text:
    APPEALS — CORPORATIONS—STOCKHOLDER’S LIABILITY. «,
    [Erie (6th) Circuit Court,
    April 13, 1907.]
    Haynes, Parker and Wildman, JJ.
    R. D. Kunz et al. v. National Valve Co. et al.
    1. Action fob Unpaid Balance of Corpobation Stock Appealable.
    An action by the creditors of a corporation to ascertain the amount of alleged unpaid balances of stock subscriptions, on which subscriptions payment had been made only with property at an alleged overvaluation, and to compel payment of such balances when ascertained is appealable. The right of appeal is not affected by the substitution of a trustee in bankruptcy for such creditors, and to subject the same to the payment of debts of the corporation.
    2. Good-Faith Rule Applicable to Issue of Cobpobation Stock in Payment fob Property.
    The holder of corporation stock, for which property was accepted in payment at an overvaluation of such property, is not liable to creditors of the corporation for the difference as an unpaid -balance, where the transaction was made in good faith, and the overvaluation was not so gross as to be constructively fraudulent.
    3. Burden of Proof.
    The burden of proof rests on a plaintiff asserting that property has been taken by a corporation in payment for stock, at a fraudulent overvaluation, to establish such fact.
    [Syllabus approved by the court.]
    Appeal from Erie common pleas court.
    H. L. Peeke, for plaintiffs:
    Cited and commented on the following authorities. Andres v. Morgan, 62, Ohio St. 236 [56 N. E. Rep. 875; 78 Am. St. Rep. 712] ; Gates v. Stone Go. 57 Ohio St. 60 [48 N. E. Rep. 285; 63 Am., St. Rep. 705]; Morawetz, Corporations Secs. 1, 227; Chicago & G. T. By. v. Miller, 91 Mich. 166 [51 N. W. Rep. 981] ; Des Moines Gas Co. v. West, 50 Iowa 16; Booth v. Bunce, 33 N. Y. 139 [88 Am. Dec. 372]; State v. Standard Oil Co. 49 Ohio St. 137 [30 N. E. Rep. 279; 15 L. R. A. 145; 34 Am. St. Rep. 541] ; Bennett v. Minott, 28 Ore. 339 [39 Pac. Rep. 997] ; First Nat. Bank v. Trebein Co. 59 Ohio St. 316 [52 N. E. Rep. 834] ; Hathorn v. Calef, 69 U. S. (2 Wall.) 10 [17 L. Ed.' 776]; Ochiltree v. Railway, 88 U. S. (21 Wall.) 249 [22 L. Ed.' 546] ; Norris v. Wrenschall, 34 Md. 492; Brown v. Hitchcock, 36 Ohio St. 667; Sutliff v. Atwood, 15 Ohio St. 186; Johnson v. Underhill, 52 N. Y. 203; Hodgkinson v. Kelly, L. R. 6 Eq. Cas. 496; Cape’s Executor’s Case, 2 De G. M. ”& G. 562; Mexican <& S. A. Co. In re, 4 De G. & J. 544; Kinsey v. Cable Co. 27 O. C. C. 633.
    If a person accepts stock issued to him as a gratuity and the corporation becomes insolvent tlie law will create a promise to pay for it.
      Handley v. Stutz, 139 U. S. 417 [11 Sup. Ct. Rep. 530; 35 L, Ed. 227] ; Upton v. Tribilcock, 91 U. S. 45 [23 L. Ed. 203] ; Sanger v. Upton, 91 ü. S. 56 [23 L. Ed. 220] ; Chubb v. Upton, 95 U. S. 665 [24 L. Ed. 523]; Pullman v. Upton, 96 TJ. S. 328 [24 L. Ed. 818] ; Morgan County v. Allen, 103 U. S. 498 126 L. Ed. 498] ; Hawkins v. Glenn, 131 U. S.319 [9 Sup. Ct. Rep. 739; 33 L. Ed. 184]; Graham v. Railway, 102 U. S. 148 [26 L. Ed. 106] ; Richardson v. Green. 133 U. S. 30 [10 Sup. Ct. Rep. 280; 33 L. Ed. 516] ; Union Mut. Life Ins. Co. v. Manufacturing Co. 97 Ill. 537 [37 'Am. Rep. 129] ; Fogg v. Blair, 139 U. S. 118 [11 Sup. Ct. Rep. 476; 35 L. Ed. 104]; Clark v. Bever, 139 U. S. 96 [11 Sup. Ct. Rep. 468; 35 L. Ed. 88] ; Kinsey v. Cable Co. 27 O. C. C. 633; Camden v. Stuart, 144 U. S. 104 [12 Sup. Ct. Rep. 585; 36 L. Ed. 363]; Rick-erson Roller-Mill Co. v. Foundry & Mach. Co. 75 Fed. Rep. 554 [23 C. C. A. 302; 43 U. S. App. 452],
    True-value rule. 10 Cyc. 472, 473, 474; Gates v. Stone Co. 6 Circ. Dee. 23 (9 R. 99) ; Ford v. Lamson, 9 Circ. Dec. 374 (17 R. 539) ; Kulp v. Fleming, 65 Ohio St. 321 '[62 N. E. Rep. 334; 87 Am. St. Rep. 611] ; Wick Nat. Bank v. Bank, 62 Ohio St. 446 [57 N. E. Rep. 320; 78 Am. St. Rep. 734]; Scofield v. Oil Co. 27 O. C. C. 347.
    Payment for shares. 5 Cyc. 378; 10 Cyc. 460, 461, 463, 464, 797, 799; Price, In re, 92 Fed. Rep. 987; Scovill v. Thayer, 105 U. S. 143 [26 L. Ed. 968].
    F. P. Zollinger is personally liable for the stock standing in his name as trustee. 10 Cyc. 697; Schwill v. Beckel, 13 Dec. 699; Cook, Stockholders Sec. 503e; Holcomb v. Gibson, 1 O. S. C. D. 783 (39 Bull. 380) ; National Tube-Works Co-, v. Gilfillan, 124 N. Y. 302 [26 N. E. Rep. 538] ; Ailing v. Wenzel, 133 Ill. 264 [24 N. E. Rep. 551] ; Coleman v. Howe, 154 Ill. 458 [39 N. E. Rep. 725; 45 Am. St. Rep. 133]; Yan Cleve v. Berkey, 143 Mo. 109 [44 S. W. Rep. 743; 42 L. R. A. 593] ; Boulton Carbon Co. v. Mills, 78.Iowa 460 [43 N. W. Rep. 290; 5 L. R. Á. 649] ; Hastings Malt. Co v. Brewing Co. 65 Minn. 28 [67 N. W. Rep. 652] ; Wallace v. Manufacturing Co. 70 Minn. 321 [73 N. W. Rep. 189; 68 Am. St. Rep. 530] ; Lloyd v. Preston, 7 O. F. D/379 [146 U. S. 680; 13 Sup. Ct. Rep. 131; 36 L. Ed. 1111]; Home Life Ins. Co. v. Fisher, 188 U. Si 726 [23 Sup. Ct. Rep. 380; 47 L. Ed. 667] ; Parmelee v. Price, 208 Ill. 544 [70 N. E. Rep. 725] ; Commercial Bank v. Warthen, 119 Ga. 990 [47 S. E. Rep. 536]. Cited in General Digest (1905) p. 459, Par. 43b.
    It is only subsequent creditors that can complain on this transaction because they are the ones who have trusted the company upon the faith of the increased stock. Rickerson Roller-Mill Co. v. Foundry & Mach. Co. 75 Fed. Rep. 554 [23 C. C. A. 302; 43 U. S. App. 452]; First

