In 1872, an Iowa railroad corporation, being indebted to a
construction company in the sum of $70,000 which it was unable to
pay in money, had a settlement with the latter whereby the debt was
paid in shares of the stock of the railroad company of the par
value of $350,000. The stock was taken at 20 cents on the dollar,
but was not at the time, worth anything in the market. Greene, a
member of the construction company, received 910 shares as his
part. Subsequently, in 1876, the railroad and its appurtenances
were sold under a decree foreclosing a mortgage given to secure the
bonds of the railroad company. Clark, a holder of bonds issued by
the railroad company in 1874, obtained judgment for the amount due
him, upon which execution was issued and returned in 1880, no
property. Greene having died, Clark brought suit against his
administrator in one of the circuit courts of Iowa, sitting in
probate, to hold his estate liable for the difference between what
was paid for the stock and its face value, upon the ground that the
stock of the corporation was a trust fund for creditors, and that
as between creditors and stockholders, the latter was bound to
account for its face value. Upon the petition of Clark, the case
was removed to and tried in the circuit court of the United States,
where a verdict was returned by direction of the court for the
defendant.
Held:
(1) That as the proceeding involved a judicial determination of
the liability of Greene's estate for the claim in question, with
parties before the court to contest all questions of law and fact,
it was a "suit" within the meaning of the act of Congress providing
for the removal of suits from the state courts. It is not competent
for a state, by legislative enactment conferring upon its own
courts exclusive jurisdiction of proceedings or suits involving
the
Page 139 U. S. 97
settlement and distribution of the estates of deceased persons,
to exclude the jurisdiction in such matters of the courts of the
United States where the constitutional requirement as to
citizenship of the parties is met.
(2) That the value of the matter in dispute here is the amount
of the claim the plaintiff seeks to establish, and that amount
being in excess of $5,000, without costs, this Court has
jurisdiction without reference to any inquiry as to what might be
ultimately realized from Greene's estate, if the claim be
established;
(3) That the estate of Greene is not liable for the face valve
of the stock by reason of the statute of Iowa providing that
nothing therein contained
"exempts the stockholders of any corporation from individual
liability to the amount of the unpaid installments on the stock
owned by them or transferred by them for the purpose of defrauding
creditors, and execution against the company may to that extent be
levied upon such private property of any individual."
Revision of Iowa, 1860, sec. 1172; Code of 1873, sec. 1082.
(4) That whether a stockholder in law or in fact owed to the
corporation any sum on the stock held by him was left by the
statute to be determined in each case upon its own circumstances
and in accordance with the principles of general law touching the
rights and liabilities of creditors and stockholders.
While the capital stock of a corporation, especially its unpaid
subscriptions, is a trust fund
sub modo for the benefit of
its general creditors, a corporation -- no statute forbidding --
may in good faith sell or dispose of its stock to creditors in
discharge of their debts.
The principle reaffirmed that when the interest of the public or
of a stranger is to be affected by any transaction between the
stockholders owning a corporation and the corporation itself, such
transaction is subject to 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 will be disregarded or annulled so far as it inequitably affects
him. Therefore, when the interest of creditors requires, those
holding shares in a corporation purporting to be, but which are
shown not to have been, paid for to the extent of their face value,
should be held liable to pay for such shares unless it appears that
they acquired the stock under circumstances that did not give
creditors and other stockholders jest ground for complaint.
The doctrine reaffirmed that the federal courts sitting in any
state have equal and coordinate jurisdiction with the state court
in determining questions of general law, although they will, in
cases of doubt, lean to an agreement of views with the state
court.
The case is stated in the opinion.
MR. JUSTICE HARLAN, after stating the facts in the foregoing
language, delivered the opinion of the court.
Page 139 U. S. 98
In the year 1872, the Burlington, Cedar Rapids and Minnesota
Railway Company -- of which at the time the intestate, George
Greene, was president, as well as a stockholder, and of which he
continued to be president until February, 1875 -- had a settlement
with the North western Construction Company, of which also Greene
was a member, for work done in building a part of its road. This
settlement showed the sum of $70,000 to be due the construction
company. The railway company, being unable to pay this claim in
money, delivered to the construction company thirty-five hundred
shares of its stock at twenty cents on the dollar, each share being
for $100, and the same was accepted in full satisfaction of the
debt. The stock, which was not worth anything in the market, was
issued directly to the members of the construction company, the
intestate Greene receiving 910 shares as his portion. No other
payment than this twenty percent was made for or on account of the
stock. The good faith of the parties in making this arrangement is
not impugned by allegation or proof. The construction company was
reluctant to take the stock, and insisted upon payment in cash.
What the original stockholders paid for their shares does not
appear, nor does the record show whether or not Greene exercised
any of the privileges of a stockholder.
