Court Opinion

ID: 6467105
Source: CourtListenerOpinion
Date Created: 2022-06-26 14:07:22.555859+00
Date Added: 2024-06-11T15:53:42.368641
License: Public Domain

Hamilton, J. (concurring).—I concur in the conclusion reached by the court in this case, and think the judgment should be reversed; but I can not agree with the views expressed in the opinion upon the question of what is known as the ‘.‘trust-fund doctrine;” nor can I agree with the court as to the effect to be given to the decision of the supreme court of the United States in the case of Hollins v. Iron Co., 150 U. S. 371. I understand the doctrine as announced and approved by that decision to be that there is no direct and express trust or lien attached to the propr erty and assets of a corporation in favor of its creditors so long as the corporation remains a solvent and going concern; that, when a corporation is created and placed in operation under its charter, it is a distinct entity — a distinct personality — in the eyes of the law; and, while it remains solvent, it has the same right to control and direct its affairs within the limits prescribed by the terms of its charter that an individual would have over his property. It has the right to acquire, lease, mortgage, sell, and dispose of its property within the limits of its charter, and so long as it acts without fraud or collusion, to the detriment of its stockholders or creditors. If its directors or officers attempt, by fraudulent means, to convey or misapply its funds or property, then a court of equity will interfere to protect the rights of the creditor’s and stockholders. But, while it remains solvent, it controls and directs its affairs independent of its creditors and stockholders, and there is no express trust or lien in favor of either against its funds or property. Becoming insolvent and in the hands of the court, it loses control over all its assets, and the same at once become .a trust fund in the custody of the court, who, in the absence of a trustee, administers upon and distributes them for the benefit of those who, under the law, may be entitled to them. Solvent and going, there is no lien or trust relation between the creditor and the company, but only the ordinary relation's of debtoi’ and creditor. Insolvent and in the custody of the court, the relations of trustee and cestui que trust at once arise, and the chancellor administers the trust, and disposes of the property, and distributes the proceeds —first, to the creditors, and, secondly, to the stockholders. It is earnestly contended by counsel for the complainants that this position is in open hostility to the fixed and settled doctrine of the supreme court of the United States, announced in all of its previous decisions. It is insisted that the capital stock of an incorporated company is a fund set apart for the payment of its debts; that the corporation is merely a trustee, holding its property for the benefit of its creditors and stockholders. It may not be out of place to look into some of the previous decisions of that court upon this question, and see if such a doctrine as contended for has really ever been the settled rule of that court, and, if so, to what extent has such rule been modified by the Tule in the Hollins case, above cited. Perhaps the most positive and expressive language of that court upon this subject is to be found in the opinion of Justiee Swayne in the case of Sanger v. Upton, decided in October, 1875, and reported in 91 U. S. 56, as follows: “The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private co-partnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity.” In order to- understand fully the scope and rheaning which should be given to the language of the court used in the above quotation, we must be advised as to the nature of the case which the court then had under consideration, that we may understand the principles of law therein declared as applied to the facts of the case which were then before the court. The Great Western Insurance Company, with an authorized capital of $500,000, had become insolvent, as a result of the great Chicago fire, of 1871. It was forced into bankruptcy, and all of its effects had passed into the custody of the bankrupt court, and were being administered by its assignee. Its assets consisted largely of the unpaid subscriptions to its capital stock. The bankrupt court, under the authority given it, and to provide means for the payment of' creditors, made an order which had the effect of a call upon the delinquent subscribers for their unpaid subscriptions, and the assignee, Upton, was ordered to collect the same. The appellant, Sanger, declined to pay, and suit was brought by the assignee to recover upon the stock. The company having become insolvent, and its property and effects having passed into the custody of the bankrupt court, to be administered by its assignee, the court held that the unpaid subscription to the capital stock was a trust for the benefit of the creditors. The court was there dealing with the property of an insolvent and dissolved corporation, then in its custody, and held that all of its property and effects, including its unpaid subscriptions to its stock, were a trust fund set apart for the payment of the debts of the company. Broad as is the above language used by the court, it must be construed as applying to a class of cases such as the one then under consideration. The