      Nat. Bank v. Mining Go. 42 Minn. 327 [44 N. W. Rep. 198; 6 L. R. A. 676;'18 Am. St. Rep. 510] ; 2 Morawetz, Corporations pars. 832, 833; Coit v. Amalgamating Co. 119 U. S. 343 [7 Sup. Ct. Rep. 231; 30 L. Ed. 420],
    521
    Beilstein and Zollinger are chargeable with knowledge of any facts which they could have ascertained with reasonable care. Wiskard v. Hansen, 99 Iowa 307 [68 N. W. Rep. 691; 61 Am. St. Rep. 238].
    As to the claim of Zollinger and Beilstein that their stock was paid for in services. Peninsular Sav. Bank v. Stove Polish Co. 105 Mich. 535 [63 N. W. Rep. 514] ; Hurst v. Fisher, 64 Ohio St. 530 [60 N. E. Rep. 626] ; Second Nat. Bank v. Fence Post Co. 13-23 O. C. C. 274.
    Intentional overvaluation of the property is actual fraud. Lloyd v. Preston, 7 O. F. D. 379 [146 U. S. 630; 13 Sup. Ct. Rep. 131; 36 L. Ed. 1111] ; affirming, Preston v. Railway, 6 O. F. D. 127 [36 Fed. Rep. 54] ; Coit v. Amalgamating Co. 119 U. S. 343 [7 Sup. Ct. Rep. 231; 30 L. Ed. 420]; Northwestern Mut. L. Ins. Co. v. Beal Estate Co. 46 Fed. Rep. 22; Boynton v. Hatch, 47 N. Y. 225; Boynton v. Andretvs, 63 N. Y. 93; National Tube-Works Co. v. Gilfillan, 124 N. Y. 302 [26 N. E. Rep. 538] ; Craivford v. Bohrer, 59 Md. 599; Wetherbee v. Baker. 35 N. J. Eq. 501; Coleman v. Howe, 154 Ill. 458 [39 N. E. Rep. 725; 45 Am. St. Rep. 133] ; Peninsular Sav. Bank v. Stove Polish Co. 105 Mich. 535 [63 N. W. Rep. 514] ; Shickle v. Watts, 94 Mo. 410 [7 S. W. Rep. 274]; Garrett v. Mining Co. 113 Mo. 330 [20 S. W. Rep. 965; 35 Am. St. Rep. 713] ; Gilkie v. Town <& Gas Co. 46 Neb. 333 [64 N. W. Rep. 978]; Osgood v. King, 42 Iowa 478; Wishard v. Hansen, 99 Iowa 307 [68 N. ~W. Rep. 691; 61 Am. St. Rep. 238]; Salt Lake Hardware Co. v. Milling Co. 13 Utah 423 [45 Pac. Rep. 200] ; Elyton Land Co. v. Warehouse & Elevator Co. 92 Ala. 407 [9 So. Rep. 129; 12 L. R. A. 307; 25 Am. St. Rep. 65] ; Boulton Carbon' Co. v. Mills, 78 Iowa 460 [43 N. ~W. Rep. 290: 5 L. R. A. 649]; First Nat. Bank v. Mining Co. 42 Minn. 327 [44 N. W. Rep. 198; 6 L. R. A. 676; 18 Am. St. Rep. 510].
    A. B. Thompson, for R. B. Fisher:
    Nature of remedy. Thompson, Corporations Secs. 3429, 3432, 3493; Cook, Corporations Secs. 204, 206; First Nat. Bank v. Peavey, 69 Fed. Rep. 455; 20 Enc. PI. & Pr. 703, 704, 710, 724; Wellington v. Construction & Imp. Co. 52 Hun 408 [5 N. Y. Supp. 587] ; Byan v. Jacques, 103 Cal. 280 [37 Pac. Rep. 280].
    Liability of one holding stock as trustee. Holcomb v. Gibson, 1 O. S. C. D. 783 (39 Bull. 380) ; Schwill v. Beckel, 13 Dec. 699; Biggio v. Sandheger, 10 Dee. 316 (8 N. P. 13) ; Marriott v. Bailway, 16 Dec. 135, 150, 151; Biggio v. Sandheger, 16 Dec. 286; Beach, Corporations Sec. 136, Subd. H. See also 2 Morawetz, Corporations (2 ed.) Sec. 852; Thompson, Corporations Secs. 3193, 3194; Cook, Corporations (4 ed.) Secs. 245, 246; Wadsworth v. Laurie, 164 Ill. 42 [45 N. E. Rep. 435]; Grew v. Breed, 51 Mass. (10 Met.) 569; Pullman v. Upton, 96 U. S.'328, 330 [24 L. Ed. 818],
    In re liability of defendants for unpaid stock subscriptions. 10 Cyc. 473, 474; Gales v. Stone Co. 57 Ohio St. 60 |48 N. E. Rep. 285; 63 Am. St. Rep. 705] ; State Tr. Co. v. Turner, 111 Iowa 664 [82 N. W. Rep. 1029; 53 L. R. A. 136] ; Dean v. Baldwin, 99 Ill. App. 582; Clev-enger v. Moore, 58 Atl. Rep. 88.(N. J.) ; Bumsey Mfg. Co. v. Kaime, 173 Mo. 551 [73 S.. W. Rep. 470] ; Eastings Malt. Co. v. Brewing Co. 65 Miran. 28 [67 N. W.-Rep. 652] ; Van Cleve v. Berkey, 143 Mo. 109 [44 S. W. Rep. 743; 42 L. R. A. 593] ; Coleman v. Howe, 154 Ill. 458, 471, 472 [39 N. E. Rep. 725; 45 Am. St. Rep. 133] ; Boynton v. Andrews, 63 N. Y. 93; Ailing v. Wenzel, 133 Ill. 264, 265 [24 N. E. Rep. 551] ; National Tube Works v. Gilfillan, 46 Hun 248 [11 N. Y. Supp. 533], affirmed, National Tube-Works Co. v. Gilfillan, 124 N. Y. 302 [26 N. E. Rep. 538] ; Choteau v. Dean, 7 Mo. App. 210; Garden City Sand Co. v. Crematory Co. 205 Ill. 42 [68 N. E. Rep. 724]; Donald v. Smelting & Refin. Co. 62 N. J. Eq. 732 [48 Atl. Rep. 771] ; Holcomb v. Gibson, 1 O. S. C. D. 783 (39 Bull. 380) ; Schwill v. Beclcel, 13 Dee. 699, 701; Thompson, Corporations Sec. 3194; Cook, Corporations Secs. 245, 246; Hospes v. Manufacturing & Car Co. 48 Minn. 174 [50 N. E. Rep. 1117; 15 L. R. A. 470; 31 Am. St. Rep. 637] ; Wallace v. Heating Mfg. Co. 70 Minn. 321 [73 N. W. Rep. 189; 68 Am. St. Rep. 530] ; Jackson v. Traer, 64 Iowa 469 [20 N. W. Rep. 764; 52 Am. Rep. 449]; See v. Heppen-heimer, 61 Atl. Rep. 844 (N. J.) ; Wetherbee v. Baker, 35 N. J. Eq. 501, 502.
    R. H. Williams and R. K. Ramsey, for defendants.
   WILDMAN, J.

This case presents first the question of the appealability of an action instituted by a creditor of a corporation to compel the payment of claimed unpaid balances upon stock issued for overvalued property and to subject the amount of such balances from stockholders to the payment of the debts of the corporation; in which case a trustee in bankruptcy has been substituted for the original creditor plaintiff, or has been permitted to come in and litigate the questions involved in the case.

At an early stage of the action we indicated our impression that the case here presented is appealable in Ohio, notwithstanding the decision of the Supreme Court in the case of Smith v. Johnson, 57 Ohio St. 486 [49 N. E. Rep. 693]. That w an action in which a receiver appointed to wind np the affairs of a corporation brought suit below to recover unpaid subscriptions to the capital stock of the corporation, and it was held that despite the fact that several stockholders were brought in who raised no question of misjoinder, it was an action, in effect, in which the remedy sought was a recovery of money and that it was a case triable to a jury and not appealable.

There was no question there as there is in the case before us, as to the effect of the taking by a corporation of property in lieu of money as payment upon stock subscriptions, or of the issues arising upon a suit by a creditor to subject any ihterest still owned by the corporation in balances of the price of stock over and above the value of the property received by the corporation in assumed full payment of the subscription price.

The question is one not free from difficulty, but our view of the-whole matter is, that the present case demands an accounting after an ascertainment of the question of the liability of stockholders to respond to the claims of the plaintiff, assuming, of course, for the moment, that there be any liability on the part of such stockholders, and that as among all concerned equity requires an adjustment of such liabilities among the Stockholders and an ascertainment of the amount of unpaid subscriptions, if any, requisite to meet the legitimate demand of creditors for the payment of debts.

We think, then, that the ease is appealable, and as we entertained that impression from the time of our first examination of the matter, we have very fully heard the case upon its merits, giving some days’ time to its trial, and since its submission to us as much time as was possible for the consideration of the legal questions involved and very able arguments and briefs of counsel. As to the written briefs, I will say that at the cost of some night work they have all been carefully examined and we think that no important questions or propositions submitted by counsel on either side have been overlooked.

The National Valve Company, a defendant here, was organized under -the laws of this state in October, 1903, with an authorized capital stock of $7-5',000, $65,000 of which was issued, and all to one stockholder, J. G-. Schurtz: It was a sort of successor to an earlier corporation known as the Vincent Valve Company, which had been unfortunate in business and whose affairs had come under the control of a trustee in bankruptcy. The Vincent Valve Company, the earlier corporation, was organized under the laws of Michigan and in the year 1899 was brought to this city of Sandusky and entered upon business here. It acquired real estate here, by donation, I think, from the chamber of commerce, and established a plant and for several years conducted its; business. In the year 1903 it had accumulated an indebtedness of some $130,000, — $100,000, or about that sum, being due to the president of the company, the said Mr. J. G-. Schurtz, and some $20,000 to the Third National Exchange bank of this city. A suit was instituted by the bank and the company’s property placed in charge of a receiver appointed by the court of common pleas of this county. He was subsequently, in proceedings in bankruptcy in the federal court, appointed a receiver therein and the property for a time remained 'under his management as such.

