Skrainka v. Allen
| Decision Date | 24 June 1879 |
| Citation | 7 Mo.App. 434 |
| Parties | WILLIAM SKRAINKA ET AL., Respondents, v. GERARD B. ALLEN, STOCKHOLDER, Appellant. |
| Court | Missouri Court of Appeals |
1. In all matters pertaining to the assets of a corporation, creditors must be preferred to stockholders, and personal profits of members which would diminish the common fund must be held for the benefit of the corporation until the creditors are paid.
2. Where persons become stockholders of a corporation with the understanding that calls are not to exceed a certain per cent, and afterwards calls are made in excess of that amount, to compensate for which second-mortgage bonds are issued to these stockholders, they are liable to the creditors of the corporation for unpaid stock to the amount realized by the sale of the bonds.
3. A corporation cannot increase its liabilities by issuing second-mortgage bonds to its stockholders without valuable consideration.
4. In a proceeding by motion against a stockholder, under the statute, the measure of the defendant's liability is determined by the number of his shares at the date of the motion, after notice given, and not at the date of the return of the execution against the corporation.
APPEAL from St. Louis Circuit Court.
Reversed and remanded.
GLOVER & SHEPLEY and JAMES TAUSSIG, for appellant.
R. E. ROMBAUER, for respondents: The liability of the stockholder becomes fixed when the execution against the corporation is returned nulla bona.-- Nixon v. Green, 11 Exch. 550; McLaren v. Franciscus, 43 Mo. 452; Miller v. Great Republic, 50 Mo. 55.
Plaintiffs filed their motion for an execution against the defendant, Gerard B. Allen, as a stockholder in the Illinois and St. Louis Bridge Company, holding unpaid stock, to satisfy a judgment against the corporation for $10,420.21, with interest at eight per cent from November 12, 1875, and costs.
The authorized capital stock of the Bridge Company was $4,000,000, in shares of $100 each. In the early part of the year 1870, $3,000,000 had been subscribed for, on which forty per cent had been paid in cash. This stock commanded a premium in the market. It appears to have been believed at that time by the projectors and friends of the enterprise that no further payments on the stock would ever be demanded; and this belief soon ripened into assurance, which the managers afterwards, in a manner, felt themselves bound to verify, as will hereafter be sn. The Keystone Bridge Company had taken the contract for the superstructure. Andrew Carnigie was a large stockholder in that corporation, and represented it and certain individual capitalists associated with him in transactions with the Illinois and St. Louis Bridge Company. The latter company being about to issue $4,000,000 of first-mortgage bonds, an agreement was entered into by its executive committee with Carnigie, in the following terms:--
“Memorandum of understanding between the Illinois and St. Louis Bridge Company and Andrew Carnigie and associates: The latter to have three months' time, say until March 20, 1870, in which to endeavor to negotiate the four million first-mortgage gold bonds of Bridge Co. To net the company, if six per cent bonds, eighty-five per cent; if seven per cent bonds, ninety per cent; twenty per cent--800,000--of the stock of said company to go with the bonds as a bonus. But should the Bridge Company itself negotiate the bonds by, say January, 1870, then Carnigie and associates to receive only ten per cent of stock, say 400,000
NEW YORK, Dec. 10, 1869.
Stockholders of the Bridge Company to have the right to take their pro rata of the bonds on same terms, provided they will agree to hold the bonds for twelve months. With above amendment, correct.
| WM. TAUSSIG, |
| ) |
| ) |
| Ex. Com. |
| WM. MCPHERSON, |
)
ANDREW CARNIGIE and Associates.”
It appears that under this arrangement it was afterwards agreed that stockholders might take one and a half million of the first-mortgage bonds, and Carnigie would dispose of the remainder. There was testimony tending to show that a subscription-paper was signed by a large number of stockholders, who thereby agreed to take the bonds on the terms indicated in the arrangement with Carnigie; but that paper had become lost, and was not produced. Carnigie disposed of his two and a half million of bonds in London, at eighty-seven and one-half per cent; and an agent appointed by the stockholders sold their allotment in the same market at ninety per cent. On or about January 21, 1871, the Bridge Company issued stock to the amount of $300,000 to the stockholders who had agreed to take the million and a half of bonds. Of this stock, all of which was credited with forty per cent as paid, seventy-five shares were issued to defendant Allen, who had been one of the earliest supporters of the bridge undertaking, and already held about seven hundred and fifty shares, on which he paid forty per cent in cash. Plaintiff claims that the defendant is responsible to him, as a creditor of the corporation, in the amount of this bonus of forty per cent on seventy-five shares, for which the defendant received a credit but which he never paid.
It is urged for the defendant that this forty per cent was not in fact a bonus, but was fairly earned by the enhanced price for which the bonds sold in consequence of the Carnigie agreement. It does not clearly appear that at the time when the sales were made in London any competent representative of the corporation might not have sold the four millions of bonds on as favorable terms as were obtained by Carnigie and the agent of the stockholders. If this was practicable, the whole expense would have been covered by the ordinary commissions, and there would have been no occasion for an issue of bonus stock. But let it be admitted that the Carnigie arrangement brought a margin of extra profit sufficient to cover or to exceed the amount of the bonus. It does not follow that the defendant, who was a director and a member of the corporation, would be permitted, as against its creditors, to make a profit out of corporate transactions which were directly committed to his control, and thus to absorb a part of the trust-fund, the capital stock, which he held in a distinct trust for the protection of those creditors. As between the stockholder and the corporation, the transaction was unquestionably valid, and was unaffected by the peculiar considerations which arise when it is impeached in the interest of a creditor. No intimation of bad faith, or of a disregard of what was understood to be the substantial interest of the corporation, is to be entertained at all. But the rule is inflexible that, in all matters pertaining to the assets, creditors must be preferred to stockholders, and personal profits of members which would diminish the common fund must be held for the benefit of the corporation until the creditors are paid. In Railroad Company v. Howard, 7 Wall. 392, there was a sale under foreclosure of mortgage of an insolvent railroad company, which was expedited and made advantageous for all concerned by an arrangement between the mortgagees and the stockholders. By this arrangement the mortgagees got a certain percentage,--some of them realizing the whole amount of their claims,--and the stockholders received sixteen per cent of the par of their stock. The United States Supreme Court held that the arrangement was void as against creditors not secured by the mortgage; “and this, although the road was mortgaged far above its value, and on a sale in open market did not bring near enough to pay even the mortgage debts; so that, in fact, if there had been an ordinary foreclosure, and one independent of all arrangements between the mortgagees and the stockholders, the whole proceeds of sale would have belonged to the mortgagees.” Here was, if anything, a stronger or harsher application of the rule than is demanded in the present case. We think that the defendant's claim to the bonus of forty per cent on the seventy-five shares must yield to the demand of the plaintiff as a creditor of the corporation.
At a meeting of the stockholders on December 20, 1871, a resolution was adopted as follows:--
This resolution was shortly afterwards ratified by the board of directors. It had become apparent that the unpaid sixty per cent of the stock issued would be needed, on account of the increased cost of the bridge over the earlier estimates. Good faith towards...
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