Gill v. Balis

¶1The Superintendent of the Insurance Department, on the 24th day of March, 1871, instituted a suit in the circuit court of Jackson county against the Kansas City Eire & Marine Insurance Company, the purpose of which was, among others, to enjoin it from carry-ing on its business as an insurance company, and to wind up its affairs. On the 9th day of August, 1871, a decree was rendered in said cause enjoining and restraining said company from conducting business, and with a view to winding up its affairs. L. C. Slavens was appointed receiver, and was directed to take possession of all the assets and property of every nature and description, including moneys, and all books, records and papers belonging to said company. On the 10th day of May, 1872, said Slavens tendered his resignation as receiver to said court, which was accepted, and on said day said court, by its order and decree, and in furtherance of its purpose of winding up the affairs of said company, appointed Turner A. Gill, the plaintiff in the present suit, receiver, and devolved upon him the performance of all.duties required of the former receiver, Slavens.

¶2By the further order of said court made in June, 1873, the said receiver, Gill, was required and directed to join in an action, prosecuted in his own name all parties liable in any way for and on account of subscriptions to the capital stock of said insurance company, now unpaid, and for balances unpaid on stock or subscriptions therefor. In obedience to this order, plaintiff Gill, as such receiver, instituted the present suit in his own name against all the defendants as stockholders of said company for the purpose of recovering forty per cent of the par value of each share of the capital stock; of said company. The trial of the cause resulted in a judgment for the plaintiff, from which the defendants prosecute their appeal to this court. The principal *428grounds of error relied upon by defendants as touching the merits of the case are, first, that the plaintiff, as receiver, could not institute or maintain a suit in his own name, and second, th^t if he could do so, they were in no way liable as stockholders, each of the defendants claiming exemption from liability as such by reason of their having surrendered their stock to said company, whereby they insist, they ceased to become stockholders thereof.

¶31. Insurance: suit by receiver of an insurance company in his own name. It will be observed that the receiver in this case derives-his power and right to sue from an order of the Jackson county circuit court; and the question pre- ~ , . seated, whether or not he can maintain this 7 suit in his own name, is dependent upon a construction of section 32, page 772, Wagner’s Statutes.. The above section'is found in a law entitled “Insurance,” which, among other things, provides for the creation of an Insurance Department, which shall be charged with the-execution of all laws in relation to insurance and insurance companies in this State, aud also provides for the appointment of a Superintendent of the Insurance Department as-the chief officer thereof. Section 32 of this law makes it the duty of the Superintendent, when, upon an examination of the affairs of any insurance company, it shall appear that such company is insolvent, or that its condition is such as to render its further proceedings hazardous to the public, to file, in the office of the circuit court of the county in which it has its principal office or place of business, a petition setting forth the condition of the company, and praying for a writ of injunction to restrain said company, in whole or in part, from further proceeding in its business. At any time after such petition is filed the court in which it is pending is charged with the duty of appointing agents or receivers to take possession of the property of said company, and upon final hearing, with the further duty of making such orders and decrees as may be needful to suspend, restrain and prohibit the further continuance-of the business of said company, or any part thereof, or for *429the dissolution of the company and the winding up of its .affairs.

¶4By virtue of this section, when the Superintendent of the Insurance Department files his petition, the court or judge may, upon inspection of the petition, before answer filed or any hearing had upon the merits, appoint a receiver to take charge of the property of the delinquent company; and if no other power than this had been conferred upon the court, the position taken by appellants that the receiver •could not prosecute a suit in his own name, for the recovery of a debt due the company, would be maintainable. But the section goes further and authorizes the court on a final hearing to make such orders and decrees as may be needful “ in winding up the affairs of such company.” It is difficult to conceive how the court could perform the duty enjoined upon it of winding up the affairs of the company, if rWfcóuld not employ agencies to enforce the collection of the debts owing to said company. The settlement or winding up the affairs of a delinquent corporation can only be accomplished by the application of its assets to the payment of its debts, and the distribution to the stockholders of what may remain after the debts are paid. Ordinarily, before the assets, when they consist in property and debts due the company, can be thus applied, it is necessary to convert the property into cash and to collect the debts, and until this is done, its affairs cannot be settled, and the duty enjoined upon the court of winding up its affairs would remain unperformed.

¶5The duty of settling up the affairs of the company being thus devolved upon the court, no reason is perceived why it might not (without any statutory provision) resort to such methods as would enable it to perform the duty. But we think that section 32, supra, sets this question at rest by expressly authorizing the court to make all orders and decrees needful for winding up its affairs. The statute invests the court in which the proceeding is pending, with the power to determine the necessity of the orders and de*430crees it may make in respect to the end to be attained ; and if, in order to the attainment of the end, it appears to the court that a necessity exists for the collection of the debts due the company, and if acting upon that necessity, it does order and direct a receiver, its own officer, to institute suits in his own name for that purpose, we would not be authorized to review his action in that respect, unless the power thus exercised was a gross and palpable abuse of it and in no aspect, of the case calculated to accomplish the winding up of the affairs of thé company. The question is not as to the power of the receiver to sue in his own name* but as to the power of the court charged with the duty of winding up the affairs of the corporation to make such orders as in its judgment are necessary to enable it to perform the duty enjoined. This question the statute settles by expressly giving such power to the court, and to deny that it possessed it would be to nullify the statute. The making of an order in terms dissolving the corporation is not a condition precedent to the exercise of the power given to wind up its affairs, since the defendant corporation in this suit instituted by the Superintendent of the Insurance Department for the purpose of dissolving it and winding up its affairs, withdrew its answer to the petition and suffered judgment to go by default.