During the summer of 1903 efforts were made for the reorganization of the new company, citizens of this city deeming it of importance that the plant be retained here and the business of the company continued, and among the gentlemen forwarding this project were some citizens well known to the members of the court, men of character and business ability. Some of them were attorneys at this bar; one of them was a former member of this court. As the result of all their efforts a new company, the present defendant, was organized and incorporated under the laws of'Ohio and the assets of the Vincent Valve Company were transferred at private sale by the trustee in bankruptcy to John G. Schurtz^ the principal creditor of the former concern, as I have already stated, and its' president. Immediately thereafter the stock of the National Valve Company to the amount of $65,000 was issued to Mr. Schurtz.

Schurtz had made certain arrangements with the Third National Exchange bank, which I will not stop to recite, in the nature of a sort of application upon its claim, which was a preferred claim upon this property, of $20,000 worth of bonds of the National Valve Company to be issued. The National Valve Company, October 26, 1903, I think, not only issued its stock to the amount of $65,000 to John G. Schurtz, but also $20,000 worth of bonds. These bonds were turned overdo the Third National Exchange bank to be applied upon its claims. Its original claims against the Vincent Valve Company had been changed into a claim for loans or advances made to Mr. Schurtz himself, to the amount of some $26,000 or $27,000, which bad enabled him to carry out tthe program formulated by the promoters of the new organization.. For the further protection of the bank a large block of the stock so issued to Mr. Schurtz,was transferred by him to Mr. F. P. Zollinger, an officer of the bank, as trustee. This block of stock was to an amount sufficient to give Mr. Zollinger the absolute control of the new company in any stockholders’ meeting. By a contract which had been entered into between him and Schurtz he was to receive 51-100ths of the.total stock, and in fact received 380 shares from Mr. Schurtz out of the 650 shares issued by the company to Schurtz. A part of this so received by Zol-linger, however, was for services rendered by him and deemed by Mr. Schurtz of sufficient value to justify the transfer to him of a portion of the stock so received by Mr. Schurtz from the valve company.

The new company issued its bonds to the amount of $40,000, inclusive of the $20,000 so delivered to the Third National Exchange bank, but of the remaining $20,000.so issued only $16,000 were ever disposed of, and it was, as we find, in the contemplation of the parties that said $16,000 in bonds were to go into the assets of the new company to furnish additional machinery in part and to reinforce or establish a working fund for the furtherance of its business. I may have omitted some of the details from this general statement, but sufficient has been, said to show the general nature of the transactions, an understanding of which is necessary to an intelligent consideration of the questions raised by the pleadings.

The vital question in the ease is the one presented by the claim of the plaintiff creditors and subsequently by the trustee in bankruptcy that the property received from Schurtz by the National Valve Company was grossly overvalued; that it was not worth the face value of the stock issued to Schurtz, added to the amount of the bonds which he received. This presents a question of fact upon which we have received a large amount of evidence. Connected with this are some legal questions which have been very interesting to us and which, perhaps, have not yet been determined by the courts of this state. That under the adjudications in Ohio stock is not necessarily to be deemed fully paid, although it máy so state upon its face, and although it may be so declared by resolution of the- directors of the company, is substantially undisputed here, and, indeed, it could hardly be disputed in view of some of the decisions of the Supreme and other courts of this state. .

The main controversy is, whether the property turned over to the corporation by Mr. Schurtz is to be taken as of its actual value at the time it was so transferred, or as of its understood and believed value by the parties then dealing with it, Schurtz on the one hand and the corporation on the other. The diversity of view entertained by the courts called upon to consider this question for many years and in many jurisdictions has led to the recognition in some jurisdictions of what is called the “true-value rule” and in others of the so-called “good-faith rule.” It is agreed by counsel in the case, who have made very careful research along the lines here involved, that there is this diversity of view among the courts of the different states. And it is also agreed that even in those jurisdictions where the so-called “good-faith rule” prevails, there is recognized as sometimes appearing in transactions of this character such gross overvaluation of property delivered or transferred to a corporation in payment of stock subscription as to- constitute, although actual fraud be lacking, a constructive fraud upon other stockholders not so favored and upon creditors of the corporation.

It is contended by the plaintiffs that the rule which makes a transfer of property apply as payment for subscribed stock only to the actual value' of the property, is the rule which obtains in Ohio, and much emphasis is placed upon the case of Gates v. Stone Co. 57 Ohio St. 60 [48 N. E. Rep. 285; 63 Am. St. Rep. 705], in support, as it is claimed, of this proposition. It is urged, also, in behalf of the plaintiffs, that if this rule does not obtain in Ohio, still in the case at bar there was such a gross overvaluation of the property as consistently with the igSxod intent and good faith of the officers of the corporation and Mr. 'Schurtz will present a casé of constructive fraud as against creditors.

On the other hand, it is claimed that the good-faith rule is the rule towards which the courts in the different jurisdictions are rapidly tending; that the overwhelming weight of authority will support transactions of this kind in which both parties act in absolute honesty, endeavoring to fix a real value upon the property transferred to the corporation in payment of stock subscriptions. The defendants insist that this rule has not been repudiated in the state of Ohio by the case of Gates v. Stone Co. supra, or any other decision of the court of last resort; but they urge that even if the rule contended for by counsel for the plaintiffs is correct, still the property transferred by Mr. Schurtz to the National Valve Company was, considering all conditions and circumstances, of an actual value equal to the par value of the stock received by him, plus the $20,000 of bonds.

A very careful analysis of the case of Gates v. Stone Co. supra, does not disclose a holding by the Supreme Court' that where the grantor and the grantee of property are in .error as to its actual value and the property is received by a corporation in payment for stock issued ostensibly as “full-paid stock,” it can be treated as only partially-paid stock if the property turns out to be not worth the estimate placed upon it by the parties so dealing with it. This Gates case does treat the question of good faith, but it is the question of good faith as applicable to the intentions of the parties with reference to others in the matter of fraud. The case was referred in the court below to Judge Pennewell, of Cleveland, as a referee, and .after the hearing of evidence he found that property had been turned out to the corporation at double its real value. No exceptions were filed to his report úpon this point, no objections made to the finding that the property was received by the corporation at twice its actual value, so that the ease presented itself to the Supreme Court as one in which that was a determined issue. There was no finding,' so far as appears in the report, what the parties at the time of the transfer believed the property to be worth; and the Supreme Court simply hold in substance that when parties receive a credit for twice the value of the property turned out to a corporation in payment for a stock subscription, they are not relieved from liability to pay the residue of the price by reason of the fact that they had confidence in the future prosperity of- the company and that they had no intention to defraud either stockholders or future creditors. I think that that is the spirit and substance of the decision of the Supreme Court in the. Gates case. But it does not anywheré appear in the case that the grantor or grantee of the property — by the grantee I mean the corporation acting through its officers — believed that the property was worth the par value of the stock. No claim of that kind seems to have been made in the case.

We are not to confuse the two kinds of intent here — the one the intent to defraud persons who may deal with the corporation or who may become stockholders in it, and the other the intent as among themselves to make an inflated but not necessarily fraudulent estimate of the value of the property. When the courts of some jurisdictions have mentioned the good-faith rule they have referred to the estimate of the value of the property in good faith by the persons making it. The Supreme Court in the Gates case, when it is talking about honesty, or good faith, is considering the intention of the incorporators and thq stock subscriber as to those with whom they are subsequently to deal, and who may rely upon the capitalization as a basis of credit. '

Passing now from this ease, which we think does not determine the question in dispute between the parties here, we have discovered no decision in Ohio upon which we are disposed to rely which settles the question, whether what is known as the time-value rule or the good-faith rule should apply to transactions of this kind and determine whether stock is full-paid or whether it«is not.

It would be a labor of very' great difficulty and hardly warranted at the present time to attempt a review of the multitudinous adjudications along these lines in other states and in England; but I think that I may not unprofitably read from 1 Cook, Corporations Sec. 46, wherein he discusses the principle involved in these disputes and states his view as to the current of authority. I read:

“A dissenting stockholder may object to such an issue, inasmuch as it decreases the value of his stock.”

That is, an issue of stock for property where the property is, in fact, overvalued.

“He may have the transaction set aside, and the person receiving-the stock compelled to return it. ’ ’

That would be futile as a means of giving relief to anyone here,, because the stock has become, I suppose, substantially worthless, the company having become bankrupt after conducting business for about a year from October 28, when the National Yalve Company issued this stock to Schurtz. The writer continues:

“Corporate creditors, however, are the pei’sons who generally complain. The company becomes bankrupt and they are not paid. They then find that the capital stock did not represent cash; it was paid for by property taken by the corporation at a yaluation much greater than its real value. The company being insolvent and its property gone, the corporate creditors seek to hold the stockholders liable. They seek to hold the stockholders liable for the par value of the stock, less 'the real value of the property which was turned in to the corporation. During the past twenty years there has been a vast amount of litigation on this subject. The courts still disagree in their conclusions, but a careful study of the eases will show that upon authority as well as principle the stockholders cannot be held liable in such a case. ' In England and New York they cannot be held liable at all, except on the basis of a rescission. And under all the well-considered decisions they cannot be held liable unless the property was of so trifling a character that it practically has no value whatever. This class of cases has arisen under two aspects: first, at common law; and, second, under statutes.
“At common law it is well settled that corporate creditors cannot hold stockholders liable on stock which has been issued for property, even though the property was turned over to the corporation at an agreed valuation which was largely in excess of the real value of the property. There have been cases which refuse to follow this rule, but it is clearly established by the great weight of authority.”

