Coleman v. Howe

• Decision Date: 14 January 1895
• Parties: COLEMAN et al. v. HOWE et al.
• Court: Illinois Supreme Court

154 Ill. 458

39 N.E. 725

COLEMAN et al.

v.HOWE et al.¹

Supreme Court of Illinois.

Jan. 14, 1895.

Appeal from appellate court, Third district.

Creditors' bill by Samuel E. Howe, the Chicago Malleable Iron Company, and the Union National Bank of Chicago against the Illinois Agricultural Works, Louis H. Coleman, Charles W. Post, Wilson T. Reed, Jay Smith, Samuel Mendenhall, Frank W. Tracy, and Jennie B. Coleman. Complainants obtained a decree, which was affirmed by the appellate court. 53 Ill. App. 82. Defendants Coleman, Smith, Mendenhall, and Tracy appeal. Affirmed.Greene & Humphrey, J. H. Matheny, and Brown, Wheeler & Brown, for appellants.

William L. Gross and Crea & Ewing, for appellees.

This is a bill, filed on December 24, 1886, by the appellees, as judgment creditors of the Illinois Agricultural Works, an Illinois corporation, alleging the issuance of executions upon their judgments, and the return of the same ‘No property found,’ against said corporation and certain stockholders therein, to enforce the liability of certain of said stockholders upon the stock subscribed for and held by them, and alleged to be unpaid to the extent of 50 per cent. of the face value thereof. Other judgment creditors were made complainants by petition. The bill alleges that the corporation was engaged in manufacturing and selling agricultural implements; that it ceased to do business in August, 1886, and was insolvent, and had delivered its property to a creditor bank, in pursuance of a trust deed, to secure some of its creditors. Of the seven stockholders who were made defendants, the bill was dismissed as to Reed. Default was entered against Post and Louis H. Coleman. Jennie B. Coleman and Tracy, Mendenhall, and Smith filed answers, as did the defendant corporation. During the progress of the litigation, Jennie B. Coleman, wife of Louis H., died testate, and her husband, as executor of her estate, was made a defendant. Upon the first hearing in the circuit court the bill was dismissed. The decree of dismissal was reversed by the appellate court in April, 1892. Howe v. Agricultural Works, 46 Ill. App. 85. After the cause was remanded, the circuit court rendered a decree, finding that there was due to the creditors upon their judgments the aggregate amount of $19,988.96; that Mrs. Coleman, or her estate, owned 200 shares of the stock ($20,000), Smith 100 shares ($10,000), Mendenhall 50 shares ($5,000), and Tracy 100 shares ($10,000); and decreeing that Tracy pay $4,441.99, Smith $4,441.99, Mendenhall $2,221, and L. H. Coleman, executor, $8,883.98,-these several amounts making all together the total amount due. The decree found that the stock was issued to and received by each of these defendants for the consideration of one-half only of its face value, and that they were liable for the remaining one-half of the par value of the stock held by them, respectively, to the extent necessary to pay said claims. The second decree thus entered by the circuit court has been affirmed by the appellate court, and the present appeal is prosecuted from such judgment of affirmance.

