author: Ostrander, J. Bird, J.

text:
    UNION CITY LUMBER CO. v. TRAVERSE CITY, LEELANAU & MANISTIQUE RAILROAD CO.
    1. Creditors’ Suits — Stockholders’ Liability — Corporations— Bonus Stock.
    The issuance of fully paid, nonassessable stock by a corporation as a bonus to purchasers of its bond issue and to promoters of the corporation, is fraudulent and void under 3 Comp. Laws, §§ 6231, 6234, as against rights of creditors.
    2. Same — Subscriber to Corporate Stook — Judgment Creditors’ Bill — Equity.
    And in a suit to enforce stockholders’ liability, persons who have accepted stock without paying for it stand in the position of subscribers.
    3. Same.
    After so agreeing, their refusal to accept the certificates of stock would not cancel their liability to such creditor.
    Bird, J., dissenting.
    4. Same — Notice or Knowledge oe Creditors.
    That complainant, at the time his indebtedness was incurred, knew nothing of defendants’ agreements with the corporation, would not constitute a defense.
    5. Same —Corporations —Stock —Fully Paid Shares —Good Faith.
    Stock issued to contractors who have received the full value of their work performed in constructing the railroad, and who paid nothing therefor, cannot be held to have been received in good faith as fully paid.
    6. Same — Parties—Demurrer—Waiver.
    The objection that certain stockholders were not named as parties defendant by complainant’s bill was not ground for dismissal, in the absence of any demurrer or objection on that ground, where the impracticability of making such stockholders parties appeared at the hearing, although the bill omitted to aver that it was impracticable to join them as defendants.
    Appeal from Kent; McDonald, J.
    Submitted June 29, 1910.
    (Docket No. 126.)
    Decided May 31, 1912.

      Bill by the Union City Lumber Company against the Traverse City, Leelanau & Manistique Railroad Company and others for the enforcement of liability of certain stockholders. From a decree in favor of part of defendants, complainant appeals.
    Modified and affirmed.

      Thomas P. Bradfield, for appellant.

      Campbell, Bulkley & Ledyard, for appellee Union Trust Co.

      James H. Campbell, for Grand Rapids & Indiana Railway Co.
   Ostrander, J.

In addition to the facts stated in the opinion of Mr. Justice Bird, I think the following should also be stated: Metheany and Kaufman, the promoters of the Traverse City, Leelanau & Manistique Railroad Company, in their scheme for financing the proposed road, arranged with the defendant Union Trust Company for the sale of its bonds. As appears by the correspondence, the letter of the defendant Union Trust Company of November 19, 1901, was addressed to these gentlemen, is in reply to theirs of November 15th, refers to the underwriting of $300,000 of 5 percent, gold bonds of the proposed company, the terms of which are described, and contains the following:

“ The bonds to be coupon bonds and the underwriting to be at ninety cents on the dollar; one-half of which underwriting, viz., one hundred and fifty thousand dollars ($150,000) you agree to subscribe for and obtain subscriptions for, at the same price, viz., ninety cents on the dollar, the Union Trust Company to be paid a bonus for such underwriting of thirty thousand dollars ($30,000) of the par value of the stock in the proposed Traverse City, Leelanau Sc Manistique Railroad, fully paid and nonassessable; * * * the bonus stock to be delivered to the Union Trust Company when the other stock is delivered to the other stockholders, and to be received and held by it under the terms of your said letter of November 15, 1901, for a period of two years from the date of its delivery.”

To this letter Metheany and Kaufman replied, acknowledging the receipt thereof, and stating:

“The same is satisfactory to us, and is hereby accepted.”

The Traverse City, Leelanau & Manistique Railroad Company filed its articles of incorporation November 25, 1901. Of an authorized capital of $500,000, $15,000 was subscribed in the articles of association. The articles showed $500 per mile subscribed and that 5 per cent, of the amount subscribed had been paid in to the directors in good faith in cash by the subscribers. 2 Comp. Laws, § 6223. The railroad was constructed. During the period from April to October, 1903, the complainant furnished certain material used in the construction of the road, for the value of which its judgment was taken. No report was ever filed by the railroad company or by its officers until 1907. The complainant was unable to secure the production in court of the books of the defendant railroad company, and there is before the court no record of the company showing the issue of any stock to any person. It appears from the testimony that a certificate or certificates of stock were issued and tendered to the Grand Rapids & Indiana Railway Company, to whom Metheany and Kaufman had made a sale of some of its bonds, and that the tender was refused. It also appears that, shortly before the bill in this cause was filed, a certificate for stock of the Traverse City, Leelanau & Manistique Railroad Company, numbered 2, for 300 shares, was issued to the defendant Union Trust Company, under date March 23, 1904, in which certificate it is stated that “Union Trust Company is the owner of three hundred shares of the full paid capital stock of ” said company. The testimony shows that this certificate was received by the Union Trust Company April 8, 1904.

On the 2d of June following, the Union Trust Company wrote to Mr. Metheany, addressed as president of the defendant railroad company, a letter as follows:

“A question has been raised whether the stock of the, Traverse City, Leelanau & Manistique Railroad Company has been fully paid ; it being claimed that the stockholders must contribute to pay obligations of the company.
“The stock fee which the Union Trust Company was to be paid for financing your road was a stock that was fully paid and nonassessable. Is that true of the stock issued for that purpose ? If it is not, I cannot accept, on behalf of the Trust Company, the stock which has already been issued.”

In reply, Mr. Metheany, adding to his signature the abbreviation “Pres.,” wrote:

“I have your letter of June 3d, on the subject of the capital stock of the Traverse City, Leelanau <& Manistique Railroad Company. The stock was issued to MacDonald Brothers & Company as part consideration under their contract for the construction of the road, and was purchased from them by Mr. Kaufman and myself. I consider the stock fully paid. If under those conditions you do not need the stock, you will please so advise me.”

The Union Trust Company kept the certificate. The contract for the construction of the defendant railroad was dated July 3, 1902, the parties thereto being the railroad company and MacDonald Bros. & Co. By its terms the railroad company, in consideration of the performance by the contractors of their undertaking, agrees to pay certain specified sums and prices; for example: For clearing, at the rate of $25 per acre; for excavating, at the rate of 20 cents per cubic yard; for track laying, at the rate of $300 per mile; for ballasting, at the rate of $575 per mile. The contractor testified that the prices named in the contract for different classes of work were prices named in the bid. Written on the margin of the contract is the following paragraph in the handwriting of Mr. Metheany:

“And as a further consideration, the company agrees to issue, deliver, and turn over to the contractor all of the unsubscribed capital stock of the company, the same being -shares of the par value of one hundred dollars each.”

The paragraph continues:

“Which said prices and capital stock [the words ‘and capital stock ’ being inserted] shall be in full consideration for all labor and material.”

The testimony of Archibald MacDonald, one of the contractors, is that he has no recollection that any certificate of stock was ever issued to him or in his name, no certificate ever came into his possession, and he never considered the capital stock of the road as of any value. The following questions and answers are a part of his testimony, on cross-examination:

“Q. And you never indorsed any certificate of stock?
“A. I would not say that.
“Q. Well, if the stock was not issued in your name, what occasion would there be for indorsing it ?
“A. I understand that Mr. Kaufman had presented one paper for me to sign one time up the road; I have no recollection of it, but, if he asked me to sign a certificate over, I no doubt did, for I thought—
“Q. If you signed over a certificate, then the certificate must have been issued in your name ?
“A. It never came into my possession, and I do not remember anything about it.
“ Q. That was not the question which I asked you. I asked you whether you ever had knowledge of a certificate of stock which was issued in your name ?
“A. No, sir.
“Q. And which you assigned over to some one else ?
“A. I have not.”

The mortgage executed to secure the bonds ran to the Union Trust Company, trustee. Later an amended mortgage was executed dated March 30, 1903. The Union Trust Company sold all the bonds at par prior to September 17, 1903, excepting $75,000 which the defendant Grand Rapids & Indiana Railroad Company agreed to and did take and issued interim certificates for the bonds containing the provision that, if the road was not completed at a certain date, the Union Trust Company would buy back the bonds. It did take back the interim certificates from all the holders excepting the $75,000 subscribed by the Grand Rapids & Indiana Railway Company. It does not appear whether the trust company ever sold the bonds to any one else or issued them- again or whether it resold them to the same people. It is not claimed that the complainant knew at the time it sold the materials to the defendant railroad company what the capital stock of the railroad company was, what amount purported to have been paid thereon, or who the stockholders were or were purported to be.

