While the relations of a party toward a corporation, as a
director and officer or as its principal stockholder, do not
preclude him from entering into contracts with it, from making
loans to it, and from taking its bonds as collateral security, a
court of equity will refuse to lend its aid to their enforcement
unless satisfied that the transaction was entered into in good
faith, with a view to the benefit of the company as well as of its
creditors, and not solely with a view to his own benefit.
In the case of a corporation, as in that of a natural person,
any conveyance of its property without authority of law, in fraud
of its creditors, is void as to them.
The capital stock of a corporation, when it becomes insolvent,
is in law part of its assets, to be appropriated to the payment of
its debts, and if any part of it has been issued without being
fully paid up, a court of equity may require it to be paid up.
R. loaned to a railroad company $100,000 upon its notes, and
received from it 1,250 shares of paid-up stock as a bonus, and 200
mortgage bonds of the company and the practical control of the
board of directors of the corporation. After this, he demanded of
this board 100 more bonds, as further collateral, and they agreed
to it. Subsequently he proposed to the board that he would make
further advances if they would put 300 more bonds in his hands as
collateral, and they assented to this proposal, but he never made
such further advances. These 400 bonds, together with other bonds
and property of the company, then came into his hands at a time
when he was acting as and claiming to be the treasurer of the
company. After the insolvency of the company took place, R. claimed
to hold these 400 bonds individually, as collateral for his debt.
Held that, as between him and the other creditors of the
company, he could not, under the circumstances, hold them as
collateral for his debt.
At the last term of court, motions to dismiss
Nelson v.
Green and
Nelson et al. v. Green were argued at the
same time with a motion to dismiss this case, and the motion was
granted as to those cases and denied as to this case. After the
entry of judgment, counsel in those cases moved on behalf of the
appellants that the sum of $450 which had been deposited with the
clerk for copies of the record should be refunded.
Held,
the judgment being announced in delivering the opinion and
announcing the judgment in this case, that $200 of that amount
should be refunded.
In equity. The previous proceedings in this case on a motion to
dismiss are reported in
Richardson v.
Green, 130
Page 133 U. S. 31
U.S. 104. The case now made at the hearing on the merits, is
stated in the opinion.
MR. JUSTICE LAMAR delivered the opinion of the Court.
This is a suit in equity, originally brought in the Circuit
Court of the United States for the Western District of Michigan by
Ashbel Green and William Bond, trustees, against the Chicago,
Saginaw and Canada Railroad Company, a corporation organized under
the laws of the State of Michigan, to foreclose a mortgage given by
that company on all its property and effects of whatsoever
description to the plaintiffs, to secure the payment of 5,500 of
its bonds of $1,000 each, payable to said trustees or bearer.
The suit was commenced on the 16th of November, 1876. A receiver
was at once appointed. The company made no defense, but numerous
parties, holders of the bonds thus secured, and others with claims
of various kinds against the company, with leave of the court,
intervened in the case, and were allowed to prove their respective
claims. The controversy resolved itself into a contest for priority
among the respective claimants in the distribution of the proceeds
of the sale of the mortgaged property thereafter to be made. On the
30th of June, 1882, a decree was rendered that the bill was well
filed, and that the complainants were entitled to
Page 133 U. S. 32
a foreclosure. The matter was referred to a master to take
testimony and report upon the validity, and also the priority, of
the various claims filed. On the 6th of November, 1882, the master
filed his report, in which he divided the claims presented into
four classes, numbered A, B, C, and D, respectively. In class C he
placed the claims secured by the first mortgage bonds, and the
amount of said security. In this class was the claim of Benjamin
Richardson for money furnished to aid in the construction of the
road, amounting, with interest, to $273,282.87, secured, as the
master found, by 200 bonds, amounting to $374,904. Exceptions to
this report were filed by nearly all of the parties interested, but
in the main it was confirmed by the court, and on the 3d of May,
1883, a decree was entered on the question of priority among the
respective claimants in the distribution of the fund arising from
the sale of the mortgaged property, which had occurred. This
decree, among other things, provided that after certain expenses
and certificates given by the receiver had been paid, the remainder
of the fund should be ratably divided among the bond claimants, and
where the bonds were held as collateral security, no greater amount
should be allowed than sufficient to satisfy the debt thus
secured.
