Austin Powder Co. v. Commercial Lead Co.

• Decision Date: 01 December 1908
• Parties: AUSTIN POWDER CO. v. COMMERCIAL LEAD CO. et al.
• Court: Missouri Court of Appeals

114 S.W. 67

134 Mo. App. 183

AUSTIN POWDER CO. v. COMMERCIAL LEAD CO. et al.

St. Louis Court of Appeals. Missouri.

December 1, 1908.

CORPORATIONS (§ 249)—INSOLVENCY—STOCKHOLDERS' LIABILITY—SET-OFF.

In a suit by a judgment creditor of a corporation to enforce a stockholder's liability on unpaid stock, the stockholder may set off against such liability a bona fide indebtedness of the corporation to him.

Appeal from St. Louis Circuit Court; Chas. Claflin Allen, Judge.

Action by the Austin Powder Company against the Commercial Lead Company and others. Judgment for defendants, and plaintiff appeals. Affirmed.

Selden C. Spencer and H. C. Ladd, for appellant. Carter, Collins & Jones, for respondents.

GOODE, J.

This case is in the nature of a suit in equity against the Commercial Lead Company, a corporation, and the individual defendants as holders of unpaid shares of stock in it. Whether or not said defendants are the only stockholders of the company is nowhere stated in the record, but it seems they are not; for numerous other defendants were originally proceeded against and the suit dismissed later as to them for some reason not stated. The company was organized in the summer of 1903, with a capital stock of $60,000. All the shares of the original capital stock were subscribed and fully paid, but in about six months the cash capital thus realized had been exhausted, and the company was in debt $62,000. The stockholders raised money to pay this indebtedness and put a surplus of $12,000 in the treasury for working capital, and then increased the capital stock from $60,000 to $100,000. Still more money was needed, and $75,000 was raised by the different shareholders lending the company money on its promissory notes drawing 7 per cent. interest and due in December, 1905, which were issued to the shareholders for the different amounts advanced by them. As an additional inducement for the loans, shares of the new stock to the aggregate par value of one-half the money advanced to the corporation were given to each shareholder who made an advancement. The company ceased to do business July 5, 1905, and then owed $90,000; that is to say, $15,000 more than the $75,000 it had borrowed from its shareholders in December, 1903. Plaintiff obtained judgment against the Commercial Lead Company October 30, 1905, for $4,379.14, and pursuant to said judgment an execution was issued, which was returned nulla bona December 4, 1905. The judgment remains unpaid, and defendant company has no assets out of which it can be satisfied. Under these circumstances, this action was instituted for an accounting, whereby the liability of each of the individual defendants to the company for unpaid stock can be determined, for a decree against each of them for the amount due from him to the company on account of his unpaid shares, and for such other relief as may be proper. Each individual defendant filed a separate answer, in which he stated the fact of his subscription to the original capital of the company and full payment of the shares then subscribed; that afterward he became the owner of other shares of the par value of $10 each, giving the number of the shares, and conceding they are unpaid, but setting up as a set-off the indebtedness of the company to him for the money lent in December, 1903, and for which it had executed its promissory note as already stated. It is admitted, or if not admitted, is proved conclusively, the Commercial Lead Company owed each of the individual defendants at the date plaintiff's execution was returned nulla bona at least twice as much as said defendant owed the company on account of unpaid shares of stock; and it is not contended the obligations of the company to the individual defendants were tainted by fraud or bad faith. These obligations accrued on account of the advancements of cash made by said shareholders of the company while it was still a going, but embarrassed, concern, to enable it to pay what it owed and continue its business, and its debts were paid with these advancements. The question to be determined is whether or not these shareholders were entitled to offset, in this proceeding, what the company owed them against their liability as holders of unpaid shares.

