Opinion
Nos. 6,552, 6,553.
Submitted January 9, 1930.
Decided January 30, 1930.
Corporations — Right to Purchase Own Stock — Insolvency — Tender — Authority of Officers to Negotiate Sale — Estoppel.
Corporations — Private Corporation may Purchase Own Stock, When. 1. A private corporation may purchase its own stock if the transaction is fair and in good faith, if it is free from fraud, actual or constructive, if the corporation is not insolvent or in process of dissolution, and if the rights of its creditors are in no way affected thereby.
Same — Authority of Officer of Corporation Negotiating Sale of Stock With Agreement to Repurchase — Estoppel. 2. Where agreements under which a corporation contracted with purchasers of its stock to repurchase it at any time upon proper notice, were signed by its secretary-manager and its assistant secretary-treasurer, the stock being issued in regular course and the corporation receiving and retaining the purchase price, it was estopped to deny that the persons negotiating the agreements were not authorized to do so.
Tender — When Unnecessary. 3. A useless tender is not required, and when it is apparent that a tender, although required by an obligation, will be refused, it need not be made; all that is needed in such situation is that the person obligated to make the tender shall hold himself ready, willing and able to perform.
Corporations — When Insolvent. 4. If a corporation because of insufficiency of its assets is unable to pay its debts in full, it is insolvent.
Same — Reason for Holding That Corporation may not Repurchase Own Stock When Insolvent. 5. The rule that a contract by a corporation to repurchase its stock will not be enforced after the corporation has become insolvent is based on the ground that when the rights of creditors intervene, it would amount to a fraud upon them to enforce it, since, if such contracts may be enforced after insolvency, the apparent purchasers and subscribers will be converted into creditors to share with other creditors in whatever assets there may be left; such a situation is against public policy.
Same — Corporation Failing to Repurchase Own Stock as Agreed — When Complaint not Subject to General Demurrer. 6. The complaint in an action to recover the purchase price of corporate stock bought under an agreement on the part of the corporation to repurchase it at any time at the price paid for it, alleging inter alia that at the time demand for payment was made the stock of defendant corporation "was then and ever since has been worthless and of no value whatsoever," but not averring that the corporation had creditors and that the enforcement of plaintiff's demand would work an injury to its stockholders, held not open to a general demurrer.
Same — When Plaintiff in Action on Contract of Corporation to Repurchase Its Own Stock may Recover Notwithstanding Corporation Insolvent. 7. Under the complaint above, even if it be conceded that plaintiff affirmatively shows that he is a creditor of the corporation by reason of its agreement to repurchase the stock on demand, he may yet recover even if the corporation be insolvent, under certain conditions, i.e., if other creditors or stockholders are not injured thereby.
Appeal from District Court, Cascade County; W.H. Meigs, Judge.
Messrs. Murch Wuerthner and Mr. Earle N. Genzberger, for Appellants, submitted a brief; Mr. Genzberger argued the cause orally.
Messrs. Hurd, Hall McCabe, for Respondent, submitted a brief; Mr. H.C. Hall argued the cause orally.
A corporation has the power to repurchase its own shares. (Cook on Corporations, 8th ed., sec. 311; Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 101 Am. St. Rep. 569, 74 P. 938.)
Defendant cannot claim that Weekes did not have the authority to make the contract, as the amended complaints affirmatively show that defendant received, accepted and retained the money in each case. ( United States Nat. Bank v. Chappell, 71 Mont. 553, 230 P. 1084.) A corporation cannot accept stock subscriptions secured by its officers and then repudiate the concurrent promise to take back the stock under certain circumstances. ( Wisconsin Lbr. Co. v. Greene W. Tel. Co., 127 Iowa, 350, 109 Am. St. Rep. 387, 69 L.R.A. 968, 101 N.W. 742; Fremont Carriage Mfg. Co. v. Thomsen, 65 Neb. 370, 91 N.W. 376.) Even in the face of a statute forbidding the purchase of its stock by a corporation, a similar transaction was upheld in the Colorado case of Mulford v. Torrey Exploration Co., 45 Colo. 81, 100 P. 596. A well-considered case involving this same proposition is that of Dickinson v. Zubiate Min. Co., 11 Cal.App. 656, 106 P. 123, in which plaintiff's right to recover from the corporation was upheld.