Benjamin Richardson's claim is in this class. It was for 600
bonds claimed as collateral security for the amount of money
advanced by him for the construction of the road, and for 1,105
other bonds which he alleged he had redeemed from certain bankers
in London, and, in another form, was for 3,574 bonds which he had
purchased at an execution sale in New York city that was had to
satisfy a judgment he had obtained against the railroad company in
the court of common pleas for the City and County of New York for
the amount of his debt, with interest. The decree allowed
Richardson's claim as respects 200 of the 600 bonds, but rejected
it as to the other bonds claimed by him. Subsequently that decree
was amended by the decree of October 8, 1883, so as to correct
certain mistakes in the calculation of interest upon the bonds. The
effect of this latter decree was to reduce Richardson's share of
the proceeds by
Page 133 U. S. 33
$2,173.91 from what the original decree of May 3, 1883, had made
it, and also to reduce in like manner the share of one of the other
intervening parties, the Wrought-Iron Bridge Company of Canton,
Ohio, by the sum of $183,60.
Four separate appeals were taken from the decree of May 3, 1883,
and an appeal was also taken by Richardson and his assignee, Henry
Day, from the amended decree of October 8, 1883. At the last term
of the Court, all the appeals were dismissed except that of
Richardson and Day, from the decree of October 8, 1883.
Richardson v. Green, 130 U. S. 104.
Before the decision at the last term of the Court was rendered,
Richardson died, and his legal representatives are now prosecuting
the appeal. As a decision upon the questions presented by this
appeal affects the distribution decreed by the court below of
$137,154.94 among the other claimants, it becomes necessary to
examine the facts and to give consideration to the equities which
relate to the claims of all those parties.
The Chicago, Saginaw and Canada Railroad Company was organized
about the 4th of December, 1872, under an Act of the Michigan
legislature approved April 18, 1871, with a capital stock of
$4,200,000, divided into 4,200 shares, for the purpose of building
a railroad from St. Clair, in the eastern part of the state, to
Grand Haven, on Lake Michigan, a distance of about 210 miles.
The original incorporators each subscribed for 210 shares of
this capital stock, five percent of which was paid in. This was all
the stock ever subscribed, and all the money paid in on any stock.
Nine of these corporators were elected directors, all but three of
whom resigned in 1873, transferring their stock, it is supposed, to
those three. The stock subscribed and the money paid on it may, for
all practical purposes, be considered as having afterwards
disappeared from the organization.
For the purpose of raising funds to build the road and equip it
the corporation executed a mortgage, and issued 5,500 seven percent
bonds, of $1,000 each, due in 30 years, with interest payable
semiannually, and placed them in the hands of its executive
committee to be put upon the market. Before selling any of its
bonds, however, the corporation borrowed
Page 133 U. S. 34
considerable money from various parties, giving the bonds as
security at the rate of two dollars in bonds for every dollar
borrowed, and also giving as a bonus to the parties from whom the
money was borrowed a large amount of capital stock.
These loans were negotiated with the following persons: (1) With
a syndicate of four persons in Philadelphia, designated in the
record as the "Philadelphia parties," who advanced money to the
company on the terms above stated until the amount aggregated,
according to the report of the master, $143,629.62. The number of
bonds pledged to the syndicate as collateral security for this loan
was 462. The Philadelphia parties claimed before the court below to
be entitled to prove all the bonds held by them to the full amount
of principal and accrued interest, and to a share in the proceeds
of the fund derived from the sale of the mortgaged property to the
extent of their loans and the interest thereon. The decree of the
court allowed their claim to the extent of 287.26 bonds only, that
number being twice the amount of the principal advanced. The second
party from whom the company obtained a loan was the appellant
Richardson, upon terms hereinafter stated. The third party was
George G. Sickles, of New York, who loaned the company $100,000
upon a pledge of 250 of the bonds, as collateral, and also a bonus
of $100,000 full-paid stock. Afterwards his son, Daniel E. Sickles,
bought 163 of the bonds for the consideration that he would assume
and pay the debt due his father, which he afterwards did. The bonds
held by the elder Sickles were then returned to the company. Daniel
E. Sickles claimed that, as an innocent purchaser, he was entitled
to priority over the other collateral bondholders, who were the
directors, officers, and promoters of the company. His demand for
priority was disallowed by the court, and the only part of his
claim that was allowed was that, as innocent purchaser of the 163
bonds, he might prove them to the full amount of his principal and
interest.
After the negotiation for the three loans above named, Thomas M.
Nelson contracted with the company to ballast and iron the first
twenty miles of the road from the Town of
Page 133 U. S. 35
St. Louis west, etc. This contract he substantially performed.
