The directors of a corporation organized under the laws of
Pennsylvania voted to make an assignment of the property of the
corporation for the benefit of its creditors, which vote was
ratified by the stockholders. They further voted to make a mortgage
to secure a claim of one of the directors as a preferred claim. The
assignment was made without making the mortgage. In an action by
the assignee to enforce payment from a stockholder of his
subscription to the stock,
held that the defendant could
not set up the failure to make the mortgage as invalidating the
assignment.
When the assets of an insolvent corporation organized under the
laws of Pennsylvania fail to meet the liabilities of the company by
an amount equal to or greater than the sum due the company from a
stockholder by reason of unpaid subscriptions to his stock, the
assignee has an action at law against him to recover such unpaid
subscriptions without first resorting to equity for an
assessment.
In an action against a stockholder in an insolvent corporation
to recover unpaid subscriptions to his stock for the benefit of
creditors, it is no defense to show that when the corporation was
solvent, he offered to pay in full and his offer was declined, if
it also further appear that he refused to be absolved from his
contract and stood upon his rights as a stockholder until the
company became embarrassed.
When the plaintiff's evidence makes out a
prima facie
case, and the defendant, after going into his evidence, does not go
to the jury on the question of fact, he abandons his defense, so
far as it depends on his own evidence, and takes the position that
the plaintiff's evidence does not make out a case.
This was an action brought originally in the New York supreme
court, and afterwards removed into the circuit
Page 146 U. S. 690
court of the United States for the Eastern District of New York,
by Henry Potts, Jr., as assignee of the Chester Tube and Iron
Company, plaintiff, against William H. Wallace.
The Chester Tube and Iron Company was a corporation of
Pennsylvania, duly incorporated under the provisions of an act of
assembly of that state approved April 29, 1874, entitled "An act to
provide for the incorporation and regulation of certain
corporations" for the purpose of the manufacture of iron or steel,
or of any article of commerce made from them. The place where the
business of the corporation was to be transacted was Chester,
Delaware County, in the State of Pennsylvania, and the capital
stock was fixed at one hundred thousand dollars, divided into two
thousand shares of the par value of fifty dollars each. The whole
amount of the capital stock was subscribed for by the defendant,
William H. Wallace, and six other persons, who had associated
themselves together for the purpose of forming the corporation. The
charter or agreement of association was dated the 13th day of
December, 1877, and letters patent were issued by the Governor of
Pennsylvania on the 5th day of January, 1878. The charter was
signed by the associates, and William S. McManus, Augustus B. Wood,
William H. Wallace, Patrick Reilly, and John Shotwell were named
therein as directors for the first year.
In and by this charter, the defendant, Wallace, subscribed for
three hundred shares of the stock, and he continued to hold his
position as director of the company until the 6th day of July,
1880, when at a meeting of the board then holden, he resigned, his
resignation was accepted, and on the 14th day of July, 1880, one F.
C. Shotwell was elected to take his place. There was no meeting of
the board of directors from January 21, 1880, to July 6, 1880.
At a meeting of the board on August 3, 1880, the following
resolution was adopted:
"Whereas it has become apparent that in order to enable this
company to meet its liabilities, some indulgence on the part of its
creditors is necessary therefore resolved that the president is
authorized to negotiate for and effect an extension
Page 146 U. S. 691
of the claims against the company upon such terms as he may deem
most likely to make it meet its indebtedness, and in the event of
his failure to accomplish such extension, the president is
authorized to execute, under the corporate seal, with his
attestation, a deed of general assignment for all the estate and
property of the company for the benefit of its creditors
pro
rata and without preference."
On the 14th day of September, 1880, a deed, purporting to be a
deed of assignment by the Chester Tube and Iron Company, by its
president, William S. McManus, under its seal, was executed to
Henry Potts, Jr., and was recorded the same day in the recorder's
office of Delaware County, Pennsylvania. This deed purported to
convey and transfer to Henry Potts, Jr., as assignee, all the
property and estate of the company of every description, in trust
to sell and dispose of the same, and to collect all the claims of
the company, conduct all the steps necessary for the purpose of
converting the assets into cash, and to divide the same without
preference among the creditors of the corporation, with the further
provision that, should there be any surplus after paying the debts,
the same should be returned to the corporation.
