The failure to enter a vote of stockholders in a corporation in
the corporation records at the time when it was adopted does not
affect its validity.
A resolution of stockholders in a corporation organized under
the laws of Kentucky to increase the capital stock of the
corporation, passed at a meeting held without the limits of that
state, is binding upon the members present and voting for it.
An increase by a Kentucky corporation of its capital stock
within the amount authorized by law is not invalidated by reason of
the fact that no amendment of the charter authorizing such increase
was ever recorded or published as required by the laws of that
state.
When a stockholder in a corporation who assents to an increase
in the capital stock of the corporation and its gratuitous
distribution among the shareholders receives such stock as full
paid stock, an obligation arises to pay for it in full, when called
upon to do so by creditors whose debts are subsequent to the
authorization of the increase, but this equity does not exist in
favor of a creditor whose debt was contracted prior to such
authorization.
An active corporation, finding its original capital impaired by
loss or misfortune, may, for the purpose of recuperating itself and
of producing new conditions for the successful prosecution of its
business, issue new stock and put it upon the market, and sell it
for the best price that can be obtained, and in such case no such
trust in favor of a creditor arises against the purchaser who in
good faith buys for less than par.
Page 139 U. S. 418
This was a bill in equity filed by Sebastian Stutz, of
Pittsburg, Pennsylvania, by certain other persons composing the
firm of Ragon Brothers, of Evansville, Indiana, and by others
composing the firm of Louis Stix & Co., of Cincinnati, Ohio, on
behalf of themselves and such other creditors of the Clifton Coal
Company as should come in and contribute to the expenses of the
suit, against the Clifton Coal Company and certain of its
stockholders, to compel an assessment upon certain shares of stock
held by the individual defendants and payment of the same as a
trust fund for the satisfaction of the debts of the company. The
bill averred in substance that the Clifton Coal Company was
incorporated under the laws of the State of Kentucky, in July,
1883, with power to purchase, lease, and operate coal mines in the
State of Kentucky, a copy of the articles of incorporation being
annexed to the bill; that by said articles the capital stock of
such corporation was fixed at $120,000, divided into shares of $100
each, with power to increase the same to $200,000 by a majority
vote of the stockholders; that all the stock was then taken and
paid for by the subscribers in some manner agreed upon between
them; that, pursuant to the authority contained in the articles of
incorporation, the stockholders, all of them being present and
voting,
"at a meeting duly held for the purpose in May, 1886,
unanimously resolved and ordered that the capital stock of said
company be, and in fact it was, then increased to $200,000, in
shares of $100 each, being an increase of 800 shares of stock of
said company;"
that of the 800 shares then created, the defendant Handley
subscribed for 86 3/4 shares, two of the other defendants for 15
shares each, and two others for 75 shares each, certificates of
which were issued by the company, and delivered to and received by
said subscribers, as they were respectively entitled, but that
neither one of them ever paid to the company any part of the said
shares, and they each, respectively, owe the said company the full
par value of the shares of the said capital stock subscribed for
and issued to them.
The bill also averred that on December 30, 1886, it having been
previously resolved to issue bonds to the amount of
Page 139 U. S. 419
$50,000, and to secure the payment thereof by a mortgage upon
its property, and said mortgage having been executed to trustees
and recorded, a contract was executed and delivered to the company
by certain others of the defendants, whose names were subscribed
thereto, in the following terms:
"We, the undersigned, subscribe for the amount set opposite our
names, respectively, to bonds of the Clifton Coal Company,
aggregating $50,000. It is agreed that $50,000 capital stock be
distributed
pro rata among the subscribers to the above
bonds;"
that several of the defendants subscribed to this contract, and
agreed to take bonds in different amounts; that said subscribers
paid the coal company for the bonds, and that with the money thus
received, to the extent of $30,000, the company paid its debts to
certain of its officers and managers, who had become liable by
endorsement for the company, and that nothing was or ever has been
paid for or upon any of the shares of capital stock thus subscribed
for, and to be distributed among them; that is to say, $50,000 of
said capital stock, equivalent to 500 shares thereof, was in fact
subscribed for and distributed among certain of the defendants, to
whom, in May, 1887, there were issued and received by them,
respectively, certificates for shares.
The bill further averred that the plaintiffs were judgment
creditors of the company by judgments obtained in the courts of
Kentucky; that their debts were created before all of the capital
stock of said company was paid in, and that all of said $80,000
increase of the capital stock, and each and all of the amounts due
to the company for any part of its capital stock, constituted a
trust fund for their benefit, which they were entitled to have
administered in a court of equity to the satisfaction of their said
debts, the company being insolvent.