Two months afterwards, he entered into another contract with the
company to clear, grub, and grade the road, and build bridges and
culverts on the second division thereof to Lakeview. Part of this
second contract was assigned to the claimant Soule. This contract
also, with the exception of a part of the grading, was performed by
these parties. They had no security for the payment for their
services. They relied on the solvency of the company and the
assurances of Richardson, who was then a director and the treasurer
of it, that arrangements were perfected for the payment of the work
as fast as it progressed. The company failed to pay the amount due
on these contracts. Suits were brought, judgments obtained, and
executions issued which were returned
nulla bona. They
presented their claims to the master, who reported in their favor
and allowed them priority over the bondholders to the amount of
$16,342.68. Exceptions to this finding, having been filed, were
sustained by the court below, which allowed their debt, but put it
in the fourth class, to be paid
pro rata from any surplus
remaining after the bondholders were paid.
The claim of the Wrought Iron Bridge Company was based upon a
contract with the railroad company under which it built an iron
bridge across the Saginaw River, which was sold by the receiver for
the sum of $20,000. This claimant was allowed a share in the
proceeds of the sale on the basis of the 66 bonds of which it had
become the actual owner.
The claim of Stevens was based upon a
bona fide loan
made to the company by him. By the decree of the court below, he
was allowed a share in the funds to the extent of 32 bonds.
Any modification of the decree of the court below favorable to
the contention of the appellants herein will correspondingly reduce
the allowances made to the above-mentioned claimants.
The loan of $100,000 by Richardson to the railroad company, on
which he obtained the first 200 bonds as collateral, was made by
him on the 31st of March, 1875, under a contract with the company
in which he agreed to lend the corporation that amount upon certain
terms, which, among others, were (1) that the company should
deliver to him 200 mortgage
Page 133 U. S. 36
bonds, of $1,000 each; (2) that within fourteen days he should
be elected a director of the company; (3) that John A. Elwell, of
New York city, should be employed by the company at a salary of
$2,500 and his personal expenses for the purpose of superintending
the construction of the road and of looking after the interests of
Richardson; (4) that, as a further collateral security, the company
should lease the first twenty miles of the road as soon as it
should be completed, and assign such lease to Richardson, and
should also assign to him all the subsidy notes pertaining to that
division of the road, he to retain all the money derived from the
lease and subsidy notes, and render unto the company at final
settlement, seven percent interest upon the money so received, and
(5) that the company should execute and deliver to Richardson 1,250
full-paid shares of capital stock of $100 each. Although on its
face this was to be fully paid up stock, it was understood that no
money was to be actually paid for it, the consideration, as recited
in the agreement, being Richardson's services, good offices, and
influence in favor of the company in the financial world.
In the contest for priority among the claimants before the
master, the judgment creditors of the corporation claimed that they
entered into the contracts with the company whereon they obtained
their judgments relying upon its resources, which they were led to
think were ample by reason of the amount of the outstanding paid-up
stock in the hands of such responsible stockholders and owners as
Richardson and the Philadelphia parties, and it was contended that
those stockholders should not be allowed to share in the proceeds
arising from the sale of the mortgaged property on the basis of the
bonds held by them as collateral unless they should first pay to
the company the full amount of the shares of stock of which they
had held themselves out to the world as the owners. The master
concurred in this view, but because there was no proof of the
actual value of the stock, he declined to make any deduction from
the amount due to Richardson, but limited his claim to the 200
bonds. The appellants received the amount which the decree allowed,
but appealed to this Court from that decree, contending that they
were entitled to a
Page 133 U. S. 37
larger share of the fund on the basis of the additional 400
bonds.
To determine the merits of the contention of the appellants, a
somewhat minute statement of the circumstances which led the board
of directors to vote to Richardson those 400 additional bonds
becomes necessary. The 1,250 shares of paid-up stock for which he
paid nothing made him the largest stockholder in the company. He
and the Philadelphia parties held all the outstanding stock with
the exception of a few shares, and the entire and absolute control
of the corporation was thus in their hands. Richardson soon
controlled a majority of the board and dominated its proceedings.
He was at once made a director according to the contract. He became
chairman of its executive committee and its managing director. The
lease of the first twenty miles of the road was made to him, and
that part was turned over to his possession. He had John A. Elwell,
his coadjutor and representative, elected a director, who became,
successively, secretary, auditor, and a member of the executive
committee of the board. He afterwards caused Ambrose, Hamm, and
Cooper to be put upon the board of directors, to each of whom he
assigned small portions of his stock to enable them to vote in
furtherance of his schemes and interests, and the 1,250 shares of
paid-up stock were in due time issued to him. At a meeting of the
board of directors held on the 5th of July, 1875, although he had
advanced nothing beyond his original loan already secured, he
demanded 100 additional bonds, representing $100,000, as
collateral, and the board, yielding to his exactions, unanimously
adopted a resolution directing the secretary and treasurer to
deposit with him that number of bonds for such purpose. Within one
month afterwards, to-wit, August 5, 1875, Richardson was
unanimously elected treasurer of the company, to fill the vacancy
caused by the resignation of E. P. Ferry, which he had tendered to
take effect when his accounts should be adjusted by the executive
committee, and when the personal obligations he had made should be
settled, or he be relieved therefrom. The board of directors also
voted to Richardson 300 additional first
Page 133 U. S. 38
mortgage bonds as collateral. How he accomplished these results,
to-wit, the resignation of Ferry, his own election as Ferry's
successor, and also the vote to himself of the 300 bonds, is very
fully explained by the testimony of the directors and of Richardson
himself. Ferry thus states why he resigned:
"Mr. Richardson said to me that he thought that, advancing as
much money as he did, he not only should have all the moneys of the
company in his hands, as treasurer, to see that they were properly
disbursed, but also the securities of the company under his
control."