In pursuance of the provisions of the Pennsylvania statutes,
regulating such assignments, Henry Potts, Jr., on October 20, 1880,
executed his bond, conditioned for the faithful performance of his
duties as assignee, in the penalty of $191,000, which bond was
approved by the Court of Common Pleas of Delaware County. Henry
Potts, Jr., assumed the trust, and proceeded with the execution of
the same so far as to file an account, which account was confirmed
by the court of Delaware County. On the 5th of March, 1882, a
petition was filed in said court, alleging the death of Henry
Potts, Jr., and on the same day an order was made appointing Henry
W. Potts as assignee to fill the vacancy occasioned by the death of
Henry Potts. Jr., and directing him to give a bond, with sureties,
in the sum of $44,000, and such bond was filed on March 6, 1882,
and on December 16, 1882, the Supreme Court of New York, County of
Kings, in which the action brought by Henry Potts, Jr., against the
defendant Wallace was still pending, ordered that
Page 146 U. S. 692
Henry W. Potts, as assignee of the Chester Tube and Iron
Company, be substituted as plaintiff in the place of Henry Potts,
Jr., deceased.
On the 22d day of June, 1883, on the petition of Henry W. Potts,
assignee, the said action was removed to the Circuit Court of the
United States for the Eastern District of New York, and at the May
term, 1888, came on to be tried before the Honorable E. Henry
Lacombe, Circuit Judge, and a jury, and resulted in a verdict for
the defendant on the 9th day of May, 1888.
On February 5, 1889, judgment was entered on the verdict in
favor of the defendant and against the plaintiff, and on the 5th
day of April, 1889, a writ of error was allowed, and the cause was
brought thereby into the Supreme Court of the United States.
The record discloses, in addition to the foregoing facts, that
the defendant's answer admitted that he had subscribed for three
hundred shares of stock, had not paid anything on account of the
same, and that demand for payment had been made on him by the
plaintiff as assignee.
To meet the
prima facie case thus made out against him,
the defendant put in evidence proceedings of the stockholders on
August 12, and of the board of directors on August 20th. At these
meetings, the president and treasurer were directed to execute and
deliver to A. B. Wood, trustee, a bond and mortgage of the company
for $11,200, to secure money advanced by him, as trustee for John
E. and Mary D. Browning, for the use of the company, and also to
assign to A. B. Wood all the company's interest in the leasehold,
machinery, and fixtures of the company, in payment of $12,260 due
Wood for money advanced by him individually for the use of the
company. The resolutions of the stockholders and of the directors
at these meetings directed the president that, after the mortgage
and assignment to A. B. Wood were executed and delivered, he should
execute the deed of general assignment provided for by the
resolution of August 3, 1880.
The defendant likewise put in evidence, under objection by the
plaintiff, the proceedings of a meeting of the directors held
Page 146 U. S. 693
on September 16, 1880, wherein resolutions were passed declaring
the act of the president in executing and delivering the deed of
assignment to have been void and without authority, and in fraud of
the rights of the company, and contrary to the will of the
directors and stockholders. These resolutions further provided that
the said pretended assignment should be repudiated, that notice of
this action should be given to Henry Potts, Jr., and that the
president should be and was removed from office and D. F. Houston
elected to take his place.
The defendant likewise offered evidence tending to show that
several times during the year 1879 and early in 1880, when the
affairs of the company were in an apparently prosperous condition,
he offered to pay to the treasurer of the company the amount of his
subscription, $15,000, and demanded his stock; that the treasurer,
acting, as he testified, under directions of the president, refused
to accept the money and to deliver the stock. The defendant
likewise proved his resignation as director on July 6, 1880.
The record further discloses that after the defendant had put in
the foregoing evidence, the plaintiff called W. S. McManus, the
president, who testified that he had never refused to accept
defendant's subscription money or to deliver the stock, and that he
gave no instructions to the treasurer to refuse defendant's payment
or to refuse to deliver his stock. He also testified that he
continued to consult with the defendant about the affairs of the
company down until July, 1880.