I am not reading all this and treating it as the law of Ohio, but only as the expression of this writer and compiler and for its indication of the trend of authority in the different states of this country and in England, and also for his discussion of the reasons which may support the one rule or the other.

I continue the quotation:

“The reason of the rule is, that if the payment by property was fraudulent, then the contract is to be treated like other fraudulent contracts. It is to be adopted in toto, or rescinded in toto and set aside. Both parties are to be restored as nearly as possible to their original positions. The property or its value is to be returned to the person receiving the stock, and he must return the stock or its real value. In New York and in England, as stated above, at common law the stockholder is not liable at all to corporate creditors, even though the overvaluation was gross and clearly known so to be. The remedy is rescission, and not the making of a new contract by the court. There are other eases, however, which hold that where the property so turned in had no substantial value, or where the overvaluation was ‘fraudulent,’ the court will hold the stockholders liable for the par value of the stock, less the value of the property. Still other cases hold that where the stock has no value when it is issued for property, the creditors are not deprived of anything and hence cannot complain. ‘If, when disposed of by the railroad company, it was without value, no wrong was done to creditors.’ Such is the language of the Supreme Court of the United States. ’ ’

I stop for a moment in the reading of the text to refer to the decision in Coit v. Amalgamating Co. 119 U. S. 343 [7 Sup. Ct. Rep. 231; 30 L. Ed. 420], affirming Coit v. Amalgamating Co. 14 Fed. Rep. 12, cited in a foot note by Cook, where this question, he says, clearly arose, and

“The court said that the creditors could not hold the stockholders liable unless there was an intentional and fraudulent overvaluation. The court said that, ‘Where full-paid stock is issued for property received, there must be actual fraud in the transaction to enable creditors of the corporation to call the stockholders to account; a gross and obvious overvaluation of property would be strong evidence of fraud.’ ”

I have already said, and it seems to be conceded by counsel for the ■defendant, an overvaluation may be so gross as to constitute not simply strong evidence of fraud but to constitute constructive- fraud and become just as binding upon the parties, so far as fixing liability is concerned, as if it were actual fraud. I read further from the note:

“The court held that although a machine and a license to use a patent were put into the company for $100,000 of stock, yet there was no fraud. The lower court said corporators ‘ought not to be made liable individually for the debts of the company at the instance of creditors, because, at a later day, the estimates fairly put upon the property at that time have become modified by subsequent events, and will not amount to the value which they set upon it.’ ”

In other words, the Supreme Court seems to be holding that the reliability of the estimate or the honesty of the persons dealing with the property cannot be affected by conditions subsequently arising, matters not known to them at the time when they fixed the value. I read further from the text:

At common law “there is no contract, express or implied,'to pay to the corporation or to corporate creditors the par value of stock which -is issued for property. Not only is there no such contract, but there is no implied fraud even though the property was overvalued. If there is express fraud the law provides ample remedies, but such a fraud must be clearly proven and is not implied from proof that the property was worth less than the par value of the stock. This principle of law, that there is no liability on stock issued for property the value of which is less than the par value of the stock, seems a self-evident principle of law. Moreover, this principle is based on business usage and is sound practice. There is no more harm in the issue of stock below par than there is in the issue of a note or bond below par. The extent to which the courts have gone in sustaining such issues of stock for property is shown by the fact that even constitutional and statutory prohibitions against watered stock have been practically construed away by the courts. Moreover, the laws of trade are more powerful than the laws of men, and in business circles it has become customary to capitalize property at a reasonably high figure. This is due to the fact that it is easier to sell stock at less than par than at par, and also to the fact that, by a large capitalization, dividends are kept low enough to avoid the cupidity of possible competitors and the interference of legislatures. To such an extent is this practice carried of issuing stock for property at an overvaluation, that the investing public and persons who give credit to corporations rather expect it, and they no longer rely upon the nominal capitalization of the company. Experience has taught them that they must investigate the real financial condition of the company, and invest or give credit upon that alone.

‘ ‘ Even the fact that a person to whom the stock is issued returns a part of it as a gift -to the corporation or to trustees for the corporation to sell the same below par and put the proceeds in the corporate treasury for a working capital does not necessarily prove fraud in the value put upon the property. The person receiving the stock may have been willing1 to sacrifice'a part of his-stock and property in order to make the rest more valuable. Shares which have been forfeited after being partly paid for may be reissued at a price equal to the unpaid subscription price or any sum in excess thereof.”

After some further discussion of the question, the writer continues, in the same section:

‘ ‘ There is a limit beyond which the courts will not go in sustaining the issue of stock for property taken at an overvaluation. If the property which is turned in is practically worthless, or is unsubstantial and shadowy in its nature, the courts will hold that there has been no payment at all, and that the stockholders are liable on the stock.
“Moreover it is to be borne in mind that the parties receiving watered stock may be liable as promoters to return profits which they have made. This is particularly the case where the promoters merely-owned an option which they have sold to the corporation at an exorbitant price.
“The remedy of the corporate creditor is in equity. An action at' law for conspiracy is difficult to maintain. The liability on stock issued for property at an overvaluation commences only upon insolvency of the corporation. Hence the statute of limitations runs from that date, or from the date when judgment is obtained against the corporation. Laches may be a bar to the collection of what is claimed to be due on watered stock. ’ ’

I have read nearly the whole of this section, which is a very long-one, because there is so much treatment in it of the principles upon which these rules are based on one side or the other — the principles, perhaps, I should rather say, which call for the adoption of some rule applicable to cases of transfer of property in exchange for stock and the resulting liabilities thereunder.

I have been much impressed in the reading of this section with the view expressed that creditors do not to-day rely upon the amount of the capitalization of the company in giving credit to a corporation to the extent that they did at some former period of our history, and the rule .upon which even the decision in Gates v. Stone Co. supra, is based, is only, that to permit property to be put in at a gross overvaluation would be a fraud upon creditors who might rely upon the capitalization of the company. It. seems to have escaped some of the courts, that where a company has remained in business for many years and its circumstances have greatly ■ changed, where it has had eithqr a profitable or an unprofitable business, the amount of its capitalization ceases to be, if it ever was, a safe criterion as to the strength of the company. That matter does not seem to be referred to in these cases, but’ the discussion is all upon the apparent theory, that the amount of the capitalization of the company is a sort of an asset for the protection of creditors, as if the money which had been paid in for stock had remained unexpended, — undisturbed, during all the vicissitudes of its business.

I am strongly of the opinion that the amount of capitalization of a company affords little basis for an estimate of the financial strength of the company. We have many companies whose profitable business has made them strong financially where their capitalization is very small, and we have others whose capitalization reaches into the millions and no one pretends to rely upon that fact as a basis of credit or an estimate of the actual financial strength of the company.

The recent promotion of numerous speculative companies of enormous capitalization, where the property was, as known to everyone, vastly less in value, is illustrative of the fact that no especial reliance is plaeed upon authorized capitalization or upon the amount of stock issued at its nominal or par value. I am suggesting all this not in any effort to repudiate the doctrine which has been established by the court of last resort of the state of Ohio, but only as explanatory of my own view that we ought not to go very much further in holding stockholders to a technical liability based upon a legal fiction. It is the judgment of this court that the “good-faith rule” should prevail in Ohio. It has not heretofore been established by any Ohio adjudication; but we believe it to be the rule more consonant with justice and more consistent with the established principles adopted in all other eases of claimed fraud. The good faith of the parties .in such cases is made the test of the validity of the transaction, except where the circumstances raise so strong a legal inference as to constitute constructive fraud.

As a question of fact, however, and lest we may be wrong in the opinion which I have expressed, we have considered the evidence bearing upon the question of the real value of the property taken by the National Valve Company from Mr. Schurtz. At the outset of this inquiry we feel very clear in our judgment that values as fixed by sacrifice sales are not to be taken as the just rule to determine the value which parties dealing with property, where the one is free to sell and the other is free to buy, should adopt. We think, as expressed in the case of Coit v. Amalgamating Co. supra, that incorporators are not to be held individually liable for the debts of the company at the instance of creditors because the estimates fairly put on the property at the time it was transferred to the company have been modified by subsequent events; and we think it equally true that the estimates which they place upon the property are not to be governed by prior forced sales of the property in a court of bankruptcy or upon execution from any court. It.has been universally held that values are not so to be fixed, but that we are to determine the value of property by its worth in the market where the grantor is free to sell, and where the purchaser is free to buy.

A number of witnesses have given their judgment as to the value of this plant and all that appertained to it as transferred by Schurtz to the National Valve Company. I will not attempt to analyze their testimony in detail and I will touch upon it only to consider certain general principles that apply to it.

