Case Name: ALLEN et al. v. RHODES
Court: United States Court of Appeals for the Eighth Circuit
Jurisdiction: United States
Decision Date: 1916-02-05
Citations: 230 F. 321
Docket Number: No. 4193
Parties: ALLEN et al. v. RHODES.
Judges: Before SANBORN and SMITH, Circuit Judges, and TRIEBER, District Judge.
Reporter: Federal Reporter
Volume: 230
Pages: 321–328

Head Matter:
ALLEN et al. v. RHODES.
(Circuit Court of Appeals, Eighth Circuit.
February 5, 1916.)
No. 4193.
1. CORPORATIONS <@=5104-STOCK SUBSCRIPTIONS — LIABILITY-—ESTOPPEL.
Subscribers to the stock of a corporation, who were directors and attended meetings as such, or who ai,tended and participated in stockholders’ meetings, or who paid the first assessment on stock subscriptions and thereby recognized the existence oí the corporation, were estopped to defend a suit by a receiver to recover the unpaid subscriptions on the ground that the full amount of the capital stock had not been subscribed in good faith.
[Ed. Note. — For other eases, see Corporations, Cent. Dig. § 451; Dec. Dig. ©=5104.]
2. Corporations <@=5562 — Stock Subscriptions — Liability to Creditors.
Though only a small part of the capital stock of a corporation was subscribed, where the subscribers organized the corporation by electing directors and other oliicers, entered into contracts, held directors’ and stockholders’ meetings for nearly five years, and some of them paid an assessment on the subscriptions, there was a de facto if not a de jure corporation, and a receiver could collect the unpaid subscriptions for the purpose of paying bona fide creditors, even though the subscribers could not be hold liable to the corporation for the payment of their subscriptions until the stock was fully subscribed in good faith.
fEd. Note.- — For other eases, see Corporations, Cent. Dig. §§ 2265, 2266, 2208-2271; Dec. Dig. <@=5562.]
8. Corporations <@=534(6) — Stock Subscriptions — Liability to Creditors.
If debts aro incurred by a de facto corporation, even if it has never been legally organized, subscribers, standing by and making no objections, will be estopped from pleading the nonexistence of the corporation, when sued for the benefit of creditors.
[Ed. Note. — For other cases, see Corporations, Cent. Dig. §§ 92, 96; Dec. Dig. @=534(6).]
Smith, Circuit Judge, dissenting.
Appeal from the District Court of the United States for the District of Nebraska; Page Morris, Judge.
Suit by Walter H. Rhodes, successory receiver of the Omaha, Decatur & Northern Railway Company, against A. W. Allen and others. From a decree in favor of complainant, certain defendants appeal.
Affirmed.
The appellee, as the successory receiver of the Omaha, Decatur & Northern Railway Company, a corporation organized under the laws of the state of Nebraska, brought this suit against the appellants to recover unpaid assessments on their subscriptions to the capital stock of the railway company. The facts are practically undisputed, the case having been submitted on an agreed statement of facts, and are as follows:
On January 20, 1903, ten persons signed and acknowledged articles of incorporation, under the laws of the state of Nebraska, of the Omaha, Decatur & Northern Railway Company, and filed the same with the secretary of state, as required by the laws of that state, on January 21, 1903. The purpose of the corporation was to construct an electric railroad, through certain counties in the state of Nebraska.
On February 24, 1903, the stock books were opened and subscriptions made for 1,106 shares of the stock. Among these subscriptions was one made by F. W. Bement for 980 shares, of the par value of $98,000, each share being of the face value of $100. The other shares were subscribed by the defendants, who were appellants in the cVurt below. The subscription by F. W. Bement, it is claimed, was not in good faith, as he had no means and did not intend to pay for the same, but was to receive them for his services as the promoter of the enterprise. These services were to be that he was to finance the company, sell the stock, place the bonds, and secure the money to build the railroad. For this he was to receive the 980 shares pf stock as fully paid up.