It further appeared from the testimony that the company was
organized soon after its articles of incorporation were filed; that
its chief office was at Mannington, Kentucky, and that it began
business at once, and made large outlays and expenditures for
machinery, buildings, materials, and labor. In the early part of
the year 1886, the company was led to believe that its coal would
coke, and therefore its products
Page 139 U. S. 420
could be profitably extended for grate and steam purposes to
ironmaking coke. To embark in the manufacture of coke, however,
money was needed, and a meeting of the stockholders was held March
31, 1886, at which a resolution was passed reciting that $50,000
was needed with which to erect coke ovens, buildings, improvements,
etc., to further develop the property, and it was unanimously
resolved to issue $50,000 of bonds of the company, in sums of
$1,000 each, due thirty years from April 1, with 6 percent
interest, and secured by a trust mortgage upon the property of the
company, and the president was authorized to dispose of such bonds
as in his discretion seemed best. The mortgage was executed to the
designated trustee and recorded. It was found, however, that the
bonds could not be sold, and to meet the demands upon the company
for money, it borrowed a large amount upon its notes, endorsed by
its directors and stockholders, and, to secure the lenders and
endorsers, the $50,000 of bonds were deposited in two banks in
Ashville, Tennessee, as additional collateral security for the
loans. Finding that no one would purchase the bonds, and being
advised that in order to effect their sale it would be better to
add an equal amount of stock to the bonds, and propose to the
purchasers of such bonds to give as a gratuity $1,000 of stock with
each $1,000 bond, a meeting of the stockholders of the company was
held at Nashville, May 31, 1886, at which all the stockholders were
present in person or by proxy, although without any call or
previous notice, and "it was unanimously resolved that the capital
stock of the company be increased to $20,000, as authorized by the
charter." This resolution was not then entered upon the records of
the corporation, but was formulated in the shape of a pencil
memorandum and adopted unanimously, although no vote appeared to
have been taken and no formal record was made of the meeting until
the summer of 1888. No notice of such change in the amount of its
capital stock was recorded or published, as required by the laws of
Kentucky. The subscribers to the bonds subsequently executed the
agreement set forth in the bill, and bonds to the amount of $45,000
were delivered to the subscribers with equal amounts of
certificates of "paid
Page 139 U. S. 421
up" stock, the receipts reciting that it "was issued with bonds
for same amount, as per agreement." The certificates on their face
recited that the shares of stock were fully paid up "and were
nonassessable," or language to that effect. Five thousand dollars
of the bonds were left in one of the national banks at Nashville as
collateral security for a loan to the company, no one having
subscribed for them. The remaining $30,000 shares of increased
stock, which were not needed to secure the subscribers to the
bonds, appeared to have been distributed
pro rata among
the old stock holders. In the latter part of 1887 and in the early
part of the following year, plaintiffs obtained judgments against
the company, which were unsatisfied, and in September, 1887, by an
order of the Circuit Court of Hopkins County, Kentucky, the entire
property of the company was placed in the hands of a receiver and
its operations stopped.
On February 8, 1889, this bill was filed against the coal
company and the holders of this increased stock to compel payment
therefor and to recover the amounts of the judgments against the
company. The court dismissed the bill as to three of the defendants
not served with process, and as to the rest held them liable to all
the creditors of the company whose debts originated after the
alleged increase of stock, and fixed May, 1886, as the date of such
increase. As to debts contracted prior to that date, they were
excluded, because as between the company and the stockholders, the
latter held such stock properly, and without liability to the
company, and all creditors who dealt with the company prior to such
increase, and not upon the faith of such stock, had no equity to
demand more than the company itself could. Five of the defendants
against whom decrees were rendered in excess of $5,000 appealed to
this Court, and the circuit court suspended the execution of the
decree as to those who could not appeal until this Court should
determine the rights of the appellants.
The opinion of the circuit court is reported in 41 F. 531.
Page 139 U. S. 422
MR. JUSTICE BROWN, after stating the facts as above, delivered
the opinion of the Court.
1. Although the resolution of May 31, 1886, increasing the stock
of the company from $120,000 to $200,000, was not formally entered
at that time upon the books of the company, and nothing but a
pencil memorandum was then made of the proceedings of the meeting,
no objection can be taken to its validity by reason of such
omission. The testimony shows clearly what took place at this
meeting. It appears from the memorandum made by Mr. Allen the
acting secretary, to have been
"unanimously resolved that the capital stock of the company be
increased to $200,000, as authorized by the charter, the purposes
for which said stock is issued being the betterment of the present
plant and the construction of a new plant for coking purposes."
This resolution was subsequently, and in 1888, when the omission
to record the same appears to have been first discovered, formally
entered upon the minute book of the corporation. The failure to
enter this resolution at the time it was adopted did not affect its
validity, as most corporate acts can be proved as well by parol as
by written entries.