In one of the foot notes to Sec. 46 of Cook, Corporations, .from which I have read, at the bottom of page 126 of the first volume, I find this language:

‘ ‘ Inasmuch as the franchise, earning power or good will is generally turned in at a high valuation, it is well to state- that the law sustains a fair valuation of the franchise,” and he cites some authority in support of this. I have not gone off to any investigation of the question as to how far the note is borne out by the decisions, because I take it for granted; and I base my conclusion upon the result of prior examinations of adjudications not dissimilar in this respect, that there is attaching to property in Ohio as in other states, a something, intangible and yet not worthless, that may have grown up along with the use of the property in the course of years. It may be something that enhances the value of a shop or some other building where a business has been carried on for a long time until customers have learned to find their way to it. It may be something attaching to the quality of stock that is turned out by a particular manufacturing establishment. It may be something that pertains to the honest and fair dealing of a merchant with his customers. In all of these instances we call it sometimes good will, sometimes we say nothing about it, but we judge the value of the property itself in the light of that circumstance taken in connection with other circumstances.

. In the case at bar there may or may not have grown up a very valuable good will connected with this plant. So far as the real estate is concerned, I doubt whether it was made particularly more valuable by reason of the fact that the Vincent Valve Company had ever conducted its business there; but the men who have spoken as witnesses upon this question, at least those who have spoken in behalf of the defendants, have taken into account in their judgment of the value of the property the fact that it had been a going concern and that it was a part of their plan of operation to keep it such after the brief period in which it was in financial difficulty. From the month of June until the month of October it was in control of the courts. From the month of July until some time in the month of November very little, if any business was done, and we are pointed to correspondence of the company with would-be purchasers of its product where the company was forced.to turn down offers or inquiries as to its goods. The very fact that it had inquiries, the very fact that, there were possible purchasers in the market who were interested in the plant and who were writing to the company and receiving responses are indicative of the fact that it had some sort of a trade which might be valuable to preserve. "We have no doubt that this was one of the matters taken into account by the promoters of the nevr company and we think legitimately so. We have considered the various items of property involved in this transfer. We have noted the character of the witnesses testifying. We think that they are honest men upon both sides, that they gave their honest judgment as to the value of the property turned over.

It is urged by counsel for the defendants, and we have heard no adverse contention on the other side, that the burden of proof rests upon the plaintiffs to establish the claim that the property was taken at an overvaluation. To sum up the whole matter, it is our view, adopting this contention of the defendants, of the correctness of which we have no doubt, that the onus resting upon the plaintiffs has not been sustained by a preponderance of the evidence. On the contrary, we think that the evidence preponderates in support of the claim made in behalf of the defendants that the stock under all the' circumstances was worth what the corporation paid for it. I am saying this in full view of the circumstance, thereafter occurring, that the business proved unprofitable, that the company failed, and that its affairs again went into bankruptcy or insolvency, but also in view of the unquestioned law that the persons engaged in the transaction were not held to prophetic vision.

Upon the question of good faith we are not to forget that no motive is apparent for any overvaluation of this property or overcapitalization of the company. They were not going out into the open market to hawk their stock about and sell it. There is no claim on the part of the creditors that anyone in fact relied upon the conduct of these men to his prejudice. There is no syllable of evidence that any credit was given upon the basis of this claimed overcapitalization — I do not know that it would be essential; but, at any rate, in judging of the whole matter it seems to us that it is fair to take into account the absence of evidence that these defendants sought to obtain credit upon any claim of theirs that the assets of the company amounted to $85,000 or any other particular sum. The man who turned out the property to the company received all the issue of stock, every share of it. No stock was sold by the company to anyone else, and in the whole transaction from its beginning to its unfortunate end, we find no evidence of anything which would fix a stigma on the character of the men who engaged in it, or which would render any one of them personally liable to respond to the claims asserted by the creditors.

Our judgment is, that the petition be dismissed.

Haynes, and Parker,' JJ., concur.


source: Caselaw Access Project

author: WILDMAN, J.

license: Public Domain

text:
    ASSESSMENTS — MUNICIPAL CORPORATIONS.
    [Lucas (6th) Circuit Court,
    March 9, 1907.]
    Haynes, Parker and Wildman, JJ.
    William V. McMaken v. Birchard A. Hayes et al.
    1. Sufficiency of Vote of Council on Street Improvements.
    When the record discloses the fact that, during proceedings and meetings of the city council for street improvements and assessment therefor, certain members of the council were present just before the votes were taken, and does not disclose that any of said members left the room before voting, and it is definitely stated that the particular resolutions and ordinances were passed by a certain number of votes being “yeas,” being the same number previously recorded as present, there is a substantial record of compliance with the statutory provision requiring the vote of the council for street improvements to be by “yeas and nays,” although the form of such record is not approved.
    [For other cases in point, see 6 Cyc. Dig., “Municipal Corporations,” §§ 1280-1305. — Ed.]
    2. Benefit to Abutting Property from Street Improvement Determined by the Council.
    Whether or not abutting property has been benefited by street improvements is not to be determined alone by the market value of the property after the improvement has been made, as compared with its value before the improvement. The real question is whether there would be any potential benefits derived from the improvements, and the determination thereof is within the discretion of the council rather than for the courts.
    [For other cases in point, see 1 Cyc. Dig., “Assessments,” §§ 223-447. — Ed.]
    3. Frontage of Property on Street as Basis for Assessment for Improvement.
    Where three separate lots, held in different ownerships, form a flatiron or wedge-shaped plat, bounded on three sides by public streets, the assessments for the improvement of adjoining streets should be assessed on each lot separately, although all three lots form a single plat of ground and are at the time used for a common purpose; and such assessment should be based on the shorter street frontage of each lot.
    For other 'cases in point, see 1 Cyc. Dig., “Assessments,” §§ 316-371. — Ed.]
    [Syllabus approved by the court.]
    O. W. Nelson, for plaintiff.
    B. A. Hayes, for defendants:
    Cited and' commented upon the following authorities: Toledo v. Sheill, 53 Ohio St. 447 [42 N. E. Rep. 323; 30 L. R. A. 598] ; Walsh v. Baron, 61 Ohio St. 15 [55 N. E. Rep. 164; 76 Am. St. Rep. 374]; Walsh v. Sims, 65 Ohio St. 211 [62 N. E. Rep. 120] ; Dayton v. Bauman, 66 Ohio St. 379 [64 N. E. Rep. 433] ; Campbell v. Cincinnati, 49 Ohio St. 463 [31 N. E. Rep. 606] ; Thatcher v. Toledo, 10 Circ. Dec. 272 (19 R. 311) ; Steckert v. East Saginaw, 22 Mich. 104; Blair v. Cary, 24 O. C. C. 560;
      Board of Education v. Best, 52 Ohio St. 138 [39 N. E. Bep. 694; 27 L. E. A. 77],
   WILDMAN, J.

This is an action brought by the treasurer to collect certain assessments for paving Fulton and Floyd streets in this city, and is defended by Birchard A. Hayes, as executor, et al., upon the grounds:

(1) That the assessments and all proceedings upon which they are based are entirely invalid by reason of the alleged fact that statutory requirements as to the taking of a vote by “yeas and nays” in the passage of certain resolutions and ordinances were not complied with.

(2) That assuming the validity of the proceedings for the construction of the pavements and the assessments for the cost thereof, the basis of the assessments was wrong in that too much frontage was charged against the lots assessed.

(3) That the property derived no benefit whatever from the paving of Fulton street, so that" any assessment for such paving was improper.

The most important question, but the one which was not perhaps so much dwelt upon either in oral argument or in briefs, is this: Whether the ordinance and the resolutions upon which the assessment was based were properly passed.

The proceedings of the council show in each instance at the beginning of the session, just what eouncilmen were present. It is not stated that a call of the roll was made, but it is alleged in each instance that a certain number of the eouncilmen, and the requisite number for the passage of such resolution or ordinance, voted “yea,” the names of the persons so voting not being specifically given in the statement of the vote. I have had the stenographer transcribe from his note, the evidence upon this subject as to each of these meetings, as shown by the journal of the board of eouncilmen, and from the transcript handed me I take by way of illustration one of the meetings and the record thereof.

From page 455, Vol. Q of the journal, it' appears that a resolution to improve Floyd street from Ashland avenue to Fulton street by paving, etc., was adopted, seventeen persons voting “yea,” or, as stated in the words of the record, “yeas, seventeen.” It appears that there were present at the session, with regard to which I have just read, whieh was on May 12, 1890, eouncilmen, whose names are given, to the number of seventeen; one of the total membership of the council was absent. The names of these eouncilmen are given as present at the convening of the meeting. The record does not show whether any of the members who were present at that time left the room prior to the vote. It does not disclose that any other member of the council came in from the time of the convening of council until the time the vote was taken.