A meeting of the stockholders was held on April 16, 1903, when directors were elected. On April 25th, the board of directors thus elected, held a meeting, at which by-laws for the company were adopted and officers elected. At that meeting an assessment of 10 per cent, payable at once was made, and paid by some of the defendants, but not paid by others, nor Bement. Directors’ and stockholders’ meetings were held after the organization a number of times, the last on November 26, 1907, after which date it does not appear any further meetings were held.
The full amount of the stock was never subscribed during the time the corporation was in existence. At a meeting of the directors held on August 24, 1903, the board made an assessment of 15 per cent. On.January 5, 1905, the board made another call of 80 per cent., declaring that 20 per cent, had heretofore been called, although the record showed that 25 per cent, had been called, so that an assessment of 75 per cent, would make the stock entirely paid up, when paid; but neither of these two assessments were paid by any of the stockholders.
Contracts were entered into by the board of directors with different parties for services to be performed, among them with Clifford C. Peirce and Lester F. Wakefield, the latter being employed as chief engineer of the company. Afterwards Peirce and Wakefield instituted suit against the railway company in the Circuit Court of the United States for the District of Nebraska, for money due them for their services, and on March 31, 1908, they secured judgment against the railway company for $3,000, interest, and costs; an execution was issued thereon, and returned unsatisfied on the 10th day of July, 1908, whereupon they filed a creditors’ bill in the Circuit Court of the United States for the District of Nebraska, for themselves, and all other creditors of the railway company, praying for the appointment of a receiver, to collect the assets and apply themi to the payment of their judgment and the claims of such other creditors, as make themselves parties to the action.
At a hearing Lester R. Sloneeker was, on the 4th day of July, 1908, appointed receiver of the railway company, and he resigning on December 21, 1908, the plaintiff, Rhodes, was appointed as successory receiver, and qualified as such. Later an order was entered by the court in that ease, requiring the creditors to present and file their claims with the receiver, and that they be referred to a special master, who was to pass upon them. On the 29th day of September, 1909, the special master filed a report, in which he reported the allowance of claims of eight creditors, amounting to a total of $5,600.72, with interest thereon; that the only assets which came to the hands of the receiver were the unpaid assessments on the subscriptions to the capital stock. This report was by the court approved and thereupon, by authority of the court, this bill was filed against the defendants to collect the amount due from them respectively on their subscriptions.
Answers were filed by the defendants, but the only serious defense made was that, as the full amount of the capital stock of $1,000,000 was never subscribed, except a small amount, viz., $12,600, the subscription of Bement being fraudulent, with no intention of being paid, that the corporation never had a legal existence and therefore they are not liable.
Upon final hearing a decree was rendered by the court against the defendants, 69 in number, for the amounts respectively due from each of them on their subscriptions. The decree further provided: “Complainant have execution against each of the above-named defendants individually, against whom judgment is rendered, for his proportionate share of the corporate debts, complainant’s claim, interest, costs, receiver’s and counsel’s fees, in the total sum of $9,490, to November 15, 1913, and in the event that complainant is unable to collect from each of the aforesaid individual defendants upon the said execution, his proportionate share of the said complainants’ claim, corporate indebtedness, he shall so report the same to this court, and the court will thereupon order additional executions to be issued against each of the said defendants, from time to time, and his proportionate share of the said corporate indebtedness, costs, interest and fees, so remaining unpaid until the full amount of complainants’ claim and the corporate debt, with interest and cost's, are fully paid: Provided, that no execution for an amount in excess of the amount hereinbefore adjudged to be due from each of the defendants shall be ordered.”
From this decree this appeal was prosecuted by 13 of the GO defendants against whom judgment had been rendered by the decree.
H. C. Brome and Clinton Brome, both of Omaha, Neb., for appellants.
Edward M. Martin, of Omaha, Neb., for appellee.
Before SANBORN and SMITH, Circuit Judges, and TRIEBER, District Judge.

Opinion:
TRIEBER, District Judge
(after stating the facts as above). Assuming that the agreement with Bement made his subscription fraudulent and void, the question to be determined upon this appeal is whether, owing to the fact that only $12,600 of the capital stock of the railway company, which was to be $1,000,000, was subscribed in good faith, the corporation had such existence as to make those who did subscribe liable to creditors of the company for the unpaid portions of their subscriptions.