court was then dealing with a bankrupt corporation, and announced a doctrine and applied a rule governing the property of a corporation in its insolvent state. I can not believe that the court intended to announce a broad and unvarying rule which should apply as well to the property and assets of a solvent and going corporation as it did to the property of an insolvent company in the hands of the court. Solvent and going, the property and assets of a corporatioii are managed and controlled absolutely by the directors and officers of the company, subject only to the rules of law applicable to debtor and creditor, and the right of the latter to collect its demands. If the company becomes insolvent, and is taken charge of by the court, the conditions in relation to its property at once change. The company loses control, and a trust is created on behalf of both creditor and stockholder against such property and assets; and the right then to have the same collected, converted into money, and applied by the court to the payment, first, of the creditors, and next to the stockholders, clearly exists. If an attempt should be made by the directors or officers of the insolvent corporation to fraudulently misapply its funds, or to engage in enterprises not warranted by its charter, the stockholders may interfere and call them to account for such action, and prevent such attempted abuse of their powers. This right of the stockholders of a solvent corporation to interfere in such cases is based, not upon the idea that they have a lien upon the property of the company, or an express trust in their favor, but upon the ground that the agent may always be compelled to account for the misapplication of the funds of his principal, and for the abuse of the power of his agency. I do not think that the supreme court, by the language used in the case of Sanger v. Upton, supra, or in other similar cases, intended to lay down the universal rule that the property and assets of a solvent and going corporation are a trust fund in the hands of the company, for the benefit of its stockholders and creditors, but intended only to make such 'rule applicable to corporations which were insolvent and in process of liquidation. That this is the correct view as to what has been decided by that court is confirmed by the language used by it in subsequent decisions. In the case of Webster v. Upton, assignee, decided by the same court, at the same term, and in a case arising out of the same bankrupt company, brought by the assignee to collect its unpaid stock subscriptions, Justice Strong, on page 71, in speaking of the liability of the subscribers for the unpaid subscriptions, observes: “This results from the fact that the whole subscribed capital is a trust fund for the payment of creditors when the company becomes insolvent.” 91 U. S. 71. This clearly shows that the court, in the use of the language in the Sanger case, “that the capital stock of a corporation is a fund set apart for the payment of the debts to that extent,” intended only to apply the same to insolvent corporations in process of liquidation by the court, and not to solvent corporations generally. In the case of Terry v. Anderson, 95 U. S. 628, the Planters’ Bank of the state of Georgia had become insolvent and failed, and an assignment was made for the benefit of its creditors. A bill was filed against the stockholders to reach the unpaid subscriptions to the stock of the bank. Chief Justice Waite, in delivering the opinion of the court, says: “Ordinarily, a creditor must put his demand into judgment against his debtor, and exhaust his remedies at law, before he can proceed in equity to subject choses in action to its payment. To this rule, however, there are some exceptions : and we are not prepai’ed to say that a creditor of a dissolved corporation may not, under certain circumstances, claim to be exempted from its operation. If he can, however, it is upon the ground that the assets of the corporation constitute a trust fund, which will be administered by a court of equity in the absence of a trustee; the principle being that equity will not permit a trust to fail for want of a trustee.” The court in that case was dealing with an insolvent corporation, and settling a controversy between the creditors of the company and the liability of a delinquent subscriber, and declares simply that the assets of an insolvent corporation are a trust fund which will be administered by a court of equity, and would not .allow the trust to fail for want of a trustee. In the case of Graham v. Railroad Co., 102 U. S. 148, a bill was filed by the complainant, Graham, against the La Crosse & Milwaukee Railroad Company, and the Milwaukee & St. Paul Railway Company, and Moses Kneeland and others to set aside certain conveyances made by the officers and- agents of the company of certain real estate belonging to the company, and to subject the same to the payment of the claims of the complainant, who became a judgment creditor of the company subsequent to the conveyance. The conveyances were alleged to have been fraudulently made by and to the agents and officers of the company, and for less than their full value. The conveyances were made at the time when the company was a solvent and going concern. The supreme court affirmed the decision below, denying the right of recovery. Justice Bradley, in delivering the opinion of the court, in discussing the trust-fund