Hamor v. Taylor-Rice Engineering Co., 187.

• Decision Date: 23 December 1897
• Docket Number: 187.
• Citation: 84 F. 392
• Parties: HAMOR v. TAYLOR-RICE ENGINEERING CO.
• Court: U.S. District Court — District of Delaware

84 F. 392

HAMOR v. TAYLOR-RICE ENGINEERING CO.

No. 187.

United States Circuit Court, D. Delaware.

December 23, 1897

(Syllabus by the Court.)

The capital stock of a corporation is a trust fund for the payment of the corporate indebtedness, before any distribution among the stockholders.

The capital stock of a corporation, in its merely nominal sense is the sum specified in its charter or certificate of incorporation, and thereby usually divided into aliquot shares; and such sum is intended to represent in amount the corporate fund which is to serve as the basis for the business or enterprise for which the corporation was created.

In its substantial sense, the capital stock of a corporation is the fund of money or other property, actually or potentially in its possession, directly or indirectly derived or to be derived from the sale by it of shares of its stock or their exchange by it for property other than money. This fund includes not only money or other property received by the corporation for shares of stock but all balances of purchase money, or instalments, due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares.

In the absence of statutory authority in that behalf a corporation whether solvent or insolvent, has no legal power to reduce the fund represented by its capital stock by any formal or voluntary act on its part, to the prejudice of its creditors either then or thereafter existing, by distributing any part of it among the stockholders by way of dividend, or by giving any part of it to one or more stockholders, or by disposing of any part of it in any other manner, except by way of changing its form to meet the exigencies of the corporate business.

It is ultra vires of a corporation to dispose of any part of its property other than surplus or net profits for the purchase of shares of its own stock, and a promissory note given by the corporation for that purpose is a nullity.

Receivers of an insolvent corporation represent both the corporation and its creditors and have the right to assert any defense to which the creditors, in contradistinction to the corporation are entitled.

Where a corporation gives its promissory note to one of its directors for the purchase of shares of its own stock from him, and within four months thereafter is adjudged insolvent, and has not sufficient assets for the payment of its debts, the burden rests upon the payee of the note who seeks to have it allowed as a claim against the corporation, if, in any event the existence of a surplus or fund of net profits at the time of the giving of the note might avail him, to show the existence at that time of such surplus or profits.

Levi C Bird, for Willard.

William S. Hilles, for receivers.

BRADFORD District Judge.

An order having been made in this cause notifying all creditors of the defendant to prove their claims and file the same in this court, Dwight D. Willard filed with the clerk, December 2, 1896, a verified claim amounting to $2200, with interest thereon from June 22, 1896, based upon a promissory note made by the defendant to his order for the above mentioned sum, bearing date March 19, 1896, and payable three months after date. The receivers of the defendant excepted to the allowance of the claim, as follows:

'As to the claim of Dwight D. Willard, being No. 25, these receivers deny that there is any obligation whatsoever on the part of the said company, the said claim being on a note made by the company to the order of Dwight D. Willard, the consideration for which said note, as these receivers are informed and believe, being the amount agreed to be paid by the said company to the said Dwight D. Willard in purchasing from him stock of the said company, which transaction and the giving of which note these receivers claim was ultra vires so far as the corporation was concerned and not within the power of said company.'

The solicitors for Willard and the receivers, agreeing that the exception to the said claim should be determined by the court without the intervention of a master, filed a statement of facts, upon which argument has been heard. The facts so stated are as follows:

'The Taylor-Rice Engineering Company is a corporation duly created by and existing under the laws of the state of Delaware, said corporation having been formed and organized under an act entitled, 'An Act concerning Private Corporations,' passed at Dover, March 14th, 1883. It is agreed that the certificate of incorporation of the said corporation shall be taken as part of this case stated. That the said company, on the 19th day of December, A.D. 1895, gave to the said Dwight D. Willard a certain promissory note, of which the following is a copy: '$2200.

