
    General Electric Company, Appellant, v. George B. Wightman, Respondent.
    
      Corporations — a mere promise to subscribe to capital stock is mid — so is a conditional subscription — extent to which a corporation may mortgage its personal ps'operty — choses in action purchased át a foreclosure Sale—they will not pass by general words.
    
    In an action brought to recover damages for the failure of -the defendant to subscribe and pay for two shares of the capital stock- of a railroad company, incorporated under chapter 565 of the Laws of 1890 to operate a street surface railroad, having a capital stock, of $60,000 divided into 600 shares of $100 each, it appeared'that fifteen, persons signed .the certificate of incorporation subscribing for fifty shares of stock and paid ten per cent of their subscriptions. Further sums were paid by the shareholders, So that the total capital paid in amounted to $9,068.12.
    The defendant with other persons entered into an agreement with the railroad company by which lie personally promised to subscribe for two shares as soon as the roadbed had been graded and the ties ,and rails had been laid, and promised to pay one-half in cash at the time of the subscription and the other half 'in cash when the railroad had been in operation fifteen days.
    On December 10, 1892, the railroad company executed a mortgage to the plaintiff, for $44,000, which covered all of the realty of the railroad company, and many of its chattels, “ and other property, personal and mixed, of whatever description and wherever situated; together with all and singular thé privileges and appurtenances thereto belonging, and whether now held or hereafter acquired by it; all things in action, contracts, claims and demands of the said railroad company, whether now owned or hereafter acquired, as well in law as in equity.” The plaintiff foreclosed the mortgage and the premises were sold on March 1, 1895, to James O. Carr by a deed conveying the realty, together with “all things in action, contracts,, claims and demands of the said railroad company,” March 13, 1895, James O. Carr assigned to the plaintiff the choses in action which he acquired under the foreclosure, referring in the assignment, to the undertaking to- subscribe fof stock above set forth. The defendant, in fact, never subscribed for any shares, and never paid any sum on account of his promise to subscribe. -
    