In explanation of his tendering his resignation, to take effect
upon being settled with and relieved from personal responsibility,
he says:
"I had endorsed the company's notes to the amount of about
$20,000 and furnished them with money, both. I had advanced the
company, as treasurer, from my own funds, in the neighborhood of
$10,000. I think it was $9,000 and something."
He further stated that Mr. Richardson assured him that the
adjustment and release asked for should be effected. He also stated
that Richardson had never performed those promises. The vote of 300
bonds to Richardson is thus explained by himself: "I demanded of
the board 300 more bonds, and got them by resolution of the board."
The resolution directed a conveyance to Richardson of 300 of the
first mortgage bonds of the company upon the consideration of
advances made and to be made by him. The fact is that the sum
actually advanced by him in addition to his original loan, for
which these 400 bonds were successively voted to him, amounted to a
little over $31,000. The terms upon which he made the demand for
these additional bonds are stated by Ferry and Elwell. At this same
meeting, held August 3, 1875, Richardson introduced the following
resolution:
"
Resolved that the president and secretary be, and they
are hereby, authorized to execute a contract for the purpose of
grading, tying, and bridging the company's located road from its
western terminus to Lakeview."
Elwell testifies that Richardson stated to the board that if
they would, by resolution, authorize him to receive 300 additional
bonds of the company of $1,000 each, he would make
Page 133 U. S. 39
further advances to a sufficient amount for the company to go on
with the extension and equipment of the road to Lakeview. It was in
consideration of these promised advances that the resolution was
adopted directing the 300 bonds to be conveyed to him. This promise
was never fulfilled by Richardson. Elwell testifies that he
advanced no money for the extension or equipment of the road to
Lakeview, nor did he purchase any iron or other material to be used
on that part of the road. Both Richardson and Ferry, according to
their own testimony, considered that the action of the board of
directors placed Richardson, as treasurer, in the shoes of Ferry at
least with regard to the custody of the unissued bonds of the
company. These bonds, 2,985 in number, were deposited with a safe
deposit company in New York city, subject to the control of Ferry.
Ferry immediately drew an order on that company authorizing it to
deliver to Richardson all the bonds belonging to the railroad
company deposited with it, and, through Elwell, gave to Richardson
the key to the vault in which they were kept, in order that he
(Richardson) might take possession of them. Armed with this order
to the trust company to deliver the bonds to him, as treasurer,
Richardson, on the 20th of August, 1875, in company with Messrs. O.
W. Child and M. J. Baney, proceeded to the place of business of the
trust company and, his order having been accepted by that company,
took possession of all the unissued bonds there belonging to the
railroad company, Messrs. Child and Baney counting them, and making
a memorandum of them. This memorandum of the number counted
included the 400 now claimed by the appellants as collateral
security. On the following day, Richardson, claiming to act under
the authority of the aforesaid resolutions of the board of
directors voting the 400 bonds to him as collateral security, and
the order of the president of the company to Ferry, separated 400
of the bonds from the remainder (Child and Baney assisting him),
and placed them in a tin box which he afterwards kept in his
personal possession. On the 11th of October, 1875, Richardson was
appointed managing director, irrevocable, and chairman of the
executive
Page 133 U. S. 40
committee, and on the 12th of the same month he gave to Ferry
the following receipt:
"Received of Edward P. Ferry, Treasurer of the Chicago, Saginaw
and Canada Railroad Co., twenty-two hundred and eighty-nine (2,289)
of the first mortgage bonds of the company, numbered as detailed by
the memorandum above, dated New York, Aug. 20, '75, and signed by
O. W. Child and M. J. Baney, placed in my custody as chairman of
the executive committee of said R.R. Co. in accordance with the
resolution of the board of directors passed Oct. 11, '75, for
custody, disposal, or sale."
"BENJAMIN RICHARDSON"
"Endorsed: Benjamin Richardson. Receipt -- 2,289 bonds. Oct. 12,
1875."
