San Antonio Irrigation Co. v. Deutschmann , 102 Tex. 201 ( 1908 )

Selig Duetschmann instituted this suit in the District Court of Bexar County, in the city of San Antonio, against the San Antonio Irrigation Company, R.H. Russell, J.A. Simmons, and Wm. McKenzie, to recover of them one-third of the irrigation plant and in the alternative the value of one-third interest in a franchise which was granted by the city of San Antonio to Simmons and Russell and their associates, which franchise was transferred by Simmons and Russell to the Irrigation Company without the consent of Deutschmann. Upon the trial before the judge judgment was entered in favor of Deutschmann against the Irrigation Comapny for $8,333.33, less $1,242.18, but judgment was rendered in favor of Simmons, Russell and McKenzie against Deutschmann.

We must resolve every conflict of evidence in favor of Deutschmann and draw that conclusion which the most favorable view of the evidence will warrant in support of the judgment.

On May 1, 1901, R.H. Russell, acting for himself and as the agent of J.A. Simmons, entered into a verbal contract, with Selig Deutschmann whereby it was agreed that Simmons and Russell should furnish the necessary capital to carry out the scheme and the right to use what was known as the Mitchell's Lake property which was owned by the Texas Oil Company, and that Deutschmann, who was a lawyer, was to furnish his time, skill and legal ability in formulating the plan for the disposition of the sewage of the city of San Antonio by which the city would give to the said parties the sewage for ninety-nine years to be used and sold for irrigation purposes. Deutschmann was also to procure the right of way from the sewer farm to Mitchell's Lake and was to act as attorney of Russell and Simmons, for which services Deutschmann was to have one-third interest in the franchise that might be procured and in the profits arising therefrom. It was agreed that a corporation should be formed and the franchise transferred to it, that Deutschmann should have one-third of the stock and Russell and Simmons should have the remainder. Deutschmann spent several months in working up the matter and finally, on September 23, 1901, he secured from the City Council of San Antonio the grant of a franchise to J.A. Simmons and R.H. Russell and their associates for ninety-nine years, by which they would have the privilege for the time stated of using the sewage for irrigation purposes. Deutschmann was the only associate of Russell and Simmons in the franchise.

Simmons was in New York and was expected to raise the money there to carry out the scheme, but he failed to do so. The franchise contained a clause requiring the parties to begin work within ninety days from the 23d of September, 1901, and in case of failure the city had the right to declare the franchise forfeited. The attention of Deutschmann and Russell had been called to the clause a number of times. About April 27, 1902, the city attorney of San Antonio notified the parties that the work must commence within a short time or steps would be taken to forfeit the franchise. Russell, Deutschmann and McKenzie then entered into an agreement that they would form a corporation under the laws of the State for the purpose of carrying out the scheme that had been inaugurated, and Deutschmann then agreed with Russell and McKenzie that he and they would transfer the franchise to the corporation when formed. He said he would go into it if he were given all the time necessary. In forming the corporation Deutschmann suggested that one Ezell should be made one of the incorporators to represent him, and he, Deutschmann, drew the charter and all necessary papers to incorporate in the name of Simmons, Russell, McKenzie and Ezell, with the understanding, entered into between the parties, that the capital stock of the corporation should be $25,000 and that each one of the incorporators, that is, Simmons, Russell, McKenzie and Deutschmann, should have the privilege of subscribing for one-fourth of the capital stock, but Deutschmann was not to receive any compensation for his interest in the franchise. Deutschmann testified that it was agreed that he was to "pay for that stock at such time as I could arrange — the arrangement with them was, I was to be the last one that was to be forced in on the money, because they said they had the money, all of them, and they knew that I had none, if I was to get a salary that was to go on the stock; I was not to be harassed or forced for any part of the stock in consideration of the fact that I had gotten the franchise. They were not expected to ask for it one day and get it the next."

The corporation was organized and the charter procured, and the Board of Directors met and determined to set apart $5,000 of the stock as a bonus to those who had been engaged in getting up the franchise; by arbitration among themselves, the $5,000 was divided, $3,000 to Russell, $1,000 to Simmons and $1,000 to Deutschmann. Deutschmann did not take out the stock allotted to him. There being four persons interested in the matter, it was decided that each should have the right to subscribe for $5,000 of the shares of stock, and the Board of Directors decided that each subscriber should pay fifty percent of the amount of the stock subscribed in cash.

When the parties went to Deutschmann with the list for subscriptions and told him that the terms were to pay fifty percent on the next day, he refused to subscribe. Deutschmann refused to sign a transfer of the franchise to the corporation, and afterwards sometime in July, 1902, Simmons and Russell made a transfer of the franchise to the San Antonio Irrigation Company. The company entered upon the work and put in ditches, etc., which are not necessary to enumerate here. Deutschmann declined to have anything more to do with the corporation and finally brought this suit to recover for the value of the one-third of the franchise.