With respect to the defendant Grand Rapids & Indiana Railway Company, it appears that it subscribed for and paid for $75,000 of the bonds at par some time before May 21, 1902. On April 22, 1902, the directors of that company passed a resolution reading as follows:

“Whereas, the general manager of this company has submitted a communication together with a contract between the Traverse City, Leelanau & Manistique Railroad Company and this company, providing for the subscription by this company to the bonds of the Traverse City, Leelanau & Manistique Railroad Company to the extent of $75,000 and the operation of said road when completed; and whereas, a full discussion of the subject, and the testimony of the operating and traffic officers of this company has developed two facts, to wit: First, that the establishment of a car ferry line between Northport and Manistique will not deprive the Grand Rapids road of as much business via Mackinaw as will probably be developed and secured to this company by the establishment of the car ferry; and, second, that if the Grand Rapids railroad does not take the proposed interest and make the contract with the Traverse City, Leelanau & Manistique Railroad Company, the Pere Marquette Railroad Company will take its place in making such contract and taking such interest; therefore, resolved, that the proper officers of this company are authorized to make a subscription in the sum of $75,000 to the bonds of the Traverse City, Leelanau & Manistique Railroad Company, and to enter into the contract as submitted for the operation of said Leelanau railroad; provided, first, that with the bonds they pha.ll receive $125,000 worth of 'the capital stock of the Leelanau company, and second, that an agreement shall be made between the Leelanau company and the Manistique, Marquette & Northern Railroad Company by which the latter company will agree to maintain a good and satisfactory ferry service between Northport and Manistique, and not transfer the same without the consent of the Leelanau company to some other port.”

It has already been stated that the capital stock of the defendant Traverse City, Leelanau & Manistique Railroad Company, mentioned in this resolution, was issued and tendered to and refused by the Grand Rapids & Indiana Railway Company. It is the contention of complainant that the Grand Rapids & Indiana Railway Company became entitled to 1,250 shares of the capital stock of the Traverse City, Leelanau & Manistique Railroad Company as soon as it paid for its bonds, which was in June, 1902, and that the Union Trust Company became entitled to 300 shares of such stock when it performed its agreement and as early as September, .1902; that therefore, upon the respective dates, they became holders of stock upon which nothing had been paid, and for the par value of which they were liable to existing and subsequent creditors of the road.

On the other hand, and upon the merits, the defendant the Grand Rapids & Indiana Railway Company insists that it is not proved either (a) that it subscribed for, or (6) that it ever became owner or holder of any of the said capital stock.

The defendant Union Trust Company upon the merits contends (a) that it was not a subscriber to the capital stock; (6) that it purchased the stock in good faith from Metheany and Kaufman, who had acquired it from the corporation through the contractors who built the road; (c) that the stock was issued to it as compensation for services rendered, and, in the absence of fraud or proof that the consideration was grossly inadequate, the transaction is not open to question; (d) that it became holder and owner of stock after the debt of complainant accrued. Some circumstances and conclusions applicable alike to the contentions of each of these defendants may first be considered.

The statute, provides that stock shall be transferable in the manner and under restrictions and conditions provided for in the by-laws—

“ But any certificate of stock issued before payment in full, shall show on its face, or by indorsement, the amount paid thereon, and no share shall be transferred on the books of the company until the same shall be paid in full, without the consent of the board of directors.” 2 Comp. Laws, § 6231.

The statute further provides:

“ That it shall not be lawful for any railroad company existing by virtue of any of the laws of this State, nor for any officer of any such company, to sell, dispose of, or pledge any shares in the capital stock of such company, nor to issue certificates of shares in the capital stock of such company until the shares so sold, disposed of, or pledged, and the shares for which such certificates are to be issued shall have been fully paid, nor issue any stock or bonds except for money, labor or property actually received, and applied to the purpose for which such corporation was created; and all fictitious stock dividends and other fictitious increase of the capital stock or indebtedness of any such corporation shall be void; and if any officer or officers of any such company shall issue, sell, pledge, or dispose of any shares or certificates of shares of the capital stock of such company, in violation of the provisions of this act, such officer or officers so doing shall be deemed guilty of a misdemeanor, and upon conviction thereof shall be punished as provided by law in case of issuing false or fraudulent railroad stocks. The provisions of this act shall apply as fully to the stocks and officers of consolidated railroad companies, as existing in whole or in part within this State, as to original unconsolidated companies existing as aforesaid.” 2 Comp. Laws, § 6344.

It is the duty of every railroad company to file with the secretary of State in July of each year a special report and statement, sworn to by the president and secretary, setting forth the number of shares of capital stock actually issued, sold, pledged, or disposed of by the company to the date of such report.

Assuming that all the stock not originally subscribed for was formally issued in the name of the contractors, or of one of them, it is not pretended that it was earned by them. It is idle to say that, in addition to the contract prices specified for work, either party to the agreement for construction of the road intended, in good faith, that the construction should also pay the par value of the shares of capital stock. The subterfuge of issuing the stock to the construction contractor has before now been found to be convenient, as is matter of common knowledge. The stock referred to in resolutions of the Grand Rapids & Indiana Railway Company and in the agreement made by the promoters and the Union Trust Company was not stock for which some one was first to pay value to the proposed company. No one, however credulous, can believe that. It must therefore be considered that, with respect to both the defendants concerned in this appeal, it was understood that when the promoted corporation was organized some of its capital stock should be issued to each of them. The right to the stock was in one case dependent upon an underwriting and sale of bonds of the promoted corporation, in the other case upon the fact of taking and paying for certain of its bonds. Each performed the stipulated condition. The stock was tendered to each of them. One received it; the other refused it. Some of the facts may be referred to more in detail. The proposition of the Union Trust Company to underwrite $300,000 of bonds of the Traverse City, Leelanau & Manistique Railroad Company and to be paid a bonus for such underwriting of $30,000 par value of the stock of said promoted corporation contains the following:

“The bonus stock to be delivered to the Union Trust Company when the other stock is delivered to the other stockholders, and to be received and held by it under the terms of your said letter of November 15,1901, for a period of two years from the date of its delivery.”

In the same communication — proposition—it is provided that, if the avails of the bonds at 90 cents on the dollar shall produce more than enough to build the railroad, the excess shall be covered into the treasury of the railroad company, and, if not sufficient, the promoters and their associates shall supply the deficit.

It is further made a condition that an operating agreement shall be entered into between the proposed corporation and the Grand Rapids & Indiana Railway Company substantially as outlined in the said letter of November 15, 1901:

" To me as secretary and treasurer of the Union Trust Company, and signed by R. R. Metheany, secretary and auditor, and a copy thereof furnished to the Union Trust Company, before any money, under the terms of this underwriting, shall become due and payable.”

The letter of November 15, 1901, referred to, does not appear to have been produced át the hearing. The letter which I have quoted from is signed by the secretary of the Union Trust Company. Metheany was secretary and auditor of the Grand Rapids, & Indiana Railway Company. The action of the directors of the Grand Rapids & Indiana Railway Company, hereinbefore set out, is in entire agreement with the understanding arrived at between the Union Trust Company and the promoters of the Traverse City, Leelanau & Manistique Railroad Company. The plan of the promoters is not obscure. It is obvious. They proposed to build a railroad, paying for construction out of the proceeds of bonds to be issued and sold. Prudently, they sought in advance to find a market for the bonds and did find one. For the purposes of promotion, they intended to use the stock of the corporation when it was formed as if it was their own, and they contracted to issue some of it in aid of the general purpose. Both contesting defendants were cognizant of, and, so far as they acted at all, they approved of, the plan. For all practical purposes, therefore, the arrangements made by the promoters with the contesting defendants. amounted to a subscription by those defendants to the capital stock of the proposed corporation, being in effect an arrangement for the disposition of $155,000 par value thereof. In other words, each of the contesting defendants, as a condition to furnishing aid to the proposed corporation, required that some of the capital stock of the corporation be turned over to it. When the corporation was organized, it ratified the arrangement made with the promoters, accepted the benefits secured thereby, and tendered performance on its part. I cannot find that the Union Trust Company and the promoters of the new corporation agreed, or intended to agree, or ever contemplated, that by its services to be rendered, the Union Trust Company would earn $30,000 par value of the capital stock of the corporation. No such claim is advanced in the answer of the Union Trust Company to the bill of complaint. No such claim is supported by testimony. Both contesting defendants, so far as the original arrangements for stock are concerned, stand alike.

It was said by this court in Peninsular Sav. Bank v. Stove Polish Co., 105 Mich. 535, 538, 539 (63 N. W. 514, 515):

“ The policy of the law, therefore, requires the utmost good faith on the part of stockholders in the payment of their stock. Any attempt to evade this liability either by issuing stock as fully paid when it is not, or by putting in property at a value grossly in excess of its real value, or by gift, or by services, or by an agreement to render services, grossly incommensurate with their value, is void as to the public and creditors.”

The. Traverse City, Leelanau & Manistique Railroad Company, the Grand Rapids & Indiana Railway Company, and the Union Trust Company were parties to an arrangement which was not only opposed to the general policy of the law, but was in direct contravention of the statute and fraudulent because forbidden. It does pot follow, however, that, because it was proposed to receive stock issued in contravention of the statute, the contesting defendants may not be held to be subscribers to stock at the suit of creditors of the corporation.