Prior to the above settlement, a resolution was adopted February
7, 1871, by the executive committee of the railway company, to the
effect that, in the adjustment or liquidation of claims against the
company, the treasurer be authorized to use its stock, if not less
than twenty percent of its par value could be realized for the
purpose. At the time the stock was issued to Greene, the financial
condition of the company was as follows: the bonded indebtedness of
its main line was $5,400,000; its floating debts over $1,000,000;
its net earnings in 1871 and 1872 and subsequently were not
sufficient to meet the interest on its bonded debts, and in March,
1872,
Page 139 U. S. 99
when the settlement in question was made, it was without means
to pay its floating debt or the interest on its bonded debt except
from net earnings and such money as could be realized from its
stock and bonds and by borrowing.
The railway company continued to operate the road until May 19,
1875, on which day, in a suit brought in the United States Circuit
Court for the District of Iowa to foreclose mortgages given by it
to secure outstanding bonds, a receiver of its property was
appointed. At this time the general condition of the company was
this: its bonded debt was $10,400,000, upon which no interest had
been paid since November 1, 1873, and its floating debt amounted to
$1,250,000, and it had no means with which to pay it. In the above
suit, a sale under a decree of foreclosure was made in July, 1876,
when the railroad and all its property were purchased and have
since been owned by the Burlington, Cedar Rapids, and Northern
Railway Company. After the appointment of the receiver, the
Burlington, Cedar Rapids, and Minnesota Railway Company ceased to
do business or to exercise its franchises as a corporation.
It should be stated in this connection that Greene on the 10th
of February, 1875, transferred the above 910 shares to John I.
Blair, a gentleman of large fortune and financially responsible for
the balance, if any, due on that stock. At the instance of the
western managers of the Burlington, Cedar Rapids and Minnesota
Railway Company, Mr. Blair undertook to save it from bankruptcy.
But, ascertaining that the company's overissue of bonds was so
great and its liabilities so large that it was necessary to
commence foreclosure proceedings and to make application for the
appointment of a receiver, he returned to Greene and others all the
stock received by him.
Clark, the plaintiff below, a citizen of Ohio, being the holder
of fifty gold bonds of one thousand dollars each of the Burlington,
Cedar Rapids and Minnesota Railway Company, dated June 1, 1874,
payable in the year 1914, and bearing interest at seven percent per
annum -- which bonds were part of a series of two thousand, each
for one thousand dollars,
Page 139 U. S. 100
secured by mortgage upon the company's net income, rolling
stock, and additions, and convertible at the option of the holder
into capital stock -- brought suit to recover the amount due
thereon, and on the 4th of June, 1878, recovered judgment against
the railroad company for the sum of $65,517, to bear interest from
that date. We infer, though the record contains no distinct
statement or proof on the subject, that the bonds became due and
payable prior to this suit on account of default in the payment of
interest. Execution was issued upon the judgment, and was returned
August 10, 1880, "No property found."
The present suit was commenced July 5, 1881, by Clark against
the administrator of Greene, a citizen of Iowa, in the Circuit
Court for Linn County in that state. The petition, after setting
out the foregoing judgment, the return of the execution thereon
unsatisfied, and the ownership of the 910 shares of stock by Greene
up to his death, and by his estate since, alleged
"that of the value of said shares of stock owned by said
decedent there has been paid only the sum of eighteen thousand two
hundred dollars, or about twenty percentum of the full value of
said stock, and there is still due upon said shares a balance of
eighty percentum of their full value, amounting to the sum of
seventy-two thousand and eight hundred dollars; that the said
balance due upon said shares was a trust fund in the hands of said
decedent for the payment of said judgment, and is still a trust
fund for the purpose in the bands of decedent's administrator; that
the defendant herein is the administrator of the estate of said
George Greene, deceased, duly appointed and qualified; that said
decedent in his lifetime failed and neglected to pay or cause to be
paid the said judgment or any part thereof, and this defendant has
failed and neglected to pay or cause to be paid the same, or any
part thereof, and the said judgment is still due and wholly
unpaid."
The prayer of the petition was for a judgment against the
defendant as administrator for the whole amount of the plaintiff's
claim, with interest and costs, and that it be allowed by the court
as a just claim against Greene's estate.
Page 139 U. S. 101
The case was subsequently removed, upon the petition of Clark,
to the Circuit Court of the United States for the District of Iowa,
and thereafter by consent was transferred to the Eastern Division
of the Southern District of that state.
The defendant, besides denying each allegation of the
plaintiff's claim and petition, pleads, in bar of the action, the
statute of limitations of Iowa and also a certain settlement and
compromise between the plaintiff and the railway company. To this
answer a replication was filed by the plaintiff.
After the evidence was concluded, the plaintiff asked several
instructions based upon the general ground that the stock used in
discharging the debt of the construction company was a trust fund
for the benefit of creditors and that, without reference to the
necessities of the railroad company or the good faith of the
transaction, Greene was accountable to the creditors of the latter
corporation for the par value of the stock issued to him under the
settlement or compromise of 1872, whatever may have been its market
value at the time he got it or at the time this action was
commenced.