Moss v. Averell, 10 N.Y. 449.
2. Nor were the proceedings of such meeting any less binding
upon those participating in it by reason of the fact that it was
held without call or notice, and outside the boundaries of the
state under the laws of which the company was incorporated. By an
act of the Legislature of Kentucky of March 3, 1876, General
Statutes, page 769, "all elections for directors and other
officers, by private corporations," etc., "shall be held within the
territorial limits of the State of Kentucky. . . . Any such
election held outside of Kentucky shall be void." Beyond the
election of officers, however, there is no statutory restriction of
corporate action to the limits of the state, and in the absence of
such inhibition, the proceedings of such meeting would, within the
rule laid down by this Court in
Railroad
v. Cowdrey, 11 Wall. 459, with regard to
directors
Page 139 U. S. 423
meetings, be binding upon all those participating in it as well
as upon those acting upon the faith of its validity or receiving
stock authorized to be issued at such meeting. It is true there are
cases holding that stockholders' meetings cannot be legally held
outside of the home state of the corporation, but the question has
generally arisen where a majority present at such meeting had
attempted by their action to a dissenting minority, or had taken
action prejudicial to the rights of third persons.
Ormsby v.
Vermont Copper Mining Co., 56 N.Y. 623;
Hilles v.
Parrish, 14 N.J.Eq. 380. Indeed, so far as we know, the
authorities are uniform to the effect that the action taken at such
meetings is binding upon those who participate in or take the
benefit of them.
Heath v. Silverhorn Lead Mining Co., 39
Wis. 146. In this case, the meeting was attended by all the
stockholders but two, who were represented by proxy, the vote
increasing the stock was unanimous, and it does not lie in the
mouth of those who participated in this act or received the stock
voted at this meeting to question its validity.
3. It is further claimed that this issue of stock was invalid by
reason of the fact that there was no amendment of the charter
authorizing such increase ever recorded or published, as required
by the law of Kentucky. The proceeding for the organization of
incorporated companies is found in chapter 56 of the General
Statutes of Kentucky, the fifth section of which requires a notice
to be published for at least four weeks in some newspaper as
convenient as practicable to the principal place of business,
specifying several particulars, among which is the amount of
capital stock authorized, and the times when, and the conditions
upon which it is to be paid in. Section six is as follows:
"The corporation may commence business as soon as the articles
are filed for record in the office of the county court clerk, and
their acts shall be valid if the publication in a newspaper is made
and the copy filed in the office of the Secretary of State, when
such filing is necessary, within three months from such filing in
the clerk's office. No change in any of the foregoing particulars
shall be valid unless recorded and published as the original
articles are required to
Page 139 U. S. 424
be, nor shall any change be made at any time or in any manner
which would be inconsistent with the provisions of this act."
Reliance is placed upon the final clause of this section for the
position assumed by the defendants, that the increase in the
capital stock, never having been recorded or published as required
by this clause, was void, and the case of
Scoville v.
Thayer, 105 U. S. 143, is
cited in support of this contention. That was also an action to
recover unpaid assessments upon stock. The statutes of Kansas
provided that any corporation might increase its capital stock to
any amount not exceeding double the amount of its authorized
capital. The corporation in question had increased its capital
stock, as it was authorized to do, by doubling it, and it
subsequently increased it by doubling it again, thus quadrupling
the original amount, the defendant in the case having attended by
proxy the meeting at which such illegal increase was voted, and
received a quantity of the stock thus issued. It was held that such
increase was
ultra vires and void, and that the defendant
was not estopped from denying the validity of the overissue or his
obligation to pay for it.
In the case under consideration, however, the articles of
incorporation did provide that the capital stock should be
$120,000, with power to increase to $200,000 by a majority vote of
the stockholders, and there was no statutory inhibition, as in
Kansas, against any such increase as it might be thought advisable
to make. Here, then, was the power to increase the capital stock to
the precise amount fixed by the stockholders at their meeting at
Nashville, and the defect was merely in the failure to record and
publish such change, as required by section six of the statute in
question.
It is insisted by the appellees, and the learned judge of the
circuit court so held, that the failure to record and publish this
increase of the capital stock, which was in fact, if not in name,
an amendment to the original articles, which had fixed the capital
stock at $120,000, was a mere irregularity and informality in the
proceedings to effect the increase -- such a one, as was said by
this Court in
Chubb v. Upton, 95 U. S.