The list thus receipted for by Richardson, as chairman of the
executive committee, included the 400 bonds numbered from 3,201 to
3,600, inclusive, which he previously, as before stated, had
separated from the original number, and claimed had been pledged to
him as collateral security. It is safe to say too, we think, that
no one interested in the affairs of the company except Elwell and
Richardson knew at that time that Richardson was holding those 400
bonds in any other capacity than as treasurer of the company.
Elwell testified that at the meeting of October 11, 1875, none of
the other parties knew that Richardson had those bonds.
W. J. Kelley testified that at a meeting of the board of
directors on that day, the understanding of the board derived from
Richardson's statement was that he had in his possession only the
original 200 bonds as collateral. Secured in the possession of the
company's bonds, Richardson refused to comply with the conditions
on which Ferry had resigned. On the 16th of August, 1875, Elwell
enclosed in a letter to Richardson two renewal notes to be
substituted for those on which Ferry had been endorser, saying:
"Mr. Ferry demands that before he resigns his office of
treasurer and turns everything over to you, that you shall endorse
the renewal notes
Page 133 U. S. 41
personally, as he did the original ones, and it is for that
purpose that I send them, and they ought to be returned to Mr.
Ferry immediately, so as to reach him the last of this week, to be
used in the bank next Monday. . . . Mr. Ferry gave me one of his
envelopes stamped, in which you had better enclose the notes to
him. . . . Mr. Ferry has agreed to turn over to you, or to deliver
to me for you on your order, all books, accounts, vouchers, etc.,
in his possession as treasurer, upon the two notes being returned
to him endorsed."
Richardson remonstrated with Elwell against this, and on the
21st of the same month he replied to Elwell's next letter,
declining to sign the notes and declaring himself indifferent to
Elwell's retention of the books and papers pertaining to the office
of treasurer, inasmuch as he (Richardson) had already become not
only the treasurer, but also the receiver, advancer, and chief
controller of the company. On that day, the board of directors
voted 120 bonds to Richardson as a bonus. Counsel for the
appellants insist in their brief that this was done in his absence,
and that he repudiated this resolution and refused to take those
bonds. This statement is in conflict with that of Kelley, president
of the company, who testifies that Mr. Richardson was present, and,
so far from objecting to the vote of the bonus to him of 120 bonds,
he insisted upon it; but as they make no claim on these bonds as a
bonus, it is not necessary to add anything further except the
remark that the action of the board illustrates the readiness of
the directors to subserve all Richardson's wishes.
At the meeting of July 8, 1876, the board, in anticipation of
the foreclosure of the mortgage then determined on, passed
resolutions auditing the entire account of Richardson against the
company, and declared the sum of $185,584.18 to be due to him from
it. Another resolution unanimously adopted, ratified and approved
the bonds issued to him for that aggregate sum. A third resolution
was adopted directing the secretary to execute and deliver to him
the notes of the company at seven percent, payable at such times as
could be agreed on with Richardson, and that there should be
embodied in the note an authority to the holder, in default of
payment, to sell such
Page 133 U. S. 42
bonds without notice, and with the right to become himself the
purchaser if sold at public sale. On the same day, immediately
after the meeting, Elwell, the secretary, gave to Richardson those
notes, in which were recited the numbers of the 600 bonds under
discussion. On the same day, Richardson and Ferry addressed to the
mortgage trustees a written request to institute proceedings to
foreclose the mortgage. These notes, on the 17th of July at the
request of Richardson, were torn up by Elwell, and demand notes
bearing the same date substituted therefor. Forthwith Richardson
commenced suit against the corporation in the Court of Common Pleas
of the City of New York on those notes, and on the 12th of August
obtained the judgment hereinbefore mentioned. Execution was issued
on that judgment, and, as the proofs clearly show, the sheriff
levied upon and sold all the bonds of the company which had been
placed in Richardson's custody, namely, the 600 bonds which he
claimed had been pledged to him as aforesaid, and 2,974 other
bonds, including 1,105 which he claimed to have redeemed from a
bank in London. At the sale, Richardson purchased all those bonds
at the price of $50 each, $178,700. A short time after this sale
and purchase, to-wit, November 16, 1876, this suit for foreclosure
was commenced, and as an intervenor therein he claimed that by
virtue of his purchase at the sheriff's sale he became the absolute
owner of the entire 3,574 bonds. Afterwards he appears to have
confined his claim to the 600 bonds alleged to have been held by
him originally as collateral security and the 1,105 bonds just
referred to. It would seem, from the briefs filed in this Court by
counsel on behalf of appellants, that the claim here is confined to
the 400 bonds above described.