The court below refused to so instruct the jury, and held as
matter of law that upon the evidence, the intestate, Greene, by
taking the 910 shares of stock upon which the twenty percent was
paid, did not become liable to pay anything further on account
thereof to creditors of the railway company, and, pursuant to its
direction, the jury returned a verdict for the defendant.
Clark
v. Bever, 31 F. 670.
The questions to be first considered relate to the jurisdiction
of the court below and of this Court.
This proceeding was commenced in one of the circuit courts of
Iowa, having general original jurisdiction in all civil actions and
special proceedings and original exclusive jurisdiction in the
respective counties of the state, among other things, "of the
settlement of the estates of deceased persons." Of the filing of a
claim against the estate of a deceased person, the executor or
administrator is entitled to notice, to be served "in the manner
required for commencing ordinary proceedings," unless the claim be
expressly admitted in writing with the approbation of the court,
and when not so admitted "the
Page 139 U. S. 102
court may hear and allow the same, or may submit it to a jury."
On such hearing, unless otherwise declared, the court is governed
by the provisions of law applicable to an ordinary proceeding. When
a claim is allowed, it is "placed in the catalogue of established
claims, but shall not be a lien." Code of Iowa of 1873, secs. 161,
2312, 2370, 2408-2411, 2416. No other court of the state except a
circuit court has jurisdiction to allow or disallow a claim against
the estate of a deceased person.
Tillman v. Bowman, 68 Ia.
450;
Shropshire v. Long, 68 Ia. 539. While an order
allowing such a claim is not an ordinary judgment upon which an
execution may issue, it is an "adjudication" establishing that
claim as one to be paid by the executor for administrator so far as
the estate in his hands is sufficient.
Foteaux v. Lepage,
6 Ia. 123;
Voorhies v. Eubank, 6 Ia. 274;
Little v.
Sinnett, 7 Ia. 324;
Smith v. Shawhan, 37 Ia. 585;
Dessaint v. Foster, 72 Ia. 640. It is suggested that the
claim in suit here is a mere incident to the marshaling and
distribution of the estate of Greene; that such estate can only be
administered and distributed by the state court in accordance with
the laws of the state, and that the circuit court of the United
States was without jurisdiction to determine whether it was or not
a valid claim against that estate. This position is wholly
untenable. As the proceeding involved a judicial determination as
to the liability of Greene's estate for the amount of Clark's
claim, with parties before the court to contest all the questions
of law and fact, it was clearly a "suit," within the meaning of the
act of Congress providing for the removal of suits to the circuit
courts of the United States. The removal in this case was therefore
proper unless it be competent for a state, by legislative enactment
conferring upon its own courts exclusive jurisdiction of all
proceedings or suits involving the settlement and distribution of
the estates of deceased persons, to exclude the jurisdiction of the
courts of the United States even in cases where the constitutional
requirement as to citizenship is met. But this Court has decided
upon full consideration that no such result can be constitutionally
effected by state legislation. The case of
Page 139 U. S. 103
Hess v. Reynolds, 113 U. S. 73,
113 U. S. 77,
involved a disputed claim originally filed in a probate court of
Michigan, carried by appeal to a circuit court of the same state
and subsequently removed to the Circuit Court of the United States
for the District of Michigan. Substantially the same question of
jurisdiction was raised in that case that is here presented. This
Court said:
"It may be convenient that all debts to be paid out of the
assets of a deceased man's estate shall be established in the court
to which the law of the domicile has confided the general
administration of these assets. And the courts of the United States
will pay respect to this principle in the execution of the process
enforcing their judgments out of these assets, so far as the
demands of justice require. But neither the principle of
convenience nor the statutes of a state can deprive them of
jurisdiction to hear and determine a controversy between citizens
of different states when such a controversy is distinctly
presented, because the judgment may affect the administration or
distribution in another form of the assets of the decedent's
estate. The controverted question of debt or no debt is one which,
if the representative of the decedent is a citizen of a state
different from that of the other party, the party properly situated
has a right, given by the Constitution of the United States, to
have tried originally or by removal in a court of the United
States, which cannot be defeated by state statutes enacted for the
more convenient settlement of estates of decedents."
See also Payne v. Hook,
7 Wall. 425;
Boom Company v. Patterson, 98 U. S.
403;
Ellis v. Davis, 109 U.
S. 485;
Delaware County v. Diebold Safe Co.,
133 U. S. 473,
133 U. S. 487;
Upshur County v. Rich, 135 U. S. 467,
135 U. S.
477.
It is next contended that under the statutes of Iowa governing
the settlement of the estates of deceased persons, the plaintiff in
error has only an interest in the "fund" arising from Greene's
estate, and as it does not appear affirmatively that such interest
exceeds or can exceed in value the sum of $5,000, this Court is
without jurisdiction, and the writ of error should be dismissed.
