It is the settled doctrine of this Court, as well as of the
Supreme Court of Missouri, that unpaid subscriptions to the stock
of a corporation constitute a trust fund for the benefit of
creditors, which may not be given away or disposed of by it,
without consideration or fraudulently, to the prejudice of
creditors.
While it is competent for a railroad corporation in Missouri,
exercising good faith, to use its bonds and stock in payment for
the construction of its road, it could not rightfully, at least as
against creditors or stockholders, issue its stock to contractors
as full paid without getting some fair or reasonable equivalent for
it. What is such equivalent depends primarily upon the actual value
of the stock at the time it was contracted to be issued, and upon
the compensation which, under all the circumstances, the
contractors were equitably entitled to receive for the particular
work undertaken or done by them. The corporation could not, by its
directors, sell or dispose of its assets to the prejudice of
creditors and stockholders under such circumstances, on such terms,
and at such prices as indicated, upon the face of the transaction,
that they were being squandered recklessly or fraudulently in
disregard of the trust committed to them.
In a suit brought against contractors for the construction of a
railroad to hold them liable for the face value of stock received
by them in payment for work done, the bill alleged that they got
$12,000 in the company's first mortgage bonds for each mile of
constructed road, and, in addition, $850,000 in its stock, and that
the mortgage bonds received by them were full and adequate
compensation for the work, but there was no allegation as to the
real value of the stock.
Held that the bill was bad on
demurrer; that it should have shown that the stock was of some
value; and that the general allegations that the arrangement was a
"fraud," a "breach of trust," a "scheme," and "colorable," without
stating the ultimate facts upon which they were based, were only
allegations of conclusions of law which the demurrer to the bill
did not admit.
The Court stated the case as follows:
The appellant, Fogg, brought this suit to recover from the
appellee, Blair, the amount of a judgment obtained by him
Page 139 U. S. 119
against an insolvent railroad corporation. The general ground
upon which it is sought to make the appellee liable is that he
holds stock of that corporation upon which he is alleged to owe
more than is sufficient to discharge appellant's judgment against
it.
The case was determined upon demurrer to the bill, which makes
the following showing: the St. Louis and Keokuk Railroad Company, a
corporation of Missouri created by an Act approved February 16,
1857, was authorized to construct a railroad road from some
suitable point on the North Missouri Railroad, not exceeding thirty
miles west of St. Charles, in that state, by way of Louisiana,
Hannibal, La Grange, and Canton, to some point near the mouth of
the Des Moines River, on the northern boundary of Missouri. Between
January 1, 1867, and May 1, 1880, it located its line between
Gilmore, about nineteen miles west of St. Charles, and Alexandria
at the mouth of that river, running in a northerly direction
through St. Charles County to Lincoln County by the way of Troy, to
a point near Prairieville, a distance of thirty-eight miles. It was
also located from the fair grounds near Hannibal, by the way of New
London, to Frankfort, in Pike County. The road between the two
places last named, a distance of eighteen miles, was completed, and
a large amount of grading was done in Lincoln County on the line
located. The sum of $300,000 was expended in grading in that
county. In the progress of the work, the company became indebted in
large amounts to a considerable number of persons, the plaintiff
Fogg, among the number.
On the 22d of September, 1870, Fogg and the railroad company had
a final settlement of their respective claims, showing due him the
sum of $9,547.75 for labor done and money furnished in the location
and construction of the railroad.
Subsequently, June 3, 1872, nearly all of the stockholders and
directors, and all of the executive officers, of the St. Louis and
Keokuk Railroad Company entered into articles of association, and
organized under the General Statutes of Missouri a new corporation
named the St. Louis, Hannibal, and Keokuk Railroad Company, with a
capital stock of $6,000,000, divided
Page 139 U. S. 120
into 60,000 shares, of $100 each, for the purpose of building a
railroad between the points named in the charter of the St. Louis
and Keokuk Railroad Company, and over most of the same ground upon
which the latter company located and graded its road, as above
stated.