It is, for example, a rule of general application that in equity, as against creditors of a corporation, the acceptance of stock, without paying for it, places the acceptor in the position of a subscriber. Handley v Stutz, 139 U. S. 417 (11 Sup. Ct. 530), cited with approval in See, Receiver, v. Heppenheimer, 69 N. J. Eq. 36, 79 (61 Atl. 843).

It has been held, too, and I think the holding should be approved by this court, that persons subscribing to an issue of the bonds of a corporation upon the condition that shares of capital stock of the corporation, equal in par value to the value of the bonds subscribed for, shall be given with the bonds, become subscribers to the capital stock, entitled to the shares when the bonds are paid for, and liable to creditors of the corporation as holders of unpaid stock. Gillett v. Trust Co., 330 Ill. 373 (82 N. E. 891). In that case it appeared that the subscriptions, in terms, were for bonds. The provision of the subscription paper relating to stock, and the only reference to stock contained therein, was:

“ Before any subscription shall be binding there shall be deposited with the American Trust & Savings Bank, as trustee, $800,000 of the capital stock of the Columbian Celebration Company, full paid and nonassessable, said stock to be held by said trustee to be delivered to the subscribers to said bonds, as follows: Each subscriber, on the full and final payment to the aforesaid trustee of the amount subscribed for by him according to the terms of his subscription, shall be entitled to receive, and the said trustee shall deliver to said subscriber, the number of bonds subscribed and paid for by him, and in addition thereto an amount of the capital stock of the Columbian Celebration Company equal, at its par value, to the par value of the bonds subscribed and fully paid for by such subscriber.”

It seems that the stock referred to had been put back into the treasury of the company by one to whom it had been issued, but who had in fact not given value for it as required by the law of the State. It was held, answering the argument that money paid for bonds ought to be treated as paid for stock, that all parties to the transaction looked upon the stock which accompanied the bonds of each subscriber as a bonus. It appeared that some of the subscribers refused and neglected to accept the shares of bonus stock. It is said in the opinion:

It has also been suggested on behalf of those who did not take actual physical possession of the stock certificates that if nothing was paid for the stock it was optional with the subscribers to take the stock or leave it when they paid for the bonds. A careful reading of the subscription agreement * * * shows that the subscribers were under precisely the same obligation to receive the stock that they were to accept the bonds. If, as between themselves and the corporation, they had the right to decline to take certificates of stock for which they had paid nothing, they had no such right as to creditors. When they became the owners of the stock, though they acquired it without paying anything therefor, they incurred a contingent liability to creditors which was not to be avoided by refusing to receive the certificates.”

And again:

“ Under the subscription agreement, when the necessary $500,000 was subscribed and payment was made by any subscriber he became the owner of the stock which was to accompany his bonds. Whether or not he obtained the certificate or left it with the trustee is a matter of entire indifference. It was by virtue of the subscription contract that he became the owner of the stock. Whether he actually received the certificate is immaterial.” Id. p. 413.

So I think it is immaterial here whether the Grand Rapids & Indiana Railway Company accepted, or did not accept, the bonus stock which it had demanded and which was tendered to it. Both it and the Union Trust Company had by the terms of the agreements they made become entitled to the stock before the complainant’s debt accrued.

It is true complainant was not informed and did not rely specifically upon either subscription to stock. But it extended credit to the Traverse City, Leelanau & Manistique Railroad Company, which company recognized the contesting defendants as entitled to own and hold $155,000 par value of its capital stock. It does no violence to settled rules or to equitable principles to permit the complainant creditor to regard them precisely as they had arranged to be regarded, namely, as having contracted to have and receive certain shares of the capital stock to be issued by the corporation debtor as a part of its original, authorized capital and to disregard, as not binding upon creditors, the stipulation that nothing should be paid for the stock. Stockholders of a corporation are permitted to escape the consequences of corporate failure beyond the sum invested or agreed to be invested in its stock, and to have a proportional share in corporate success. As against those who furnish the corporation with property necessary to carry on its business, no one who has stipulated for what has been called a “ ground floor ” interest in the corporation, who holds, or is entitled by the stipulation to hold and own, any part of the original issue of capital stock, ought to be permitted at his pleasure, and as his interest seems to demand, to repudiate or profit by the stipulation. That his position is concealed from creditors ought not to aid him. In my opinion, both the Grand Rapids & Indiana Railway Company and the Union Trust Company should be held to be liable to pay complainant upon the ground that they were as to creditors original subscribers to the capital of the debtor corporation. The Union Trust Company should be held liable upon the further ground that it accepted unpaid for shares of stock pursuant to an arrangement which matured before complainant’s debt was contracted.

It is urged as a reason for refusing relief that the bill is defective because all the stockholders are not made parties and no sufficient excuse is made for not bringing them upon the record. Dunston v. Hoptonic Co., 83 Mich. 372 (47 N. W. 322), Thompson on Liability of Stockholders, § 353, 3 Clark & Marshall on Private Corporations, p. 2461, are cited and relied upon. The particular default mentioned in the brief is that Daniel W. Kaufman, one of the original subscribers to the capital stock, was made a party to the bill and afterwards, without a showing that he was beyond the jurisdiction of the court, was dismissed. It is contended, further, that the testimony shows that this defendant was in fact a resident of Detroit for at least two years prior to the hearing. It is also urged that the record affords no information as to the personnel and number of stockholders other than the original subscribers, nor information as to when and to what amount stock was issued to Metheany and Kaufman.

It appears that the bill of. complaint was filed April 20, 1904. Complainant’s judgment was rendered February 15, 1904, for indebtedness accruing between April 21, 1903, and September 25, .1903. Execution was issued against the judgment debtor and returned unsatisfied. The subscribers to stock upon the articles of association were made parties defendant, as well as the contesting defendants. It has been heretofore stated that no report of the corporation was made until the year 1907. None of the defendants who answered intimated that there were stockholders not brought upon the record. The books of the Traverse City, Leelanau & Manistique Railroad Company and certain papers were, upon the petition of complainant, ordered to be produced, including the book, papers, and record showing the amount paid for stock in such corporation by the several stockholders prior to September 24, 1903. They were not produced. Interrogatories to be answered by defendant Richard R. Metheany were filed. This man was one of the promoters herein-before referred to and was afterwards- president of the above-named corporation.

One of the interrogatories was:

“Referring to the books and papers which the defendant Traverse City, Leelanau & Manistique Railroad Company were asked to produce in a petition filed November 1, 1904, where were said books and papers November 1, 1904?”

The answer was:

“In answer to interrogatory 3 this defendant says that he does not know where the books and papers which the Traverse City, Leelanau & Manistique Railroad Company were asked to produce in court were on the 1st day of November, 1904, but believes that they were in the hands of Daniel W. Kaufman, the treasurer and vice president of said railroad company at that time, and the said D. W. Kaufman was at that time living in Chicago, 111.”

In answer to interrogatory 10, the answer was:

“This defendant in answer to interrogatory 10 says that all of the books and papers of the Traverse City, Leelanau & Manistique Railroad Company were in the possession of said railroad company at the city of Grand Rapids, Mich., in the spring of 1903, and during that spring and summer the officers of said railroad company were removed to Manistique, Mich., and all of the books and papers of said railroad company were removed to Manistique, Mich., at that time, and since the removal of said books and papers from the offices at Grand Rapids, Mich., to Manistique, Mich., this defendant never saw the books and papers referred to in interrogatory 3, or any of them; that D. W. Kaufman, the vice president and treasurer of said Traverse City, Leelanau & Manistique Railroad Company removed from Manistique, Mich., to Chicago, 111., in the fall of 1903, and this defendant believes that the books and papers referred to in interrogatory 3 were taken to Chicago by said D. W. Kaufman at the time he removed to the city of Chicago, where he still resides.”

In answer to interrogatories 15 and 16, the answers were:

“This defendant in answer to interrogatory 15 says that D. W. Kaufman has been in the State of Michigan but once to defendant’s knowledge since November 1, 1904, at which time he was in the city of Grand Rapids in the spring of 1905 for part of a day, and this defendant saw him a short time then.
“This defendant in answer to interrogatory 16 says that D. W. Kaufman has been in Grand Rapids and Kent county but once since November 1, 1904, to defendant’s knowledge, and that was the same time as set forth in the preceding answer.”

It appears further that originally a subpoena and an alias subpoena were issued for the appearance of Daniel W. Kaufman, and were each of them returned not served because Kaufman could not be found. It further appears that this cause came on for hearing June 22, 1908, and that during the hearing a colloquy occurred between counsel as to whether Daniel W. Kaufman was a party to the suit. Counsel for complainant said:

“ I might state that I discovered, I think Thursday, that Mr. Kaufman was in the State. He was formerly a party and after a number of aliases were issued, as the records will show, we failed to get service on him, and the suit was dismissed as to him. On Thursday I found him in the State and issued a subpoena to Mr. Kaufman, which I will have marked and offered in evidence, together with the proof of the constable’s inability to find him, attached.”

