German-American State Bank v. Soap Lake Salts Remedy Co.

• Decision Date: 08 January 1914
• Citation: 77 Wash. 332,137 P. 461
• Court: Washington Supreme Court
• Parties: GERMAN-AMERICAN STATE BANK v. SOAP LAKE SALTS REMEDY CO. et al.

137 P. 461

77 Wash. 332

GERMAN-AMERICAN STATE BANK v. SOAP LAKE SALTS REMEDY CO. et al.

Supreme Court of Washington

January 8, 1914

Department 1. Appeal from Superior Court, Grant County; R. S. Steiner Judge.

Action by the German-American State Bank, a corporation, against the Soap Lake Salts Remedy Company, a corporation, and others. From a judgment for defendants plaintiff appeals. Reversed and remanded.

Voorhees & Canfield, of Spokane, for appellant.

Vanderveer & Cummings and H. McC. Billingsley, all of Seattle, for respondents.

CROW C.J.

Action by the German-American State Bank, a corporation, upon two promissory notes executed by the Soap Lake Salts Remedy Company, a corporation, and to recover from C H. Clodius, A. O. Kuck, J. W. McBurney, and H. E. Christensen their unpaid subscription to the capital stock of the defendant corporation. The defendant corporation interposed a demurrer to the complaint, which was overruled, and, after its failure to further plead, plaintiff claimed a default. The remaining defendants answered separately. At the close of plaintiff's evidence a nonsuit was entered as to each and all of the defendants. The plaintiff has appealed.

Pending the appeal, H. E. Christensen died testate, and J. W McBurney, his executor, has been substituted as respondent. As McBurney is a respondent in his personal capacity, we will refer to Christensen as a respondent in all matters which prior to his decease affected him.

About June, 1907, a corporation known as the Soap Lake Salts & Oil Company, hereafter called the oil company, was organized with a capital stock of $50,000; respondents J. W. McBurney, C. H Clodius, A. O. Kuck, and H. E. Christensen being a portion of the stockholders. After continuing for about a year, it proved an unprofitable concern, doing a business of about $500 a month, with operating expenses largely in excess thereof. It incurred a number of liabilities which it could not pay, including an indebtedness of about $1,500 to the appellant bank in the form of an overdraft. The stockholders and trustees thereupon determined to organize a new corporation, to be known as the Soap Lake Salts Remedy Company, hereafter called the remedy company, one of the respondents herein. The remedy company was incorporated for $200,000, and one Miss M. E. Wagner, a stenographer and employé of one of the respondents, subscribed for its entire capital stock, with the exception of about six shares, which were subscribed by the incorporators. All assets of the oil company were conveyed to Miss Wagner, who forthwith conveyed the same to the remedy company in full payment of her stock subscription. Stockholders in the oil company thereupon surrendered their stock in that company to Miss Wagner and received in exchange a proportionate amount of stock in the remedy company. Respondents Clodius and Christensen, president and cashier of the appellant bank, as such extended credit to the oil company by permitting the overdraft above mentioned. This overdraft seems to have been assumed by the remedy company, which increased it until it reached $2,104.08. On November 24, 1908, the remedy company, to decrease this overdraft, executed and delivered to the appellant bank its promissory note for $2,000; the same being one of the notes upon which this action is based. Thereafter the remedy company again overdrew its account with the appellant bank, and on December 10, 1909, in settlement, executed and delivered to the appellant its second promissory note for $1,840.55; the same being the second note upon which this action is based. The assets which the oil company conveyed to Miss Wagner, and which she in turn conveyed to the remedy company, included 153 acres of land in Grant county of the value of about $6,000, subject to an unpaid purchase-money mortgage for $5,000, and further consisted of certain personal property of a total value not exceeding $500. It is conceded that the remedy company has ceased doing business; that it has lost the real estate in a foreclosure proceeding; that its other assets are practically valueless; that it is insolvent; and that appellant cannot recover on its notes, unless it can recover from the respondent stockholders, on their unpaid stock subscriptions. It is not necessary to enter upon a minute statement of the facts or detail the number of shares of stock held by each respondent in the remedy company. It may be mentioned that stock of the face value of about $76,000 was turned into the treasury of the remedy company to be held and sold as treasury stock. We are satisfied the evidence was sufficient to show that respondents were subscribers to their stock; that they acquired the same with full knowledge of all the transactions and dealings involved in the organization of the remedy company; and that nothing more than a nominal consideration was paid by them for the stock which they now hold. Their liability to creditors of the insolvent corporation, upon their unpaid stock subscriptions, is well established by former rulings of this court. Adamant Mfg. Co. v. Wallace, 16 Wash. 614, 48 P. 415; Dunlap v. Rauch, 24 Wash. 620, 64 P. 807; Davies v. Ball, 64 Wash. 292, 116 P. 833; Grady v. Graham, 64 Wash. 436, 116 P. 1098, 36 L. R. A. (N. S.) 177; Lantz v. Moeller, 136 P. 687.

The evidence in this case convinces us that the subscribed capital stock now held by respondents has never been paid either in cash or in property of an equivalent value.

In the Adamant Manufacturing Co. Case, supra, the late Chief Justice Dunbar said: 'It must necessarily follow, for the protection of creditors who dealt with these corporations that the stock subscribed for must be paid in cash or in property of an equivalent value. In other words, the corporation must be in the actual condition which it represents itself to be in financially. If it were allowed to hold itself out as having a capital stock of $100,000, when in reality the capital stock, which is and must be, under the theory of the law, assets in the hands of the corporation, is worth only one-half that amount, the corporation is to that extent doing business under false colors and is obtaining credit upon the faith of an asserted estate which is purely fictitious. And where, by any arrangement between the shareholders and the corporation, the stock is issued as fully paid up when in fact it has not been paid to the full...