      Held, that the Stock Corporation Law prescribed the only method by which subscriptions could be made to the capital stock of a corporation, and that mere promises'to subscribe were void;
    That it was the policy of this State to require that all corporations should be organized with a bona fide capital stock, to be issued only for cash, labor or property;
    That persons who entered into a contract like the one under consideration did not become stockholders, or entitled to a voice in the management of the affairs' of the corporation until their shares were paid for and issued, and that conditional subscriptions for the stock of corporations were contrary to public policy and were void;
    That the contract under consideration did not relate to the purchase from a corporation of shares legally in existence, and which had been acquired by the corporation after their issue, but had relation to shares never issued; that, it constituted an attempt to secure original capital stock in a mode forbidden by the statute;
    That the mortgage taken by the plaintiff was void under section 2 of chapter 688 of the Laws of 1892, because, under the proof, the mortgage greatly exceeded the amount of the paid-up stock of the corporation, and was given to secure a sum exceeding two-thirds of the value of the property of the corporation;
    That, assuming that under the statutes of this State, a railroad might mortgage its choses in action and might do this by the use of general words, the purchaser at the sale under the foreclosure of such a mortgage would acquire no title to choses in action not described in the j udgment or notice of sale and in the conveyance of them, with sufficient particularity to be identified.
    Appeal by the plaintiff, the General Electric Company, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the. clerk of the county of Erie on the 31st day of May, 1895, upon the dismissal of the complaint directed by the court after a trial before the court and a jury at the Erie Circuit.
    March 26, 1892, the Buffalo, North Main Street and Tonawanda Electric Railroad Company was incorporated, pursuant to the Railroad Law, chapter 565 of the Laws of 1890 (Chap. 39, Gen. Laws), for the purpose of constructing and operating a street surface railroad, six miles in length, and extending from Main street in the city of Buffalo, to Delaware street in the village of Tonawanda. Its capital stock was fixed at $60,000, divided into 600 shares of $100 each. March 1Y, 1892, fifteen persons signed the certificate of incorporation, subscribing for sixty shares of stock, and on or before March 25, 1892, they paid to the treasurer of the corporation ten per cent of the amounts subscribed by. them.. After the payment of the ten per cent ($600) by the incorporators, a further sum of $8,463.12 was paid in by the shareholders on their subscriptions, which two sums, aggregating $9,063.12, was all the capital' ever •paid in by the subscribers for shares.
    At some time (the date not appearing) the defendant' and five others signed and delivered to the corporation a contract of which the following is a copy: .
    “ Buffalo, North Main Street and Tonawanda Electric Railroad Company".
    ■ “ Whereas, the above-named company was duly incorporated under the. General Railroad Laws of the State of New York on.the 26th day of March, 1892, having the following officers.: President,. L. F. W. Arend; Vice-President, Albert T. FancherSecretary, Edward Rutherford, and Treasurer, Charles C. Mead. The capital stock of the company is $60,000, divided .into 600 shares at $100 each ; and whereas, it. is proposed by this company to build and operate an electric street railroad on the following route: Beginning on Main Street in the City of Buffalo, N.-Y., near its intersection with the City Line, and running thence . northwesterly through private property to the intersection of the Town Line Road, so-called; with the City Line of said City of Buffalo; running thence northerly along and on the east side of the Town Line Road to Mischler’s Corners; running thence northwesterly along the Eggertsville Road or Williamsville Road, so-called, to the village of Tonawanda, N. Y., and northerly along Young Street, which is a continuation of the Williamsville Road, of said village to within one hundred feet of the intersection of Young Street with Main Street of said Village. The road is to. be operated as soon as completed and cars will make half-hourly trips each way.
    •- “ Now, therefore,-we, the undersigned, for and in consideration of the foregoing promises and the fullfillment . thereof, hereby agree with the said Buffalo, North Main Street and- Tonawanda Electric Railroad ' Company to subscribe for the number of .shares of stock in said railroad company set opposite our respective' names below at The time'when and .as soon as. the' roadbed of said proposed railroad on the route above - specified .shall ’ have been graded-arid ties and rails shall have "been laid thereon, and we further agree to pay one-half of snch stock in cash at the time of such subscription and the other half thereof in cash when the said railroad shall have been in operation fifteen days.
    Names. P. 0. Addresses. No. of Shares.
    Wm. Coulson.............. Buffalo..........Ten.
    Andrew J. Kurtz........... Buffalo..........Ten.
    F. S. Oaks.................Cattaraugus, N. T. Two.
    Geo. B. Wightman.......... Buffalo..........Two.
    Albert C. Spann............ Buffalo..........Three.
    Maria‘C. Sickman.......... Buffalo..........2J shares, $250.”
    December 10,1892, the Buffalo, North Main Street and Tonawanda Electric Railroad Company executed a mortgage to the General Electric Company to secure the payment of $44,000, which was recorded June 19, 1894, in the office of the clerk of Erie county, in hook No. 690 of Mortgages, at page 373. The mortgage covered all of the realty of the mortgagor, many of its chattels “ and other property, personal and mixed, of whatever description and wherever situated, together with all and singular the privileges and appurtenances thereto belonging, and whether now held or hereafter acquired by it; all things in action, contracts, claims and "demands of the said railroad company, whether now owned or hereafter acquired, as well in law as in equity.”
    January 7, 1895, the General Electric Company recovered a judgment foreclosing said mortgage, pursuant to which the property covered by the mortgage was sold March 1, 1895, to James O. Carr for $28,0.00. March 5, 1895, the referee executed a deed to the purchaser, in which the realty mortgaged was described and conveyed, together with “ all things in action, contracts, claims and demands of the said railroad company.” March 13, 1895, James O. Carr assigned to this plaintiff the choses in action which he acquired under said foreclosure, referring in the assignment to the obligation of this defendant, and March 21, 1895, the referee’s sale and conveyance were confirmed by the court.
    
      Ola/rk II. Timermcm, for the appellant.
    
      Thomas I. Stone, for the respondent.
   Follett, J.:

This action was begun February 3, 1894, to. recover damages alleged to be $200, with interest from. May 1, 1893,- for the, defendant’s failure to subscribe and.pay for two shares of the capital stock of the Buffalo, North Main Street and Tonuwada Electric Railroad Company, as provided- i-n the contract set forth in the. statement of facts. The defendant in his answer alleged that the contract was invalid, was procured by fraud and false representations, -and that.the railroad company had failed to perform, the conditions contained in the contract, and certain - collateral -conditions and stipulations made- when the contract was signed,. At the close of the plaintiff’s evidence the complaint was dismissed-,, and the plaintiff excepted. The dismissal of the complaint was rested on two grounds : (1) That-the contract Was invalid; (2) that the plaintiff acquired no title to the, contract through .the -mortgage and its foreclosure.

The defendant never subscribed for any shares and never paid any sum ori account of his contract to subscribe in the future-for two shares.

Whether the sribscription- contract was signed before or after May 1-8,1892-^ the date of the amendment of the Stock Corporation Law —is not disclosed by the evidence, though it is, alleged in the complaint that it was executed on or about May 15, 1892.