The record further shows that, on the closing of the testimony,
it was conceded by the counsel for the plaintiff and the defendant,
respectively, that there was no question of fact to be submitted to
the jury; that thereupon the counsel for the plaintiff requested
the court to direct the jury to find a verdict for the plaintiff,
which request was denied, and this ruling was excepted to; that the
court, on motion of defendant's counsel, directed a verdict in
favor of the defendant, and that the plaintiff's counsel duly
excepted to the ruling in that behalf. The jury, under the
direction of the court, found a verdict for the defendant.
Page 146 U. S. 697
MR. JUSTICE SHIRAS, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The assignments in error are nineteen in number, but they
present substantially but one question, did the court err, in view
of all the evidence, in directing the jury to find a verdict for
the defendant?
Page 146 U. S. 698
There were no findings of fact by the court or jury, and no
charge or opinion of the court is shown by the record. We are
therefore left to draw the materials upon which we are to revise
the judgment of the court below from the various offers of evidence
and exceptions thereto, read in the light afforded by the
respective briefs and arguments of counsel.
Taken in logical order, the first ground of defense is found in
the position that the assignment to Potts for the benefit of
creditors was invalid, and the want of validity is supposed to be
found in the fact that in executing the deed of assignment, the
president did not follow certain instructions and conditions
imposed upon him by the board. Undoubtedly the act of the president
in executing and delivering the deed of assignment was fully
warranted by the resolution of the board of August 3, 1880, but it
is claimed that, by reason of proceedings at the stockholders'
meeting held on August 12th, and at a meeting of the board of
directors on August 20th, the authority of the president, granted
by the resolution of August 3 was modified, or made conditional on
certain other acts that he was to do.
At the stockholders' meeting, a resolution was passed directing
the president, directors, and officers of the company to execute a
bond and mortgage to secure A. B. Wood, one of the directors, for
certain trust moneys he had advanced to the company, and also to
make an assignment to said Wood of the leasehold and fixtures of
the company, in payment of moneys alleged to have been advanced by
him for the use of the company.
The resolution of the board of directors of August 3 authorizing
the president to make a deed of assignment for the benefit of
creditors was laid before the stockholders, and, upon motion, was
approved and ratified, and the president was authorized to execute
a general assignment after the mortgage and assignment of lease to
A. B. Wood should be duly executed and delivered.
At a meeting of the board held on August 20, 1880, the action of
the stockholders in directing the execution of a mortgage and
assignment of the lease to A. B. Wood was reported, and was, by a
resolution, approved.
Page 146 U. S. 699
It would seem that the mortgage and assignment of lease to Wood
were never executed, and that the president on September 14, 1880,
executed and delivered the deed of assignment to Potts.
As already stated, this action of the president in making the
deed of assignment, without the mortgage and assignment to Wood
having been executed, was sought to be repudiated by the board at a
meeting held on September 16, 1880.
Whether the proposition to secure Wood, one of the directors of
an insolvent company, by a mortgage covering all the property of
the company, would have been valid as against the other creditors
of the company is more than doubtful. However that may be, the
record does not show that any steps were ever taken to prevent the
assignment to Potts from taking effect. There is no evidence that
Potts was ever notified of the action of the directors attempting
to make the deed of general assignment subject to a prior mortgage
and assignment in favor of Wood; nor does it appear that any effort
was made in the court having jurisdiction of the subject to set
aside the deed to Potts. On the contrary, it appears that the
assignee was suffered to proceed in the execution of his duties as
assignee by filing his bond and inventory and an account, and upon
the death of Henry Potts, Jr., no objection was made on behalf of
Wood or the company to resist the appointment of a successor.
The proposition that Wallace, when called upon by the assignee
to pay for his stock, could take refuge in the abortive attempt of
the directors to prefer one of their own number seems to us to be
altogether inadmissible.