It is not denied that by the transfer the San Antonio Irrigation Company acquired the legal title to the franchise, but it is claimed that as it had notice of Deutschmann's interest at the time it acquired the franchise, it is liable for the value of it.

It is conceded that by the transfer made by Russell and Simmons the corporation acquired the legal title to the franchise. It is claimed, however, that Deutschmann had an equitable interest in the franchise at the time the corporation acquired it, and that, it being transferred without his consent and with notice to the Irrigation Company of his interest in it, he should recover from the corporation the value of the one-third of the franchise.

It is apparent from the facts in this case that when the original scheme was originated by the three promoters, Russell, Simmons and Deutschmann, the purpose was that the franchise when acquired should be the property of the three, one-third interest to Deutschmann and the other two-thirds to Russell and Simmons. It must have been intended that when the corporation should be formed stock would be issued to each of the promoters in proportion to his interest in the franchise, and that the money to develop the enterprise and construct the irrigation plant would be procured by some means other than by sale of the stock. When Simmons failed in New York to secure the money and the city of San Antonio became restless with regard to the beginning of the work, a situation was developed that demanded new measures. The plan of procedure was then changed, and it was decided that the franchise should be transferred to the corporation which was to be formed, and that stock should be issued by the corporation and subscribed for by each of the promoters, to be paid for in full. Deutschmann expressly says that he was not to receive any compensation for his one-third interest in the franchise, and was to pay for his stock. That was a full and complete abandonment of his claim for any compensation for that interest when it should be transferred to the corporation, and upon his action in thus abandoning and waiving his right the other members entered into the corporation with him and each transferred his own interest without compensation. McKenzie had not been interested originally, but he came into the business under this last agreement. Deutschmann stood then just as if he had never had an arrangement by which he was to receive pay in stock for his interest in the franchise.

Section 6 of Article XII of our State Constitution reads as follows: "No corporation shall issue stock or bonds except for money paid, labor done, or property actually received." The terms, "money paid," are very definite and plain and do not mean that stock can be sold for money to be paid, but must be sold for cash. Of course it can be paid for in instalments, but it must be paid for in money, or in property actually received, or by labor actually performed for the company. The contract which Deutschmann sets up, by which he was not to pay for the stock any money at the time of its issue, is plainly and unquestionably in violation of the Constitution of the State, and being in violation of the Constitution, that agreement in so far as it provided that Deutschmann should have all the time that he might find necessary in which to pay for his stock was void. Williams v. Evans,87 Ala. 726. The case cited construed a provision of the Constitution of Alabama very much like ours, in fact, almost in the same language, but not quite so emphatic. In that case there had been an agreement to issue stock in excess of the amount paid, and the court held that it was in violation of the Constitution and therefore void.

A contract which is in contravention of the Constitution of the State, as the one under consideration, can not give a right of action for damages or for any other relief in the courts of this State. Moss v. Bank, 102 Ga. 808. In the case cited the bank had agreed to furnish money with which the borrower intended to purchase futures, which was known to the bank. When the time came for getting the money the bank declined to furnish it and the borrower brought suit for damages for a failure to keep the contract. The Supreme Court of Georgia held that no relief could be given for the violation or refusal to comply with such a contract.

If the directors of the corporation had furnished Deutschmann with stock to be paid for at such time as he could arrange, it would not have been a sale for "money paid," and would have been in direct violation of the Constitution. The directors offered to Deutschmann the benefit of the lawful part of his contract, which was to subscribe for $5,000 of stock and pay for it as other stockholders, which he declined. If the sale could have been on time, the agreement set up by Deutschmann is so vague as to the time of maturity as to make it unenforceable and void. Burleigh v. Parton, 21 Tex. 585. The judgment which Deutschmann recovered in the District Court against the corporation is a penalty for having kept the law, for having obeyed the Constitution of the State.

It is said that Deutschmann's right to receive stock for his interest in the franchise was revived on the failure of the corporation to perform the contract with him. The answer to that proposition is, the surrender of that right was not made upon condition that he should have the stock upon the terms claimed. Deutschmann says no more than that he was "willing to go in" if he could have the time he needed. To permit Deutschmann to recover the value of his interest in the franchise would be in effect to enforce the unlawful contract.

We are of opinion that the facts show that Deutschmann can have no right of action against the corporation, therefore, it is ordered that the judgments of the District Court and Court of Civil Appeals be reversed and that judgment be here entered in favor of plaintiff in error and against Deutschmann, that he take nothing by his action.

Opinion filed December 23, 1908.

DISSENTING OPINION.