Opinion
No. 45-514.
03-20-1919
LASK v. BEDELL, Inc.
William Hauser, of Bloomfield, and Henry Goldstein, of New York City, for complainant. Wood MeKee, of Paterson, and Morris Meyers, of New York City, for defendant.
"Not to be officially reported."
Suit by Charles Lask against Bedell, Incorporated. On final hearing. Decree withheld until additional party is brought in.
William Hauser, of Bloomfield, and Henry Goldstein, of New York City, for complainant.
Wood MeKee, of Paterson, and Morris Meyers, of New York City, for defendant.
LANE, V. C. The facts, as I find them, are as follows: On March 1, 1918, complainant loaned one Corcoran $2,000 for the purpose of enabling Corcoran to acquire an interest in the stock of Bedell, Incorporated, a corporation. The loan was evidenced by a note, dated March 1, 1918, made by Corcoran to Lask, which note is unpaid. Corcoran, at the time of the advance, assigned to complainant, as collateral security for the payment of the note, "fifty per cent. of my [holdings] stock, preferred and common, in the Bedell, Incorporated, of Paterson, N. J., to be held in payment of note issued to him by Charles Lask until same is paid by me, for value received." Previous to this, and on February 16, 1918, the then holders of the capital stock of Bedell, Incorporated, had agreed to sell the stock to Corcoran, and simultaneously therewith Corcoran had assigned his interest in that contract to Levay & Friedberg, the people who were putting up the money. On February 25th an agreement had been entered into between Corcoran and Levay & Friedberg, under the terms of which Corcoran was to invest in the concern $2,000, payment to be made March 1, 1918. Levay & Friedberg were to invest $18,000, the stock of Bedell, Incorporated, was to be increased, and Corcoran was to receive $2,000 in common and $2,000 in preferred of such stock. On February 26, 1918, the transaction between the owners of the then existing stock of Bedell, Incorporated, and Corcoran and Levay & Friedberg, was consummated. Ninety shares of the then existing stock (there being 100 in all) was issued to Levay & Friedberg, and 10 shares to Corcoran. The certificates were never actually delivered, but Corcoran was thereafter recognized as a stockholder. On May 4, 1918, after a certificate had been filed increasing the capital stock from $10,000 to $40,000, one half common, the other half preferred, a meeting of the stockholders and directors was held, at which meeting there is recited to have been present: Abraham Levay, 45 shares; Abraham Friedberg, 45 shares; John J. Corcoran, 10 shares. At that meeting there was authorized the issuance to Levay & Friedberg, or their designee, of $39,000 in stock, and Levay & Friedberg, at the same meeting, directed the corporation to issue, of the stock, 200 shares common and 200 shares preferred to Corcoran. The consideration for the issuance of the increased stock was an indebtedness due from the corporation to the owners of the old stock, which indebtedness Levay & Friedberg, as individuals hadpurchased. Stock certificates were actually drawn up, but were not, in fact, delivered, for the reason, as stated, that Friedberg went on the road, and the papers were left with Meyers, the attorney. Friedberg testified that, if the defalcation hereinafter mentioned had not occurred, he judged that the stock would have been delivered to Corcoran. Corcoran, on May 4, 1918, was appointed general manager. A provision of the by-laws required that the general manager should give a suitable bond. No bond was given or exacted. In August Corcoran absconded and fled the state. Prior to his going he wrote a letter to Friedberg, advising him of the condition of affairs, and also a letter to Lask, inclosing in the letter to Lask an instrument, which reads as follows:
"July 3, 1918.
"To Whom It May Concern:
"I hereby assign 200 shares of preferred and 200 shares of common stock of Bedell, Inc., Paterson, N. J., for the consideration of one dollar and other valuable consideration, to Mr. Charles Lask of No. 159 Madison Ave., New York City, N. Y. I also give Mr. Lask power of attorney with regard to the abovementioned holdings. Signed this 3d day of July, 1918."
The assignment was antedated by Corcoran. No notice was given to the corporation, either of the assignment of March or of the lastmentioned assignment, until after the defalcation. The bill makes party defendant only Bedell, Incorporated, and prays that complainant may be adjudged to be the owner and entitled to the immediate possession of the shares of stock, that defendant be decreed to forthwith issue such shares, and that complainant have such other and further relief as may be proper. The claim of defendant is that the stock was not delivered to Corcoran because, under the by-laws, it was provided that a bond should be exacted, and the stock was held by defendant in lieu of the bond. On the trial defendant insisted, in addition, first, that the stock had not been issued, and that Corcoran had merely a chose in action against the corporation, and that the assignee of such chose in action took it subject to any equity of defendant, and that defendant was entitled to offset against the claim of the assignee its claim against Corcoran for the amount embezzled, in the neighborhood of $4,000; second, that it had a lien upon the stock for the amount due to the corporation from Corcoran. I will deal, first, with the contention made in the answer.
I. There is no evidence that any arrangement was made whereby the stock was to be held by the corporation in lieu of the bond. No agreement on Corcoran's part that it should be so held was shown. Both he and Friedberg were witnesses, and no attempt was made to prove an agreement, either that the stock should be held by the corporation in lieu of the bond, or that the stock should be held to answer any claims the corporation might have against Corcoran.