Another ground of defense urged was that the plaintiff had
mistaken his remedy; that the proceeding to enforce the liability
of Wallace should have been by a bill in equity.
We might dismiss this position by the observation that it does
not appear to have been taken by the defendant in his answer or to
have been brought to the attention of the court at the trial.
As, however, for other reasons, the case has to go back for
another trial, it may be well for us to briefly consider the merits
of the suggestion.
Page 146 U. S. 700
It is undoubtedly true that, in Pennsylvania, in the case of an
insolvent corporation, its assets, including unpaid capital stock,
constitute a trust fund, and that such fund cannot be appropriated
by individual creditors, by means of attachments or executions
directed against particular assets, but should be distributed on
equitable principles among the creditors at large.
Accordingly, it was ruled by the Supreme Court of Pennsylvania
in
Lane's Appeal, 105 Penn.St. 49, and in
Bell's
Appeal, 115 Penn.St. 88, cases cited by defendant's counsel,
that a bill in equity is a proper remedy whereby to subject the
property of an insolvent corporation to the claims of its
creditors.
Some general expressions were used in those opinions, cited in
the brief of defendant's counsel, which seem to countenance the
proposition that the only remedy in each case is by a bill in
equity, but an examination of the facts of the cases, and of the
reasoning of the opinions, clearly shows that what the court meant
was that the proceeding must in some form be a remedy for all, and
not for some, of the creditors -- that the remedy must be
coextensive with the nature of the property as a trust fund.
That this is the proper reading of those cases is shown by the
later case of
Citizens' Savings Bank v. Gillespie, 115
Penn.St. 564. That was the case of a suit brought by an assignee of
an insolvent bank for the benefit of creditors against a subscriber
for stock remaining unpaid, and the supreme court, per Paxson,
C.J., said:
"There being no assessment in evidence, the learned judge left
it to the jury to find whether the whole of the unpaid subscription
was required to pay the debts of the company. We see no error in
this. If the unpaid subscriptions were required to pay the
creditors, no assessment was necessary, under the authority of
Yeager v. Scranton Trust Company, 14 Weekly Notes of Cases
296. It was there said that"
"the uncontradicted evidence shows that it was necessary to
collect the whole of the stock subscription in order to pay the
sums due the depositors of this insolvent corporation. "
Page 146 U. S. 701
"There is not even an apparent conflict between the case
referred to and the later cases of
Lane's Appeal, 105
Penn.St. 49, and
Bell's Appeal, 105 Penn.St. 88, 564.
Those were creditors' bills, filed against insolvent corporations
to compel the payment by the stockholders of their unpaid
subscriptions, and it was held that in such cases there must be an
account taken of the amount of debts, assets, and unpaid capital,
and a decree for an assessment of the amount due by each
stockholder. The reason of this is plain. Upon the insolvency of a
corporation, a stockholder is liable for only so much of his unpaid
subscription as may be required to pay the creditors. Hence, he may
not be called upon in an arbitrary way to pay any sum that an
assignee or creditor may demand. It is therefore requisite to
ascertain in an orderly manner the extent of the stockholders'
liability before proceedings are commenced to enforce it. But the
necessity for this does not exist when the whole amount is required
to pay the debts. Hence, in such cases, as was said in
Yeager
v. Scranton Bank, supra, an assessment is not essential. The
assignee may sue at once, for all is required."
At the trial in the present case (
see page 27 of the
record), the counsel for the defendant consented to take the
statement of the company's clerk, without contradicting it, that
the assets of the company appeared to be $250,000, and the
liabilities $270,000 to $275,000. It was not necessary, therefore,
to have a preliminary assessment against Wallace, as the jury could
have found, under the concession of his counsel, that the entire
amount of his unpaid stock was necessary to meet the indebtedness
of the corporation. We understand the concession to mean that the
debts exceeded the assets, including the unpaid subscriptions of
the defendant and the other stockholders. If we are wrong in this,
the defendant can show the facts and invoke, if he be so advised,
the doctrine of
Savings Bank v. Gillespie if, indeed, that
doctrine will avail him.
