Carter v. Union Printing Company

• Decision Date: 13 June 1891
• Parties: CARTER v. UNION PRINTING COMPANY
• Court: Arkansas Supreme Court

16 S.W. 579

54 Ark. 576

CARTER v. UNION PRINTING COMPANY

Supreme Court of Arkansas

June 13, 1891

APPEAL from Pulaski Chancery Court, DAVID W. CARROLL, Chancellor,

Judgment reversed.

Morris M. Cohn for appellant.

1. The judgment against the company is binding on the stockholders. Morawetz on Priv. Corp. (1st ed.), sec. 619; Thomp. Liability Stock., sec. 329.

2. The wrecking of the company by McMurtry and his associates, while they were directors and officers, made them liable in damages to its creditors. Mansf. Dig., sec. 984; 42 N.W. 926; 20 F 181; 13 P. 161; 7 A. 514.

3. Capital paid in means cash, under secs. 968-971, Mansf. Dig. 91 U.S. 60; 17 Ohio St. 187; 1 McCrary, 92; 69 Pa.St. 334; 44 Barb. 625.

4. But if the stock could be paid for in property, it should have been shown to be actually worth the amount subscribed. Const., art. 12, sec. 8; Morawetz (ed. 1882), sec. 374; note to 31 F. 676; Green's Brice's Ultra Vires (Am. ed 1880), 142; 20 N.W. 764-7; 59 Md. 599, 604; 69 Pa.St. 334; Bates, Lim. Part, secs. 47, 48, 54; 47 N.Y. 225.

5. The arrangement between the corporation and the stockholders could not relieve McMurtry from paying his stock, at the expense of the creditors. And this does not depend upon insolvency. 91 U.S. 56; ib. , 47; ib., 69; 103 id., 508; Taylor, Corp., sec. 545; Angell & A., Corp., sees. 600, 603; Boone, Corp., sec. 112; Mor. on Corp., secs. 109, 112, 781, 824; 1 McCrary, 96; 59 Md. 599; 47 N.Y. 225, 232; Wait, Fr. Conv., sec. 369.

6. The company could not cancel unpaid stock, or buy it in after insolvency at the expense of creditors. Mansf. Dig., sec. 981; Wait, Insolv. Corp., sec. 582; Morawetz (1st ed.), sec. 589; Boone, Corp, sec. 141; Thompson, Liability of Stock., sec. 205; 91 U.S. 56, 60, 61; 103 U.S. 498; 54 Md. 429; 35 N.J.Eq. 501; 20 Md. 764; 57 Miss. 602.

7. Insolvency and fraudulent conveyance may be proved by circumstances. 95 U.S. 6; ib., 22; 50 id., 314; ib., 42; Pom. Eq. Jur., vol. 2, sec. 973, p. 511; The doctrine as to increase of stock is the same. Ib.; Morawetz on Corp., sec. 831; 37 Md. 522.

8. One stockholder may be sued. 22 How., 380; 101 U.S. 205; 114 Pa.St. 153; 12 Ore. 322; Thompson on Liability of Stock., secs. 354-5-7.

House & Cantrell and Sanders & Watkins for appellee.

1. A corporation has the power to purchase its stock where there is no fraud. In this case the stock was not merged or reduced. Cook on Stock, etc., sec. 311; 11 Wall. , 96; 2 Morawetz, Corp., sec. 841; Thompson on Liability of Stock., sec. 134; 6 Cent. L. J., 109; 114 Mass. 37.

2. The unpaid subscription of a stockholder, when his stock is subscribed and issued after the debt is contracted, is not a trust fund for the benefit of such creditor, because he does not contract upon the faith and credit of such stock. 2 Morawetz, Corp., secs. 832, 833; 44 N.W. 198; 42 Minn. 327; 119 U.S. 343.

3. Stock can be paid for in property such as is necessary to carry out the object and purpose of the corporation. Cook on Stock, etc., sec. 13; 27 Penn., St., 416; 6 Cent. L. J., 109; Mansf. Dig., sec. 973.

4. Insolvency is not alleged nor proven.

OPINION

HEMINGWAY, J.

