Alabama Terminal & Improvement Co. v. Hall

• Decision Date: 02 July 1907
• Parties: ALABAMA TERMINAL & IMPROVEMENT CO. ET AL. v. HALL ET AL. HALL ET AL. v. ALABAMA TERMINAL & IMPROVEMENT CO. ET AL.
• Court: Alabama Supreme Court

44 So. 592

152 Ala. 262

ALABAMA TERMINAL & IMPROVEMENT CO. ET AL. v. HALL ET AL.

HALL ET AL. v. ALABAMA TERMINAL & IMPROVEMENT CO. ET AL.

Supreme Court of Alabama

July 2, 1907

Appeal from Chancery Court, Montgomery County; W. L. Parks Chancellor.

Bill by J. L. Hall and another, as trustees, etc., and others against the Alabama Terminal & Improvement Company and others. From a decree overruling a demurrer to the bill defendants appeal; and from a decree dismissing an amended bill as to defendants O. C. Wiley and others, complainants prosecuted a cross-appeal. Affirmed on defendants' appeal, and reversed and remanded on complainants' cross-appeal.

R. L. Harmon, A. A. Wiley, and W. S. Thorington, for appellants.

Gunter & Gunter and Horace Stringfellow, for appellees.

TYSON C.J.

The bill in this cause, as originally filed, averred that Woolfolk, as president of the debtor corporation, without authority, agreed with the shareholders that they should pay their stock subscriptions to the capital stock of the debtor corporation, and that he would thereupon purchase their stock for the corporation, and pay for the same with its assets, which was done. It was also averred that by reason of such agreement and purchase of the stock the appellants as shareholders had never paid their subscription obligations. In other words, the averments of the bill, in substance and legal effect, showed that the appellants had obtained from Woolfolk as president without any authorization from his corporation, their subscription obligations and bonds belonging to the corporation, without any consideration being paid for them. In short, they were the recipients of a gift from Woolfolk of their obligations and bonds, which were assets of the corporation, which was, of course, a fraud upon the debtor corporation and the complainants, its creditor. The bill prayed specially that the appellants be required to pay their subscription obligations, and also contained a prayer for general relief. Upon appeal to this court it was held that the bill was without equity, for the reason that the complainants had an adequate remedy at law by garnishment, and this upon the proposition that the corporation was not bound by the acts of Woolfolk which were averred to be unauthorized; it not being shown that the corporation had ratified his acts, or had otherwise estopped itself to treat his unauthorized action as a nullity, and, therefore, could institute and maintain actions at law upon the subscription obligations which had been illegally and inefficaciously canceled and surrendered to the appellants as makers. Henderson v. Hall, 134 Ala. 455, 494, 32 So. 840, 63 L. R. A. 673.

Upon a remandment of the cause the bill was amended by omitting the averment that Woolfolk's acts were unauthorized, and averring in lieu thereof that the management of the affairs of the corporation was left to Woolfolk as president, and facts showing a ratification by the corporation of his acts, thus committing it to the fraud originally alleged against the complainants, and also by adding a special prayer "that the said several defendants be required to account for and be charged with all the said assets of the said Alabama Terminal & Improvement Company for which they were justly liable." Again the equity of the bill was challenged, and upon appeal to this court it was held that it contained equity. It was there said: "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. Shares 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. 2 Morawetz on Corporations, §§ 789, 790, 793, 794; 2 Thompson on Corporations, § 2054 et seq.; Hall & Farley, Trustees, v. Henderson, 126 Ala. 449, 480-482, 28 So. 531, 61 L. R. A. 621, 85 Am. St. Rep. 53, and authorities there cited. Money is leviable property (Barnett v. Bass et al., 10 Ala. 951; 1 Freeman on Executions, § 111), and money paid by a debtor corporation for shares of its own stock is property fraudulently transferred, which may be reached and subjected by the creditor on bill in chancery. Investment bonds of one corporation owned by a debtor corporation are chosen in action leviable by process of garnishment. Their transfer in payment for shares of stock of its own capital by the debtor corporation is a fraud on creditors of the corporation, and a creditor may proceed by bill in equity to set aside such transfer and subject them to his debt. Promissory notes, and other forms of obligation of the subscriber to the capital stock of a corporation for the amount of his subscription, which must be also for the face amount of the stock subscribed for and unpaid, are choses in action which under the garnishment statutes, are subjectable to the debts of the corporation. The foregiveness of them--that is, the surrender of them, canceled as paid, to the maker, when they have not been paid--is, as to creditors, a fraudulent transfer of them, upon which the creditors may come into equity by bill against the maker to coerce their payment upon the complainant's debts. So, too, of course, where the obligor makes only colorable payment, as by the satisfaction of an undoubtedly illegal claim he assumes to hold against the company, or of a claim he has against a third person or another corporation, for which the obligee corporation is not liable. And where the solvent maker actually pays in part and is forgiven as to the residue, or as to the residue is allowed credit by the satisfaction of such illegal claim or claims against another corporation or person, he may in like manner be required to pay such residue to creditors of the corporation. Hall & Farley v. Alabama Imp. Co. (Ala.) 39 So. 285.

Upon the cause being again remanded, the appellants demurred to the bill as amended; and from the decree overruling the demurrer this appeal is prosecuted.

One of the points raised by the demurrer, insisted on by appellants' counsel, is that the amendment was a departure from the original bill, introducing a new cause of action, and therefore barred by the statute of limitations when made. "The statute of amendments to bills is broad and liberal, extending to striking out or adding new parties, or to meet any state of evidence which will authorize relief. Before final decree, the amendment of the bill is a matter of right. The limitations upon its exercise are that it shall not operate an entire change of parties, nor make a new case, nor work a radical departure from the cause of action stated in the original bill. New matter or new claims may be introduced, entitling complainant to additional or different relief from that specially prayed in the original bill, if it is not repugnant to the prayer and purpose. Whether the original bill contained equity--whether it presented a case of which the court could take cognizance, entitling complainant to relief--is not a material inquiry. If it did not, supplying or correcting its deficiencies was the proper office of an amendment. Prickett v. Sibert, 75 Ala. 315; Seals v. Pheiffer, 81 Ala. 518, 1 So. 267." Fite v. Kennamer, 90 Ala. 470, 473, 7 So. 920.

In Ingraham v. Foster, 31 Ala. 132, it is said "To make an amendment improper, it is not enough that there be a mere inconsistency or repugnancy of allegation. There must be an inconsistency or repugnancy of the purposes of the bill, as contradistinguished from a modification of the relief." See, also, Blackwell v. Blackwell, 33 Ala. 57-63, 70 Am. Dec. 556; Cain v. Gimon, 36 Ala. 168; Moore v. Alvis, 54 Ala. 356. In the case last cited the original bill sought to enforce a vendor's lien on a certain tract of land. It alleged that complainant sold the land to the respondent, taking his promissory note therefor, which recited that it was given for the lands described in the bill; that he (complainant) gave his bond, conditioned to make title upon payment of the purchase money; that respondent went into possession of the land under the purchase, and so continued; and that the purchase money was due and unpaid, etc. The respondent, in his answer, denied that the note was given for the purchase money of the land, or that he had bought it (the land) from complainant. He stated the transaction to be this: That he was indebted to the complainant for borrowed money, and that complainant proposed that, if he make him an absolute deed to the lands to secure the debt, he (complainant) would give him an extension of the debt, and would execute bond for title to convey the land to him (respondent) when the amount of the note was paid in full; that in pursuance of this agreement the note was executed. The amendment to the bill adopted the transaction as stated in the answer of the respondent, and sought to have the deed declared...