Case Name: CHARLES H. LAVELL, Trustee in Bankruptcy of Everybody's Store, a Corporation, Bankrupt, Plaintiff and Respondent, v. F. G. BULLOCK et al., Defendants, and F. G. BULLOCK, Appellant
Court: North Dakota Supreme Court
Jurisdiction: North Dakota
Decision Date: 1919-08-02
Citations: 43 N.D. 135
Docket Number: 
Parties: CHARLES H. LAVELL, Trustee in Bankruptcy of Everybody’s Store, a Corporation, Bankrupt, Plaintiff and Respondent, v. F. G. BULLOCK et al., Defendants, and F. G. BULLOCK, Appellant.
Judges: Bronson, J., concurs.
Reporter: North Dakota Reports
Volume: 43
Pages: 135–150

Head Matter:
CHARLES H. LAVELL, Trustee in Bankruptcy of Everybody’s Store, a Corporation, Bankrupt, Plaintiff and Respondent, v. F. G. BULLOCK et al., Defendants, and F. G. BULLOCK, Appellant.
(174 N. W. 764.)
Corporations — evidence as to balance due on stock.
This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due to the corporation on his corporate stock. As trustee in bankruptcy the plaintiff brings the action to recover from the appellant $700 and interest as the balance due on 14 shares of common stock in Everybody’s Store. Held:
1. The evidence clearly shows that on such stock there never was any balance due to the company.
Corporations — stock issued contrary to state Constitution — void.
2. Stock issued as bonus stock in violation of § 138 of the Constitution, which prohibits corporations from issuing stock or bonds except for money, labor, or- property received, is void.
Corporations — liability of purchasers of stock illegally issued as to creditors.
3. Purchasers of stock issued in violation of the constitutional prohibition are not, under the circumstances in the instant case, precluded from asserting- the void character of the stock as against creditors of the corporation.
•Corporations — effect of § 4554, Compiled Laws 1913 —rights of creditors ag-alnst bona fide purchasers of stock illegally issued as fully paid.
4. Section 4554, Compiled Laws of 1913, which provides that each stockholder is liable individually for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him, is construed, and held to create no cause of action in favor of creditors as against a bona fide purchaser of stock originally issued as fully paid contrary to law.
Opinion filed August 2, 1919.
Note. — On effect of transfer of shares of stock on liability for unpaid subscription, see notes in 47 L.R.A. 246, and L.R.A.1918D, 1049.
On liability of transferee of corporate stock on unpaid subscriptions, see note in 30 L.R.A. (N.S.) 283.
On creditor’s knowledge that stock is unpaid as affecting stockholders’ liability, see note in 7 A.L.R. 972.
On liability of stockholders on subscription for stock, see note in 40 Am. Dec. 358.
On liability of stockholders to the creditors of an insolvent corporation for the amount due on their unpaid stock, see note in 35 L. ed. U. S. 227.
Appeal from judgment of the District Court of Cass County, Cooley, Special Judge.
Reversed and dismissed.
Laivrence & Murphy, for appellant.
The action is not one "properly triable in a court of equity under the circumstances here presented, but should be in the form of an action at law in which this defendant has the right to have the facts determined by a jury. Comp. Laws 1913, § 760S; Kohler v. Agassiz (Cal.) 33 Pac. 741.
The ordinary action for the recovery of a call is an action at law. 4 Thomp. Corp. pp. 351, 352.
“The remedy to collect subscriptions was held not to be in equity, although the defense was interposed that the board of directors released the subscription, but the corporation claimed that such release was fraudulent.” 4 Thomp. Corp. p 352.
The basis of this action is the purported call by the referee which is simply a demand for a debt due on contract, and therefore if the basis for an action at all is a basis for an action at law. Porter v. Northern F. & M. Ins. Co. The meaning of the word “call” or “instalment” strictly speaking means the action of the board of directors or of a corporation demanding the payment of all or a portion of unpaid subscriptions. 4 Thomp. Corp. § 3686.
“An action by a receiver to collect unpaid subscriptions is an action at law, and it is not proper practice to join all delinquent stockholders as defendants in one action.” See also Johnston v. Allis, 71 Conn. 207, 41 Atl. 816.