dóctrine, and the right of solvent and insolvent corporations to manage and dispose of their property and assets, on page 160, 102 U. S., observes: “It is contended, however, by the appellant, that a-corporation debtor does not stand on the same footing as an individual debtor; that, whilst the latter has supreme dominion over his own property, a corporation is a mere trustee, holding 'its property for the benefit of its stockholders and creditors; and that if it fail to pursue its rights against third persons, whether arising out of fraud or otherwise, it is a breach of trust, and creditors may come into equity to compel an enforcement of the corporate duty. This, as we understand, is the substance of the position taken. We do not concur in this view. It is at war with the notions which we derive from the English law with regard to the nature of corporate bodies. A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but, in law, it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as absolutely as an individual can hold it. Its estate is the same. . Its interest is the same. Its possession is the same. Its stockholders may call the officers to account, and may prevent any malversation of funds, or fraudulent disposal of property on their part. But that is done in the exercise of their corporate rights, not adverse to the corporate interests, but coincident with them. When.a corporation becomes insolvent, it is so far civilly dead that its property may be administered as a trust fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other circumstances, are as much the absolute property of the corporation as any man’s property is his.” If the language used by that court in any of its previous decisions were such as to leave a doubt as to its position upon the trust-fund doctrine, and as to the power of a corporation over its funds or property, or as to the legal relations existing between a corporation and its stockholders, such doubt is clearly removed by the expressive-language used by Justice Bradley in this decision. It is, in effect, that a corporation, in its solvent condition, subject only to the terms of its charter, has absolute dominion oyer its property and assets, freed from any lien or trust in favor of either the creditor or stockholder. Becoming-insolvent, the corporation is civilly dead; and a court of equity, at the instance of the proper parties, will take charge of its property and effects, and will administer them as a trust fund, for the benefit of those who may be entitled to it. The insolvency of the company, and the possession of its affairs by the court, convert at once all of the property into a trust fund, which till then is not a trust fund, or subject to any lien on behalf of the creditor. In the case of Railway Co. v. Ham, 114 U. S. 587, there had been a consolidation of four railroad companies, under an agreement whereby the new company was to protect the rights of the old companies. The new company, subsequent to the consolidation, executed a new mortgage on all the property, to pay a large bonded indebtedness. In a controversy between the bondholders of the new company and a mortgagee of one of the old companies, it was contended that the property of the original company, the Toledo & Wabash Railway Company, was a trust-fund for the payment of all its creditors; and, when the new company took the property of this company under the consolidation, it took it charged with that trust. Justice Gray, in delivering the opinion of the court (114 U. S. 594) says: “The property of a corporation is, doubtless, a trust fund for the payment of its debts, in the sense that when the corporation is lawfully dissolved, and all its business wound up, or when it is insolvent, all its creditors are entitled, in equity, to have their debts paid out of the corporate property before any distribution thereof among the stockholders.” The case of Hawkins v. Glenn, 131 U. S. 319, was a bill in equity filed by Glenn, as trustee of the National Express & Transportation Company, an insolvent corporation, to recover the unpaid subscription due from delinquent shareholders. Chief Justice Fuller, in rendering the opinion of the court (131 U. S. 332, 9 Sup. Ct. 743), observes: “Unpaid subscriptions are assets, but have frequently been treated by courts of equity as if impressed with a'trust sub modo, upon the view that, the corporation being insolvent, the existence of creditors subjects these liabilities to the rules applicable to funds to be accounted for as held in trust.” In the case of Fogg v. Blair, 133 U. S. 534, the St. Louis & Keokuk Railroad Company was chartered by the legislature of the state of Missouri in 1867. It located its road, and the appellant, Fogg, did something over $9,000 worth of work for the company, the amount of which was settled upon between him and the company in September, 1870. In June, 1872, another company, known as the St. Paul, Hannibal & Keokuk Railroad Company, was also chartered; and, under an arrangement made between the two companies, the first company sold to the latter all its property •and effects, the latter agreeing to assume and pay all liabilities incurred by the first company. Subsequent to this, the new company executed a mortgage to the •defendant, Blair, as trustee, to secure a large amount of bonds issued by the new company upon the road. TJpon default being made upon the bonds, Blair brought a suit to