II. If the stock was in fact issued, although the certificates had not been delivered, then I fail to see upon what theory the corporation can offset against the claim of the assignee to the possession of the certificates, and to have such entry made upon the books of the corporation as will evidence his rights, any claim that the corporation may have as against Corcoran. It is the recognized law of this state that the certificate of stock is merely evidence of ownership, and that there need not be a certificate issued and delivered to vest a person with the rights of a stockholder. Storage Co. v. Assessors, 56 N. J. Law, 389, 29 Atl. 160; Warren v. Pim, 66 N. J. Eq. at page 381, 59 Atl. 773, citing Downing v. Potts, 23 N. J. Law, 66, 79: Bijur v. Standard Distilling & Distributing Co., 74 N. J. Eq. at page 556, 70 Atl. 934, affirmed on opinion below 78 N. J. Eq. 582, 81 Atl. 1131; N. Y. & East. Tel., etc., Co. v. Great East. Tel. Co., 74 N. J. Eq. at page 230, 69 Atl. 528, affirmed on opinion below 75 N. J. Eq. 297, 72 Atl. 1119; Fidelity Trust Co. v. Federal Trust Co., 87 N. J. Eq. 550, 100 Atl. at page 619.
The question is whether, in fact, the stoek was issued. In Wolcott v. Waldstein, 86 N. J. Eq. 66, 97 Atl. 951, cited by defendant, the holding of Vice Chancellor Learning was based upon the fact that the transaction under which the stock was to be issued was never, in fact, consummated. In Fidelity Trust Co. v. Federal Trust Co., supra, I held, although there were no stock certificates issued or book entries, that the transaction had been consummated, and that James Smith, Jr., had become a stockholder. In the case at bar, the transaction under which the stock was to be issued was consummated. Corcoran had paid his $2,000. The debt due from the corporation to the holders of the old stock, taken by assignment by Levay & Friedberg, had been surrendered. The corporation had directed the issuance of the stock to Levay & Friedberg, or their nominees; Levay & Friedberg had directed the corporation to in fact issue 200 shares of common and 200 shares of preferred to Corcoran, who had, as above stated, paid the full consideration therefor. The certificates were drawn up, and nothing remained to be done, except the physical delivery of the certificates. This delivery was not withheld because of any agreement. The stock was not put in escrow. The delay in delivering was due to the absence of the parties.
I am convinced, therefore, that it must be considered in this case that Corcoran, at the time of the defalcation, was in fact a stockholder of the corporation to the extent of 200 shares of common and 200 shares of preferred. If this be so, then in any actionof the assignee of Corcoran to enforce his rights in the corporation, or to compel the corporation to recognize him as a stockholder, the corporation cannot set up or offset its demand against Corcoran; the act of the officers of the corporation in delivering the certificates and making the entries upon the hooks being purely ministerial.
III. Defendant claims a lien upon the stock, and counsel for defendant cites in support of his proposition Hammond & Co. v. Hastings, 134 U. S. at page 401, 10 Sup. Ct. 727, 33 L. Ed. 960. That case, as a casual inspection will show, was based on a statute of Michigan giving a lien. The law is well settled that, in the absence of statute or by-law or agreement, a corporation has no lien upon the stock of a stockholder for a debt due from the stockholder to the corporation. 23 American & English Encyc. of Law (1st Ed.) p. 689; Drexel v. Long Branch Gas Light Co., 3 N. J. Law, 250; Young v. Vough, 23 N. J. Eq. 325; 7 Ruling Case Law, title "Corporations," § 177. Counsel also cites Mcllroy Banking Co. v. Dickson, 66 Ark. 327, 50 S. W. 868. It appears that the ruling in that case was based upon a statute. The brief of defendant was prepared and filed by New York counsel. Under a statement of counsel that the authorities are clear to the effect that a corporation is entitled to a lien on stock of stockholders who have embezzled money of the corporation, excerpts from the opinions of the courts in the two last cited cases are quoted. There is omitted any reference to the fact that both cases were decided upon statutes. A cursory examination of the cases would have indicated that they cannot be considered in any wise as authority for the proposition advanced by counsel. The courts in this jurisdiction are not accustomed to having cases cited to them in a misleading manner. The courtesy usually extended to counsel from New York to appear in cases in this court will not be extended by me to counsel engaged in this case until his conduct shall have been, if it can be, satisfactorily explained.
Complainant therefore is entitled, in my judgment, to a decree compelling the corporation to issue the stock to him, and to make such entries on the books as will evidence ownership in him. The jurisdiction of equity, I think, is indicated by the following cases: Morris v. Hussong Dyeing Machine Co. et al., 81 N. J. Eq. 256, at page 201, 86 Atl. 1026; Reilly v. Absecon Land Co., 75 N. J. Eq. at page 74, 71 Atl. 248; Archer v. American Waterworks Co., 50 N. J. Eq. 33, 50, 24 Atl. 508; Lockward v. Evans, 88 N. J. Eq. 530, 102 Atl, 19. In this case it is apparent that the dispute between the parties would have to be settled in this court because of the alleged equitable claims on the part of defendant. While the bill is apparently based upon the theory that Corcoran had a right of action against the corporation to compel the corporation to issue the stock to him, yet there is a prayer for general relief. No objection has been made to the pleadings and the case has been fully heard. I think relief, therefore, may be granted upon the facts as I find them. Complainant is not bound or prejudiced by the position he takes in his bill as he had no knowledge, at the time he filed it, of the actual conditions.
I do not think, however, that a decree should be made until Corcoran is made a party defendant. The assignment made by Corcoran to Lask is as collateral security. I think the corporation is entitled to his presence in the suit That he is a proper party was held by Vice Chancellor Emery in Morris v. Hussong Dyeing Machine Co., 81 N. J. Eq. 256, at page 261, 86 Atl. 1026. That he may, if necessary, be brought in by publication, is settled in Andrews v. Guayaquil & Quito Railway Co., 69 N. J. Eq. 211, 60 Atl. 568, affirmed 71 N. J. Eq. 768, 71 Atl. 1183.
I will withhold the signing of a decree until he is brought in.