“On the contrary the probability or even the possibility of a multiplicity of suits is negatived by the facts in the case, nor are any facts averred showing that the remedies provided by law are not entirely adequate.” Bismarck Water Supply Co. v. Barnes, 153 N. W. 458.
“We venture to say that it would not be seriously suggested that a common interest in any such question of law, where the legal interests of the parties were wholly distinct, could constitute any ground of equitable jurisdiction, when the several controversies affected by the question were purely legal controversies. Suits do not become of equitable cognizance because of their number merely.” Youngblood v. Sexton, 20 Am. Rep. 657; Marshall-Wells Co. v. New Era Co. 13 N. D. 396.
The stockholders’ liability is not conditional nor secondary under said section. It is a primary liability, and accrues as soon as the debt is contracted. It may be enforced as a personal liability by the procedure laid down in §§ 5767, 6770, Revised Code 1899. Comp. Laws 1913, §§ 7997, and following; Burke v. Sehoer, 33 L.R.A.(N.S.) 1057, 130 N. W. 962.
Subscriptions to the stock of a corporation do not constitute trust funds for the benefit of its creditors, so as to give chancery jurisdiction of a suit to reach them for the creditors’ benefit.
“Compelling creditors of a corporation to elect between a pending garnishment proceeding and suit in chancery to reach unpaid stock subscriptions will not confer jurisdiction on the chancery court if it did not otherwise exist.” Hall v. Henderson, 63 L.R.A. 673; O’Beax-Jewelry Co. v. Volfer, 28 L.R.A. 707.
“The general rule supported by a great number of cases is that the stockholders’ statutory liability does not pass either to a receiver or to an assignee in insolvency, and cannot be enforced by either’.” Hammond v. Cline, 170 Ind. 453, 84 N. E. 827; Wallace v. Milligan, 110 Ind. 498, 11 N. W. 599; Runner v. Dwiggins, 147 Ind. 238, 36 L.R.A. 645, 46 N. E. 580. See also Lane v. Morris, 8 Ga. 468; Abbey v. Grimes Dry Goods Co. 44 Kan. 415, 24 Pac. 426; Howell v. Eirst Nat. Bank, 52 Kan. 133, 34 Pac. 395; Hanson v. Konkersley, 37 Mich. 184; Patterson v. Stewart, 41 Minn. 84, 42 N. W. 926, 16 Am. St. Rep. 671, 4 L.R.A. 745; Re People’s Live Stock Ins. Co. 56 Minn. 180, 57 N. W. 468; Minneapolis Baseball Co. v. City Bank, 66 Minn. 441, 38 L.R.A. 415, 69 N. W. 331; Olson v. Cook, 57 Minn. 552, 58 N. W. 625; Palmer v. Bank, 65 Minn. 90, 67 N. W. 893; Liberty Eemale College Asso. v. Watkins, 70 Mo. 13; Hamilton Nat. Bank v. American Loan & T. Co. 66 Neb. 67, 92 N. W. 189; Wright v. McCormack, 17 Ohio St. 86; Umstad v. Buskirk, 17 Ohio St. 113; Cushing v. Perot, 175 Pa. 66, 34 Atl. 447, 52 Am. St. Rep. 835, 34 L.R.A. 737; Parker v. Carolina Sav. Bank, 53 S. C.-583, 31 S. W. 673, 69 'Am. St. Rep. 888; Colton v. Mayer, 90 Md. 711, 45 Atl. 874, 78 'Am. St. Rep. 456, 47 L.R.A. 617.
“It does not exist in favor of a subsequent creditor who has dealt with the corporation with full knowledge of the arrangement by which the bonus stock was issued, for a man cannot be defrauded by that which he knows when he acts.” Ilospes v. N. W. Manufacturing & Car Co. 15 L.R.A. 474.
“But the law implies such a promise only in favor of the subsequent creditors who are presumed to have extended credit to the corporation on the faith of the increased stock, and they alone are entitled to enforce their claims against those accepting that stock.” Anglo-American Land, M. & A. Co. v. Lombard, 132 Fed. 735. See also Hadley v. Stutz, 139 H. S. 417-435, 34 L. ed. 706.