I will not take time to read from the transcript of the various meetings. It is enough to say as to all of them that the record discloses the names of the persons who were present at the opening of the sessions, and what persons came in-or what persons departed during the session; and, although-the names of the persons voting “yea” at the time of the claimed adoption of each resolution or ordinance are not given, still the number voting “yea” in each instance coincides with the number stated in the earlier part of the record to have been present. It is insisted that-this is not sufficient; that the statute requires the call of the roll and the announcement by each member of his vote. That the statute ko requires is unquestionably true. The roll should be called and each member should announce his vote. As has been stated in the opinion in a case in our Supreme Court Reports, and has also been very forcefully asserted in a decision from another state cited to us, the object of the law is to place each member of the council upon his individual responsibility and also to inform the public how the member votes. It is the influence upon the mind of each member caused by the knowledge that the public will be informed as to how he votes that is the inducement to the requirement that he shall make public announcement of his vote upon the passage of each resolution or ordinance of the character such as we have here; that is, an ordinance of a permanent or general nature, or upon suspensions of rules so as to permit the ordinance to be read three times and passed at one meeting.

There is a case very close to the case at bar cited by counsel for defendants, Steckert v. East Saginaw, 22 Mich. 104. I will not stop to read it. There is much of the language in the opinion of Judge Cooley which perhaps might fully sustain the contention of counsel for defendants, and if it were the only ease bearing upon this question which we have been able to find, we should perhaps be very greatly influenced by it;, but there are other adjudications which we have had occasion to .examine, and I will make reference to some of them in order that we may, if possible, ascertain the general current of authority upon the question of the sufficiency or insufficiency of such a record.

The case of Barr v. Auburn (Vil.), 89 Ill. 361, holds that where the journal of a board of trustees, six in number, of a village incorporated under Rev. Stat. 1874, Chap. 24, showed that only one member, naming him, was. absent from the meeting of the board at which a certain resolution was passed, and contained this entry: “On motion of” [one of the members], “the following ordinance” [the one in question] “was unanimously adopted,” the showing'of the journal was sufficient upon the question of the proper passage of the ordinance under Sec. 41 of said act, which provided that the “yeas and nays” shall be taken upon the passage of all ordinances; that the same shall be entered upon the journal of the board, and that the concurrence of a majority of all the members elected in the city council shall be necessary to the passage of any such ordinance.

The statute there is not essentially different from our own in the section relied upon by counsel for defendants.

The case of Preston v. Cedar Rapids, 95 Iowa 71 [63 N. W. Rep. 577], holds that where the only provision regulating the voting on the passage of an ordinance by the council of a city under a charter is a rule, adopted by the city, that “All votes taken on the adoption of ordinances shall be taken by the ‘yeas and nays,’ ” it is sufficient for the record to show that all the aldermen voted for the ordinance.

In the case of Downing v. Miltonvale, 36 Kan. 740 [14 Pac. Rep. 281], with reference to a statute which provided that “All ordinances of the city shall be read and considered by sections at a public meeting of the council, and the vote on their final passage shall be taken by ‘yeas and nays,’ which shall be entered on the journal by the clerk,” it was held that where the journal shows the full vote adopting the ordinance as a whole on its final passage, it will be presumed that it was read and adopted by sections.

See also Brophy v. Hyatt, 10 Colo. 223 [15 Pac. Rep. 399].

It might be interesting to read more in detail from these various' cases, but we have concluded, although we do not approve of the practice which has been adopted, or, at least, was followed at one time in this city, in the recording of such votes as this, that there has not been such a departure from the law as, under the circumstances of this case, would justify a holding that the entire proceedings with reference to these assessments are invalid.

We think that, where the record discloses the fact as to each session of council which is under investigation that certain named members were present and it does not appear that those members or any of them departed from the session during the intervening time between its opening and the taking of the vote, or where it is indicated just which ones did depart, and where the record discloses, as here, not simply that the particular resolution or the particular ordinance was carried by a certain number of votes, but where it is definitely .stated upon each occasion that there were so many “yeas,” indicating that there must have been a taking of the vote by “yeas and nays” as to each individual member so as to enable the chairman or other person counting the vote to determine just how many voted for the resolution or ordinance, it is to be presumed that the persons whose names are given and whose number would equal the number said to have voted “yea” are the same persons who did so vote. Our judgment then is, that these proceedings are not invalid for the reason suggested by counsel for defendants.

Much difficulty has been eliminated from our consideration of the case by the concessions of counsel for the plaintiff as to the invalidity-of some of the assessments, with regard to which I need not go into detail — counsel have agreed as -to those; but we are left with the inquiry whether too much frontage has been assessed as to certain of these lots, and also whether any benefit accrued'to some of them by the Construction of the Fulton street pavement.

Taking this latter matter first, it is urged by counsel for defendants that from the time that the Fulton street pavement was constructed the property has remained in the possession and ownership of the defendants and that the pavement has become out of repair and substantially useless, perhaps, so that the market value of the property is not enhanced by it. ' The question is not, however, whether the market value is at present greater by reason of the pavement than it was before the pavement was constructed, nor whether the pavement is of present use to any of this property. The question is whether at the timé the pavement was constructed it was substantially beneficial to the properties, and we are not sufficiently apprised that the judgment of the council was at fault in this respect to justify a holding that the properties were not at that time benefited. For aught that appears, although no sales have been made of those lots or either of them, it might have been done. The market value may have been enhanced, or the pavement may have been useful in some other respects. The assessments seem to be pretty heavy upon these lots, and it is entirely possible that the properties are burdened far beyond the amount of any benefits received from the pavements, but this is so largely a matter of discretion with the council, a matter of judgment for them to exercise, that we do not feel justified in interfering with it.

It is also urged, as to the Fulton street pavement, that the improvements upon^wo of these lots, the three lots involved here being Nos. 14, 15 and 16, consist of a residence fronting on Ashland avenue, and it is claimed that with that building there is no very convenient or practicable way of improving the parts of the lots that abut on Fulton street, so as to make access to Fulton street therefrom particularly desmable or essential to the use of the properties. The three lots and their surroundings may be described succinctly as follows: They lie within an angle formed by the intersection of Fulton street and Ash-land avenue, north of said intersection, and almost exactly at this intersection Flpyd street crosses, so as to cut off or pass along the southerly end of one of the thrge lots. The combined property is in a sort of wedge or flatiron shape, lot 14 being the northerly lot of the three, 15 the middle one and 16 the southerly one, lots 14 and 15 extending from Ashland avenue to Fulton street, and lot 16 abutting oh Ashland avenue and Fulton and Floyd streets, having a frontage on Floyd street of 32.1 feet. On Fulton street all the lots have longer lines than on Ash-land avenue.

Referring again, before leaving the matter, to the contention that has been made that the property as it is improved by a structure on lots 14 and 15 derives no great benefit from the paving of Fulton street, we think that it may justly be said that' it is not altogether the present use that is made of the property but its potential use that fixes the market value of property and that such use is to be taken into account by the persons assessing the benefits. To what extent the property as a whole may be enhanced in value, if at all, by reason of the Fulton street, pavement we are unable to say, but that it may have been potentially benefited by the pavement, we think, is altogether probablé, or, at least, not improbable. With the present residence on lots 14 and 15, it may not be desirable to build shops or business buildings of any kind on the parts of lots 14 and 15 abutting on Fulton street, but possibly either at the present time or some future time it might be practicable to do so to the advantage of the properties. We dismiss, then, this question as to whether or not the properties have been benefited by the Fulton street pavement with the conclusion that we can find no just ground for interfering in this respect with the jurisdiction and action of the municipal authorities.

Another contention made by counsel for the defendants is, that the city’s estimate of the frontage assessed is wrong. It appears that lots 14 and 15 have each a frontage, if we call it such, on Fulton street, of fifty-six feet, and on Ashland avenue of fifty feet. The lots strike Ashland avenue at right angles so that the frontage is shorter on that avenue than on Fulton street. The same thing is true as to lot 16, which has a frontage on Ashland avenue of ninety-nine feet and on Fulton street of 129.34 feet. It is conceded, I believe, by counsel for plaintiff, that as to 14 and 15 the Ashland avenue frontage should be taken, and that the assessment, which has been upon the basis of fifty-six feet, is too great. We think that counsel are entirely right in this concession, and that it is one that should be made. It is the conclusion at which we should have arrived as to these two lots, had the concession not been made.

As to lot 16, it is claimed now by counsel for plaintiff that the frontage on Ashland avenue of ninety-nine feet should be taken instead of 32.1 feet on Floyd street. In the case of Toledo v. Sheill, 53 Ohio St. 447 [42 N. E. Rep. 323; 30 L. R. A. 598], it was held, with reference to a corner lot, that the frontage to be assessed should presumptively be that on the shorter line. We have here, as to lot 16, not simply a lot abutting on two streets but we have one abutting on three. We have no doubt that the principle of the decision applies, and our judgment is, that the frontage contended for by counsel for defendants is the correct one; that is, 32.1 feet. It is urged by counsel for plaintiff that these three lots are substantially one property. There is but one improvement upon them and lot 16 is little more than a lawn or dooryard, it is said, appurtenant to the residence property on lots 14 and 15. It is said, that a walk leading from the entrance to the house on lots 14 and 15, angles across a part of lot 16, so that the three lots should be taken together as one residence property and logically be assessed upon the Ashland avenue length or front. We think, however, that this contention of counsel for plaintiff cannot be sustained. It happens at the present time that no especial use is apparently made of lot 16 other than .that stated, but, as in the other case, we are to consider not simply the present, but the future, uses that may be made of the property. The principle is just as applicable in favor of the defendants as it is against them. And it -is to be remembered, as shown by the evidence, that the titles to the properties were, at the time of the assessments, in different people, lots 14 and 15 being owned by Mrs. Birchard Hayes, and lot 16 by the late Rutherford B. Hayes.

