First Nat. Bank v. Pearson

Stevens, J., delivered the opinion of the court. The appeal in this case is from a decree of the chancery court of the Second district of Jones county, sustaining a demurrer to an amended bill of complaint filed by appellant as a creditor of a mercantile corporation known as Myrick Mercantile Company against appellees, certain stockholders of said corporation. The bill charges that the capital stock subscribed for and paid in by the original shareholders of the Myrick Mercantile Company was five thousand, one hundred dollars; that appellant became a creditor of the Myrick Mercantile Company in the sum of one thousand, two hundred dollars; that after said corporation became indebted to complainant appellees became dissatisfied as shareholders and sold to the corporation itself the shares of stock owned by appellees, respectively, to the amount of two thousand, six hundred dollars of the par value, or more than fifty per cent, of the original capital; that the funds derived from the First National Bank, appellant herein, were used for the purpose of buying a portion of the stock so purchased by the corporation, and that this • fact was unknown to appellant at the time; that the withdrawal of said assets rendered the said corporation insolvent; that “the withdrawal of the said twenty-six shares of the capital stock of said corporation and the taking from the assets of said corporation the said sum of two thousand, six hundred dollars by the aforesaid shareholders rendered said cor [644] poration insolvent and wrecked said corporation financially.” The bill further details the subsequent insolvency of Myrick Mercantile Company, its assignment for the benefit of its creditors, and its final adjudication in bankruptcy by the United States District Court, and the administration of its affairs by the trustee in bankruptcy. It is further averred in the bill that all the assets have been distributed by the trustee; that appellant has received a dividend of twenty-five per cent., which it has duly credited upon the note evidencing its indebtedness and herein sued on. The amount of stock subscribed by the several defendants and the amount of money paid by the corporation in the purchase of the stock and the exact balance claimed by appellant upon its original indebtedness are detailed with particularity. The prayer of the bill is that each of the defendants be held liable to complainant for the amount of money each received in payment of his stock, that the defendants be held as trustees for the money so received, that the court render a decree for the balance found to be due complainant upon the- note of the Myrick Mercantile Company, and that a personal decree be rendered against the defendants, not exceeding, however, as against any defendant, the amount of capital withdrawn by him. The demurrer challenged the sufficiency of the bill— the material assignments being that the bill is multifarious; that the cause of action, if any, is against the respondents individually and severally, and not against them jointly; that the cause of action, if any, is in the trustee in bankruptcy, and not in the complainant; that the bill does not allege that the Myrick Mercantile Company was insolvent at the time the shares of stock were sold by respondents, and that the note given complainant and herein sued on was given and accepted after the shares of stock were alleged to have been sold and transferred; and that there is no equity on the [645] face of the bill. The court sustained the demurrer, and dismissed the bill, and from this decree appellant appeals. The bill, in our judgment, states a cause of action. It was proper to join appellees in one suit. This is a creditors’ bill against shareholders of a defunct corporation to pursue and recover the actual amount of money unlawfully paid by the debtor corporation to the defendants in the purchase of their stock. The complainant holds one claim and toward the liquidation of that claim the several respondents must contribute to the extent of money severally paid them in these stock transactions. Begardless of whether the action in in this case could be maintained by the trustee in bankruptcy, it is averred in the bill that the “trustee in bankruptcy declines to bring this suit for complainant,” and inasmuch as complainant has no further remedy at law against the insolvent corporation,, it has, under all of the authorities, the present equitable remedy against these stockholders. In Thompson on Corporations (2d Ed.), vol. 4, par. 4079, it is said: “Generally speaking, the corporation cannot purchase its own stock where the effect' of the purchase is injurious to the interest of creditors.....On this question it has been observed by one of the courts that ‘a permissive recognition of the unrestricted right of a corporation to purchase the shares of one of its stockholders as against creditors necessarily concedes the same right to the corporation to purchase the entire capital stock.’ If this right be accorded to a corporation, and it is exercised to its full limit, we would have the case of a corporation having distributed its entire capital to its stockholders, leaving it as the owner of its own promises obligatory with which to* pay its debts to its creditors. Of these it would seem, the creditors had a sufficiency.” And again, on page 632: [646] “When a stockholder transfers his stock to the corporation and receives in return a portion of the capital, he holds such capital subject to the superior equities of creditors. ’ ’ Many authorities are cited by Mr. Thompson in support of the text in the notes on pages 630, 631, and 632. In the case of Kimbrough v. Davies, 104 Miss. 722, 61 So. 697, Judge Smith, spealdng for this court, says: “The capital stock of a corporation is a fund set apart, among other purposes, for that of paying the debts of the corporation; and whether or not it be a trust fund, impressed with all of the attributes of such a fund, it seems to be universally held, upon sound and plain principles of common honesty, that it cannot be withdrawn by the stockholders until all of the debts then owing by the corporation have been paid. ’ ’ Section 923, Code of 1906, provides that: “No part of the capital stock in any corporation shall be withdrawn or diverted from its purpose, nor a dividend declared, when the company is insolvent, or would be rendered insolvent by such withdrawal on the payment of such dividend.” The retiring, therefore, of twenty-six shares of the capital stock of the Myrick Mercantile Company under the circumstances detailed in the bill amounted to a withdrawal of a portion of the capital stock and violates the spirit, if not the plain letter, of this statute. This specific question is discussed with great satisfaction in Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944; Crandall v. Lincoln, 52 Conn. 73, 52 Am. Rep. 560; Buck v. Ross, 68 Conn. 29, 35 Atl. 763, 57 Am. St. Rep. 60; Hall v. Henderson, 126 Ala. 449, 28 So. 531, 61 L. R. A. 621, 85 Am. St. Rep. 53; Hall v. Alabama Terminal & I. Co., 143 Ala. 464, 39 So. 285, 2 L. R. A. (N. S.) 130, 5 Ann. Cas. 363. In the last case, McClellan, C. J., well says: [647] “The purchase by a corporation of shares of its own capital stock is a fraud upon its creditors. Such shares neither import nor represent any right or claim in or to, or to subject to their payment, the assets of the corporation as against the rights of creditors. Shared purchased by the corporation have no value as assets, for the payment of corporate debts. Obviously, therefore, the transaction involves, on the one hand, the diversion of corporate assets to persons — shareholders— who have no debt against the company, nor the shadow of claim to or against its assets so far as creditors are concerned, and, on the other, the acquisition by the company, in the stead of assets thus diverted, of a mere right to reissue certain shares, or shares to a certain amount in its capital, which right is of no value as assets for creditors. Such a diversion of corporate property is, in respect of creditors, essentially a gift to the shareholders whose shares are purchased by the company, a purely voluntary transfer of corporate assets in fraud of corporate creditors, fraudulent and void as to creditors, and this, regardless of the intention actuating the company and the selling shareholders.” We think it immaterial that the indebtedness of appellant was renewed. The original debts primarily due by the corporation to appellant were extended and consolidated into one note, and the new note seems to have the added provision of “collection fees.” The debt itself has never been paid, and the right to recover any expenses of suit or collection as provided by the new note is not called, in question by the demurrer. Let the cause be reversed and remanded with leave to appellees to answer the bill within thirty days after the receipt of mandate by the clerk of the court below. Reversed and remanded.