
    BOSTON FEAR vs. J. KEMP BARTLETT, JR., Trustee of the VALLEY LAND and IMPROVEMENT COMPANY.
    
      Corporations — Subscription to Capital Stock obtained by Fraud — Right of Subscriber to avoid the same before the Insolvency of the Company — Ratification of Subscription — Contract to be Performed in another State.
    
    If a party is induced to subscribe for shares of the stock of a corporation, upon the faith of certain representations contained in a prospectus-issued by the company, which representations are false, and within a reasonable time after the discovery of the fraud, and before the insolvency of the company, he notifies the company that he repudiates the contract, these facts constitute a valid defence to an action to recover the subscription.
    The subscriber to the stock is released in such case because he has exercised his right to avoid a contract obtained by fraud. The subsequent insolvency of the corporation does not make him liable on such a contract, and the equities of the creditors of the company are not superior to his own.
    
      Quaere : Whether the subscriber could repudiate a subscription obtained by the fraud of the corporation after its insolvency, when he had no opportunity of becoming aware of the fraud prior thereto.
    The doctrine that unpaid subscriptions to the capital stock of a corporation are a trust fund for the benefit of its creditors, does not apply so as to prevent a defrauded shareholder from rescinding his contract before proceedings in insolvency have been instituted against the company, or what is regarded in law as an act of insolvency committed.
    Defendant’s contract of subscription was made in July, 1890. Two months thereafter, upon discovering the alleged fraud, he repudiated the subscription. A year afterwards defendant paid to a director of the company one thousand dollars, “in order to save what he had already paid,” but at the same time declared that he did not intend to make any further payment on his subscription. Defendant was unable to read or write. Held, that under these circumstances, such payment could not be treated as amounting to a ratification of the contract of subscription.
    
      Appeal from the Court of Common Pleas. At the trial the plaintiff offered the following prayers :
    
      Plaintiff's ist Prayer. — The plaintiff prays the Court to declare that upon the testimony of the defendant himself,, there was no such repudiation of the contract of the defendant as a stockholder of the Valley Land and Improvement Company as to discharge him from liabilities as such stockholder in this suit. (Granted.)
    
      Plaintiff's 2nd Prayer. — The plaintiff prays the Court to declare that the defendant having admitted that he signed the subscription contract offered in evidence, for fifty shares of the capital stock of the Valley Land and Improvement Company, of the par value of one hundred dollars each, and that he paid and received the certificate of payment of two thousand dollars on account of said shares, then the defendant became a stockholder of said company, and the company had his authority to register his name upon its books as a stockholder of said shares of its capital stock; and it being admitted that while the defendant’s name was so registered the company incurred a large amount of indebtedness, which yet remains due and unpaid, and which it is unable to pay without recourse to the liability of its stockholders, then, by force of the unwritten law of Virginia, as shown by the decisions of .the Supreme Court of Appeals of Virginia offered in evidence, and by force of the decrees of the Circuit Court for Page County and the deed of trust offered in evidence, the plaintiff is entitled to recover in this suit, notwithstanding the Court shall further find that after the company incurred such indebtedness, which still remains unpaid, the defendant attempted to repudiate his subscription, as testified to by him. (Granted.)
    
      Plaintiff's 3rd Prayer. — The plaintiff prays the Court to declare that the defendant having admitted that he signed the subscription contract offered in evidence for fifty shares of the capital stock of the Valley Land and Improvement Company of the par value of one hundred dollars each, and that he paid and received the certificate of the payment of two thousand dollars on account of said shares, then the defendant became a stockholder of said company, and the company had his authority to register his name upon its books as a stockholder of said shares of its capital stock; and it being admitted that while the defendant’s name was so registered, the company incurred a large amount of indebtedness which yet remains due and unpaid, and which it is unable to pay without recourse to the liability of its stockholders, then by force of the decrees of the Circuit Court for Page County, and the deed of trust offered in evidence, the plaintiff is entitled to recover in this suit, notwithstanding the Court shall further find that after the company incurred said indebtedness, which still remains unpaid, the defendant attempted to repudiate his subscription, as testified to by him. (Granted.)
    And the defendant offered the three following prayers:
    