Our conclusion of the whole matter is, that the assessment should stand with the modifications which I have indicated: that lots 14 and 15 should be assessed each upon the basis of fifty feet front and lot 16 upon the basis of 32.1 feet. I believe that this disposes of. all the questions that were presented. The decree of the court w.ill be accordingly entered.

Haynes and Parker, JJ., concur.


author: QIFFEN, J.

text:
    LIFE ESTATES — REMAINDERMEN.
    [Hamilton (1st) Circuit Court,
    March 8, 1907.]
    Swing, Giffen, and Smith, JJ.
    Mary C. Capelle et al. v. Wm. F. Wieman et al.
    Rights of Parties to Property after Death of Life Tehant.
    When a life tenant dies during the term, an equitable distribution among all the claimants, of rent due after the death of said tenant will not be set aside.
    [Syllabus approved by the court.]
    Eebob to Hamilton common pleas court.
    J. R. Von Seggern, for plaintiffs in error.
    Furber & Jackson, for defendants in error.
   QIFFEN, J.

This action was commenced to recover $20.15 received by the defendants as rent under the following circumstances:

Henry Wieman devised the premises to his widow, Mary Wieman, for life with remainder to plaintiffs. The rent was due and payable from one'of the tenants on the fifteenth of each month, and from the other tenants on the first of each month,. Mary Wieman, the life tenant, died on the twelfth day of November, 1905. The monthly rent due and payable on the fifteenth of November and the .first of December following was collected by the defendant, W. F. Wieman, and apportioned between the plaintiffs and the defendant, as executor of the last will and testament of Mary Wieman, deceased.

At common law when the life tenant dies during the term, neither party could recover any portion of the rent; by statute in England and some of the states, the rent is apportioned among such claimants. But no such statute prevails in Ohio, and the rent having been apportioned between the plaintiffs and the defendant executor according to principles of natural justice and equity, the former were not entitled to any relief, and the judgment dismissing their petition will be affirmed. Van Hayes v. West, 2 Circ. Dec. 37 (3 R. 64).

Swing and Smith, JJ., concur.


author: WINCH, J. HENRY, J.

text:
    BENEFICIAL ASSOCIATIONS — PARTNERSHIP.
    [Summit (8th) Circuit Court,
    September 30, 1904.]
    Hale, Marvin and Winch, JJ.

      J. H. Webster et al. v. Taplin, Rice & Co.
    1. Association op Business Firms -for Mutual Protection not a Partnership.
    A voluntary association of business concerns formed for the purpose of adopting a uniform basis of dealings between the members thereof and their employes, and the investigation and adjustment of questions arising between them, is not a partnership.
    [For other cases in point, see 6 Cyc. Dig., “Partnership,” §§ 1-27. — Ed.]
    2. Liability oe Member oe Association eor Dues and Assessments.
    Benefits to be received from the membership in an association of business concerns, for adjustment of difficulties between the member and their employes, are sufficient consideration for an agreement to pay dues and other sums required by the constitution.
    [For other cases in point, see 1 Cyc. Dig., “Associations,” §§ 45-60. — Ed.]
    3. SUEFICIENCY OE DEMURRER TO RAISE OBJECTION TO AN ACTION.
    Objections, in an action for dues and assessments due a beneficial association, that all of the remedies within the organization have not been exhausted should be raised by answer and not by demurrer.
    4. Forfeiture of Membership by Failure to Pay Dues.
    Membership in such association does not cease from the mere nonpayment of dues, so as to relieve a member from liability therefor.
    [For other cases in point, see 1 Cyc. Dig., “Associations,” §§ 61-94; “Beneficial Associations,” §§ 77-108. — Ed.]
    [Proofs of these decisions and syllabus were submitted to Judges Winch and Henry and corrected.- — Ed.]
    Error to Summit common pleas court.
    Two Hearings- — First Hearing.
    This action was originally brought in the common pleas court of Summit county, Ohio, by the district committee for the fourth district, to recover, on behalf of the National Founders’ Association, dues and assessments, quarterly and special, and. the equity in the reserve fund, amounting to a little over $1,000.
    Taplin, Rice & Company had joined the association in the early part of 1900, signing the usual application form and reporting on May 1 the niunber of molders and other employes in their employment. They paid the quarterly dues up to October 1, 1900, but had never paid any other dues or any other regular or special assessments, nor had they ever paid their equity for the reserve fund. The defendant filed a demurrer on the ground that the petition did not constitute a cause of action, and raised two points:

      First. That the association is a partnership and cannot sue one of its members at law.
    Second. That the agreement of the members to pay dues, assessments, etc., was without legal consideration.
    The trial court sustained the demurrer and the association took the case to the circuit court, the opinion of* which court, delivered by Winch, J., on September 30, 1904, is as follows:
    Squire, Sanders & Dempsey, R. F. Denison and Allen, Waters, Young & Andress, for plaintiffs in error.
    Stuart & Stuart, for defendant in error.

       The defendant took the case to the Supreme Court, where the er’.o.s complained of were the two points raised the first time in the circuit court, and the one point raised the second time in the circuit court. The Supreme Court affirmed the court below, without report, April 9, 1907; 76 Ohio St. 000; 52 Bull. 210.

   WINCH, J.

The only error complained of in this case is the sustaining of a general demurrer to the amended'petition. It is set forth in the plaintiff’s petition that plaintiffs, defendant and over five hundred othms are members of the National Founders’ Association, which is a voluntary association formed for the purpose of adopting a uniform basis of just and equitable dealings between the members of said association and their employes, and not for the purpose of business adventure, trade or profit, whereby the interests of both may be properly protected, and the investigation and adjustment by the proper officers the association of 'any question arising between the members of said association and their employes. 1

It is further alleged that defendant made application for membership in the association, which application was duly received, and that defendant was elected and became a member of the association, and promised to pay it, or its duly authorized officers, all dues, assessments, quarterly or special, and other amounts payable by reason of the action of said association.

The petition further sets forth articles of the constitution of the association, providing for the payment of dues, assessments, a reserve fund based on the proportion of molders employed by the member, initiation fees and special assessments, the several amounts due and payable in accordance with said articles, demand therefor, and refusal of defendant to pay.

It is stated that the action is brought by plaintiffs in their o-v" names, being duly authorized by the association to do so, and that tlv suit is brought in behalf of the association and all its members.

The objection to the sufficiency of the petition is based upon two propositions, the first of which is, that the plaintiffs’ association is in law a partnership, and as such, cannot sue one of its members.

Definitions of partnership found in the text-books and adjudicated cases uniformly include the characteristic of a sharing in profits. Parsons, Partnership (2 ed.) 69, says:

September 30, 1905.

“A community of interest in the profits is essential to a partnership.”

Voluntary associations with many members may be organized for the purpose of sharing in the profits of some venture or they may be organized without such purpose.

The following is to be found in 1 Lindley, Partnership 50:

“No partnership or quasi partnership subsists between persons who do not share either profit or loss and do not hold themselves out as partners.
“Societies and clubs, the object of which is not to share profits are not partnerships.”

It appearing affirmatively from the petition that the National Founders’ Association is not organized for the purpose of business adventure, trade, or profit, the objection that it is a partnership is not well taken.

The second objection to the sufficiency of the petition is, that even if the association is not a partnership there is no consideration shown for the promise to pay the assessments and other charges.

We think the benefits to be received from membership in the association are sufficient consideration for the agreement to pay the dues and other sums required by the constitution.

Quoting from the case of Palmetto Lodge v. Hubbell, 2 Strob. (S. C.) 457 [49 Am. Dec. 604] :

“Conceding that the liability of. the defendant depends on contract, requiring a consideration, the consideration of his' undertaking to support the constitution and by-laws, and pay all ‘legal demands,’ was, that he should be admitted a member of the lodge and possess the rights and capacity of a corporator.”

The suggestion that the remedies within the organization for the collection of these payments .have not yet been exhausted, and that an action cannot be maintained until they have been, we think should be made by answer, and it is not necessarily raised by demurrer. The demurrer should have been overruled, and for error in sustaining it the judgment is reversed.

Hale and Marvin, JJ., concur.

Second Hearing,

Taplin, Rice & Co. v. J. H. Webster et al.

Marvin, Winch and Henry, JJ.

