Stutz v. Handley

• Decision Date: 18 March 1890
• Citation: 41 F. 531
• Parties: STUTZ et al. v. HANDLEY et al.
• Court: U.S. District Court — Middle District of Tennessee

41 F. 531

STUTZ et al. v. HANDLEY et al.

United States Circuit Court, M.D. Tennessee.

March 18, 1890

Walter Evans and W. L. Gordon, for complainants.

E. H East and Pilcher & Weaver, for defendants.

JACKSON J.

The complainants, on behalf of themselves and all other creditors of the Clifton Coal Company who may choose to come in, bring this suit to reach and subject to the payment of their debts against the company the amounts remaining unpaid upon shares of the capital stock of said corporation held and owned by the several individual defendants. The material facts of the case, on which the questions of law arise and the rights of the parties depend are but little controverted, and are as follows: In June 1883, the Clifton Coal Company was organized under the general laws of Kentucky. Chapter 56, Gen. St., which went into effect December 1, 1873. After enumerating in detail the purpose, nature, and character of the company's business, and its special powers, the charter provided, among the latter, that 'the amount of capital stock shall be $120,000, with power to increase to $200,000 by a majority vote of the shareholders; the times when and the conditions upon which said stock is to be paid in to be determined by the board of directors. ' By another provision the board of directors were authorized to receive real estate, leasehold estate, mining rights, the right to take timber and right of way, in payment of such parts of subscription for capital stock and at such value as they might deem advisable. The shares were fixed at $100 each. The charter further provided that the indebtedness of the company should at no time exceed two-thirds of its capital stock, and that the private property of its stockholders was to be exempt from all liability for corporate debts. This exemption, however, had no reference to the liability of shareholders on unpaid stock; for by the fourteenth section of said chapter 56 of the General Statutes, under which the corporation was organized, it is provided that 'nothing herein shall exempt the stockholders of any corporation from individual liability to the amount of the unpaid installments on 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 such individual.'

The articles of incorporation were duly recorded July 3, 1883, in the county court clerk's office of Hopkins county, Ky., and the company's principal place of business was established at Manington, in the adjacent county of Christian. The capital stock, to the extent of $120,000, as to which no controversy arises in the present suit, was promptly subscribed for, and the company immediately commenced operations upon the lands it had acquired, and proceeded to make large outlays and expenditures for machinery, buildings, merchandise, and labor connected with the mining and selling of coal for steam and grate purposes, to which its business was, for several years, chiefly confined. Early in 1886 experiments were made and opinions were expressed by experts, which led the stockholders and managers of the company to believe that the company's coal could be profitably converted into iron-making coke. On March 31, 1886, a meeting of the stockholders was held, (all the stock being represented in person or by proxy,) at which, after reciting that $50,000 was needed and required by the company with which to build coke-ovens, buildings, and structures of various kinds, and to further develop the property, it was unanimously resolved to issue the bonds of the company to an amount not exceeding $50,000, in sums of $1,000 each, due at 30 years after April 1, 1886, bearing 6 per cent. interest, payable semi-annually, and secured by trust mortgage upon the company's lands, mines, machinery, buildings, and equipments. The president of the company was authorized to dispose of said bonds when ready, as in his discretion might seem best. The mortgage was duly executed to the designated trustee, and recorded, and bonds of the company to the amount of $50,000 were issued. A sale of these bonds was not promptly effected, and, needing funds to carry on its contemplated and desired improvements, the company procured loans for considerable amounts from certain banks in Nashville, for which its notes, indorsed by several of its larger stockholders, were executed; and, as a further protection to the banks making the loans, said bonds were deposited with them by way of additional collateral security.

