Banta v. Hubbell
| Decision Date | 11 November 1912 |
| Citation | 150 S.W. 1089,167 Mo.App. 38 |
| Parties | W. S. BANTA, Assignee, Appellant, v. JOHN M. HUBBELL, Respondent |
| Court | Kansas Court of Appeals |
Appeal from Boone Circuit Court.--Hon. N. D. Thurmond, Judge.
AFFIRMED.
Judgment affirmed.
W. M Williams, Sebastian & Sebastian for appellant.
(1) Where a corporation, becomes insolvent it is the duty of the directors to make an assignment for the benefit of creditors. Huse v. Ames, 104 Mo. 91. (2) The assignment dissolves the corporation. Kehlor v. Lademann, 11 Mo.App. 550. (3) All the assets of the assigned corporation including unpaid balance on stock passes to the assignee, by the deed of assignment, to he held in trust for the benefit of the corporation creditors. Lyonberger v. Bank, 10 App. 499. (4) A corporation is insolvent, when it is not able to pay its debts and the amount paid in on its subscription stock. Jones on Failing and Insolvent Corporations, sec. 9; Shrainka v. Allen, 76 Mo. 384. (5) After the insolvency of the corporation, although the legal owner of the assets may continue as before, the beneficial interest of the stockholder no longer exists. In equity as well as law the beneficial interest belongs to the creditor, and constitutes a trust fund, and the directors become trustees. Thompson on private Corporations, sec. 3259; Williams v Jones, 23 Mo.App. 114; Gotschalk v. Stover, 85 Mo.App. 569; Miller v. Ins. Co., 50 Mo. 65; Gill v. Balis, 72 Mo. 433. (6) The transfer or attempted transfer by defendants, of their stock to insolvent persons, after the corporation had created debts which it was unable to pay so as to release themselves from personal liability, for the unpaid balance on their stock, is fraudulent as against the creditors of the corporation. Schufeldt v. Smith, 131 Mo. 290.
McBaine & Clark for respondent.
(1) The finding and decree should be affirmed because plaintiff's petition does not state a cause of action. Simmons v. Dent, 16 Mo.App. 295; Marks v. Williams Cooperage Company, 204 Mo. 242; Miller v. Insurance Co., 50 Mo. 55, 57. (2) The court should affirm the decree below which was for the defendant, because the evidence does not show that the hotel company was insolvent at the time of the transfer of the stock. Hamilton v. Goodwin, 46 N.W. 563; Sabin v. Fuel Co., 25 Ore. 15. (3) Under the evidence the court below properly found for the defendant because the trial court found according to the greater weight of the evidence that the transfer of the stock to Berry by defendant was not made for the fraudulent purpose of avoiding his liability on the same to the creditors of the company. Miller v. Ins. Co., 50 Mo. 55, 57; Gottschalk v. Stover, 85 Mo.App. 569. (4) The directors are under no different obligation from the ordinary stockholder in disposing of their stock. 10 Cyc. 577, 578; Thompson v. Ins. Co., 9 Ont. 308; Trisconi v. Winship, 43 La. Annual, 45; In re Cauley & Co., 31 Am. & Eng. Cor. Cas. 438.
--This is an action prosecuted by the assignee of a business corporation for the recovery of an unpaid subscription to the capital stock. A similar suit against Charles D. Matthews, another alleged stockholder, was brought in the same court and by stipulation tried with this case. What we shall say in this opinion will apply with equal force to that case. A trial to the court resulted in a judgment for the defendant in each case and appeals were taken by plaintiff.
In January, 1910, the Columbia Hotel and Catering Company was incorporated under the provisions of article IX, ch. 12, Revised Statutes 1899, and immediately engaged in the operation of a restaurant in the city of Columbia. The defendant Hubbell was one of the incorporators and directors named in the articles as was also Charles D. Matthews the defendant in the other case. The other incorporators and directors were Benjamin L. Berry and George S. Leighton. The capital stock was two thousand dollars, divided into four hundred shares of the par value of five dollars each and the articles stated that all of the stock was subscribed and one-half paid up. Berry subscribed for one hundred and sixty shares, Matthews and Hubbell for one hundred shares each and Leighton for forty shares. The directors elected Leighton president and manager, Hubbell vice-president, Matthews treasurer, and Berry secretary. Hubbell and Matthews were men of means; Berry and Leighton had no means except their contributions to the capital stock.
