Flinn v. Bagley

• Decision Date: 27 June 1881
• Citation: 7 F. 785
• Parties: FLINN, Assignee, v. BAGLEY and others.
• Court: U.S. District Court — Eastern District of Michigan

7 F. 785

FLINN, Assignee, v. BAGLEY and others.

United States District Court, E.D. Michigan.

June 27, 1881

This was a bill in equity by the assignee of the Detroit Novelty Works to compel the payment of the balance due upon certain unpaid subscriptions to the capital stock of the company. The material facts were that the company was organized in 1859 with a capital stock of $50,000, divided into 2,000 shares of $25 each. In 1871 it was proposed to increase the stock of the company to $100,000, and the following agreement was entered into by the defendants in this suit, or by those from whom the defendants hold their stock:

'The undersigned subscribe hereby the amount set opposite our respective names, and agree to pay the same towards the increased stock of the Detroit Novelty Work, in three equal instalments, on April 3, 1871, May 3, 1871, and June 3 1871, (without grace,) it being understood that stock shall be issued to subscribers for such subscriptions at 66 2/3 cents upon the dollar, and that a total amount of the subscriptions hereto shall be $20,000; and further, that negotiations upon the basis proposed by T. W. Misner, under date of March 31st shall be completed before these subscriptions shall be of binding force. Detroit, April 1 1871.'

This agreement was assented to by all the existing stockholders of the company, and was carried out by the payment of the money, $20,000, and the issuance of the stock, $30,000. The corporation having gone into bankruptcy, and its assets proving insufficient to pay its liabilities, the complainant in the suit, who had been chosen its assignee, filed this bill to compel the defendants, who are stockholders of the company under the above subscription, to pay one-third of the par value of the increased stock taken under that agreement. On July 29, 1874, a majority of the directors of the company filed with the secretary of state the annual report required by statute, in which it was stated that the amount of capital paid in was $75,000; and also set forth the names of the stockholders and the number of shares held by each, the aggregate being 4,000 shares, which at $25 each would be $100,000.

H. M. Campbell and Alfred Russell, for complainant.

C. A. Kent and F. A. Baker, for defendants.

BROWN D.J.

That the capital stock of a corporation is a trust fund for the payment of its debts, and that the law implies a promise by the subscribers of stock to pay its par value, which in this instance was $25 per share, when called for, and that no subsequent release of their original contract or subscription by the corporation will avail against the claims of creditors, are propositions too clearly established to admit of question. But whether a court cannot compel a subscriber to live up to a bargain he has made, but can make another bargain for him, and compel him to live up to that, is a different question. In the case under consideration it is clear that no actual fraud was intended. The novelty works found itself embarrassed for means, and resolved to raise money by increasing its capital stock. As its existing stock, however, was worth only two-thirds of its par value, it was obviously impossible to sell its new stock at par, since all the stock would stand upon an equal footing and no one could be found to pay a dollar for that which was worth but 66 2/3 cents. There was, therefore, no recourse but to issue new stock at its real value. All the stockholders of the corporation having assented to this arrangement, it was evidently no fraud upon them, and the corporation itself would be estopped to claim more than the agreed price. Neither was it a fraud upon the existing creditors, since the assets of their debtor were increased by the amount of money actually paid in, and, to that extent, they were benefited by the subscription.

It is, then, only as a fraud upon future creditors that exception can be taken to the transaction. While the statute (Comp. Laws, Sec. 2841) requires the capital stock of such corporations to be divided into shares of $25 each, there is no express prohibition against stock being issued for less than its par value. But conceding, upon the authority of Hawley v. Upton, 102 U.S. 314, and Sturgis v. Stetson, 1 Bissell 246, that the directors of a corporation have no right to issue stock at less than its par value, that the subscription was void, and that an action will lie by the assignee of the corporation against the contributories to compel a surrender of the stock or payment for the same at its real value when the subscription was made, does it follow that a court can compel the subscribers to pay the par value of the shares? Subscriptions to the stock of a corporation are purely a matter of contract. Sturgis v. Stetson, 1 Biss. 248; Parker v. North Cent. Mich. R. Co. 33 Mich. 24. And where there is an express contract the law will not permit one to be implied. Cutter v. Powell, 6 T.R. 324. Pittsburgh & Connersville R. Co. v. Stewart, 41 Pa. 54-58. Undoubtedly, when a subscriber originally agrees to take so many shares, the law will imply that he is to pay at the rate of $25 per share, and no subsequent release or modification of that agreement by the corporation will prevent creditors from insisting full payment. But the English cases hold that if for any reason the subscription be void at all, it is void in toto, and that the assignee cannot treat it as void to compel a return of the stock and valid to obtain the payment of its par value. It follows from this that if the contributory agrees only to take paid-up shares he cannot be compelled to take unpaid shares.

In Currie's Case, 3 De G.J. & S. 367, directors of a company took a transfer of paid-up shares from an allottee who had them allotted to him by the company in part payment of purchase money in respect of certain property purchased by the company. The same directors were also holders of other paid-up shares, taken by them for attendance fees. The validity of the purchase in the one case, and the allowance of attendance fees in the other, were impugned. Held, that the transactions could not be affirmed in part and repudiated in part, and that consequently the directors, if treated as shareholders at all, must be treated as paid-up shareholders, and not placed on the list of contributories in either case.

In delivering the opinion of the court of chancery, Lord Justice Turner observed:

'These shares were allotted to Butcher under the authority given by the articles as paid-up shares, in part of the consideration of the purchase made by the directors from him. The purchase was either valid or invalid. If valid, it is clear that neither he nor his alienees can be called upon to contribute in respect to these shares. If invalid, I cannot see my way to hold that either a court of law or court of equity could no more than treat the purchase as void, and undo the transaction altogether. It could not, as I apprehend, be competent either to a court of law or to a court of equity to alter the terms of a purchase, and treat as shares not paid up shares which were given as paid-up shares, in part consideration of the purchase. Fraud, assuming there was fraud, would of course warrant the court in treating the purchase as void, or in undoing it; but it could not, as I conceive, authorize the court to substitute other terms.'

In Carling's Case, L.R. 1 Ch.Div. 115, an agreement was entered into with the trustee of an intended company for the sale to the company of a property for a certain sum in cash and a certain number of fully-paid-up shares. The vendor applied to the appellants to...