·
ST,uTZ t7. HANDLEY· . · ,. . _', c. · · , '
,
581
from the court.in.which it originated. What justifiable' ground can b& for the case ,here ,when, u,pon the fnce of the record, it is' Clear that the cou,rt can take no cognizance of it, and it must be finally !emanded to thestate ,court for want,of In my opinion, the plaintiff is not prohibited from filing the record at a date earlier than the first day of the next session, and can then challenge the jurisdiction of the court as it appears upon the face of the recorda. Motion to remand granted.
STUTZ
et al. 11. HANDLEY
et at
(Oircu'lt Uoun, M. D. TenneBBee. ,Marcb 18, 1890.)
1.
CoRPOlUTIONs.::-AorloN AGAINBTSToCKHOLDBRB-RBS JUDICATA.
Where, in anlWUon against a oorporation for the price of machinery, a counterclaim for damages by breach ,of warranty Is disallowed, it, is res ittdlcata as to the stockhOlders, and such counter-claim canuot be pleaded In a suit, on the same canse at action, to recover the amount unpaid on their subscriptions ot stock. Where all the stockholders of a corporation assent totbeaction of a stockholders' meeting in increasing the capital stock, or ratify such action, they cannot afterwards object to sucb increase that no formal notice of tbemeeting was given,'or that it was held in another state than that hi wnich tlle,corporation was chartered. there being nothing in the charter to prohibit its beingsolleliL ' Where, a corporation organized under 'Gen. St. Ky. c. 56,' hQII by Its charter the power to Increase its capital' stock, its stockholders, who have acquiesced in such an increase' ,ana receiveti the stock issued thereupon, when' sued by a creditor of thl! corporation for the ,amount unpaid on such stock, are estopped to say that the Increase WlloS invalid because itewas not published and recorded as required by, seetions 5 and 6 of the above chapter. ' , ' OllSTOCX-VALIDITY__EsTOP1'lCL.
2.
S.SAKE.
4. SAKE.....;STOQltHOLDERS', LIABILITY FOR UNPAID STOCK. After such increase was made in the capital stock, a pol'tionof the new shares W80fl distributed among the stockholders, upon the understanding that they were the'owners of the new stook in proportion to the amounts they respectively held of the old, and .the certUlcatesissued to them recited that the stocll; was paid up. The corporation then beoame indebted to complainants. who had notice of the increase Of. the capit.iJ;lstock. but not of the disposition made of it, and afterwards the corporation became insolvent. Held, that the stookholders are liable to complainants for the full amoiintof the new stock so issued to them, and not paid for; the capitll1 stock being a trusttund for the benefit of creditors. G. BAKE. ' This liability for tbe full amount reprellented by tbe unpaid stock, on the insolvency of the corporation, extends to persons tc:l whom a portion of the new stock was issued as an inducemen.t to purcllase ponds of the corporation, though they, too, received certificates reciting that the stock was paill uP. since their &006ptance and holding of the stock is, in le&,al efre($, a subscription therefor which imports a promise to pay.
In Equit,y. Creditors' bill· . .Walter Eva718and W. ,L.. Gordon, for complainants· .' E. H. Ea8t,and Pilcher.JcWeaver, for dElIEmdantB· . JACKSOlll, J",I'the complainants, on behalf of themselves and all other ofthl,l ,Clifton Coal Company who may choose to come in, bring this suit to reach and subject to the pa.ymentof their debts against the rep1aining unpQ.id upon shares of the capitalstock
532
DDERAL REPORTElt;-vol. 41.
dvsaid Corporation beld and owned by the 'several 'fte material facts of tbe case, on which the questions and tlierights of the parties depend, are but little controverted, and are as follows: In June, 1883, the Clifton Coal Company was organized undei'thegenerallaws of Kentucky. Chapter 56, Gen. St., which went into effect December 1,1873. After enumerating in detail thepurpose, nature, and character of the company's business, and its special powers, the charter provided, among the latter, that "the amount of capital stock shall be $120,000, with power to increase to $200,000 by a majority vote of the shareholders; the times when and the conditions upon which said stock is to be paid in to be determined by the hoard of directors." By another provision ,the board ofi directors were authorized to receive real estate, leasehold estate, mining rights, the right to take timber and right of way, in' payment of such, pa.rts,iof subsc:dption for capital stock and at such value as theym,ight deem advisabll;3, ,T1W at : The that the indebtedness of the sto9k.dmd , company should at noth:ne exceedtwd-thirds of that the,;private property of its stocliholders, was to be exempt from all liability for corporate debts. This exemption, however, had no reference to the liability" of sharehqlders on uppaid stock; for by the s!3ction of said chapter 56 of the General Statutes, under which the corporation was organi;Zed, it Js provided that "nothiqg,herein sha).! the stockholders of any corporation from individual liability to the amount of the unpaid installments on stock' owned by tl:!.eni, or transferred by them for the purpose Qfdefrauding .creditors; and execution against the company may, to that extent, be levied upon the private property of such individhal." . . . The articles of incorporation were duly recorded July 3, 1883, in the county court office of Hopkins county, Ky., and the compaPY's principl'\:l place of business was established at Manington, in the adjacent county of Christian. The capital stock, to the e:x:tent .of $120,QOO,a,s to which no controversy arises in the present 8uit, was promptly subscribed the lands for, and the 'company inlmeclia,tely commenced it had acquired;'and proceeded to make large outlays and, expenditures for machinery "buildiqgs·. and labor connected with the milling and se1liilg otcoal for steam and grate purposes, to which, its business was, for several years, chiefly confined. Early in 1886 e;p;eripy .experts, whichiled Jthe ments stockholders and managers of the company to believe thaUhe 'company's coal could be converted into ,.o.n ,fdafch 31, 1886, a meetmg of the stockholders. waS held, (all' the/stock }je,ing represented in personor'by .proxy ,) at which, aHer' thlit'$,aO,000 was needed and required by the company with whicb'tC);buHd cokeovens, buildings, and structures of various kinds, !lnd to further develop the 'property, it was uniinim6usly resol\7edtd'lssue of;thii '<'!6tnpany to an alllOtlnt not ex;ceeding of'$"l'iOOO each, 'd,u,e at 30 yearsllfter April.1. 1886, beaHr1M, (I) 'per cent; 'interest, semitannqaUYI' and secured by; trust pOll' the! COUl pahy'Js lailds;
STUTZ V. HANDLEY.