foreclose the mortgage, to which Fogg was made a party. The latter answered, and filed a cross bill, claiming a lien prior to the bonds, and contended that the new company, under the contract of purchase, took all of the property of the old company, charged with a trust in favor of himself and other creditors of the old company. This contention was denied, and the cross bill dismissed. Justice Field, rendering the opinion of the court (133 U. S. 541), says: “We do not question the general doctrine invoked by the appellant, that the property of a railroad company is a trust fund for the payment of its debts, but do not perceive any place for its application here. That doctrine only means that the property must first be appropriated to the payment of the debts of the company before any portion of it can be distributed to the stockholders. It does not mean that the property is so affected by the indebtedness of the ■company that it' can not be sold, transferred, or mortgaged to bona fide purchasers for a valuable consideration, except subject to the liability of being appropriated to pay that indebtedness. Such a doctrine has no existence.” A careful examination of the above cases will show that they do not support the contention that' there is any direct trust or lien upon the property and assets of a corporation in favor of its creditors. I do not think that that court, in any of the above eases,' intended to declare such a rule to be the doctrine of that court; but, if there should have existed any doubt upon this subject from any language used by the court in any of the above cases referred to, then such doubt is clearly removed, and the' position of that court distinctly defined, by the clear language used by it In the case of Hollins v. Iron Co., 150 U. S. 371. The defendant company was created a corporation under the laws of Alabama. In 1882 it made and executed to Preston B. Plumb a mortgage to secure $500,000 in bonds. In August, 1887, he, as trustee, took possession of all of the property, and filed a bill to foreclose the mortgage. Some three months after the commencement of this suit, the complainant, who was simply a contract creditor, with no lien upon the property, filed a bill on behalf of himself and other unsecured creditors against the company, the trustee, and unpaid subscribers to the stock of the company, charging that the bonds and mortgages were invalid, setting up the unpaid subscriptions to the stock, asking for a receiver, that the stock be collected, and that the property be sold for their benefit. A decree of foreclosure was entered in the Plumb suit, and the bill of the complainant dismissed. It was contended by the complainant that the property and assets, including the unpaid subscriptions to the capital stock of the company, were a trust fund for the benefit of himself and other general creditors, which could be enforced in their behalf. The court, by Justice Brewer, after reviewing the decision of that court upon .the doctrine of trust funds, observes (150 U. S. 381): “While it is true language has been frequently used to the effect that the assets of a corporation are a trust fund held by a corporation for the benefit of creditors, this has not been to convey the idea that there is a direct and express trust attached to -the property. As said in 2 Pom. Eq. Jur., section 1046, they ‘are not, in any true and complete sense, trusts, and can only be called so by way of analogy ov metaphor.’ ” And the court, in further discussing this subject, on page 383, says: “In other words, — and that is the idea which underlies all these expressions in reference to ‘trust’ in connection with the property of a corporation, — the corporation is an entity, distinct from its stockholders as from its creditors. Solvent, it holds its property as any individual holds his, free from the touch of a creditor who has acquired no lien; free, also, from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to the creditors, places the property in a condition of trust, first for the creditors, and then for the stockholders. Whatever of trust there is arises from the peculiar and diverse equitable rights of the stockholders as against the corporation in its property, and their conditional liability to its creditors. It is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property, as such, for the direct benefit of either creditor or stockholder.” Further continuing this discussion, the court says, on page 385: “The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud, or sometimes even mere mismanagement, in respect thereto; but, as between itself and its creditors, the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor.” The relation existing between a corporation and its creditors is somewhat analogous to that which exists between a partnership and its creditors. If a partnership becomes insolvent, a court of equity assumes charge of all of its property and effects, and, through its officers, collects and distributes the fund, first, to partnership creditors, before any portion of it can be applied either to the partner or to his individual creditor. It may be said that the court holds the property in trust for the partnership creditors,' or that, they have an equitable lien thereon. This means that the partnership creditors simply have an equitable prior right to have their claims satisfied out of the partnership property in the hands.of the court-belonging