The court below sustained the demurrers to the amended complaints upon the theory that the amended complaints failed to allege a tender of the indorsed certificates to the defendant. The complaint in each case alleges that the defendant refused to comply with the contract and claimed to the plaintiffs that it was unable to perform the contract. "A tender is not necessary when it appears that it would have been refused if made." ( Baum v. Northern P. Ry. Co., 55 Mont. 219, 175 P. 872; Hills v. Mutual Oil Co., 65 Mont. 317, 211 P. 314; Christiansen v. Aldrich, 30 Mont. 446, 76 P. 1007; Finlen v. Heinze, 32 Mont. 354, 80 P. 918; Hulen v. Stuart, 191 Cal. 562, 217 P. 750.)
Where a corporation has power to purchase its own capital stock, such power cannot be exercised by an officer of the corporation without special authorization by the board of directors. (14a C.J. 439; Nunez Gin etc. Co. v. Moore, 10 Ga. App. 350, 73 S.E. 432; Maryland Trust Co. v. National Mechanics' Bank, 102 Md. 608, 63 A. 70; Beach v. Palisade Realty etc. Co., 86 N.J.L. 238, 90 A. 1118; Calteaux v. Mueller, 102 Wis. 525, 78 N.W. 1082; Charles R. Hedden Co. v. Dozier, 99 N.J. Eq. 543, 133 A. 857.) A mere business manager of a corporation does not, by virtue of his office, ordinarily possess the power of buying in its capital stock. (14a C.J. 439.) An agent merely to sell shares of its stock, without any authority to sell on special terms or conditions, cannot bind the corporation by a sale on special terms unless the corporation sees fit to ratify the agreement. (2 Fletcher on Corporations, sec. 608; 14 C.J. 577; see, also, Aetna Casualty Surety Co. v. American Brewing Co., 63 Mont. 474, 208 P. 921; Farrell v. Gold Flint Mining Co., 32 Mont. 416, 80 P. 1027; Hopkins v. Paradise Heights Fruit Growers' Assn., 58 Mont. 404, 193 P. 389; 14a C.J. 94, 359; 2 Thompson on Corporations, sec. 1513; Rev. Codes, secs. 5931, 5933, 5938, 5994.)
Where the contract is negotiated and executed by an agent original authority or subsequent ratification must be pleaded and proved. (14a C.J. 399; Wagner v. St. Peter's Hospital, 32 Mont. 206, 79 P. 1054; Butte B.C. Min. Co. v. Montana Ore P. Co., 21 Mont. 539, 55 P. 112.)
In complaints of this character, it is universally held that it must be alleged that plaintiff made an offer to redeliver the stock. So far as concerns any redelivery or offer, the only allegation is that plaintiff has been and now is ready, willing and able to redeliver to defendant the certificate. Such an allegation is insufficient. ( Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 360, 101 Am. St. Rep. 569, 74 P. 938; Hulen v. Stuart, 191 Cal. 562, 217 P. 750; Lyons v. Snider, 136 Minn. 252, 161 N.W. 532; Weatherman v. Reid, 62 Mont. 522, 205 P. 251; Jendresen v. Hansen, 50 Mont. 216, 146 P. 473; Peterson v. Nelson, 77 Mont. 539, 252 P. 368; Olsen v. Northern S.S. Co., 70 Wn. 493, 127 P. 112.)
