Coffin v. Ransdell

• Decision Date: 18 March 1887
• Citation: 11 N.E. 20,110 Ind. 417
• Parties: Coffin v. Ransdell, Receiver
• Court: Indiana Supreme Court

110 Ind. 417

11 N.E. 20

Coffin

v.Ransdell, Receiver¹

Supreme Court of Indiana.

March 18, 1887.

Appeal from superior court, Marion county.

Harris & Calkins, for appellant. Harrison, Miller & Elam, for appellee

MITCHELL, J.

Daniel M. Ransdell, as receiver of the Unthank Plow Company, a corporation organized under the law of the state of Indiana, brought this suit against Francis A. Coffin, a shareholder, to recover an alleged balance due upon his stock subscription. He alleges that he brings the suit by the especial direction of the court under whose appointment he is acting as receiver. From the facts put forward in the complaint, and relied on as a ground of recovery, it appears that the Unthank Plow Company was organized on the thirteenth day of July, 1881, by Daniel Unthank, Francis A. Coffin, and William E. Coffin. The capital stock was fixed at $50,000, divided into 1,000 shares of $50 each. Articles of association were filed as required by law. These are embodied in the complaint. “The object and business of the corporation,” as set forth in its articles of association, “is the manufacture and sale of agricultural implements, and other articles and machinery, and also to acquire, purchase, and hold letters patent for such patented articles as it may desire to manufacture.” The three corporators were named in the articles as directors. The articles of association concluded as follows:

“The undersigned hereby associate themselves together for the purpose of forming this corporation, and severally subscribe the amount of stock set opposite their names.

[Signed] Daniel Unthank, 499 shares.

Francis A. Coffin, 499 shares.

William E. Coffin, 2 do.”

These articles were signed July 13, 1881.

The complaint avers that the corporation was organized as the successor of Unthank & Coffin, a partnership, engaged in the same business as that proposed to be conducted by the corporation, and that the members of the late firm were Daniel Unthank and Francis A. Coffin. It is charged that the only manner in which there was ever any payment, or pretense of payment, of the stock severally subscribed by Daniel Unthank and Francis A. Coffin, or either of them, was by turning over to the corporation the property and assets of the firm of Unthank & Coffin, which property and assets, the plaintiff avers, the subscribers Unthank & Coffin well knew were not of the value of one-fourth of the stock so subscribed by them. Unthank and Coffin, it is alleged, each owned one-half of the property so turned over in payment of their respective subscriptions. It is averred that the property so transferred consisted in part of letters patent, securing the right to manufacture plows of a certain kind, which letters patent it is alleged were turned in at a valuation of $27,000, each of the late partners taking credit on his subscription for one-half that amount. Plows, and material on hand for the manufacture of plows, estimated at $3,000, were in like manner applied, as were also bills receivable, and credit accounts of the late firm, amounting to $9,000. The balance of the subscription was paid, the complaint avers, “by turning in other alleged assets of Unthank & Coffin which were not assets at all.” What these alleged assets were, or their value, is not stated. It is charged, ingeneral terms, that the letters patent, and other articles and assets so turned in and applied, were vastly over-estimated in value; that the bills receivable were worth less than one-half the amount they were credited for on the subscriptions,-all of which, it is alleged, was well known to the defendant.

From the facts as set forth, and which are substantially stated above, the conclusion is drawn that the defendant is indebted for at least 75 per cent. of his original stock subscription. An accounting and judgment are prayed. The appellant contends that the facts stated do not constitute a cause of action against him, and hence that the court below erred in overruling his demurrer to the complaint.

It is fairly inferable from the facts disclosed that, at or subsequent to the incorporation of the company, it was agreed between the directors of the corporation and the defendant that his interest in the property and assets of the firm of Unthank & Coffin should be transferred and accepted in full payment of his subscription to the stock of the Unthank Plow Company, and that it was so transferred and accepted. The gravamen of the plaintiff's case is that, because there was an over-valuation of the property, the transfer and acceptance constituted, as against subsequent creditors of the corporation, payment pro tanto only. Assuming, as receiver, to represent the creditors of the corporation, the plaintiff in his official or representative character asserts the right to ascertain the real value of the property and assets transferred, and to recover from the defendant the difference between such value and the amount subscribed by him as unpaid subscription.