This contention must be overruled. The plaintiff seeks a judgment
against the
Page 139 U. S. 104
estate of Greene for the sum of $65,523.20, with interest. The
defendant disputes the whole of that claim. The sum sued for -- the
entire claim having been rejected -- is the value of the matter in
dispute here, and our jurisdiction to determine that dispute cannot
depend upon an inquiry as to whether the estate of Greene, when
fully distributed, may or may not yield to the plaintiff, if
successful here, something in excess of $5,000. Such an inquiry is
as inadmissible on this writ of error, as it would be if the
judgment had established the claim of the plaintiff against
Greene's administrator for the full amount, and a writ of error had
been prosecuted by him to reverse that judgment. The case is
different from
Miller v. Clark, 138 U.
S. 223, decided at the present term, where the appeal
was dismissed because it appeared affirmatively that the appellant,
who was the plaintiff below, did not claim, and could not possibly
recover, for himself a sum in excess of $5,000.
We come now to consider the principal questions in the case.
They relate to the liability of the defendant for the difference
between the face value of the stock issued to Greene in 1872 and
the value at which it was rated in the settlement of that year with
the Burlington, Cedar Rapids and Minnesota Railway Company. The
general proposition advanced by the plaintiff is that it was not
competent for the railway company to issue to Greene and his
associates in discharge of its debt to them, amounting to $70,000,
thirty-five hundred shares of stock of the par value of $350,000,
although the settlement upon that basis may have been demanded by
the best interests of the company and was made in good faith,
without intention to harm the corporation or to defraud its
creditors, existing or subsequent, and although the stock at the
time "was not worth anything in the market," and that Greene took
the 910 shares issued to him for twenty percent of its face value,
subject to the implied condition that he should be liable for any
unpaid debts of the corporation to the extent of the difference
between the face value of the stock and the amount at which it was
taken by him. It is not contended that such liability arises from
the relations Greene held
Page 139 U. S. 105
to the two companies making the settlement of 1872, but from the
obligations the law imposed for the benefit of creditors both upon
the corporation issuing the stock and its stockholders. Of course
under this view, 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, or
its stock had remained, as it was when taken, absolutely worthless.
Such the plaintiff in effect insists is the law of Iowa.
The statutory provisions that are supposed by the plaintiff to
sustain his position, which were in force when the stock in
question was issued, are found in Title XX, chapter 52, of the
Revision of the Statutes of Iowa of 1860, relating to the creation
of corporations for the transaction of any lawful business,
including the establishment of ferries, the construction of canals,
railways, bridges, or other works of internal improvement. Section
1150. Among the powers which such corporations may exercise are "to
make contracts, acquire and transfer property, possessing the same
powers in such respects as private individuals now enjoy," and
"to establish bylaws, and make all rules and regulations deemed
expedient for the management of their affairs in accordance with
law, and not incompatible with an honest purpose."
Section 1151. Articles of incorporation were required to be
recorded in the office of the recorder and Secretary of State. Sec.
1152. A notice of the incorporation must be published, containing
the name of the corporation and its principal place of transacting
business; the general nature of such business; the amount of
capital and stock authorized, and the terms and the conditions on
which it is to be paid in; the time of the commencement and
termination of the corporation; by what officers or persons the
affairs of the corporation are to be conducted, and the times at
which they will be elected; the highest amount of indebtedness or
liability to which the corporation is at any time to subject
itself, and whether private property is to be
Page 139 U. S. 106
exempt from corporate debts. Sections 1154, 1155. A failure to
comply with the above and other provisions in relation to
organization and publicity rendered the individual property of all
the stockholders liable for the corporate debts, except that
stockholders in railway companies were made liable only for the
amount of stock held by them in such companies. Sections 1166,
1338. Intentional fraud in failing to comply substantially with the
articles of incorporation, or in deceiving the public or
individuals in relation to their means or their liabilities,
subjected those guilty thereof to fine and imprisonment, or both,
at the discretion of the court. Section 1163. The practice of fraud
in the manner mentioned caused a forfeiture of all the privileges
conferred, and the courts could proceed, upon information, to wind
up the business of the corporation. Section 1167. A copy of the
bylaws of the corporation, and a statement of the amount of capital
stock subscribed, the amount actually paid in, and the amount of
the indebtedness in a general way, was required to be kept posted
up in the principal places of business, subject to public
inspection, such statement to be corrected as often as any material
change took place in relation to any part of the subject matter of
the statement. Sections 1161, 1162.
The provisions upon which the plaintiff particularly relies are
the following:
"SEC. 1169. The transfer of shares is not valid, except as
between the parties thereto, until it is regularly entered on the
books of the company so far as to show the name of the persons by
and to whom transferred, the number or other designation of the
shares, and the date of the transfer; but such transfer shall not
in any way exempt the person or persons making such transfer from
any liability or liabilities of said corporation which were created
prior to such transfer. . . ."
