Case Name: M. A. BALDWIN, as Receiver of the North Dakota Improvement Company, a Corporation, Plaintiff and Respondent, v. TIMBER INVESTMENT COMPANY et al., Defendants, and J. A. JOHNSON, H. M. Collinson, C. E. Burgess, and Ferd Noecker, Defendants and Appellants
Court: North Dakota Supreme Court
Jurisdiction: North Dakota
Decision Date: 1918-11-30
Citations: 43 N.D. 638
Docket Number: 
Parties: M. A. BALDWIN, as Receiver of the North Dakota Improvement Company, a Corporation, Plaintiff and Respondent, v. TIMBER INVESTMENT COMPANY et al., Defendants, and J. A. JOHNSON, H. M. Collinson, C. E. Burgess, and Ferd Noecker, Defendants and Appellants.
Judges: Christianson, J., did not participate.
Reporter: North Dakota Reports
Volume: 43
Pages: 638–656

Head Matter:
M. A. BALDWIN, as Receiver of the North Dakota Improvement Company, a Corporation, Plaintiff and Respondent, v. TIMBER INVESTMENT COMPANY et al., Defendants, and J. A. JOHNSON, H. M. Collinson, C. E. Burgess, and Ferd Noecker, Defendants and Appellants.
(176 N. W. 662.)
Corporations — suit by alleged creditor to recover for worthless stock.
1. This is a suit by one insolvent and defunct corporation against a similar corporation, and against the subscribers to its capital stock. Judgment was given against the appellants under the statute providing that each stockholder of a corporation is liable for its debt to the amount unpaid on the stock held by him. Appellants subscribed for certain shares of worthless stock, to he delivered on full payment, but no stock was ever delivered to them, and they never became stockholders, and their subscriptions were canceled before the action was commenced. The judgment is reversed and the action dismissed.
On Petition for Rehearing filed November 12, 1919.
Corporations — indebtedness an individual obligation and not debt of corporations.
2. The evidence is examined and held to show that the indebtedness upon which plaintiff’s action is based was not an indebtedness of the defendant corporation, but an individual indebtedness of an officer, common to both plaintiff and defendant corporations, and that plaintiff corporation had knowledge of such fact.
Corporations — defendants who signed subscriptions for stock not liable to one who knew subscriptions to be invalid.
3. Where one claiming to be a creditor of a corporation extends credit with knowledge of the fact that all of the stock of the corporation has been issued in trust for certain individuals and placed in escrow pending the performance by them of the conditions upon which their ownership shall become absolute, and where such individuals take subscriptions for the resale of their stock running in the name of the corporation, it appearing that all the stock of the corporation was to be issued in exchange for certain property, those who sign so-called subscription agreements are not liable to such creditors as stockholders under § 4554, Comp. Laws 1913.
Note. — The great weight of authority appears to be that one dealing with a corporation with knowledge that the stock has been issued as fully paid in exchange for property at an amount above its actual value cannot hold the stockholders for the difference between the actual value of the property and the par value of the stock, as will be seen by an examination of the eases collated in a note in 7 A.L.R. 972, on creditor’s knowledge that stock is unpaid as affecting stockholders’ liability.
On liability of stockholders to creditors for corporate debts, see note in 3 Am. St. Rep. 806.
On stockholder’s liability on his subscription generally, see note in 9 Am. Dee. 96.
Corporations — creditor with full knowledge of facts cannot claim prop» erty exchanged for stock was not equal to par value of the stock.
4. A creditor who extends credit- with knowledge that the stock of a cor- ' poration has been issued as fully paid and nonassessable in exchange for property is precluded from subsequently asserting that the property is not the equivalent of the -par value of the stock.
Corporations — liability of parties who subscribed for stock after entire stock has been issued.
5. Where it is sought to hold subscribers as stockholders under § 4554, Comp. Laws 1913, and it appears that certificates for the whole capital stock had been issued before the alleged subscriptions were taken, defendants are not liable as subscribers.
Opinion filed November 30, 1918.
Rehearing denied June 24, 1919.
'Appeal from the District Court of Cass County, Honorable Chas. ■A. Polloch, Judge.
Reversed and action dismissed.
