Olmstead v. Vance & Jones Co.

Mr. Justice Ricks delivered the opinion of the court: It is contended by defendants in error, the objectors below, that an agreement by a corporation to buy its own stock is equivalent to a contract to diminish its capital, and cannot be enforced to the injury of creditors. Plaintiff in error contends, that at the date of the contract between the Smith & Jones Company and Bentley & Olmstead none of the objectors were creditors; that the contract, as soon as the stock was delivered to Bentley & Olmstead, became an executed contract, and therefore no present creditors of the corporation are or can be injured, and that the corporation could lawfully make such an agreement to re-purchase its own stock, provided that at the date of such agreement the rights and interests of then existing creditors would not be affected. It has been repeatedly held that the capital stock of a corporation is a trust fund for the payment of its corporate debts, and that the shareholders of a corporation are charged with notice of the trust character which attaches to it; that they are, to all intents and purposes, privies to the trust, and hold the stock subject to all equities which attach to it; and this is so, irrespective as to whether there were fair dealings or actual or constructive fraud between the parties. (Clapp v. Peterson, 104 Ill. 26; Commercial Nat. Bank v. Burch, 141 id. 519.) The evidence shows that neither J. N. Vance nor the Vance Shoe Company had knowledge of the conditional subscription of Bentley & Olmstead at the time the subscription was made, and that as soon as they did learn of it they objected to the carrying out of the provisions of that agreement in respect to paying the guaranteed dividends and for the re-purchase of the stock. As a matter of fact, this agreement to re-purchase has never been carried out, and Bentley & Olmstead are now attempting to enforce this secret and conditional agreement, which it is plainly to be seen will be to the injury of the existing creditors of the corporation. This court has repeatedly held that, as against the claims of creditors, it is immaterial what private arrangements subscribers may make with the corporation, and that any device by which members of the corporation seek to avoid the liability imposed upon them by law is void as to creditors, whether binding or not as between themselves and the corporation. (Clapp v. Peterson, 104 Ill. 26; Alling v. Wenzel, 133 id. 264; Coleman v. Howe, 154 id. 458.) If such an arrangement as that made between the Smith & Jones Company and Bentley & Olmstead could be enforced, a corporation might then, at the time of its organization, make such a contract with each of its stockholders as to totally destroy the capital stock of the concern and deprive the creditors of all security from this trust fund. The capital stock is a trust fund furnished for the benefit of the creditors of the corporation, and equity will not permit it to be destroyed or impaired to their injury -for the benefit of stockholders. The creditors of this corporation had a right to rely upon the application of the capital stock toward the payment of their claims, and to permit this plaintiff in error to cancel his stock upon this inequitable agreement, and to receive a premium of ten per cent in addition, would be in violent disregard of a long line of decisions of this court. It is contended by plaintiff in error that if this claim should fail it should fail only as to those objectors who have a right to object and who do object, and that the decree should be limited to the protection of such creditors’ rights. This contention is manifestly unsound. Upon objection by any of the creditors it became necessary for plaintiff in error to establish his claim. The whole foundation of this claim rests upon the agreement with the corporation to re-purchase Bentley & Olmstead’s stock. It then became necessary for the court to determine, as between plaintiff in error and the creditors, if this agreement to re-purchase could be enforced. That this agreement is void as to the creditors has been shown, and Bentley & Olmstead’s entire claim resting upon this agreement must fall with it. It is also contended by the plaintiff in error that the record in this case fails to show the objectors were creditors, and that therefore the court below properly overruled their objections. The record shows that the Vance Shoe Company and H. E. Vance duly filed their claims with the receiver. The order of the circuit court was that all claims so filed should be legal and valid claims unless objections were filed thereto within ten days, and as no objection appears to have been filed to the claims of the Vance Shoe Company and J. N. Vance, then, under the order of the court, they must be held valid and binding claims upon the company. But the record also shows that the total claims filed amounted to §78,943.81, and, calculating, from the known rate and dividends paid, the total claims allowed were §73,208.16, and therefore the amount of claims objected to amounted to §5735.65. Bentley & Olmstead’s claim, which was objected to and included in that amount, was for §2498.20, which leaves a balance of objected claims amounting to §3237.45. As the claim of J. 1ST. Vance was for §4000, he must therefore be a creditor for at least §762.55. This being so, it is immaterial whether or not the other objectors were creditors. Under the view we have taken of this case it is not necessary to discuss the numerous other points presented by plaintiff in error in his brief. The action of the Appellate Court in reversing the cause and remanding it, with instructions to disallow said claim without prejudice to the claim of the receiver against plaintiff in error, was proper. The judgment of the Appellate Court should therefore be affirmed. Judgment affirmed.