Court Opinion

ID: 7944644
Source: CourtListenerOpinion
Date Created: 2022-09-08 23:18:54.64845+00
Date Added: 2024-06-11T16:33:52.026298
License: Public Domain

Grant, C. J.
(after stating the facts). We think that Mr. Wells sold his stock to the corporation and not to Mr. Clark individually. Mr. Wells had invested in the corporation $5,000, receiving therefor five thousand par value of the stock fully paid. He acted in entire good faith, and there is an entire absence of evidence showing any intent on the part of the stockholders to defraud creditors. The only evidence of any existing indebtedness at that time is the testimony of Harvey J. Wells, as follows:
“We might, have been owing a little money at that time; I could not give you exactly the amount. I could approximately, somewhere within $300.” .
No then existing creditors, if there were any, are now complaining. The claim of complainants Minnie and Chauncey R. Clark is eliminated from the case. The cross-bill denied the validity of their debt. They did not answer the cross-bill, and the order pro confesso admits the allegations to be true. They do not, therefore, now stand in this suit as creditors. The assets of the corporation were worth about $9,000. All the creditors now complaining are subsequent creditors, who gave credit with the mortgage on file in the proper office. The stockholders are not in position to complain, for they were all willing parties to the transaction and are therefore estopped to deny its validity. Solomon Solar Salt Co. v. Barber, 58 Kan. 419; Butterworth & Lowe v. Milling Co., 115 Mich. 1.
The transaction as to all parties then having any interest in the corporation or its assets was entirely valid. The interveners, subsequent creditors, while conceding that the record of the mortgage is constructive notice to *422them of its existence, insist that it was not notice to them that the assets of the company had been used to purchase some of the capital stock, and they insist that such use of the funds was void as to subsequent creditors. It is not correct to say that creditors have suffered a loss of the capital stock. The stock here involved was fully paid up. It was not liable to assessment. Its surrender to the company did no.t diminish the security of creditors. The use of the funds of the corporation to pay for the stock diminished its assets which would be as injurious to creditors as would be the purchase of the assessable stock of a stockholder. If the law prohibits one transaction it prohibits also the- other, as the same diminution of the assets of the corporation results in each case.
The first important question to determine is the relation in which Mr. Murphy stands to the corporation. He insists that he put $4,452 into the corporation as a creditor, while Mr. Wells insists that he put it in as purchaser of his stock. No stock was issued to Mr. Murphy, but that was not essential to constitute him a stockholder. He admits his intention to’ become a stockholder, but denies that that intention was consummated by actual purchase. He was elected a director on October 1st, and also treasurer. His friend Sheehan was also elected a director and secretary at the same time. Mr. Murphy from that time controlled the affairs of the corporation. His method of dealing with it appears from the fact that he immediately caused the note of the company to be given to his particular friend, Mr. Allen, for $1,800, when Allen had not delivered the goods for which the note was given. Mr. Murphy testified:
“After I got in as treasurer Allen got his' note for $1,800 at a crack.”
It appears that the property thus contracted for has not yet been delivered. Murphy continued in the control of the company until this litigation began and a receiver was appointed by the court. Mr. Wells’ stock which he *423sold to the corporation was assigned to Mr. Clark and the assignment authorized him to dispose of it to himself or others. Under the law Mr. Murphy could not be a director without being a stockholder. He knew this. He thus held himself out as a bona fide stockholder and a director. His mouth ought now to be closed from asserting that he is not. He testified that his advance on October 8th of $2,000 to Clark was “in view of my taking an interest in that business with others.” That language is susceptible of no other construction than that he paid that $2,000 for the purpose of making himself a stockholder. He was then a director and nearly the entire of his “advances,” as he calls them, were made while he was a director, and while he held himself out as a stockholder. He told Harvey and William Wells on September 2d that he (Murphy) had taken over their plant and was operating it under a different arrangement, and Mr. Sheehan said the same thing. Mr. Harvey Wells also testified that Mr. Clark told him in September that he had “sold out to Murphy and Sheehan and a couple of other Canucks.” We believe their statements. At that time Mr. Murphy was in charge of the office of the corporation and managing its affairs. The contract of October 1st included all the stock which had been issued; it did not include unissued stock. Mr. Murphy’s expressed intention to be a stockholder, his holding himself out as such, his becoming a director knowing that he could not be one unless he was a stockholder, his payment of $2,000 in view of an interest in the business, his control and management of the corporate affairs, his statements to the Wellses, the fact that Mr. Clark had nothing to do with the management of the corporation after Murphy’s advent into it, and that he was not called as a witness by him, point, in our judgment, to but one conclusion, and that is that Mr. Murphy was a stockholder. Money paid towards the purchase of stock cannot be converted into a loan to the detriment of other interested parties. Having found that he was a stockholder, the remaining ques*424tion is, How much and whose stock did he buy? As above stated, the contract of purchase covered all the issued'stock. The intention of Murphy and his associates was to obtain substantially the entire stock of. the corporation. Simultaneously with this contract of purchase, and evidently in furtherance thereof, Murphy and Sheehan were elected directors and respectively treasurer and secretary, and Mr. Clark stepped out.
It is immaterial whether Mr. Murphy paid his money into the treasury of the company in furtherance of the contract of October 1st, or whether that was abandoned and he paid it for himself. While there is no express showing what particular stock Mr. Murphy paid his money to purchase, a court of equity will apply it in accordance with the principles of justice and equity. As above stated, Mr. Wells acted in good faith. There was no one in existence at that time to' be defrauded. Mr. Clark, to whom the stock was assigned for the company, was authorized to sell it. We will apply the payments to this stock, and will hold that this purchase was valid in so far as he paid for it, viz., to the extent of $4,452. Mr. Murphy paid this money to the corporation with full knowledge of the transaction between Mr. Wells and the corporation. He had the corporate books before him where the entire transaction was in good faith recorded.
We are compelled to hold that the assessable stock and the assets of a corporation constitute a trust fund,. not only for the benefit of existing, but also for future, creditors (American Steel & Wire Co. v. Eddy, 130 Mich. 266; Peninsular Savings Bank v. Stove Polish Co., 105 Mich. 535; Upton v. Tribilcock, 91 U. S. 45), and that the assets of a corporation cannot be used by it in the purchase of its outstanding stock to the exclusion of subsequent creditors.
It follows from our conclusion, that the mortgage is invalid to the extent of $548, which was included in the sale to the corporation and has not been resold. It is apparent under the record as it now stands that the assets will *425be more than sufficient to pay the debts. Should this prove to be the case Mr. Wells will be entitled to receive out of the surplus sufficient to pay him this amount. The decree will be modified in accordance with this opinion. Neither party will recover costs.
Blair, Ostrander, Hooker, Moore, Carpenter, and McAlvay, JJ., concurred. Montgomery, J., did not sit.