to the insolvent partnership before individual creditors can be paid. So it is with a corpoi’ation. Solvent and out of the hands of the court, it holds complete dominion over its property, unfettered by any direct trust or specific lien in favor of either creditor or stockholder. It can deal and be dealt with in relation to its property as effectually as an individual can with his. "While the directors and officers stand in a fiduciary relation in respect to its property, and may be called to account by the stockholders for any fraud or mismanagement of its affairs, yet, as between the corporation and its creditors, there exists simply the relationship of debtor and creditor, and the company does not hold its property charged with any direct trust -or lien in their favor. It may be contended that his view is in antagonism to the prevailing and settled opinions of both state courts and text writers upon this subject. Whatever may have been the views of text writers, ratified and supported as they may have been by courts of high state authority, it is sufficient for us that the supreme court of the United States, in the case last cited, has given, in clear and unambiguous language, it's latest emphatic expression upon this question, and its opinion is a controlling authority upon this court. It is said that to adopt this view is to overturn a settled rule applicable to trust funds which, from the days of Judge Story, has' grown and become deeply imbedded in our state and national jurisprudence. To say that this will overturn a settled rule is but to confound the destruction of a principle with the time and manner of its application. There is a wide distinction between overturning a principle and the time, method, and circumstances of its application. The principles underlying the trust fund doctrine, as applied to tho property and assets of a corporation, are not overturned, but still exist; not, however, in the broad and unlimited degree which some courts of high authority have announced, but in a more limited sense; not in the broad sense that the entire property and assets of a solvent and going corporation are a trust fund, charged with an express trust or a specific lien in favor of either stockholder or creditor, but in the sense that when the conditions and circumstances in relation to the business of a corporation arise, when it becomes insolvent and in the custody of the court, then the principles of the trust fund will apply, and will lay hold of the property, and, under the supervision of the court, will be administered to the creditors and stockholders. >We may observe that this view is consonant with both logic and reason. The trust fund idea had its origin in the early history of our jurisprudence, when the business of the country was confined to narrow limits, when there were comparatively but few organized companies engaged in the transaction of business, and when there were but few, if any, railroad corporations in existence. From a provincial state, we have become a great commercial nation, whose vast business interests are largely owned and conducted by artificial persons, in the form of corporate bodies. Probably four fifths of the capital invested in 4he commerce and business of the country is controlled and managed in this manner. To declare that this entire property is held by those corporate bodies charged with an express trust in favor of the individual stockholders, or covered by a specific lien in favor of the creditor, is to extend the application of the trust fund idea to a dangerous limit, and to a limit never comtemplated by the founders of that doctrine. This is not the abrogation of the rule, nor the destruction of the doctrine, but simply to limit its application to that class of cases where the facts and circumstances will justify the courts in invoking its aid for the relief of creditors and stockholders. The individual defendants in the case under consideration could not, or did not, pay their ten per cent on their subscriptions to the stock of the railroad company. The officers and directors of the company conceived that it would be to the interest of the company to take back this stock from these original subscribers, sell and negotiate it to other persons, and thus utilize it in the construction of the road. This the officers and directors of the company did, at a time when the corporation was solvent, and managed by a board of director’s and officers composed of other persons than the defendants. The corporation, by this transaction, did not lose the benefit of this stock subscription, but controlled and disposed of the same, so that the company received the full benefit of it in the final construction of the road. The company being a solvent and going concern at the time of this transaction, there was no lien or trust in favor of the complainants as against this stock or the unpaid subscriptions of the company; and the directors, pursuing a course which they deemed for the best interest of the company, chose to take back the stock, and sell and dispose of it to other parties, for the use and benefit of the company ; ■ and, there being no actual fraud alleged or shown in the transaction, the complainants have no legal right to complain. I therefore concur in the conclusion reached by the court, upon the grounds herein stated, and also upon the grounds stated by Associate Justice Bantz as to the statute of limitation.