588
mines, machinery, buildings, and equipments: The president of the company was authorized to· dispose of said bonds when ready, as in his discretion might seem best. The mortgage was duly executed to the designated trustee, and recorded, and bonds of the company to amount of$50,000 were issued. A sale of these bonds was not prompt.. ly effected, and, needing funds to carryon its contemplated and desired improvements, the company procured loans for considerable amounts from certain banks in Nashville, for which its notes, indorsed by several ofits larger stockholders, were executed j and, as a further protection to the banKs making the loans, said bonds were deposited with them by way. of. .a4ditional collateral security. On: the day of May, 1886, Ii. called meeting of the stockholders was held at Nashville, Tenn., 1,073 of the 1,200 shares being represent.. ad in.,pert:!on, when "it was unanimously resolved that the capital stock of .be increased to $200,000, as authorized by the charter; the purpQsefor which said stock is issued being the' betterment ent,; plant, and the construction of a new· plant for coking purposes. " +,he proceedings of this meeting were taken downat the timein pencil'by the acting secretary, but,by inadvertence or oversight, the resolution was not. formally entered upon the minute book of the company. until when the omission was discovered. But the fact of the meeting, QUhe who. were present, and the adoption of the resolution, isfuUy and clearly established, aside from the pencil memorandum of the proceedings, and the subsequent entry.thereofupon the minute book of the company. It wassuppo.sed and. assumed that the increase of $&0,000 to the capital stock of the company, notWithstanding theexw pre;ssed purposes for which it was made, belonged proportionately to the e;x:isting stockholders, and that they could contro], dispose of, distribute, alld dividethe same as they deemed proper. Acting upon this idea, and be!ng advised by a banker who had undertaken to see the company's bonds that; in order to make them" go" more readily, it would be well to add an amount of the stock for distribution with each bond, the managing qfficers of company. on pecember 30, l886, with the knowledge and collsentofall ,the holding the originalstoc]rof$120,w 000, pre.pare.d,fI,nd caused to becirculnted, a subscl1iption,paper"as tolIt;>wll' ,viz.: the undersigned, subscribe fortheamountsetopposite t9 our names,respectively, to bonds of the Clifton Coal ,Company,aggregat. iIl gJH50,OOO. It is agreed that $50,000 of the, $200,000 capital .stock; be distributed pro rata among the subscribers to the above bonds." The defendants ;Handley, Neely, McLester, Talbot,El@tcher, Buckner, James, Erwin, 4nnom,'D.T. & W. A. Rankin, Murray; Dibbrell & Co., Orr" J.a.cksml'& Co., and White; with others not served in the :suit,became! S'!l.9scrihlilIiS.'w said paper for different am()untsiof the bonds, .to the ex.... tll,llt of, $t.l5,:OOO, leaving $5 1000 thereof untaken., The defendants : Ill,l.ndley, large.portiop.sof the li)ld Btock·. T-4e White had been an original fltockh6lder to the amount of but bad. transf'lrred his &tock in. Nbvo:ember, 1885.. · He,'with' wtl.e tj,n jnd.orser of. fodU6,500, <' ·
584
FEDERAL' 'REFIOR'11ER,
vol. 41.
,for whiob ·Il.oout ,$30,000 of said! ·hands' were h)'pothElcated' itEr ctlllll,teial bank,{the 'nolder oBbe note,) of which,:White was a security;' authorized his name to be signed to said ,subscription paper:for,$5,000of the bonds,upon an understanding and agreement !pade with,Neely and Sanford that· they would take up the bonds in a few days, or :get.some one to take them oft' his hands in a short time. This arrangement formed no part of the subscription paper, nor was it made asa condition thereto; but was a private understanding between White and'said parties, to provide for the payment of said subscription. Neely 'and Sanford made their note, on demand, for $5,000, which White indorsed, and the bank of which White was a director accepted the note I and paid out for White said amount; to the secretary and treasurer of the company. who. delivered ,totbe bank, for White, $5,000' of said bonds, and an. equal amount of stock, which the bank' was to bold as security for thepayinent of the noteiin which position the matter stood at the filing of his answer herein. It is claimed for defendant White that he did not read'or examine the subscription paper to which he authorized his name to be signed. This was his own fault, and constitufus no defense. "It willnot do for a man to enter into a contract, and,when called upon to respond to its obligations, to say that he did llot, read it when he signed it, or did not know what it contained. lfhewilbnoheadwhat he signs, (or authorizes to be signed,) he alone: is-responsible for, his omission." Uptlm v. Tribilcock, 91 U. S. 50. The proof, however, established that be knew of the arrangement to have an equal amount of stock "go" with the bonds. Neither will White's agree-' ment with Neely-and Sanford alter 'his position as the actual holder Cif the 50 shares·ofstook issued with the $5,000 ofbonds subscribed for by him. So far as creditors are .concerned, he remains the holder of said .50sha.res, (see ,Hawkina v. Glenn; 181 U. S. 326,335,9 Sup. Ct. Rep. 789,) and occupies the same position as other' defendants who .accepted' stock with; bonds. " . :,Some of the other defendants, not previously connected with the compamy asstookho!ders, :were led, is' they state; to subscribe for said bonds' onthesup!>ositioo, that the stock which was to be distributedwilh the' bonds;was' or would be a part Of the old stock, which existing stockhold.. ' era, wouJd surrender for their benefit·. But no such representation was I made by any: agent or officer ofthtl company. Mt; Handley,' who was: most active in procuring subscriptions for the bonds, appears to have acted in perfect good faith. :His'rEipl'esentationswere to the effect that the company had' concluded to boud its property foi $50jOOO; that it had' its coal would make cokei that, with the of making coke, the property'was'6rst 'classi that undt:r the 'charter it was allowed to increase its capital stock to $200,OOOi was' alteml)r iSsued (that a resolutionhad:been passed bystookholders toisSlie the remaining 880,000 ofstock,apatt of which would be given with the Dondsi that th'e onginal- $120,0001ut stock would have'riopreference O\'er' the new, orincreased$SO,OOO; arid thatin his opinion,with proper manage- . be at or above par in two orthteeyelU's.He.
.) '", 'STUTZ
635
'.lieved, as did other that the property o]thecompany ·-entirely adequate and sufficient for tbepayment of said bonds. The mines and property at the time were in. good condition. The company hll-d, jn the summer of 1886, contracted with complainant Statz for machinery to crush and work the coal, so as to free it of sulphur to such l!-n extent as to make it coke well.: H had a guarJl,nty that this machinery wOjlld sufficiently rid the coal Iilulphur to enable the company to cemelltit inw:good coke. If this expectation of making,coke, which was iQ,Pf()<:essoftrW at the time subscriptious were solicited, had been !!ubseqUElIltly realized, the reasonable value of the company's property would have been ;from$200,000 to $300;000. H$ndley had this sort of, confidence in thef\lture of the company, which he honestly expressed, and the subscribersto the paper of December, 30" 1;886, wer,e.nodoubtlargely, iDtluebCed, oil taking said bonds" by the hopes and they enter.tainedi8il,to the future valu:eof the stock of the w,bich was to .bedistributed to them along with the,bonds. The pld stock of thEl COIIl:pany wa:sat that timQ tated on"theml;lrket at from 33 to 50 cents,on the dollar. ",: . After paying for the bonds, there was issued to the several subscribers therefor, in January, 1887, equal amounts o{ the company's capital stock;' the receipts for the certificates reciting that the stock ,was uissued with bondsJor same amount as per agreement," or"issued ,to go with; 8· , bQnds of company as. per IJ,greement of stoQkholdl:l,,"," 'and 'upon the face it was stated that the party named .therein was ,entitled to so many shares" Of the fully paid capitl!