In a bill by judgment creditors against an incorporated
insurance company and its stockholders to compel the latter to pay
up the balance due on their several subscriptions to the stock,
they cannot be allowed to defend themselves by an allegation that
their subscriptions were obtained by fraud and misrepresentation of
the agent of the company.
It is too late, after the investment is found to be
unprofitable, and debts are incurred, for stockholders to withdraw
their subscriptions, under such a pretense or plea.
It is not a sufficient objection to the bill for want of proper
parties that all the creditors or stockholders are not sued. If
necessary, the court may, at the suggestion of either party that
the corporation is insolvent, administer its assets by a receiver,
and thus collect all the subscriptions or debts to the
corporation.
This was a bill filed on the equity side of the court by
Ogilvie, Angle & Co., traders in partnership in Iowa, together
with twelve other persons, citizens of Missouri, Ohio, and
Michigan, against the Knox Insurance Company and against Levi
Sparks and thirty-six other persons, subscribers to the capital
stock of the company. Being a creditor's bill, filed by the
complainants and such other creditors as might make themselves
parties, thirty-two other creditors came in and made themselves
parties to the suit. The bill alleged that the complainants had
recovered divers judgments against the insurance company, upon
which executions had issued, the return
Page 63 U. S. 381
to which had been, "no property;" that the other defendants
severally subscribed for stock in the company, and were still
indebted for it, payment not having been enforced by the company.
The prayer of the bill was that they might be decreed to pay their
subscriptions, and that the judgments might be satisfied from the
fund thus produced.
At the September rules, 1852, the bill was taken
pro
confesso against all the defendants, but afterwards they all
except the company appeared, demurred, and, upon the demurrer being
overruled, answered. The securities, being the subscription notes,
were brought into court. Collum's answer was adopted by most of the
other defendants, which answer is particularly noticed in the
opinion of this Court. After sundry other proceedings, not
necessary to be mentioned, the court dismissed the bill, and the
complainants appealed to this Court.
Page 63 U. S. 387
MR. JUSTICE GRIER delivered the opinion of the Court.
The complainants in this case are judgment creditors of the Knox
Insurance Company. The numerous other defendants are stockholders
of the company, and are severally charged as debtors to it, for the
unpaid portion of the stock subscribed by them.
The company is insolvent, or at least is unable to pay its
creditors, without calling in the capital subscribed and secured,
but not actually paid in cash. This it has failed or refused to do.
This bill is filed to compel these stockholders or debtors to the
corporation to pay the amount of their debts, in order that the
creditors of the company may obtain satisfaction.
The bill was taken
pro confesso as against the
corporation. The other defendants, being corporators, are
consequently concluded as to the averments of the bill affecting
them as such. As stockholders who have not paid in the whole amount
of the stock subscribed and owned by them, they stand in the
relation of debtors to the corporation for the several amounts due
by each of them. As to them, this bill is in the nature of an
attachment, in which they are called on to answer as garnishees of
the principal debtor.
Where a number of special partners are incorporated to carry on
the business of insurance, the stock subscribed and owned by the
several stockholders or partners constitutes the capital or fund
publicly pledged to all who deal with them. Insurance companies or
corporations, unless they have the privilege of using their capital
for banking purposes, seldom require the actual payment of it all
in cash. Contracts of
Page 63 U. S. 388
insurance or indemnity, though not literally "gaming contracts,"
are nevertheless in the nature of wagers against the happening of a
certain event. The calculation of chances is greatly in favor of
the insurer. In a large number of policies, it is but reasonable to
expect that the amount of premiums will exceed that of the losses.
The insured are thus made to pay one another, and with common good
fortune afford an overplus to make a dividend for the insurers.
Hence the Knox Insurance Company, like others of the same
description, did not require their stockholders to pay in cash more
than ten percent of their several shares. They were allowed to
retain the remaining ninety percent in their own possession,
substituting therefor their bonds, or other securities. Thus every
stockholder became a borrower from, and debtor to, be capital stock
of the company. If in the course of events the chances were
favorable, a dividend of twenty percent on capital would give a
profit of two hundred on the money actually paid out by them. On
the contrary, if they were adverse, the capital represented by
securities must necessarily be paid in to satisfy the just debts of
the company.
The ninety percent retained by the stockholders is as much a
part of the capital pledged as the cash actually paid in. When that
portion of the capital represented by these securities is required
to pay the creditors of the company, the stockholders cannot be
allowed to refuse the payment of them, unless they show such an
equity as would entitle them to a preference over the creditors, if
the capital had been paid in cash.
Let us now examine their defense, and see if they have
established such an equity.
They do not deny that they paid the ten percent, gave their
securities for the balance, and have received their certificates
for their several shares of stock; but they contend that they are
not bound to pay these securities, because the agent of the
corporation, who took the subscriptions of stock made certain
representations concerning the state of the affairs of the
corporation, which were not true, and, as a consequence thereof,
they are not bound to pay these securities.
Page 63 U. S. 389
The numerous defendants, with some immaterial variations and
qualifications, adopt the answer of their co-defendant, Collum,
which we shall give verbatim from the record, to show we have not
misstated or mistaken the nature of the defense set up.
"And, by way of defense to said suit, said Collum alleges that
just before he gave said note, accepted said first bill, Robert N.