M. A. Hildreth, for appellant Noecker.
The rule is well settled that one cannot faithfully serve two masters whose interests are diverse. Andrews v. Pratt, 44 Cal. 309; San Diega v. S. D. L. A. R. Co. 44 Cal. 106; Wilbur v. Lunde, 49 Cal. 290 (19 Am. Rep. 645); Cumberland Coal & I. Co. v. Sherman, 30 Barb. 553; Jackson v. Ludeling, 21 Wall. 616.
The making of the notes was a fraud on the stockholder and the burden of proof shifts to the plaintiff to show that there was good faith in the entire transaction. First Nat. Bank v. Flath, 10 N. D. 283; Mooney v. Williams, 9 N. D. 329.
Harold B. Nelson, for appellant H. M. Collinson.
If a party dealing with a corporation, with full knowledge of the fact that its nominal paid-up capital has not, in fact, been paid up fox-in money or property to the full amount of its par value, he deals solely on the faith of what has been actually paid in. First Nat. Bank v. Gustin Minerva Con. Min. Co. 44 N. W. 198; Coit v. Amalgamating Co. 119 IJ. S. 343, 30 L. ed. 420; Adamont Mfg. Co. v. Wallis, 16 Wash. 614, 48 Pac. 415; Rickerson Roller Mill Co. v. Farrel Foundry Co. 43 U. S. App. 425, 75 Fed. 561; Gogebick Invest. Co. v. Iron Chief Min. Co. 78 Wis. 427, 47 N. W. 726; Cunningham v. Holly, 58 C. C. A. 140, 121 Fed. 721; Robinson v. Bidwell, 22 Cal. 379; State Trust Co. v. Turner, 111 Iowa, 674, 82 N. W. 1029; Woolfolk v. January (Mo.) 33 S. W. 432; Walburn v. Chenault (Kan.) 23 Pac. 657; Whitehill v. Jacobs (Wis.) 44 N. W. 630.
That a corporation may cancel subscriptions to its shares, where the rights of creditors have not intervened, there can be no doubt. 10 Cyc. 452; Hill v. Silvery, 3 1.RA. 150; Campbell v. Baven, 42 N. W. 355; Shoemaker v. Lumber Co. 73 N. W. 333.
The issuance of the stock and the payment therefor are concurrent acts, and, until both have been done, the defendant Collison did not become a stockholder, and no liability as such was created. 1 Thomp. Corp. §§ 775, 791, cases there cited.
The shareholder is not liable to creditors after the insolvency of the corporation, unless the circumstances are such that he would have been liable to the corporation itself. Bank v. Mining Co. 44 N. W. 198; Eobertson v. Sibely, 10 Minn. 323; Association v. Seligman, 1 Am. St. Eep. 776.-
Where officers of different corporations unite in the same individual, whatever knowledge or notice such individual has, as an officer of one corporation, he 'is bound to have as the officer of the other corporation. 10 Cyc. 1054; Emerado Farmers Elev. Co. v. Bank of Emerado, 20 N. L>. 270; Bank v. Moline & S. Co. 7 N. D. 211.
M. J. Englert, for appellant C. E. Burgess.
The directors had authority to cancel appellant’s subscription, and by so doing release him from future liability to future creditors. This cancelation was binding upon the creditors and upon the corporation itself. Lexington & O. E. Co. v. Bridges, 46 Ky. 556, 46 Am. Dec. 536; Mills v. Stewart, 41 N. Y. 384; Allen v. Montgomery, 11 Ala. 437; Maculy v. Eobinson, 18 La. Ann. 619; Cook, Stock & Stockholders, § 127; Thompson’s Liability of Stockholder’s, § 193; New Albany v. Burke, 11 Wall. 96.
J. J. Weeks, for appellant Johnson.
Where a person deals with a corporation, with full knowledge of the fact that its nominal paid-up capital has not, in fact, been paid for in money or property to the full amount of its par value, he deals solely on the faith of what has been actually paid in. First Nat. Bank of Deadwood v. Gustin Minerva Con. Min. Co. 44 N. W. 198.