665,
95 U. S. 667,
to constitute no defense to a subscriber to such increased
Page 139 U. S. 425
stock. In that case, it appeared only that objection was made to
the proceedings by which the company increased its stock, on the
ground of irregularity and informality in the papers filed in the
public offices, and it was held that one who contracted with an
acting corporation by purchasing stock in the same could not defend
himself against a claim upon such contract, in a suit by the
corporation, by urging the illegality of its organization. In
Veeder v. Mudgett, 95 N.Y. 295, which was also an action
by directors against stockholders of a corporation to enforce the
liability imposed upon them because of an alleged failure to pay in
the full amount of the capital stock, it appeared that the meeting
at which the increase stock was voted was not formally called, nor
was a certificate of the increase of capital made and filed as
prescribed by the state statute. The stock was, however, all issued
to stockholders who voted for the increase. These holders
subsequently received dividends thereon, voted at stockholders'
meetings, and in all respects were treated and acted as
stockholders. The court held the attempted increase illegal, but
that the defendant stockholders, as against the creditors of the
company, by accepting their proportions of the increased stock, by
voting for its increase, by taking dividends upon it, and by
holding it out to those dealing with the company as an actual
component of its capital, were estopped from denying the validity
of the increase. It was argued in that case, as it is in this, that
an act absolutely and wholly void because incapable of being
performed could not be made valid by estoppel; but this was held to
be true only where there was an entire lack of power to do the act
so brought in question, and the case of
Scoville v. Thayer
was cited. "But where," says the court,
"as in the present case, the abstract power did exist, and there
was a way in which the increase could lawfully be made, and the
creditors acted without fault, believing that the increase had been
lawfully effected, and the necessary steps had been taken, there
the doctrine of estoppel may apply, and the increased stock be
deemed valid as against the creditors who have acted upon the faith
of such increase."
It is true that in neither of those cases was the court
embarrassed
Page 139 U. S. 426
by a statute declaring that certain conditions must be observed
or the increase would not be valid. But we think that the clause of
section 6, upon which reliance is placed, must be read in
connection with section 18 of the same act, which provides that
"No persons acting as a corporation under the provisions of this
act shall be permitted to set up or rely upon the want of a legal
organization as a defense to an action brought against them as a
corporation; nor shall any person who may be sued on a contract
made with such corporation, or sued for an injury done to its
property, or for a wrong done to its interests, be permitted to
rely upon such want of legal organization in his defense."
It is true that this section seems to apply rather to a want of
an original legal organization of the company, but we think it
should be regarded as applying as well to amendments to such
organization, and that no defense connected with the original
organization which a party contracting with the corporation would
be disqualified to set up can be made available in connection with
an amendment to the original articles.
So far as the question of liability to the proposed assessments
is concerned, these defendants, with respect to their relations to
this corporation, are divisible into two distinct classes: first,
those of the original stockholders who received the $30,000
increased stock as a gift; second, those who subscribed to the
$50,000 bonds and received an equal amount of stock as a bonus or
inducement to make the subscription.
4. With regard to the first class -- namely the original
stockholders, who voted for this increase of 800 shares and then
distributed among themselves 300 of those shares without the shadow
of right or consideration -- it is difficult to see why they should
not be called upon to respond for their value. The only claim made
upon their behalf is that they never agreed to contribute or pay
for the same; that the stock was expressly declared to be "fully
paid" and "free from all claims or demands upon the part of the
company;" that there was no evidence that the creditors of the
company knew of or relied up his increase in their dealings with
the company, and that they had a right to return and surrender the
same,
Page 139 U. S. 427
which they offered to do. There is no reason to suppose that
these stockholders did not act in good faith and in the belief that
they were entitled to this stock. The fact that they did not
subscribe for it or agree to take it until the receipt of the
certificates is immaterial, as the acceptance of the certificates
is sufficient evidence of an agreement to pay their par value.
Sanger v. Upton, 91 U. S. 56,
91 U. S. 64;
Chubb v. Upton, 95 U. S. 665;
Brigham v. Mead, 10 Allen 245.
Ever since the case of
Sawyer v.
Hoag, 17 Wall. 610, it has been the settled
doctrine of this Court that the capital stock of an insolvent
corporation is a trust fund for the payment of its debts; that the
law implies a promise by the original subscribers of stock, who did
not pay for it in money or other property, to pay for the same when
called upon by creditors, and that a contract between themselves
and the corporation that the stock shall be treated as fully paid
and nonassessable, or otherwise limiting their liability therefor,
is void as against creditors. The decisions of this Court upon this
subject have been frequent and uniform, and no relaxation of the
general principle has been admitted.
Upton v. Tribilcock,
91 U. S. 45;
Sanger v. Upton, 91 U. S. 56;
Webster v. Upton, 91 U. S. 65;
Chubb v. Upton, 95 U. S. 665;
Pullman v. Upton, 96 U. S. 328;
County of Morgan v. Allen, 103 U.
S. 498;
Hawkins v. Glenn, 131 U.
S. 319;
Graham v. Railroad Co., 102 U.
