Frazier v. Zachariah

• Decision Date: 06 January 1936
• Docket Number: 31878
• Citation: 174 Miss. 378,164 So. 893
• Court: Mississippi Supreme Court
• Parties: FRAZIER v. ZACHARIAH et al

164 So. 893

174 Miss. 378

FRAZIER v. ZACHARIAH et al

No. 31878

Supreme Court of Mississippi

January 6, 1936

Division A

Suggestion Of Error Overruled January 20, 1936.

APPEAL from the circuit court of Sunflower county HON. W. H. Cox Judge.

Action by T. A. Frazier against Mrs. Joe Zachariah and Mrs. M. E Gilmer. Judgment for defendants, and plaintiff appeals. Reversed and rendered.

Reversed, and judgment here for appellant.

Maynard, FitzGerald & Venable, of Clarksdale, for appellant.

The propriety of refusing the appellant and granting to appellees a peremptory instruction is the question presented by this appeal. On such a question, all facts proven and all facts, reasonably inferable must be taken to be established.

Dean v. Brannon, 139 Miss. 312; McKinnon v. Braddock, 139 Miss. 424; Wise v. Peugh, 140 Miss. 479; Yates v. Houston & Murray, 141 Miss. 881.

The defendants were stockholders in the Gilmer Grocery Company. Book is evidence of who is stockholder.

Lehman Durr & Co. v. Glenn, 6 So. 44; Walsh v. State, 74 So. 45; Oden v. Vaughn, 85. So. 779.

Appellants are estopped to deny their status as stockholders for they ratified all transactions relating to stock, stock subscriptions and dealing with notes in that they knowingly received dividends from the corporation as stockholders, and, pursuant to agreement, had the dividends applied in partial payment of the stock, conduct inconsistent with non-ownership of stock.

Perkins v. Bank, 103 Miss. 179; Turnbull v. Payson, 95 U.S. 419, 24 L.Ed. 437.

Persons holding stock are estopped as against creditors to deny that they are legal stockholders.

Aldrich v. Rice, 161 Miss. 879; Davis v. Butler, 128 Miss. 847; Allen v. Edwards, 93 Miss. 719; Turnbull v. Payson, 95 U.S. 419, 24 L.Ed. 437; Thigpen v. Miss. Cent. R. Co., 32 Miss. 347.

The company was insolvent at the time the notes were cancelled without payment or consideration given and delivered to appellants.

The company was adjudicated as such by the federal bankruptcy court for the proper district.

Freeman on Judgments (5 Ed.), sec. 1476; Gratiot County Bank v. Johnson, 249 U.S. 246, 63 L.Ed. 587.

Such an adjudication is binding on a stockholder who is necessarily a party because where, as here, the directors, agents of the stockholders, voted to file the petition, they were acting within this authority.

14A C. J., Corporations, secs. 3104 and 3108; U.S.C. A., Title 11, sec. 1.

A trustee in bankruptcy has the right to bring suit and enforce payment for unpaid subscriptions for stock if needed to pay debts.

Ogilvie v. Knox, 22 How. 380, 16 L.Ed. 349; Sanger v. Upton, 91 U.S. 56, 23 L.Ed. 220; Scoville v. Thayer, 105 U.S. 155, 26 L.Ed. 968; Harrigan v. Bergdoll, 270 U.S. 500, 70 L.Ed. 733; Potts v. Wallace, 146 U.S. 689, 36 L.Ed. 1135.

The suit must be brought by the trustee and in a state court of proper venue and at law.

Kelly v. Gill, 246 U.S. 116, 62 L.Ed. 185; Freeman v. Winchester, 10 S. & M. 577.

The trustee in bankruptcy must sue in his own name and not in that of the corporation, because he sues in his own right, since cause of action is in him.

Reagan v. Midland Packing Co., 8 F.2d 954.

It is the settled doctrine of the Supreme Court of the United States and the American states generally, that the capital of an insolvent corporation is a trust fund, at least sub modo, for creditors for the payments of debts; that the law implies a promise by original subscribers to stock to pay for the stock for this purpose.

Camden v. Stuart, 144 U.S. 104; Fogg v. Blair, 139 U.S. 118; Handley v. Stutz, 139 U.S. 417; Morgan County v. Allen, 103 U.S. 498; Sanger v. Upton, 91 U.S. 56; Upton v. Tribilcock, 91 U.S. 45; 2 Thompson on Corporation, sec. 3911; Payne v. Bullard, 23 Miss. 88; Kimbrough v. Davis, 104 Miss. 722; Bank of Laurel v. Pearson, 109 Miss. 638; Sections 4148, 4149 and 4153, Code of 1930.

It is the duty of a receiver to collect the unpaid subscriptions to its capital stock, which becomes a trust fund in his hands for the benefit of creditors.

Campbell v. Chapman, 31 So. 101; Kretchmar v. Stone, 90 Miss. 375; Reagan v. Midland Packing Co., 8 F.2d 954.

Section 4153, Code of 1930, provides that each stockholder shall be individually liable for the debts of the corporation contracted during his ownership of stock for the balance that may remain due and unpaid for the stock subscribed, and may be sued by any creditor of the corporation.

Vick v. LaRochelle, 57 Miss. 602; Robinett v. Starling, 72 Miss. 652; Payne v. Bullard, 23 Miss. 88.

