Lavell v. Bullock

Bobinson, J. This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due on his corporate stock. As trustee in bankruptcy the plaintiff brings this action to recover from appellant $700 as the balance due on fourteen shares of common stock in “Everybody’s Store.” The Constitution says that no corporation shall issue stock or bonds except for money, labor done, or money or property actually received. § 138. The statute says, “Each stockholder in a corporation is individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him.” Comp. Laws 1913, § 4554. In the consideration of this case it is not necessary to enter upon any debatable grounds or to discuss any nice points of law. The purpose of the statute is to protect parties who deal with and trust corporations relying on obligations of stockholders to pay what they owe to their corporation. Under the statute a stockholder is not merely a person who picks up and holds stock that he may find lying on the street. He is a person who takes the stock under a contract to pay for it. When the corporation has received its pay for stock it may be sold and transferred the same as any chattel or .chose in action. Neither a corporation nor its trustee or assignee can maintain an action for a balance due on stock unless there is a balance due the corporation. In this case the proof does not show any balance due the corporation. All the common stock was bought and paid for by the president of the company. Then he traded some of it to Barney, who transferred to appellant fourteen shares of his common stock, which reads on its face that it is fully paid and nonassessable. And it is stipulated that ap [142] pellant paid full and fair value for this stock. He is a purchaser in good faith. Here is the history of the case: — In October, 1913, at Fargo, one II. M. Cornell opened a trading house known as “Everybody’s Store.” At the end of three months he was in debt about $12,500 with assets of $25,000. Then he concluded to unload his debts and assets by turning himself into a trading corporation. Accordingly in the name of himself, his wife, and one E. C. Hamilton, he filed with the secretary of- state articles of incorporation fixing the capital stock at $100,000. This included 500 shares of preferred stock at $100 a share, and 1,000 shares of common stock at $50 a share. The purpose of the corporation was to do a general trading business, to assume debts and liabilities, and to borrow money in unlimited amounts. The company at once proceeded to assume the debts and obligations of Cornell and took over his business. The 1,000 shares of common stock it issued to Cornell in payment of his lease and the good will of his business; 250 shares of preferred stock it issued to Cornell in payment of all his assets. Cornell at once elected himself president and treasurer. To his good wife, who became a director, he gave 20 shares of common stock; to E. C. Hamilton, 125 shares; to one Flick of Minneapolis, 125 shares. On the books of the company — the journal and the ledger — it does appear on several pages that for the lease and good will of the business the company was charged $50,000. On the trial the books were put in evidence. Cornell was called as a witness for plaintiff and testified that he bought over the common stock in exchange for the lease and good will of the business. He says, “I gave for the common stock my lease and the good will of the business, the location and establishment of the business.” (17.) Q. “What were the 250 shares of common stock issued to Flick and Hamilton for?” A. “That really belonged to me and I turned them off to them gratis. (17.) The 20 shares of stock issued to my wife I just gave her as a present.” Q. “What was the value of the good will and lease ?” A. “I figured it was worth what we sold it to the company for, $50,-000. I think we figured it at $50,000. We estimated it was worth that amount.” (102.) [143] In a written contract on December 29, 1913, it is recited and agreed that Cornell sold to tbe company tbe good will of tbe business and tbe lease of the premises and property amounting to $25,000. That in consideration of such sale tbe company, agreed to issue to tbe seller certain certificates of fully paid stock to tbe amount of $75,000, namely, 250 shares of preferred stock and 1,000 shares of common stock. In a subsequent written agreement of January 2, 1914, it is recited that tbe corporation has sold and delivered to Cornell 1,000 shares of common stock and be agrees to replace in tbe bands of tbe treasurer 250 shares of tbe common stock to be retained by tbe treasurer and allotted to purchasers of preferred treasury stock as an inducement to buy tbe preferred treasury stock. Doubtless tbe company assumed tbe great load of debts and paid too much for its whistle. But that was tbe purpose of its organization and this is not an action to rescind tbe contract of sale, and tbe mere inadequacy of tbe price does not make tbe contract void. As tbe record shows, Mr. Cornell purchased and paid for all tbe common stock, which reads on its face that it is fully paid and nonassessable. Then be transferred to one Barney 15 shares of stock and Barney transferred 14 of bis shares to appellant. But on said 14 shares there is nothing due to tbe corporation. It never had any cause of action against tbe appellant. It bad no dealings with him. Suing as tbe representative of tbe corporation and its creditors of course tbe plaintiff can assume no rights only such as belong to the corporation and its creditors. Furthermore, tbe purpose of tbe statute is to protect parties who deal with and give credit to a corporation on tbe faith and credit of its stockholders, to tbe amount of their corporate stock. In this case it appears that after tbe incorporation the business taken over was conducted in tbe same name and in tbe same manner as before tbe incorporation. And there is no showing that tbe creditors in dealing with the corporation knew that it was a corporation or that it bad any stockholders. Certainly there is nothing to show that they were in any way deceived in regard to tbe holders of tbe common stock. Tbe records of tbe company were open to them, and those records were very brief. They clearly showed that Cornell bad purchased and paid for all the common stock; and that on such stock no balance [144] was due to the company. Hence the judgment must be reversed and the action dismissed, with costs. Bronson, J., concurs.