Where the plaintiff placed no reliance upon the supposed full-paid capital of a corporation, on an increase in the number of shares of its capital stock, it was held, in Coit v. North Carolina Gold Amalgamating Co. supra, that he would have no cause of complaint by reason of the subsequent recall of such shares. Easton Nat. Bank v. American Brick & Tile Co. (N. J.) 8 L.R.A.(N.S.) 271, 272; Anglo-American Land, M. & A. Co. v. Lombard, 132 Fed. 733.
“The fact that stock certificates cite that the stock is Lully paid up and nonassessable’ was held to be no protection to the assignee thereof as against corporate creditors where such assignee had notice that it was not in fact paid up, or where the circumstances are such that a person of average intelligence would know the facts in relation to the stock being paid up, but the rule does not apply to an innocent purchaser.” 4 Thomp. Corp. 1327; Davies v. Ball, 116 Pac. 833; note in 38 L.R.A. 494.
Foider & Oreen and Pfeffer & Pfeffer, for respondent.
“The stockholder is liable to the extent that the subscription represented by his stock requires him to contribute to the corporate funds, and when sued for the money he owes, it must be in a way to put what he pays, directly or indirectly, into the treasury of the corporation, for distribution according to law.” Patterson v. Lynde, 106 U. S. 519, 27 L. ed. -265.
“Unpaid subscriptions on the capital stock of a corporation pass, like other assets, to the trustee in bankruptcy, and he is the only party that can bring an action or proceeding thereon.” Sanger v. Upton, 91 H. S. 56, 23 L. ed. 220; Ee Crystal Spring Bottling Co. (D. 0.) 96 Fed. 945; Lane v. Nickerson, 99 111. 284.
“It is only through the instrumentality of the trustee, when the corporation has been adjudged a bankrupt, and the estate is in process of settlement in the bankrupt court, that the creditor can reach and subject such assets to the payment of his debt.” Glenny v. Langdon, 98 IT. S. 20, 25 L. ed. 43; Peer'y v. Carnes, 86 Mo. 652; Lane v. Nicker-son, supra; Blair v. Ilanna, 87 Ind. 298; Perkins v. Cowles, 157 Cal. 625, 30 L.E.A.(N.S.) 283, 108 Pac. 711.
“The amount due from the stockholders for the subscribed stock of the corporation is a trust fund for the creditors of the corporation, and such unpaid subscriptions to its stock are a part of its assets, and may be collected for its creditors.” Vermont Marble Co. v. Declez Granite Co. 135 Cal. 579, 56 L.E.A. 728, 87 Am. St. Eep. 143, 67 Pac. 1057; Walter v. Merced Academy Asso. 126 Cal. 583, 59 Pac. ÍL36; Visalia & T. E. Co. v. Hyde, 110 Cal. 632, 52 Am. St. Eep. 136, 43 Pac. 10.
“By purchasing from the original stockholders, the transferees assumed as a matter of law all the liabilities that the transferrers of the stock to them were under, and took it subject to all their obligations. Visalia & T. E. Co. v. Hyde, supra. Hence the defendants were liable to a call for payment of the unpaid subscriptions in the bankruptcy proceedings, and the trustee had a right to maintain this action to recover on the calls.” Babbitt v. Eead, 137 Fed. 712, 215 Fed. 395; Ee Eemington Automobile & Motor Co. 153 Fed. 345; Allen v. Grant (Ga.) 50 S. E. 494 (opinion by Judge Lamar); Ee Bothe, 173 Fed. 597.
As to the necessity of an assessment, and as to the amount necessary to be assessed upon each share of stock, the finding of the referee is conclusive. To this extent the authorities are unanimous. Ee Eemington, 153 Fed. 345; Ee Munger, 168 Fed. 910; Ee Newfoundland Syndicate, 201 Fed. 917; Ee Stipp Const. Co. 221 Fed. 372. (This is a late case approving procedure followed here.)
The equity jurisdiction should be sustained upon the ground that a multiplicity of suits thereby was avoided, if for no other reason. 1 Pom. Eq. 3d ed. chap. 269; Wyman v. Bowman, 127 Fed. 257; Patterson v. Lynde, 106 H. S. 519, 520, 27 L. ed. 265, 1 Sup. Ct. Eep. 432; Van Pelt v. Gardner, 54 Neb. 711, 75 N. W. 874.
Any shareholder who pays more than his proportion of the corporate debts may enforce contribution of his cosubscribers. Van Pelt v. Gardner, 54 Neb. 709, 75 N. W. 874; Dill v. Ebey, 27 Okla. 584, 46 L.R.A.(N.S.) 440, 112 Pac. 973.
