," nor of any of the contracts, agreements or arrangements by and between the partnership and the corporation or of any of the agreements or contracts by and between any of the members of the partnership or corporation, nor of the fact that said Peters had agreed to assume or pay his said claim, nor did the plaintiff give credit to the corporation, but looked to the firm for his loan. And the court coming now to state its conclusions of law from the facts so found and above set forth, it is considered by the court:
1. That said corporation had no authority to sign said note, and that the signing thereof in the way and manner set forth in the finding of facts was "ultra vires."
2. That said note is not the liability of said corporation.
J. M. McGillivray, for plaintiff in error.
The one fact controlling in this case, which must be ever kept in mind, but which must have been overlooked by the circuit court, is, that when the corporation received the partnership assets — stepped into its shoes, as it were — the partnership was indebted to plaintiff in the sum of $2,000.00, evidenced by its outstanding promissory note.
Consent is a necessary element in a contract of novation. Bouv. Law Dict.; Tit. Novation; 16 Am. Eng. Enc. Law, 867; Wood v. Pugh, 7 Ohio, pt. 2, 156; Bacon v. Daniels, 37 Ohio St., 279. And a novation is never presumed. 16 Am. Eng. Enc. Law, 868.
Therefore, when the corporation took the place of the partnership and assumed its debts, it assumed that of the plaintiff, for the very simple reason that the contract with Peters did not make it his debt, as between plaintiff and the partnership.
There can be no difference between a lack of value in an interest in a partnership turned over to a corporation in payment for some of its capital stock because of an overestimate of partnership property and that one of the partners who subscribed for stock was indebted to or for the corporation in such sum as to materially reduce the value of his interest. Gates, Admr., v. The Tippecanoe Stone Co., 57 Ohio St., 60, this does not conflict with Bank v. Trebein, 59 Ohio St., 316.
The contract of a corporation is presumed to be 16 intra vires until the contrary is made to appear. Bank v. Flour Co., 41 Ohio St., 557; Express Co. v. The R. R. Co., 99 U. S., 101. And this, being a trading corporation, was possessed of general authority to execute notes. Hays v. Gas Light Co., 29 Ohio St., 330; Burt v. Rattle, 31 Ohio St., 116.
And this includes mill companies. Smith v. The Eureka Mill Co., 6 Cal., 1.
And it is not necessary that express authority should have been given. Bank v. Gas Light Co., 159 Mass., 506.
There is no finding that the corporation did not assume and agree to pay plaintiff's claim; that it was excepted from the debts of the partnership outstanding at the date of the reorganization; that any contract or arrangement was made between the partnership and corporation in any way affecting it, unless in the general agreement of assumption, and inasmuch as the fact of transferring individual or partnership property raises a strong inference of assumption of debts, the failure to find against the assumption leaves the inference stand. Savings Co. v. Saw Co., 104 Mo., 425.
Our contention is that the doctrine of ultra vires and estoppel cannot apply; but if, as found by the circuit court, the corporation lacked authority to make the note, our answer is, the matter of making a note is within the corporate power. Hays v. The Gas Light Co., 29 Ohio St., 330; Burt v. Rattle, 31 Ohio St., 116.
And then the rule is — The doctrine of estoppel applies to a trading corporation the same as a neutral person in all transactions within its cooperate authority. Bank v. Flour Co., 41 Ohio St., 552.
The acts of the corporation in paying interest on plaintiff's note for seven years and in reducing the principal from two to one thousand dollars, was a full and complete ratification of the acts of Sutherland and Long in making the notes and carrying the debt. Taylor on Corporations, Sections 269-272; Supervisors v. Schenck, 72 U. S., 772; Cace Mnfg. Co. v. Soxman, 138 U. S., 431.
T. A. Jones, for defendant in error.
There was no connection whatever between the plaintiff and the corporation. His original loan was to the partnership; he did not even know of the existence of the corporation; between plaintiff and the corporation there was no transaction whereby the shadow of a consideration existed. In the language of the finding of facts the plaintiff did not "give credit to the corporation, but looked to the firm for his loan." Bank v. Flour Co., supra; Park Bank v. German-American M. W. S. Co., 116 N. Y., 281; Fox v. Rural Home Co., 90 Hun., 635; Bank v. Wells, 79 N. Y., 498; Davis v. Railway Co., 131 Mass., 258; Morowitz Corp., Sec. 232.
