64 F. 90 (7th Cir. 1894), 105, Wechselberg v. Flour City Nat. Bank

Docket Nº:105.
Citation:64 F. 90
Case Date:October 27, 1894
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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64 F. 90 (7th Cir. 1894)




No. 105.

United States Court of Appeals, Seventh Circuit.

October 27, 1894

Action by the Flour City National Bank against Julius Wechselberg, Ernest S. Moe, and Charles H. Williams. Plaintiff obtained judgment. Defendant Wechselberg brings error.

This is an action at law by the Flour City National Bank against Julius Wechselberg (plaintiff in error). Ernest S. Moe, and Charles H. Williams, as defendants below, for recovery of the amount due upon a promissory note for $3,000, dated September 18, 1889, made by the Northwestern Collection Company to the Northwestern Collection, Loan & Trust Association, and indorsed to said bank. The alleged liability of the defendants below is based upon their acts in the incorporation of the Northwestern Collection Company as a corporation under the laws of Wisconsin, and the transaction at large of business thereunder, without having capital paid in as required by statute, whereby it is asserted that they became personally obligated to

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pay indebtedness so contracted. The complainant alleges facts to state a liability created by the statute of Wisconsin, viz. section 1773, c. 86, which is the act providing for incorporations; and also charges that the defendants are liable 'personally and as copartners in trade upon the obligations so contracted. ' Demurrer to the complaint was overruled (45 F. 547), and the defendants answered severally. The issues were tried before the court upon stipulation waiving a jury, and there were findings of fact and conclusions of law thereupon against all of the defendants; but Wechselberg alone sues out a writ of error.

The facts found, aside from jurisdictional and formal matters, may be summarized as follows (the portions to which exception is taken being placed in brackets), viz:

On April 6, 1888, the plaintiff in error, with the other two defendants below, executed articles of incorporation forming the Northwestern Collection Company of Milwaukee as a corporation to do a general collection and reporting business, with capital stock fixed at $5,000, divided into shares of $25 each. These articles were duly filed and recorded as required by the statute; contained the required provisions, named the general officers to be elected by and from a board of three directors, stated their duties, and provided that any person might become a member or stockholder by subscribing to and becoming the owner of one share of stock, and, further, that 'the corporators should compose the first board of directors. ' Certificate of incorporation was thereupon issued by the secretary of state, but no further steps were taken by any of the defendants to comply with the statutory requirements, no by-laws were adopted, no stock certificates issued or arranged for, and no stock was ever subscribed for or paid in by the defendants or any other person, and the noncompliance was known by each of the defendants. The defendants Moe and Williams, assuming to be president and secretary, respectively, of the corporation, immediately began to carry on a general collection business at Milwaukee, under this corporate name; and they, in the course of their said business, caused to be printed letter heads and business cards with statement of incorporation, and their names and offices as aforesaid, including therein the name of Julius Wechselberg as vice president, all of which were used and distributed during a year and a half of their operations. The plaintiff in error 'knew all the time that Moe and Williams were carrying on said business in the name of said corporation. ' He took no part in the management ('but did not at any time, disavow his connection with the said corporation as incorporator, officer, or stockholder, until after the commencement of this action '). He never received any profit or emolument from it, and 'the evidence does not establish that he had actual knowledge that his name was used upon the letter heads,' or that he was held out as an officer of the company; but ('under the circumstances, if he did not know it, he could have ascertained the fact by merely slight attention to the matter, and was guilty of negligence in not knowing it, having become a party to the incorporation, and knowing that the business was being carried on in the name of the incorporation by the other defendants, and consenting thereto, when no capital stock had been subscribed or paid in to his knowledge or in fact, as he was bound to know, he cannot shield himself from liability by reason of his negligent ignorance of the use of his name; and by uniting in the incorporation, and permitting and consenting to the transaction of business by and in the name of the incorporation without stock subscription or payment of any part of a stock subscription, he made himself liable for all debts lawfully contracted in the name of the incorporation '). It is further found that the public representation of Wechselberg as vice president of this corporation was made known to the payee in the note in suit prior to the contracting of the debt for which it was given in renewal, but is not shown to have been known by plaintiff below until after the maturity of the renewal note. Also that the purported corporation made collections for and had active business connection with the corporation named as payee in said note, in which drafts were frequently drawn by the latter upon the former, and accepted and discounted through plaintiff bank. The note in suit was in renewal of one of these drafts so discounted, drawn September 11, 1889, and is a transaction of this purported corporation.