In view of all the facts and circumstances presented by this
record, we are unable to see any such superior equity arising out
of the transactions of Richardson with this company as entitles him
to a priority over the other creditors in the distribution of the
fund in question, or anything in his mode of getting possession of
the 400 bonds which gives him a better claim to them than that of
the other creditors. While we may not be prepared to concur with
the master in some of the
Page 133 U. S. 43
reasons upon which he based his report, yet we do not think
either that report or the decree of the court below confirming it
contains any error of which the appeal ants can complain.
Richardson's relation to the subject matter of this controversy
was threefold: (1) that of a creditor of an insolvent corporation
claiming for his debt priority of payment over those of all other
creditors, out of the fund arising from a foreclosure sale of the
mortgaged property; (2) that of a director and officer of that
corporation at the time his debt against it was created, and (3)
that of the largest shareholder of its capital stock. Undoubtedly
his relation as a director and officer, or as a stockholder of the
company, does not preclude him from entering into contracts with
it, making loans to it, and taking its bonds as collateral
security; but courts of equity regard such personal transactions of
a party in either of these positions not, perhaps, with distrust,
but with a large measure of watchful care, and unless satisfied by
the proof that the transaction was entered into in good faith, with
a view to the benefit of the company as well as of its creditors,
and not solely with a view to his own benefit, they refuse to lend
their aid to its enforcement. In
Twin Lick Oil Co. v.
Marbury, 91 U. S. 587,
91 U. S. 588,
MR. JUSTICE MILLER, delivering the opinion of the Court, said:
"That a director of a joint stock corporation occupies one of
those fiduciary relations where his dealings with the subject
matter of his trust or agency, and with the beneficiary or party
whose interest is confided to his care, is viewed with jealousy by
the courts, and may be set aside on slight grounds, is a doctrine
founded on the soundest morality, and which has received the
clearest recognition in this Court and in others."
In relation to the rights and liabilities of a stockholder, this
Court said in
Sawyer v.
Hoag, 17 Wall. 610,
84 U. S. 620,
MR. JUSTICE MILLER again delivering the opinion of the Court:
"We think it now well established that the capital stock of a
corporation, especially its unpaid subscriptions, is a trust fund
for the benefit of the general creditors of the corporation."
Proceeding to show that this trust cannot be defeated by a
simulated payment of the stock subscription, nor by any device
short of
Page 133 U. S. 44
an actual payment in good faith, he concluded with these
words:
"It is therefore but just that when the interest of the public
or of strangers dealing with this corporation is to be affected by
any transaction between the stockholders who own the corporation
and the corporation itself, such transaction should be subject to a
rigid scrutiny, and if found to be infected with anything unfair
toward such third person, calculated to injure him or designed
intentionally and inequitably to screen the stockholder from loss
at the expense of the general creditor, it should be disregarded or
annulled so far as it may inequitably affect him."
In the case last cited, the stockholder nominally paid the stock
subscription, but the money was immediately taken back as a loan,
and it was claimed by him as a valid payment. The transaction was
characterized by the court as a "fraud upon the public, who were
expected to deal with them."
In
Graham v. Railroad Co., 102 U.
S. 148,
102 U. S. 161,
this Court said, MR. JUSTICE BRADLEY delivering the opinion:
"When a corporation becomes insolvent, it is so far civilly dead
that its property may be administered as a trust fund for the
benefit of its stockholders and creditors. A court of equity, at
the instance of the proper parties, will then make those funds
trust funds, which, in other circumstances, are as much the
absolute property of the corporation as any man's property is
his."
In the more recent case of
Wabash, St. Louis & Pacific
Railway Co. v. Ham, 114 U. S. 587,
114 U. S. 594,
it was said by this Court, speaking through MR. JUSTICE GRAY:
"The property of a corporation is doubtless a trust fund for the
payment of its debts in the sense that when the corporation is
lawfully dissolved and all its business wound up, or when it is
insolvent, all its creditors are entitled in equity to have their
debts paid out of the corporate property before any distribution
thereof among the stockholders. It is also true in the case of a
corporation, as in that of a natural person, that any conveyance of
property of the debtor, without authority of law, and in fraud of
existing creditors, is void as against them."