It is to be noted that there is an entire absence of any charge or suggestion that the corporation was in any way misled or overreached by the defendant as to the situation or value of the property, nor does it appear that the transaction was merely colorable, or a mere device on the part of the corporators to absorb the capital stock of the corporation, without making what was regarded and agreed upon as an equivalent in payment. The inference is that the board of directors, comprising all the stockholders, with full knowledge of all the facts, accepted the property and assets in question as payment, and, without any fraudulent intent, consummated the transaction, which stood without question until it was assailed by the receiver in the manner stated. It is to be observed, further, that this is not a suit to rescind or set aside the transfer and acceptance of the property, or any part of it, as fraudulent, nor is there any pretense that the transaction was ultra vires and void. From the frame of the complaint, and in all its distinctive features, the action is purely a suit at law to collect unpaid subscriptions to stock. Accepting the situation and the property as he found it, the receiver simply says that the only payment or pretense of payment which the defendant ever made of his subscription was in the manner stated, and that, because the property taken in payment was knowingly overvalued by the defendant and the other corporators, the difference between the actual value of the property and assets so taken and the amount of the defendant's subscription remains unpaid.

The argument in support of the judgment of the court below, which was for the plaintiff, rests upon the proposition that the capital stock of a corporation, especially the unpaid subscriptions to such stock, constitute a trust fund for the benefit of the general creditors of the corporation. This being so, it is argued that the representative of the creditors “has the right, as against anybody, and as against any settlement or contract to which they were not parties, to inquire into the state of the fund, and to insist that all who were really indebted be compelled to pay.” That subscriptions to the capital stock of a corporation are required to be made in good faith cannot be doubted. Simulated subscriptions by persons who had neither the ability nor purpose to pay, and arrangements between the subscribers and the agents or promoters of a corporation that subscriptions shall be merely colorable, are a fraud upon the law. This much was decided in the recent case of Holman v. State, 105 Ind. 569, 5 N. E. Rep. 702. The legislative purpose in making provision for corporate organizations was that subscriptions to the capital stock should constitute a fund or capital with which to purchase property necessary for the corporate business, and to enable the corporation to engage in and carry out the purpose of its organization. It is upon the faith of its capital stock, either paid in and invested in available property and corporate assets, or to be paid in, that credit may be extended to the corporation. Having paid, or agreed to pay, their subscriptions for stock, is the consideration upon which the several corporators enjoy exemption from personal liability for corporate debts, except as such liability may be imposed by statute.

It follows, necessarily, that unpaid subscriptions to the capital stock of a corporation constitute a trust fund for the benefit of creditors; and it follows also that the officers of the corporation, who are trustees in respect to its property and funds, cannot waste or dissipate the corporate assets, nor can they defeat or impair the trust, by accepting merely simulated or fictitious payment of stock subscriptions, or by any other device short of an actual payment of that which is in good faith taken as an equivalent for the stock. Scovill v. Thayer, 105 U. S. 143;Sawyer v. Hoag, 17 Wall. 610;Osgood v. King, 42 Iowa, 473;Wetherbee v. Baker, 35 N. J. Eq. 501;Boynton v. Hatch, 47 N. Y. 225;Crawford v. Rohrer, 59 Md. 599; Thomp. Liab. Stockh. § 129; Mor. Corp. §§ 423, 824, 825.

Any arrangement, therefore, between a stockholder and the officers or agents of a corporation, by which paid-up shares of stock are issued upon merely simulated or nominal payments, whether such payment be made in money or property, is regarded, as between the stockholders and the creditors of the corporation, as a sham, and hence no payment at all. Such payments, like simulated subscriptions, are an evasion of the law, and are therefore fraudulent and void. The affirmation of the foregoing propositions do not, however, meet the exigencies of the plaintiff's case. Having averred an actual substantial payment to and acceptance by the corporation of...