-lstock of Clifton Coal Co. I which sha:res are transferable on tbe books of the aom,pany"eitber personally or by attorney, upon surrenqEll' of this .free from: al]' claims Qr, demands on. the part of the company." All the defendants that thus took stock the bonqsappear upon the company'a books ·as stockholders; all of them still hold, !laid stock;. and ,all" except White, have, either i.o, per,son: or by prOJl:Y, yoted the same at subsequent meeting of the stockholders. In March and April, ,1887" $80,O,QOofthe.lj.0wQr increased stock .wasdistributed prQ rata· .among ,the holders of the, old stock;, increasing their, .respective shares or holdings 25 per cent. Thisincrease of their stock effected by simply surrendering their certificates of old stock, new certificates for the larger amount; Thus the defendant· Handley, in lieu .of cenifiGff.te No.1 of old stock for 200 shares taken on March 8, 1887, new certificate No. 16 for 250 shares. So wi11h other certificates surrendered by him, making his proportion of the,i.llcreased stock86t shares. The defendant Neely, who had;300 shares of the old ,f\tock, knew of the arrangement to issue an equal aInount of stock with tlle ':bonds, and to distribute $30,000 oftlle in{:reased stock by the ofM:fl.Y, 1886;. and on April5,1887,ex.ecuted,bis'poWElr of attorney to Samuel R. Sanford, authorizing the Jatter, for him.:8rnd in ,his harne, toreceipt "to the Clifton Coal Com pany for stock.in Ply palp,e, "and transfer·and sell thesam,e'aB; if I Wt:1J'llthere pre!lent."Under,this cj>.Qw.er, of fQJ;, , 300
538
DDEBJ.LREPORTER,
sbarell,and for Neely, and in Neely's name, receipted for 375 sbares of stock, tbe certificates for which were delivered to Sanford, as agent fol' . Neely, and which Sanfotdsubsequently voted at the stockhold.ers' meeting under a general proxY' which he held from Neely to represent his stock. Neely claims that' he bas hever received the new certificates for the incteasedBhares; that Sanford's act in receipting in his name for the new or addition'al75 shares was unauthorized, and therefore not binding upon bim.· 10:' view of Neely's knowledge of the disposition proposed to be made of the increasedstock ordered by the resolution of May, 1886; of the (act that the idea prevailed with the old stockholders that this increased stock belonged to themselves; of bIs general authority previously given to Sanford to represent his stockj of the express language of his power of 'attorneyj and of the fact that Neely's name thereafter stood upol) the company's books as the holder of said new or additional 75 'shares,-:his effort now' to disclaim ownership thereofcannbt be allowed, and in respeet to said 75 shares he must be held to stand precisely upon the same footing as defendant Handley occupied in regard to the extra 861 shares received by him. . This;disposition which was made of the inerensedor new stock, in distributing 845,000 thereof to the subscribers for bonds, and 830,000 thereof among the old stockholders, proportionately, does not appear to to have been 8uthorizedor directed by any expressed corporate action. .The books' oftha company in evidence show 110 action,either by the directol"sor stookholders, on the subject. It is, however, established by the proof that all the old stockholders knew of and acquiesced in the disposition of the new stock as madej that such increased stock was represented and voted at subsequent meetings of stockholders; and that it was recognized and held out to the public as a part of the capital 'stock of the tlompany. The debts due the several complainants were contracted by the company after its bonds, as directed by the resolutions of March 31, 1886, were issued, and after its capital stock was increased 008200,000 by the 'resolution of May, 1886. On January 11, 1887, the company executed ,its note to complainant Stutz for $3,266;87, payable April 11, 1887, befor the balance due him for certain ,patented coal-washing machinery furnished the company under contract made in June, 1886, to prepare the coal for coking. He obtained judgment against the company ,on said note in the United States circuit court at Louisville on March 8, 1888, for 83,466.20, on which execution was duly issued, and returned :nulla bona. The complainants Ragon Bros. and Louis Stix & Co. sev'erally obtained judgments against the company in the circuit court of Munty, Ky., for;their respective demands, in October, 1887, (In which executions were issued, and also returned nulla bona. Their judgments were founded upon claims for merchandise furnished the comPanyjat its request, between March and August, 1887. The debt due Ragon Bros. is fully established, aside from their judgment, the validity of which is attacked for want of ·proper service. But we think thei", judgment is- valid, the>summons having been served upon Allen, the
687 secretary and treasurer of the Clifton Cl"lal Company. Complainants had no knowledge or notice of the subscription paper of December 30, 1886, under which $45,000 of the new stock was distributed to those who subscribed for bonds, nor of the distribution among the old stockholders of $30,000 of said increased stock; nor does it affitmatively appear that they, or eitberof them, dealt with and trusted the company upon the faith of that increased stock. But the fact that the capital stock had been increased to $200,000 was made public, and was generally known. The company being unable to .pay its debts, the circuit court of Hopkins county,Ky., early in 1888, on the application of certain creditors, placedits property in the hands of a receiver, and the company became and is now hopelessly insolvent. The on behalf of themselves and all other creditors, seek to compel the several defendants, as owners of the increased capital stock, to pay up the amounts of their respective holdings to the extent necessary to satisfy their debts against the company, claiming that both those who accepted such stock with the bonds subscribed for, and those of the old stockholders to whom portions of the increased stock was distributed, are equally liable, and bound to make such payment, on the broad and well-established principle that unpaid capital stock of a corporation in the hands of original holders is a trust fund for creditors, which the corporation and its stockholders eannot, by any contract, contrivance, or arrangement between themselves, divert from that purpose and application. No valid objection can be raised to the form of the suit. The bill is properly filed, under the authority of Hatch v. Dana, 101 U. S.205. Its object being to reach and subject a trust fund, complainants were not even required to have reduced their claims to judgments, and exhausted their remedy .at law after theinsolvency of the company. Case v. Bea'lJr regard, Id. 688-690. The defendants interpose various special and general defenses. They resist the right of complainant Stutz to enforce payment from them, on the ground that he warranted or guarantied the coal-washing machinery which he furnished the company to accomplish certain results which it failed to do; that by reason of such failure there was a breach of his warranty or guaranty, whereby the company sustained great damage, which, it is claimed, exceed his claim, and should defeat his recovery. But this cbunteHlaim for damages, sll,stained by the alleged breach of warranty or guaranty, was set up by the company as a defense to his suit in..the United States circuit court, and was disallowed. It cannot be relitigated in this case, for the reason that the delendants, as shareholders, being represented by the corporation in that suit, have al. ready had their day in court on question. The judgment in Stutz's favor is conclusive against defendants, until reversed for error or impeached for fraud. It cannot be collaterally attacked, or shown to be erroneous, in this suit. Mor. Priv. Corp. §§ 865, 886, and cases cited; Tay!. CQrp. § 737.. The defendants who accepted stock with their bonds set up, as a llpe.cial defense, that the stock, which they thus acquired was understood to be, and was in fact, a part of the original $120,000. paid-up
888
nDElUL' BIlll'OR'11EB,'VGI.