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The corporation was wholly without capital or resources out of which to pay this debt. Both the payee and its assignee were ignorant to this want of capital and of noncompliance with any of the statutory requirements. The exceptions and assignments of error are directed to the portions of the findings of fact which are above quoted in brackets, and to each of the conclusions of law and the judgment.

Quarles, Spence & Quarles (Chas. Quarles, of counsel), for plaintiff in error.

Shepard, Haring & Frost and Wilson Vanderlip (Edward W. Frost and John R. Vanderlip, of counsel), for defendant in error.

Before WOODS, Circuit Judge, and BUNN and SEAMAN, District Judges.

SEAMAN, District Judge (after stating the facts as above).

The plaintiff in error was held by the circuit court to be jointly liable with the other defendants below for the indebtedness contracted by their assumed corporation, the Northwestern Collection Company, in the absence of any capital stock. This liability was based upon the facts found in his relation and conduct as a corporator, and the court did not undertake to determine at the trial whether it arose under the statute or at common law. Corporations are entirely the creatures of statute, and, when duly formed, one of their chief characteristics, distinguishing them from partnerships and other joint ventures, is the exemption of the individual associates from liability for the corporate obligations, except as the enabling act may impose liability. This immunity, which is an important advantage of membership, can only be secured by compliance with the statutory requirements for incorporation. In the case of corporations organized for a purpose and under a law requiring capital stock, the capital becomes a fund to which creditors must look for satisfaction of debts. It is a substitute for individual liability, and constitutes a trust fund for the benefit of creditors. Upton v. Tribilcock, 91 U.S. 45; Alder v. Manufacturing Co., 13 Wis. 57; 1 Beach, Priv.Corp. § 116. Capital stock is, therefore, the vital requirement of every business corporation, and its actual existence is usually placed by enabling statutes as a condition precedent to corporate existence. It is found and conceded in this case that there was no capital stock in fact, and no capital paid in or subscribed; that the articles of incorporation which were entered into by the plaintiff in error with the other defendants below prescribed $5,000; that these articles were duly executed by the three parties, and duly filed and recorded; that without capital, and without the actual taking of any further step towards organization, business was opened by Moe and Williams as actors, in the name of the assumed corporation; that this was known to the plaintiff in error, but he did not take part in their operations, or receive any profit or emolument; that printed matter was used and distributed, wherein the plaintiff in error was named as vice president, and, while 'the evidence does not establish that he had actual knowledge' of this use of his name, it is found that 'under the circumstances, if he did not know it,

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he could have ascertained the fact by merely slight attention to the matter, and was guilty of negligence in not knowing it. ' Furthermore, it is recited in the articles which were entered into that 'the corporators should compose the first board of directors'; and, although such a provision would not control an organization effected by stockholders, who are empowered by the statute to elect directors, it may be considered as a fact tending to show intention or knowledge. The debt in question was incurred in the business so carried on, and in the line apparently contemplated by the articles.

The statute which authorizes incorporation for the purposes stated in these articles in chapter 86, tit. 19, of the Revised Statutes of Wisconsin, contained, with amendments, in 1 San. & B.Ann.St.c. 86. Section 1771 provides that 'three or more adult persons, residents of this state, may form a corporation in the matter provided in this chapter,' for objects there named. Section 1772 provides: 'In order to form such a...

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