“Each and every stockholder shall be personally liable to the creditors of the company to the amount of what remains unpaid upon his subscription to the capital stock, and not otherwise.” Patterson v. Lynde, 106 U. S. 519, 27 L. ed. 265; Hayden v. Thompson, 71 Eed. 60; Kelley v. Fourth of July Min. Co. (Mont.) 42 L.R.A. 621; Allen v. Grant (Ga.) 50 S. E. 494; Van Cleve v. Berkley (Mo.) 42 L.R.A. 593; Bailey v. Tillinghast, 99 Fed. 801.
On proper rule as to equitable jurisdiction to avoid multiplicity of suits, see dissenting opinion of Judge Marshall of Wisconsin in Illinois Steel Co. v. Schroeder, 113 N. W. 51; N. Y. L. Ins. Co. v. Beard (D. C.) 80 Fed. 66; Cook v. Carpenter (Pa.) 1 LJR.A.(N.S.) 900.
“An arrangement by which the stock is nominally paid and the money immediately taken back as a loan to the stockholder is a device to change the debt from a stock loan to a loan, and is not a valid payment as against creditors of the corporation, though it may be good as between company and the stockholders.” Sawyer v. Hoag, 17 Wall. 610, 21 L. ed. 731 (syllabus) ; Webster v. Upton, 91 U. S. 65, 23 L. ed. 384; Upton v. Tibilcock, 91 U. S. 45, 23 L. ed. 203; Hawkins v. Glenn, 131 U. S. 319, 33 L. ed. 189; Scovill v. Thayer, 105 U. S. 143, 26 L. ed. 968.
“A contract of a corporation limiting the liability of its stockholders to a portion of the par value of their stock is void both as to creditors and the assignee in bankruptcy.” Edwards v. Schillinger (111.) 33 L.R.A.(N.S.) 895, 91 N. E. 1048.
“The experience and good will of the partnership which it is claimed were transferred to the corporation are of too unsubstantial and shadowy a nature to be capable of pecuniary estimation in this connection.” Oambden v. Stuart, 144 U. S. 104, 36 L. ed. 363.
Doctrine reinforced by statute similar to ours in some respect. East-on Nat. Bank v. American Brick & Tile Co. (N. J.) 64 Atl. 917, 8 L.it.A.(N.S.) 271, opinion by Judge Pitney; Peninsular Sav. Bank v. Black Stove Polish Co. (Mich.) 63 N. W, 514 (services by way of “influence” consideration for stock, held not valid as to creditors; re views authorities) ; German Mercantile Co. v. Wanner, 25 N. D. 479, 142 N. W. 463.
The acceptance of a certificate of stock issued to the person who accepts it implies a promise that he will pay for the shares, and that thereby the party stands liable to pay assessments, although he has not yet made any express promise to do so. 10 Oyc. 381; Van Clevo v. Berkey (Mo.) 42 L.B.A. 593; Be M. Allemen Co. 172 Fed. 611; Vermont v. Declez (Cal.) 56 L.B.A. 728, 67 Pac. 1057; Elyton v. Birmingham (Ala.) 12 L.B.A. 307; Kelly v. Fourth of July Min. Co. (Mont.) 42 L.B.A. 621.

Opinion:
Bobinson, J.
This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due on his corporate stock. As trustee in bankruptcy the plaintiff brings this action to recover from appellant $700 as the balance due on fourteen shares of common stock in "Everybody's Store." The Constitution says that no corporation shall issue stock or bonds except for money, labor done, or money or property actually received. § 138. The statute says, "Each stockholder in a corporation is individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him." Comp. Laws 1913, § 4554. In the consideration of this case it is not necessary to enter upon any debatable grounds or to discuss any nice points of law. The purpose of the statute is to protect parties who deal with and trust corporations relying on obligations of stockholders to pay what they owe to their corporation. Under the statute a stockholder is not merely a person who picks up and holds stock that he may find lying on the street. He is a person who takes the stock under a contract to pay for it. When the corporation has received its pay for stock it may be sold and transferred the same as any chattel or .chose in action. Neither a corporation nor its trustee or assignee can maintain an action for a balance due on stock unless there is a balance due the corporation. In this case the proof does not show any balance due the corporation. All the common stock was bought and paid for by the president of the company. Then he traded some of it to Barney, who transferred to appellant fourteen shares of his common stock, which reads on its face that it is fully paid and nonassessable. And it is stipulated that ap pellant paid full and fair value for this stock. He is a purchaser in good faith.