On the 3d of March, 1873, the St. Louis and Keokuk Railroad
Company, by deed, assigned and transferred to the St. Louis,
Hannibal, and Keokuk Railroad Company its entire line of railroad,
completed as well as unfinished, together with all its property of
every kind and nature, without paying the plaintiff's debt or said
other debts, and by such assignment and transfer rendered itself
incapable of doing so. But in such deed it expressly stipulated and
required the St. Louis, Hannibal, and Keokuk Railroad Company to
assume the said debts, including the plaintiff's, and the latter
company did expressly assume and agree with the other company to
pay the above debts of plaintiff and others. The St. Louis,
Hannibal, and Keokuk Railroad Company took possession of the
railroad and all the property so assigned and transferred to it,
and there was no other consideration for the assignment and
transfer than its assumption of the above debts.
In an action at law brought by the plaintiff September 22, 1880,
in the court below, against the two companies, it was held that he
could not recover against the St. Louis, Hannibal, and Keokuk
Railroad Company the amount of his claim. Thereupon that action was
dismissed as to that company, and at a second trial, the plaintiff
obtained judgment against the St. Louis and Keokuk Railroad Company
for $16,496.06 and costs, upon which execution was issued and
returned no property found. Afterwards, on the 5th of May, 1884, in
a suit in equity in the court below, the plaintiff recovered a
judgment against both companies for the full amount of his
judgment, with interest and costs.
On the 24th of February, 1881, the defendant, Blair, a citizen
of New Jersey, and Moses Taylor entered into a written contract
with the St. Louis, Hannibal and Keokuk Railroad Company for the
grading of its road, or so much thereof as remained ungraded,
between the south line of Pike County near Prairieville
Page 139 U. S. 121
and some point on the Wabash, St. Louis, and Pacific Railroad
between Wentzville and Peruque, for the building of bridges
thereon, and for furnishing therefor all the materials, including
the ties and rails, for the tracks of the road, the work to be
completed and finished on or before the 31st of December, 1881, and
to be equal in construction and materials to the part of the road
then completed. In consideration of the work so to be done, the
company covenanted and agreed to pay and deliver to Blair and
Taylor first mortgage bonds of the company equal to the sum of
$12,000 for each mile of constructed road, and $850,000 par value
of the capital stock of the company, in full payment for the
construction of said part of its road.
In pursuance of that contract, Blair and Taylor constructed and
completed such part of the road on or about July 15, 1882, making
connection with the Wabash, St. Louis, and Pacific Railroad at
Gilmore, a length of thirty-eight miles of main track and two miles
of side track, receiving from the railroad company its first
mortgage bonds to the amount of $480,000, equal to $12,000 per mile
of main and side tracks, and a certificate, each, for 4,250 shares
of its full paid stock of the par value of $425,000. It is alleged
in the bill that the work done by them "was not worth more than
$12,000 per mile;" that the first mortgage bonds delivered to them
constituted "full and adequate consideration for all the work done
on said part of said railroad by said Blair and Taylor under said
contract;" that the issuing and delivery
"of said certificates for said 4,250 full-paid shares each in
the capital stock of said St. Louis, Hannibal, and Keokuk Railroad
Company to said Blair and Taylor, as aforesaid, was without any
valuable consideration paid or moving from said Blair and Taylor,
or either of them, to said railroad company, and there was no
consideration for said stock and the agreement on the part of said
St. Louis, Hannibal, and Keokuk Railroad Company;"
that
"the agreement on the part of the said St. Louis, Hannibal, and
Keokuk Railroad Company to issue and deliver to said Blair and
Taylor shares in its capital stock to the amount of $850,000,
pretendingly in part payment for the completion of said part of
said
Page 139 U. S. 122
railroad between the south line of Pike County, Missouri, near
Prairieville, in said county, and Gilmore, on the Wabash, St.