"SEC. 1172. Nothing herein contained exempts the stockholders of
any corporation from individual liability to the amount of the
unpaid installments on the stock owned by them or transferred by
them for the purpose of defrauding creditors, and execution against
the company may to that extent be levied upon such private property
of any individual. "
Page 139 U. S. 107
"SEC. 1173. In none of the cases contemplated in this chapter
can the private property of the stockholders be levied upon for the
payment of corporate debts while corporate property can be found
with which to satisfy the same, but it will be sufficient proof
that no property can be found if an execution has issued on a
judgment against the corporation, and a demand thereon made of some
one of the last acting officers of the body for property on which
to levy, and if he neglects to point out any such property."
"SEC. 1174. The defendant in any stage of a cause may point out
corporate property subject to levy, and upon his satisfying the
court of the existence of such property, by affidavit or otherwise,
the cause may be continued or execution against him stayed until
the property can be levied on and sold, and the court may
subsequently render judgment and order execution for any balance
which there may be after disposing of the corporate property
according to the stage of the cause; but if a demand of property
has been made, as contemplated in the preceding section, the costs
of such proceedings shall in any event be paid by the company or by
the defendant."
These provisions are substantially preserved in the Iowa Code of
1873, §§ 1058, 1059, 1062, 1063, 1068, 1071, 1078, 1082-1084.
The argument in behalf of the plaintiff assumes that,
consistently with these statutory provisions, no one can, under any
circumstances whatever, become the owner of the stock of an Iowa
corporation except subject to the condition that where property of
the corporation cannot be found, the private property of the
stockholder may be seized under execution in favor of a judgment
creditor to the extent of the difference between what he actually
paid for the stock, whether in money or in property, and its face
value. And it is further insisted that, independently of the
statute, such is the doctrine of general law relating to
subscriptions to the stock of corporations, as announced by this
Court in several cases. We are of opinion that neither of these
positions can be maintained.
Page 139 U. S. 108
The local statute undoubtedly proceeds upon the ground that
unpaid installments of stock subscribed constitute -- no other rule
being prescribed by legislative enactment -- a trust fund for the
benefit of creditors. But it does not declare that a corporation is
without power under any circumstances whatever to dispose of its
stock at less than par, or that stock purporting to be full paid
shall in all cases, and without reference to the circumstances
under which it was acquired, be deemed unpaid to the extent that
the amount given for it by the owner, whether in money or in
property, was less than its face value. On the contrary, the
statute itself imposes no express restriction upon the disposition
by a corporation of its stock except such as is imposed upon
individuals, and prescribes no rule in respect to the liability of
a stockholder to creditors except that when corporate property
cannot be found to pay a judgment creditor his private property may
be seized under the execution to the extent of any unpaid
installments on the stock owned by him. Whether any such
indebtedness really exists upon the part of a particular
stockholder, and whether he in law or in fact owes any sum on the
stock held by him, was left by the statute to be determined in each
case, upon its own circumstances and in accordance with the
principles of general law touching the rights and liabilities of
creditors and stockholders. If the legislature had intended that
the acquisition of stock at less than its face value should be
conclusive evidence in every case that the stock, as between
creditors and stockholders, is "unpaid," it would have been easy to
so declare, as has been done in some of the states. If such a rule
be demanded by considerations of public policy, the remedy is with
the legislative department of the government creating the
corporation. A rule so explicit and unbending could be enforced
without injustice to anyone, for all would have notice from the
statute of the will of the legislature. It is not for the courts,
by mere interpretation of a statute, not justified by its language,
to accomplish objects that are within the exclusive province of
legislation. If, when receiving the 910 shares of stock in payment
of his portion of the claim of $70,000 against the railroad
company, Greene had supposed
Page 139 U. S. 109
that he would thereby become liable to account to creditors for
its full face value without regard to the real value of the stock,
and whether the corporation subsequently became bankrupt or not, he
certainly would not have taken it. It is equally certain that no
such result was contemplated by the other party to the settlement.
It is also certain that the acceptance by the members of the
construction company of worthless stock in full discharge of its
claim was a benefit to both the existing creditors and the holders
of stock of the railroad company not paid in full; to creditors,
because it diminished the number of that class who would be
entitled to share in the assets of the company; to stockholders so
situated, because it lessened the number of creditors to whom, in
any contingency, they would be liable in their private property for
the debts of the corporation. Here was a corporation which, at the
time of the settlement of 1872 with Greene and his associates, was
unable from its net earnings to pay the interest on its bonded
debt. It could not pay even its floating debt without borrowing
money or making sale of stock. But its stock could not be sold for
money. It had no market value, and the company could not get rid of
the debt due for construction except by borrowing money or selling
stock. If it had borrowed money and secured its payment by mortgage
upon its real property or income, it would thereby have added to
the burdens of creditors and original stockholders. So far as the
record discloses, it did in good faith what was best for all then
concerned in the railroad company -- namely, paid off a large claim
for construction with worthless stock, those to whom it was issued
taking their chances that it might at a future time acquire some
value, but with the certainty that if the railroad company became
bankrupt and ceased to do business, all of its assets would be
appropriated by creditors, leaving nothing whatever to
stockholders.