S. 148,
102 U. S. 161;
Richardson v. Green, 133 U. S. 30.
It is simply in affirmance of this general principle that
section 14, c. 56, of the General Statutes of Kentucky declares
that nothing in the act conferring corporate franchises or
permitting the organization of corporations "shall exempt the
stockholders of any corporation from individual liability to the
amount of the unpaid installments on stock owned by them." If the
corporation has no right as against creditors to sell or dispose of
this stock with an agreement that no further assessment shall be
made upon it, much less has it the right to give it away or
distribute it among shareholders without receiving a fair
equivalent therefor, and thereby induce the public to deal with it
upon the credit of such shares, as representing the assets of the
corporation.
Union Mut.
Page 139 U. S. 428
Life Ins. Co. v. Frear Stone Mfg. Co., 97 Ill. 537. The
stock of a corporation is supposed to stand in the place of actual
property of substantial value, and as being a convenient method of
representing the interest of each stockholder in such property, and
to the extent to which it fails to represent such value, it is
either a deception and fraud upon the public or an evidence that
the original value of the corporate property has become
depreciated. The market value of such shares rises with an increase
in the value of the corporate assets and falls in case of loss or
misfortune whereby the value of such assets is impaired, and the
increase of value of such stock is taken to represent either an
appreciation in value of the company's property beyond the par
value of the original shares or so much money paid to the
corporation as is represented by such shares. If it be once
admitted that a corporation may issue stock without receiving a
consideration therefor, and where it does not represent actual or
substituted value in corporate assets, there is apparently no limit
to the extent to which the original stock may be "watered" except
the caprice of the stockholders. While an agreement that the
subscribers or holders of stock shall never be called upon to pay
for the same may be good as against the corporation itself, it has
been uniformly held by this Court not to be binding upon its
creditors.
5. Somewhat different considerations apply to those who
subscribed for the bonds of the company with the understanding that
they were to receive an amount of stock equal to the bonds as an
additional inducement to their subscription. The facts connected
with this transaction are substantially as follows: some three
years after the company was organized, it became apparent that the
enterprise as originally contemplated -- namely, the mining and
selling of coal for steam and domestic purposes -- was not likely
to be a success, owing to the inferior character of the product,
and the only hope of the company lay in the manufacture of the coal
into an ironmaking coke -- that is, a coke containing a percentage
of sulphur low enough to admit of the manufacture or merchantable
pig iron. To embark in this, however, money was needed, and as
Page 139 U. S. 429
the stock of the company was not worth more than fifty cents on
the dollar, it was evident this could not be effected simply by the
issue of new stock. It was proposed at the meeting in March that
money should be raised by the issue of $50,000 of bonds, with which
to add the requisite structures to the plant. But it was soon
evident that the bonds could not be negotiated without the stock,
and, acting upon the suggestion of a Nashville banker, it was
resolved at the meeting in May that the stock should be increased
800 shares, 500 of which should be turned over to the subscribers
to the bonds as a bonus or an additional consideration. The
evidence is uncontradicted that the bonds could not have been
negotiated without the stock, that they were both sold as a whole,
that the transaction was in good faith, and, considering the risk
that was taken by the subscribers, the price paid for the stock and
bonds was fair and reasonable. The directors appear to have done
all in their power to obtain the best possible terms, and there is
no imputation of unfair dealing on the part of anyone connected
with the transaction. At that time, the mines and property of the
company were in good condition and the prospects of success were
fair.
The case, then, resolves itself into the question whether an
active corporation, or, as it is called in some cases, a "going
concern," finding its original capital impaired by loss or
misfortune, may not, for the purpose of recuperating itself and
providing new conditions for the successful prosecution of its
business, issue new stock, put it upon the market, and sell it for
the best price that can be obtained. The question has never been
directly raised before in this Court, and we are not, consequently,
embarrassed by any previous decisions on the point. In the
Upton cases, arising out of the failure of the Great
Western Insurance Company; in
Hatch v. Dana, 101 U.
S. 205, and in
Hawkins v. Glenn, 131 U.
S. 319, the defendants were either original subscribers
to the increased stock at a price far below its par value or
transferees of such subscribers, and the stock was issued, not, as
in this case, to purchase property or raise money to add to the
plant and facilitate the operations of the company, but simply to
increase its original stock
Page 139 U. S. 430
in order to carry on a larger business, and the stock thus
issued was treated as if it formed a part of the original capital.
In
County of Morgan v. Allen, 103 U.
S. 498, the same principle was applied to a subscription
by a county to the capital stock of a railroad company, for which
it had issued its bonds, although such bonds had been surrendered
to the county with the consent of certain of its creditors.