Louis, and Pacific Railroad, as aforesaid, was only colorable, and
was a scheme on the part of said Blair and Taylor to get said stock
without paying therefor, and it was a fraud upon your orator and
other creditors of said St. Louis, Hannibal, and Keokuk Railroad
Company,"
and
"the making of said contract and issue and delivery by the
directors and officers of the St. Louis, Hannibal, and Keokuk
Railroad Company of said certificates for said 4,250 shares each of
full-paid stock in the capital stock to said company to said Blair
and Taylor, without receiving the par value thereof either in money
or work was a breach of trust, of which said Blair and Taylor had
full knowledge and notice;"
that
"the said stock in the hands of said Blair and Taylor was and is
null and void as against your orator and other creditors of said
St. Louis, Hannibal, and Keokuk Railroad Company,"
and that by reason of the premises, Blair still owes that
company the sum of $425,000 for the 4,250 shares of its stock
delivered to him as aforesaid.
It further appears from the bill that in a suit to foreclose a
deed of trust executed August 1, 1877, by the St. Louis, Hannibal,
and Keokuk Railroad Company to secure the payment of certain bonds,
in which suit the present plaintiff was a defendant, the railroad
and all the property appurtenant thereto were sold and purchased by
John I. Blair for the sum of $370,000, which amount was not
sufficient to pay the bonds secured by the deed of trust. In that
suit Fogg's judgment, then amounting to $18,365.11 and costs, was
adjudged to be junior and inferior to the lien of the deed of
trust. 25 F. 684; 27 F. 176;
Fogg v. Blair, 133 U.
S. 534.
The St. Louis and Keokuk Railroad Company and the St. Louis,
Hannibal, and Keokuk Railroad Company are both insolvent. The
latter company has no officers and keeps no office, and the
foreclosure and sale of its property has practically dissolved it
as a corporation, and John I. Blair is the only stockholder of that
company whose stock is known to the plaintiff to be unpaid and who
is within the jurisdiction of the court below.
Page 139 U. S. 123
The plaintiff, proceeding in his present bill on the ground that
the stock of the St. Louis, Hannibal, and Keokuk Railroad Company
is a trust fund for the payment of its debts, prays that the
certificate to Blair of 4,250 shares of full-paid stock be
cancelled, and that he be decreed to pay to the plaintiff the full
amount of his decree against that company, and also the full amount
of the judgment, interest, and costs of such other unsatisfied
judgment creditors of that company as shall come in and contribute
to the expenses of this suit in proportion to their respective
demands, and that the plaintiff and other unsatisfied judgment
creditors of the St. Louis, Hannibal, and Keokuk Railroad Company
have such relief as may be equitable.
Page 139 U. S. 125
MR. JUSTICE HARLAN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
It is the settled doctrine of this Court as well as of the
Supreme Court of Missouri that unpaid subscriptions to the stock of
a corporation constitute a trust fund for the benefit of its
creditors, which may not be given away or disposed of by it without
consideration or fraudulently, to the prejudice of such creditors.
New Albany v.
Burke, 11 Wall. 96,
78 U. S. 106;
Sawyer v.
Hoag, 17 Wall. 610,
84 U. S. 620;
Upton v. Trebilcock, 91 U. S. 45;
Sanger v. Upton, 91 U. S. 56;
Webster v. Upton, 91 U. S. 65;
County of Morgan v. Allen, 103 U.
S. 498,
103 U. S. 509;
Scoville v. Thayer, 105 U. S. 143,
105 U. S. 154;
Hawkins v. Glenn, 131 U. S. 319,
131 U. S. 335;
Richardson v. Green, 133 U. S. 30,
133 U. S. 45;
Peters v. Bain, 133 U. S. 670,
133 U. S. 691;
Clark v. Bever, ante, 139 U. S. 96
(present term);
Liebke v. Knapp, 79 Mo. 22, 24. And this
principle of general law is reinforced in Missouri -- where the
transaction in question occurred, and by whose laws the railroad
corporations mentioned in the bill were created -- by a statute
giving a judgment creditor of a corporation where corporate
property cannot be found upon which to levy his execution, the
right to an execution against a stockholder "to the extent of the
amount of the unpaid balance of such stock by him or her owned." 1
Rev.Stats.Missouri, 1879, p. 121, c. 21, § 736; 1
Rev.Stats.Missouri, 1889, § 2517.
