Court Opinion

ID: 3430571
Source: CourtListenerOpinion
Date Created: 2016-07-05 19:59:32.830495+00
Date Added: 2024-06-11T14:03:42.851157
License: Public Domain

I believe the foregoing opinion to be radically and fundamentally wrong, and for that reason I cannot allow it to pass without expressing my dissent. The opinion on the original submission of the cause was concurred in by four members of the court; and, although it is true that the case has been elaborately argued upon the rehearing, there has not been a single additional reason adduced why the decision should be other than that *Page 485 
already given in the opinion heretofore filed. I say this with all the printed arguments before me, and, to show that I am correct in the statement, I quote from the original opinion as follows:
"As we understand the position of counsel for plaintiffs, they concede that a corporation may, as between itself and one to whom it is indebted, make a valid disposition of its stock, and issue full paid certificates of stock for such consideration as may be agreed upon by the contracting parties. But it is claimed this cannot be done to the prejudice of the creditors of the corporation, and it is urged that the mere showing that the stock held by defendants was issued to them in payment of a debt due them at the rate of twenty cents on the dollar renders the defendants liable to the creditors for the remaining eighty cents on the dollar. On the other hand, it is contended by counsel for defendants that, in the absence of fraud, such a transaction is valid between the parties, and, if entered into in good faith, cannot be impeached by creditors of the corporation.
"In the case of Phelan v. Hazard, 5 Dill., 45, the parties were the owners of a tract of land supposed to be mining property. The land was incumbered by certain mortgages. Rowland G. Hazard, one of the owners, was the holder of one of these mortgages. Articles of incorporation were adopted by the owners, and the property was conveyed to the corporation, for which it issued to the owners certain shares of full-paid stock. Rowland G. Hazard afterwards transferred his stock to the defendant. Afterwards the corporation made its promissory notes to the plaintiff's assignor, and the action was brought to recover the amount due on the promissory notes, upon the ground that the stock had never been paid for, and defendant, under the statutes of Missouri, was liable for the plaintiff's debt to the extent of the par value of the stock. The answer denied that the shares had not been paid up in full, and averred that the record and books of the company *Page 486 
showed that they were fully paid, on the faith of which defendant purchased the stock. It appears that under the statute of Missouri a creditor of a corporation may maintain an action against a stockholder after a dissolution of the corporation. It was not charged in that case that there was any fraud in the original transaction. It was held that unless the transaction is impeached for fraud it is valid, and that this cannot be done unless the attack is directly made. The court said: `The cases are numerous wherein such transactions as that which was entered into in this instance between the owners of the mining property and the corporation which they formed have come before the courts, and, in the absence of fraud, have been sustained.' It is further said: `The following proposition is fully sustained by the authorities: That the contract is valid and binding upon the corporation and the original share-takers, unless it is rescinded or set aside for fraud; and that, while the contract stands unimpeached, the courts, even where the rights of creditors are involved, will treat that as payment which the parties have agreed should be payment.'
"In the case of New Albany v. Burke, 11 Wall., 96, a city subscribed to the capital stock of a corporation, payment therefore to be made in bonds of the city. A part of the bonds were delivered to the corporation, and afterwards, by an agreement. between the corporation and the city, the bonds were surrendered and the stock subscription was canceled. The action was brought against the city by a creditor of the corporation, in which it was alleged that the settlement and compromise between the city and the corporation was illegal. It was held that, as both the city and the corporation acted in entire good faith, and did that which, under the facts of the case, was for the interest of both, no recovery could be had of the city.
"It is a general principle, well established by authority, that the subscribed capital stock of a corporation is a fund held by it in trust for its creditors, and any release of payment in *Page 487 
full for stock subscribed is ordinarily a fraud upon the creditors of the corporation. While this is the rule, it is apparent that it can have no application to a case where it is shown that the transaction complained of is untainted with fraud, and entered into and carried out in good faith by the contracting parties, and without prejudice to creditors.