41.
sha.l·esheld·by the old stockh6ldersrwhd surrendered ,the Bame to go withtbebonds,and that s;uch stock istherefore "noi1:"assessable" in their hands. No sucb contract or undeMtanding, either with the company 01' old stockholders, is shown; nods it'in any wa:yimplied from the terms ofthesubscription paper of December 30; 1886, under which the bonds and 'accompanying stock were obtained. The old stockholders in fact made no such surrender for the' benefit of those, who took the bonds. On the contrary, the stock, which was given to 'the purchasers ofthe , bonds, 'was issued before the old stockholders surrendered their old cerfor the larger tificates, for the purpose of obtaining" new amount. It is thus clearly established that the stock, which went with the bonds, was a part of tp,e increased, and not of the original, stock;, This special defense is not, even if it would have availed anything under the alleged arrangement. : We CGme next to the consideration of the main defenses interposed. by all the defendants, which: are: First, that theirtcreasedstock was void" and neither conferred anyrightsnol' imposed any liabilities upon them; and, second, that,ifsaid increase was valid or binding upon them, they cannot, ,under the circumstances, be required to pay the amounts represented,by tbeirseveralholdingsofsuchstock, in ol'der to satisfy creditors of the company. Itisurged'that the attempted increase of stock was void, because the stockholders' meeting which authorized it was held in Tennessee instead of Kentucky; ,beCau8eno formal notice thereof was given; and because sucb increase of stock, being an amendment orthe conipany's charter, wasnotrec6rded Kentucky, and notice of tlle published, which it is claimed, constituted conditions precedent to any valid increase of the stock; Thecharter:ofthe Clifton CoalCompany contains no express,provision Umitingthe company, in its business . transactions, to the territory of Kentucky. On the, contrary, it was au" arid transact its business as well without as tborized to establish within the limits of that state. The charter contains no express tjonilgainst its directors and stockholders holding their meetings out of , the state. It 'is settled that, in the a.bsepce of 'such prohibition' in the charter or laws of the state creating', the corporation, the hold their meetings and transact I the ·business of the company;in another state. RaiJ:roado,.v. Oowdrey,ll Wall. 476,477. Stockholders' meetings, however,shou1d generally, be,held within the state' or under whose laws, the corporation' is ,chartered,in order to be ingupon ,a dissenting minority· But no valid objection can be made to a:stockholders' maetingiheld in a foreign jurisdiction, provided all the shareholders give theiroonsel)t to such meeting, Or ratify its In the: present case, every'stockholde;r assented to and held at Nashville, which directed the increase ohtockj 1,073 oUhe existing shares wererepl'eaented in person at the meeting, and the two 1101ders oUhe remaining 127. sQares ratified and approved of the action takenf .' qndersuchOirdumstances, previous fOJ;mal potice of the' meeting. ,iujt: 'nooessary, ;and :the increased, stock then autlloriZe(J,'hayingbeerijlarriedupon the books oithe company, cannot
" t .
STUTZ tI.:,HA:NDnEY.
1lQwbe questione<1, for want offdrmal noticeofthe. meeting, 'or because it. was held .in Tennessee. The remaining and. chief ground. on which the invalidity oithe in+ stork is rested! is the failure· to record and .publish the fact that increase had been and made. It;; is . contended, or this proposition assumes, that such recording and pUblication were conditions .precedent to any valid increase of the capital stock;aud sections 3, 5, aJ;ld 6 of ehapter 56 of the General Statutes of Kentucky are referred to as:sustnihlng this view. By section 3, incorporators are required, before l:lommeilCingany business other than organization, to adopt articles of incorporation, which,after being signed and acknowledged as deeds are are to be. recorded in a book kept for that purpose in ,the office of (the clerk of the county where the company's principal place of business is located. By seetion 5, notice is to be published at }t'ast four weeks in some convenient newspaper,giving the name of the corporation, and its principal place of business; the general nature ·of the business proposed to be transacted; the amount of capitaLstock authorized; the time orits commencement and termination; by,whlitofficers its business is to be conducted; the highest amount of indebtedness to which the corporation is at any time to subject itself; and whether the private.property of the stockholders is to be exempt from liability for the corporate '<lebts., :By section 6, the corporation may commence business as soon as the articles are filed for record in the proper office, and its acts are deemed::valid if said publication is made. This section further provides that "no change in any of the foregoing particulars shall be valid, unless recorded und published as the original articles are required to be; nor shall any change be made at .any time, or in any ,manner, which 'would be inconsistent with the provisions of this act." In the case of Heinig v. Manufactwring (10., 81 Ky. 300, it was held that the publicationand filiug of articles ofincorporation in the proper office for record, ali required by said ,section, were conditions precedent to the validity of any acts of the corporation. But that decision was expressly overruled in the sUbsequent case of. Walton v.: Riley, 85 Ky. 413-421, 3 S. W. Rep. 605, in which it was held that the operation of section 6 must be restricted and confined, so far, as it by implication declares the acts of the corporation, invalid, to 'ca,llleB where it is sought to annul the charter or franchise as authorized by the seventeenth section ofsaid .act,!which provides that "persons acting as 0. corporation, under the provisions of this act, shall be presumed to be legally organized, until the contrary is shown; and no such franchise shall be declared actually null or forfeited, except in a regular proceeding brought for that purpose." . B)rsection 18, it is provided that "no persons, acting as a corporation under the provisions hfthis act, shall be permitted to set up or rely upon the want of a legal as a·defense to action brought. against them as a corporation j nor shall, !:lny person who may be sued on a cOntract made with such corporation,iorsued for an injury done to its property, or for a wrong done 'to its interests, be permitted,to rely upon such'want of leKalorganiza-
I'Jl:DEBAL REPORTER,
Butd\side from the estoppel created by this last section dfthe ac£,and independent of the construction placed by the Kentnckycourt of appeals uponlthe above-quoted elauseof section 6, which this court, upon wellI!lettledrules, should follow, can it be maintained that defendant can successfully question or impeach the validity of the increased stock because of the company's failure to record and publish the facts of such increase? We are' clearly of the opinion that they cannot. It is conceded that the corporation had authority to increase its capital stock. This power was not only expressly conferred in and by its charter or articles of incorporation, which authorized the company "to increase its stock to $200,000 by a majority vote of the stockholders," but was clparly implied from the provision of section 6 and the general law. Beinginveswd with authority of law to make an' increase of its capital stock, it is settled by the deoisions, especially of the supreme court,that neither the corporation, nor stockholders who accept such increased stock, can, after the insolvency of the company, question its validity as against creditors for any failure or neglect on the part of the company to do some other act, the performance of which rested or depended upon itself. There is a clear distinction between the power to make an increase of stock and the formality to be observed or act to be subsequently performed by the -corporation in the exercise of such power. A want of power or lawful authority will defeat or render void an attempted increase, while irregularities in the exercise of conceded power is never allowed to invalidate such stock, or to furnish the holders thereof an available defense against liability thereon. Where the power to- increase its capital stock exists, and is exercised, the corporation's failure to perform some act devolving upon itself, in connection therewith, such as recording and publishing its action, constitutes an irregularity or neglect of duty of which the state only can complain or take advantage in a direct proceeding against the corporation; but stockholders who have -accepted portions of such increased stock are estopped from denying the validity of the increase upon any such irregularity or neglect. This is clearly settled by what are known as the Upton ilise8, (Upton v. Pribilcock, ·91 U. S. 45; Sangerv. Upton, 1d. 56; Websterv. 1d. 65; ahubb v.Upton, 95 U. S. 665) PuUman v. Upton, 328; and Oasey:v. GaUi, 94 U. S. 673.) The principles announced in these cases;are directly applicable to the present on.the point under consideration; nor are they in any wise modified or affected by the subsequent decisions of Scovill v. Thayer; 105 U. S. 143 t in which the distinctionhetween the want of power to make an increase, and irregularities or informalities in the exercise of a conceded power, as above suggested t is illustrated and applied. By the law of Kansas, the power of the company to increase its stock was expressly limited and confined to double the amount originally authorized. The attempted increase was in excess of that amount. It was held that :such excess was void, and conferred no right and imposed no liability upon the holdeN thereof, upon the ground ,that there was a want or lack of power on the part of the company to make such au'incrense. For this reason, those who received certificates for such unauthorized stock, although theyab-
STUTZ .,. HANDLEY.
