Bent v. Hart

• Decision Date: 29 March 1881
• Citation: 10 Mo.App. 143
• Parties: SILAS BENT, RECEIVER, Appellant, v. OLIVER A. HART, Respondent.
• Court: Missouri Court of Appeals

10 Mo.App. 143

SILAS BENT, RECEIVER, Appellant,

v.OLIVER A. HART, Respondent.

St. Louis Court of Appeals, Missouri.

Mar. 29, 1881.

1. A stockholder owns only a right or share in the proceeds or profits of the stock, proportioned to the amount of his contribution, together with the ultimate right to receive back his contribution, or so much thereof as may remain upon a dissolution of the corporation, which right he may transfer to a third person without impairing any right of a creditor of the corporation.

2. That the stockholder sells his stock for more than its value is no ground for attacking the sale at the instance of a receiver of the corporation.

3. A stockholder who has paid his stock in full may, in the absence of fraud, return his stock to the corporation and receive therefor a cash consideration.

4. Where, pending proceedings to wind up an insurance company, of which the stockholders have notice, this company, in consideration of a transfer of all its assets, is reinsured by another company, which contracts to pay the shareholders of the reinsured company their stock in full, provided said stock be exchanged for an equal amount of stock in the reinsuring company; and a stockholder makes this exchange of stock and the reinsured company is afterwards adjudged insolvent, these facts do not show a cause of action against the stockholder at the suit of the receiver of the reinsured company.

APPEAL from the St. Louis Circuit Court, BOYLE, J.

Affirmed.

THOMAS T. GANTT and JOHN M. GLOVER, for the appellant: The capital stock of a corporation is a trust-fund for the payment of its creditors.-- Munna v. Potomac Co., 8 Pet. 281; Wright v. Petrie, 1 Smed. & M. 319; Nevitt v. Bank, 6 Smed. & M. 513; Hightower v. Thornton, 8 Geo. 493; Nathan v. Whitlock, 3 Edw. Ch. 215; Vose v. Grant, 15 Mass. 476. In the absence of statute or charter power, the stock cannot be divided among the stockholders, even though the corporation be solvent, except upon the final winding up of its affairs for the purpose of ceasing business.-- Mather v. Bates, 2 N. Y. Leg. Obs. 213; Pettibone v. Van Rensolaer, Id. 210; Payne v. Bullard, 3 Mason, 308; Powell R. Co. v. King, 17 Ohio St. 534. Though there be such a statutory or charter power, if the corporation makes a dividend of its capital stock among its shareholders, not leaving corporate funds enough to pay outstanding debts, the receiving shareholder can be compelled to refund for the benefit of creditors.-- Scott v. Eagle Fire Ins. Co., 7 Paige, 198; Bedford R. Co. v. Bowen, 48 Pa. St. 28; 5 Smed. & M. 428; Mann v. Pents, 2 Sandf. Ch. 257; Lauman v. Lehigh Valley R. Co., 30 Pa. St. 42; Bank St. Mary's v. St. John, 25 Ala. 566; Wood v. Dummer, 3 Mason, 308. Equity will follow the trust-fund or its proceeds into whatsoever hands it comes, except those of a purchaser without notice for value, and compel its application to the payment of the corporate debts.--2 Story's Eq. Pl. 1252; Ang. & Ames on Corp. 540-546; 1 Kid on Corp. 273; Briggs v. Penniman, 8 Cow. 387; Slee v. Bloom, 19 Johns. 456; Haslet v. Witherspoon, 2 Rich. Eq. 395; Allen v. Montgomery R. Co., 11 Ala. 437; Caldwell v. Montgomery, Talbott. Pamph. (Stat. Lim.) 106; Thomas v. Brinefield, 7 Ga. 154. It does not follow that because the transfer to the Mound City has not been set aside and is not alleged in this petition to be invalid, that the plaintiff cannot recover of the defendant.-- Chase v. Walker, 26 Me. 555; Prince v. Shephard, 9 Pick. 176.

H. A. & C. A. CLOVER, for the respondent.

LEWIS, P. J., delivered the opinion of the court.

The petition alleges that the St. Louis Mutual Life Insurance Company, a corporation, had a capital stock of one thousand shares of $100 each, of which, on December 13, 1873, the defendant held fifty-five; that the corporation was insolvent; that a proceeding, begun October 6, 1873, by the State superintendent of insurance to wind up the company, was then pending. Of all of which defendant had notice.

That on the first-named date, the Mound City, a corporation, reinsured all the risks of the St. Louis Mutual for the sole consideration of a transfer of all its (the St. Louis Mutual) assets, which full transfer the Mound City Life Insurance Company received. On its part, the Mound City, besides reinsuring the risks of the St. Louis Mutual, contracted to pay to each shareholder of the St. Louis Mutual his stock in full, provided he first exchanged that stock for an equal amount of Mound City stock within a set time, and then demanded its redemption of the Mound City within a specified period; that the defendant exchanged his stock, and demanded and received his $5,500 under the contract; that the St. Louis Mutual was adjudged insolvent February 15, 1877, and Silas Bent, plaintiff, appointed sole receiver; that the assets of the company will not pay its liabilities by a half million dollars, and that the Mound City is also insolvent, and cannot pay any part of this deficit.

The petition prays that the defendant may be ordered to pay to him the said sum of $5,500 so received in redemption of his stock. The defendant demurred to this petition upon the ground that it did not state a cause of action. The court below sustained the demurrer, and the case comes up on the propriety of that ruling.

It is contended for the plaintiff that the capital stock of a corporation is a trust-fund for the payment of its creditors; that it cannot lawfully be returned to the subscribers, or divided among them, except upon the final winding up of the affairs of the corporation, for the purpose of ceasing business; that, even then, if corporate funds enough be not left for the payment of outstanding debts, the receiving shareholders may be compelled to refund for the benefit of creditors; that the transaction in this case is equivalent to a withdrawal by the defendant stockholder of so much from the trust-fund which is needed for the payment of creditors, and equity will, therefore, compel him to refund the amount so withdrawn.

When it is said that the stock of a corporation is a trust-fund for the payment of its creditors, care must be taken to understand precisely what is meant by the word “ stock.” An undiscriminating application of the term sometimes begets confusion. It is said that the shareholder owns or possesses a certain portion of the stock. But does he, in fact, own or possess a part of the fund which must be held sacred to the prior claims of creditors? Does he, by converting what he possesses into cash for his own benefit, in any wise diminish that fund? The argument for the plaintiff seems to assume the affirmative, as to both these propositions. Yet neither is true.

The capital stock of a corporation is the fund which has accumulated in its coffers from the contributions of its members. It may be practically identified in the money, notes, bonds, securities, or even land-titles, wherein the contributions have been invested. It includes all claims against shareholders for their unpaid subscriptions. All these elements, or their value, to the authorized extent, represent the capital stock or working capital of the corporation, in like manner as the goods...