      Defendant's ist Prayer. — If the Court finds from the evidence that the defendant contracted with the Valley Land and Improvement Company to purchase fifty shares of the capital stock for the sum of five thousand dollars, and paid two thousand dollars on account thereof on the day of said purchase, on July nth, 1890, that said contract was made with J. D. Wheeler, the company’s agent, and that the defendant was induced to make said contract up&n the representations contained in the printed prospectus of the said company, which has been offered in evidence, and said company delivered to the defendant, through said agent, the receipt for the two thousand dollars so paid, signed by said Wheeler, which has also been offered in evidence, is the same, or a copy of the same exhibited by the said Wheeler to the defendant at the time of said contract of sale and of said stock; and if the Court shall further find that said prospectus contained fraudulent and material misrepresentations of facts which were calculated to induce subscriptions to stock, and that the defendant, by reason of said false statements, whs induced to subscribe to the said fifty shares of stock; and if the Court shall further find that in the fall of 1890, and subsequent to the public sale of lots in September, 1890, and while the company was still conducting business through its officers, the defendant notified the said Wheeler, the company’s agent, and also notified Levi Z. Condon, one of the directors of the said company, prior to January 1st, 1891, that he had heard that the said company was a swindle and fraud, and that he would have nothing more to do with it, and would pay no more money on his stock subscriptions; and shall further find that he did so because he learned that the company did not own the lands represented to him that it owned, and of other misrepresentations, and that said notice was given within a reasonable time after he had learned of said misrepresentations; and further find that the defendant was and is now a citizen of Maryland, then the verdict must be for the defendant. (Rejected.)
    
      Defendant’s 2nd Prayer. — If the Court shall find that the prospectus offered in evidence had been exhibited by the agent or agents of the Valley Land and Improvement Company to the defendant, or that the said statements offered in evidence as to the ownership of the caves and mineral property, &c., as testified to by the defendant, before any contract was entered into between said company • and him were made with a view to induce him to take the stock mentioned in the evidence, and that said prospectus formed part of the contract with reference to said stock, between said company and the defendant, and that when said contract was made said company did not own and control the Luray Inn and Caverns, or had not acquired about twenty-five hundred acres of the choicest land for building sites and manufacturing purposes, or did not own or control about eight thousand acres of the best mineral property in Virginia, consisting of iron, manganese and other valuable minerals, or shall find that it is untrue to any material extent that the books of subscription of sale of said stock were hardly opened when one hundred thousand dollars were subscribed, and that the defendant heard prior and after the lot sale, circumstances putting him on enquiry as to said misrepresentations contained in • said prospectus, in any of the above-mentioned particulars, he called on J. D. Wheeler, the company’s agent, and notified him that he would no longer be bound by said contract, or make further payments thereon, and gave Levi Z. Condon, as agent and director of said company, such a notice before January 6th, 1891; and shall further find that when such notice was given, the said company was a going concern, engaged in the conduct of its business by its own officers, and that the defendant did give said notice within reasonable time after discovering said misrepresentations, and also that the defendant was then and still is a citizen of Maryland, then the verdict ought to be for the defendant. (Rejected.)
    
      Defendant’s yd Prayer. — The defendant prays the Court to exclude from this case all evidence tending to show what is the unwritten or written law of the State of Virginia as to the rights of subscribers to the capital stock of its corporations to repudiate said subscription, because the same is not applicable to this case. (Rejected.)
    The Court below (Dobler, J.), before whom the case was tried by agreement without a jury, granted the plaintiff’s prayers and rejected the defendant’s prayers, and from the judgment in favor of the plaintiff for $1,650, the defendant appealed.
    The cause was argued before Robinson, C. J., Bryan, McSherry, Briscoe, Page and Boyd, JJ.
    
