Court Opinion

ID: 6309598
Source: CourtListenerOpinion
Date Created: 2022-02-18 19:19:14.147383+00
Date Added: 2024-06-11T08:59:02.700147
License: Public Domain

The opinion of the Court was delivered by
Paxson, J.
It is not denied that both classes of stockholders of the Williamsport Eire Insurance Company are liable to creditors of said company. The contention is whether the “cash stockholders,” or the “ note stockholders,” as they are called for convenience, are primarily liable. The company was organized in 1869, with an authorized capital of $100,000, divided into two thousand shares, of $50 each. Of these shares, thirteen hundred and six appear to have been subscribed for, $25 per share paid thereon, and the company commenced business. In the month of January, 1870, the remaining six hundred and ninety-four shares were subscribed for by the officers and directors of the company, who respectively gave their notes for $25 per share. These notes were, by special order of the board, handed to the president of the company, and by him deposited specially in the West Bz’anch Bank, where they remained until some time in 1873, when, in pursuance of a resolution of the boai’d, all of said .notes were returned to the. parties, and the stock retransferred to the company.
At this time the latter had become insolvent. This stock is what has been referred to as the note stock.
The above arrangement was altogether a peculiar one. Its avowed object was to enable the company to undergo an inspection by the insurance commissioner. Its practical effect was to create the impression that the stock was all sold, and 50 per cent, paid up thereon. The notes referred to appear as a part of the assets of the company in its published statemezits. That the transaction was a fraud upon creditors was conceded; indeed, it is too plain a proposition to dignify by an az’gument or the citation of authority. It was contended, however, that it was good between the “nóte stoekholdei’s” and the company ; that, as it was intended for the benefit of the lattez’, and was done in entire good faith, the company cannot questiozi it after having returned the subscribez’s their notes and accepted from them a suzuender of the *127stock. Conceding all that can be legitimately urged in support of this proposition, it fails to meet the requirements of the case. It is the creditors of the company who are now demanding that the note stockholders shall make good their subscriptions. Have the latter any such equity as entitles them to throw the burden of this call upon the shoulders of the cash stockholders ? It may be if the cash stockholders had assented to the arrangement made by the note stockholders, as between themselves, they might have been bound by it. But no such assent appears upon this record, nor does the master find they had knowledge of it. The facts, from which he impliedly infers such notice, are too weak and inconclusive to affect the cash stockholders. It is true the matter appears upon the minutes of the board, but there is nothing to show that the stockholders ever saw them. This is a matter between the officers and directors and a portion of the stockholders. While the action of the former, in the line of their duty and to the extent of their power, binds the corporation, the stockholders are not aftecled with notice of acts of commission or omission of the board of directors which are ultra vires. This transaction, briefly stated, was an appropriation by the officers and directors of the six hundred and ninety-four shares of stock to themselves. If the company proved successful they would have the benefit of auy advance in the market value of the stock, and could draw the dividends. If, on the other hand, disaster overtook it, they could return the stock, and get back their notes. This is just what was done here.
Whatever may have been the motive, it is too plain for argument that this fast and loose arrangement gave the note stockholders an unfair advantage over the cash stockholders. And we cannot say that it worked no injury. The fact that the stock was apparently all sold may have induced persons to purchase stock in the market who would not otherwise have done so. Then again, the note stockholders participated in the dividend of July, 1870, and by that amount the cash stockholders were injured.
We are of opinion that both classes of stockholders are responsible to the creditors, and that neither has an equity to throw such burden upon the other. The cash stockholders having paid up $25 per share on their stock, the note stockholders are primarily liable until they have, respectively, paid up a like amount; after that, pro rata.
The other questions raised by the assignments of error were not pressed at the argument, and need not be discussed.
The decree is reversed, at the costs of the appellees, and it is ordered that the record be remitted for further proceedings.