To say that a corporation may not, under the circumstances above
indicated, put its stock upon the market and sell it to the highest
bidder is practically to declare that a corporation can never
increase its capital by a sale of shares if the original stock has
fallen below par. The wholesome doctrine, so many times enforced by
this Court, that the capital stock of an insolvent corporation is a
trust fund for the payment of its debts rests upon the idea that
the creditors have a right to rely upon the fact that the
subscribers to such stock have put into the treasury of the
corporation in some form the amount represented by it, but it does
not follow that every creditor has a right to trace each share of
stock issued by such corporation and inquire whether its holder or
the person of whom he purchased has paid its par value for it. It
frequently happens that corporations, as well as individuals, find
it necessary to increase their capital in order to raise money to
prosecute their business successfully, and one of the most frequent
methods resorted to is that of issuing new shares of stock and
putting them upon the market for the best price that can be
obtained, and so long as the transaction is
bona fide and
not a mere cover for "watering" the stock and the consideration
obtained represents the actual value of such stock, the courts have
shown no disposition to disturb it. Of course no one would take
stock so issued at a greater price than the original stock could be
purchased for, and hence the ability to negotiate the stock and to
raise the money must depend upon the fact whether the purchaser
shall or shall not be called upon to respond for its par value.
While, as before observed, the precise question has never been
raised in this Court, there are numerous decisions to the effect
that the general rule that holders of stock, in favor of creditors,
must respond for its par
Page 139 U. S. 431
value is subject to exceptions where the transaction is not a
mere cover for an illegal increase.
Thus, in
New Albany v.
Burke, 11 Wall. 96, a city subscribed to the stock
of a railroad, and issued bonds for a part of the subscription,
agreeing to issue them for the rest of it, when the road should be
built to a certain point. The road relied mainly upon these bonds
to raise the necessary money. The validity of the bonds being
denied by taxpayers who had filed bills to enjoin the raising of a
tax to pay the interest, their value in the market was largely
impaired, and it was found they could not be sold without a
sacrifice. Under these circumstances, the company applied to the
city to pay a certain sum which had been borrowed by the road upon
the pledge of the bonds already issued, with sundry other moneys,
and in consideration thereof the city obtained from the company a
large number of bonds which had not been negotiated, and a
cancellation of the subscription. In a suit brought by a judgment
creditor to enforce the original subscription, it was held that the
compromise was legal, and the payment of such subscription would
not be enforced, although it subsequently turned out that the bonds
were worth more than they could have been sold for. Said Mr.
Justice Strong, speaking for the Court:
"Had the company sold to a stranger and then the city become a
purchaser from the stranger, it will not be contended that any
creditor of the company could complain. And it can make no
difference whether the purchase was made directly or indirectly
from the first holder of the bonds, assuming that there was no
fraud. The transaction . . . was, in substance, plainly nothing
more than a purchase by the city of its own bonds, some of which
had been issued and others of which it was under obligation to
issue at the call of the vendor. . . . Looking at it in the light
of subsequent events, it was no doubt an advantageous purchase for
the city, and if the uncontradicted evidence is to be believed, it
was deemed at the time an advantageous sale or arrangement for the
company. . . . We may add the evidence is convincing that the
contract between the city and the company was made in the utmost
good faith, with no intention to wrong
Page 139 U. S. 432
creditors of the latter; that it was at the time considered
advantageous to the company, and it is not proved that all was not
paid for the bonds issued and to be issued that they could have
been sold for in the market."
So in
Coit v. Gold Amalgamating Company, 119 U.
S. 343, it was held that where the charter of a
corporation authorizes the capital stock to be paid for in
property, and the shareholders honestly and in good faith pay for
their subscriptions in property instead of money, third parties
have no ground of complaint, although a gross and obvious
overvaluation of such property would be strong evidence of fraud in
an action by a creditor to enforce personal liability. The Court
held that where full-paid stock was issued for property received,
there must be actual fraud in the transaction to enable creditors
of the corporation to call the stockholders to account. In
delivering the judgment of the court in that case at the circuit
(14 F. 12), MR. JUSTICE BRADLEY observed:
"That trust [in favor of creditors] does not arise absolutely in
every case where capital stock has been issued, and where it has
been settled for by arrangement with the company. It is not as if
the stockholders had given their promissory notes for the amount,
these notes being in the treasury of the company; but there are
often equities to which the stockholders are entitled -- on which
they are to stand."
As one of them, he mentioned the case of stock dividends fairly
made in consideration of profits earned, and of accumulations of
the property of the company, and observed:
"It is not true that it is in the power of a creditor in every
case and in all cases, as a mere matter of right, to institute an
inquiry as to the valuation of the amount of the consideration
given for the stock, and disturb fair arrangements for its payment
in other ways than by cash. If the stock has been fairly created
and paid for, there is an end of trusts in favor of anybody, and
this does not affect the general proposition that unpaid
subscriptions of stock are a trust fund to be administered for the
benefit of creditors after a corporation becomes insolvent."
