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CHAPTER VII.

GENERAL LIABILITY OF MEMBERS TO CORPORATE CREDITORS.

§ 115. Introductory.

116. The capital stock as a trust fund for corporate creditors. 117. Applications of the "trust fund" doctrine.-(a) Liability upon assets of the company distributed among

shareholders.

118. (b) Liability upon shares issued below par.

119. Exceptions to the foregoing rule.

120. (c) Liability upon shares is

sued for property or services accepted at an over-valuation.

121. (d) Liability upon shares issued gratuitously.

122. The trust fund" doctrine

not recognized in England. 123. Accrual of liability - Remedy against company to be first exhausted.

124. Exceptions to the foregoing rule.

125. To whom the liability attaches. (a) The registered holder.

§ 126. (b) The transferrers.

127. Transfers to a man of straw do not relieve the transferrer. 128. Transfers to infants and married women do not relieve the transferrer.

129. Transfers to the corporation itself, when effective to relieve the transferrer.

130. Registration of transfer necessary to relieve the transferrer.

131. (c) Transferees.

132. (d) Pledgees.

133. (e) Legatees and distributees.

134. (f) Bankrupts' estates.

135. (g) Decedents' estates.

136. (h) Trustees, executors and administrators.

137. (i) Agents. 138. (j) Infants.

139. (k) Married women.

140. Priority between creditors. 141. Contribution between mem

bers.

142. Effect of increase and reduction of the capital stock.

§ 115. Introductory. At common law the stockholders in a corporation are not liable individually for the corporate debts. The capital stock is the fund to which alone the creditors may resort, except in cases of fraud.' The personal re

1 Salt Lake City National Bank v. Hendrickson, (1878) 40 N. J. 52; Atwood v. Rhode Island Agricultural Bank, (1850) 1 R. I. 376; Van Sandan v. Moore, (1826) 1 Russ. Ch. 392, 408; Warfield, Howell & Co. v. Marshall

County Canning Co., (1887) 72 Iowa, 666; s. c. 2 Am. St. Rep. 263. See generally as to the status and liabilities of members of corporations and, limited companies, articles in 79 Law Times, 414, 438; 49 Law Times,

sponsibility of the stockholders is inconsistent with the nature of a body corporate. It is always a creature of statute. It does not exist at common law; nor can it be created by a

182; 44 Law Times, 329; 43 Law Times, 2, 97, 192, 194; 42 Law Times, 419, 495; 40 Law Times, 459; 7 Law Times, 20, 52, 72, 126. In Alabama, West Virginia, Missouri, Nebraska and Oregon, there are constitutional guaranties that stockholders shall in no case be liable otherwise than for unpaid stock owned by them. Stimson's Am. Stat. Law, (1886) § 449. In Carr v. Iglehart, (1854) 3 Ohio St. 457, counsel argued that stockholders in a corporation are individually liable for its debts, unless by some provision of the charter, or statute law, they are exempted from such responsibility. "The counsel for the complainant," said the court, "admits that Blackstone and divers other eminent writers upon the law and also certain courts, have entertained a contrary opinion, but he is very clear that they were all wrong, and he hopes and thinks this court will not be governed by such loose and inconsiderate expressions, either of text books or judges." But the court was of opinion that counsel was wrong and said: "We suppose that no law is better settled than that they are not liable."

1 Myers v. Irwin, (1816) 2 Serg. & R. 371; Liverpool Ins. Co. v. Massachusetts, (1870) 10 Wall. 566, 575; Walker v. Lewis, (1878) 49 Tex. 123; Jones v. Jarman, (1879) 34 Ark. 323; Windham Prov. Inst. v. Sprague, (1871) 43 Vt. 502; Wood v. Hicks, 7 Lea, 40; New England Bank v. Stockholders, (1859) 6 R. I. 188; Green v. Beckman, (1881) 59 Cal.

545.