The material facts developed by the proof are as follows: In the spring of 1883, L. H. Coleman, Post, and Reed formed a partnership under the firm name of Coleman, Post & Reed for the purpose of manufacturing agricultural machinery, and entered upon that business in Springfield. A tract of 7 1/2 acres of ground, worth $6,000 or $7,000, was donated to them, and they put into the concern about $6,000. They continued to do business as a firm until November, 1884, at which time their whole plant, including ground, building, and machinery, was worth not to exceed $75,000, and they were in debt to the amount of $70,000. On September 19, 1884, Coleman, Post & Reed formed the corporation known as the Illinois Agricultural Works, with a nominal capital stock of $300,000. Their report as commissioners showed subscriptions as follows: L. H. Coleman, 1,500 shares, $150,000; Post, 1,000 shares, $100,000; Reed, 500 shares, $50,000. Neither of them paid any money into the treasury of the corporation, but transferred to it their said firm property in the manner hereinafter stated. They were reported as directors for the first year. The articles of incorporation were filed in Sangamon county, where all the parties lived, on September 22, 1884, but the said directors for the first year met for organization for the first time on October 28, 1884, when Coleman was elected president; Reed, secretary; Post, superintendent; and Mendenhall, treasurer. Coleman, Post & Reed prepared a deed, dated October 25, 1884, which was acknowledged by them on November 21, 1884, and recorded on that day, conveying their entire plant, for an expressed consideration of $300,000, to the said corporation. It was represented, before the corporation was organized, that the firm had made a profit in its business during the year of $18,000, and the capital stock was fixed at $300,000, because that was the amount which, at 6 per cent. interest, would yield $18,000. The evidence shows that interviews were had, before any stock was issued, with Tracy, Mendenhall, Smith, and Mrs. Coleman, in which they agreed in advance that they would take stock at 50 cents on the dollar. It was also underwtood in advance that Coleman, Post & understood in advance that Coleman, Post & of the face value of $150,000, at 50 cents on the dollar. All that the corporation received for the issue of the $300,000 of stock was the conveyance to it of the property, worth only $75,000; and the corporation assumed the payment of the $70,000 of indebtedness owing by the old firm, as hereinafter stated. There seems to have been a verbal subscription for the stock by the seven stockholders already named, before the original subscriptions as reported to the secretary of state were made. Tracy was to get stock of the face value of $10,000 for $5,000, Smith was to get stock of the face value of $10,000 for $5,000, Mendenhall was to get stock of the face value of $5,000 for $2,500, and Mrs. Coleman was to get stock of the face value of $20,000 for $10,000. Stock for these amounts was subsequently issued to them severally upon payment of the respective sums stated. A stock book was procured on September 22, 1884. The first issue of stock seems to have been made as follows: $75,000 to Coleman, $50,000 to Post, $25,000 to Reed, $10,000 to Smith, $5,000 to Mendenhall. The evidence is somewhat conflicting as to how many certificates of stock were made out upon the first issue, but four certainly were made out at first,-to Coleman for $75,000, to Post for $50,000, to Reed for $25,000, and to Tracy for $10,000. When Tracy's certificate was presented to him he declined to receive it, saying that the stock had not been properly issued; that the issue should first be to the original subscribers; that there was ‘only one way to issue it, and that was by a trustee, surrendering the stock they had, and then issue it in place of that stock. They did not seem to get at the modus operandi of keeping that stock till that time.’ Thereupon the first issue was destroyed, and the stock book was burned. A new stock book was then obtained, and on October 23, 1884, there was a new issue of stock in the manner following: 1,500 shares ($150,000) to Coleman, 1,000 shares ($100,000) to Post, 500 shares ($50,000) to Reed,-making $300,000 in all. It will be observed that this second issue was made five days before the board of directors organized by the election of officers on October 28, 1884. The certificates for these shares were issued on November 10, 1884, there having been assignments on the backs of the certificates of one-half the shares, amounting to $150,000, to Mendenhall, trustee; and on that day certificates were issued and receipted for to Coleman for 750 shares ($75,000), to Post, 500 shares ($50,000), to Reed, 250 shares ($25,000), and to Mendenhall, trustee, 1,500 shares ($150,000). The certificate to Mendenhall, trustee, for 1,500 shares was afterwards surrendered, and filed on November 27, 1884. On November 24, 1884, a certificate for 200 shares ($20,000) was issued to Mrs. Coleman, and receipted for by her; a certificate for 100 shares ($10,000) was issued to Smith, and receipted for by him, per F. W. Tracy. On November 27, 1884, certificates for 50 shares were issued to Mendenhall, and receipted for by him; a certificate for 100 shares ($10,000) was issued to Tracy, and receipted for by him; and a certificate for 1,050 shares ($105,000) was issued to Mendenhall, trustee, and receipted for by him. It was after the third issue, by which stock to the amount of $150,000 was issued to Coleman, Post & Reed, that they delivered to the corporation their deed for the plant worth only $75,000, so that in reality they paid for their stock only 50 per cent. of its face value. The evidence is unquestioned that Smith, Tracy, Mendenhall, and Mrs. Coleman only paid 50 cents on the dollar for the stock issued to them of the face value of $45,000. They appear to have received their stock directly from the corporation, and not from Mendenhall, trustee. The stock, amounting to $105,000, remaining in Mendenhall, as trustee, belonged to the corporation. He paid nothing for it. He was a stockholder and the treasurer, and this trust stock was placed in his hands for sale for the benefit of the corporation. He was to put it on the market, and sell it at 50 cents on the dollar. Coleman swears that the 1,500 shares of stock issued to Mendenhall, trustee, were surrendered to the corporation in consideration of its assumption of the indebtedness of $70,000, which latter amount was less than 50 cents on the dollar of the face value of the stock so surrendered. The debts due to these appellees were embraced in the debts so assumed.

MAGRUDER, J. (after stating the facts).

The capital stock of an insolvent corporation is a trust fund for the payment of its debts. If...