He then introduced a subpoena duces tecum and return of an officer, made June 20, 1908, certifying that he tried to serve the subpoena of June 19, 1908, on Kaufman in Detroit, but was unable to find him either at his office or his house.

In the bill of complaint it is prayed that the defendant Traverse City, Leelanau & Manistique Railroad Company, as a part of its answer, be required to disclose the names and residences of all persons or corporations to whom any of the capital stock of said company was issued prior to September 25, 1903, and the amount actually received by said company from said persons and each of them. This defendant did not file an answer. I do not find in the record evidence of any objection based upon a want of proper parties.

The rule announced in Dunston v. Hoptonic Co., 83 Mich. 372 (47 N. W. 322), a cause decided upon demurrer to the bill, was stated in Adler v. Manufacturing Co., 13 Wis. 57, as follows:

“ The authorities show that in such actions, unless it be impossible or impracticable, all the stockholders must be made parties. This is required in order to enable the court to do complete justice between the stockholders themselves, and so that no one of them may be compelled to pay more than his due proportion, and that all alike may be obliged, according to the number of their respective shares and their pecuniary ability, to contribute toward the losses which the company may have sustained: For it would be manifestly wrong and unjust to allow the creditors to select one or more of the stockholders and compel them to submit to burdens from which the other shareholders, though equally bound, are exonerated. Hence the shareholding defendants have the right, unless some good reason for the omission be shown, to insist on all the other shareholders being parties also.”

I have no disposition to change it. But I hold that while the bill in this cause should have charged the impracticability of naming all shareholders, and did not do so, such impracticability was made to appear, and, there having been no demurrer interposed, the bill will not be dismissed in this court for want of proper allegations in this behalf.

The decree of the circuit court will be modified in accordance with this opinion, and, as modified, affirmed, with costs of both courts to complainant.

Moore, C. J., and Steere, McAlvay, Brooke, Blair, and Stone, JJ., concurred with Ostrander, J.

Bird, J.

The complainant, being a judgment creditor of the Traverse City, Leelanau & Manistique Railroad' Company, and being unable to collect its judgment, filed its bill of complaint to enforce it against certain of its stockholders on the theory that they had not paid in full for the stock which they held. This railroad was incorporated under the Michigan laws in November, 1901, with a capital stock of $500,000, for the purpose of constructing a line of railway from Traverse City to North-port in this State. The road was graded in 1902, and the ties and rails were laid in 1903. In September, 1903, the road became indebted to complainant for ties. The project was not a success and, the company failing to make payment for the ties, complainant sued and recovered a judgment against it for $1,408.67. After a hearing, the trial court gave complainant a decree against the original incorporators (save one upon whom service of process was not obtained) who subscribed for $15,000 of capital stock, but denied complainant relief against the Grand Rapids & Indiana Railway Company and the Union Trust Company. The question submitted to this court is whether these two defendants should also be held liable.

Was the Grand Rapids & Indiana Railway Company ah owner of stock prior to September, 1903 ? The claim of the complainant is that, prior-to the time its debt was incurred, the Grand Rapids & Indiana Railway Company was the holder and owner of $125,000 of. the par value of said stock for which it had paid no value. To support this contention complainant offered in evidence a resolution passed by the board of directors of that company, the material part of which is as follows:

“Resolved that the proper officers of this company are authorized to make a subscription in the sum of $75,000 to the bonds of the Traverse City, Leelanau & Manistique Railroad Company, and to enter into the contract as submitted for the operation of said Leelanau Railroad; provided, first, that with the bonds they shall receive $125,000 worth of the capital stock of the Leelanau Company.”

This was followed by a showing that the Grand Rapids & Indiana Railway Company subscribed and paid for the $75,000 in bonds. This was substantially all the material testimony complainant offered as to the ownership of the stock by the railroad. The Grand Rapids & Indiana Railroad Company, through its general manager, Mr. Hughart, conceded that the resolution was passed and that the company purchased the bonds and admitted that the stock was tendered to him, but that he declined to accept it, and that the company was never the owner of any stock prior to the time complainant’s debt was incurred. The resolution of the hoard, being followed by a purchase of the bonds by its officers, carries with it a very strong inference that the balance of the resolution was also carried out and the stock received, but, in the face of positive testimony that the stock was neither accepted nor received by the company, we are of the opinion that the trial court came to the right conclusion concerning it.

Was the Union Trust Company a stockholder prior to September, 1903 ? It appears that, just prior to and while the incorporation of the company was in contemplation, R. R. Metheany and D. W. Kaufman (who were elected president, and vice president and treasurer, respectively, upon its incorporation) made an arrangement with the Union Trust Company to act as trustee in a mortgage to be placed upon the railway, securing the payment of $300,000 in bonds of the company, and to underwrite them at 90 cents on the dollar, on condition that the officers of the railway company would subscribe for one-half of them at the same price. A further consideration was agreed upon to cover the cost of the bonds and the payment and cancellation of interest coupons. To this was added the following paragraph:

“ The Union Trust Company to be paid a bonus for such underwriting of $30,000 of the par value of the stock in the proposed Traverse City, Leelanau & Manistique Railroad, full paid and nonassessable, the capitalization of said company not to exceed $500,000, the bonus stock to be delivered to the Union Trust Company when the other stock is delivered to the other stockholders. $ $ »

In pursuance of this agreement, the mortgage was executed and the bonds sold. The sale of the bonds was completed in September, 1902, by the trust company, but it did not receive its certificate of stock' until April, 1904. Under these facts counsel are in direct conflict over the question as to whether the trust company was a stockholder prior to the time the debt was incurred by the railway company.

The record shows that the railway became indebted to the complainant in September, 1903. The trust company finished selling the bonds in September, 1902. The trust company had then performed the services which entitled it to the stock under its contract. The stock then belonged to the trust company, but its delivery was postponed until the stock should be delivered to the other stockholders. Save for the clause with reference to delivery, it could have then enforced the delivery of the certificate. We think it must be said, under these circumstances, that the trust company became the owner of the stock and a member of the company in September, 1902, so as to make it liable as a stockholder at the suit of a creditor, notwithstanding it did not receive its certificate of stock until September, 1904. The certificate is not the stock. It is simply evidence of title to the stock. Angelí & Ames on Private Corporations, § 113; 1 Cook on Stock and Stockholders, § 192; Chaffin v. Cummings, 37 Me. 83; Burr v. Wilcox, 22 N. Y. 551; Holland v. Development Co., 65 Minn. 324 (68 N. W. 50, 60 Am. St. Rep. 480); Hawley v. Upton, 102 U. S. 314; Mitchell v. Beckman, 64 Cal. 117 (28 Pac. 110); Corwith v. Culver, 69 Ill. 502; Kimball v. Davis, 52 Mo. App. 194; 26 Am. & Eng. Enc. Law (2d Ed.), p. 1034. In Angell & Ames the doctrine is laid down that “one may have all the rights and be liable to all the duties of a member without a certificate.” In Chaffin v. Cummings, in passing upon a like question, the court said in part:

“Nor is it necessary that certificates should have been issued. These only constitute proof of property, which may exist without them. When the corporation has agreed that a person shall be entitled to a certain number of shares in its capital, to be paid for in a manner agreed upon, and that person has agreed to take and pay for them accordingly, he becomes their owner by a valid contract, made upon a valuable consideration.”

By the terms of the contract, the trust company was to receive 300 shares of bonus stock. It performed the services contracted for. It accepted the stock and has since retained it, and, so far as the record shows, it has made no effort to rescind that part of the contract, nor has it asked to have the stock canceled on the ground of misrepresentation or fraud. Under all of the authorities, these facts would constitute the trust company a stockholder. It is insisted upon behalf of the trust company that the stock was issued to it for services rendered, and, in the absence of fraud and of any showing that the consideration was grossly inadequate, the transaction is not open to question.

The record shows that the trust company received a fair and probably the usual compensation for such services. It received $1 for each bond issued to cover the cost and an agreed consideration for paying, canceling, and returning the paid coupons to the company. It bought the bonds at 90 per cent, of their face value and sold them at par, thereby making a profit of $15,000 on the deal. The contract does not deal with the stock as a part of the real consideration for performing the services but as a bonus — a something in addition to what is ordinarily received. The stock of the railway company belonged to the company, and the president and treasurer had no right,' as against creditors, to give it away as a bonus.