Do the decisions of this Court require us to hold in such a case
that a creditor taking stock in payment of his claim is bound to
other creditors for the face value of the stock? The plaintiff
contends that our decisions are to that effect. Let us see. In
Sawyer v.
Hoag, 17 Wall. 610,
84 U. S. 620,
it was held
Page 139 U. S. 110
that the capital stock of a corporation, especially its unpaid
subscriptions, is a trust fund
sub modo for the benefit of
its general creditors. And this principle was reaffirmed in
Upton v. Tribilcock, 91 U. S. 45;
Sanger v. Upton, 91 U. S. 56;
Webster v. Upton, 91 U. S. 65;
Pullman v. Upton, 96 U. S. 328;
Chubb v. Upton, 95 U. S. 665;
Morgan Co. v. Allen, 103 U. S. 498;
Scoville v. Thayer, 105 U. S. 143;
Hawkins v. Glenn, 131 U. S. 319,
131 U. S. 335,
and
Richardson v. Green, 133 U. S. 30,
133 U. S. 45.
There is no dispute here as to the soundness of this general
principle. The dispute is as to its application to a case like the
present one. We can be aided in solving this inquiry by
ascertaining the character of the particular cases in which it has
been applied by this Court. In
Sawyer v. Hoag, a
subscription of $5,000 to the stock of an insurance company for
which the subscriber paid in full, but received in return the check
of the corporation for $4,250 under an agreement that the debt for
the stock should be extinguished, and the amount of the check
should be treated simply as a loan of money to the stockholder, was
held to be a mere device to evade the rule that unpaid
subscriptions of stock constitute a trust fund for the benefit of
the creditors of the corporation; consequently, that the stock
there in question was to be regarded, as between the corporation
and creditors, to be unpaid to the extent of the amount received
back from the corporation under the pretense of a loan. In
Upton v. Tribilcock, an actual subscriber to the stock of
an insurance company upon which he agreed to pay twenty percent was
held responsible for the balance, and could not escape liability
therefor because of representations by the agent at the time of the
subscription that he would be only responsible for that amount, or
by proving a subsequent arrangement with the company canceling the
subscription and accepting, as in full payment, his note for the
twenty percent agreed to be paid.
Sanger v. Upton was
another case of the actual subscription of stock upon which the
subscriber was held to pay the full sum subscribed. In
Webster
v. Upton, a person holding certificates of stock by transfer
from the original subscriber, and standing
Page 139 U. S. 111
upon the books of the corporation as a stockholder, was held
liable for the balance due upon the stock without proof of an
"express" promise upon his part to pay. In
Chubb v. Upton,
the decision was that one receiving a certificate of stock for a
certain number of shares at a given sum per share, thereby became
liable to pay the amount thereof when called upon by the
corporation or its assignee in bankruptcy, and in
Pullman v.
Upton that a transferee of stock who caused the transfer to be
made to himself, as collateral security for a debt of the
transferor, was liable for the balance due on such stock. The
doctrine of the latter case was approved in
Hawkins v.
Glenn. In
Morgan Co. v. Allen, it was decided that
the subscription by a county to the capital stock of a railroad
company, together with the bonds given therefor, constituted with
other property of the company a trust fund, to which all its
creditors could rightfully look for satisfaction of their claims,
and that by no device or combination to which particular creditors
were parties could it withdraw its bonds from that fund, and
thereby avoid liability to the general creditors of the company. In
Scoville v. Thayer, it was declared, among other things,
that a contract between a corporation and its stockholders that
they should never be called upon to pay any other assessment than
that paid at the outset, while good as between the corporation and
the stockholders, was a fraud in law upon creditors, which they
could have set aside whenever their rights intervened and their
claims were unsatisfied. In
Richardson v. Green, it was
held that the issuing by a corporation of bonus stock was in
violation of a statute of the state declaring it to be unlawful to
issue certificates of stock until the shares were fully paid, and
that one exercising the privileges and powers of a stockholder in a
corporation was not exempt from the liabilities attaching to a
bona fide stockholder who took shares purporting to be,
but which in fact were not, fully paid.
This detailed statement of the above cases has been made because
of the confident assertion that they rest upon doctrines
necessarily requiring the reversal of the judgment. We do not
concur in this view. In all of these cases except one,
Page 139 U. S. 112
there was an actual subscription of a given amount. They were
cases of promises to pay the company the amount subscribed, not of
sales by it. According to those cases, a stockholder, becoming such
by formal subscription or by transfer upon the books of the
corporation, cannot be discharged to the injury of creditors by any
agreement, arrangement, or device to which creditors do not give
their assent, and by which the stockholder is to pay less than the
amount due upon such stock; this upon the ground stated in
Webster v. Upton, that
"neither the stockholders nor their agents, the directors, can
rightfully withhold any portion of the stock from the reach of
those who have lawful claims against the company,"
and that "the stock thus held in trust is the whole stock, not
merely that percentage of it which has been called in and paid."