¶62. -: fraudulent attempt of directors to release stockholders. Defendants base their claim of exemption from liability as stockholders on a certain resolution passed by the board of directors on the 17th day of Eeb- „ ruary, 1871, to the effect that all stockholders w;h0 would pay live per cent on their respective shares of stock and surrender their stock certificates to the company, should have the privilege of retiring from the company, and withdrawing their stock notes. Defendants claim that they complied strictly with the above resolution, and by reason of such compliance they are released from liability as stockholders. It is, on the other hand, insisted that the passage of said resolution by the directors *431was ultra vires, and for that reason void, and that it was also fraudulent as to creditors and stockholders.

¶7A solution of this question can only be reached by reference to the facts found by the referee to whom the case was referred. It appears from his report that the capital stock of the company was $400,000, of which $255,250’ had been subscribed, and on which only ten per cent had been paid, and the remainder secured by the stock notes of the respective shareholders; that after the resolution of February 17th, 1871, the stockholders, among whom the defendants are embraced, surrendered to the company certificates of stoik amounting to $167,200, after paying five per cent thereon, and received therefor from the company their stock notes, given to secure the payment of stock respectively subscribed for by them to the amount of $150,400, The only stock remaining, after this surrender, amounted to $88,000, on which there was owing not to exceed $81,000r only $41,760 of which the referee finds was collectable. At the time the resolution was adopted, according to the report of the finance committee of said company, the company had lost $48,250, and the liabilities of the company other than the capital stock amounted to $32,121.27, including a reinsurance fund estimated at $10,000, which estimate the referee finds to be $5,621.37 less than it ought-to have been. In the report of this committee no account-was taken of $350,000 of outstanding policies and liabilities. The referee further finds that on' the 7th day of February, 1871, the Superintendent of the Insurance Department entered, through an expert, upon an examination of the condition of said company, who, on the 14th day of February, three days before the passage of the resolution under which defendants claim exemption, reported to the-Superintendent that the condition of the company was-such as to render its further proceeding in business hazardous to the public and those holding its policies. The referee finds further, that at the time of the passage and adoption of said resolution the affairs of said company *432were in a bad, unsound, unsafe condition, and in such, a ■state that the stockholders of said company were liable to lose heavily ; and said directors also, then, each and all, well knew of the before mentioned examination of the affairs of the company, caused to be made by the Superintendent of the Insurance Department, and that said Superintendent would probably file a petition praying for an injunction to restrain said company in whole from further proceeding with its' business, to wind up its affairs; and they also knew that said company had failed to make the reports to the Insurance Department required by law, and to comply with the law governing it and its business in many respects ; that said resolutions were never ratified or adopted by the stockholders of said company. The referee further finds that at the time of the passage of the resolution, excluding the stock notes held by the company, the remaining assets amounted only to $2,000.

¶8In the light of the above facts we cannot see how the action of the board of directors in the passage of the resolution of February, 1871, can be upheld. Casting out of view liabilities which might come against the company in consequence of the $350,000 of outstanding policies, and taking the estimate of its liabilities to be $32,121.27, as reported by the finance committee, if all the stockholders had complied with the terms of the resolution by paying ’five per cent of their stock notes and surrendering their .stock, and receiving in return therefor their stock notes, constituting all the assets of the company except $2,000 .and the five per cent thus paid in on $255,250, amounting to $12,762.50, the spectacle would be presented of a company with liabilities amounting to $32,121.27, with no one responsible for the payment of the balance of $17,358.77, which would be remaining after the application of the $12,762.50 and $2,000 of the assets to the payment of such liabilities. A resolution which embraces within its scope ■such a result can neither be maintained on principle nor authority. It is no answer to this to say that but two-*433thirds of the stockholders availed themselves of the avenue of escape from liability provided in the resolution. Its validity is to be tested by the fact that under its terms ■all the stockholders might have escaped liability, taking with them all the assets of the company, amounting to $230,780, except $2,000, and putting in the treasury in lieu thereof $12,762.50 in money, with which to pay liabilities amounting to $32,121, for the payment of which all the stockholders would have been rateably bound previous to such withdrawal. If such withdrawal of all would have operated as fraud in law, if not in fact, on the creditors, so ■the withdrawal of a part would likewise fro tanto have the same effect.