"The case of Osgood v. King, 42 Iowa, 478, is relied upon by counsel for plaintiff as sustaining the right of recovery in this case. In that case it was charged in the petition that certain parties, including the defendant, organized and incorporated a coal company, and that at the time of the incorporation, and before any other party had any interest in said corporation, the said incorporators, including King, the defendant, conveyed certain lands to the corporation, and issued to themselves certificates of stock for 1,900 shares of $100 each; that the land conveyed was not worth more than $27,500, and would not make payment of more than $14 per share for the stock issued. Recovery was sought as against the defendant, one of said stockholders. The defendant demurred to the petition, and it was held that the demurrer should have been overruled, upon the ground that the transaction, as shown by the averments of the petition, was a gross fraud upon the creditors of the corporation. If the defendant had answered, and upon the trial made it appear, that the transaction was entered into in good faith, and that it did not operate as a fraud upon creditors, it is not to be supposed that the ruling would have been different in that case from the authorities above cited.
"In the case at bar the defendants answered, and a trial was had upon evidence introduced in court, from which it appears that the Burlington, Cedar Rapids  Minnesota Railroad Company was hopelessly bankrupt as early as 1871. On the seventh day of February of that year, the company adopted a resolution, which was in these words: `Resolved that, in the adjustment and liquidation of claims against the company, the treasurer be authorized to use the stock of the company, provided not less than twenty per cent of the par value can be *Page 488 
realized for the purpose.' The auditor of the railroad company testified as follows: `I am positive that the way the construction company came to receive the 3,500 shares of the stock of the railway company was this: Certain payments were to be made to it in cash, and the shares were given in payment under the resolution referred to. The railway company was entirely unable to pay $70,000 in cash, and the stock had to take the place of the cash payment. They were reluctant to take the stock. The transaction was made at the instance of Judge Greene. The stock was not worth anything in the market. The road owed a floating debt of $500,000. We had no way of paying except by its earnings and its stock, and by borrowing. * * *' This testimony is not contradicted, and its truth must be conceded. It further appears that the mortgages upon the road were foreclosed, and its property was purchased by the mortgage bondholders, and the new company was organized. It is not claimed that the stock in question had. at the time it was issued to the defendants, or afterwards, any value whatever, and, of course, the foreclosure of the mortgage extinguished the stock.
"Now, under this state of facts, if we were to hold the defendants liable to the plaintiffs for eighty cents on the dollar of the stock which was issued to them, it would be grossly unjust. This stock was not issued in pursuance of an original stock subscription. It was issued in pursuance of the above resolution entered upon the records of the corporation. These defendants were creditors, and they took stock under that resolution because they could get nothing else. The stock was then worthless, and so remained, and no creditor would have been defrauded if an unlimited amount of it had been issued.
"The plaintiffs, in effect, demand that because defendants took this worthless stock they are liable to pay the debts due from the corporation to the other creditors. This would be grossly inequitable, and we know of no rule of law requiring us to so hold. It appears that George Greene was president *Page 489 
of the Burlington, Cedar Rapids  Minnesota Railroad Company at the time this stock was issued, and both he and Traer were stockholders, and members of the construction company, and officers therein. These facts are alluded to in argument. But a stockholder or a director of a corporation may deal with the corporation, and the law will protect him as well as any other party. His relation to the corporation goes only to the question of the good faith of the transaction. Smith v. Skeary,47 Conn., 47. We think the facts in this case fully rebut the presumption of fraud which attaches in transactions of that kind, and that the court should have rendered a judgment against the plaintiff for costs."
It will be seen from the foregoing quotation that no question is made as to the general rule, that the sale of stock in a corporation by the directors for less than the price fixed by the charter is unauthorized, and the stockholder is liable for the unpaid balance. Or, repeating the quotation from Morawetz, found in the foregoing opinion: "The law is well settled that every device by which the stockholders of a corporation seek to discharge themselves from liability to pay their stock subscriptions in full, will be treated as a fraud upon creditors, and may be set aside, if the company should afterwards become insolvent;" or as expressed in Taylor on Corporations: "If the property received is grossly unequal in value to the par value of the shares, the subscriber who received the shares originally, or his subsequent transferee with notice of the circumstances, may be compelled to make up the difference in value, in a suit by or on behalf of the persons injured thereby."
