Brant v. Ehlen

• Decision Date: 28 April 1882
• Parties: [a1]DANIEL R. BRANT v. JOHN F. EHLEN, JOHN M. DENISON, JOSEPH WILKINS and others.
• Court: Maryland Court of Appeals

59 Md. 1 v. JOHN F. EHLEN, JOHN M. DENISON, JOSEPH WILKINS and others.

Court of Appeals of Maryland

April 28, 1882

APPEAL from the Circuit Court of Baltimore City.

The appeal in this case was taken from a decree of the Court below, dismissing the bill of the complainant. The case is stated in the opinion of this Court.

The cause was argued before BARTOL, C.J., STONE, GRASON, MILLER ALVEY, and ROBINSON, J.

Charles Marshall, and William A. Fisher for the appellant.

It is the doctrine of the American Courts that the unpaid instalments of the capital stock constitute a trust fund for the payment of its debts, to be administered honestly by the directors, so long as the corporation is a going concern, but subject to the powers of Courts of equity, for the prevention of any misapplication, and for its administration, when the directors have failed or ceased to perform their duties in regard to it. It is a trust fund, for such purpose, in the same sense that all other property of the corporation is to be so treated. Thompson on Liability of Shareholders sec. 10.

Nowhere has the rule been more forcibly and fully stated than in the Supreme Court of the United States. The most recent cases there have arisen in the administration of the estates of bankrupt corporations, but it has been always relied upon as an equitable principle and was first enunciated there in an equity proceeding quite similar to that adopted in this cause. Hatch vs. Dana, 101 U. S., 205; Hawley vs. Upton, 102 U. S., 314; County of Morgan vs. Allen, 103 U. S., 498; Curran vs. Arkansas, 15 How., 304, 307-8; Ogilvie vs. Knox Ins. Co., 22 How., 380; Sawyer vs. Hoag, 17 Wallace, 619-21; Upton vs. Tribilcock; 91 U. S., 47-50; Sanger vs. Upton, 91 U. S., 59-60.

Some of the cases cited were proceedings by assignees of bankrupts but the Court treated the rule relied upon, as not one arising out of the bankrupt law, but out of the application of the equitable rule to the proceedings in bankruptcy. 107 U. S., 205.

It is singular that a principle, so promotive of good faith and fair dealing should not have been accepted by the English Courts. It is nevertheless true that it has not been adopted there. The English Courts do not recognize the existence of the trust fund for creditors, or treat the unpaid instalments as part of it. The right of the creditor must be asserted through and based entirely upon that of the corporation. By the English rule, if the company is estopped by its contract from asserting that the shares are not fully paid, the creditor is equally estopped. Thompson on Liability of Shareholders, sec. 133. The English doctrine was asserted in argument, in Sawyer vs. Hoag, 19 Wallace, 619, but it met with no favor.

So wide a diversity of decision upon a point so fundamental, has naturally led to differences equally as radical upon other questions as to the liability of subscribers and shareholders. It is not astonishing then that there exists an ""American" doctrine which forbids the transfers of shares in a failing company for the purpose of evading liability, while there is an "English" one, that there may be a transfer to a man of straw for the sole purpose of escaping liability. See Thompson on Liability of Shareholders, secs. 211-215.

A Court of equity takes cognizance of the subject-matter by virtue of its jurisdiction as to trusts, and it is not absolutely necessary that all creditors should be made parties. Thompson on Liability of Shareholders, sec. 258; Ogilvie vs. Knox Ins. Co., 22 How., 391-2; Hatch vs. Dana, 101 U. S., 205, 210, &c. The Court of equity will take the place of the directors, and make the calls which they ought to have made upon the subscribers. Hatch vs. Dana, 101 U. S., 214.

The assignors of the stock, who have come into privity with the company, by having the transfers made to them upon the books, are liable for the unpaid subscriptions. Webster vs. Upton, 91 U. S., 69, &c. Bond vs. Susq. Bridge Co., 6 H. & J., 132-3; Hall vs. Ins. Co., 5 Gill, 499.