We are now brought to the last and most substantial ground urged
by the defense -- the one on which, we may conjecture, that the
court below chiefly relied in directing the jury to find
Page 146 U. S. 702
their verdict for the defendant. It is thus expressed in the
brief of the defendant's counsel:
"All duties and obligations imposed upon the defendant by his
subscription were fully discharged and cancelled by the refusal on
the part of the company, while it continued solvent, to receive the
payment and performance tendered."
It may be readily conceded that if the evidence in the case
disclosed that the defendant's offer of payment and performance was
refused by the company while solvent, and that the defendant
availed himself of such refusal, and declared himself off from his
contract of subscription, the defendant was thereby exonerated from
the obligation of his subscription, and that his liability to pay
would not be revived by the subsequent insolvency of the company
and by the demands of the assignee.
The record discloses a very different state of facts.
The defendant was himself one of the original corporators, and
was, by the articles of association, made one of the directors of
the company. This position he continued to occupy until July 6,
1880, which date, according to the uncontradicted evidence, was
subsequent to the actual insolvency of the company.
John Shotwell testified that he was treasurer and secretary of
the company from the time of its organization to its failure; that
he ascertained that the company was in embarrassed circumstances in
the spring of 1880; that he had a habit of going to the defendant's
office and talking with him about the company's affairs; that the
company's notes went to protest in August. The resolution of the
board to make the assignment for the benefit of creditors was
adopted on August 3, 1880. Certainly, up until July 6, 1880,
Wallace indicated no intention to withdraw himself from the
company. On the contrary, he continued from time to time to declare
his readiness to pay his subscription, and to stand on his rights
as a stockholder. He himself testified that he learned that the
company was in trouble in June, 1880; that the president consulted
with him in regard to the company's affairs after that; that these
consultations continued down to two or three
Page 146 U. S. 703
months before the final collapse; that defendant's firm
continued to be agents of the company up to the time of its
failure, and that what he was seeing the president about was
business connected with the company, the selling of goods and
collecting of accounts due, etc., and that, so long as he
considered the stock good, he was ready to take it and pay for
it.
Even, therefore, if the company had while solvent refused to
receive payment and to issue a certificate of stock, the evidence
shows that the defendant did not elect to declare himself absolved
from his contract, but stood upon his rights, as a stockholder and
director, until the company's affairs had become involved in
embarrassment. It was then too late for the defendant to change his
position. If on August 3, 1880, the day on which the directors
resolved to make an assignment, the affairs of the company had been
prosperous and its stock valuable, Wallace was still in a position
to demand his stock and to compel payment to himself of any
dividends that might be declared.
So that, even if the company and the defendant had then agreed
that the latter should then be exonerated from his liability to the
company, such an agreement would have been void as against the
creditors of the insolvent company. In
Sawyer v.
Hoag, 17 Wall. 610, it was held that the relations
of a stockholder to the corporation, and to the public who deal
with the latter, are such as to require good faith and fair dealing
in any transaction between him and the corporation, of which he is
part owner and controller, which may injuriously affect the rights
of creditors or of the general public, and a rigid scrutiny will be
made into all such transactions in the interest of creditors, and
that it was not competent for the insolvent company to make a valid
agreement with a stockholder to exonerate him from his liability.
In other words, the doctrine laid down was that the governing
officers of a corporation cannot, by agreement or other transaction
with the stockholder, release the latter from his obligation to
pay, to the prejudice of its creditors, except by fair and honest
dealing and for a valuable consideration.
In
Hawley v. Upton, 102 U. S. 314, it
was said, per
Page 146 U. S. 704
Waite, C.J., that
"it cannot be doubted that one who has become bound as a
subscriber to the capital stock of a corporation must pay his
subscription if required to meet the obligations of the
corporation. A certificate in his favor for the stock is not
necessary to make him a subscriber. All that needs to be done, so
far as creditors are concerned, is that the subscriber shall have
bound himself to become a contributor to the fund which the capital
stock represents. If such an obligation exists, the courts can
enforce the contribution when required. He cannot be discharged
from the obligation he has assumed until the contribution has been
actually paid, or the obligation in some lawful way
extinguished."