¶93. Corporation: directors cannot reduce capital stock. The resolution in question never having been ratified nor sanctioned by the stockholders, is also assailable on ground that the directors had no power Pass inasmuch as by its operation the capital stock was diminished from $255,250 to $88,000. The directors had only the general powers of managing the affairs of the company in the prosecution of its business, and its business was to make contracts of “insurance against loss or damage by fire, on land and water, on any description of property or merchandise.” Such powers do not authorize the directors either to increase or diminish the capital stock, or to change the fundamental organization of the company. The case of Railway Co. v. Allerton, 18 Wall. 233, fully sustains the above proposition, where it is held that changes in the extent of constituency or membership of a corporation involving the amount of its capital stock, are necessarily fundamental in their character, and cannot on general principles be made without the express or implied consent of the members. A change as respects the constituency or capital and membership of a body corporate, being fundamental and next in importance to the purposes and objects of the corporation,'without the consent of the stockholders, “ would be to make them members of an association in which they never con*434sented to become such. It would change the relative influence, control and profit of each member. If the directors alone could do it, they could always perpetuate their power. Their agency does not extend to such an act unless so expressed in the charter.”

¶10The case of Upton v. Tribilcock, 91 U. S. 45, is equally emphatic in condemnation of the right of .directors to limit the liability of stockholders as to unpaid stock, and pronounces such a transaction void. Justice Hunt, speaking for the court, uses the following language : “ The capital stock of a moneyed corpox-ation is a fund for the payment of its debts. It is a trust fund, of which the directors are trustees. It is a trust to be managed for the benefit of its shareholders during its life, and for the benefit of its creditors in the event of its dissolution. This duty is a sacred one, and cannot be disregarded. Its violation will not be undertaken by auy just-minded man, and will not be permitted by the courts. The idea that the capital of a corporation is a football to be thrown into the market fox-purposes of speculation, that its value may be elevated ox-depressed to advaxxce the interests of its managers, is a modern and wicked invention. Equally unsouxxd is the-opinion that the obligation of a subscriber to pay his subscription may be released or surrendered to him by the-trustees of the company. This has often been attempted, but never successfully. The capital paid in and promised to be paid in is a fund which the trustees cannot squander or give away. They are bound to call in wl^pt is unpaid and carefully husband it when received.” Section 201,. Thompson on Stockholders, is an authority to the effect that the American courts have steadily annulled all arrangements between corporations and their stockholders whereby the latter wex-e sought to be released from their liability to creditoi-s. The same author, in the following section, refers to the case of Dorr v. Stockdale, 19 Iowa 269, to which 'counsel of defendants have cited us as sustaining the resolution of the 17th February, 1871, as the only Amex-ican *435case showing a departure from the rule laid down by him.

¶114. -: withdrawal of stock. It is, however, urged by counsel that notwithstanding the retirement of defendants from the company under the resolution of the directors, with $150,000 of ps asse(;S) the unpaid stock notes of other stockholders who did not retire, were sufficient to pay all creditors, and that no wrong was done by virtue thereof to creditors, and that they could not, therefore, complain. In the case of the Bedford R. R. Co. v. Bowser, 48 Pa. St. 29, a similar question to the one here presented was considered. In that case 266 subscribers to the stock of a railroad company claimed to be released by virtue of an order of the board of directors authorizing the cancellation of their stock, and the court instructed the jury that if the company had sufficient assets to pay its debts, such order was valid, and the cancellation of the stock under it released the defendants. The court held that this instruction was erroneous, and remarked, in passing upon it, that the directors of the company then in office wore its agents, with limited power, the extent of which the defendant was bound to know. Their duties were to conduct the affairs-to the furtherance of the ends for which the company was-created. They had no right to give any of its funds, or to deprive it of any of its means, to accomplish the full purpose for which it was chartered. The creditors were not the only persons who had interest at stake. The stockholders who had paid their subscriptions or bought their stock … were at least equally interested. So in the case of Spackman v. Evans, L. R., 3 H. L. Cas. 186, where a kindred question came before the court, Lord Cranworth remarked that a stockholder might well object to relieving other stockholders and say “ I became a stockholder, relying on the names of those who were engaged with me in the partnership. I delegated the management to certain directors, with defined powers and duties. It was part of the stipulation of the deed of partnership that none of my fellow shareholders should quit the partnership *436except by substituting in'his place some other person approved by the directors. This was, I thought, sufficient security to me, that iu the event of my being called on by a creditor, who, having recovered judgment against the company, should proceed to enforce payment'against me, I had solvent partners, from whom I might obtain contribution, and now I find that, without authority, you, the directors, have taken on yourselves to enable several of my partners to withdraw from the partnership, a proceeding which I never authorized.” It follows, we think, from the above authority, that tbe resolution of the board of directors of February 17th, 1871, whether it be considered with reference to its bearing on tbe creditors of the company or its stoekolders, or on both, cannot afford the protection which the defendants claim under it.

¶12The other questions presented by the counsel we have not considered, not deeming them material to a proper disposition of tbe case. Judgment affirmed,