By the Stock Corporation Law, chapter 564, Laws- of 18.90 (Chap.. 38, Gen. Laws), it was provided

§ 41.. Subscriptions to stooh.— If the whole capital stock, shall not have been subscribed at the time of filing the certificate -of incorporation,, the directors- named in the certificate may open books, of subscription, to fill up the -capital- stock in,such.places,, and after giving-such notices as they may deem expedient, and may continue to receive, subscriptions until- the whole capital stock is subscribed. At the time-of subscribing every subscriber shall pay to the-directors ten per cent upon the amount subscribed by him in .money,, and no .subscription shall -be received or taken without.such .payment,. except as provided in the next section.”: . . ’ .
“ §- 42. Must be paid f or in cash / exceptionsNo corporation shall issue either stock or bonds except for money, labor done or property actually received- for the use and lawful purposes- of such. corporation, at its fair value, and all stock issued in violation of the provisions of this section shall be void.”

By chapter 688, Laws of 1892 (Chap. 36, Gen. Laws), passed May 18, 1892, the above sections were amended so they now read as follows: '

“ § 41. Subscriptions to stock.— If the whole capital stock shall not have been subscribed at the time of filing the certificate of incorporation, the directors named in the Certificate may open books of subscription to fill up the capital stock in such places, and after giving such notices as they may deem expedient, and may continue to receive subscriptions until the whole capital stock is subscribed. At the time of subscribing every subscriber, whose subscription is payable in money, shall pay to the directors ten per centum upon the amount subscribed by him in cash, and no such subscription shall be- received or taken without such payment.”
§ 42. Consideration for issue of stock, cmd bonds — No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value.
“ No such bonds shall be issued for less than the fair market value thereof.” ^

In this State corporations can be organized only pursuant te special charters or to general' statutes authorizing their organization for certain prescribed purposes. The General Statutes require stock corporations to have a capital, the amount, of which and the par value of the shares are to be'fixed by the certificates of incorporation. These statutes prescribe how shares of stock shall be subscribed, paid for and issued, and it is the policy of this State to require all corporations to be organized honestly, with a bona fide capital stock to be issued only for cash, labor or property, and -thus provide the necessary means for carrying out the purposes of their creation and thereby prevent frauds upon their creditors and the public. The statutes provide that the affairs of the corporation shall be controlled by the shareholders and by directors elected by-shareholders, and thus provide for their management by persons: having a pecuniary interest in their success.

In this State contracts by which individuáis agree to become shareholders in corporations are not governed by the rules applicable to common-law contracts, but áre controlled by the statutes prescribing how such contracts shall be made.

The learned counsel for the plaintiff insists that corporations may-pro vide for securing their capital by contracts to subscribe in the future for shares instead of by subscriptions made in the mode prescribed by statute. This contention, I think, is not founded on reason or precedent, and, if sanctioned, would open the door for promoters to' create broods of corporations without substantial capital, which, instead of being controlled by shareholders having a pecuniary interest in their success, would be wholly within the control of the original incorporators. The case before, us is a forcible illustration of the evils which would flow from permitting corporations to make and enforce such contracts. The capital stock of this corporation was fixed at $60,000, which, had it been subscribed, paid in and honestly expended, would have insured the construction of the road, but, instead of raising or attempting' "to raise the capital required,. fifteen pérsons, the precise . number required by the statute, executed a certificate of incorporation and subscribed for ten per cent of the'capital'stock and'.paid in ten per cent — $600 —: on their subscriptions.'. ."Whether other subscriptions for stock made in the manner required by the statute were secured, does not appear, though it was shown that" $8,463.12, in addition .to the’$600, was paid in by shareholdérs," which equals fifteen percent, phis $63.12, of the capital stock of the corporation. The' property of the corporation was then mortgaged for $44,000, and the result was" speedy bankruptcy, the usual one with corporations so organized.

Persons entering into contracts like the one under consideration do -riot be’cdriie shareholders until their shares are paid for and issued, until which time they are entitled to no voice in the manageinént of the affairs of ’ the corporation, which will be wholly under the control of the original incorporators, who may, as in this case,' content' themselves with subscribing for barely, sufficient capital to effect an organization' of a corporation to be controlled and managed in their interests. It has been held, in. this State that conditional subscriptions for the stock of corporation's are contrary to public policy, and void. (Butternuts & Oxford Turnpike Co. v. North, 1 Hill, 518; Fort Edward, etc., Plank. Road Co. v. Payne, 15 N. Y. 583.) The contract before us is not ' only a conditional one, but it provides for securing the capital stock of the corporation in a way not authorized by the statute.