The capital stock of corporations is a trust fund for the payment of creditors, but when the reason for the rule does not exist, the rule itself ceases to apply. Coit v. Amalgamating Co. 119 H. S. 343, 30 L. ed, 420; Kickerson Boiler Mill Co. v. Farrel Foundry Co. 43 H. S. App. 452, 75 Fed. 561; Cunningham v. Holly, 58 C. C. A. 140, 121 Fed. 721; State Trust Go. v. Turner, 111 Iowa, 674, 82 N. AY. 1029 ; AAalbum v. Chenault (Kan.) 23 Pac. 657; AAhitehill v. Jacobs (AYis.) 44 N. AY. 630; Young v. Iron Co. 65 Mich. Ill, 31 N. AY. 814; AYoolfolk v. January (Mo.) 33 S. AY. 432; Mfg. Co. v. AAallis (AAash.) 48 Pac. 415; Robinson v. Bidwell, 22 Cal. 379; Gogebick Invest. Co. v. Iron Chief Min. Co. 78 AAis. 427, 47 N. AA. 726; Adamont Mfg. Co. v. AAallis, 16 AAash. 614, 48 Pac. 415.
The general rule is that the shareholder is not liable to the creditors after the insolvency of the corporation unless the circumstances are such that he would have been liable to the corporation itself. Deadwood First Nat. Bank v. Gustin Minerva Min. Co. 44 N. AA. 198; Union Sav. Asso. v. Seligman, 92 Mo. 635, 15 S. AA. 630; Burgess v. Seligman, 107 U. S. 20, 27 L. ed. 359; 10 Cyc. 651, 1053, 1054; Emerado Farmers Elevator Co. v. Bank of Emerado, 20 N. D. 270; Bank v. Moline & S. Co. 7 N. D. 211; Chase v. Redfield Creamery Co. 81 N. AA. 951.
A. TY. Fowler, for respondent.
The unpaid balance upon his stock is a statutory asset to which all creditors are entitled to resort. Marshall-AAells Hardware Co. v. New Era Coal Co. 13 N. D. 396; German Mercantile Co. v. AAanner, 25 N. D. 483; Easton Nat. Bank v. American Brick Co. (N. J.) 8 L.R.A. (N.S.) 2711, 64 Atl. 917; 4 Thomp. Corp. § 4801.
The books of the corporation are admissible to show prima facie when parties became stockholders and the amount paid or unpaid upon their stock. Fish v. Smith (Conn.) 47' Atl. 711.
Payment of stock subscription is an affirmative defense, and must be alleged and proved by defendant. Hargadine v. Breedlove (Olda.) 130 Pac. 267.
No particular form of acceptance is essential in order to constitute an offer to become a stockholder a binding contract. It is sufficient that the corporation, by its acts, shows that it equivocally accepts the offer. 10 Cyc. 384; Jackson v. Sabié, supra.
The appellants being purchasers of stock, and therefore stockholders, it is wholly immaterial that only intermediate stock certificates, and not final stock certificates, were delivered to them. Jackson v. Sabie supra; Holland v. Duluth (Minn.) 68 N. AA. 50; Balbraith v. McDonald, L.R.A.1915A, 465 and note.

Opinion:
.Robinson, J.
This suit was commenced in the summer of 1916. It is a suit by one defunct and bankrupt corporation against another of the same kind, and against several persons who were induced to subscribe for the worthless stock of the Timber Company. Before the action was commenced each corporation was legally dead and buried. It had ceased to exist and its charter had been canceled. However, judgment went against the Timber Company for some $40,000, against its subscribers, — Noecker, $5,115; Burgess, $1,390; Collinson, $112; Johnson, $667.
The case presents a wealth of material in the form of testimony, account books, and exhibits. The principal actor was Edward Wilson, who quit the state and went to New York city in January, 1913. In each corporation he was the organizer, president, manager, treasurer,— and the whole thing. Receiver Baldwin was nearly always the treasurer or director in one or both of the corporations, but Wilson never allowed him or any other person to handle the money, give checks, or keep the bank books. The first corporation was organized in 1906, with a stock capital of $100,000; the second, in 1909, with a capital of $1,500,000. The real purpose of each corporation was to sell blocks of worthless stock and investment certificates at 100 cents on the dollar, and to put the money into the pockets of Wilson. This he knew well how to do, and he did it.
The complaint is on a note to this effect:—
Fargo, May 27, 1906.
On the 1st day of December, 1912, for value received, I promise to pay to the order of the North Dakota Improvement Company $29,-345.50, with interest at 8 per cent.
[Signed] Timber Investment Company,
By E. A. Wilson, Pres.
Then it avers that each personal defendant is a stockholder of the Timber Investment Company, and has not paid for his stock.
