Atlanta & Walworth Butter & Cheese Ass'n v. Smith

• Decision Date: 26 October 1909
• Citation: 141 Wis. 377,123 N.W. 106
• Parties: ATLANTA & WALWORTH BUTTER & CHEESE ASS'N v. SMITH ET AL.
• Court: Wisconsin Supreme Court

141 Wis. 377

123 N.W. 106

ATLANTA & WALWORTH BUTTER & CHEESE ASS'N

v.SMITH ET AL.

Supreme Court of Wisconsin.

Oct. 26, 1909.

Syllabus by the Judge.

As a general rule, in case a corporation purchases its own stock, paying therefor by corporate assets, subsequent creditors cannot be regarded, judicially, as prejudicially affected.

As a general rule, unless plainly prohibited by statute or its organic act, a corporation may buy its own stock, using its assets therefor, so long as it acts in good faith pursuant to authorization by its governing body, and its officers, acting in like good faith, may do so as to stockholders actually or impliedly consenting and as to past or future creditors.

The trust fund doctrine that under all circumstances the assets of a corporation constitute a trust fund for creditors does not prevail in this state.

In general, under section 2320, St. 1898, a transfer of property cannot be impeached for fraud upon subsequent creditors of the transferror unless there was at the time of the occurrence mutual intent to defraud them.

If a stockholder of a corporation, by agreement with it or any of its officers, sells his stock to the organization in exchange for corporate assets, knowing, actually or constructively, that the result will be to render the corporation insolvent, all parties to the transaction contemplating that it will continue in business and incur indebtedness as before, the creditors relying upon appearance of the previous solvent condition continuing, the result to them must be presumed to have been mutually intended, supplying the element of bad faith essential to condemn the transfer.

In the circumstances stated in No. 5 the stockholder, co-operating in creating the delusive appearance, as to subsequent creditors, is estopped from claiming that his relations to the corporation were severed by the transaction so far as their continuance is necessary to preserve statutory liability under section 1773, St. 1898.

A transaction in the circumstances stated in No. 5 is void as to subsequent creditors by the law of estoppel and by section 2320, St. 1898, as well.

Where a transaction involving a transfer of property is void as to creditors of the transferror, and equity jurisdiction is not necessary to remove a cloud on title or for some other relief within the peculiar field of equity jurisdiction, the creditors may proceed at law, treating such transaction as if it never occurred, it being void as to him, and the bringing of an action inconsistent with validity of the transfer being a sufficient election.

Appeal from Circuit Court, Douglas County; A. J. Vinje, Judge.

Action by the Atlanta & Walworth Butter & Cheese Association against Frank M. Smith, impleaded with others. Judgment for plaintiff, and defendant Smith appeals. Affirmed.

Action by a creditor of the Superior Produce Company, a Wisconsin corporation, to recover of its stockholders upon the ground of their being personally liable for indebtedness incurred by the corporation in business carried on before one-half of its capital stock was subscribed for.

The complaint contained two causes of action, one on an account for $115.44, and on a note for the same amount, both account and note having been duly assigned to the plaintiff, and the other for $549, a balance of account which accrued in plaintiff's favor. Defendant Frank M. Smith, who only answered, claimed that he became a stockholder January 15, 1906, and ceased to be such July 14, 1906, and otherwise put in issue all allegations of the complaint.

The cause was tried by the court resulting in this decision as to facts: The Superior Produce Company is a Wisconsin corporation organized in 1905, with an authorized capital of 100 shares of $100 each. Shortly after such organization 31 shares were subscribed for, as follows: W. H. Cloud 16 shares, J. K. Stephens 10 shares, and C. K. Stephens 5 shares. The stock so subscribed for was fully paid. No other stock was taken. The corporation however commenced doing business and incurring indebtedness as soon as organized. About January 15, 1906, Smith became the owner of 15 shares of stock, purchased of J. K. and C. K. Stephens. Except as hereafter stated he continued such owner down to the time of the trial. About June 26, 1906, the corporation incurred the indebtedness of $115.44, mentioned in the complaint. Thereafter it gave to the creditor a note for such amount and subsequently, before this action was commenced, plaintiff became the owner of the indebtedness and the note. July 1, 1906, the corporation was indebted to Smith for money loaned to it in the sum of $1,300, at which time he and the president, W. H. Cloud, knew the business had proved a failure financially. July 14, 1906, by an agreement between Smith and Cloud, the latter, without express authority, assuming to act for the corporation, its property, in the main, valued by them at $3,607.80, was transferred to Smith for his stock at its par value, his account to the extent of $900, his assumption of a mortgage indebtedness on the property of $832, and other indebtedness on such property of $107.80, he at the same time drawing from the corporation in money $327.92, as the balance of his account. They then owned all the corporate stock outstanding. Before the transfer the value of the assets of the corporation, at a somewhat overappraisement, was in excess of its liabilities to the extent of $794.75. The result of the transaction was to leave the corporation with indebtedness greatly in excess of its assets. Its business after such transfer was continued as before, according to the contemplation of the parties, during which time, and in October, 1906, it became indebted to plaintiff in the sum of $550.78, all without any knowledge on its part of the transfer aforesaid or of the fact that sufficient stock had not been subscribed to give the corporation legal capacity to transact business without incurring personal liability of its stockholders. Smith did not intend to act in fraud of creditors of the corporation past or future, but his conduct resulted in placing an ostensibly solvent concern before the public, which was in fact insolvent. It failed November 1, 1906, with liabilities of some six times its assets.