541
tended corporate meetings, were held not to be estopped from disputing its validity. The supreme court, speaking by Mr. Justice WOODS, say: "We think he [the holder of such stock] is not estopped to set up the nullity of the unauthorized stock. It is true that it has been held by this court that a stockholder cannot set up informalities in the issue of stock which the corporation had the power to create;" citing the Upton G'a8e8. "But those were cases where the increase of the stock was suthorized by law. The increase itself was legal, and within the power of the corporation, but there were simply informalities in the steps taken to effect the increase. These, it was held, were cured by the acts and acquiescence of defendant; but here, the corporation being absolutely without power to increase its stock above a certain limit, the acquiescence of the shareholder can neither give it validity nor bind him or the corporation." The reason for the distinction thus indicated is founded upon the principle that a' corporation has no inherent authority of its own motion, or by its own action, to effect fundamental changes in its constitution or organic law, such as an increase of its capital stock involves. It is an essential prerequisite or condition precedent to the validity of such a change that the sovereign by whom the corporation is created, or under whose law it is organized, shall give its consent thereto, either in the company's charter, or by some general or special act. But, when such authority is conferred, those who accept stock under 'the exercise of the power by the corporation are not allowed to shield themselves from liability in respect thereto by setting up the failure on the part of the company or of themselves to perform any subsequent act or duty resting within its or their own control, such as making, recording, or publishing a certificate ofsnch corporate action. This court had occasion to consider and apply this distinction between lack of power on the part of the corporation and the mere non-performance of acts devolving upon itself or. within its own control in the case of Winters v. Armstrong, 37 Fed. Rep. 508-520, where the subscribers for increased capital stock were relieved because the corporation failed and ceased to exist before it had acquired the requisite power to make the increase. In Veeder v. MudgeU, ,95 N. Y. 295, the facts were that the corporation was organized in 1868, :with its capital stock fixed at $200,000. No certificate ofits incorporation was made and recorded as required by the law. In 1869 a resolution was passed by the company's directors increasing the stock to $300,000. At an informal meeting of the stockholders a vote was passed approving this action of the board of directors. This meeting of stockholders was not called, nor was the vote approving the increase passed by two-thirds of the stockholders, as the law required. No certificate of this increase was made and filed for record as required by section 22 of the act under which the company was organized, and which provided that "when so filed. the capital stock," etc., "shall be increased." The increased stock was issued, and the holders of a portion thereof were, upon the insolvency ofihe corporation, sought to be made liable on the same. It was urged in defense that, in view of the requirements of the law, and of the a.bsence of any compliance therewith, said increase of stock was
that theholuers1theioofwel'EPnot eStopped from dis'priting :itsinvalidlty.",'After referring tofthe failure of the. oorporation,to observe of the statute\ thet court say, (ptige 310 i) , illegal, biltille 'as against the creditors of the cor.ipany, the defendant 'stockhflldef8; accepting tllelrprdp6rtlon of the inoteasedstock by voting for its:increaae,by taking dividends lipon it, and holding it out to those deal.lng compone.nt of its capital, are estopped from .d.e.nY. ing,. to.e.. . l.. .. Ill. (:\lal.idity of the ,.i.n Ilreas.a, .and. ml\st.. l>e held respons.illle, as if . ... 'it was ,Tlie authorities fo(thls,. doctrine iue,numerollll and stl'ong. 19 N. Y 119; Chubbv.Upton,95 U. S. 665; Aspinwall 'v. StWcM, 57 Y.831; Railroad 00. v. Cary, 26 N. Y,". 75; Kent v. Min'ingCo.,7BN:.Y;159; Sheldon·ilf,;.:B. 00. v.Eiokemeyer H. B. M. Go., 90 N. Y. 613; The answer made ':to them ;is that an act absolutely and wholly .vold,b,IlCa'ls9: poder the. law incaPllble of being performed, cannot be made validby This is trAe wber,e lawtbere is an entire lack 'do the act which' broqght in que!ltion; . 'rhe distinction is well of illustr&ted in ScovW v. Thayer. 105 U. S. 143. Under the law of Kansas, no company like :that then before 'court could inCirease its capital to more thandoubleanflnlOuntoriginallyM1;4otized. The capital was sought to be ,increased in excess of that amount. ".A.lilagainst creditors, it was claimed to be a valid incl'ease·. by the operatJoll, ofJlln estoppel, but tbe court l'I1led otherwise, and for the very of an estoppel, the misleading of oreditorsto theirhijury, was wanting.' The latter knew, and were bound to know, thatn0I>0wer existed tosolilcrease the capital, and therefore that it 'was not increased; and hence'they'were not and could not be misled. .But 'where, as.in tbe'present case, the abstract powertUd' exist, and there was a way in whichtlle:increase could laWfully be made, and the creditors could, without fault, beJillve that the increasf;l had lawfully effected, and the necessary steps, had been taken·. then the doctrine of ,estoppel may apply, and ,the inCreased stock be deemed v1l1id, as to the creditors." . . So it is said in Momwetz on Private Corporll.tions, § 763, that "if a (Jorporatioll 'is·authorized by law to increase its capital stock, upon complying with certain prescribed forms or conditions,and the corporation or its agents appear to have 'endeavored to comply with the prescribed forms or conditions, and have in fact increased the company's capital stock by issuing new shares, on the assumption that the legal right to increase the capital stock had been acquired, and if the holder of SllCh new shares bas ntted as a shareholder, and enjoyed the rights of a shareholder, then thecreationof such new shares will be recognized by the courts, and giv,Emeffectaccording to the intention of the parties, although· the statutory formS'orconditions were not complied with, and no legal right to create the new:shares wasiri'fnotobtained;" Ohubb v. Upton, 95'U. S. 668, is to the same effect, where it is said that, "ifit be conceded that its increase<i stock ,was but, de jactp, and that it could have been a.n'tIulled or 8ul1ptessed by the action of the attorney generaJ, as acting un;' d'er an irregu.}ar)drgani.zation, the, defendant derives no aid from the'admission." 'Ilre clear to the point that he cannot make the perfornirthe engagement he has made." Under these authorities, ('rid under the provision of section 18 of chapter 56 \of ,Statutes' of Kentucky,and' the construction
543 placed by the court of appeals of that state upon section 6 of said chapter, it is clear that defendants cannot impeach the validity of the increased stock of the Clifton' Coal Company,held by them, respectively. That increase is valid and binding upon -them, both as to the corporation and its creditors, where claims have arisen since such increase was authorized and directed. The second and- remaining ,general ground of defense to be consid. eredis that, even if the increased stock was valid, or its validity cannot be impeached by the holders thereof, still the defendants who accepted and hold portions of such new stock cannot, under the circumstances of case, be required to pay up the amounts represented by their shares; because the holders made and entered into no contract or agreement to pay for the same, and because it is not shown that complainants, or any other creditor on whose behalf the suit is' brought, either trusted or dealt with thflcompany upon the faith of this increased stock" or of defendant's ownership thereof. How far is this defense, which presents the most important question in .the case,availlible to the old stockholders, such as defendants Handley and Neely, to whom $30,000 of the increased stock was distributed proportionately? And how far is it availablefu those defendants who accepted portions of such new stock along with the bonds they subscribed for? The former class stand upon a somewhat different footing from the latter, although neither understood or expected that or could be called upon, in any event, to pay for the new shares of stock received by them respectively. The old or existing stockholders, without any contract or agreement with the corpobut under a tacit understanding among themselves, and upon the idea or assumption that the increased capital stock belonged to them, distributed 300 shares thereof "pro rata" among themselves, while the subscribers for the company's bonds, with the assent of the old stock· holders,' received of such increased stock shares equal in amount: to their bonds. The old stockholders were clearly ·mistaken in supposing that all or any portion of the new. stock belonged to, or could beappropri.. ated bi,.them as "non-assessable" or paid-up stock; nor can they\'a;fter the insolvency" of the company, escape liability to creditors for- the amounts represented by the increased stock accepted and held by them; upon the ground of such mistake, or for the reason that the certificates which they reeeived for the new shares recited that the stock was fully paid up. , There is nothing in the charter of the Clifton Coal Company, or in'th$ General Statutes of Kentucky, under which the corporation was ized, sanctioning or its members to appropriate any of its capital stock, witbout paying or beil1g liable to pay therefor; On the contrary,the charter implicitly prohibits such a distribution in providing' that the :directors may determine the times and conditions upon which the stock is to be paid iu, and in allowing the company to receive real and: household .estates, mining rights, etc., in payment· for stock; while section 14 of chapter. 56 expressly_ declares that nothing in the act (lonferring corporate franchises, or permitting the.Organization of corpora..
