Appleton v. Turnbull

• Citation: 84 Me. 72,24 A. 592
• Parties: APPLETON v. TURNBULL.
• Decision Date: 08 December 1891
• Court: Supreme Judicial Court of Maine (US)

24 A. 592

84 Me. 72

APPLETON

v. TURNBULL.

Supreme Judicial Court of Maine.

Dec. 8, 1891.

(Official.)

Appeal from supreme judicial court, Penobscot county.

Action by Frederick H. Appleton, assignee of the Lincoln Pulp & Paper Company, against William W. Turnbull, to recover a balance due from him on stock of the assignor.

Appleton & Chaplin, for plaintiff.

Wilson & Wooclard, for defendant.

FOSTER, J. The Lincoln Pulp & Paper Company, a corporation existing under the Jaws of this state, was adjudged insolvent on petition of its creditors, and the plaintiff, as assignee, brings this suit to recover the sum of $6,020, being the balance of 40 per cent. of the par value of 301 shares of the company's stock issued to the defendant, and for which he paid only 60 per cent. of its par value under' an allotment of stock made by the directors of the corporation, November 4, 1884.

No contention is made in reference to the validity of the plaintiff's claim against the defendant, inasmuch as this court has recently decided in McAvity v. Paper Co., 82 Me. 511, 20 Atl. Rep. 82, upon a state of facts similar in their bearing to those presented here, that the acceptance and payment of 60 per cent. of the new stock allotted to the stockholders must be considered "an agreement for" those shares; and consequently those who accepted and paid the per cent. named would be chargeable for the balance unpaid, as having "subscribed for or agreed to take stock in said corporation," within the meaning of the statute, and in accordance with the decision of Libby v. Tobey, 82 Me. 397, 404, 19 Atl. Rep. 904.

The defendant, then, being primarily liable for $6,020 unpaid on his shares allotted to him, at $50 a share par value, contends that he has a full defense to the plaintiff's claim by virtue of Rev. St. c. 46, § 48, which provides that "a defendant in such suit * * * may prove that he has bona tide claims in contract or tort, several, or joint with other persons, against said corporation, absolute or contingent, or which could be availed of by set-off in court or on execution, for the whole or any part of the amounts for which he would be liable under this chapter," etc.

Assuming that the defendant has debts against the corporation equal to or greater in amount than the claim for unpaid stock which the plaintiff seeks to recover in this action, we are brought to the consideration of this important question: Can debts which a stockholder has against an insolvent corporation be set off against a debt which he owes for unpaid stock, in a suit against him by an assignee of the insolvent corporation, who represents all the creditors, and who, in accordance with his duty, is marshaling the assets in order to close up the affairs of the corporation, and make a pro rata distribution among all the creditors?

To answer this correctly, and in its application to the present case, requires an understanding of the stockholders' rights and liabilities, both at common law and under the statute.

It is too firmly established at the present day to be questioned that the capital stock of a corporation is a trust fund for the payment of its debts. It is a substitute for the personal liability of the individual members of private copartnerships, and those who deal with the corporation have a right to rely upon its capital stock for their security. Unpaid stock is as much a part of the assets of the corporation as the money that has been paid in upon it. Creditors have the same right to insist upon its payment as upon the payment of any other debt due the corporation, so far as it is necessary to the satisfaction of debts due from the corporation. During the existence of the life of the corporation it is a trust to be managed for the benefit of the stockholders; but, in the event of its dissolution or insolvency, it becomes a trust fund for the benefit of its creditors. If, in such case, the assets are not sufficient to pay all its debts in full, each creditor is equitably entitled to receive a ratable share of the assets which remain. Hence it follows that, where proceedings have been instituted to obtain a general distribution of the assets of an insolvent corporation among the creditors, the shareholders cannot, at common law, when sued for the amount due upon their unpaid stock, set off debts due to them from the corporation. In such case the doctrine laid down by the courts for 30 years is that they must pay up their shares in full, and are entitled only to a ratable distribution of all the company's assets, and are to receive dividends upon their claims against the corporation in common with other creditors. Mor. Priv. Corp. § 861; Cook, Stocks, § 193. The rule was settled by the supreme court of the United States in Sawyer v. Hoag, 17 Wall. 610, (1873,) where the court say: "The debt which the appellant owed for his stock was a trust fund devoted to the payment of all the creditors of the company. As soon as the company became insolvent, and this fact became known to the appellant, the right of set-off for an ordinary debt to its full amount ceased. It became a fund belonging equally, in equity, to all the creditors, and could not be appropriated by the debtor to the exclusive payment of his own claim." Scovill v. Thayer, 105 U. S. 143, 152; Sanger v. Upton, 91 U.S. 56; Stockton v. Bank, 32 N. J. Eq 163,167; Williams v. Traphagen, 38 N. J. Eq. 57; Wheeler v. Millar, 90 N. Y. 353.