Wilmington, Del., December 19, 1895.

Three months after date we promise to pay to the order of Dwight D. Willard, at the First National Bank of Wilmington, two thousand two hundred dollars, without defalcation, for value received.

'The Taylor-Rice Engineering Co. ' Jas. A. Taylor, Prest.

'Edmund Wright, Jr., Treasurer.'

That the said note was renewed for three months on the 19th day of March, A.D. 1896, which said renewed note is the basis of the claim of the said Dwight D. Willard against the said receivers. That at the time the first of the said notes was given, the said Dwight D. Willard was a director of The Taylor-Rice Engineering Company. That said note was given to the said Dwight D. Willard by the said company in part payment of thirty shares of the capital stock of the said company of the par value of one hundred dollars each, and that the said Dwight D. Willard, upon the receipt of the said note and $500 in cash paid by the said company, surrendered or was to surrender to the said company the said stock. That the said transaction above set forth was authorized by a meeting of the board of directors of the said company, held shortly before the said note was given. That at the time said note was given and when the said resolution was passed, said corporation of which is still due and unpaid; but the said corporation in the opinion of the said directors was in a solvent condition. That at the time of the giving of the said note, the greater portion of the stock was owned by the directors of the said company, then consisting of James A. Taylor, John V. Rice, Junior, Edmund Wright, John M. Rogers and the said Dwight D. Willard. That the said board of directors thought that said corporation was solvent and that it was then possible to carry on the business of the said company, and to pay the obligations of the said company, together with the note of the said Willard. That on the 17th day of April, A.D. 1896, and before the maturity of the renewal of said note, the said James P. Winchester and James A. Taylor, were appointed by the circuit court of the United States for the district of Delaware, receivers of the said company, by reason of the insolvency thereof, and that there are not sufficient funds or property in the hands of the said receivers to pay the indebtedness against the said company, exclusive of the claim of the said Dwight D. Willard. That nine tenths or more of the stock of the corporation was owned by the directors, who, at a meeting of the board of directors, authorized the purchase of the said stock and the giving of the said promissory note. The aggregate merchandise accounts against the corporation presented to the receivers, now aggregate $1475.92, nearly all of which, to wit, $1137.93, was contracted by the corporation after the note was given to Willard in purchase of his stock, and the balance of the indebtedness other than the Willard note, to wit, $6692.35, is to James A. Taylor, the president and a director of said corporation, and to John M. Rogers, a director of said corporation, who, as directors, agreed to the purchase of the stock from Willard, and who directed the corporation to give the said promissory note. That the directors who agreed to the purchase of said stock and giving of said promissory note, at the time of the giving of said promissory note, took said action because they believed it to be for the best interests of the corporation in a financial point of view. Taylor's account was for salary due from the corporation and Roger's claim was for money loaned to the corporation, the Rogers account having been incurred long previous to the purchase of the Willard stock and part of the Taylor salary earned before that time. That the receivers object to paying the said note on the ground that the giving thereof was not within the power of the said company, and was void as against the other creditors thereof.'

The defendant was incorporated in September, 1894, under the general incorporation law of Delaware, chapter 147, vol. 17 Laws Del. 1883, with power 'to manufacture and sell engines of all kinds, and all appliances pertaining thereto, machinery, tools, tools of precision for measurements, and all other tools and machinery whatsoever. ' The capital stock authorized in the certificate of incorporation was $55,000, divided into 550 shares of the par value of $100 each, it being required that $35,000 should be paid in before commencing business. Subsequently, by a supplemental certificate obtained in February, 1895, the authorized capital stock of the defendant was increased to $750,000, divided into preferred and common stock, the former amounting to $250,000 and the latter to $500,000; the par value of shares in each being $100. It does not appear whether the stock which the defendant undertook to purchase from Willard was part of its original authorized capital stock, or whether it was common or preferred stock issued under the supplemental certificate. Nor does the statement of facts...