New York County NyArchives Court.....Gamble, James Vs. Queen's County Water Co 1889
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Source: Reports Of Cases - New York
Written: 1889

First Department, March Term, 1889.

JAMES GAMBLE, Respondent, v. THE QUEEN'S COUNTY WATER COMPANY, ROBERT F. MULLINS 
and Others, Appellants.

Issue of stock and bonds by a corporation — when the court will restrain it.

In an action, brought to enjoin the defendants from carrying out a resolution 
directing the issuing of stock and bonds with which to purchase property 
proposed to be sold to the defendant, The Queens County Water Company, a 
corporation incorporated under the general manufacturing act, it appeared that 
the property was to be sold by one Robert F. Mullins, who was a trustee thereof, 
and that the resolution provided for the issuing of $50,000 of stock and $60,000 
in mortgage bonds for property, the value of which was not over $65,000.

Held, that as the stock must be treated as cash, and had to be taken at its par 
value of $50,000, it would leave, to be paid by these bonds, the balance of the 
value of this property, viz., $15,000, which would be an issue at the rate of 
twenty-five cents upon the dollar of the bonds, which would be secured by a 
mortgage upon the identical property sold.

It was claimed that as a majority of the stockholders of this corporation, 
including Mullins, consented to the arrangement, the plaintiff could not 
maintain this action.

Held, that although, in all matters of administration, the wishes of the 
majority must control, yet where such administration tends to fraudulently 
deprive the minority of their rights and interests in the corporation the courts 
will interfere for their protection.

That the issuing of these bonds at twenty-five cents on the dollar, under the 
facts disclosed in this case, would be such a wanton waste of the property of 
this corporation as called upon a court of equity to intervene for the 
protection of the stockholders who were to profit by this extraordinary 
transaction.
 
Van Cott v. Van Brunt (82 N. Y. 540) distinguished.

Appeal from a judgment entered, upon the trial of the action at a New York 
Special Term, on May 11, 1888, in the office of the clerk of the city and county 
of New York, enjoining the carrying out of a resolution of the stockholders of 
the defendant corporation authorizing the issuing of certain stock and mortgage 
bonds for the purpose of an extension of the water-works mentioned in the 
complaint.

W. B. Hornblower, for the appellant.

James W. Perry, for the respondent.

Van Brunt, P. J.:

Were it not for the claims made by the appellants, because of the decision in 
the case of Van Cott v. Van Brunt (82 N. Y., 540), in which the principle that a 
purchase of property from a trustee by his cestui que trust is presumed to be 
fraudulent seems to have been disregarded, we should be entirely content to 
leave the disposition of this case upon the opinion written by the learned judge 
who heard the case in the court below.

There are various grounds upon which the decision in the case cited may be 
distinguished from the case at bar. In the first place, in that case all the 
stockholders consented to the transaction, and it does not appear that, at the 
time of the transaction, there were any creditors of the corporation, or that 
there were any parties who could be affected adversely by this remarkable 
contract. In the next place as far as the issue of stock was concerned, the 
rights and obligations of the appellant corporation were very different from 
that of the corporation mentioned in the case cited, the one being a corporation 
formed under the general railroad act, and the other under the provisions of the 
general manufacturing act, the provisions in the two acts in relation to the 
issue of stock being essentially and fundamentally different.

The trustees of a company formed under the manufacturing act may purchase 
property necessary for their business, and issue stock to the amount of the 
value thereof in payment therefor, otherwise the stock must be paid for in cash. 
This valuation of property must be a fair valuation, considering the purposes 
for which the property is to be used and the nature of the business, and 
although an honest over-valuation will not of itself subject the owners of stock 
to personal liability, yet where it appears that property, the value of which is 
well known and understood and capable of being ascertained, is purchased at a 
price far beyond its real value, this raises a presumption of fraud, and, unless 
rebutted by evidence explaining this apparent bad faith, the transaction is 
fraudulent in law and the holders of the stock are liable for the unpaid portion 
thereof.

In the case at bar the contract, the execution of which is sought to be 
restrained, provided for the issue of $50,000 of stock and $60,000 in bonds for 
property, the value of which was not over $65,000. It is true that it is sought 
to prove that for this stock and these bonds $65,000 would not be an inadequate 
price, but no such test can be applied. The stock must, at least, be treated as 
cash. Under the circumstances, it is clear that the stock which it is proposed 
shall be issued far exceeds, at its par value, the fair valuation of its 
proportion of the property to be purchased. It is urged, however, that the 
corporation has the power to sell its bonds at any price which it might see fit. 
It is true that there are many authorities which go to sustain, to a certain 
degree, this proposition. But no case has been cited where the sale of the bonds 
has been at such a low rate as would raise the presumption of fraud in the 
transaction. In the case at bar, assuming the stock to be taken at its par value 
of $50,000, it would leave these bonds to pay the balance of the valuation of 
this property, namely, $15,000, which would be an issuance of the bonds at the 
rate of twenty-five cents upon the dollar, and which would be secured by a 
mortgage upon the identical property sold. A transaction of this kind shows 
itself to be fraudulent upon its face, and it would require the clearest proof 
that a sale of bonds at twenty-five cents on the dollar, when the stock was 
taken at par, could be said to be made in good faith. A transaction of this 
kind, undertaken for the purpose of evading the statute, cannot be supported, 
and this construction of the contract is evidently resorted to for the purpose 
of such evasion. But it is claimed that as a majority of the stockholders of 
this corporation, including Mullins, consented to this arrangement, that, 
therefore, the ordinary rules applicable to such a transaction cannot be made 
available to the plaintiff upon the ground that in a corporation of this 
description the minority of the stockholders have no rights which the majority 
need respect. It is undoubtedly true that such is the rule to a very great 
degree in such corporations. But, under its protection, the courts will not 
allow the majority to fraudulently deprive the minority of their rights. 
Although, in all matters of administration, the wishes of the majority must 
rule, yet where such administration tends to fraudulently deprive the minority 
of their rights and interests in the corporation the courts will interfere for 
their protection.

In the case at bar, as already suggested, the very transaction itself shows a 
fraudulent design, and no explanation has been given by the evidence offered 
which relieves the transaction of the conclusion necessarily forced upon us by 
its terms. The issuance of these bonds at twenty-five cents on the dollar, under 
the facts disclosed, in this case, would be such a wanton waste of the property 
of this corporation as would call upon a court of equity to intervene for the 
protection of the stockholders who are not to profit by this extraordinary 
transaction.

The judgment must be affirmed, with costs.

Brady and Macomber, JJ., concurred.

Judgment affirmed, with costs.

Additional Comments:
Reports of Cases Heard and Determined in the Supreme Court of the State of New 
York. Marcus T. Hun, Reporter. Volume LIX, 1889, HUN 52. Banks & Company, 
Albany, NY. 1901.

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