Osgood & Moss v. King

Day, J. I. This action is brought, under section 1084 of the Code, to charge a stockholder with the payment of a judgment rendered for a corporate debt. Section 1082 of the Code, which is substantially the same as section 1172 of the Revision, is as follows: “Neither anything in this chapter contained, nor any provisions in the articles of incorporation, shall exempt the stockholders from individual liability to the amount of the unpaid installments of the stock owned by them, or transferred by them for the purpose of defrauding creditors, and execution against the company may, to that extent, be levied upon the private property of any such individual.” The petition in substance alleges that the defendant and three others, the stockholders, officers, and sole incorporators of the National Coal and Mining Company, representing and constituting said company, made an arrangement with themselves as stockholders, whereby eleven hundred acres of land, which they knew and understood to be worth no more than $27,500, were conveyed to the company and accepted by it, in full payment of 1900 shares of the capital stock of the company, at $100 each, or $190,000; and that, in consideration of such conveyance, they issued to themselves certificates for 1900 paid up shares in the capital stock of the company. 1. CORPORATION: unpaid subscription: trust That the company, as between itself and the stockholders, had the right to take payment of stock in anything it saw fit, maT admitted. But quite a different qnestion arises when the rights of creditors of the corporation are involved. The unpaid subscriptions to the capital stock of a corporation are a trust fund for its general creditors. The officers of a corporation cannot, by agreement or arrangement with the stockholder, release him, to the prejudice of [483] creditors, from Ms obligation to pay Ms subscription, unless the transaction is characterized by the utmost fairness. The law makes a stockholder liable to a creditor to the extent of the unpaid installments on the stock owned by him. The intention of the law is, that property, or a fund, equal to the capital stock of the company, or so much of it as the articles of incorporation require to be subscribed previous to commencing business, shall in fact exist and be subject to the debts of the corporation. When a corporation, as did the one in question, advertises that i'ts capital stock is $200,000, divided into shares of $100, to be paid in at such times and in such sums as the board of directors may determine, third persons dealing with it have a right to expect and to demand that $200,000 have been or will be in good faith paid into its capital stock in property or money, so as to become liable for its obligations. 2__._. fraud. It is a gross fraud for the officers of such a corporation to issue to stockholders paid up certificates of stock, in consideration of real estate conveyed at a price known and understood to be many times its real value. Eut such a fraud is greatly intensified when the officers of a corporation deal with themselves as stockholders, and accept such a conveyance in payment of their own stock. Under such circumstances every principle of honesty and justice requires that, as between the stockholder and a creditor, the stock shall be considered paid only to the extent of the fair value of the property conveyed; and that, for the balance, the stockholder shall be held individually liable, in the event of his failure to point out corporate property, subject to levy. Under no other construction can the rights of innocent persons be protected, and laudable enterprises be, at the same time, fostered and encouraged. It would be a reproach to the law if the officers of a corporation could be permitted to advertise its capital stock at a large amount, and then, by a mere arrangement between themselves and the stockholders, accept payment in property of a merely nominal valué,-and, without incurring individual liability upon themselves or the [484] stockholders, make the stock in fact one-seventh, or one-tenth, or one-twentieth the amount advertised. The case of Burnham & Van Shaick v. N. W. Ins. Co., 36 Iowa, 632, is strongly in point. See, also, Sawyer v. Hoag, 17 Wall., 610. The foregoing view disposes of the first, second and fourth points of the demurrer. 3____ notice. II. The only remaining point presented by the demurrer is, that plaintiffs had constructive knowledge, at the time the debt was contracted, that the stock was fully paid an(j £pe an(j matmer of payment. The petition alleges that the consideration for the deed was expressed in it, and that it was recorded October 26, 1811. The record of this deed would be constructive notice to a subsequent purchaser from the grantors, that there had been a prior conveyance. But certainly it could be no constructive notice to a person proposing to trust a corporation, that the capital stock had been paid by the conveyance of a certain amount of land. No one would think of looking at the records for such a purpose, nor does the law require one to do so. The demurrer, we think, should have been overruled. Reversed.