Members of a partnership — Form a corporation to continue business — Partnership property transferred to corporation — Debts of partnership become debts of corporation — Member of firm assumes debt of partnership — Does not discharge firm debt — Changes in stockholders of incorporation do not affect liability to creditors — Corporation liability as surety on note.
1. The members of a partnership, engaged in the milling business, agreed among themselves to incorporate for the purpose of continuing the business as a corporation. The corporation was formed and each according to the agreement transferred his interest in the firm property to the corporation, receiving therefore an aliquot part of the capital stock equal to that held by him in the firm; all of the property of the firm being in this way transferred to the corporation: Held, that the debts of the partnership became the debts of the corporation and it is liable therefor.
2. In the case above stated, a member of the firm, in contemplation of the proposed change, agreed to assume and pay a debt of the firm to one of its creditors, in discharge of a debt of his to the firm. The creditor of the firm had no knowledge of this and never assented to it: Held, that this did not constitute a novation, nor, in any way, affect his rights as a creditor against the corporation.
3. Changes in the stockholders of a corporation in no way affect its liability to its creditors. The stockholders of a corporation may wholly change, and the rights and liabilities of the corporation remain the same.
4. Where the managing agent of a corporation executes a note in its name to secure a debt on which it is primarily liable to the creditor, but on which, as between it and a third person, signing the note, it is surety, the company is liable thereon, though no express authority had been given the agent to so execute the note.
The facts disclose that the corporation was formed by the incorporation of the members comprising a partnership. The change was from a partnership to a corporation. The latter took all the property of the partnership. This was accomplished by the members of the firm on the formation of the corporation, transferring their respective interests in the partnership to it, and receiving a like interest in the capital stock of the company in consideration of the transfer. The members of the partnership may be said to have simply put on a new coat. The stock seems to have been divided into interests or shares of one-eighth. The members of the partnership having seven-eighths and holding one-eighth in common; or which is more to the purpose, each one-eighth held by the former members of the firm, represented, in the capital of the company, one-eighth plus one fifty-sixth of the capital stock, since the capital was all owned by those who formed the partnership. On this state of case it is very clear that the corporation was liable for this debt, whether it had expressly assumed the indebtedness of the partnership or not. It is not to be regarded as an ordinary sale of property by one to another. A partnership is a quasi legal entity. It owns property and has liabilities as such. Its creditors have a right to the payment of their claims from the partnership assets in preference to individual creditors, and have in equity a lien on the assets of the firm, that may be worked out through the partners. So that, when the partners transferred all the property of the firm to the company, the partnership was dissolved and the rights of its creditors followed the partners and the property into the corporation, and it was bound to discharge the debts of the partnership, having received the property of the partnership on which it had obtained credit. It could not retain the property and repudiate the liability.
All that the corporation paid for the property transferred to it was the stock issued in exchange — simply a metamorphosis of a partnership into a corporation, without any change of individuals, and unless it assumed the payment of the debts of the firm, there was no consideration for the transfer of the property — for the stock without the property represented nothing and was worth nothing. That a corporation could be formed and, with its capital, purchase a partnership and its business without being liable for its debts unless expressly assumed, is not doubted; but this is not such a case. This is like the case of Reed Brothers Company v. First National Bank, 46 Nebr., 168, where a partnership, engaged in a general mercantile business, in straitened and failing circumstances, incorporated, and the assets and business of the partnership were transferred to the corporation and appropriated to its object and purpose, the business of the partnership being continued by the corporation, it was held, that the corporation was presumptively liable for the partnership debts. See 2 Cook on Stockholders, Sec. 669, and note 3; Mor. Corp., Sections 791 and 812; Broughton v. Pensacola, 93 U. S., 266-270; Beach on Priv. Corp., Sec. 360.
There was in fact no purchase in this case; it, as shown, was simply a change from doing business in one capacity to that of another — the same persons changed from partners to corporators — and this distinction reconciles many cases on the subject, that might otherwise seem in conflict. Where there is a purchase in fact by a new company from an old one, there is, as before observed, no liability of the new for the debts of the old company, unless assumed as a part of the consideration. But where a mere transformation is had — parties remaining the same, and the property is transferred by the members of the old company transferring their interest in it, for an equal interest in it as property of the new, the transaction does not constitute a sale by the one and a purchase by the other; it is simply a change in the manner and form of carrying on the same business by the same persons; and, brushing aside the fiction of a legal entity, it is seen that no real change has taken place, and that in looking to the new formation for payment, the creditor looks to the same persons, possessed of the same property and rights, he contracted with in the first instance; and to construe the transaction as to creditors as a purchase, tends to operate a fraud on their rights. Every purchase implies two distinct persons — a buyer and seller. It is a moral impossibility for one person to buy of, or sell to, himself. Modern decisions, as observed by Mr. Taylor (Private Corporations, Sec. 51), are tending to a disregard of the mental conception, that a corporation is an entity separate from its corporators, as in many instance it is simply a "stumbling block" in the way of doing justice between real persons.