The same rule prevails in England, as may be seen in the leading decision of Grissell's Case, L. R. 1 Ch. App. 528, (1866.)

If the defendant's rights, as well as his duties, were to be determined by the common law alone, it is evident that the defense interposed in that case could not prevail.

We must ascertain, then, whether the statute has altered the common law and enlarged the defendant's rights.

It is undoubtedly the intention of the statute, as manifested by sections 47, 48, Rev. St. c. 46, to provide a remedy against the delinquent stockholder by two different parties towards whom he stands in entirely different relations: (1) By an individual creditor of the corporation who has an unsatisfied judgment against the corporation in his own name and for his own personal benefit; (2) by a trustee, receiver, or other person appointed to close up the affairs of an insolvent corporation.

The contention of the plaintiff is that so much of section 48 as is quoted above applies only to the first class,—to a suit brought by an individual creditor, and not to a suit brought by a person of the second class, as in the present case.

Section 47 provides that "any person having such judgment, or any such trustees, receivers, or other persons appointed to close up the affairs of an insolvent corporation, may, within two years after their right of action herein given accrues, commence an action on the case or bill in equity, without demand or other previous formalities, against any persons (if a bill in equity, jointly or severally, otherwise severally,) who have subscribed for or agreed to take stock in said corporation, and have not paid for the same," etc. And, by section 48, "a defendant in such suit may prove * * * that he has bona fide claims in contract or tort, several, or joint with other persons, against said corporation, absolute or contingent, or which could be availed of by set-off in court or on execution, for the whole or any part or the amounts for which he would be liable under this chapter," etc. and proof of such matters is declared to be a full or partial defense for such defendant.

What is meant by "such suit?" "'Suit' is applied to proceedings in chancery as well as in law, and is therefore more general than 'action,' which is almost exclusively applied to matters of law." Bouv. Law Dict. "Suit." "'Suit' is a generic term, and denotes any legal proceeding of a civil kind brought by one person against another." Co. Litt. 291a; Rap. & L. Law Diet. "Suit." "The term is certainly a very comprehensive one, and is understood to apply to any proceeding in a court of justice, by which an individual pursues that remedy in a court of justice which the law affords him." Weston v. City Council of Charleston, 2 Pet. 449, 464. Chief Justice Marshall, in Cohens v. Virginia, 6 Wheat. 264, 407, defines the term in the following language: "We understand it to be the prosecution or pursuit of some claim, demand, or request. In law language, it is the prosecution of some demand on a court of justice."

In the construction of this statute, then, the term "such suit" undoubtedly must be held to apply to any action or bill in equity brought by a person having a judgment against a corporation, or by any trustee, receiver, or other person appointed to close up the affairs of an insolvent corporation. To hold that it applies only to a suit brought by a person having a judgment against a corporation, and that it has no application where suit is brought by trustees, receivers, or other persons appointed to close up the affairs of an insolvent corporation, would violate the plain provisions of a statute whose terms are so free from ambiguity or uncertainty as to require no passing comment in reference to the general rules applicable to their interpretation.

The statute in question was enacted in 1871, c. 205, entitled "An act fixing the liability of stockholders in corporations," and thereby important changes were made in the laws then existing in relation to the liability of stockholders. Libby v. Tobey, ...