2 Terry v. Little, (1879) 101 U. S. 216; Marshall Foundry Co. v. Killain, (1888) 99 N. C. 501; s. c. 6 Am.

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St. Rep. 539; Morley v. Thayer, (1880) 3 Fed. Rep. 737; Chase v. Lord, (1879) 77 N. Y. 1; Slee v. Bloom, (1822) 19 Johns. 453, 473; Great Falls &c. R. Co. v. Copp, (1859) 38 N. H. 124; State v. Morristown Fire Assoc., (1851) 3 Zab. 195; Gray v. Coffin, (1882) 63 Mass. 192, 199; French v. Teschimaker, 24 Cal. 518, 540; Inhabitants of Norton v. Hodges, (1868) 100 Mass. 241; Oliver v. Liverpool &c. Ins. Co., (1868) 100 Mass. 531, 539; Coffin v. Rich, (1858) 45 Me. 511. In Jerman v. Benton, (1884) 79 Mo. 148, it is held that a street railway company is a railroad corporation under Mo. Rev. Stat. § 57, imposing only single liability on the stockholders of "all existing railroad corporations." In Wise v. Miller, (1887) 45 Ohio St. 388, it was held that the stockholders being indirectly liable for the debts of the corporation to an amount equal to the stock held by them, and beneficially interested in its credit and property thereby obtained, their covenant of indemnity to him who, on the faith of it, indorsed the paper of the corporation, for their mutual benefit, expressly created an obligation, like that which the law implies on the part of every principal, and their relation to him, if not strictly that of a surety, is analogous to it, giving rise to corresponding rights and remedies. For further treatment of this subject see articles in 7 Ir. L. T. 267; 24 Leg. Obs. 321; 3 Mo. West. Jur. 385; 3 Cent. L. J. 667; 4 Am. L. Mag. 363, 921; 1 Am. L. Mag. 96; 2 L. Int. 210, 240, 269; 19 Sol. J. & Rep. 230; and the notes in 99 Am. Dec. 435; 49 Am. Dec. 310; 3 Am. St. Rep. 806.

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majority vote of the shareholders nor by a by-law of the corporation. It is one of the distinguishing features of corporations that the individual property of members is exempt from liability for corporate debts. Herein consists the great superiority of a corporation over a partnership or an unincorporated joint-stock company. Immunity from such liability is one of the inducements which has led to the multiplication of private corporations, and caused them to supersede the ordinary partnership to a great extent, in hazardous enterprises, or enterprises requiring large capital. The corporate creditor contracts with the corporation and not with the members. Even when the law of the State provides that where an execution against a corporation is unsatisfied, execution may issue against stockholders to the extent of their unpaid stock, it does not make the stockholder a debtor to the corporate creditor, nor furnish the latter any remedy against the estate of the stockholder. And wherever the debt of a corporation is satisfied in part, there is also a pro tanto discharge of the liability of stockholders. So that if the whole amount due upon unpaid subscriptions be not required to meet the corporate liabilities, then only so much as is requisite can be collected in an action instituted by the creditors of the company. And evidence may be introduced to show whether or not there is any property in the hands of the assignee for the benefit of creditors, which can be applied in satisfaction of the claim. But although the corporation may have assets

1 Flint v. Pierce, (1868) 99 Mass. 68 Trustees of Free School v. Flint, (1847) 54 Mass. 539; Kennebec &c. R. Co. v. Kendall, (1850) 31 Me. 470; Reid v. Eatonton Manuf. Co., (1869) 40 Ala. 98.

2 Spense v. Iowa Valley Construction Co., (1873) 36 Iowa, 407.

3 Smith v. Huckabee, (1875) 53 Ala. 191; "Growth of Corporate Organization," 20 Cent. L. J. 481.

4 Wood v. Hicks, 7 Lea, 40.

5 Donnelly v. Hodgson, (1885) 13 Mo. App. 15, construing Mo. Rev. Stat. § 736.

7 Bell's Appeal, (1887) 115 Pa. St. 88; Beach on Railways, § 420. But see Citizens' Trust Co. v. Gillespie, (1887) 115 Pa. St. 564, holding that where subsequently to an assignment made by a corporation for the benefit of its creditors, suit to collect unpaid subscriptions is instituted, and no evidence of an assessment is adduced, recovery can be had only in case the whole of the unpaid subscriptions is needed for the payment of the corporate debts.

8 Sleeper v. Goodwin, 67 Wis. 577, holding also that when no such

6 San Jose Savings Bank v. Pharis, property can be found, the court (1882) 58 Cal. 380.

may in accordance with Wis. Rev.

consisting of debts owing it from other parties, the creditors will not be required to await the collection of doubtful claims or claims in litigation. "The shareholders must pay and pay promptly and take upon themselves the onus of delay and risk as to all such cases." Incorporators are also individually liable for money illegally received by the corporation, where the corporation is but a cloak for illegal transactions."

§ 116. The capital stock as a trust fund for corporate creditors. The stockholders of a corporation being in general free from personal responsibility, the capital stock constitutes the sole fund to which creditors may look for the satisfaction of their demands. It is the basis of the credit which is extended to the corporation by the public, and a substitute for the individual liability which exists in other cases. So far as creditors are concerned, it is regarded in the law as a trust fund pledged for the payment of the debts of the corporation. Until they are paid, the stockholders are postponed; they are only entitled to that which remains, after the claims of the creditors are extinguished. This is as true of the unpaid shares subscribed or balances due thereon, as of the amount which has been actually paid in. Such unpaid shares and balances are as much a part of the capital stock as the sums which have already been realized thereon. Aside from the funds on hand, they often constitute the only resource of the company. They are debts due to it, the payment of which can be enforced by its officers. The delinquent subscribers

Stat. (1878) § 3224, estimate the respective liabilities of the shareholders and enforce the same by judgment without the appointment of a receiver.