It is the universal rule that such an agreement as is here presented is absolutely unenforceable if the corporation is insolvent or in process of dissolution, or if the rights of creditors are affected thereby. ( Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 101 Am. St. Rep. 569, 74 P. 938; 2 Fletcher on Corporations, p. 1332; 7 R.C.L., sec. 210; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 Am. Rep. 199; Sarbach v. Kansas Fiscal Agency Co., 86 Kan. 734, Ann. Cas. 1913C, 415, 122 P. 113; Latulippe v. New England Inv. Co., 77 N.H. 31, 86 A. 361; McIntyre v. Bement's Sons, 146 Mich. 74, 10 Ann. Cas. 143, 109 N.W. 45; Grinde v. Dakota Trust Sav. Bank, (S.D.) 222 N.W. 670; Fuller v. Motor Tire Service Co., 190 N.C. 655, 130 S.E. 545.) Since the value of corporate stock depends entirely upon the amount and value of its assets ( Stokes' Estate, 240 Pa. St. 288, 87 A. 975; Miller v. Barber, 66 N.Y. 558; Tevis v. Ryan, 13 Ariz. 120, 108 P. 461), if the stock is worthless it must be for the reason that it has no assets or that its liabilities so far exceed its assets as to render it insolvent. Under either contingency appellants are in no situation to enforce the contract here sought to be enforced. It is only where it affirmatively appears that the assets of the corporation exceed its liabilities that such contracts will be enforced. ( Copper Belle Min. Co. v. Costello, 12 Ariz. 318, 100 P. 807; Schulte v. Boulevard Gardens Land Co., 164 Cal. 464, Ann. Cas. 1914B, 1013, 44 L.R.A. (n.s.) 156, 129 P. 582; 14a C.J. 280, and cases cited in note 89.)
These two cases were consolidated for argument and one opinion will suffice for both. Both arise out of substantially the same facts. What is said of one complaint will serve for the other, unless mention of difference is made.
It is alleged that the defendant issued certain shares of capital stock of the corporation to plaintiff upon an agreement that defendant would buy back the stock at any time, upon two weeks' notice, at the price therefor. One plaintiff, in reliance upon the agreement, bought forty shares of stock at the price of $5,000, and the other likewise bought sixteen shares at the price of $2,000. Thereafter each plaintiff gave the defendant two weeks' notice, and demanded that defendant buy back the stock as agreed, but defendant refused to buy the stock, claiming it was financially unable to do so, and ever since has so failed, neglected and refused.
It is alleged that at the time of and since the date of demand, the stock "then was and ever since has been worthless and of no value whatsoever," and that there is no market for the stock, nor has there ever been since the date of the demand; that plaintiff at all times named in the complaint has been, and now is, ready, willing and able to deliver to the defendant the certificate issued by defendant to the plaintiff for the stock upon the payment to her of the sum agreed to be paid by the defendant therefor, has offered the stock to the defendant, and has delivered to the clerk of the court the stock certificate duly indorsed. No part of the sum demanded by plaintiff has been paid by defendant.
1. In Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 101 Am. St. Rep. 569, 74 P. 938, 940, Judge Clayberg speaking for the court said: "We believe the rule to be well settled in the United States by the overwhelming weight of authority and reason that a private corporation may purchase its own stock if the transaction is fair and in good faith; if it is free from fraud, actual or constructive; if the corporation is not insolvent, or in process of dissolution; and if the rights of its creditors are in no way affected thereby," supporting the text with a long line of authorities. (And see 2 Fletcher's Cyclopedia on Private Corporations, sec. 1136, 14a C.J. 275.)
2. We shall assume that the agreement relied upon in each complaint was valid and not within any of the inhibitions mentioned in the foregoing quotation.
Some contention has been made by counsel for defendant that the persons who sold the stock for, and negotiated the agreements in behalf of, defendant were not authorized to do so, but we are not impressed by the argument. Both agreements were signed in the name of the corporation; one by the secretary-manager, "who was employed as the exclusive agent and officer with the authority to sell the capital stock of the corporation," and the other, following negotiations between the secretary-manager and the purchaser, by one signing as "Ass't Sec.-Treas."
The corporation seems to have issued the stock in regular course, and it certainly received and retained the money. It cannot now retain the benefits of the transaction and deny the authority by which the benefits were obtained. ( United States Nat. Bank v. Chappell, 71 Mont. 553, 230 P. 1084; Latulippe v. New England Inv. Co., 77 N.H. 31, 86 A. 361; Tierney v. Butler, 144 Iowa, 553, 123 N.W. 213.)