The directors held periodical meetings at which there was always a full attendance and at which full reports of the business were submitted by Berry and Leighton who were in active charge of the business. The reports for the first two months disclosed that the business was profitable but after that it became unprofitable and steadily lost money. Without going into details, the statement of the business submitted at a meeting of the board of directors held October 5, 1910, showed that, counting the capital stock paid in as a liability the total liabilities were $ 2098.38, and the total assets $ 1703.40. That is to say the corporation owed creditors $ 1098.38 and had surplus assets of $ 605.02, but the capital paid in was impaired in the sum of $ 394.98. The corporation had not defaulted in the payment of its debts and was not being pressed by creditors. Hubbell and Matthews were dissatified with the management and Berry and Leighton were not in harmony. Each attributed the poor showing of the business to the misconduct of the other and all of the directors were of the opinion that a change of some sort was necessary. The minutes of the meeting of October 5th recite:
Hubbell and Matthews desired to retire and it seems that both Berry and Leighton aspired to the sole management and control of the business. Berry was the successful contestant in this race. On October 13 he bought the stock of Hubbell and Matthews at par, paying one-half of the purchase price in cash which he procured from sales of some of his own stock and giving his notes for the remainder, payable in sixty days. He secured the payment of these notes by an assignment to each of his vendors of the stock purchased of him. Berry as manager for the corporation continued the business until December 15, 1910 on which date the corporation made a voluntary assignment to plaintiff for the benefit of creditors. The assets at that time were about the same as at the time of Berry's purchase of the stock of Hubbell and Matthews but the liabilities had increased about $ 400. The capital stock was wiped out and the assets at face value about equaled the liabilities to creditors. Owing to the natural shrinkage in the value of the assets incident to winding up a business under such unfavorable conditions, the debts of the corporation cannot be paid in full without recourse on the stockholders for the unpaid half of the capital stock. All of the persons shown by the books to be stockholders at the time of the assignment are insolvent and on the theory that the sales of their stock by Hubbell and Matthews to Berry, were invalid, plaintiff seeks to hold them for the payment of their unpaid subscriptions.
Shares of stock in a business corporation are personal property and their owner has the same jus dispondendi over them that he has over any other personal property owned by him and in instances where only a part of the stock subscription has been paid and a part has been left unpaid the freedom of sale and transfer is not impaired until a legal call has been made for the payment of the whole or a part of such unpaid subscription. [10 Cyc. 583.]
There is only one restriction on the exercise by a shareholder of his right to sell and transfer shares of stock which have not been fully paid. A shareholder in an insolvent corporation with knowledge actual or implied of such insolvency is not permitted to sell his shares to a man of straw in order to escape liability on the stock. [Simmons v. Dent, 16 Mo.App 288.] When a corporation becomes insolvent in the sense in which we shall define that term, it is the duty of the directors to make an assignment for the benefit of creditors. [Huse v. Ames, 104 Mo. 91, 15 S.W. 965; Hutchinson v. Green, 91 Mo. 367, 1 S.W. 853.] And its assets, including unpaid stock subscriptions become impressed with the character of a trust fund for the benefit of creditors. Consequently it is uniformly held that a transfer of stock made under such circumstances for the purpose of evading a plain liability to creditors is a fraud and will be set aside either in a statutory proceeding at law prosecuted by a creditor who had exhausted his remedy against the corporation or in a suit in equity prosecuted by the assignee of the corporation. That unpaid subscriptions of stock not called in by the directors are assignable in a general assignment for the benefit of creditors is a proposition about which there can be no serious dispute but such assets are equitable...
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