Here is the history of the case: — In October, 1913, at Fargo, one II. M. Cornell opened a trading house known as "Everybody's Store." At the end of three months he was in debt about $12,500 with assets of $25,000. Then he concluded to unload his debts and assets by turning himself into a trading corporation. Accordingly in the name of himself, his wife, and one E. C. Hamilton, he filed with the secretary of- state articles of incorporation fixing the capital stock at $100,000. This included 500 shares of preferred stock at $100 a share, and 1,000 shares of common stock at $50 a share. The purpose of the corporation was to do a general trading business, to assume debts and liabilities, and to borrow money in unlimited amounts.
The company at once proceeded to assume the debts and obligations of Cornell and took over his business. The 1,000 shares of common stock it issued to Cornell in payment of his lease and the good will of his business; 250 shares of preferred stock it issued to Cornell in payment of all his assets. Cornell at once elected himself president and treasurer. To his good wife, who became a director, he gave 20 shares of common stock; to E. C. Hamilton, 125 shares; to one Flick of Minneapolis, 125 shares. On the books of the company — the journal and the ledger — it does appear on several pages that for the lease and good will of the business the company was charged $50,000. On the trial the books were put in evidence. Cornell was called as a witness for plaintiff and testified that he bought over the common stock in exchange for the lease and good will of the business. He says, "I gave for the common stock my lease and the good will of the business, the location and establishment of the business." (17.)
Q. "What were the 250 shares of common stock issued to Flick and Hamilton for?"
A. "That really belonged to me and I turned them off to them gratis. (17.) The 20 shares of stock issued to my wife I just gave her as a present."
Q. "What was the value of the good will and lease ?"
A. "I figured it was worth what we sold it to the company for, $50,-000. I think we figured it at $50,000. We estimated it was worth that amount." (102.)
In a written contract on December 29, 1913, it is recited and agreed that Cornell sold to tbe company tbe good will of tbe business and tbe lease of the premises and property amounting to $25,000. That in consideration of such sale tbe company, agreed to issue to tbe seller certain certificates of fully paid stock to tbe amount of $75,000, namely, 250 shares of preferred stock and 1,000 shares of common stock. In a subsequent written agreement of January 2, 1914, it is recited that tbe corporation has sold and delivered to Cornell 1,000 shares of common stock and be agrees to replace in tbe bands of tbe treasurer 250 shares of tbe common stock to be retained by tbe treasurer and allotted to purchasers of preferred treasury stock as an inducement to buy tbe preferred treasury stock. Doubtless tbe company assumed tbe great load of debts and paid too much for its whistle. But that was tbe purpose of its organization and this is not an action to rescind tbe contract of sale, and tbe mere inadequacy of tbe price does not make tbe contract void. As tbe record shows, Mr. Cornell purchased and paid for all tbe common stock, which reads on its face that it is fully paid and nonassessable. Then be transferred to one Barney 15 shares of stock and Barney transferred 14 of bis shares to appellant. But on said 14 shares there is nothing due to tbe corporation. It never had any cause of action against tbe appellant. It bad no dealings with him.
Suing as tbe representative of tbe corporation and its creditors of course tbe plaintiff can assume no rights only such as belong to the corporation and its creditors. Furthermore, tbe purpose of tbe statute is to protect parties who deal with and give credit to a corporation on tbe faith and credit of its stockholders, to tbe amount of their corporate stock. In this case it appears that after tbe incorporation the business taken over was conducted in tbe same name and in tbe same manner as before tbe incorporation. And there is no showing that tbe creditors in dealing with the corporation knew that it was a corporation or that it bad any stockholders. Certainly there is nothing to show that they were in any way deceived in regard to tbe holders of tbe common stock. Tbe records of tbe company were open to them, and those records were very brief. They clearly showed that Cornell bad purchased and paid for all the common stock; and that on such stock no balance was due to the company. Hence the judgment must be reversed and the action dismissed, with costs.
Bronson, J., concurs.