      R. B. Tippett (with whom was Jas. E. Tippett on the brief), for the appellant.
    
      John P. Poe, Attorney-General, and Joseph C. France (with whom was Charles Marshall on the brief), for the appellee.
    Conceding for the argument that the defendant was misled by a material, untrue statement in the prospectus, and that in due time he disaffirmed the contract, then it is clear that his defence would be a good one in any suit brought by the eompany. But the company having become insolvent, and the demand for payment being made by a trustee appointed to collect the unpaid subscriptions for the purpose of paying therewith the company’s debts — whose equity is stronger, that of the innocent creditor, or that of the defrauded subscriber? A corporation can have nothing but what it acquired through its stock subscriptions ; a creditor can therefore look to nothing but these. Suppose he actually examines the company’s stock ledger, and finding that subscribers, of whose solvency he is sure, still owe the company, lends his money in good faith before such subscribers have disaffirmed — who-has the stronger right? A fraudulent contract is only voidable; when repudiated it becomes void, not from the date of its making, but from the date of its disaffirmance. Following this principle, the decisions are as follows:
    In England, where and because a system of publicly registering the names of stockholders prevails, a defrauded stockholder must institute public proceedings for the purpose of having his name removed from the list, if the company refuses so to remove upon demand. In this country there is no such system and no such requirement. A repudiation distinctly made to the company or to any authorized agent ends the matter, if the rights of third parties are not involved. In England, any one whose name has not been removed from the registry before the time of winding up, or even before insolvency, must contribute to pay creditors, even if defrauded into his subscription. But it is a mistake to conclude that this rule is based upon the requirements of the public registry system; the rule was laid down in the often quoted case of Oakes v. Turquand, L. R. 2 H. L. 325, but in the latter case of Stone v. The City and County Bank, 3 C. P. Division, 283; the Court (Bramwell, L. J.), in commenting on Oakes v. Turquand, says that a stockholder’s liability arises, not from estoppel, but “ depends upon a principle similar to that upon which the decision in Kingsford v. Merry proceeded. It was there held that if the owner of goods sells them, owing to a fraudulent representation, and before he discovers the fraud another person acquires some claim to them, he cannot afterward rescind the contract.”
    Now, while we have in this country no registry system, nevertheless, there are two rules growing out of the decisions, which, in a measure, supply its place. These are, (1st), a creditor is conclusively presumed to give credit to a corporation upon the faith of its stock' subscriptions, and (2d), the creditor is conclusively presumed to know in reference to the names of the subscribers and the amounts due by them, that which an examination of the company’s books at the time of giving the credit would disclose. Handley v. Stutz, 139 U. S. 509. “ Whatever may be the law between the delinquent subscriber and the corporation, the rights and equities of corporate creditors are not to be thereby affected.” Rider v. Morrison, 54 Md. 429 ; Crawford v. Rohrer, 59 Md. 604. “ A defrauded stockholder must notify the company and claim rescission before they incur liabilities on the faith of his contract.” Cunningham v. Edgefield R. R. Co. 2 Head (Tenn.) 23 ; Chubb v. Upton, 95 U. S. 665. “ One who has been induced to subscribe for corporate stock by fraudulent representations, cannot recover the amount paid until the claims of creditors are satisfied,” “ although the fraud was not discovered until after insolvency.” Turner v. Grangers' Co., 65 Ga. 649. See also Upton v. Hansbro, 3 Bissell, C. C. 425 ; Chubb v. Upton, 95 U. S. 665 ; Howard v. Glenn, 11 S. E. R. 610; McDermott v. Harris, 9 N. Y. 184; Weisiger v. Richmond Ice Co. (Va., Nov., 1894.)
   Robinson, C. J.,

delivered the opinion of the Court.

The plaintiff is the ^Trustee of the Valley Land and Improvement Company, ‘chartered by the State of Virginia, and this is a suit to enforce the payment of the defendant’s subscription to the capital stock of the company. The defence is that the defendant was induced to become a subscriber on the faith of certain representations set forth in. a prospectus issued by the company ; that these representations were false and fraudulent, and that the defendant, as soon as he became or could by reasonable diligence become aware of the fraud, and before the insolvency of the company, repudiated his contract of subscription and so notified the company.^'', f

The defence is substantially the same as that relied on in Bartlett, Trustee, v. Savage., 78 Md. 561, in a suit by the present plaintiff against the defendant in that case to recover his subscription to the stock of the same company. - And in that case we said that if the defendant was induced to become a shareholder on the faith of certain representations contained in a prospectus issued by the company, and that these representations were false, and that within a reasonable time after the discovery of the fraud, and before the insolvency of the company, he repudiated his contract of subscription and so notified the company, these facts, if found by the jury, constituted a valid defense to the action.

The counsel for the appellee did not seem to think we had gone so far in that case, and in view of the fact that there are a number of other suits in the Court below involving the same defence, the question has again been fully argued and fully considered by us ; and we see no reason to modify or qualify in the least the judgment in the Savage case. We cannot agree that it is in any manner in conflict with what is known as the trust fund doctrine, now recognized in this country. This doctrine, it has been said, was first announced in Wood's case, 3 Mason, 308, where the stockholders of a bank divided among themselves two-thirds of its capital, stock, without leaving sufficient funds to pay its creditors, and Mr. Justice Story held, and justly held, that the property of the bank must first be applied to the payment of its creditors, before there could be any dis-. tribution of its assets among the stockholders. And the most emphatic enunciation of the doctrine is to be found in the opinion of Mr. Justice Miller, in Sawyer v. Hoag, 17 Wallace, 610, where a stockholder of an insurance company having given his note for his subscription to its capital stock, after the insolvency of the company and with full knowledge of its insolvency bought up claims against the company for one-third their face value, and then set up these claims as a set-off to his unpaid subscription.