The present case presents features that are not to be found in the
others. It is not the case of an ordinary subscription of stock in
a given amount. Nor is it strictly one of an ordinary purchase of
stock for purposes of investment. It is the case of a creditor of a
insolvent railroad corporation which, in consequence of its
inability to pay creditors in money, was threatened with
bankruptcy, and which refused or was unable to pay except in stock
that was without market value. 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. We do not think the statute
of Iowa can be properly construed to cause such a result in respect
to corporations organized under its laws.
We must not be understood as modifying in any respect the
principles laid down in the cases above cited, nor the salutary
rule laid down in
Sawyer v. Hoag that when the interest
of
Page 139 U. S. 113
the public or of strangers is to be affected by any transaction
between the stockholders owning 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."
These principles were reaffirmed in
Richardson v.
Green, and should not be relaxed in any case in which they may
be applied consistently with justice. So, when the interest of
creditors require, those who hold shares of stock in a corporation
purporting to be, but which are shown not to have been, paid for to
the extent of their face value, should be held liable to pay for
such shares in full unless it appears that they acquired the stock
under circumstances that did not give creditors and other
stockholders just ground for complaint. As said by this Court in
Peters v. Bain, 133 U. S. 670,
133 U. S.
691,
"unpaid subscriptions to stocks are assets, and have frequently
been treated by courts of equity as if impressed with a trust
sub modo in the sense that neither the stockholders nor
the corporations can misappropriated subscriptions so far as
creditors are concerned."
See also Graham v. Railroad Co., 102 U.
S. 148,
102 U. S. 161;
Wabash, St. Louis &c. Railway v. Ham, 114 U.
S. 587,
114 U. S. 594;
Fogg v. Blair, 133 U. S. 534,
133 U. S. 541.
The general grounds upon which we have proceeded are supported
by
New Albany v.
Burke, 11 Wall. 96,
78 U. S. 103
et seq. In that case, a judgment creditor of an insolvent
railroad corporation sought to hold the City of New Albany liable
for the balance alleged to be due by it on a subscription to the
capital stock of that corporation. Under an ordinance of the city,
a subscription of $400,000, payable in city bonds, was made by it
to the stock of the corporation, the railroad company agreeing that
not more than $250,000 of the bonds should be called for until the
road was completed to a certain place. Pursuant to the
subscription, the city delivered to the company $200,000 of its
bonds, payable to bearer. In consequence of its inability to obtain
money on them, the company was unable
Page 139 U. S. 114
to carry on the works, and abandoned the enterprise after having
pledged nearly all of the bonds received by it for money borrowed
to prosecute it. Under those circumstances, the company proposed to
the city that if it would provide means for the payment of the sums
borrowed, the bonds so pledged should be returned to the city and
cancelled. If the bonds had been sold by the pledgees, they would
not have brought more than sufficient to pay the sums borrowed. The
city accepted the proposition made to it upon the condition, to
which the railroad company acceded, that the latter would cancel
the city's subscription and consent to the repeal of all ordinances
relating thereto. The agreement was carried into effect, the city
paying the sums for which the bonds were pledged, amounting to more
than $36,000. All the bonds except seven that had been sold were
returned to the city and cancelled, as was also the subscription of
stock. One of the contentions of the judgment creditor was that
this arrangement or compromise was fraudulent in law because the
capital stock of the corporation was a trust fund irrevocably
pledged for the benefit of creditors, and that the corporation
could not, when insolvent, give away its assets, or release its
debtors without payment, or do any other act prejudicial to
creditors. This Court said:
"There was no restriction in the contract upon the power of
disposition, and none at law or in equity, unless it be that the
company could not part with the bonds in fraud of its stockholders
or its creditors. And it had the right, which all other debtors had
at the time, to make preferences among its creditors -- to pay one
rather than another. It is not to be disputed that, situated as the
company was at the time when the contract of August and September,
1857, was made, with the debt of $36,000 pressing upon it and with
no other means of relief, it might have sold the entire lot of 243
bonds which it held, or was entitled to call for at the best price
that could have been obtained, and might have applied the entire
proceeds, had they been needed, to pay that single debt. Of this
neither the stockholders nor the other creditors could have
complained. . . . Time has revealed that the bonds were
Page 139 U. S. 115
worth more than they could have been sold for, but we are to
look at the circumstances as they were when the transaction took
place in considering what was its nature, and whether it was legal.
. . . Certainly it [the compromise] did not place the company in
any worse position than it must have held had it not been made. . .
. Besides, as we have seen, the arrangement assailed by the
complainants was not a modification of the subscription previously
made, or a bonus given for a release. It was rather a purchase of
the city debt. We think it was not beyond the power of the
contracting parties."