It is further argued, on behalf of the trust company, that it was not a subscriber to the capital stock of the corporation, but purchased it in good faith from the president and treasurer, who had acquired the stock from the corporation. This claim is based in part upon the following correspondence:

“ June 2, 1904.
“ Mr. R. R. Metheany,
“President Traverse City, Leelanau & Manistique Railroad Co., ‘
“Grand Rapids, Michigan.
“My Dear Mr. Metheany:
“A question has been raised whether the stock of the Traverse City, Leelanau & Manistique Railroad Company has been fully paid — it being claimed that the stockholders must contribute to pay obligations of the company.
“The stock fee which the Union Trust Company was to be paid for financing your road, was a stock that was fully paid and nonassessable. Is that true of the stock issued for that purpose ? If it is not, I cannot accept, on behalf of the trust company, the stock which has already been issued.
“Please reply to this letter.
“Very truly yours,
[Signed] “Ellwood T. Hang®,
“First Yice President.”
“Traverse City, Leelanau & Manistiqub Railroad Co.,
“Office of President,
“Grand Rapids, Mioh., June 6, 1904.
“Mr. Ellwood T. Hance,
“Vice President Union Trust Co.,
“Detroit, Michigan.
“Dear Sir.
“I have your letter of June 3d, on the subject of the capital stock of the Traverse City, Leelanau & Manistique Railroad Company. The stock was issued to MacDonald Brothers & Company as part consideration under their contract for the construction of the road, and was purchased from them by Mr. Kaufman and myself. I consider the stock fully paid. If under those conditions you do not need the stock, will you please so advise me.
“Yours truly,
“R. R. Metheany, Pres.”

The contract to render the services was made on behalf of the company. The services were rendered for the company and not for its officers, and the certificate of stock which the trust company received was delivered to it in pursuance of its contract, and it is not claimed by the trust company that it ever paid anything for the stock to either the railroad company or to Metheany and Kaufman except as it was a part of the consideration for its services performed for the railroad company, and there was no competent proof that either Metheany or Kaufman paid anything for the stock. And even if the officers of the railway did agree with the trust company that the stock was fully paid, if as a matter of fact it was not fully paid, such an agreement would be no defense to the trust company in an action like the present one. Ogilvie v. Insurance Co., 22 How. (U. S.) 380; Upton v. Tribilcock, 91 U. S. 45.

It would be manifestly unjust to permit the trust company to retain stock for which it has paid nothing and thereby become a part owner of the railway and of the very ties furnished by complainant, and at the same time deny complainant any relief. We are of the opinion that the trust company was a stockholder at the time the ties were purchased and should be held liable therefor.

The decree made by the trial court will be reversed as to the Union Trust Company, and affirmed as to the other defendants. Complainant will recover costs of both courts.


source: Caselaw Access Project

author: Bird, J.

license: Public Domain

text:
    HAKES v. MACKLIN.
    1. Process — Service—Joint Defendants.
    Where plaintiff caused a summons to be issued against several joint defendants, and after service had been made upon several of them, and after the sheriff’s return showing such service, plaintiff caused an alias summons to be issued to the sheriff of another county, where one of the defendants was found and served, the objection that the original summons ■ was returned before service upon certain defendants, and before the return day thereof, amounted merely to an irregularity of which plaintiff alone could complain. Act No. 235, Pub. Acts 1901.
    ,2. Fraud — Sales—Bills and Notes — Waiver.
    Purchasers of a stallion who made no claim of fraud for upwards of four years after delivery of the animal, could not, after its death, defend an action on promissory notes in the hands of indorsers, for false representations as to the condition or quality of the stallion.
    3. Same — Rescission— Sufficiency.
    And their request, made at the end of the season to the vendor, to replace the animal in pursuance of his warranty in writing, given at the time of making such contract, was not a rescission, but an affirmance, of the sale.
    Error to Mecosta; Palmer, J.
    Submitted April 5, 1911.
    (Docket No. 11.)
    Decided May 31, 1912.
    Assumpsit by Elisha H. Hakes against Daniel Macklin and others upon three promissory notes. Judgment for plaintiff. Defendants bring error.
    Affirmed.

      Gogger & Broomfield, for appellants.

      Louis E. Howlett, for appellee.
   Bird, J.

The defendants were sued as makers of three promissory notes for $600 each. A jury in the trial court gave plaintiff a verdict for the full amount of his claim, and the defendants have assigned error thereon in this court.

The notes in question were joint and several obligations, and were executed by 18 residents of Mecosta and Isabella counties and delivered to one Russell lams for the purchase price of a Percheron stallion. The notes were dated March 27, 1902, and made payable on September 1, 1903, 1904, and 1905. An association known as the Millbrook Percheron Horse Breeding Association was formed to own and manage the horse. The signers of the note were members of the association and each owned a $100 share in the capital stock of $1,800. The following written guaranty was given to the defendants:

“Now, therefore, I hereby guarantee the above named horse to be a reasonable sure foal getter, with proper care and handling. In case he should not prove so, I agree either to replace him with another horse of the same breed and price, upon delivery to me of the above named horse in as sound and good condition as he is at present, or to return the notes given for him, or refund the purchase price paid for said horse.”

The horse was used for breeding purposes several seasons with rather indifferent success. After four and a half years of ownership by the defendants, the horse died as the result of an injury. Only 11 of the 18 signers were served with process, and but five of them made a defense.

The defense was the general issue and notice that the defendants would show that they were induced to purchase the horse and sign the notes by false representations made by lams and his agents. The false and fraudulent representations consisted in the statements that the horse was a reasonably sure foal-getter and that each member of the association would be liable only for the amount of his stock. Notice was also given that it would be shown that the plaintiff was not a bona fide holder for value of the notes and that the contract with lams had been rescinded.

Error is assigned because the trial court denied defendants’ motion to dismiss the suit as to defendant Macklin. The record shows that the suit was commenced by summons against the 18 makers on the 11th day of August and the return day was fixed as September 1st. After service had been had upon 8 of the defendants in Mecosta county, and on August 18th, the sheriff returned the writ' with a certificate to that effect, and a further notation that the other defendants were not found. On the 86th day of August a like summons was issued by the clerk of Mecosta county, directed to the sheriff of Isabella county, in which he was commanded to make service on certáin other defendants, including the defendant Macklin. The summons bore the certificate of the clerk that 8 of the defendants, naming them, had already been served in the county of Mecosta. This summons was returned to the Mecosta county court with the return of the sheriff of Isabella county that he had served defendant Macklin in that county. Defendant Macklin appeared specially and moved the court to vacate the service as to him on the ground that the process with which he was served was void.

It is argued by his counsel that, because the original summons was returned after being served on only a part of the defendants and before the return day, the subsequent summons issued to the sheriff of Isabella county was void. We are unable to agree with counsel in this conclusion. There is nothing in the statute which inhibits the issuing of another summons until after the return day named in the original writ. The statute provides that, “when one or more of the defendants shall be served with process, * * * the plaintiff in such action may sue out one or more writs of summons.” 3 Comp. Laws, § 10010, as amended by Act No. 225, Pub. Acts 1901.

The important fact and the jurisdictional one is whether service has been had on one or more of the defendants in the county where the suit is commenced. The usual way of making proof of this fact is by the return of the writ with a certificate of service indorsed thereon. The latter part of rule 1 (a) enables plaintiff at his option to have a return made and still keep the writ in the hands of the officer until after the return day, as he might wish to do if he were laying the foundation for substituted service. No question of substituted service is involved here. If it can be said that a premature return of the writ was made under this statute, it would not render void the service upon the defendant Macklin. It would amount to nothing more than an irregularity at which only the plaintiff could complain.

The defendants/have assigned a large number of errors based upon the admission and rejection of testimony upon the charge of the court and his refusal to charge. Plaintiff’s counsel argues that the assignments of error are not well taken, and further that, if any error was committed by the trial court, it was not prejudicial error for the reason that defendants made no case which entitled them to go to the jury. This is based upon the claim of plaintiff that, if there were any fraud in the making of the contract, the defendants have by their conduct waived it. We are much impressed by this argument. The record shows that the defendants purchased the horse in March, 1902; that they used him several seasons for breeding purposes, and later, one of the members of the association was permitted to have the use of him for his keeping. They kept him until he died in November, 1906. The five defendants who defended this action admitted upon cross-examination that they knew when they signed the notes that they were signing notes for $1,800. If they did, they must have known that the representation made to them that they would be liable for only the amount of their stock was untrue. They also knew as early as the fall of 1902 that the representation that the horse was a good foal getter was not in accordance with the fact, and yet they sat idly- by for over four years without making any effort to rescind the contract on the grounds of fraud.

Defendants’ counsel claim that the contract was rescinded by a letter written by Mr. Evans on June 9, 1902. After explaining in his letter that the horse had had very poor success, he says:

“We have given the horse a fair trial and at this writing the stockholders are very much dissatisfied and want you to come and replace the horse or take him back. The majority of the stockholders would prefer that you take him back. We will willingly submit to anything that is reasonable and fair. If you replace him we would ask you to date the notes ahead as we have lost this season besides the money we have spent.”

There is no claim in the letter that they have been defrauded, neither is there any intimation that the contract is to be avoided on the ground of fraud. Instead, the letter is an attempt to induce lams to carry out the contract by taking back the horse or replacing him with another.

Iñ a very similar case where an attempt was made to defeat- an action on the notes on the ground of fraud, without first rescinding the contract, this court said:

“The defendants cannot on this record question the validity of the contract on the ground of fraud, as they have never attempted to rescind the contract.” Rumsey v. Fox, 158 Mich. 248 (122 N. W. 526).