Upon such facts the court held that the purchase, in form by the corporation, of the 15 shares of stock was fraudulent as to plaintiff, rendering Smith, notwithstanding such purchase, a stockholder as to the claims in suit. Judgment was therefore awarded against Smith and Cloud as claimed in the complaint, and against C. K. Stephens, who became a stockholder prior to the accruing of the indebtedness of $550.75, for that amount, and against all for costs. Smith appealed.

G. O. Linderman (S. M. Marsh and G. E. Dietrich, of counsel), for appellant.

Luse, Powell & Luse, for respondent.

MARSHALL, J. (after stating the facts as above).

The ground, in the main, upon which the trial court decided that plaintiff was entitled to recover, is that a corporation cannot, lawfully, under any circumstances, buy in its own stock paying therefor by assets of the company. It may be that this states too broadly the learned circuit court's view of the law but it is warranted, it is thought, by the language of the decision, and is certainly warranted by the argument of counsel for respondent in support of the judgment, citing authorities from foreign jurisdictions, supposed to directly, or inferentially, so hold, and, deducing by construction, the same doctrine from our statutes, and criticizing decisions of this court, so far as they directly or substantially hold otherwise.

True, under some circumstances a purchase by a corporation of its own stock would be a fraud on stockholders and under other circumstances a fraud on present or future creditors and so void or voidable at the instance of one or more of them in an appropriate judicial proceeding, though the circumstances under which such a transaction may be impeached by future creditors must be quite special. So much so that it is often found stated generally by text-writers that, in case a corporation buys in some of its own stock, a subsequent creditor cannot complain. Cook on Corporations (5th Ed.) § 311.

By a long line of decisions here, in the absence of a plain statutory prohibition to the contrary, and we have none, or such prohibition in the articles of organization of the corporation, a corporation may, in general, so long as it acts in good faith by authorization of its governing body, lawfully purchase its own stock, either as to stockholders or present or future creditors, and without such authorization its officers may, acting in good faith, do so as regards consenting stockholders or such creditors. The court spoke decisively on the subject in Shoemaker et al. v. Washburn Lumber Co., 97 Wis. 594, 73 N. W. 333,Calteaux v. Mueller, 102 Wis. 525, 78 N. W. 1082,Marvin v. Anderson, 111 Wis. 387, 87 N. W. 226,Pabst v. Goodrich, 133 Wis. 43, 113 N. W. 398, and Gilchrist et al. v. Highfield et al. (decided herewith) 123 N. W. 102.

While it must be conceded that the common law of England and the judicial rule in a number of states is contrary to the foregoing, it has support in the decisions of many state and federal courts, significant among them being Dupee v. Boston Water Power Company, 114 Mass. 37;Leland v. Hayden, 102 Mass. 542;Tuttle v. Batchelder & Lincoln Co., 170 Mass. 315, 49 N. E. 640;Republic Life Ins. Co. v. Swigert, 135 Ill. 150, 25 N. E. 680, 12 L. R. A. 328;First Nat. Bank of Peoria v. Peoria Watch Co., 191 Ill. 128, 60 N. E. 859;Blalock v. Kernersville Mfg. Co., 110 N. C. 99, 14 S. E. 501;Fremont Carriage Mfg. Co. v. Thomsen, 65 Neb. 370, 91 N. W. 376;Rollins v. Shaver Wagon & Carriage Co., 80 Iowa, 380, 45 N. W. 1037, 20 Am. St. Rep. 427;West v. Averill Grocery Co., 109 Iowa, 488, 80 N. W. 555;Eggmann v. Blanke, 40 Mo. App. 318;City Bank of Columbus v. Bruce et al., 17 N. Y. 507...