Cleveland Printing Ink Co. v. Phipps (30 Ohio App. 161, 1928)

Vickery, J.

This cause comes into this court on appeal from the common pleas court of Cuyahoga county.

The action below was brought by the plaintiff, the Cleveland Printing Ink Company, to cancel 300 shares of stock that had been issued to the defendant, Prank Phipps. The court below finding in favor of the plaintiff, and ordering a cancellation and return of these shares of stock, an appeal was taken by Phipps to this court, and the case was submitted to this court on the same evidence that was heard in the court below.

We have gone over this evidence, heard the arguments of counsel, and familiarized ourselves with the briefs, and we think a decree must be entered for the defendant, for the reason that the record in this case shows that one Baumgardner was the inventor of a certain process or formula for the making of printing ink, and that Phipps was a sales agent, selling medical books, and as such came in contact with doctors and others; that Phipps and Baumgardner were friends, and, Baumgardner stating that he had this process, and would like to establish a manufacturing plant, they entered into an agreement that, if a manufacturing plant was formed, they would have half of the stock issued to them for the process or formula, which Baumgardner had patented or copyrighted, and which the record shows was worth at least $6,000. Baumgardner so claims, and there is no evidence to the effect that it was not worth at least $6,000, and Baumgardner says it is worth even more than that.

Now after this agreement was entered into between Phipps and Baumgardner, Phipps went out and solicited subscriptions to the stock among his friends, and raised the sum of $6,000, whereupon a corporation was formed. It was formed in the office of Roscoe Ewing, the employees in the office acting as incorporators and becoming the first directors, and the record shows that the first five certificates of stock were issued to them as such directors,.one share to each, who successively resigned as the interested parties were elected to the board of directors in their stead. The sixth certificate of stock, which called for 600 shares, amounting to $6,000, was drawn up and assigned by the officers to Baumgardner. The corporation was a $25,000 corporation; $12,000 of the stock of which was to be issued. That certificate of stock was never as a matter of fact delivered to Baumgardner, and remained intact in the book, but the next certificates, 7 and 8, were 300 shares each, one certificate being issued to Baumgardner and one to Phipps, which accounts for the whole issue of 600 shares to Baumgardner, in payment of his process. By virtue of the agreement between Phipps and Baumgardner, it was split up between the two, each to have 300 shares, and, in accordance with that agreement, the 300 shares were delivered to Baumgardner and 300 to Phipps, and this accounts for certificate No. 6; it being replaced by these two certificates to Baumgardner and Phipps.

For a long period of time thereafter, Phipps voted his 300 shares, and Baumgardner voted his 300 shares, but subsequently an audit of the books was made by some one who found this certificate No. 6 in the stock book of the company, and, inasmuch as it had not been indorsed by Baumgardner, he claimed that Baumgardner owned that stock, ignoring the splitting up of the same number of shares of stock between Baumgardner and Phipps that appeared on the stubs of certificates numbered 7 and 8. Thereafter Baumgardner claimed to hold the 600 shares of stock, and claimed that Phipps did not have any, and upon that a suit was brought to cancel these shares of stock, and the court below, as already stated, held that the certificates of shares of stock to Phipps should be canceled.

We cannot help coming to a different and contrary conclusion, that these shares of stock were issued to Phipps in accordance with his agreement with Baumgardner, and that Phipps was the owner of 300 shares and Baumgardner the owner of 300 shares.

It is now claimed by the board of directors that they had no right to issue these .600 shares of stock for the formula and process for manufacturing this ink, for they had not complied with the Blue Sky Law of Ohio (Section 6373-1 et seq., General Code), and therefore that the stock was never issued. This is a singular plea, and comes rather late in the day and with very bad grace, for the resolution of the board of directors shows that this formula and process were reasonably worth $6,000, and this resolution was passed by the board of directors, who had become all the stockholders in the corporation, and the 600 shares of stock were issued for the process or formula, which thereupon became the property of the company, and was to be transferred and assigned to the company.

It is alleged and argued now that such assignment was never made. Well, if it was not made, it is the fault of the directors of the corporation, and they could have gone into court at any time, and could come now into the court of equity and compel an assignment of this formula. The evidence, without any doubt, shows that this corporation was formed upon the distinct understanding and agreement between all the parties that $6,000 was to be raised outside, which Phipps raised, and the formula or process was to be regarded as of the value of $6,000, and Baumgardner in his testimony says it is worth that and much more.

Now, after the corporation was formed and this formula was used by it for the entire period of time it ran, after this corporation had the use of it and the stock had been transferred to Baumgardner and Phipps in accordance with their contract, and after they had become officers of the corporation and had voted this stock in the corporation, it is rather late for the directors, after they had reaped the benefits of this stock, to say that they had not complied with the law. In other words, they are estopped, even if the transaction was contrary to the Blue Sky Law, which I do not concede.

That a suit has been brought against Baumgardner to cancel this stock proves nothing. The only way that this whole transaction could be righted, and that is impossible, would be to put the persons in statu quo, before there had been any transferring of this process and formula and before there had been any division of the stock. That a suit has been brought against Baumgardner proves nothing. It would look as if Baumgardner and the directors of the corporation were in collusion to get back the stock of Phipps. The record clearly shows a contract between Phipps and Baumgardner, whereby this stock should be divided between them, and it was as a matter of fact divided, and no trouble arose until Austin, who was in the employ of Baumgardner, discovered what he thought was a mare’s nest in finding this stock certificate No. 6, which had been made out to Baumgardner, unassigned. The certificate had never been delivered to him, and the same number of shares was issued in the next two certificates, Nos. 7 and 8, as already pointed out, which were in lieu of and account for the nondelivery of certificate No. 6.

We think, therefore, that it comes with ill grace from the directors to set up the illegality of this transaction, to set up that they did not comply with the Blue Sky Law, after they have reaped the benefits all these years of the use of this process or formula, and after having a distinct right in equity to enforce an assignment of this process or formula, so the whole claim that there was no consideration for this, and that it is contrary to law, fails. Accordingly, a decree must be entered for the defendant, and he, in our judgment, is entitled to these 300 shares of stock.

Decree for defendant.

Sullivan, P. J., concurs.

Levine, J., not participating.