But again, the facts found show that the assumption of the debts of the partnership, was a part of the understanding and agreement by which the company was formed: The finding is, that at the date of the "reorganization" the partnership conveyed all its property, real and personal, to the corporation; and that it was formed for the purpose of continuing the business in which the partners had been engaged; and, "That the liabilities of the partnership were treated by the corporation as debts of the corporation, and in renewing the partnership liabilities the corporation treated them in the same way as liabilities of the corporation made after the incorporation; and that the transactions of Sutherland with the plaintiff in causing the notes to be renewed, were well known to all the stockholders of the corporation save M. L. Sternberger," whose relation to the corporation will be hereafter noticed. These facts are only consistent with an express understanding that the debts of the partnership were to be assumed and paid by the company. It will help, in understanding the transaction, to note the fact, that the same persons who formed the partnership were the incorporators of the company — there were not two real parties in existence, dealing with each other. It was conducted by one set of persons, managing a business for their own profit and convenience; and what more natural in such case, than in passing from a partnership to a corporation they should determine to carry with them their liabilities as well as their property. Nothing could be gained to them by not doing so, and it would be much to their convenience to do so. And, it seems, that this is not disputed as to their creditors in general, but certain facts are found which are supposed to vary this obligation as to the claim of the plaintiff. It is found that at the time of the "reorganization," the firm owed some $20,000; and that a short time before, the members made an assessment on themselves of $1,000.00 to each one-eighth interest, amounting to $7,000.00, one-eighth not being assessed. The balance of the indebtedness to be carried by the company. At the time of the assessment Rufus Peters, owner of a fourth interest, was assessed $2,000.00. Not being able to pay, he assumed the payment of the debt to the plaintiff, then $2,000.00. It is claimed that this amounted to a novation. But the plaintiff was not consulted, knew nothing of the arrangement, could not have assented, and did not; and therefore there was no novation as to him. His rights remained unaffected. Under this agreement payments were made, and renewals given from time to time, when the amount was reduced to the sum for which the note in suit was given, the renewals having been signed as the note in suit, except during the time Sternberger was a subscriber to stock. When these payments were made by the corporation it immediately charged them to Peters and took credit to itself on his account for salary. This was a very clear recognition by the corporation that it regarded the debt as its own, so far as the plaintiff was concerned. It made the payments and took credit to itself in its account with Peters. This was according to the agreement between it and Peters, but the plaintiff was no party to it and did not know of it. As between Peters and the corporation it was the debt of the former, but as between the plaintiff and the corporation, it was the debt of the latter.
Again, the fact is found that one Sternberger after the company was formed, subscribed for an eighth interest in the capital stock of the company at $5,000.00. This, we suppose, was the one-eighth the company owned and had not been disposed of. It amounted to no more than an effort to increase the stock to that extent — one-eighth was added in the way of what is commonly called water. This, however, amounted to nothing, as in about a year afterwards, he surrendered the stock. There is no finding that he ever paid for it — the finding is that he subscribed for it. We assume that if the evidence had warranted such a finding, it would have been made; the rule being that when a finding is requested it contains all the facts that the evidence warranted. It is also found that one Evans purchased of Peters a portion of his stock, agreeing to pay $500 for it; but the finding is that he had not paid for it at the time of the assignment. We do not see how any of these findings can in any way affect the right of the plaintiff to be regarded as a creditor of the corporation. The fact remains that the persons who composed the partnership constituted the stockholders of the company from its organization to the assignment. But suppose it were true that Sternberger became and remained a stockholder of the company, and that Evans acquired and paid for a portion of the stock of Peters, how would this vary the rights of the plaintiff? His rights accrued when the partnership became a corporation, and cannot be changed by subsequent changes in the stockholders. His rights avail against the company and not the stockholders. The latter may wholly change and the company remain the same as to rights and liabilities.
But it is argued that the act of Long in signing the company's name was ultra vires. The doctrine has no application to this case. We have shown that the debt was the debt of the company; it received all the property of the plaintiff and was morally and legally bound to pay it. Every corporation has power to make a note to secure the payment of its own debt.
Judgment reversed.