Clark v. Bever

• Decision Date: 01 January 1887
• Citation: 31 F. 670
• Parties: CLARK v. BEVER, Adm'r, etc.
• Court: U.S. District Court — Southern District of Iowa

31 F. 670

CLARK v. BEVER, Adm'r, etc.

United States Circuit Court, S.D. Iowa.

June Term, 1887

P Henry Smythe and Joseph Anderson, for plaintiff.

Charles A. Clark, for defendant.

LOVER J.

Whoever in my opinion, takes the stock of a solvent corporation, must receive it cum onere. He proposes to become a member of the corporation, and to participate in its rights, profits and benefits on equal terms with other stockholders, in proportion to his stock, and he cannot take these advantages without assuming the burdens of the corporation in like proportion to the amount of his stock. This may not be true, indeed, I think it is not true, of the case of an insolvent corporation which is in the course of settlement or liquidation. I cannot see that the creditors of a solvent corporation, the assets of which are entirely adequate to the satisfaction of their claims, have any interest in compelling a particular stockholder to pay up his stock in full; but it is surely otherwise, as I will presently show, with the full-paying stockholders themselves.

These principles may be best illustrated by considering the relations which the taking of stock creates. The stockholder assumes a three-fold relation: (1) to the corporation itself; (2) to the creditors of the company; (3) to the other stockholders.

To the creditors he becomes a debtor to the amount of his unpaid stock, when the company becomes insolvent, and fails to pay its debts. To the other stockholders he assumes the relation of a quasi partner, in that he participates in the profits and advantages of the corporation, and takes its burdens to the extent of his unpaid stock. To the corporation itself he is bound by the contract by which he owns the stock which has been issued to him. He is a debtor to the corporation to the amount of his unpaid stock. What is the nature of the contract which the taking of stock in a corporation creates? What relations does it establish between the shareholder and the other stockholders, and also to the creditors and the corporation?

The taking and receiving of stock is a contract founded upon certain considerations to the stockholder. It is not a gift to him. By the taking of the stock he becomes a member of the body corporate. He has a right to vote upon his stock. He entitles himself to his share of the profits, if any, and to the property of the corporation upon the final distribution in proportion of his holding of stock. Such are the considerations flowing to the stockholder. And what are his undertakings in consideration of the rights and interests thus secured? His undertaking is to pay for the stock. Can a stockholder, by agreement with the corporation issuing the stock, lawfully stipulate that he shall pay less than the face value of the same,-- say 10 or 20 cents on the dollar? It is manifest that the law will not permit any party to make a contract which necessarily works a fraud upon the rights of other parties. Now, if all the subscribers and takers of stock should be allowed, by contract with the company, to pay less than the face value of the stock, a fraud upon the creditors, in case of insolvency, would be the unavoidable result. Creditors, in dealing with the corporation, look to its means of payment, which is in part its capital stock, and its earnings. The stockholders are members of the corporation. They authorize the corporation, which is organized for their benefit and profit, to hold them forth to the world as contributors, to the respective amounts of their stock, to the assets and capital of the corporation. They thus give the corporation credit. They also take its earnings, in proportion to their shares, in the form of dividends. They receive these dividends in proportion to the full amount of their shares, and not upon any reduced basis founded upon their contract to pay into the corporation less than the face value. These earnings and dividends, if not received by the shareholders, could be applied to the satisfaction of the claims of creditors.

To permit stockholders to pay 10 or 20 per cent. on their stock, and receive dividends on it at the rate of 100 per cent., would work manifest injustice to creditors. To permit the stockholders and the corporation to hold the stockholders out to the world as responsible for $100 upon each share of stock, and, by a private agreement between the corporation and the shareholders, to allow the latter to pay only ten or twenty dollars on each share, would work manifest fraud upon the creditors of the corporation. Hence the law would not permit such a contract between the company and the shareholders. It is equally clear that it would work wrong and injury, pro tanto, to creditors, in case of insolvency, to permit any one stockholder to receive dividends upon full stock, and pay only a small per cent, upon it into the treasury of the company. If there is anything fundamental, respecting both corporations and private partnerships, it is that creditors have a right to satisfaction before any member of the firm or corporation is entitled to appropriate the earnings or profits.

But supposing that creditors should have no right to complain, assuming that the assets of the corporation should be sufficient to pay all debts,-- we must still consider the relation of stockholders to one another, and the results that would flow from a rule permitting the corporation to issue stock to particular persons at less than the face of the stock. Of course, the original subscribers of stock, and all others not exempt by contract with the corporation from full payment, would be compelled to pay dollar for dollar of their stock; for such would be the contract involved in their subscription to the capital stock. This might result in the grossest inequality and injustice between different classes of stockholders. While one class would be required to pay only perhaps 10 or 20 cents on the dollar, and another dollar for dollar, all would participate equally in the profits and dividends, and in the final distribution of the corporate property. In case of insolvency, one set of stockholders might be compelled to pay in, for the benefit of creditors, 100 cents on the dollar, and another favored class only perhaps 10 or 20 cents on the dollar. I am not, therefore, able to see how a solvent corporation could, without the consent of the stockholders, lawfully issue stock to other parties exonerated from the payment of its full face value. The president and directors are but trustees for the creditors and stockholders, and, as such, they must, in the absence of express law, do what justice and equity require; and equity certainly requires equality of both benefits and burdens among stockholders.

But the question before the court in the present case is whether or not the principle in question is of universal application. Does the doctrine that the president and directors of a corporation cannot lawfully issue stock exonerated from full payment, apply to all possible cases? Does it apply at all to a corporation in a state of insolvency, using its stock, without other means of payment, to satisfy and discharge the debt of a particular creditor? The supreme court of Iowa have, in a majority opinion in the case of Jackson v. Traer, 64 Iowa, 469, 20 N.W. 764, as I understand their judgment, laid down the broad and sweeping doctrine that it is absolutely illegal for the president and directors of a corporation to issue stock to any party with a stipulation exempting the stockholder from full payment of the stock, so far as creditors are concerned. Such a stipulation is simply void. The stockholder is bound to pay up the full face value of the stock, notwithstanding the agreement of the corporation with him to the contrary. The general principles laid down, and strongly enforced in the majority opinion, stand, no doubt, upon impregnable ground. They are stated with marked ability and fullness in that opinion. But I incline to think the majority were in error in applying the principle to the case then before them, which, indeed, was the very case now before the court. I am of opinion that there may be some exceptions in the application of that principle, just and most salutary as it undoubtedly is; and that the case before us is one of those exceptions.

What are the grounds and reasons of the doctrine that a stockholder cannot, by contract with the corporation, be exempt from the full payment of his stock? The sole reason and basis of the principle is that the capital stock, in common with the other property of a corporation, is a trust fund primarily for the satisfaction of its debts, and subject to the rights of creditors for the benefit of shareholders. Now, suppose it could be shown, in any given case, that an issue of stock by the company, with the right to the stockholder of partial payment, would prove a benefit rather than an injury to both creditors and shareholders, what reason would there be to apply the principle in question to such a case? Of course, the burden of showing the beneficial character of such a transaction to creditors and shareholders would rest upon the holder of the stock. Suppose a creditor of an insolvent corporation should see fit, for any reason satisfactory to himself, to receive the worthless stock of the corporation as paid up stock, at 20 cents on the dollar in full satisfaction of his debt, what possible injury could accrue to other creditors and stockholders? Would such a transaction not prove an absolute benefit to them? In the first place, such stock, in the possession of the company unissued, would be of no value whatever to creditors. It would produce nothing, and pay nothing. It would seem, therefore, that the payment of a debt by the issue of such worthless stock would...