There are two relations which subscribers to the stock of a company, and their assignees occupy. One is the relation to the company itself, and that is merely the relation that grows out of the contract of subscription, the relation of debtor and creditor. That relation is controlled entirely by the terms of the contract of subscription. It may be made the subject of agreements between the company and the shareholder, agreements that will bind the rights of the parties as between themselves. The company may release the stockholder, or may refuse to make a call for payment, and as between them, the release would be good, and the failure to make a call would prevent the company from bringing a suit. Taggart vs. W. Md. R. R. Co., 24 Md. To this relation the right on the part of the subscriber to plead a set-off when sued for a call is incident, as in the case of any ordinary suit to recover a debt.

The other relation, however, is entirely different. That is, the relation which the subscriber sustains to the creditors, when the company becomes insolvent. As to them, his unpaid subscription is a trust fund, beyond the reach of any agreement between him and the company, tending to impair or divest it. This right of the creditor is not one that he derives from, or prosecutes under the name and authority of the company, but it is an original right of the creditor, not derived from the company at all, but a right which is placed beyond the control of either subscriber or company, or both. No arrangement or agreement between the stockholder and the company, except such as is sanctioned by the organic law of the company, or to which the creditor has consented, can affect his rights.

The stockholder when called on to pay his unpaid subscription, cannot set off against it a debt due him by the company, because the debts are not due in the same right. Nor can he plead that the company has released him, or agreed to accept performance in some way not sanctioned by the charter.

The radical difference between the English and the American doctrine is, that the former accords to the creditors only such rights as they can assert in the name of the company, and through its contracts, while the latter accords to the creditor rights growing out of the relation of stockholder, impressed upon it by law in his favor from the moment he becomes such, a right dormant, it may be, as long as the company is solvent, and a going concern, but one which becomes active and effectual when the company becomes bankrupt, and attaches itself at once to the subscription, whether paid or remaining in the treasury, or unpaid and still in the hands of the subscribers. Morrison, &c. vs. Rider, 54 Md., 431; County of Morgan vs. Allen, 103 U. S., 509; Fiery vs. Emmart, 36 Md., 473.

This view of the rights of the creditor enables us to meet the propositions with reference to the rights, or supposed rights of those who claim that they took the stock under the belief that it was fully paid. The mistaken belief of these persons cannot affect the rights of creditors who have in no way contributed to the mistake. Even if the stockholder had been deceived and misled into taking the stock by the company, or by his assignor, in the case of an assignee, it would be no answer to the claim of the creditor if the stockholder has not taken immediate steps to rescind his contract, and actually procured its rescission before the failure of the company. To hold any other view would plainly do away practically with the American doctrine on the subject.

The inquiry is, has the subscription been paid, not did the stockholders believe it to have been.

In this case, the debt sued for was contracted while all the present defendants held stock. The suit of Brant was a constant notice to them that the land might never have been the property of the company, and that if it was not, the stock had never been paid. Still the company went on mining his coal, using some part of the proceeds to litigate with the true owner, and with the presumed knowledge that if it should lose the land, there would never have been a dollar in the treasury in payment of the subscription to the stock. When they failed, and lost the land, there is something almost ludicrous in the claim that Brant shall treat his own land, wrongfully taken from him, as payment of the stock, because the stockholders have been disappointed. It seems strange that he should be made to bear the burden of their disappointment. He could not have been worse off if he had lost his case.

Again the assignees of stock, even if they became such by fraud, cannot be allowed to rescind as against their assignors, unless they are in condition to restore their assignors to their original condition.

These assignees held the stock during all the time this large debt was being incurred. The assignors parted with it before there was any debt or any liability. They could very well refuse to receive back the stock from their assignees burdened as it now is with such a heavy liability.

It being ascertained that the unpaid instalments are a trust fund which can be called in by a Court of equity, and that the assignees of the stock must respond to any liability, the next point to be determined is whether the capital stock has been paid up.

[Counsel maintained that there was no stock fully paid.--REP.]

As soon as the relation of shareholder is created, either by subscription, or by becoming the holder of a certificate of assignment, the obligation to pay whatever remains unpaid on the stock arises, and such an obligation, in the event of the failure of the company, is in favor of creditors, even that is beyond the power of the company to release or discharge except by requiring it to be paid...