In Mestler v. Jeffries, 145 Mich. 598 (108 N. W. 994), Mr. Justice Moore, in speaking of the duty of one who has been defrauded, said:

“The law in relation to the rescission of contracts on the ground of fraud has been declared many times in this court. It is to the effect that a party intending to rescind a contract because of fraud must be prompt in communicating the fraud when discovered, and consistent in his notice to the opposite party of the use he intends to make of it,” — citing the following authorities: Jones v. Disbrow, Har. Ch. (Mich.) 102; Street v. Dow, Har. Ch. (Mich.) 427; Galloway v. Holmes, 1 Doug. (Mich.) 330; Craig v. Bradley, 26 Mich. 353; Hubbardston Lumber Co. v. Bates, 31 Mich. 158; Dunks v. Fuller, 32 Mich. 242; Farrington v. Smith, 77 Mich. 550 (43 N. W. 927); Dailey v. King, 79 Mich. 573 (44 N. W. 959); Condon v. Hughes, 92 Mich. 367 (52 N. W. 638); Wylie v. Gamble, 95 Mich. 575 (55 N. W. 377); Bedier v. Fuller, 106 Mich. 342 (64 N. W. 331); Warnes v. Brubaker, 107 Mich. 440 (65 N. W. 276); Reed v. Ismond, 110 Mich. 16 (67 N. W. 912); Bennett v. Hickey, 112 Mich. 383 (70 N. W. 900); Speicher v. Thompson, 141 Mich. 654 (104 N. W. 1104).

We are of the opinion that the defendants have, by their inaction and retention of the horse, waived their right to insist upon the fraud. Under this view of the case, the other assignments of error will not be considered.

The judgment of the trial court is affirmed.

Moore, C. J., and McAlvay, Brooke, and Ostrander, JJ., concurred.


text:
    CALKINS v. RICE.
    1. Schools and Sohool Districts — Change of Site — Notice — Statutes — Annual Meeting.
    The amendment of 2 Comp. Laws, § 4728, made by Act No. 75, Pub‘. Acts 1905, requires that notice of intention to vote on a change of site of a schoolhouse must be given before the question may be lawfully passed on at an annual meeting of the voters.
    2. Same — Sufficiency of Notice.
    Notice of the annual meeting “for the transaction of such other business as repairing, building, or changing site, as may lawfully come before.it,” etc., was an evasive and insufficient attempt to comply with the statute.
    3. Same.
    The school board was unauthorized to change the site and place the schoolhouse on property which had not been leased or conveyed to the board. 2 Comp. Laws, § 4673.
    Appeal from Clinton; Searl, J.
    Submitted June 26, 1911.
    (Docket No. 54.)
    Decided May 31, 1912.
    Bill by Levi J. Calkins and others against Calvin M. Rice, director of the school district of Bingham and Bengal townships, Clinton county, and others, for an injunction and further relief. From a decree for complainants, defendants appeal.
    Affirmed.

      William M. Smith, for complainants.

      Walbridge & Kelly, for defendants.
   Bird, J.

The complainants commenced these proceedings to restrain the officers of fractional school district No. 1 of Bengal and Bingham townships, in Clinton county, from moving the schoolhouse to another site. The trial court granted the relief prayed, and defendants have appealed..

It appears from the record that at the annual meeting held on July 12, 1909, a resolution was adopted changing the site to the northwest corner of section 20, a short distance from the old site. Subsequently and at the same meeting a motion prevailed to leave it to the school board to decide whether the site should be located on section 20 or 17. At this meeting there were present but 7 voters, including the members of the school board. When it became known that the site had been changed, a special meeting was held on July 26th, at which there were 28 -voters present, and they voted 15 to 13 to retain the old site. At a district board meeting held August 9th, the district board, by resolution, chose the northwest corner of section 20 as the new site. On Saturday afternoon, August 14th, one member of the board caused the schoolhouse to be placed on rollers, and on Sunday, August 15th, with the aid of a traction engine, it was hauled onto the new site. A temporary injunction against moving it was allowed by the trial court on Saturday, but it was not served until Monday morning. The trial court found that the proceedings to change the site were illegal and void and ordered defendants to return the schoolhouse to the old site.

One of the grounds of invalidity relied upon is that the notice of the annual meeting was defective, in that it did not state that it was the intention to vote on the question of changing the site, in compliance with 2 Comp. Laws, section 4728, as amended. This section now reads as follows:

The qualified voters of any school district, when lawfully assembled, may designate by a vote of two-thirds of those present, such number of sites as may be desired for schoolhouses and may change the same by similar , vote at any annual or special meeting, or by the. same vote may enlarge any existing site. Whenever the question of designating a school site or of changing a school site is to be brought before the school meeting, the notice of said meeting shall state the intention to vote upon such question

That part of the section in italics was added by the legislature in 1905. Act No. 75, Pub. Acts 1905. Before this amendment was passed, it was generally understood that any business which the district could legally transact could be done at an annual meeting, without giving any notice thereof. Auditor General v. Sparrow, 116 Mich. 574 (74 N. W. 881). This amendment was added to the law with the evident purpose of requiring a notice to be given of all meetings at which it was the intention to vote upon the question of designating or changing the site, and we think it applies as well to an annual meeting as to a special meeting, if it be the intention to vote on that question.

The question then arises: Was the following notice a compliance with this amendment:

“Notice of Annual School Meeting.
“Notice. — The annual meeting of School District No. One Frl. of the Townships of Bingham and Bengal, for the transaction of such other business as repairing, building, or changing site as may lawfully come before it, will be held at the schoolhouse, Bingham township, on Monday, the 12th day of July, 1909, at 8 o’clock p. m.
“ Dated this 2d day of July, 1909.
[Signed] “C. M. Rice, Director.”

The notice appears to lack the quality of frankness. It has the appearance of attempting to comply with the statute without doing so. It is not stated in the notice that it is the intention to vote on the question of changing the site. It is true a reference is made to the question of changing the site, but it is done by including it among other matters of business which might be táken up if it were lawful and the meeting so disposed. The reference which is made to it is not coupled with the statement that it is the intention to vote upon the question. A good illustration of the efficacy of the notice in question is found in the fact that it brought out to the annual meeting but 7 voters, whereas a subsequent notice of a special meeting, from which it was understood that a vote would be taken on that question, brought out 28 voters. We are impressed that it was to prevent school sites from being designated or changed at annual meetings by only a small per cent, of the qualified voters that induced the legislature to add this amendment. If we are to give it the effect intended, we must hold that the notice was not a substantial compliance with the statute, and that all proceedings had in pursuance of it are illegal and void.

It is further insisted by complainants that the proceedings are invalid by reason of the failure of the district board to acquire the fee or a lease of the new site for a term of 50 years before placing the schoolhouse thereon.

The record shows that a deed of the new site was executed by the owner and his wife and left with his attorney, but was neither recorded nor delivered to the district board, nor to any member thereof, prior to the moving of the schoolhouse. The statute provides that, after a site has been designated, it shall be the duty of the district board to acquire it. 2 Comp. Laws, § 4673. If we were to concede that the site had been lawfully designated, we would still be obliged to hold that the action of the board in placing the schoolhouse on the new site, before it acquired the title or a 50-year lease thereto, was an unauthorized and illegal act, for the reason that it was a direct violation of the inhibition of the statute. Id. § 4673.

Other questions affecting the validity of the proceedings are raised by complainants, but we think it unnecessary to discuss them. The trial court reached the right conclusion, and its decree will be affirmed. Complainants will recover their costs in this court.

Moore, C. J., and McAlvay, Stone, and Ostrander, JJ., concurred.


author: McAlvay, J.

text:
    BERNARD v. GRAND RAPIDS PAPER BOX CO.
    1. Evidence — Master and Servant — Res Gestas.
    It was error to admit in evidence as a part of the res gestee a reply of defendant’s foreman to a question of plaintiff, more than fifteen minutes after the injury, tending to show the foreman’s purpose, in starting the machine which caused the accident, was to test it, since the statement was neither spontaneous nor a part of the aot done, but amounted merely to narrative of a past transaction.

    2. Same — New Trial — Weight or Evidence.

      Held, that the verdict should have been set aside as against the great weight of the evidence.
    Error to Kent; McDonald, J.
    Submitted June 23, 1911.
    (Docket No. 47.)
    Decided May 31, 1912.
    Case by Henry Bernard against the Grand Rapids Paper Box Company for personal injuries. Judgment for plaintiff. Defendant brings error.
    Reversed.

      Bundy, Travis & Merrick, for appellant.

      Carroll, Kirwin & Hollway, for appellee.

       As to how near the main transaction declarations must be made in order to constitute part of the res gestee, see note in 19 L. R. A. 733.

   McAlvay, J.