1 Moses v. Ocee Bank, 1 Lea, 398, 414. Acc. Stark v. Burke, 9 La. Ann. 341. See also Beach on Railways, 420.

2 McGrew v. City Produce Exchange, (1886) 85 Tenn. 572; s. c. 4 Am. St. Rep. 771.

3 Wood v. Dummer, (1824) 3 Mason, 308, per Story; Sawyer v. Hoag, 17 Wall. 610; Upton v. Tribilcock, 91 U. S. 45; Sanger v. Upton, (1875) 91

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U. S. 56, 60; Scammon v. Kimball, 92 U. S. 362, 367, where the court said, "Such an indebtedness [for unpaid shares] constitutes an exception to the rule that when there are mutual debts one may be set against the other;'" Marshall v. Foundry Co., (1888) 99 N. C. 501; s. c. 6 Am. St. Rep. 539; Bunn's Appeal, (1884) 105 Pa. St. 49; Ogilvie v. Knox Ins. Co., (1859) 22 How. 380; Mumma v. Potomac Co., (1834) 8 Peters, 281; Payson v. Stoever, (1873) 2 Dillon, 427; Webster v. Upton, (1875) 91 U. S. 65, 66, 67; Chubb v. Upton, (1877) 95 U. S. 665.

are its debtors, and the directors are clothed with authority to compel them to pay. When the company is indebted, and other means of meeting its liabilities are exhausted, the exercise of this authority becomes a duty, which they are under the highest moral obligation to perform. Creditors are supposed to have trusted as well to the unpaid subscriptions and to the fair and faithful exercise of the compulsory power for their payment, as to the sums actually paid in; and when it becomes necessary to their security or satisfaction, they have a legal right, either by the voluntary action of the proper officers, or through the aid of the courts of the country, to have it exercised in their behalf. If, therefore, by the wilful or stubborn inaction of the directors or stockholders, the company fails to meet its obligations and perform its duties, a

1 Wood v. Dummer, (1824) 3 Mason, 308, per Story; Bassett v. St. Albans Hotel Co., (1875) 47 Vt. 313; Tarbell v. Page, (1860) 24 Ill. 46; Osgood v. Laytin, 3 Keyes, (N. Y.) 521; s. c. 5 Abb. (N. S.) 1; Thompson v. Reno Savings Bank, (1885) 19 Nev. 103; s. c. 3 Am. St. Rep. 797; Allen 1. Montgomery R. Co., 11 Ala. 437; Goodwin v. McGehee, 15 Ala. 232, 246; Smith v. Huckabee, 53 Ala. 191, 195; Glenn v. Semple, 80 Ala. 159; s. c. 60 Am. Rep. 92, 94; Jones v. Arkansas Mechanical &c. Co., 38 Ark. 17; Ward v. Griswoldville Manuf. Co., 16 Conn. 593, 599; State v. Commercial State Bank, (Neb. 1890) 44 N. W. Rep. 998, where it was held that the assets of a banking corporation organized under the laws of Nebraska, after it has ceased to carry on business, are a trust fund for the payment of its debts.

The rights of the creditors to the corporate property are superior to those of the stockholders, or the assignee of an insolvent stockholder; Crandall v. Lincoln, 52 Conn. 73; s. c. 52 Am. Rep. 560, 562; Hightower v. Thornton, 8 Ga. 486; s. c. 52 Am. Dec. 412; Farnsworth v.

Robbins, (1887) 36 Minn. 369; Haskell v. Sells, 14 Mo. App. 91; National Trust Co. v. Miller, 33 N. J. Eq. 155; Wetherbee v. Baker, 35 N. J. Eq. 501.

2 Wood v. Dummer, (1824) 3 Mason, 308, per Story; Mann v. Pentz, 3 N. Y. 415, 422; Dayton v. Borst, 31 N. Y. 435, 436; Bartlett v. Drew, 57 N. Y. 587, 589; Hastings v. Drew, 76 N. Y. 9; Gilmore's Ex'rs v. Bank of Cincinnati, 8 Ohio, 62, 71; Bank of Virginia v. Adams, 1 Pars. Sel. Cas. 534; Lane's Appeal, 105 Pa. St. 49; s. c. 51 Am. Rep. 166; Jewell v. Rock River Paper Co., (1882) 101 Ill. 57; Reid v. Eatonton Manuf. Co., 40 Ga. 98, 102; s. c. 2 Am. Rep. 563, 565; Allibone v. Hagar, 46 Pa. St. 48, where the court said that whatever might be the law between the delinquent subscribers and the corporation, the rights and equities of the corporate creditors were not to be affected thereby; Clapp v. Peterson, (1882) 104 Ill. 26, 31; Robertson v. Conrey, 5 La. Ann. 297; Rider v. Morrison, (1880) 54 Md. 429, 444; Payne v. Bullard, (1851) 23 Miss. 88; s. c. 55 Am. Dec. 74.

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