The authorities arc conflicting whether subscriptions made to a corporation, when the full amount of the capital stock has not been subscribed, or, if subscribed, some of the subscriptions' are not in good faith, are collectible by the corporation, when the statutes of the state, under which the corporation was formed, are silent on the subject and the articles of incorporation do not contain such a provision. Neither the statutes of Nebraska nor the articles of incorporation make it a, condition precedent that they are to become effective oniy when the full amount of the capital stock is subscribed ifi good faith. But assuming, without deciding, that, until the entire capital stock is subscribed in good faith, the subscribers cannot be held liable to the corporation for the payment of assessment calls on their subscriptions, the question is whether that rule applies to an action by a receiver appointed on behalf of judgment creditors of the corporation.
The appellants James R. Anderson, H. V. Byram, C. E. Barlow, Geo. M. Byram, G. H. Busse, P. 13. Gordon, Richard Lewis, and James P. Latta were directors and attended meetings as such. The following appellants attended and participated in stockholders' meetings of the corporation: I. N. Holman, j. R. J. Mitten, H. G. Byram, C. E. Barlow, James McAllister, Charles Phipps, George Byram, Eugene L. Byram, G. H. Busse, J. E. Butts, P. B. Gordon, William B. Gregg, Richard Lewis, and Thos. Ashley. The following appellants paid the first assessment, and thereby recognized the existence of the corporation: James R. Anderson, J. E. Henry, J. R. J. Mitten, W. B. Watson, j. M. Comically, Cliloc R. Canfield, Eugene L. Byram, E. IT. Deman, A. K. Sears, and Neis P. Larson. These .appellants are clearly estopped, and as to them the decree must be affirmed, regardless of what conclusion we may reach as to the liability of the other appellants. 7 Ruling Case Law, p. 235; Planters', etc., Packet Co. v. Webb, 144 Ala. 666, 39 South. 562; Lincoln Park Chapter v. Swatek, 204 Ill. 228, 68 N. E. 429.
The record shows that, although but a small part of the capital stock of the corporation was subscribed, the subscribers organized the corporation by electing directors and other officers, entered into contracts, held directors' and stockholders' meetings for nearly five years, the first meeting being held on February 24, 1903, and the last on December 26, 1907, and that some of the subscribing defendants paid the first call of 10 per cent. These acts certainly make it a de facto corporation, if not de jure, and being a de facto corporation the subscribers to the stock are liable to creditors of the corporation for unpaid subscriptions. Tulare Irrigation District v. Shephard, 185 U. S. 1, 13, 22 Sup. Ct. 531, 536 (46 L. Ed. 773). It was there held:
"From the authorities, some oí which are above cited, it appears that the requisites to constitute a corporation de facto are three: (1) A charter or general law under which such a corporation as it purports to be might lawfully be organized; (2) an attempt to organize thereunder; and (3) actual user of the corporate franchise. Being a de facto corporation, the general rule is that none but the state can call its existence in question."
And the court held that, being a corporation de facto, a holder of its bonds could recover on them. See also Harrill v. Davis, 168 Fed. 187, 94 C. C. A. 47, 22 L. R. A. (N. S.) 1153, decided by this court.
In 5 Thompson on Corporations (2d Ed.) § 5183, it is said:
"The rule is believed to be without exception that a stockholder sued by or on behalf of the creditors after the corporation has become insolvent is estopped to question the legal existence of the corporation of which he was a stockholder."
And in section 5184 the same author states:
"A stockholder cannot urge as a defense that the corporation was irregularly or illegally organized, since his liability is an incident to the liability of the corporation, and the corporation would, in most cases, be estopped to set up such a plea. It is enough that the corporation is a corporation de facto"— citing numerous authorities, which sustain the text.
