Burke v. Smith

• Decision Date: 01 December 1872
• Citation: 21 L.Ed. 361,16 Wall. 390,83 U.S. 390
• Parties: BURKE v. SMITH
• Court: U.S. Supreme Court

83 U.S. 390

21 L.Ed. 361

16 Wall. 390

BURKE v. SMITH.

December Term, 1872

APPEAL from the Circuit Court for the District of Indiana, the case being thus:

Burke, Putnam, and others were the equitable owners of a judgment recovered in 1857 against the New Albany and Sandusky Railroad Company. Upon this judgment an execution was issued in 1858, which, on the 1st of December of that year, was returned 'nulla bona.' On the 29th of January, 1868, that is to say, about ten years after the execution had been thus returned unsatisfied, they brought the present suit. It was a bill in chancery against one Smith and some twenty-seven other defendants, and, alleging the insolvency of the company, it sought to subject to the payment of the judgment, rights which, it alleged, the company had against the said defendants. It averred that the defendants, on the 22d of August, 1853, under the general railroad laws of Indiana, organized the above-named railroad company and subscribed to its capital stock, severally, amounts which they had never paid, and the object of the bill was to compel the payment of the debts thus incurred, and the application of the payments to the satisfaction of the complainants' judgment. The facts were these:

On the 22d of August, 1853, under the general railroad laws of the State, the defendants, with others, united in forming articles of association for the incorporation of the New Albany and Sandusky Railroad Company, and severally subscribed to its capital stock in sums varying from $1000 to $5000. [The railroad laws referred to allow, it may be added, no organization of a road until at least $50,000, or $1000 for every mile of the proposed road, shall have been established.] The articles of association contained the following stipulation:

'Provided, however, and it is hereby understood, that if the city of New Albany, in its corporate capacity, shall hereafter take stock in this corporation to the amount of $50,000 or upwards, inasmuch as the present subscribers being residents of and owning property in said city, will then be under the necessity of contributing still further to the corporation by way of taxation, unless a portion of the present subscription is taken off their hands, the said city shall accept, in part of the amount to be subscribed in its corporate capacity, at its par value, a transfer of any amount of stock now subscribed for by each individual over and above the amount of six shares, or $300, which each such individual may desire or request shall be so transferred.'

There were fifty-five original subscribers, and the aggregate amount of the subscriptions was $148,750. With such a subscription, and under such articles of association, the subscribers became a corporate body. After their incorporation the city of New Albany subscribed $400,000 to the capital stock of the company.¹ This subscription was made on the 19th of November, 1853, and on the 31st of December next following, the directors of the company adopted an order,

'That the original subscribers to the articles of association be permitted, in accordance with the stipulations contained in the articles, to transfer any amount of the stock so originally subscribed by them over and above the amount of six shares, or $300, to the city of New Albany; said city having made a subscription to the stock of said company to the amount of $50,000 and upwards, and that the stock thus transferred be merged in the subscription already made by said city, so that the stock of said city, under her present subscription, with the stock so transferred, shall not exceed $400,000 as subscribed by her.'

The directors of the company, who made this order, were themselves subscribers, like the defendants, for more than six shares, or sums above $300.

So far, there was no controversy respecting the facts. And there was also an 'agreement of record'—a document certified by the clerk of the court below, with the bill, answers, depositions, &c., as part of the full, true, and complete copy and transcript of the record and proceedings in the case—that the defendants transferred to the city of New Albany all the stock subscribed by them in excess of $300 for each, in compliance with the stipulation contained in the original articles of association; that the transfers were made before the 1st day of July, 1854; that none of these original subscribers were ever charged on the books of the railroad company with any greater amount of stock than $300; that the amount of stock charged against each (viz., $300) had been fully paid long before the filing of this bill, and when called by the company, and that such payments had been accepted by the company as full satisfaction of the respective subscriptions.

The question was, whether the defendants were debtors to the railroad company for any excess of their subscriptions above $300.

The court below was of opinion that they were not, and dismissed the bill against them.

The complainants appealed.

Messrs. Burke, Porter, and Harrison, for the appellants:

The defendants confessedly subscribed large sums to the stock of the road, and so organized it. By the laws of Indiana it could not have been otherwise organized. Having organized it and given it the power to incur debts, and it having incurred them, these persons—the solid and solvent subscribers—the men on the faith of whose subscriptions creditors have given money and done work—all at once and suddenly vanish from the scene.

Now are they released?

The directors certainly had no power to release them as against the creditors of the company. This is certain. The argument then will be that the subscribers have made a transfer of their stock to the city, and that the city having assumed their subscription, they are discharged? But the record shows no copy of any transfer. What is said by the clerk under the head of 'agreement of record' constitutes no part of the record at law. That this court cannot notice such a paper was decided in Fisher v. Cockerell,² in Suydam v. Williamson,3

New Orleans v. Gaines,⁴ and in other cases.

Then even if a paper transferring the stock were shown, there is no evidence that the city ever accepted the transfer. What power indeed, supposing a transfer to have been attempted to be made—what power had the city in its corporate capacity to accept it? So far as appears it had none.

Then again. The act of the directors releasing the defendants was void, not only on general principles, but also because they were all personally interested in having such an order of release, and in fact all availed themselves of it.

The whole operation is void. It is an attempt upon the part of the directors to allow a cancellation of so much stock, a nominal transfer to the city, but a real blotting out of so much stock; a transfer that would relieve the directors and their fellows, but that would not increase the stock of the transferee. Whatever name may be given such a transaction, its substance and effect, if permitted, would be to reduce the capital of the company and its means of paying its debts and carrying out the objects of the corporation to the extent of the amount so transferred. The directors have no authority to thus dispose of the effects of the corporation.

Mr. M. C. Kerr, contra.

Mr. Justice STRONG delivered the opinion of the court.

The question to be solved is whether the appellees are debtors to the railroad company for the excess of the subscriptions above $300, made by them to the articles of association. If they are, the complainants have an equitable right to subject those debts to the payment of the judgment they have against the railroad company. And it must also be conceded that if the company has, in fraud of its creditors, released subscribers to its stock from the payment of their subscriptions, the release is inoperative to protect those subscribers against claims of the creditors. Under the law of the State, all railroad companies are required to have a subscription to their capital stock not less than $1000 for every mile of their proposed roads before they may exercise corporate powers. This requirement is intended as a protection to the public, and to the creditors of the companies. And it is clear that the directors of a company, organized under the law, have no power to destroy it, to give away its funds, or deprive it of any means which it possesses to accomplish the purposes for which it was incorporated. The stock subscribed is the capital of the company, its means for performing its duty to the commonwealth, and to those who deal with it. Accordingly, it has been settled by very numerous decisions that the directors of a company are incompetent to release an original subscriber to its capital stock, or to make any arrangement with him by which the company, its creditors, or the State shall lose any of the benefit of his subscription. Every such arrangement is regarded in equity, not merely as ultra vires, but as a fraud upon the other stockholders, upon the public, and upon the creditors of the company.

It is upon these principles that the appellants in this case rely, and the question is whether they are applicable to the facts as found.

That the subscriptions made by the appellees to the articles of association for the incorporation of the company were, according to their terms, not absolute engagements to pay for a greater amount of stock than $300 for each subscriber is undeniable. They were engagements to pay for the number of shares subscribed, only on the contingency that the city of New Albany should not afterwards take stock in the corporation to the amount of $50,000 or upwards, or, if such stock should be taken, on the contingency that they failed to transfer a part of their subscriptions to the city. Such was the letter and the spirit of the contract entered into by each subscriber. Whether the law permitted it to have such a legal effect we will presently consider. But...