544
FEDERAL REPORTER,
tions "shall exempt the stockholders of any corporation from individual liability to the amount of the unpaid installments on stock owned by them." But aside from this provision of the statute, which is nothing more than the legislative recognition of ·the general principle enfo\'ced by courts of equity, it is well settled by the authorities that the old stockholders (Handley and Neely) in the present case, who accepted and held portions of the increased stock, cannot claim exemption from lill.bility thereon, as against creditors, especially those who have dealt with the company in ignorance of the arrangement that such stock was treated and .received as fully paid up, when such was not the fact. A corporation cannot legally give away its capital stock, nor distribute the same, among shareholders without consideration. "The rule that shares cannot lawfully be declared paid up, unless their par value has been ('.ontributed to the company's capital, rests upon the equities existing between the shareholders forming the \lbmpany, and upon the equitable rights of outside parties, who deal with the company in the faith of the capital indicated by its charter." 1 Mor. Priv. Corp. § 427. "It is manifestly incompetent for the corporate management to agree with a shareholder that shares, issued to him for a nominal consideration, shall be treated as fully paid up." Tay!. Corp. § 545, and cases cited. The wholesome and well-established doctrine that the capital stock of a corporation is a trust fund for the payment of corpol'ate debts is utterly incon$istent with the idea that original holders of .stock can, by an.y contract, contrivance, or device between themselves, or between themselves and the corporation, acquire and retain shares in the company without incurring liability to pay therefor, whenever such payment is needed to meet the demands of creditors. The original holders of unpaid capital stock are. affected with duties towa.rds creditors which constitute or create trust relations between them, to the extent that such unpaid 'shares held by the former, are required to satisfy the claims of the latter. "The law is accordingly settled that any condition or arrangement attached to the contract ora shareholder in a corporation, which, if carried out, would lessen the amount of capital held out to creditors as iheir security, is a fraud upon. creditors, and will therefore be denied effect." 2 Mor. Corp. §.842,andcases cited. It is notrnaterial that there was no express contract or agreement on the part of: said defendants to subscribe and pay for the increased stock received by them, or that the certificates issued to them therefor recited that the shSl1es were paid up. The untrue statement in the certificate, that the shares are paid up, cannot discharge the shareholder, who has not paid for the same, from liability thereon. It has no greater effect than the unauthorized delivery of an untrue receipt to a person indebted to the corporation. The debtor of the company, obtaining such a re;. ceipt withoutact'ual payment. would certainly not be discharged, even . as to the corporation. Neither can the originalhold'er of unpaid shares avoid liability therefor, by reason of the false recital in the certificate is. sued to him that the stock was fully paid up. A bona ,fide purchaser or transferee, without notice from the original holder of such a certificate,'
B'l'uTZ 11. HANDLEY.
would, no doubt, stand upon a different ·footing; .but the defendants Handley and Neely, as the first holders, respectively, of 80 and 75 shares of the increased stock, clearly occupy no such position. While they entered into no express undertaking to pay for these' shares, but intended and expected to receive and hold the same as fully paid, in accordance with the recital of the certificates issued therefor, still this acceptance and holding of such certificates until the of the company operates to impose upon ·them the legal obligation to pay up said shares in order to discharge the demands of creditors. In Uptonv. Tribilcock, 91 U. 8.47, 48, the shareholder had paid 20 per.cent. of the shares, and the certificate, issued to him for the whole amount, had stamped across its face the word, ".Non-assessable." The court held that"theac· ceptance and holding of a certificate of shares in an incorporation makes the holder liable to the responsibilities of a shareholder." The legaleffect of the certificate was to make the remaining 80 per cent. payable on demand. The court said: "We.see no qualification oftbis result in the word' non.assessable,' assuming it to be incorporated into and to form a part of the contract. It is quite ex· travagant to allege that this word operates as a waiver of the obligation, cJ:'eatedby the acceptance and holding of a certificate, to pay the amount due upon the shares. A promise to take sbares of stock imports a promise to pay for them. The same effect results from an acceptance and holding of a certificate." The rule thus laid down, which was reaffirmed in the subsequent cases of Sanger v. Upton, 91 U. 8. 64; Webster v. Upton,ld. 67, 71; Chubb v. 'Upton, 95 U. 8. 666; and Hawley v. Upton, 102U.8. 316,-establishes the liability of defendants Handley and Neely for the 86 and 75 shares of the new stock, for which they respectively accepted and held certificates. On behalf of all the defendants who accepted and· held certificates of the new stock, "distributed" to them along with bonds, it is urged that they cannot be held liable .thereon to.creditors, because they were in no sense subscribers for such stock, and entered into no contract and ag.. sumed no obligation to pay therefor. Itisc1aimed for them that neither the company nor the old stockholders could enforce such a liability upon or against them, and tbat creditors cauassert no better or superior rights. Assuming that the subscription pap'er of Dec(,lmber 30, 1886, which $50,000 of the $200,000 capital stock be stated that "it is agreed distributed pro rata among the subscribers to the above bonds," constituted a contract between the subscribers for the bonds and the corpora. tion, rather than an agreement between themselves, made with the consent and approval of the old stockholders, are creditors, who dealt with the company::withotlt notice or knowledge of that arrangement, precluded from recovering of defendants who accepted and held certificates of stock thereunder? The property of the company was considered ample security for the payment of the bonds, and the distribution of stock to the subscribers for the bondl] was not infact, or by the terms ofthe subscription Pl1per, in any proper sense a sale. ofsuch stock at and for its market v/lolue. v.4:1F.no.10-35
FEDEl1:AL"UPORTEB,
;,i:Ilithfl,weU..fdonsidered! caSe of Mdi1-owv. Steel 00.,' 10S;:W. Rep.' 495,' (decitled,1Jythe suprE;lmecourt of Tennessee in 188l),)iti w8sheld that an',agreemellt by which persons acorporatioD'are to have bonds Of the 'corporation to an ltl;llQunt 'equal to the stocij:/subscribedfor, seonredby mortgage on the corporate, property, is illegal and void, and cannot be enforced against the corporation, even'though tM rights of no creditors oithe corporation are involved; ,It was said: by ,the court tnat, "wlletherthis I basis of organization' be construed to be a; oontractwhereby to the stock was to, be given a bond as a bonus, or each sub" scriber to tbe bonds was10 be given p!li<l1-upstock asa bonus,oras an agteement by which each contributor to tlie capital stock was to'receive the obli-gationof the company" seoured by a primary Inortgage, that he should be' repaid the amount of his with interest, suohagreement would cleaclybe!illegaJ and ineffective its-to l!,dsting or subsequent creditors of the: cotpOtatioQ,.npon the'ground that the payment for the ,stock was unreal and simulated, or that the bond had been issued upon noconsiderationj"
v.