Can the transactions between Richardson and the insolvent
Page 133 U. S. 45
corporation, of which he was largely the owner and controller,
especially with respect to the claim he is urging in this case,
stand the test of the fairness and good faith which, as a director
and stockholder, he owed to the corporation, its creditors and
bona fide bondholders? His very first transaction with the
corporation, by which he introduced himself into it as a
stockholder, was an illegal and fraudulent act. We refer to the
agreement on the part of the company to issue to Richardson 1,250
shares of bonus stock. At the time this agreement was made and the
stock issued in pursuance thereof, the statutes of Michigan
provided
"that it shall not be lawful for any railroad company, existing
by virtue of the laws of this state, nor for any officer of any
such company, to sell, dispose of, or pledge any shares in the
capital stock of such company, nor to issue certificates of shares
in the capital stock of such company, until the shares so sold,
disposed of, or pledged, and the shares for which such certificates
are to be issued, shall have been fully paid."
2 Comp.Laws Mich., par. 7757.
We have seen that all the acts of Richardson, as director,
stockholder, chairman of the executive committee, and treasurer,
all of which offices he held at one time, had their origin in this
bonus stock. After having exercised all the privileges and powers
of a stockholder in the corporation, it cannot be seriously
contended that he is to be held exempt from the liabilities which
would attach to a
bona fide shareholder who has taken
shares purporting to be paid up, but which in truth are not paid
up. The case of
Scoville v. Thayer, 105 U.
S. 143,
105 U. S.
153-154, bears a close analogy to this. Mr. Justice
Woods, delivering the opinion of the Court in that case, said:
"The stock held by the defendant was evidenced by certificates
of full-paid shares. It is conceded to have been the contract
between him and the company that he should never be called upon to
pay any further assessments upon it. . . . But the doctrine of this
Court is that such a contract, though binding on the company, is a
fraud in law on its creditors which they can set aside; that when
their rights intervene, and their claims are to be satisfied, the
stockholders can be
Page 133 U. S. 46
required to pay their stock in full."
The same rule is laid down in
Ex parte Daniell, 1 De G.
and J. 372. In that case, the directors of the company allotted to
themselves a number of shares by a resolution that the shares so
allotted were to be treated as paid-up stock in full. Daniell, one
of the directors, was not present at the time the resolution was
adopted, but he afterwards accepted the shares allotted to him. An
order having been made for winding up the company, assessments were
made upon those shares for the purpose, it is supposed, of paying
the debts of the company. It was held that Daniell was liable to
those assessments to the same extent as if the resolution had not
provided that the shares were to be treated as paid-up stock.
The principle underlying all of the decisions which we have
cited upon this point is that the capital stock of a corporation,
when it becomes insolvent, is in law assets of the corporation, to
be appropriated to the payment of its debts, and that creditors
have the right to assume that the stock issued by the corporation
and held by its stockholders as paid-up stock had been paid up, or,
if unpaid, that a court of equity at the instance of the proper
parties, could require it to be paid up. In the case now before us,
the bonds claimed by the appellants were voted to Richardson by his
associated directors, every one of whom owed his election to the
holders of this bonus stock alone. The total amount of the advances
made by him, for which these bonds are collateral, is very little
larger than one-half of the amount of the stock which he had as
paid-up stock. If the stock given to him and the Philadelphia
parties had been really paid-up stock, there would have been no
insolvency on the part of this corporation.
Irrespective of the question whether he can be made liable for
the face amount of this stock or for its proved value, the facts we
have detailed certainly do not entitle his claim to outrank that of
any
bona fide creditor, whether secured or unsecured, in
the matter of distribution.
The master found that the 400 bonds had never been delivered by
the company to Richardson in his individual capacity in pledge as
collateral security for the moneys advanced. It
Page 133 U. S. 47
is strenuously argued in behalf of appellants that the evidence
taken under the order of the court, after the findings of the
master had been made and his report filed, for the purpose of
explaining the receipt given by Richardson to his predecessor,
Ferry, is sufficient to overturn the master's report on that point.
That evidence was before the court when it rendered the decree
complained of, and, so far as the decree shows, it was not regarded
as essentially modifying the facts as found by the master. We think
the conclusion of the court was correct. We do not deny that cases
may arise in which, if everything were admitted to be fairly done,
with the knowledge and acquiescence of the company, such a personal
possession as that which Richardson obtained, although not such an
actual delivery as the board had intended and directed, might be
considered as equivalent to a legal delivery. But under the special
circumstances of this case, in view of the unfair means employed by
Richardson to have the entire body of the company's bonds
transferred from the custody of Ferry into his own custody and the
clandestine manner in which he took out the 400 from that body not
only without notice of the fact to the company, but with an
implied, if not an expressed, denial of the transactions, we do not
think that he can be regarded as standing in the position of a
legal and equitable pledgee, or that he ever acquired, as such
pledgee, a lien on the 400 bonds. But even if there could be any
doubt on this point, Richardson himself, by his own act, has
removed it. He waived and abandoned all claim to any lien as a
pledgee by his voluntary surrender and delivery of the bonds to the
Sheriff of the County of New York as the property of the company to
be sold under execution. If the 400 bonds were not delivered to
Richardson, as we think the court below correctly held, it follows
that the unissued bonds were not subject to attachment or to
execution as valid and binding obligations against the company, and
that Richardson's purchase at the sheriff's sale vested in him no
title or ownership in them.