Carnan, an agent of said insurance company, came to Jeffersonville
to procure persons there to give notes and bills for stock in said
insurance company, and in order to induce said Collum to give his
said note and accept said first bill for such stock, said Carnan,
as such agent, then and there falsely and fraudulently said and
represented to said Collum and in his hearing that stock in said
insurance company to the amount of seventy-five dollars had then
been subscribed for at Vincennes, and on the Wabash River, and all
of said amount had then been paid or secured as the charter of said
insurance company required. Said Collum did not then know nor then
have the means of knowing to the contrary of said representations,
and he fully believed them to be true, and with that belief he gave
his said note and accepted said two bills for stock in said
insurance company, and if he had not fully believed said
representations, he would not have given said note nor accepted
said bills or either of them. At the time said representations were
so made, and said given and said first bill accepted, there had not
been more than twenty-five thousand dollars of stock in said
insurance company subscribed for and paid and secured, as said
charter required, at Vincennes, on the Wabash River, which said
Carnan then well knew. Said Carnan also, at and just before said
Collum made his said note and accepted his said first bill,
represented to him that said insurance company then had $40,000 of
funds on hand, mostly in Eastern exchange, which they could not
dispose of at Vincennes, and they wished to get stockholders at
Jeffersonville, so as to have an officer of said insurance company
there, and they would then send those funds there to be sold and
used. Said Collum did not then know, and had no means of knowing to
the contrary of said
Page 63 U. S. 390
representation, but he believed it, and it was a strong
inducement with him to make his said note and accept his said
bills; yet he is now informed and believes said representation was
grossly false, and that said insurance company did not at that time
have, and had not at any time had, that sum or anything like that
sum of money on hand, and mostly in Eastern exchange, which they
could not dispose of at Vincennes."
Carnan, who was examined as a witness, denies the charges made
in this answer and declares that he was not authorized by the
company to make such representations and did not make them.
To establish their defense, several of the defendants themselves
were called as witnesses, alleging that as their responsibility was
several and not joint, each one may be called as a witness for all
the rest. Much of the argument of this case has been expended on
the question of the competency of these witnesses to testify in
their own case, but we do not think it necessary to decide it, as
there are other facts in the case which show clearly that the
matter pleaded cannot affect the relative rights of the parties in
the case, assuming it to be true.
Those who seek to set aside their solemn written contracts by
proving loose conversations should be held to make out a very clear
case, and when they charge others with fraud founded on such
evidence, their own conduct and acts which speak louder than words
should be consistent with such an hypothesis. Assuming the fact
that Carnan did make the representations charged, what was the
conduct of these Jeffersonville stockholders, who now seek to
repudiate their contracts on the allegation of fraud? After having
a full opportunity to examine for themselves into the affairs of
the company, they alleged no fraud, nor expressed any desire to
withdraw their subscriptions; on the contrary, when fully informed
that the amount of stock subscribed at Vincennes did not equal that
taken at Jeffersonville, and when an offer was made to increase the
Vincennes subscriptions so as to equal those at Jeffersonville, the
defendants and those who acted with them objected and insisted that
the lower the amount of stock, the
Page 63 U. S. 391
higher would be the dividend, and consequently it had better not
be increased till after the first dividend of twenty-five percent
had been made.
2. After the defendants had a full opportunity to know the
situation of the company, its funds and its property, they
organized at Jeffersonville a branch of the corporation, having
resident directors at that place. This board met from time to time
through the months of April, May, June, July, and up to 13th
August, 1850. While there was a prospect of a dividend if 250
percent on the amount of cash paid in, their eyes were shut to the
deceit supposed to have been practiced on them. In the month of
May, a fire at Owensville, Kentucky, was reported in which the
company lost about $50,000. His seemed to injure the prospect of
the large dividend, yet even then it was not so clearly perceived
that the defendants were defrauded.
The directors at Jeffersonville, who represented their
interests, continued to meet till the middle of August and till a
succession on losses made it apparent that the capital of the
company would be nearly all required to pay for the losses
incurred. When these facts became patent, the directors at
Jeffersonville, at their last meeting in August, "after taking time
to consider what was best to be done," concluded to consider
themselves defrauded, and withdraw their capital from the
company.
We need not cite authorities to show that this discovery was
made too late and that a court of equity cannot receive such a
pretense as a valid defense against the creditors of this
corporation.
II. The objection made to the bill for want of proper parties is
equally untenable. The creditors of the corporation are seeking
satisfaction out of the assets of the company to which the
defendants are debtors. If the debts attached are sufficient to pay
their demands, the creditors need look no further. They are not
bound to settle up all the affairs of this corporation, and the
equities between its various stockholders or partners, corporators
or debtors. If A is bound to pay his debt to the corporation in
order to satisfy its creditors, he cannot
Page 63 U. S. 392
defend himself by pleading that these complainants might have
got their satisfaction out of B quite as well. It is true, if it be
necessary to a complete satisfaction to the complainants that the
corporation be treated as an insolvent, the court may appoint a
receiver with authority to collect and receive all the debts due to
the company, and administer all its assets. In this way, all the
other stockholders or debtors may be made to contribute.
For these reasons, we are of opinion that the decree of the
circuit court should be
Reversed with costs, and that the record be remanded, with
instructions to that court to enter a decree for the complainants
against the respondents severally for such amount as it shall
appear was due and unpaid by each of them on their shares of the
capital stock of the Knox Insurance Company, and to have such other
and further proceedings as to justice and right may
appertain.