On the -- -- day of May, 1886, a called meeting of the stockholders was held at Nashville, Tenn., 1,073 of the 1,200 shares being represented in person, when 'it was unanimously resolved that the capital stock of the company be increased to $200,000, as authorized by the charter; the purpose for which said stock is issued being the betterment of present plant, and the construction of a new plant for coking purposes. ' The proceedings of this meeting were taken down at the time in pencil by the acting secretary, but, by inadvertence or oversight, the resolution was not formally entered upon the minute book of the company until 1888, when the omission was discovered. But the fact of the meeting, of the stockholders who were present, and the adoption of the resolution, is fully and clearly established, aside from the pencil memorandum of the proceedings, and the subsequent entry thereof upon the minute book of the company. It was supposed and assumed that the increase of $80,000 to the capital stock of the company, notwithstanding the expressed purposes for which it was made, belonged proportionately to the existing stockholders, and that they could control, dispose of, distribute, and divide the same as they deemed proper. Acting upon this idea, and being advised by a banker who had undertaken to see the company's bonds that, in order to make them 'go' more readily, it would be well to add an equal amount of the stock for distribution with each bond, the managing officers of the company, on December 30, 1886, with the knowledge and consent of all the stockholders then holding the original stock of $120,000, prepared, and caused to be circulated, a subscription paper, as follows, viz.: 'We, the undersigned, subscribe for the amount set opposite to our names, respectively, to bonds of the Clifton Coal Company, aggregating $50,000. It is agreed that $50,000 of the $200,000 capital stock be distributed pro rata among the subscribers to the above bonds. ' The defendants Handley, Neely, McLester, Talbot, Fletcher, Buckner, James, Erwin, Lannom, D. T. & W. A. Rankin, Murray, Dibbrell & Co., Orr, Jackson & Co., and White, with others not served in the suit, became subscribers to said paper for different amounts of the bonds, to the extent of $45,000, leaving $5,000 thereof untaken. The defendants Handley and Neely were existing holders of large portions of the old stock. The defendant White had been an original stockholder to the amount of $20,000, but had transferred his stock in November, 1885. He, with Neely and Sanford, was an indorser of the company's note for $16,500, for which about $30,000 of said bonds were hypothecated as collateral security with the bank, (the holder of the note,) of which White was a director. White authorized his name to be signed to said subscription paper for $5,000 of the bonds, upon an understanding and agreement made with Neely and Sanford that they would take up the bonds in a few days, or get some one to take them off his hands in a short time. This arrangement formed no part of the subscription paper, nor was it made as a condition thereto, but was a private understanding between White and said parties, to provide for the payment of said subscription. Neely and Sanford made their note, on demand, for $5,000, which White indorsed, and the bank of which White was a director accepted the note, and paid out for White said amount, to the secretary and treasurer of the company, who delivered to the bank, for White, $5,000 of said bonds, and an equal amount of stock, which the bank was to hold as collateral security for the payment of the note; in which position the matter stood at the filing of his answer herein. It is claimed for defendant White that he did not read or examine the subscription paper to which he authorized his name to be signed. This was his own fault, and constitutes no defense. 'It will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained. If he will not read what he signs, (or authorizes to be signed,) he alone is responsible for his omission. ' Upton v. Tribilcock, 91 U.S. 50. The proof, however, established that he knew of the arrangement to have an equal amount of stock 'go' with the bonds. Neither will White's agreement with Neely and Sanford alter his position as the actual holder of the 50 shares of stock issued with the $5,000 of bonds subscribed for by him. So far as creditors are concerned, he remains the holder of said 50 shares, (see Hawkins v. Glenn, 131 U.S. 326, 335, 9 S.Ct. 739,) and occupies the same position as other defendants who accepted stock with bonds.

Some of the other defendants, not previously connected with the company as stockholders, were led, as they state, to subscribe for said bonds on the supposition that the stock which was to be distributed with the bonds was or would be a part of the old stock, which existing stockholders would surrender for their benefit. But no such representation was made by any agent or officer of the company. Mr. Handley, who was most active in procuring subscriptions for the bonds appears to have acted in perfect...