As to creditors the obligation for unpaid subscriptions is unconditional.

Vermont Marble Co. v. Granite Co., 135. Cal. 579, 56 L.R.A. 728; Quartz Glass Mfg. Co. v. Joyce, 27 Cal.App. 523, 150 P. 648.

A subscription to stock in a corporation is not only an agreement between the corporation, but is such also as to other subscribers who have the right to suppose that all subscribers are treated alike.

Meyer v. Blair, 109 N.Y. 600, 4 A. S. R. 500; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 A. R. 199; White Mountains R. Co. v. Eastman, 34 N.H. 124; Jackson, etc., County v. Walls, 105 La. 89.

The cases are unanimous in support of the rule that an extrinsic or collateral agreement between a particular subscriber to corporate stock and the corporation or its agents whereby the subscriber is not to be held liable is invalid and void, as it constitutes a fraud upon creditors, other subscribers and stockholders.

Reiff v. Nebraska-California Colony Co., 277 F. 417; Jones v. Dodge, 97 Ark. 248, L.R.A. 1915A, 472; Faris v. Beck, 74 Colo. 480, 222 P. 652; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 A. R. 199; Sarbach v. Kansas Fiscal Agency Co., 86 Kan. 734, Ann. Cas. 1913C, 415; Thompson v. Rec. Savings Bank, 19 Nev. 103, 3 A. S. R. 797; Wetherbee v. Baker, 35 N.J.Eq. 501; Industrial Profit Sharing Bank v. Curkale, 158 S.C. 21; Meyer v. Blair, 109 N.Y. 600, 4 A. S. R. 500; Robinson v. Pittsburg, etc., Ry. Co., 32 Pa. 334, 72 Am. Dec. 792; Galena & S.W. R. Co. v. Ennor, 116 Ill. 55, 4 N.E. 762; Morrell v. Martin, 23 N. M. 563, 170 P. 45; York Park Bldg. Assn. v. Barnes, 39 Neb. 834, 58 N.W. 440; Jackson F. & M. Ins. Co. v. Walls, 105 La. 89, 29 So. 503.

It may be urged that since under statute the taking of a note for stock is illegal, the note cannot be collected by creditors. The subscriber is estopped as against creditors to plead the violation of the statute.

Aldridge v. Rice, 161 Miss. 879; Allen v. Edwards, 93 Miss. 719.

Neill & Clark and Allen & Allen, all of Indianola, for appellees.

The plaintiff, trustee in bankruptcy, only acquired such rights as were vested in the Gilmer Grocery Company, whose estate he represents, and does not acquire any interest in any claim that any of the creditors of the Gilmer Grocery Company may have had against its stockholders.

3 U. S. Digest, Bankruptcy, page 1085, sec. 79; U.S.C. A., Title 11, Bankruptcy, sec. 10-a; 7 C. J., sec. 219, page 130, and sec. 226, page 133; Section 4153, Code of 1930.

In Coder, Trustee, v. Arts, 213 U.S. 223, it was held, that the necessary effect upon other creditors, of a mortgage executed by an insolvent within four months of the filing of the petition in bankruptcy, to secure a pre-existing debt, does not dispense with the necessity of showing an actual intent on his part to hinder, delay, or defraud creditors, which is essential under the bankruptcy act of July 1, 1898, sec. 67 E.

3 Thompson on Corporations, section 3430, page 2485; 7 C. J., sec. 281-h, page 177.

It appears therefore that until the trustee shall have proceeded in equity to have the transaction between the Gilmer Grocery Company and its stockholders, the appellees here, set aside, and the debt and notes sued on reestablished, that no legal title to the debts and notes could be vested in the trustee.

All of the authorities seem to hold that a suit at law can be maintained only in the name of the holder of the legal right of action.

47 C. J., sec. 35, page 23; Wilson v. McElroy, 2 S. & M. 241; Vanhouten v. Riley, 6 S. & M. 440; Lake v. Hastings, 24 Miss. 490.

The legal title to the respective causes of action sued on not being held by the trustee, we conclude that no action is maintainable.

Appellees are purchasers of stock and not subscribers; in the absence of the proof of tender or delivery of the stock, we conclude that there is no right of recovery.

14 C. J., sec. 754, page 508, and sec. 826, page 551.

A note, obligation or security of any kind given or transferred by any subscriber for stock in any corporation shall not be considered, taken, or held as payment of any part of the capital stock of the company.

Section 4148, Code of 1930; Montjoy v. Delta Bank, 24 So. 870; Ellis Jones Drug Co. v. Williams, 103 So. 810.

Purchaser knowing notes were given for corporation stock in violation of statute could not recover thereon.

Aldridge v. Rice, 138 So. 570.

The notes and debt here sued on being for stock in the Gilmer Grocery Company conferred no right upon the corporation against the makers of the notes, appellees here, are utterly void as to the makers, and cannot be recovered upon in this suit.

We admit that under the law and authorities that the rule would be different if this were a suit on behalf of creditors, but we insist that the trustee in bankruptcy stands in the same shoes as the Gilmer Grocery Company, and has no statutory right.

There can be no question of estoppel in the present case because the Gilmer Grocery Company had knowledge of all the facts with which knowledge the trustee in bankruptcy is legally charged, and the defenses set up, that the notes were in violation of the statute, and were to be paid only from dividends of the company, are...