By answer each one denies that he is a stockholder, and avers that in 1910, by fraud and deception of said companies, their agents, and managers, he was induced to subscribe for certain shares of worthless stock, and that in the year 1912 the subscription was duty rescinded and canceled.
The default judgment was given against the Timber Company without proof that Wilson had authority to make the note; It was given on an affidavit that on July 6, 1916, the summons and complaint were served on H. H. Aaker, secretary of the company. But in truth Aaker was not secretary of the company. It had ceased to exist and its charter was canceled February 1, 1915. In January, 1913, Wilson left the company for good, taking with him E. M. Farmer, who had been the real secretary. The company at once collapsed. The books fail to show that it ever did another particle of business, and fail to show that Aaker was ever secretary. But the only purpose of the judgment against the defunct Timber Company was to lay the foundation for a judgment against the other defendants.
As it appears, each appellant subscribed for a few shares of stock, made a pa(t payment, and refused to pay the balance. Each received from the Timber Company a certificate, giving the number of shares, the sum paid, and a promise to deliver the stock upon full payment. The by-laws of the company provide that "no certificate of stock shall be issued until full payment." Ex. A-15. A sample of the real stock certificate is in evidence. It is an imposing and magnificently engraved document, surmounted by a glorious spread eagle. It shows that the person therein named is a stockholder, and that his stock is fully paid. (52) Stockholders of a corporation are persons who hold stock. They are limited partners, because each has a right to share in the profits and losses, and, by his vote and otherwise, to direct and control the affairs of the company. In dealing with a corporation the creditors have a right to assume that the members are honest, and have paid, or will pay, for their stock which they have accepted and received. And the creditor who does not know to the contrary may assume that a corporation of $1,500,000 is not organized to swindle those who subscribe for stock. By statute each stockholder of a corporation is liable to honest .creditors to the amount unpaid on his capital stock. Comp. Laws, § 4555. Now the questions here present are few and simple:—
(1) Is the Wilson Improvement Company a creditor — an honest judgment creditor — entitled to maintain this action? The answer is: No, no, no.
(2) Are the appellants' stockholders? No.
(3) Were the subscriptions obtained by fraud and without consideration? Yes, yes.
(4) Were the subscriptions canceled before this action was commenced ? Yes, yes; most assuredly.
Certain.it is that in December, 1911, and December, 1912, the cancelation of each subscription was duly entered on the books of the company, both on the journal and in the ledger; and in like manner numerous other cancelations were made, amounting to some $30,000. While the books of the corporation are not necessarily evidence in its favor, they are certainly evidence against it.
Wilson knew of good reasons for canceling the stock. He knew, and all his agents and managers knew, that the stock was a mere gold brick; that the Timber Company had no property, save a worthless option on some timber licenses. He knew that no person had subscribed for or made payments on the stock, without some deceptive allurments and -promises. He knew how he had contracted to exchange large blocks of stock for timber licenses which he did not deliver, and how he had, at the same time, acted as buyer and seller. Ex. A-62. It may well be that, in dealing with his pals, Wilson was not as generous as he ought to have been, and yet they must have had some crumbs from their master's table. Baldwin paid for his ten shares of stock only $100. He was allowed for commissions a credit of $625, and he was permitted to pay the balance by merely adjusting it. Tie testifies: "I don't owe the company anything. I have adjusted the matter." Q. "How did you adjust it?" A. "Nothing more than by my statement." (75) What amazing innocence! Manifestly there is no consideration for the stock subscriptions, and the law will not enforce a promise to pay good money for nothing. 13 C. J. 368; Shellberg v. Wilton Bank, 39 N. D. 530, 167 N. W. 723. The promise to purchase the timber stock was in no way different from a promise to purchase a regular gold brick. The enormous one and a half million charter which the Timber Company displayed was itself a fraud and a gold brick. It cost $775, and it represented nothing of value.
Indeed it is passing strange that any court should entertain a suit on such a contract. In such a case the quibbles and fine theories of the law are of no avail. It is time for courts and counsel to know that the law must not be used to rob men of their property.
Counsel say the answer of Noecker is merely a general denial, and he did not appear at the trial; but that is no reason for asking the court to aid in robbing Noecker. The judgment against him is manifestly unjust. The Timber Company has had $1,500 of his good money for nothing, — for absolutely nothing. To hold that he must give up for nothing a further sum exceeding $5,000 would be a lasting reproach to the court.
Judgment reversed and action dismissed, with costs.