Now, why it is necessary for this court to elaborate and cite authority after authority to support so plain a proposition, is more than I can imagine. The principle is not denied by any counsel in argument in this case, and was not denied in the original opinion, but directly recognized.
But the majority of the court ignore the question as to the right of a person found in the possession of shares of stock, *Page 490 
which have not been fully paid, to show that he did not acquire the same as a stock subscriber, and that the transaction by which the stock was issued to him was not a dishonest device, and was not prejudicial as to any one, and that no creditor or stockholder of the company was or could be defrauded thereby. The evidence shows beyond question that the stock was absolutely worthless, and that the company was hopelessly bankrupt, and had no means to pay the debt due to the construction company, and that the stock was taken because of that fact. In the face of this evidence, it is said in the majority opinion that the seventy thousand dollars of debt "was more, as we infer, than the company could easily discharge by a cash payment;" and that "there might have been an understanding that dividends should be made upon it as upon other stock, and that the remaining eighty per cent should not be called for; and that Greene and Traer may have had corrupt motives in taking the stock, and that they may have regarded the stock as of some value, and hoped that the company would be able to pay its debts. "All the fear and apprehension expressed in the opinion as to the peril of creditors and other stockholders is completely answered by the undisputed facts in the case. The thought of the opinion, and, indeed, the only ground upon which it can be based, under the conceded facts, is that, where a person who is a creditor takes payment of a debt in shares of stock in a corporation which is bankrupt and insolvent, and has nothing else to pay with, and the stock is worthless, and the face of the shares amounts to more than the debt, he must pay the difference to the other creditors of the corporation. In other words, the opinion holds that the transaction is conclusively presumed to be fraudulent, and the holder of the stock cannot be allowed to show that it was not a fraudulent device, and that the creditors were not in any manner prejudiced thereby. I feel warranted in saying that no court has ever held any such doctrine. I concede, and in the investigation of this case always have conceded, that it is incumbent on the person to *Page 491 
whom the stock is issued to show the good faith of the transaction, and that no one was prejudiced thereby. With due deference to the majority, I think the case of Van Cott v. VanBrunt, 82 N.Y., 535, is precisely in point. I quote from the head note of the case, which is a fair statement of the question decided.
"Defendant, V.B., being the president and director of the H.A.R.R., as such president entered into a contract with C., by which the latter agreed to build and equip a portion of the road, for a certain sum in stock of the company, and for a certain sum in its bonds. Immediately afterward, and in accordance with a previous arrangement, the contract was assigned by C. to V.B., who, with others associated with him, performed the contract at an expense less than the par of the stock and bonds agreed to be paid therefor, which they received. In an action by plaintiff, among other things, to recover of V.B., as the amount unpaid upon the stock, a proportionate share of the difference between the par value of the stock so transferred and the cost of performance, it appeared that the contract was entered into and assignment made in good faith, after full deliberation and consultation, with the knowledge and assent of all the directors and stockholders of the company, as the only means to insure the construction of the road, and that the amount expended exceeded the actual value of the stock and bonds delivered in payment.Held that the stock so transferred was to be considered as full paid-up stock, and that the action was not maintainable."
I have written more than I intended to write, and would not have written anything if it were not for an abiding conviction that the majority opinion is radically wrong in holding, as it does, that the defendants are conclusively presumed to be liable. Their right to be heard ought not, in my judgment, to be denied by such a proposition as that twenty cents are not worth one hundred cents.
If a laborer on the railroad at one dollar and twenty cents a day had received for his month's pay one hundred dollars *Page 492 
of this worthless stock, because he could get nothing else, according to the above opinion, the Louisa County National Bank, another creditor, could recover of him the difference between the amount of his wages and the hundred dollars, upon the principle that twenty cents are not worth one hundred cents, and his mouth would be closed against showing his good faith, and that the bank was not prejudiced. And the decision would be a solemn determination that, by, thus taking payment, he was a party to a fraudulent transaction to the prejudice of the bank.
  SEEVERS, J., concurs in this dissent. *Page 561