Counsel for the appellants in their brief put not a little
stress upon the fact that Richardson's claim is based upon the
Page 133 U. S. 48
advance of actual money for the enterprise to the full amount of
$185,584.18. The answer to this is that the decree of the court
below recognized his claim to the entire amount, and gave him his
ratable share of the proceeds of the sale, upon the footing of the
200 bonds delivered to him, up to the amount of $273,282.87. We are
of the opinion that that decree gave him the fullest measure of
allowance to which he could possibly be justly entitled.
It is hardly necessary to say much with respect to the claim of
Richardson to the 1,105 bonds alleged by him to have been redeemed
as aforesaid. Upon this question, the master says:
"The case is briefly this: the board of directors sent one of
their number as financial agent to Europe, with authority to
negotiate a sale of bonds. While there, to defray expenses, he
borrowed a sum of money from a Mr. Stevens, and pledged to him 50
of the bonds as collateral security. These, together with the 1,105
bonds, this agent and Stevens deposited with the Consolidated Bank
of London with agreement that the bonds should not be delivered to
anyone without the joint order or consent of the agent and Stevens.
The agent was withdrawn from Europe. The indebtedness due Stevens
was allowed to go to protest, and the directors were fearful
Stevens would not only sell the bonds pledged, but would also sell
the 1,105, and the purchaser obtain title to the whole, and thus
render nearly valueless the securities held by the directors. To
prevent this calamity, Richardson advanced the money, charged it to
the company, and received its notes therefor. He then attempted to
do what he was fearful might have been done in London, namely, levy
upon and sell the 1,105 bonds, and himself become the purchaser at
a nominal sum, and thus gain an unconscionable advantage over other
bondholders. It is a general rule that fraud or any gross
misconduct on the part of the salvors in connection with the
property saved will work a forfeiture of the salvage, and the
evidence in this case with reference to the means employed to
obtain a levy on the bonds in question, and the sale thereof, fully
justifies us in the conclusion which I have reached, that no
allowance ought to be made to Richardson, by way of 'equitable
salvage,' for the
Page 133 U. S. 49
moneys advanced by him to obtain the return of the bonds to the
company."
We fully agree with what is said by the master, and do not deem
it essential to add anything further on that point.
As regards the decree of October 8, 1883, we think it sufficient
to say that the corrections made by it, as regards the calculations
of interest on the bonds, in the original decree, were correct and
proper, and were warranted by the law. The original decree had
allowed interest on some of the bonds owned and held as collateral
security from the date of their issue. The amendatory decree simply
allowed such interest to be calculated from the date when the bonds
were actually delivered to the owners and holders of them. Such
correction was eminently legal and just.
The decree of the court below is affirmed.
NELSON V. GREEN. Appeals from the Circuit Court of the United
States for the Western District of Michigan. Nos. 947 and 1027 of
October Term, 1888.
These cases were hears with
Richardson v. Green on the
motions to dismiss at the last term of Court, and are reported with
it in
130 U. S. 130 U.S.
104. After the announcement of the judgment on the motions on the
13th of March, 1889, Mr. William A. McKenney, on behalf of Nelson,
on the 22d of April, 1889, moved to have four hundred and fifty
dollars refunded, which Nelson had been obliged to deposit with the
clerk. After announcing the foregoing opinion and judgment,
MR. JUSTICE LAMAR delivered the opinion of the Court on this
motion.
In connection with this case, a motion has been made by Thomas
M. Nelson, one of the intervening petitioners in the suit, whose
appeals were dismissed at the last term of the court, to have
refunded to him the sum of $450, deposited with the clerk under the
order of this Court of January 14, 1889, requiring such deposit to
be made in order that his counsel might have two printed copies of
the record.
Page 133 U. S. 50
This motion is based upon the following grounds:
(1) That the petitioner was not one of the principal litigants
in the appeals, but was simply an intervening judgment creditor,
having no interest in the matter of the controversy between the
bondholders and the trustees;
(2) that his demand is quite small, when compared with the
amount involved in the controversy between the principal litigants,
and
(3) that he was not a necessary party to the determination of
the questions involved in the controversy between the main parties
to the litigation, but simply intervened as the only manner in
which he could protect his rights under his judgment against the
company for work and labor performed for it in the construction of
the road.
The motion is granted to the extent of $200.