A like question came up in Jerman v. Benton, 79 Mo. 148, in a motion under the statute (Rev. St. 1899, § 985 [Ann. St. 1906, p. 870]), for an execution against a stockholder to satisfy a judgment against the corporation. Judge Martin, then commissioner of the Supreme Court, examined and expounded the subject on principle and authority with his usual care and lucidity, and concluded that in a proceeding on the statute for an execution against a shareholder the latter might set off against the demand of the judgment creditor of the corporation any indebtedness due from the corporation to the shareholder. This decision was preceded by the decisions of this court in Webber v. Leighton, 8 Mo. App. 502, and Merchants' Ins. Co. v. Hill, 12 Mo. App. 148, 165, in which the same ruling was made, and has been followed by the decision in Coquard v. Prendergast, 35 Mo. App. 237, 243. The reasoning on which the set-off is allowed is this: If a defunct corporation is indebted to a holder of unpaid shares, the latter should enjoy the same facilities for obtaining satisfaction of his debt any other creditor has, and not be discriminated against by permitting a judgment creditor to collect his demand in full out of the shareholder's liability on his shares. The two kinds of creditors are put on an equal footing as regards obtaining priority of satisfaction out of the assets of the company, and their success made to depend on their comparative diligence. As the holder of unpaid shares cannot proceed against himself for satisfaction of his claim, his liability is an asset of the company which is not accessible to him by the statutory remedy; and hence his equality with other creditors ought to be protected, as regards said asset, by allowing him to set off any debt the company owes him, if another creditor seeks satisfaction from him. The decisions we have cited suggest that in a suit of an equitable nature, instituted by all the creditors of the defunct company, or by one or more for the benefit of all and against the company and all its shareholders, to have an account taken of its total assets and liabilities and the former distributed among the various creditors according to their demands, a set-off would not be allowed in favor of a holder of unpaid shares, but he would be compelled to pay his liability in full and take his proportion of the company's assets like any other creditor at large. This would be a just rule, and I perceive no reason why it cannot be applied in a suit of a chancery character by one or more creditors in their own behalf and against one or more stockholders; for the court can order the other creditors and shareholders brought in, and take an account and distribute the assets ratably. Spurlock v. Burnett, 170 Mo. 372, 377, 70 S. W. 870. But in Washington Savings Bank v. Butchers' & Drovers' Bank, 130 Mo. 155, 31 S. W. 761, the rule regarding a shareholder's right of set-off, as theretofore enforced only in proceedings on the statute for an execution, was adopted in a proceeding in the nature of an equity suit instituted by several judgment creditors of the insolvent bank against numerous shareholders. Whether part or all of them is unstated. Suffice to say for present purposes the facts of that case relevant to the question with which we are dealing were in all respects like those of the case at bar; and the claim of the defendants therein to be allowed similar set-offs against the suit of the judgment creditors of the bank for balances due on unpaid shares was sustained and the prior decisions in this state touching the question approved. It is hinted, rather than said, this right would not be accorded in a suit to wind up the affairs of an insolvent corporation through a receiver or assignee. The later case of Shields v. Hobart et al., 172 Mo. 491, 510, 72 S. W. 669, 95 Am. St. Rep. 529, was a suit in equity similar to this one, and the right of set-off was upheld; but the particular demands which those shareholders undertook to offset were rejected because they were not proved to be bona fide obligations of the company. From the foregoing decisions it is clear the contention of plaintiff that the assets of the defendant company, including the amounts due on unpaid shares of stock, became, when the company failed, a trust fund for the benefit of its creditors to be distributed ratably among them, is not the law to the extent asserted, to wit, that in the present suit, not brought to obtain an accounting in behalf of all the creditors against all the shareholders, nor to have the assets of the company collected and distributed pro rata under a decree of the court, said doctrine should be applied.

The judgment is affirmed. All concur.

NOTE.

[a] (U. S. Sup., Mo., 1890) In a proceeding against a stockholder to recover an alleged balance of unpaid stock due to the corporation, the stockholder may set off any subsisting debt due by the corporation to him.—(App. 1882) Merchants' Ins. Co. v. Hill, 12 Mo. App. 148, affirmed (1885) 86 Mo. 466, which is affirmed in Hill v. Merchants' Mut. Ins. Co. (1890) 134 U. S. 515, 10 Sup. Ct. 589, 33 L. Ed. 994.

[b] (U. S. C. C. A., Kan. 1903) In a proceeding against a stockholder in a federal court, by motion for execution against him after the recovery of a judgment at law against the corporation and return of execution nulla bona, as provided for by the Kansas statute, the stockholder cannot interpose as a set-off a claim against the corporation, which does not constitute a legal defense as against the plaintiff, and can only be availed of by a suit in equity.— Crissey v. Morrill, 125 F. 878, 60 C. C. A. 460.

[c] (U. S. C. C. A., Kan., 1904) In an action at law in a federal court...