The ease then went back to the trial court, where the defendant filed an answer setting np Art. 4, Sec. 8, of the by-laws of the association, which provides that: “The secretary shall notify the members of all dues or assessments as they become payable, and if the same are not paid to the treasurer, within thirty days from the date of such notice, the treasurer shall make draft for such unpaid dues, and any member failing to honor such draft shall cease to be a member of this association, etc.,” and claiming that, by the refusal of the defendant to pay dues after October 1, 1900, it had ceased to be a member of the association.

The plaintiffs filed a reply in which they denied that Art.-4, Sec. 8, applied to this case; denied that any draft had been issued, and set up Art. 15, Secs. 1 and 2, and Art. 16, Sec. 1, which provides that:

“No member shall be relieved or absolved from the duties, obligations, requirements and agreements connected with his membership in this association, unless he shall have given four weeks’ notice in writing to the secretary, of his intention to resign from the said membership, whereupon said resignation may be accepted by the sanction of the committee of his district,, at the expiration of the notice, provided that such member shall not be in arrears for any dues or assessments, and shall pay any expenses for assessments incurred prior to his resignation, that may be made upon member at or before the next annual meeting of the association.”

Also that:

“No member shall resign during the existence of a strike.”

And also:

“Should any member refuse or fail to comply * * * with the obligations of membership of this association, the president shall have power to suspend his membership until the next annual or special meeting of the association, when in case of continued contumacy he may be expelled by a two-thirds vote of the members present.”

The reply also set up that the defendant never notified the secretary or the association in writing, of its intention to resign, never did resign, and that at all times the defendant had been in arrears for assessments and dues.

The case was tried to a jury and the trial court instructed the jury that, under Art. 4, Sec. 8, Art. 15, Secs. 1 and 2, and Art. 16, Sec. 1, there were only two methods of terminating membership in the association. One was by resignation, the member having complied with the requirements of Art. 15, Secs. 1 and 2; the other by expulsion, as provided by Art. 16, Sec. 1, and that Art. 4, Sec. 8, merely gave the association the right to expel a member.

The jury found a verdict in favor of the plaintiffs, and defendant took the case to the circuit court, the opinion of which court, rendered by Henry, J., is as follows:

Stuart & Stuart, for plaintiff in error.

Squire, Sanders & Dempsey, R. F. Denison and Allen, Waters, Young & Andress, for defendants in error.

HENRY, J.

Plaintiff in error operates a foundry in this city and was a member of a certain foundrymen’s association, represented by the defendants in error. Judgment was recovered against the former for arrears of dues to said association. Its defense was, that under the rules of the association it ceased to be a- member when it failed to pay its dues, and was thus relieved of liability therefor. There are other provisions of the rules relating to resignation and expulsion of members. But it is admitted that the plaintiff in error’s membership has not been discontinued under either of these sections. Literally, there is some color for the contention that there was a third method of terminating membership; but, reading all the rules together, we think the court below was clearly right in holding otherwise, and the judgment is affirmed.

Marvin and Winch, JJ., concur.


author: GIFFEN, J. JELKE, J.

text:
    CARRIER — CONTRIBUTORY NEGLIGENCE.
    [Hamilton (1st) Circuit Court,
    February 2, 1907.]
    Jelke, Swing and Giffen, JJ.
    Nellie McKee v. CINCINNATI Traction Co.
    Province or Court and Jury on Questions of Contributory Negligence.
    Where a passenger on an inclined railroad attempts to step from the’ truck to the platform, before the truck has been securely fastened, the gate having been opened by defendant’s servant, and is injured by falling between the truck and platform, the jury should be left to determine whether or not the danger was so obvious that the plaintiff in the ordinary exercise of her faculties could have known of the same.
    [For other cases in point, see 6 Cyc. Dig., “Negligence,” §§ 705-722. — Ed.]
    [Syllabus approved by the court.]
    Error to Hamilton common pleas court.
    D. D. Woodmansee, for plaintiff in error.
    Kittredge & Wilby, for defendant in error.
   GIFFEN, J.

While the opinion announced in this case at a former hearing' and reported in Cincinnati Trac. Co. v. McKee, 27 O. C. C. 630, may possibly be construed as holding that the failure of the plaintiff to look down and observe where she was stepping, was, under any circumstances of the case, as matter of law contributory negligence; yet it is manifest that the court did not intend to so hold, else it would have rendered judgment for the defendant instead of remanding the case for a new trial, as the fact itself was undisputed. There were in that case, as there are in most cases of the kind, circumstances to be considered in determining whether the plaintiff was excused for failure to observe where she was stepping. We weighed the evidence as shown by the record and found no fact of sufficient weight to afford a good excuse, although different minds might reasonably arrive at a different conclusion, as did one of the judges who sat in the case.

The record now before us was made upon an amended petition in which the negligence is charged as follows:

[ “Plaintiff avers that the defendant, by its agents and servants carelessly, unskillfully and improperly managed and controlled said truck and said incline railway, by opening the gates on said truck, upon which plaintiff was a passenger, for the egress of passengers, before said truck had been securely fastened to said stationary platform, and by carelessly moving said truck and attempting to fasten the same to said platform after said gates had been negligently opened as aforesaid, and while plaintiff upon invitation of defendant was passing from said truck to said stationary platform — because of which, and without fault on her part, plaintiff’s left foot was pressed between said truck and said stationary platform.”

It is difficult to determine from this petition or the evidence whether the truck momentarily ceased moving and then, after the gates were opened, started up again, or continued to move without interruption from the time it left the base of the incline until it bumped against the platform at the top and caught the plaintiff’s foot. Were it not for the testimony of Mary Brinkmeyer at page 51 of the bill of exceptions, which itself is by no means clear, we would conclude that the truck never ceased moving up until the accident occurred. In that case the plaintiff herself must have been conscious of the continued upward movement of the truck, of the space between the truck and the platform, and of the danger in attempting to pass out without looking down or observing where she was stepping and hence was required to look, or offer some reasonable excuse for not looking.

But leaving- that ont of consideration the question is fairly presented by undisputed evidence, whether the fact that the gates were partly opened by the attendant, to wit, about two feet, justified the plaintiff in assuming that the truck was securely fastened to the platform, and in walking off without looking down, there being nothing to prevent her from so looking and seeing the space between the truck and the platform and thereby avoiding injury.

It will be observed that the gates were only partly opened and although there was room for the plaintiff to walk out, there was no complete invitation to do so. If she had actually closed her eyes, and then, relying on the fact that the gates were partly opened, attempted to walk out, the danger of having her foot crushed would have been no greater, and her negligence would have been no more contributory, yet no one would claim that under such circumstances she would be free from blame.

It is claimed that this case should be governed by the case of Chamber of Commerce Bldg. Co. v. Klussman, 25 O. C. C. 728, and the case of Breuer v. Frank, 16 Dec. 231, both being affirmed without report by the Supreme Court. In the former case the third proposition of the syllabus is as follows:

“The entrance to the shaft of a passenger elevator is not ordinarily a place of danger and persons having a right to ride on the elevator on seeing the entrance open may assume that the cab of the elevator is in the shaft at that floor. Hence, a tenant of a building is not guilty of contributory negligence who while going on an errand approaches the elevator shaft to be conveyed by the elevator to the floor where he has his office, and finding the shaft open and being deceived by the resemblance of the inside of the shaft to the cab of the elevator steps into the shaft, falls to the bottom and is injured although by looking closely he might have observed that the cab was not present. ’ ’

This did not relieve the plaintiff in that case of all care in' the premises, but holds only that, from the fact that the elevator door was open he was justified in assuming the presence of the cab, and in relying to some extent at least upon its presence.

In the case before us the reliance was absolute and unqualified, not because she saw the situation of the truck, but because the gates were partly opened by the attendant.

In the case of Frank v. Breuer, supra, the chief contehtion arose on a special instruction given by the court to the jury, to wit:

“If you find from tire evidence that at the time the plaintiff approached the door leading to the elevator shaft the door was wide open, the plaintiff was not obliged in law to stop, look and make a special examination' to find out if the elevator cab was there. And if, under such circumstances, he stepped into the open shaft without first stopping to look and make a special examination, that fact alone would not in law constitute contributory negligence such as would .bar the plaintiff from recovering in this case.”

. It may well be, that the plaintiff in that case was not obliged in law to stop, look and make a special examination, nor to stop for the purpose of looking and making a special examination, and yet be required to look: hence the instruction was not erroneous.

In this case it was unnecessary for the plaintiff to stop, listen, specially examine the truck, or change her position, and the only requirement necessary to avoid injury was to look before stepping. The source of danger was plainly visible, although not actually known, and hence brings the case within the rule stated in Conneaut (Vil.) v. Naef, 54 Ohio St. 529 [44 N. E. Rep. 236]. There was no error in directing a verdict for the defendant. •

JELKE, J.

I dissent from the views expressed by Judge Giffen and am of the opinion that the question should have been submitted to the jury, whether or not the opening was in the circumstances so obvious that Nellie McKee in the ordinary exercise of her faculties could have known of the same.

Judgment of the common pleas reversed.

Swing, J., concurs with Jelke, J.