principle oftbese cases, that tbe, unpaid stock of ai(:lQrporation 'constitutes a trustfund' for the benefit of,general creditors, Wl:dClh'can by 110 contrivllnce'ordevice be held ,efi'ect, ;,scheme, bywh.ich every' was to and also stock of the company, each to the amount of the subscription, was to throw all risks and hazards of the business upon the:public,whoshciuld' dealiwitbthecorporationj while the contributors were'to .relip,all pOssiblegainB, and be seomed against loss in the event· the cliterprise pl1oved:nnprofttable. -Such acol1ttact was considered invalid, ev.eii :as: tathe cdi'poration.Butit was suggested, or rather left an open question, (by the learned judgedeliverillgthe opinion of the, court in that case,) whether an organized and going corporation might notmake;snch:a. dispositioBof its bonds and stock; :citing in that conneotion ·:M(!lrawetz on :Brhr8,te Corporatidns; § 306, in which it is said: " "It il'l therefore, of for paid-up shares &sbareholderwbose shares ,have not in fact been pai'd ';up'is ItWoul4;oelL dir6iQtinfdnIU!Plllntof.tbe,rlgbts of all etistiilg sbareholders in, tbe, complIony, 'lind, a llpqn pars()nsgiving, credit. ··· ,been reduced by, losses, itwoll,ld:not be a wroJ;lgagailistthe existingsharehoId!'lrB to issue.certiiftMtes Under fairness arid equality would merely require that thenewshane8'be.issued' at their Mtual U:sharas, in a corporation Could in no, peillsuoo aUells :tbantbeir, lace value, it :would be practicaUy i.IPpossibIeto Ii slUe, of,new shares fall.en ,: . ;: :, It willJ>e: notic:ed,' that' 8l isaleof' nElW- shares' at less:th8lu: par, under the circumstances stated, iwoMd; not be a; W'l'bng,against 9:xlisting .shareholders·. Whetherit·wouldbe ggod!againsUiedit9rsis:8i ditrerent question. So fal' as the, ,right ofctediiorsiare involved precisely-the -the, subscriber 'forbonds:.of·corporations, same objOOtion'exists taking inoraased stock, as a: bonus, tbafexists !:\ . ,,I'
610; ,8,Ild
8.143 .
to'
647, b(>nus" pn 'and .the, same consideration. ";. In, eachrcasa :with ,the the payment 01' oQntributionof one amouQt, to acquire both a debtagajnst the company andaproMta share and.interest in the enterprise, without risk:to himThe.legal effect Of such an arrangement,either as to increased or stock, is an undertaking on the part of the ,corporation to return or repaybis contribution or loan, with interest, confer upon him all the rights of a shareholder, and exempt him from allt>bligation to account for the trust fund represented by bis share. The transaction casts upon the public, dealing with the corporation, all the risks and hazards of the enterprise; and allows the ,holder .of the shares, wbile reaping all, the and advantages of its success without liabilities for l,oases, to call far,and,requirea repayment of his advance. The settled principles of the law, which impress upon the capital stock of a corporation the character of a trust fund, and establish trust relations between holders of such stock while unpaid, and creditors of the corporation, will not sanction such 'a contract when the rig4ts of creditors 'In this ra-. spect n,o valid distinction exists ,between original and'new stock. The supreme court in Chubb v.Upton,95 U. S. 667, places the increased stock of a corporation upon the same footing as the original stock"and has steadily refused, as against creditors, to recognize any disposition thereofwhich could not have been made of the original stock. The settled doctrine of that court is that creditors without notice are not affected by any arrangement or,device between the corporation and those, accepting shares of its stock fall short of actual payment therefor in good . ., In Sawye:r v, Hoag, 17 Wall. 618, 619, the transaction was valid as between tile corporation aud the shareholders; but was held· invalid as againstthe representatives of creditors. So in Hawley v. Upton, 102 U. S. 316, the shareholder's express written agreement with the corporation was to pay $200 (or 20 per cent. of its par value) for 10 shares of stock. As 1;>etween him and the corporation, this would held valid, but as against creditors it was held not binding, have anq.hewas required to pay up the 80 per cent; the court sayipg that, "as the company could not sell ita stock at less than par, what was <1,one amounted in law to a subscription for the stock,. and .nothing else. It is true the stock he tpokpurported to be non-assessable; but that, in Jaw, could only mean that no assessment would be made beyond the percentage he had specially bound himself to pay, unless the legal liabilities of the company required it." All the Upton Oasea dealt with; increased or new stock,and the supreme court, in favor of the representstive of creditors, disregarded the special eont;racts made between the corporation and the shareholders,. and compelled the latter to pay in full for tpeir shares. To the same effect, see the well';considered case of Flinn v. Bq,gley, 7 Fed. Rep. 785. In harmony with the principle enforced in these cases is the decisioll:of the Kentucky court ()f appeals in the:case of Haldeman v. Ai1l8lie, 82 Ky. 395, in whii:}hthe capital stock of the cOr.P<?l'fttion, organized under the same law as the Clifton Coal
548
DDEJ1ID.: 'Ul'OBTEB, vol. 41.
Company, was, and it was provided. by section 5 of the articles of incorporation. that each subscriber, upon e!ltecuting his note for $1,000, payable in bank,and paying $500 in cash, should come entitIedto paid-up stock 0(400 shares, ($40,000.) The private property of stockholders was exempt from liability for corporate debts, and the charter,further provided that "the highest amount of indebtedness to which the corporation is st any time to subject itself shall be the Bum of $15,000." ;Tbe managing: officers contracted debts far beyond this limit, and the:corporationbecame insolvent. , The court held that creditors could compel the payment of. the entire stock j (of $1,200,000,) if necessaryto,satiafy their demands. The court says: "The effect of the limitation upon the amount to be pnid bytJ'Je subscribers for their stock woUld not exempt them from liability to a creditor who had dealt with the corp<lrationdnjgnoranceof the articles of association, limiting be by the corporation 01' those the amount of the ducting it. ... ',,'" ... The public had the right to believe that each subscriber, taking 400 shal'esof stock at $100 per share, had either paid up his stock, or was liable for the amount; !lnd when trusting the corporation upon the faith of its ability to pay, and without any knowledge as to the restrictions contained in the contract between the stockholders" a creditor of the corporation COl;ll,d compel the payment of the entire stock, if necessary to satisfy his dem,and."
