Story Case

In promoting the New York - Chicago Air Line, Howard Lewis submitted this proposition to Meredith Burnham, a retired banker: Burnham should agree to place his name upon the subscription list for 10,000 shares common stock at $50 a share, until Lewis should sell a total of 1,000,000 shares at that price.

After this amount should be sold, Lewis agreed to cancel Burnham's subscription, and also make him a present of 5,000 shares. This last condition was not made a part of the subscription contract, but was inserted in a separate document which Burnham retained in his possession. The New York-Chicago Air Line corporation was perfected and the company did construction work at La Porte, Indiana, incurring considerable indebtedness. At the opening of the great European war, the promoters lost courage, and discontinued their work, omitting to pay a number of creditors. These now attempted in the name of the corporation to enforce its subscription contract against Burnham and others. In his defense, Burnham plead the secret condition attached to his contract. Is this a defense?

Ruling Court Case. Minneapolis Threshing Machine Company Vs. Davis, Volume 40 Minnesota Reports, Page 110, Volume 12 American State Reports, Page 701

Edward Janney, a promoter, started a movement to organize a manufacturing corporation with $250,000 capital, whose works should be located at Junction City, near Minneapolis. One McDonald proposed to subscribe $60,000 to the capital stock of the proposed corporation if the citizens of Minneapolis would subscribe the remaining $190,000. Janney then made a canvass of the citizens of Minneapolis to procure the remaining amount of capital stock. Davis, among others, subscribed $5,000. When the whole amount was subscribed, McDonald then paid in his $60,000. The corporation was organized under the name of the Minneapolis Threshing Machine Company. It incurred debts to the amount of $75,000, in preparing operations. It then called upon Davis for his $5,000 subscription. He refused to pay. The corporation, thereupon, brought this action against him to recover the same.

Davis then showed that he had made an agreement with Janney, the promoter, that his subscription was not to be delivered to the company, and not to become binding, until four designated men had also made subscriptions of $5,000 each; and that not one of the four had purchased stock; he contended, therefore, that his subscription was not binding upon him.

Decision

The condition upon which Davis' subscription to the stock of the corporation was to become binding was secret, known only to himself and Janney, the promoter. The corporation, in reliance upon the belief that his subscription was absolute and unconditional, had incurred large debts; the other subscribers, in reliance upon the same belief, have paid in much of their subscription. To permit Davis now to draw out, because of the non-fulfillment of this secret condition, would be fraud upon the corporation and fraud upon the other subscribers. The Court, under the circumstances, felt that this could not be done. It was decided that Davis was estopped to maintain the existence of the secret condition upon which he made his subscription.

Mr. Justice Mitchell, who delivered the opinion of the Court, said in part: "The corporation has been organized and engaged in business, expending large sums of money, and contracting large liabilities, all upon the strength of these subscriptions to its stock, and in entire ignorance of this secret oral condition which defendant now claims to have attached to the delivery of his subscription. To permit the defendant to relieve himself from liability on any such ground under this state of facts would be a fraud on others who have subscribed and paid for stock, upon the corporation, which has been organized and incurred liabilities in reliance upon the subscriptions, and on creditors who have trusted it. The familiar principle of equitable estoppel by conduct applies, viz: Where a person, by his words or conduct, wilfully causes another to believe in the existence of a certain state of facts, and induces him to act on that belief so as to alter his own previous condition, he is estopped from denying the truth of such facts to the prejudice of the other."

Judgment was, accordingly, given for the Minneapolis Threshing Machine Company.

Ruling Law. Story Case Answer

When a person subscribes to the stock of a corporation, he has the right to subscribe under whatever conditions please him. He may stipulate for anything he desires, if the corporation is willing to accept him on such conditions. Such a subscription deceives neither other subscribers, nor creditors of the corporation. But when he stipulates for some secret condition, he deceives other subscribers, and creditors of the corporation as well. Accordingly, if other subscribers have subscribed on the strength of his subscription, if debts have been incurred by the corporation on the basis of an unconditional subscription by him, if creditors have extended credit on the representation that he is an unconditional subscriber, such subscriber is not at liberty to set up these secret conditions. He is estopped to say that he subscribes upon some condition which was unknown to all except one of the promoters. In the Story Case, therefore, Mr. Burnham has no right now to say that his agreement to take stock in the corporation was conditional. His subscription can be enforced for the benefit of the creditors who acted in reliance on the apparent status of the corporation.