And this seems to be the. rule in the state of Nebraska, as established by the decisions of the Supreme Court of that state. In Lusk v. Riggs, 70 Neb. 713, 97 N. W. 1033, it was held that where the articles of incorporation have not been filed with the secretary of state, as required by the statutes of the state, the corporation, although having acted as such, would not be held liable, nor could it enforce its contracts; but upon a rehearing this decision was set aside, and the rule, recognized in other states, followed that, being a de facto corporation, persons who dealt with it as such cannot question its legal existence, nor can the corporation plead that it was never legally organized. 70 Neb. '718, 102 N. W. 88. The same rule is laid down in 10 Cyc. 494, 495.
A leading case on that subject is Minor v. Mechanics' Bank, 1 Pet. 46, 65, 7 R. Ed. 47. In that case only $320,000 out of $500,000 of the capital authorized by the charter was subscribed in good faith, but the court did not regard tliis deficiency in tlie subscriptions as at all affecting the status of the corporation or the validity of its operations. In Aspinwall v. Butler, 133 U. S. 595, 10 Sup. Ct. 417, 33 L. Ed. 779, it was said:
"There was no express condition that the individual subscriptions should, be void if the whole $600,000 was not subscribed; and, in our judgment, there was no implied condition in law to that effect. Each subscriber, by paying the amount of his subscription, thereby indicated that it was noti made on any such condition. It is not libe the case of creditors signing a composition deed to take a certain proportion of their claims in discharge of their debtor. The fixed amount of capital stock In business corporations often remains unfilled, both as to the number of shares subscribed and as to payment of installments ; and the unsubscribed stock is issued from time to time as the exigencies of the company may require. The fact that some of the stock remains unsubscribed is not sufficient ground for a particular stockholder to withdraw his capital."
To the same effect is Scott v. De Weese, 181 U. S. 202, 21 Sup. Ct. 585, 45 L. Ed. 822. In the Minor Case it was also held that a fraud between some of the original subscribers and commissioners, whereby their subscriptions were not made bona fide, but with the intention of not paying for the stock, could not be set up to the injury of creditors, who did not participate in nor have notice of the fraud. Cole v. Satsop R. R. Co., 9 Wash. 487, 37 Pac. 700, 43 Am. St. Rep. 858; Farnsworth v. Robbins, 36 Minn. 369, 31 N. W. 349; Morrison v. Dorsey, 48 Md. 468; Musgrave v. Morrison, 54 Md. 161.
If debts are incurred by a de facto corporation, even if it has never been legally organized, the subscriber, standing by and making no objections, will be estopped from pleading the nonexistence of the corporation, when sued for the benefit of creditors. Homan v. Steele, 18 Neb. 652, 26 N. W. 472; Hudson v. Greenhill Seminary, 113 Ill. 618; International Fair Association v. Walker, 83 Mich. 386, 47 N. W. 338. In the last cited case there had only been a preliminary agreement to form the corporation, and it was held:
"The object sought to bo accomplished by this preliminary agreement was a lawful one; the promises contained in this preliminary agreement were mutual, and the acts done and the moneys expended were in reliance upon these original subscriptions; and there could be no difficulty in enforcing this agreement at the common law."
In Gress v. Knight, 135 Ga. 60, 68 S. E. 834, 31 L. R. A. (N. S.) 900, it was well said:
'When a person becomes a stockholder of a corporation, be becomes a part of it. Its agents are in a sense his agents. They go out and deal with the public. If through their dealings debts are incurred, assuming both the stockholder and the creditor to be innocent and that one must suffer, the former, who put it in the power of the agents to do the wrong, should suffer rather than third parties, who dealt with such agents."
There is no pretense that any fraud has been practiced on any of these appellants, who probably were influenced to subscribe to the stock of the corporation by the belief that it would greatly benefit them by affording them cheap and rapid transportation. During the entire time the corporation was alive, none of them ever objected to any acts of the directors, nor asked to be relieved of their subscriptions. The debts which have been allowed against the corporation have been found by a court of competent jurisdiction to be bona fide and justly duetto the parties, for services rendered in good faith, under contracts with the corporation, and we see no reason why the subscribers to the stock should'now be permitted to escape the consequences of their own acts, whether due to carelessness or ignorance.
The decree is right, and is affirmed.