This case is before this court for review upon writ of error by defendant from a judgment against it in favor of plaintiff, recovered for personal injuries, claimed to have been caused on account of the negligence of defendant. Defendant company operated a paper box manufactory in Grand Rapids. Plaintiff was first employed by defendant in August, 1908, just after it had met with a fire loss, which necessitated moving temporarily into other quarters. He was employed as a millwright and carpenter to assist in installing, machines moved over from the building where the fire occurred to another building, and continued at such work for about four weeks. In November following, when defendant’s building was ready for occupancy, he was again employed by defendant and worked as a millwright in installing machines, fitting up shafting, pulleys, hangers, etc., in defendant’s building. The work was of the same kind as that done by him when first employed. As fast as machines were set up by him and ready for operation, they were put in use in the regular work of the factory; and his work continued in the same room in which machines were in operation until December 18, 1908, when the injury complained of occurred. Plaintiff on that day, and the day previous, had worked at putting in the shafting, setting up and getting ready for operation a dovetailing machine. He was working under the direction of Mr. Vos, who had charge over him, and who told him where to set this machine. He had put up most, if not all, of the shafting in that room. He fastened the dovetailing machine to the floor with but two lag screws, which, passing through holes in the bottom of the frame, were screwed into the floor. This machine is connected with a countershaft on the floor. There is a main shaft along the ceiling to which the countershaft, upon which there is a loose pulley and a drive pulley, is connected with the machine by a belt. To start this machine, the belt is shifted from the loose pulley to the drive pulley.

Plaintiff, considering he had completed his work in setting up this machine, went down to the next floor and asked Mr. Vos to come and see if it was right. At this time, the belt from the main shaft to the countershaft was on the loose pulley, and the belts from the countershaft to the machine were on. The top part of the machine, which holds the material to be dovetailed, and is operated by pushing it over the knives, was not in place. These knives were fastened to an arbor, at each end of which is a pulley, connected with a countershaft by belts, and when power is applied the knives revolve in plain view in the open throat, when the top is removed. Mr. Vos went with plaintiff as requested. At that time, the machine was not running.

What occurred after they came to the machine is in dispute. Plaintiff’s version is that Vos looked at the machine, and, putting a straight edge alongside of the pulley, said it was all right; that Vos was standing on the side of the machine near the countershaft and the loose pulley, and plaintiff was on the opposite side of the machine; that when Vos said it was all right plaintiff turned and picked up a chisel in his right hand, and was passing the machine; that he heard the loud buzzing of the machine starting, and that is the last he recollects. He was just across the machine from Vos, looking at him, and saw him make no motion to start it. He claims the chisel caught in the knives, and his arm was drawn into them. He testifies that he did not start the machine, and that it had not been started before on that morning; that he had never started the machine, and had never started any machine, nor seen any started. No other eyewitness was produced by plaintiff.

The testimony of Mr. Vos contradicts the testimony of plaintiff. He says plaintiff came to him after he had installed this machine, stating that the boxes were running hot, and requested him to come up and see what the trouble was. He went upstairs with him and felt of the boxes. They were warm, which indicated that the machine had been running. He told plaintiff that they were screwed down too tight, and at his request plaintiff got a wrench and loosened them. He then told plaintiff to start the machine to see how it would run. Plaintiff did as directed, and the machine started. It shook considerably, and Vos asked if he had put all the lag screws in. Plaintiff replied that he had not; and then he picked up an oil can and oiled the side on which he stood, and reached across the knives to oil the box on the other side. In doing so, the knives caught his shirt sleeve and dragged his arm in.

The theory of the plaintiff was that Vos started the machine for the purpose of testing it; and to establish this he was permitted, over objection, to testify to a statement made by Vos after the accident, when in the ambulance with him on the way to the hospital. This testimony was offered and admitted as a part of the res gestae.

At the close of the plaintiff’s case, counsel for defendant moved to strike out the conversation with Mr. Vos in the ambulance on the way to the hospital, on the ground that it was not a part of the res gestae. A motion was also made for a directed verdict in favor of defendant, for the reason that no negligence chargeable to defendant had been shown. Both motions were denied and exceptions taken.

On the part of the defendant, much testimony was introduced for the purpose of showing that the accident was caused by the negligence of plaintiff. This testimony was given by eyewitnesses and those to whom plaintiff had stated the cause of his injury. A motion for a new trial was made, based upon the refusal to give certain requests to charge, the improper admission of testimony, particularly the claimed conversation with Mr. Vos in the ambulance, and also that the verdict was against the weight of the evidence. This motion was denied and exceptions in writing taken by defendant.

The errors assigned cover the questions raised upon the motion for a new trial. This opinion will be confined to the principal errors relied on by defendant.

The court, in denying a motion for a new trial, relative to the conversation with Vos in the ambulance, held that it was part of the res gestae. It has been settled, upon the great weight of the authorities, that, to make such statements admissible as res gestae, they must be spontaneous, made at or near the time and place of the accident, and so closely connected with the occurrence as to be evoked and prompted by it.

“On the other hand, narrations not the natural and spontaneous outgrowth of the occurrence, and so far separated from the act they are alleged to characterize that they are not a part of it, and so connected with it as to receive credit from it, are purely narratives of a transaction already past.” White v. City of Marquette, 140 Mich. 310, at page 314 (103 N. W. 698), and authorities cited.

The plaintiff, immediately after the accident, was taken to another part of the factory, where his arm was temporarily dressed, and he waited for an ambulance. He said that he was unconscious part of the time. Fifteen or 20 minutes after the accident, the ambulance came, and Yos accompanied plaintiff to the hospital. On the way, as plaintiff testifies, the following occurred:

“Q. Did Peter Yos say anything to you, after your injury, while in the ambulance, while on the way to the hospital ?
“Mr. Bundy: Wait a moment; I object to that as in-, competent and immaterial.
“Mr. Kirwin: It is offered as part of the res gestae. (Objection overruled and exception taken.)
“A. I said to Mr. Yos, ‘What did you start that machine for ? * Says he: ‘ Henry, I started it with the intention of testing it out; but I should not have done it without putting a top on.’ ”

This was not a voluntary, spontaneous statement. According to plaintiff’s testimony, this statement resulted only from and was in answer to a direct question asked by him. It was drawn out by the direct interrogation of plaintiff. It was not the statement of an injured person, who had been for a time unconscious. The condition of the plaintiff in the instant case has no relation to the statement of Mr. Yos. It was made after the occurrence and away from the place. It cannot be said to have been a part of the act it is claimed to characterize, and was therefore a narrative of a transaction already past and completed, and was hearsay. This statement, made by its agent under the circumstances already narrated, was not competent for the purpose of fixing liability upon defendant for plaintiff’s injury.

The following excerpts from opinions of this court are in point:

“ The statements of an agent, when made in the course of his employment, and while engaged in the business of his principal, are binding upon the principal, because they are part of the res gesteej but no agent is employed to make admissions outside of his employment. * * * In the case of Vicksburg & Meridian Railroad v. O'Brien, 119 U. S. 106 [7 Sup. Ct. 121], the court, quoting Mr. Justice Strong [Northwestern Packet Co. v. Clough], 20 Wall. 541, states the principle of the rule to be that, ‘ the agent to do the act is not authorized to narrate what he had done and how he had done it, and his declaration is no part of the res gestee.’ ” Hall v. Murdock, 119 Mich. 390 (78 N. W. 329).
“We think there was no error in excluding this testimony. The injury had already occurred. It became a matter of narration, and was not even narration of the incident, but of the cause which led to the incident. We think the question was within the ruling of this court in Andrews v. Mining Co., 114 Mich. 375 [72 N. W. 242]; Michigan Cent. R. Co. v. Coleman, 28 Mich. 440.” Dompier v. Lewis, 131 Mich. 144 (91 N. W. 152).

The court erred in admitting plaintiff’s testimony of the statement of Mr. Vos.

The other contention argued on the motion for a new trial was that the verdict of the jury was against the weight of the evidence. Plaintiff was the only witness of the accident who testified in his behalf. Another witness, named Heth, who was an electrician, and had, on the day previous, installed the motor which furnished power to the shaft by which this dovetailing and other machines were operated, who, just before the accident was near this machine, was called as a witness by plaintiff. He did not see any part of the accident, having gone a short distance beyond a partition, which cut off all view of the plaintiff and his machine. He testified that plaintiff was hurt a very short time after he got out of sight. None of his testimony tends to prove how the accident occurred. It related to his recollection as to whether this machine was running that morning before the accident.