Again, after observing that the arrangement made was binding
upon the railroad company, through which as well as against which
the judgment creditors claimed, the Court said:
"No doubt the subscribed capital stock of a corporation is a
fund held by it in trust for its creditors, as is also all its
other property, and had the railroad company released, without
equivalent consideration, or given it away, its action would have
been fraudulent, and might have been set aside by a court of
equity. But certainly it was in the power of the directors to apply
the subscription on bonds taken in payment to the extinguishment of
debts, and if thus applied in good faith, all being obtained for it
that it was worth, no one has been wronged. It is therefore a
question of fact to be determined by the evidence whether the bonds
and the balance of the city's subscription were thus applied. . . .
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 the 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."
These principles have not been modified by any decision of this
Court, and they fully sustain the judgment in this case. And there
is some support for the judgment in
Gelpcke v. Blake, 19
Ia. 263, 268 (decided in 1865), in which a creditor of railroad
corporation sought to hold a stockholder liable on his subscription
notwithstanding his release by it. The court said:
"Again, a release is a contract, and the articles of
Page 139 U. S. 116
incorporation give to this company all the powers described in
section 674 of the Code of 1851. The sixth clause of that section
invests the company with power to make contracts, acquire and
transfer property, possessing the same powers in such respects as
private individuals now enjoy. There was no lack of power,
therefore, in this company, nor do we think there would have been
in the board of directors, to rescind the contract with or without
the consent of the stockholders or others, when it was done in good
faith and under the peculiar and equitable circumstances of the
case."
The clause in the Code of 1851, above referred to, was
reproduced in Revision 1860, § 1151, and in the Code of 1873, §
1059.
It is, however, contended that the judgment cannot be sustained
without disregarding later decisions of the Supreme Court of Iowa
which, it is insisted, rest upon the statute of that state and are
binding upon this Court. Reliance is particularly placed by the
plaintiff upon
Jackson v. Traer, 64 Ia. 469. All the cases
in that learned court to which attention has been called were
determined after Greene acquired the stock in question, and all,
with one exception, after this litigation was commenced. The
recognition in the Iowa statute of the right of creditors of
corporations to look to unpaid installments of stock subscriptions
to obtain satisfaction of their demands did not confer a new right,
but is a recognition of a right existing before the statute, in
virtue of the relations between a corporation and its creditors and
stockholders. The new right given to the creditor by the statute is
to have his execution, when corporate property cannot be found,
levied upon the private property of the stockholder who is indebted
on his subscription of stock, it being declared, out of abundant
caution, that nothing in the statute "exempts" stockholders from
individual liability to the amount of their unpaid installments of
stock. The decisions of the state court are not, therefore, to be
regarded as resting upon the local statute, but only as expressing
the views of that tribunal in respect to the same principles of
general law announced by this Court, after the fullest
consideration, in the numerous cases to which we have adverted. The
leading case in the state court upon this
Page 139 U. S. 117
subject is
Jackson v. Traer, above cited. It involved
the liability of Greene's estate to another judgment creditor of
the railroad company for the difference between the face value of
his stock and the price at which it was received in payment of his
claim. Upon the first hearing in the supreme court of the state,
all its members except one held that the stock should be treated as
fully paid. Upon a rehearing at the October term, 1884, some time
after this action was brought and had been removed into the court
below, three of the judges held that Greene's estate was bound to
account to creditors for eighty percent of the face value of the
stock received by him. Chief Justice Rothrock and Judge Seevers
dissented. The two cases since
Jackson v. Traer -- we
allude to
Boulton Carbon Co. v. Mills, 78 Ia. 460, and
Tama Water Power Co. v. Hopkins, 79 Ia. 653 -- do not rest
upon any ground that is inconsistent with the views we have
expressed. We cannot, consistently with our deliberate judgment
upon this question of general law, accept the decision in
Jackson v. Traer as controlling the determination of the
present case. Upon questions of that character, the federal courts
administering justice in Iowa have equal and coordinate
jurisdiction with the courts of that state, although they will lean
"towards an agreement of views with the state court if the question
seems to them balanced with doubt."
Railroad
Co. v. Lockwood, 17 Wall. 357,
84 U. S. 367;
Burgess v. Seligman, 107 U. S. 20;
Pana v. Bowler, 107 U. S. 529;
Hough v. Railway Co., 100 U. S. 213,
100 U. S. 226;
Railroad Co. v. National Bank, 102 U. S.
14,
102 U. S. 30-31;
Myrick v. Michigan Central Railroad, 107 U.
S. 102,
107 U. S. 109;
Carroll County v. Smith, 111 U. S. 556;
Bolles v. Brimfield, 120 U. S. 759. The
judgment below, in our opinion, is in accordance with the law as it
was adjudged to be when Greene received the stock in question and
surrendered his claim upon the railroad company, and with the law
as this Court has since that time frequently declared it to be, and
our duty is to so declare in the case before us.
Judgment affirmed.
MR. JUSTICE BROWN, not having been a member of the Court when
this case was argued, did not participate in its decision.