Adamant Mfg. Co. of America v. Wallace

• Decision Date: 18 March 1897
• Court: Washington Supreme Court
• Parties: ADAMANT MANUF'G CO. OF AMERICA v. WALLACE ET AL.

48 P. 415

16 Wash. 614

ADAMANT MANUF'G CO. OF AMERICA v. WALLACE ET AL.

Supreme Court of Washington

March 18, 1897

Appeal from superior court, Pierce county; John C. Stallcup, Judge.

Suit by the Adamant Manufacturing Company of America against Thomas B. Wallace and others and the Adamant Plaster Manufacturing Company. From a judgment in favor of defendants, plaintiff appeals. Affirmed.

Bausman Kelleher & Emory, for appellant.

Campbell & Powell, for respondents.

DUNBAR J.

This is a suit in equity brought by a judgment creditor of an insolvent corporation to obtain payment for its debt from certain of the stockholders, upon the ground that the stock subscribed by them had not been fully paid. We say an "insolvent" corporation, although this is one of the questions in controversy; but we are satisfied from an investigation of the record that the corporation was insolvent, so that it will not be necessary to discuss that question further on. The defendant corporation, the Adamant Plaster Manufacturing Company, was organized in April, 1889 with a capital stock of $100,000, divided into 1,000 shares of $100 each. $45,000 of stock was subscribed by one Holbrook, and was paid for by him by turning over to the company a certain contract for patent rights for the manufacture of adamant. The defendants in this action, the other stockholders, subscribed for the other $55,000 worth of shares, and an agreement was entered into between themselves that this stock should be issued to them as paid-up stock upon their building a factory and equipping it for the manufacture of adamant, upon their paying in to the corporation $5,000 as a working capital, and upon the purchase of certain real estate in Tacoma as a site for the factory, and the stock was so issued. It is the contention of the appellant that the property turned over to the corporation in consideration of these shares was not worth the face value of the shares, and that a fraud was thereby perpetrated upon the creditors, one of whom is the plaintiff in this action. It might be well to state here that the plaintiff corporation had obtained judgment against the defendant corporation, execution had issued, and a writ of nulla bona returned, which return was the basis of this action against the stockholders to compel them to pay in to the corporation sufficient to liquidate its debt. The defendants demurred to the plaintiff's complaint on the ground that it did not state facts sufficient to constitute a cause of action, which demurrer we think, was properly overruled.

The first ground of objection to the complaint is that it shows on its face that the capital stock of the defendant corporation consisted of 1,000 shares, but it nowhere appears in the complaint that all of said shares were subscribed. In support of the contention that this is a necessary averment, appellant cites Hotel Co. v. Schram, 6 Wash. 134, 32 P. 1002. This case is easily distinguished from that one. In that case the action was brought by the corporation itself, while in the case at bar the action is brought by a creditor, and another rule prevails. However, this question was squarely decided by this court in opposition to respondent's contention in McKay v. Elwood, 12 Wash. 579, 41 P. 919, where it was held that, in an action by a corporation upon an unpaid stock subscription, the complaint was not demurrable on the ground that it failed to allege that the capital stock of the corporation had been subscribed, when the complaint otherwise alleged that plaintiff was and had been a duly-organized and existing corporation during all the time referred to in the complaint.

The next objection was that there was no allegation in the complaint that any demand or call was ever made by the trustees of the defendant corporation, or otherwise, or at all, upon the individual defendants, or upon any of them, for the sums respectively subscribed by them, and alleged by the complaint not to have been paid; citing Elderkin v. Peterson, 8 Wash. 674, 36 P. 1089, which case was also an action by a receiver against a stockholder, and is therefore not in point. The creditor has no control over the corporation or its business; is not supposed to know whether calls have been regularly made or made at all. So it will be readily seen that while this may be a duty of the corporation itself, in suing one of its members over whom it has control, the duty should not be imposed upon a creditor. That no calls are necessary before an action can be commenced by a creditor against the stockholder, see 2 Mor. Priv. Corp. § 821, where the distinctions above referred to are commented on at length. We think the complaint, in all respects, was sufficient.

It is not necessary, in discussing the merits of this case, to set out in full the answer of the defendants, for the real contention must be whether or not the stock subscribed for was paid for in cash or its equivalent. The doctrine that the stock of a corporation is a trust fund for the benefit of creditors is one which is founded in equity and fair dealing and, in any event, has become so well established in this country that it can no longer be gainsaid. This doctrine was announced by Chancellor Kent, as early as 1824, in Wood v. Dummer, 3 Mason, 309, F. Cas. No. 17,944, and since that time has become the established law of this country, and is termed the "American doctrine," although, as shown in the case above referred to, the same doctrine had long been established in England; and so universally has this doctrine been accepted in America, especially, that the citation of authorities seems a work of supererogation. We will, however, quote from 2 Mor. Priv. Corp. § 820, the rule which is announced as follows: "Debts due a corporation are equitable assets, and may be reached by creditors through the aid of a court of chancery, if the legal assets which can be reached by execution prove insufficient. The liability of shareholders to contribute the amount of their shares as capital is treated in equity as assets, like other legal claims belonging to the corporation. This liability, together with the capital actually contributed, constitutes the trust fund, which in equity is deemed pledged for the payment of the corporate debts." This being true, then it must necessarily follow, for the protection of creditors who dealt with these corporations, that the stock subscribed for must be paid in cash, or in property of an equivalent value. In other words, the corporation must be in the actual condition which it represents itself to be in financially. If it were allowed to hold itself out as having a capital stock of $100,000, when in reality the capital stock, which is and must be, under the theory of the law, assets in the hands of the corporation, is worth only one-half that amount, the corporation is to that extent doing business under false colors, and is obtaining credit upon the faith of an asserted estate which is purely fictitious. And where, by any arrangement between the shareholders and the corporation, the stock is issued as fully paid up, when in fact it has not been paid to the full amount of its face value, but has been paid in property of a fictitious or inflated value, a court of equity will compel a payment by the stockholder, for the benefit of the creditor who has dealt with the corporation relying upon the asserted value of its assets, to the full amount or face value of the stock. Such is almost the universal holding of the courts of the present day. See First Nat. Bank of Deadwood v. Gustin Minerva Con. Min. Co. (Minn.) 44 N.W. 198; Tayl. Priv. Corp. § 702. The latter authority lays down the rule as follows: "To issue shares, as fully paid up, for property known to the corporation and the shareholder receiving them to be materially below their par value, is a fraud on creditors, for whose benefit the shareholder to whom the shares are issued may be compelled to...