I am unable to see any difference in principle between making a stockholder pay a larger per cent. on his shares than he has expressly agreed and undertaken to pay; and -compelling a shareholder to pay up the wholeamotintrepresented by cartificates which he has accepted, and under contract as paid-uR shares, but which hav:e not in fact been paId. If the unpaid balance lilay be'reached and 'Subjected to the payment of corporate debts, in disregard of the contract, why may not the unpaid whole' ofoutstanding shares: be likewise renched and subjected, notwithstanding the agreement that they should be treated or considered as fully paid? The recital in the certificateS issued to and received by defendants. tbat the'shares were "fully paid up.'and free from all claims and deIDflnds On part of the company/" Jcannotrelieve them, under the authority;;of Hooley v.Upton. 102 316, from liability to creditors, even if valid against the corporation. The case of Goit v. Amalgamation Co., 14 Fed. 12-18, andthe'sama case on appeal, reported in 119 U. S. 343-347, 7 Sup. Ct. Rep. 231, cited by counsel for the defense, is not in conflict with the foregoinga:uthorities. In that case there was ariew issue of stock, connected with' the acquisitio'n by the corporation of certain real estate, tbetitle to which failing, or proving defective, the new stock was thereupon called in'Sind canceled, and the transaction rescinded. Tbe'cteditors; who after the mncellaHon of the transaction and this new stock sought to compel parties to whom portions of it were issued to pay up the, same,kMwofand acquiesced' in the whole transaction. Mr. Justice BRAI>LEY saird, in deciding the case on the circuit, that "if a legal presumption did notarise that Mr.Coit [the creditor] knew of the trilnsaction at 'that time, and there was no proof that: he
· STUTZ ". HANDLEY.
knew ofit, it would present a different case." Coit's claim originated be. fore the temporary increase of the stock, and the supreme court, in passing upon the case, (119U. S. 347,7 Sup. Ct. Rep. 234,) say: "Had anew been created by the company after the issue of the stock, and before its recall, a different question would have arisen." In the subse:quent case of Bank v. Alden, 129 U. S. 372,9 Sup. Ct. Rep. 332, the supreme cou.rtagain held that a creditor of a corporation, who had knowl'edge of and as.sented to a transaction between the corporation and a stock· holder at the time when it took place, could have no resort against such stockholder. But these cases have no application here, for it does not appear complainant had any knowledge of, or gave any consent to, the arrangement under which the increased stock was distributed to subscribers for bonda and to existing stockholders. The complainants are not required to go further, .and show affirmatively that they knew of the stock being increased, and treated or dealt with the corporation upon the faith that it had actually been or would be paid. The increase of the stock was made public, and those thereafter dealing with the company will be presumed to have done so in reliance upon such stock as a part of the porate capital pledged for their security. Haldeman v. Ainslie, 82 395; PuUrnan v. Upton, 96 U. S. 331; and Adderly v. Storm, 6 Hill, 629\ In this last case it is said: . "It seems to have been thought a matter of some moment that the so far as appeared on the trial, had lIot examined the stock ledger before he gave credit. to the company. But there are other ways in which he may have learned that the defendants were stockholders, and, besides, I do not see that the liability of the stockholder has been made to depend on the fact that creditor knew he could be reached. ... ... ... As the defendants were in fact stockholders, they must answer to the plaintiff, although he may nut have known at the time he trusted the company that the defendants could: he reached." , As stated in Haldeman v. Ainslie, 82 Ky. 395, the public had the right
to believe that each holder of the increased stock hali either paid for his share or was liable for the amount; and a creditor who trusts the ration upon the faith of its ability to, pay, and without any knowledge of the contract or arrangement between the stockholders and the pany under which the stock is treated as paid up, may compel shar&holders to make actual payment. The statement in section 833'ofMor. rawietz on Private Corporations, that subsequent creditors would have an equitable claim to' have new shares paid up in full, "if it was expresslY' represented to the creditors that the new shares had actually been issued ," is hardly warranted by the authorities. I have found no case which im. poses upon the creditors the hurden of showing any such express repr&sentationthat the new shares had actually been issued, as a condition to· his right to 'compel stockholders to pay up their unpaid shares. It ing settled by the authorities referred to that the qoltl company could not lawfully give or distribute to defendants paid-up shares of its increased stock as a bonus to go with its bonds subscribed for by them: and it b&ing further settled that the 'acceptance and holding· of certificates for such shares ofstock is, in effect, the same as a promise to take shares,.which'
FEDnA.Ii2ERORtrERj: vol.
CENTRAl.
TabsT
CO. fl. ST. LOUIS; A. '" T. RY. CO.
/SSt
lor other creditors to come in, and a reference is directea to the master to report the debts of all such creditors as may chose to come in and claim the benefit·of the suit and the decree against the defendants. A decree will be accordingly entered, declaring the liability of defendants for the amount of their respective holdings of said increased and unpaid stock, with costs of this suit; and,upon the ascertainment of the claims entitled to payment out of said funds, execution as at law will issue against the several defendants for the amount due from each, until such claims are fully paid. .
CENTRAL
TRUST
Co. '11. ST. LoUIS, A. &T. Ry. Co. CoMPANIIlS. .. '
(Oi"euU Oourt, E. D. Arkansas. February 27,1800.)
OW!1ing a line of. railroad in Arkansas consolidated with a Missouri corpora.t.ion, owning a .line'Of. .railrOad in Missouri. By the co.n.80lo idatiQIS; the company became the owner ·of the road in botbstates, but in Arkansas it is to be regarded as an Arkansas corporation, and in Mis80uri as II Missouri . . RBOIlIVEns--TERMS:-MoRTGAGE-RAILBOAD COMPANIES.
S.
. Wben lWstate court has jurisdiction of tbe parties and the subject-matter,its against receiver of a United States court is as and conclusive as It is any other suito!,". " FJl:DI\RALCOURTS'-JURI8DICTION. ,The UnitedStatea circuit courts are not invested witll appellate or snpervisory jUrisdiction over the,state courts, and cannot annul, vacate, or modify tbeir judg. mt)ntB: This rule ts 'not a:il'ected by the last clause of'tbe third section ohhe act approved August 1:8, 1888, (25 U. S. St. 486.) . . 6. APl'BAL-BoND-RIlClilIVER8. .. . Iteceivers appealing in good fll.ith from the judgmen1lB of the state courtsshpuld not be required to give 8uper8edeaa bouds. .. ., '. . by the Oourt.)
8.
Wb.ell a. receiver is appointed for a railroad,. tbe better practice is, .for the judge or court making the appointment, to stipulate at the time, and as a condition 'of tbe appointinent of Q receIver, 'what debts and liabilities of tbe railway company shall be Ujade II charge on tbe property and paid by tbe receivers.. If tbe mortgagee is unwilling to take a receiver pn tbe terms imposed, the foreclosure can proceed without a receivership. If no order is made wh:en the it may be . OJ' STATE COURTS.
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PhiUipa and Ste:wart,for complainant. J. M.t!cJ. G. Taylor, for defendant.
In Equity.
S. H. West, for the receivers.
CALDWELL, J. }n 1886 the St. Louis, .Arkansas.& Texas RaHwa1 Company- in Arkansas and· Missouri, a corporation organized under, the lawsofthestate of Missouri, acquired the title to a railroad, previously built by another company,running from Bird's Point, in Missouri, to Texarkana, Ark. On the 4th day of May, 1886, this Missouri cQrpera-. tion:mcuted a mortgage to the plaintiff. to secure thepayrrlent ofm first Inbitgage bonds,oq its road and appurtenances Arkansas aqd