3. The question whether a sufficient tender of the stock was made to the defendant seems to have disturbed the trial court, but is not seriously argued here. We have held repeatedly that a useless tender, is not required, and that, when it is apparent that a tender, although required by an obligation, will be refused, it need not be made; all that is needed in such a situation is that the person obligated to make the tender should hold himself ready, willing and able to perform. ( Oscarson v. Grain Growers' Assn., 84 Mont. 521, 277 P. 14; Hills v. Mutual Oil Co., 65 Mont. 317, 211 P. 314; Finlen v. Heinze, 32 Mont. 354, 80 P. 918.)
4. Counsel for defendant asserts that the contracts are not enforceable for the reason that the complaints show the defendant is insolvent. Plaintiffs allege that, at the time of demand, and ever since, the stock has been, and is now, worthless and of no value whatsoever. It would seem that this condition must exist as a result of one or two conditions — either that the corporation's liabilities are greater than its assets, or the corporation has no assets. If the corporation, because of insufficiency of its assets, is unable to pay its debts in full, it is insolvent. ( Stadler v. First Nat. Bank, 22 Mont. 190, 74 Am. St. Rep. 582, 56 P. 111; National Bank of Anaconda v. Yegen, 83 Mont. 265, 271 P. 612.) The general rule undoubtedly is that a contract by a corporation to repurchase its capital stock will not be enforced after the corporation has become insolvent. ( White v. Lorimer's City Dye Works, 46 Idaho, 490, 269 P. 90; Grinde v. Dakota Trust Savings Bank, (S.D.) 222 N.W. 670.) The rule is based, not upon the ground that a corporation has not the 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. (Note to McIntyre v. E. Bement's Sons, 146 Mich. 74, 10 Ann. Cas. 143, 109 N.W. 45, 47, citing In re S.P. Smith Lumber Co., (D.C.) 132 Fed. 618, affirmed, 140 Fed. 988, 72 C.C.A. 682; Olmstead v. Vance etc. Co., 196 Ill. 236, 63 N.E. 634, affirming Vance Jones Co. v. Bentley, 92 Ill. App. 287. )
The promise of a corporation to buy its own stock "must be considered as made, and accepted with the understanding that the shareholder may not, in face of insolvency of the company, change his relations from that of shareholder to that of creditor, * * * receiving the benefits of the other. To this rule there appears to be no exception." ( McIntyre v. E. Bement's Sons, supra; and see 14a C.J. 280.)
"The reasoning underlying the determination of the courts is that the capital stock of a corporation constitutes a trust fund for the payment of debts, and that creditors are presumed to contract with the corporation upon the faith that its stock, so far as appears by its records, has been paid in, and that those who appear to be stockholders are, in fact, stockholders; this entirely aside from statute. If a purchaser of, or subscriber to, stock may contract with the corporation that it shall repurchase the stock, then every purchaser or subscriber may do likewise, and if these contracts may be enforced against the corporation after insolvency, then not only will creditors be deprived of recourse to the capital stock as a trust fund, but the apparent purchasers and subscribers will be converted into creditors to share with other creditors whatever assets there may be left. Such a situation is, of course, opposed to public policy, and cannot be permitted to exist." ( Hoover Steel Ball Co. v. Schaefer Ball Bearings Co., 90 N.J. Eq. 164, 106 A. 471, 472; Grinde v. Dakota Trust Sav. Bank, supra.)
But there is no showing in the complaint that there are any creditors of the defendant corporation, nor that the enforcement of plaintiffs' demands will work an injury to any stockholder. Where the reason for the rule fails, the rule fails, and upon the facts pleaded we see no reason why the plaintiffs are not entitled to judgment, even if the corporation is insolvent. ( O'Rourke v. Grand Opera House Co., 47 Mont. 459, 133 P. 965.) It may be argued that, in addition to the showing of insolvency, the defendant corporation is affirmatively shown to have creditors; that the plaintiffs claim to be creditors. But the foregoing discussion discloses that, if they are creditors, they may enforce their claims under certain conditions only; their claims will not be enforced if others are injured, as is explained above.
The district court sustained a general demurrer to each complaint and thereupon entered judgments for the defendant. From what has been said it appears that the demurrers should have been overruled. The judgment in each case is reversed, with direction to the trial court to overrule the demurrer.
ASSOCIATE JUSTICES MATTHEWS, GALEN, FORD and ANGSTMAN concur.