A case nearer in point is that of
Clark v. Bever, ante,
139 U. S. 96,
decided at the present term of this Court. In this case, a
railroad
Page 139 U. S. 433
company, of which defendant's intestate was president and
stockholder, had a settlement with a construction company, of which
defendant's intestate was also a member, for work done in building
the road. The railroad company, being unable to pay the claim of
the construction company, delivered to it 3,500 shares of its stock
at 20 cents on the dollar, and the same were accepted in full
satisfaction of the debt. The stock was not worth anything in the
market, and was issued directly to the defendant's intestate. No
other payment than the 20 percent was ever made on account of this
stock. A judgment creditor of the railroad company filed a bill to
compel the payment by the defendant of his claim upon the theory
that he was liable for the actual par value of such stock, whatever
may have been its market value at the time it was received. It was
held he could not recover. "Of course, under this view," says MR.
JUSTICE HARLAN in delivering the opinion of the Court,
"everyone having claims against the railway company -- even
laborers and employees -- who could get nothing except stock in
payment of their demands, became bound, by accepting stock at its
market value in payment, to account to unsatisfied judgment
creditors for its full face value, although at the time it was
sought to make them liable the corporation had ceased to exist, and
its stock had remained as it was when taken, absolutely worthless .
. . To say that a public corporation, charged with public duties,
may not relieve itself from embarrassment by paying its debt in
stock at its real value -- there being no statute forbidding such a
transaction -- without subjecting the creditor, surrendering his
debt, to the liability attaching to stockholders who have agreed,
expressly or impliedly, to pay the face value of stock subscribed
by them, is in effect to compel them either to suspend operations
the moment they become unable to pay their current debts, or to
borrow money secured by mortgage upon the corporate property."
So, in
Fogg v. Blair, ante, 139 U. S. 118,
also decided at the present term, it was held to be competent for a
railroad exercising good faith to use its bonds or stock in payment
for the construction of its road, although it could not, as against
creditors
Page 139 U. S. 434
or stockholders, issue its stock as fully paid without getting
some fair or reasonable equivalent for it. It was there said:
"What was such an 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."
It appeared in that case that full and adequate compensation for
the work done had been paid by the company in its mortgage bonds,
and, as the bill contained no allegation whatever as to the real
market value of such stock, it was held that the contractors
receiving this stock were not liable to creditors for its par
value. It was added:
"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
on 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."
It would seem to follow from this that if the stock had been of
some value, that value, however much less than par, would have been
the limit of the holder's liability.
In
Morrow v. Nashville Iron & Steel Co., 87 Tenn.
262, the Supreme Court of Tennessee held that a contract with a
subscriber to stock of a corporation, that for every share
subscribed he should receive bonds to an equal amount, secured by
mortgage on the company's plant, is void as against creditors, and
also between the subscriber and the corporation. But the court drew
a distinction between such a case and sales of or subscription to
the stock of an organized and going corporation. It said:
"The necessities of the business of an organized company might
demand an increase of capital stock, and if such stock is lawfully
issued, it may very well be offered upon special terms. In such
case, if the market price was less than par, it is clear that a
purchaser or subscriber for such stock at its market value would,
in the absence of fraud, be
Page 139 U. S. 435
liable only for his contract price. So a case might arise where
the stock of a going concern was much depreciated, and where its
bonds were likewise below par, and there was lawful authority to
issue additional stock and bonds. Now in such case the real market
value of an equal amount of stock and bonds might not exceed or
even equal, the par value of either. In such cases, the question of
fraud aside, the purchaser would only be held for his contract
price."
This case from Tennessee puts as an illustration the exact case
with which we are now dealing.
The liability of a subscriber for the par value of increased
stock taken by him may depend somewhat upon the circumstances under
which, and the purposes for which, such increase was made. If it be
merely for the purpose of adding to the original capital stock of
the corporation, and enabling it to do a larger and more profitable
business, such subscriber would stand practically upon the same
basis as a subscriber to the original capital. But we think that an
active corporation may, for the purpose of paying its debts and
obtaining money for the successful prosecution of its business,
issue its stock and dispose of it for the best price that can be
obtained.
Stein v. Howard, 65 Cal. 616. As the company in
this case found it impossible to negotiate its bonds at par without
the stock, and as the stock was issued for the purpose of enhancing
the value of the bonds, and was taken by the subscribers to the
bonds at a price fairly representing the value of both stock and
bonds, we think the transaction should be sustained, and that the
defendants cannot be called upon to respond for the par value of
such stock, as if they had subscribed to the original stock of the
company. Our conclusion upon this branch of the case disposes of it
as to those who were held liable by virtue of their subscription to
the bonds.
