Exrs v. Peterson

• Decision Date: 30 September 1882
• Citation: 104 Ill. 26,1882 WL 10370
• Parties: HOWARD L. CLAPP et al. Exrs.v.GEORGIE H. PETERSON.
• Court: Illinois Supreme Court

104 Ill. 26

1882 WL 10370 (Ill.)

HOWARD L. CLAPP et al. Exrs.

v.GEORGIE H. PETERSON.

Supreme Court of Illinois.

Filed at Ottawa June 21, 1882.Rehearing denied September Term, 1882.

OPINION TEXT STARTS HERE

APPEAL from the Appellate Court for the First District;--heard in that court on appeal from the Circuit Court of Cook county; the Hon. WILLIAM H. BARNUM, Judge, presiding.

Messrs. ISHAM, LINCOLN, BURRY & RYERSON, for the appellants:

The exchange of stock for property between Clapp and the company was a legal and valid transaction, and one not liable to be impeached by any one. As to the power of corporations to purchase their own stock, see Tayler v. Miami Exporting Co. 6 Ohio, 218; Coleman v. Columbia Oil Co. 51 Pa. St. 77; Chicago, Pekin and Southwestern R. R. Co. v. Marseilles, 84 Ill. 643; City Bank of Columbus v. Bruce, 17 N. Y. 507; Hartridge et al. v. Rockwell et al. R. M. Charlt. (Ga.) 260; Angell & Ames on Corporations, sec. 280; Brice on Ultra Vires, (2d Eng. ed. 1877,) 175; Williams v. Savage Manf. Co. 3 Md. Ch. 452; State v. Smith, 48 Vt. 266; Cooper v. Frederick, 9 Ala. 738.

Where the corporation is insolvent or in the process of dissolution, an exchange of its property for stock will not be sustained as against creditors. Wood v. Dummer, 3 Mason, 308; Vose v. Grant, 15 Mass. 505; Spear v. Grant, 16 Id. 9; Curran v. Arkansas, 15 How. 304; Bartlett v. Drew, 57 N. Y. 587.

A stockholder is not a trustee at all. Directors are, but as such they bear no greater relation to stockholders than to a creditor. Angell & Ames on Corporations, sec. 313; Verplanck v. Mercantile Ins. Co. 1 Edw. Ch. 87; Bayliss v. Orne, 1 Freeman's Ch. 174; Hodges v. Screw Co. 1 R. I. 312.

This is certainly a case where the doctrine of equitable estoppel should be applied, to prevent injustice. Pierpont v. Bernhard, 4 Barb. 364; Nolte v. Chisman, 88 Ill. 186; Lloyd v. Lee, 45 Id. 277; Herman on Estoppel, 12.

We also submit that the decree was erroneous in holding Clapp to be accountable on all the stock surrendered by him, instead of such a pro rata as his stock bore to the whole capital stock. Wood v. Dummer, 3 Mason, 308; Vose v. Grant, 15 Mass. 505; Curran v. Arkansas, 15 How. 304; Mumma v. Potomac Co. 8 Pet. 281.

Messrs. PAGE & PLUM, for the appellee:

The capital stock of the corporation is a trust fund for the payment of its debts. (2 Story's Equity Jur. sec. 1252.) It is a substitute for the personal liability existing in partnerships, and 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 debts, except as against bona fide purchasers without notice of the trust. Sanger v. Upton, 91 U. S. 60; Bartlett v. Drew, 57 N. Y. 587; Tinkham v. Borst, 31 Barb. 407; Spear v. Grant, 16 Mass. 9; Ogilvie v. Knox Ins. Co. 22 How. 387; Mumma v. Potomac Co. 8 Pet. 286; Curran v. Arkansas, 15 How. 304; Hightower v. Thornton, 8 Ga. 486; Wood v. Dummer, 3 Mason, 308; Vose v. Grant, 15 Mass. 505; Adler v. Milwaukee P. B. Co. 13 Wis. 60; Perry on Trusts, secs. 217, 835, 836.

Stockholders are conclusively charged with notice of the trust character of the capital stock. As to it they can not occupy the status of innocent purchasers, but are for all purposes privies to the trust. Thompson's Liability of Stockholders, sec. 13; Angell & Ames on Corporations, sec. 600; Wood v. Dummer, 3 Mason, 313; Curran v. Arkansas, 15 How. 307; Ogilvie v. Knox Ins. Co. 22 Id. 387; Upton v. Hansbrough, 3 Biss. 436.