While it was competent for the St. Louis, Hannibal, and Keokuk
Railroad Company, exercising good faith, to use its bonds and stock
in payment for the construction of its road, it could not
rightfully, at least as against creditors or stockholders,
Page 139 U. S. 126
issue its stock to Blair and Taylor as full paid without getting
some fair or reasonable equivalent for it. What was such an
equivalent depends primarily upon on the actual value of the stock
at the time it was contracted to be issued and upon the
compensation which, under all the circumstances, the contractors
were equitably entitled to receive for the particular work
undertaken or done by them. The principles which, by established
law, govern the relations between a corporation and its creditors
and stockholders and the management of the corporate property would
be of little value if the corporation, by its directors, could sell
or dispose of its assets to the prejudice of creditors and
stockholders under such circumstances, on such terms, and at such
prices as indicated upon the face of the transaction that they were
being squandered recklessly or fraudulently in disregard of the
trust committed to them. For such violations of trust the courts
furnish ample remedy, independently of any statute prescribing a
special mode for enforcing the liability of stockholders for the
balance due upon stock held by them purporting to be, but which is
not, full paid. Is the plaintiff entitled to relief, under any
proper application of these principles?
It is averred in the bill, and the demurrer admitted for the
purposes of the hearing below, that full and adequate compensation
for the work done by Blair and Taylor was $12,000 per mile in the
company's first mortgage bonds. Assuming this to be true, if the
stock issued to Blair and Taylor was of any considerable value at
the time they received it, or if the circumstances attending its
delivery to them indicated bad faith upon their part or upon the
part of the corporation, different questions would arise from those
now presented. But the bill contains no allegation whatever as to
the real or market value of the stock. The Court cannot say, from
any facts set forth in the bill as to the condition of the
railroads in question, that the stock when delivered to the
contractors was worth par, or that it had any substantial value.
If, when disposed of by the railroad company, it was without value,
no wrong was done to creditors by the contract made with Blair and
Taylor. If the plaintiff expected to recover in this suit
Page 139 U. S. 127
upon the ground that the stock was of substantial value, it was
incumbent upon him to distinctly allege facts that would enable the
court -- assuming such facts to be true -- to say that the contract
between the railroad company and the contractors was one which, in
the interest of creditors, ought to be closely scrutinized. He
seems to have carefully avoided making any allegation as to the
real or probable value of the stock, and to have supposed that the
court, in the absence of averment or proof to the contrary, would
assume that it was worth par or had substantial value. As he
impugned the good faith of the transaction between the company and
the contractors, it was incumbent upon him to state the essential
ultimate facts upon which his cause of action rested, and not
content himself with charging generally that what was done was
"colorable," a "fraud," a "breach of trust," and a "scheme" by
which Blair and Taylor were to get the stock without paying for it.
These are allegations of legal conclusions merely, which a demurrer
does not admit.
Dillon v.
Barnard, 21 Wall. 430,
88 U. S. 437;
United States v. Ames, 99 U. S. 35,
99 U. S. 45;
Pullman Palace Car Co. v. Missouri Pacific Railway,
115 U. S. 587,
115 U. S. 596;
Ford v. Peering, 1 Ves.Jr. 72, 77. It is consistent with
the allegations of the bill that the stock was absolutely without
value when issued to Blair, and up to the time when the railroad
and all the property appurtenant thereto was sold under the of
foreclosure. The demurrer was properly sustained.
Decree affirmed.