6. We have no doubt the learned circuit judge held correctly
that it was only subsequent creditors who were entitled to enforce
their claims against these stockholders, since it is only they who
could, by any legal presumption, have trusted the company upon the
faith of the increased stock.
First National Bank of Deadwood
v. Gustin Minerva Consolidated
Page 139 U. S. 436
Mining Company, 44 N.W. 198; 2 Morawetz on Corporations
§§ 832, 833;
Coit v. N.D. Gold Amalgamating Co., 14 F. 12.
We also agree with him that creditors who became such after the
increase was voted in May, 1886, are entitled to look to those who
subsequently received the stock, notwithstanding they did not
receive it until after the debts had been contracted. The circuit
judge found in this connection that the
"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 affirmatively appear that they, or
either of 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 real question in this connection is when may it be presumed
creditors trusted the corporation upon the faith of the increased
stock? Obviously when such increase was ordered. That is a fact to
which publicity would naturally be given. The creditors could not
be expected to know when and by whom such stock would be taken. It
is true, they assume the risk of the stock not being taken at all,
but the moment shares are taken, they are supposed to represent so
much money put into the treasury as they are worth, which becomes
available for the payment not only of future, but of existing,
creditors. It is manifest that any attempt to gauge the liability
of stockholders by the exact time they took their stock with
reference to the dates when the several claims of the creditors
accrued, and by the further fact whether the creditors actually
knew of and relied upon such stock, would, in a case like this,
where the creditors and stockholders are both numerous, lead to
inextricable confusion. Even the flexibility of a court of equity
would be inadequate to adjust the rights of the parties.
7. With regard to the special defense set up by Neely that he
never consented to nor received certificates for increased stock,
we agree with the circuit judge that it is not sustained. He did
not live in Nashville, but had given a proxy to one
Page 139 U. S. 437
Sandford to represent him at stockholders' meetings. He knew of
the arrangement to issue an amount of the stock equal to the bonds
and to distribute $30,000 of the increased stock ordered by the
resolution of May, 1886, and on April 5, 1887, he gave a power of
attorney to Sandford authorizing the latter, for him, and in his
name and stead, to "receipt to the Clifton Coal Company for stock
in my name, and transfer, bargain, and sell the same as if I were
there present." Under this power of attorney, Sandford surrendered
Neely's certificate for 300 shares, and receipted for 375 shares,
the certificates for which were delivered to him as agent of Neely,
and which Sandford subsequently voted at stockholders' meetings
under the general proxy from Neely to represent his stock. Knowing
of the contemplated action in issuing the new stock, and having
authorized Sandford to represent him in all matters connected
therewith, we think it too late for him to repudiate Sandford's act
in receiving the additional 75 shares, which were distributed to
him as the owner of 300 original shares. Indeed, the circuit judge
finds it to be established by the proof that all of the old
stockholders knew of and acquiesced in the disposition of the new
stock as made, and that such increased stock was represented and
voted at subsequent meetings of stockholders, and was recognized
and held out to the public as part of the capital stock of the
company. Under the case of
Sawyer v.
Hoag, 17 Wall. 610, Neely was clearly not entitled
to set off against the claim of the creditors his own claim against
the corporation. Cook on Stock and Stockholders §§ 193 and 194.
There are several minor points made in the briefs of counsel
with regard to the claims of certain creditors which we do not find
it necessary to discuss at length. We think there was no error in
the rulings of the court in these particulars.
It results that the decree of the court below must be
Reversed, and the cause remanded for further proceedings in
conformity with this opinion.
MR. CHIEF JUSTICE FULLER, with whom concurred MR. JUSTICE LAMAR,
dissenting.
Page 139 U. S. 438
I dissent from the conclusion of the Court in respect of the
stock received by the subscribers to the bonds. That stock was not
paid for in money or money's worth, or issued in payment of debts
due from the company, or purchased at sale upon the market. It was
a mere bonus, thrown in with the bonds as furnishing the inducement
to the bond subscription, of larger control over the corporation,
and of possible gain without expenditure. Becoming secured
creditors through the bonds, the subscribers increased their power
through the stock. In my view, there was no actual payment for the
stock, and to treat it as paid up is to sanction an arrangement to
relieve those who would reap the benefit derived from the
possession of the stock in the event of the success from liability
for the consequences in the event of the failure of the
enterprise.
When the capital stock of a corporation has become impaired, or
the business in which it has engaged has proven so unremunerative
as to call for a change, creditors at large may well demand that
experiments at rehabilitation should not be conducted at their
risk.
My Brother LAMAR concurs with me in this dissent.