There is no estoppel or ground for laches in this case. As soon as appellee discovered the fraud, and in 1874, she filed her bill, and it was pressed in the courts as fast as possible, and only terminated September 5, 1879, when a rehearing was denied in this court, ( Reed et al. v. Peterson, 91 Ill. 288,) and this bill was filed September 18, 1879.

It is not incumbent upon appellee to adjust the equities, if any, between the stockholders. Hatch v. Dana, 101 U. S. 205; Bartlett v. Drew, 57 N. Y. 587.

Mr. JUSTICE SHELDON delivered the opinion of the Court:

By the will of her step-son, P. W. Bonner, who died in July, 1870, appellee, Georgie H. Peterson, a resident of the State of New York, became owner of all personal property left by said Bonner, and in September, 1870, on application made to her in New York, she sold all said property to the Illinois Land and Loan Company. On November 20, 1874, she filed her bill against said company to set aside such sale, and for other relief in respect thereto, on the ground that she had been induced to make the sale through the fraudulent misrepresentations of the company, for an inadequate consideration, and on May 1, 1877, she obtained in the suit a money decree against the company, for $5653.33. An execution issued upon the decree having been returned nulla bona, Mrs. Peterson, on September 18, 1879, filed her bill in chancery in the present case, to subject property in the hands of Caleb Clapp to the payment of this decree. A decree was entered in her favor granting the relief sought, which, on appeal to the Appellate Court for the First District, was affirmed, and the present appeal taken to this court.

It appears that the Illinois Land and Loan Company was chartered by an act of the legislature in 1867, with a capital stock of $100,000, with 1000 shares, of $100 each, all of which was paid in. Caleb Clapp, a non-resident of the State, was a stockholder in the company, and in January, 1874, he surrendered to the company 555 shares of stock, in consideration of which the company executed to him a deed of warranty of two lots in Chicago, one of the value of $50,000, and the other of the value of $5500, that amount being the consideration stated in the deed. The stock was canceled, and was considered, at the time, of par value. Mr. Clapp continued to be till his death, and his estate still is, the owner of the lots. It is these lots which are sought to be subjected to the payment of said money decree against the company.

The legal principle which appellants' counsel lays down and insists upon as applying to the case, is, that corporations may purchase their own stock in exchange for money or other property, and hold, re-issue or retire the same, provided such act is had in entire good faith, is an exchange of equal value, and is free from all fraud, actual or constructive, this implying that the corporation is neither insolvent nor in process of dissolution. We think there must be added to the proposition the further condition that the rights of creditors are not affected. The doctrine so elaborately urged by appellants' counsel, that a corporation has the power to purchase its own stock, seems well enough settled, and was asserted by this court in Chicago, Pekin and Southwestern R. R. Co. v. Marseilles, 84 Ill. 643. Yet, in so holding there, the qualification was added, that, in equity, the transaction might be impeached if it operated to the injury of creditors. We see nothing to show that the transaction in the present case was not in good faith, that there was any element of fraud about it, or that there was anything in the apparent condition of the company to interfere with the making of the exchange that was had. It is only as injuriously affecting the interests of creditors, we think, that the transaction can be questioned, and it is in that view that it must be considered and passed upon.

In Sanger v. Upton, 91 U. S. 60, it is laid down: “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 it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation for their security.” This doctrine is abundantly established by the authorities. 2 Story's Equity Jur. sec. 1252; Wood v. Dummer, 3 Mason, 308; Spear v. Grant, 15 Mass. 505; Curran v. Arkansas, 15 How. 304; Bartlett v. Drew, 57 N. Y. 587.

The shareholders of a corporation are conclusively charged with notice of the trust character which attaches to its capital stock. As to it they can not occupy the status of innocent purchasers, but they are to all intents and purposes privies to the trust. When, therefore, they have in their hands any of this trust fund, they hold it cum onere, subject to all the equities which attach to it. Thompson's Liability of Stockholders, sec. 13; Wood v. Dummer, 3 Mason, 312.

It is objected, against the principles above stated, that the cases in which they were declared were where there was actual or constructive fraud or unfairness, where the corporations were insolvent, or in process of being wound up. The question naturally would arise mostly in such circumstances, but the principles enunciated are general in scope, following from the nature of the capital stock of corporations, and the relation of a stockholder to the corporation, and we know of no limitation of their application as above suggested, or reason for denial of their full applicability to the present case. Indeed, we do not understand appellants' counsel as asserting the validity of the purchase, or reduction...