But whatever may have been the origin of the doctrine, it means and can only mean, that when a corporation has been lawfully dissolved or has -become insolvent, its entire property, including unpaid subscriptions to its capital stock, becomes a trust fund for the payment of its debts, and that creditors are entitled in equity to have their debts paid out of the assets of the company before there can be any distribution among the stockholders. Fogg v. Blair, 133 U. S. 534; Railroad Co. v. Ham. 114 U. S. 587 ; Brandt v. Ehlen, 59 Md. 1. And no one can question the justice and sound sense of the doctrine as thus understood. But it is only when the company has been dissolved or has become insolvent that this equitable doctrine arises. So long as the company is a going concern, having the possession and management of its property', contracts made by and with the company are governed by the same principles of law as contracts between individuals. And such being the casq/, if one is induced to become a subscriber to its capital stock by the fraud of the company and within a reasonable time after the discovery of the fraud, there being no laches on his part in discovering the fraud, repudiates his subscription, and this too before the insolvency of the company, under such circumstances he is, according to the settled law of this country, relieved of all liability on account of his subscription. He is relieved because he has the right to avoid a fraudulent contract, and because he has exercised this right. The subsequent insolvency of the company can upon no principle make him liable on a fraudulent contract which he has thus £ repudiated. / v And under such circumstances we cannot agree that the equities of the creditor are superior to those of the defrauded shareholder. Whether the subscriber could repudiate his subscription obtained by the fraud of the company after its insolvency, when he had no opportunity of becoming aware of the fraud before the insolvency, is a question in regard to which we are not to be understood as expressing any opinion. For the authorities in support of the views we have expressed, we may refer to Savage's case, 78 Md. 561.

And even in England, whére the Companies Act of 1862, provides for the appointment of a public officer, whose duty it is to register the name, the capital stock, together with a statement as to the object and purposes of every company or. corporation, with the names, addresses and number of shares taken by each subscriber, and the amount paid on each share, which register is open to the inspection of all persons, and which further provides, that every subscriber whose name appears upon the register shall, upon the winding up of the company, contribute to the payment of its debts, even under this Act it is now well-settled that a shareholder, whose subscription was obtained by fraud, may rescind the contract before the insolvency of the company. Reese River Mining Company v. Smith, L. R. 4, H. L. 64.

And when we speak of the right of the defrauded shareholder to rescind his contract before the insolvency of the company, we mean before proceedings in insolvency voluntary or involuntary have been instituted, or some act done that in law is regarded as an act of insolvency, for until then the trust fund doctrine relied on by the appellee has no application. Graham v. Railroad Company, 102 U. S. 148.

It follows from what we have said there was error in granting the second and third prayers of the plaintiff and in refusing to grant the defendant’s second and third prayers. And there was error also in granting the plaintiff’s first prayer, that upon the testimony of the defendant himself there was no such repudiation of his contract as to discharge him from liability. We agree that it was incumbent on the defendant ’to repudiate his contract within a reasonable time after the discovery of the fraud, and we agree, too, it must be a real and not a pretended repudiation, and we agree, too, that what amounts to a repudiation must largely depend upon the facts and circumstances of each particular case. Now, in this case, the defendant’s subscription was made in July, 1890, and there is proof tending to show that early in September of the same year, two months after the subscription, upon discovering the fraud alleged to have been practised upon him, he at once repudiated his contract of subscription.

Now it appears that in September of the next year Mr. Condon, one of the directors of the company, and who had been somewhat instrumental in getting the defendant to subscribe for the stock in question, called on the defendant and told him there was more trouble at Luray and that he wanted to get ten thousand dollars to save the property of the company, and that he had paid five thousand dollars in cash on account of his stock, and wanted to try and save what he had paid. To this the defendant replied: ■“ I will never give another dollar towards that subscription to the stock.” After some further conversation the defendant said he was willing to give a thousand dollars to save what he had already paid on his subscription, and thereupon gave to Condon his cheque for that amount. But all through his testimony the defendant insisted that the amount thus paid by him was contributed solely for the purpose of saving the two thousand dollars paid by him at the time of his subscription, and was never meant or intended as a further payment on account of such subscription. The defendant is, it appears, unable to read or write, aud it would be unfair, under all these circumstances, to say that the thousand dollars thus paid by him is to be treated as amounting in law to an affirmation of his subscription, especially in view of his declarations made at the time it was paid that he never would pay another dollar on account of his subscription.

In dealing with the defendant’s subscription, we have treated it as a Virginia contract. The company was chartered by that State, with its office and place of business in that State, and although the subscription was made in this State, the contract was to be performed in Virginia. And this being so, the rights and liabilities of the parties under it are to be determined by the law of that State. And what we have said as to the right of the defendant to repudiate his subscription on the ground that it was procured through the fraud of the company, is strictly in accord with decision of the Court of Appeals of that State in Weisiger and others v. Richmond Ice Machine Company, 90 Va. 795.

(Decided June 19th, 1895.)

Judgment reversed and new trial awarded.  