On the part of defendant, plaintiff was disputed by three witnesses, who saw the accident or the circumstances immediately preceding and following it. These witnesses were Vos, the foreman, whose testimony has already been given, and two men working in the same room on machines not far from plaintiff. One of them saw the accident, and testifies that plaintiff’s sleeve caught in the knives, while he was reaching across to oil the arbor on the other side. The other saw plaintiff with an oil can in his hand oiling on the side near him, and then reach over the knives to oil on the other side. His attention was then taken by his own work, and he did not see his arm drawn into the machine. He was also disputed by the testimony of eight witnesses as to direct and positive statements made by plaintiff to them or in their presence, to the effect that the accident occurred in the manner claimed by defendant, and that it was his own fault. Two other witnesses, who worked in this factory, testified that plaintiff quite frequently used other machines, and they had seen him start and stop them. One of them, who had worked on this machine, had seen him start and stop it. A witness, who was employed by a firm of sawmakers which sharpened the knives for the machines in defendant’s factory, testified that he sharpened the knives on this machine a few days after the accident, and that they were only dull. The teeth were sound, and had no marks or nicks on them. If metal had struck these teeth, they would have been broken or bent. Five of these witnesses were not employes of defendant. They were disinterested witnesses and not impeached. They were ordinary workingmen of the same class as plaintiff. Of all these witnesses, Vos alone can be said to have been in any way an interested witness.

The plaintiff denied this testimony; and his wife and daughter denied that a certain statement by plaintiff, detailed by one of the witnesses, did occur. The eyewitnesses were not disputed, except by plaintiff; and none of them was impeached.

Under our practice, this court must exercise its judgment as to the weight of the evidence in the instant case. We are satisfied upon this record that the verdict was against the clear weight of the evidence. We do not see how any other conclusion is possible. The instant case is of that class occasionally before the courts where, for some reason, not always apparent, justice has miscarried, and a verdict has been found against the weight of the evidence. Brassel v. Railway Co., 101 Mich. 5 (59 N. W. 426); Gregory v. Railway, 138 Mich. 368 (101 N. W. 546); Growe v. Railroad Co., 142 Mich. 696 (106 N. W. 395).

We do not think that it is necessary to consider any other questions discussed in the briefs.

The judgment is reversed, and a new trial granted.

Moore, O. J., and Brooke, Blair, and Stone, JJ., concurred.


text:
    KUSCHINSKY v. FLANIGAN.
    1. Landlord and Tenant — Rent—Defenses—Eviction.
    The eviction of a tenant from a part of demised premises, either by the landlord or by title paramount, bars the landlord’s rights to any of the .rout.
    2. Same — Partial Dispossession.
    To leave rubbish on the tenant’s premises and to construct a stairway outside a barn on the leased premises and to permit the public to pass over the leased land, to gain access to an apartment above, operated as such eviction.

      3. Same — Waiver.
    Payment of rent for a number of months thereafter and retention of possession did not waive the tenant’s right to defend against an action for rent.
    4. Same — Lease—Description.
    Under alease describing the premises as “dwelling house No. 471, located on the west side of Lincoln avenue,” the tenant acquired a right to so much of the lot as was necessary to the complete enjoyment of the building as a dwelling, including all the lot not occupied by a barn that opened on adjacent premises.
    5. Same — Waiver op Tenant’s Right.
    Plaintiff’s claim, supported by testimony, that defendant expressly waived his rights and assented to plaintiff’s action; also that defendant impliedly waived them by doing plumbing in the barn, defendant disputing the claim, should have been submitted to the jury under proper instructions.
    Error to Wayne; Donovan, J.
    Submitted June 27, 1911.
    (Docket No. 81.)
    Decided May 31, 1912.
    Assumpsit by Casper Kuscbinsky against Richard Flanigan for rent due under a lease in writing. Judgment for defendant. Plaintiff brings error.
    Reversed.

      Friedman, Smilansky & Blumrosen, for appellant.

      Thomas L. Dalton, for appellee.
   Bird, J.

The plaintiff sued defendant in justice’s court to recover a balance due on the lease of a dwelling, No. 471 Lincoln avenue, in the city of Detroit. The lease was in writing, and was to run for 21 months and 6 days, at $25 per month. The defendant vacated the premises a month and a half before the lease expired, and tendered a half month’s rent then due; but the plaintiff refused to accept it, and sued to recover two months’ rent. Judgment passed for defendant in both the justice’s and circuit courts. The defendant resisted payment of the rent, on the ground that his lease had been broken by the plaintiff by a partial eviction. It appears that plaintiff was the owner of the adjoining premises, No. 469 Lincoln avenue, and across the rear of both lots stood a barn, the second story of Which plaintiff began to remodel into a living apartment soon after defendant took possession. The defendant is a plumber, and occupied the lower floor of the barn as a shop. An outside stairway was constructed to permit access to the apartment; and the tenants of the apartment were permitted by plaintiff to pass to the street over defendant’s lot. As a result of the remodeling, defendant’s back yard was filled with building materials and rubbish. The defendant claims that by reason of these acts he was deprived of the use and enjoyment of a portion of the premises, and to such extent he was evicted. While the plaintiff does not deny the grounds upon which defandant rests his claim for partial eviction, he seeks to avoid the effect of them by claiming that the defendant has waived his right to insist upon them by remaining in the occupancy of the premises and paying the rent therefor for eight months after they occurred.

We are of the opinion that plaintiff invaded defendant’s rights under the lease when he constructed the outside stairway and permitted the tenants of the rear apartment to pass over his lot to and from the street, and by filling his back yard with building materials and rubbish. By so doing, he deprived defendant of the beneficial use and enjoyment of a portion of the premises which he had leased. 11 Am. & Eng. Enc. Law (2d Ed.), p. 471.

The rule of law applicable to an action to recover rent, where partial eviction has taken place, is stated as follows:

“ The rule established by the great weight of authority is that an eviction of the tenant by the landlord from a part only of the demised premises works a suspension of the entire rent, though the tenant remains in possession of the balance of the premises demised. The rent in such a case will not be apportioned with regard to the value of the portion from which the tenant was evicted; nor can the landlord recover for the use and occupation of the portion of which the tenant retains possession.” 18 Am. & Eng. Enc. Law (2d Ed.), p. 298, and cases cited; Pridgeon v. Boat Club, 66 Mich. 326 (33 N. W. 502).

The rule is tersely stated in Royce v. Guggenheim, 106 Mass. 201 (8 Am. Rep. 322), by Mr. Justice Gray, where a similar case was considered:

“The eviction of a tenant from the demised premises, either by the landlord or by title paramount, is a bar to any demand for rent, because it deprives him of the whole consideration for which rent was to be paid. Gilbert on Rents, 145; Morse v. Goddard, 13 Metc. 177 [46 Am. Dec. 728]. And his eviction by the landlord from part of the premises suspends the entire rent, because the landlord ‘ shall not so apportion his own wrong as to enforce the lessee to pay anything for the residue.’ Hale, C. J., in Hodgkins v. Robson, 1 Ventr. 276, 277; Page v. Parr, Style, 432; Shumway v. Collins, 6 Gray, 227; Leishman v. White, 1 Allen, 489.”

And it is said in Morris v. Kettle, 57 N. J. Law, 218 (30 Atl. 879), that:

“The tenant may continue in possession of the remainder of the premises, and his possession will not be construed as consent to the eviction; nor will the subsequent payment of rent, according to the terms of the lease as a voluntary act, operate as a waiver. Nothing but a new contract by the tenant to pay rent, in substitution for the original lease, will renew his obligation to pay.”

Applying these rules of law to the admitted facts in this case, it at once becomes apparent that the defendant did not waive his right to insist upon a partial eviction by remaining in possession of the remainder of the premises and paying rent therefor for several months after the acts complained of were committed.

There was, however, another question of waiver, which should have been submitted to the jury. It was the claim of plaintiff that the defendant expressly consented to the construction of the stairs and the remodeling of the barn; and, further, that defendant impliedly gave his consent by doing the plumbing for plaintiff in the apartment. The defendant denied that he expressly gave his consent, and explained at some length why he did the plumbing. The trial court failed to submit this question with proper instructions; in fact, he made no reference to the questions of waiver in his charge. We think his failure to do so was error.

It is also argued by plaintiff that, by the terms of the lease, the defendant was not entitled to the use of the back yard; that only the house and the land upon which it was situate passed with the lease, and therefore the acts complained of were no invasion of defendant’s rights. The lease described the property as the “dwelling house No. 471, located on the west side of Lincoln avenue.” It was a leasing by the street number, and it—

“ Included so much of the lot upon which the building was situate as was necessary to the complete enjoyment of the building for the purpose for which it was let, and nothing more.” 24 Cyc. p. 1044.

The testimony shows that the lot has a frontage of 30 feet, and the back yard is 30x40 feet, and that the barn has no opening into the back yard. In view of these facts and the further one that the building was leased to be used for a dwelling, we think the lease carried with it all of the lot which was not occupied by the barn.

Many assignments of error are based upon the charge of the court. The charge, as it appears in the record, is so meager that it was not very helpful to the jury. The court neither stated to them the questions of fact, which were for their consideration, nor the rules of law applicable thereto; and his charge as a whole fell so far short of his statutory duty that we feel the case must be reversed and a new trial ordered.

Moore, C. J., and McAlvay, Stone, and Ostrander, JJ.. concurred.