In
Burke v.
Smith, 16 Wall. 394, it was said, per Strong,
J.:
"It has been settled by very numerous decisions that the
directors of a company are incompetent to release an original
subscriber to its capital stock, or to make any arrangement with
him by which the company, its creditors, or the state shall lose
the benefit of his subscription. Every such arrangement is regarded
in equity, not merely as
ultra vires, but as a fraud upon
other stockholders, upon the public, and upon the creditors of the
company."
In
Upton v. Tribilcock, 91 U. S.
45, it was held that
"the original holder of stock in a corporation is liable for
unpaid installments of stock without an express promise to pay
them, and a contract between a corporation, or its agents and him,
limiting his liability therefor is void both as to the creditors of
the company and its assignee in bankruptcy."
It requires no argument to show that if a company cannot, by
agreement in any form, when in insolvent circumstances, release the
obligation of a subscriber to its stock, much less can it attain
the same end by declining to accept payment of his subscription,
and it is equally obvious that even if such refusal is made when
the company is supposed to be prosperous, yet if the stockholder
declines to acquiesce in such refusal, and persists in maintaining
his position as a stockholder and director until insolvency has
supervened, it is then too late for him to claim the benefit of the
company's refusal.
Page 146 U. S. 705
We have thus far dealt with this aspect of the case as if the
company had in point of fact refused to accept the defendant's
subscription money and to recognize him as a stockholder, but an
examination of the record shows that there was no such refusal by
the company either before or after it became insolvent.
The defendant's witnesses, consisting of Shotwell, the
treasurer, of William Bispham, a partner of the defendant, and of
the defendant himself, testified that several times during the year
1879 and the early part of 1880, the defendant had offered to pay
the amount of his subscription, which the treasurer refused to
accept, and the treasurer testified that, in so refusing, he was
acting under the instructions of the president; but the president,
when called on behalf of the plaintiff, denied that he had ever
refused to accept the defendant's subscription money or to give him
his stock, and denied that he had ever instructed the treasurer to
do so.
With the testimony in this condition, the counsel of both
parties conceded of record that there was no question of fact to be
submitted to the jury, and requested the court to give peremptory
instructions to the jury, and the court accordingly directed the
jury to find for the defendant.
As the plaintiff had clearly made out a
prima facie
case before the defendant went into his evidence, and as the
defendant did not ask to go to the jury on the questions of fact,
he might well be regarded as having abandoned his defense so far as
that depended on the evidence adduced by himself, and as having
taken the position that the plaintiff's evidence did not make out a
case.
But even if it should, for the sake of the argument, be conceded
that the jury did find that the treasurer, in refusing to accept
the money, obeyed instructions given him by the president, such
action on the part of the president was not the action of the
company, and did not bind the company or its creditors.
The president had no legal power or authority to deplete the
coffers of the company by instructing the treasurer to refuse to
accept subscription money when tendered.
In
Bank of United States v.
Dunn, 6 Pet. 51, it was
Page 146 U. S. 706
held that an agreement by the president and cashier that the
endorser on a note shall not be liable on his endorsement does not
bind the bank; that it is not the duty of the cashier and president
to make such contracts, nor have they the power to bind the bank
except in the discharge of their ordinary duties.
It is true that if the acts of the president are ratified by the
corporation, or if the corporation permits a general course of
conduct or accepts the benefit of his act, they will be bound by
it; but the general rule is that the president cannot act or
contract for the corporation except in the course of his usual
duties.
And the rule is still stronger against the power of the
president to bind the corporation by giving up its securities or
releasing claims in its favor.
In the present instance, there is no evidence whatever of
ratification by the directors of the alleged act of the president
in reference to the defendant's obligation. It does not appear that
they knew anything about it, and it is plain that the company
received no benefit from it.
Upon the facts disclosed by the record, we are clearly of
opinion that the court below erred in instructing the jury to find
for the defendant, and in entering judgment on the verdict.
The judgment is reversed, with directions to grant a new
trial, and for further proceedings in conformity with this
opinion.