In February, 1886, the Union Printing Company was organized as a corporation with a paid capital stock of $ 10,000. In June following its stock was increased to $ 30,000. Munro and Van Valen subscribed for $ 15,000 of the new stock and McMurtry for the remainder, they having given to him $ 3500 of their own to induce him to take his. He paid on the stock for which he subscribed $ 3530, and bound himself to pay the balance, $ 1470, on call. He became the president of the company, and continued as such until the 2d of September following, when his resignation was tendered and accepted. On the same day the following proceedings are shown by the minutes of the directors' meeting, to-wit:

"CALLED MEETING OF THE BOARD OF DIRECTORS.

LITTLE ROCK, ARK., September 2, 1886.

"At a meeting of the board of directors of the Union Printing Company, called by direction of the president and held at its place of business, on the 21st day September, 1886, the following named directors were present: J. Erb, F. L. Munro and J. M. Wade.

"President A. McMurtry being absent, the vice-president took the chair, and called the meeting to order. The reading of the minutes of the previous meeting was dispensed with. The following was read, and, upon motion of Mr. J. Erb, was unanimously adopted:

WHEREAS, There has heretofore been issued to A. McMurtry certain stock in this corporation amounting to $ 8500, upon which the sum of $ 5000 purports to have been paid thereon, but in fact there has been but the sum of $ 3530 paid thereon, and leaving the sum of $ 1470 due and unpaid, and which was to be paid at the time of issue; and,

"WHEREAS, The said McMurtry now fails and refuses to make such payment, but has offered and agreed to accept the sum $ 3530 as purchase of said stock; and,

"WHEREAS, This corporation is in need of immediate funds, and can resell the said stock so as to realize the sum of $ 1470;

"Now, therefore, The said offer of said McMurtry is hereby accepted, and the president of the corporation is authorized and empowered to buy said stock and have the same transferred to the corporation, * * * not for the purpose of retiring the same, but for the purpose of reissue and resale for the benefit of the concern. And the said president is hereby authorized and fully empowered to enter into, on the part of the company, such contract and negotiations, and to make such securities, by mortgage of property of the concern, as well secure to the said McMurtry the purchase price of said stock and will perfect the purchase of said stock, and to do and perform all such matters and things as in his judgment may be necessary to carry out the purpose of this resolution.

"WHEREAS, This corporation is in need of money to meet certain liabilities due therefrom; now, therefore, be it

"Resolved, That the president of this corporation be and he is hereby authorized and fully empowered to borrow of any one who is willing to lend the same the sum of $ 1470, and to execute to such lender the obligation of this company, and to procure any and all securities, personal or otherwise, or to make a mortgage upon the property of this company, in such way and manner as may to him, the said president, seem right and proper, to secure the said loan."

In pursuance of these resolutions the company borrowed $ 1470 from R. C. Lynch, a brother-in-law of McMurtry, and executed to Lynch and McMurtry's representatives, he having died, a mortgage on all its property to secure the sum so borrowed, as well as the amount agreed to be paid to McMurtry.

About the time when the company was organized, the plaintiff entered into a contract with it whereby it became bound to pay him for service to be rendered. He subsequently brought suit for a breach of that contract, and on the 28th of November, 1888, recovered judgment in the sum of $ 1344.20. Execution was issued on the judgment and returned nulla bona, whereupon this suit was brought for the purpose--among others--of requiring McMurtry's representatives to pay to plaintiff a sufficient part of the amount unpaid on his stock to satisfy the judgment.

It appears that on the original stock of $ 10,000 no, cash was paid. The incorporators owned a lot of printing presses and material, and this was contributed in payment for the original stock. The property contributed had been purchased for $ 3000, of which a balance of $ 2000 was unpaid and secured by mortgage on the property. Before this suit was brought a suit had been instituted wherein a decree was rendered for the sale of the company's property under the two mortgages above referred to; a sale was had and a sum realized insufficient to pay the first mortgage. Upon the hearing in this case the chancellor dismissed the bill, and the plaintiff has appealed.

In design and effect, the transaction between McMurtry and the company amounted to an agreement for a cancellation of his stock subscription by returning to him what he had paid in and releasing him from liability for unpaid installments. We proceed to inquire whether the company had the right, as against its creditors, to release him from his liability. If it had not this right, the plaintiff is entitled to recover the amount of such liability; and as counsel stated in the argument that it was sufficient to satisfy his claim, we may waive other questions discussed. The creditors of a corporation have a right to look to its property for the payment of their claims, and to object to any disposition of it in fraud of their rights; and this right extends as well to claims due it as to its property in possession. Upon this question the Supreme Court of the United States has used the following language: "The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private co-partnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation, for their security. Unpaid stock is as much a part of this...