It should be borne in mind that the contract under consideration does not relate to the purchase of shares legally issued by the corporation to some shareholder, and subsequently acquired by the corporation, but it is a contract in respect to shares which had not been issued, and had no independent existence, and was an attempt to secure the original capital stock in a mode not sanctioned by the statute. If this contract is valid, a corporation may enter into contracts indefinitely postponing the time for the purchase of and payment for shares, make the payment therefor dependent upon such conditions as the parties may agree upon, and thus defeat. the theory of our statutes that the stock of corporations shall be promptly subscribed and paid for by shareholders, all standing on the same footing, to the end that the corporation; shall have a sufficient capital and be controlled by persons having a pecuniary-interest in its success. This contract violates the policy of this State in respect to the mode, of making up the'capital of corporations, and should not be enforced.

Again, the plaintiff is attempting to enforce this contract in aid of the mortgage which it took December 10, 1892, for $44,000, in. defiance of the 2d section of chapter 688 of the Laws of 1892— the Stock Corporation Law -—which provides :

“ The amount of the obligations issued and outstanding at any one time secured by such mortgages, excepting mortgages given as a consideration for the purchase of real estate, and mortgages authorized by contracts made prior to May 1, 1891, shall not exceed the amount of its paid-up capital stock, or an amount equal to two-thirds of the value of its corporate property at the time of issuing the obligations secured by such mortgages, in case such two-thirds value shall be more than the amount of such paid-up capital stock.”

- The case shows that the' amount for which this mortgage was given greatly exceeded the amount of the paid-up capital stock of the corporation, and it inferehtiall'y appears "from the record that the mortgage was given to secure'a sum, exceeding two-thirds of the value of the property of the corporation.

By the record in Dean v. Biggs (25 Hun, 122; affd., 93 N. Y. 662) it appears that the deféndant executed the certificate of incorporation'by which he subscribed-for five shares, paying twenty-five per cent, and thus became one of the original incorporators of the railroad which subsequently mortgaged .its railway,, real estate, certain chattels, “ and all the chartered rights, privileges and franchises now possessed, or which shall hereafter be acquired by the party of the first part, pertaining to said railroad, as completed, and to be completed, together with all and singular the tenements, hereditaments and appurtenances thereunto belonging, or in any wise appertaining, and the reversions, remainders, tolls, incomes, rents, issues and profits thereof; and also all the estate, rights, title, interest, property, possession, claim and demand whatsoever, as well in law as in equity, of the said party of the first part, of, in and to the same and every part thereof with the appurtenances.”

June 3, 1876, pursuant to a judgment of foreclosure, the property mortgaged was sold and conveyed to Merritt King by a conveyance which followed the description contained in the mortgage, and thereafter he assigned his title to the stock subscriptions to Dean, the plaintiff in the action. After the foreclosure sale a judgment- was recovered by a creditor of the corporation sequestrating its property and ajDpointing a receiver therefor, who afterwards assumed to sell the claims arising upon the subscriptions for stock. At the receiver’s sale the defendant became the purchaser of his own subscription, and the question- was, which had the better title, the purchaser under the foreclosure, or the purchaser under the receiver ?

Dean sought to sustain his action upon two grounds: (1) That subscriptions were covered by the words “property, possession, claim and demand whatsoever, as well in law as in equity, of the said party of the first part; ” (2) that the subscription having been made by an incorporator for the purpose of organizing the corporation, it was an incident of the franchise and passed under the mortgage. It was held that the mortgage was not a lien upon the subscription and that the purchaser under the foreclosure acquired no title to it.

Assuming that, under the statutes of this State a railroad may mortgage its choses in action, and by general words, I think the purchaser under the foreclosure of such a mortgage acquires no title to choses in action which are not described in the judgment uotice of sale and in the conveyance with sufficient particularity to he identified. (Dean v. Biggs, supra; Milwaukee & Minn. Ry. Co. v. Milwaukee & Western. R. R. Co., 20 Wis. 174 ; Smith v.. McCullough, 104 U. S. 25; Morgan County v. Thomas, 76 ILL. 120 ; 5 Thomp. Corp. § 6197; Jones on Rys. § 108; 3 Wood’s Ry. Law [1st ed.], 1617.)

To hold that choses in action pass under general words, in judgments and conveyances, would cause confusion and uncertainty in respect to the property which the purchasers under foreclosure sales acquire. Judicial sales must describe with reasonable certainty the property sold.

The judgment should be affirmed, with costs.

All concurred.

Judgment affirmed, with costs.  