Hospes v. Northwestern Manuf'g & Car Co
| Decision Date | 18 January 1892 |
| Citation | 50 N.W. 1117,48 Minn. 174 |
| Parties | Ernest L. Hospes et al. v. Northwestern Manuf'g & Car Co |
| Court | Minnesota Supreme Court |
Argued December 14, 1891,
Appeal by Charles D. Gilfillan, John Kerwin, Henry B. Willis, and others, holders of common stock in the Northwestern Manufacturing & Car Company, from an order of the district court, Washington county, made July 14, 1891, overruling their demurrer to the supplemental complaint of the Minnesota Thresher Manufacturing Company filed in the insolvency proceedings pending against said first-named corporation.
The Northwestern Manufacturing & Car Company was a manufacturing corporation organized May 10, 1882, under 1878 G. S. ch. 34 § 120. It confessed judgment in the district court, May 10, 1884, in favor of Ernest L. Hospes and W. K. Wurdeman for $ 364.03. Execution was issued on the judgment, and returned wholly unsatisfied. Thereupon Hospes and Wurdeman commenced an action in the district court, Washington county setting forth these facts, and praying that the property of the corporation be sequestered, and a receiver appointed to continue its business until a sale could be made under the order of the court. 1878 G. S. ch. 76, § 9. On the same day an order was granted requiring the corporation to show cause before McCluer, J., why such receiver should not be appointed at once. The parties appeared, and by consent E. S Brown was on said May 10, 1884, appointed such receiver of the property of the corporation, and empowered to continue its business, employ and discharge officers, prosecute and defend suits, and wind up its affairs. The receiver thus appointed, qualified, and entered upon the discharge of his trust. The district court on September 9, 1884, made another order, requiring all the creditors of the Northwestern Manufacturing & Car Company to exhibit their claims within six months after the first publication of the order, and become parties to the proceeding, and in default thereof that they be precluded from all benefit of the judgment, and from sharing in the distribution of the assets realized under such judgment.
The Minnesota Thresher Manufacturing Company, another corporation, thereupon presented and filed its claim against the insolvent Northwestern Manufacturing & Car Company, and afterwards, on October 28, 1889, by leave of the court presented and filed its supplemental complaint, (1878 G. S. ch. 76, § 16,) on behalf of itself and all the other creditors, and against these appellants and more than 100 others, holders of the common stock of said insolvent corporation, to compel them severally to pay to the receiver the face value of this common stock, claiming that this common stock was issued without any payment whatever to the corporation for it; that some of the defendants received it through devices stated in the opinion, and that others took assignments of shares from first holders with full knowledge of all the facts. An order was entered making all these holders of common stock parties to the action, and requiring them to enter their appearance and to answer the complaint, and providing for the service of a summons upon each to answer in conformity with the order.
This supplemental complaint stated that the debts of said Northwestern Manufacturing & Car Company exceeded $ 3,400,000; that the intervener, the Minnesota Thresher Manufacturing Company, did, prior to October 27, 1887, purchase and become the owner of $ 1,703,000 thereof; that all the assets of said insolvent car company had been sold, and had realized $ 1,105,000, but that the expenses contracted by the receiver in continuing the business and completing the articles in process of manufacture were $ 770,000, and that there remained only $ 335,000 to apply upon the indebtedness of the insolvent car company; that the stock consisted of $ 3,500,000 preferred and $ 1,500,000 common; that the preferred was to receive dividends of 7 per cent. annually and no more; the common to receive no dividend until the dividend on preferred should be first paid out of the profits realized in the business; that the common stock was issued and delivered to defendants without consideration; that it was bonus stock, and was given by said Northwestern Manufacturing & Car Company gratuitously to defendants; that some of such common stock was thereafter transferred by the persons receiving it to the other defendants, but that they each had full notice and knowledge before purchasing that nothing had been paid to the corporation for it, and that it was issued as a bonus, and without consideration. The complaint prayed that each of the holders of such common stock account with the receiver and said thresher company and the other creditors concerning said common stock, and their liability to pay therefor, and that it be adjudged that each of the holders of common stock pay into court an amount equal to the par value of their respective holdings of such stock, and that the money be distributed among the creditors.
Many of the holders of the common stock appeared and demurred to this complaint, upon grounds stated in the opinion, and it was stipulated that M. D. Grover, Esq., should, as referee, hear argument, and report to the court what order he advised to be made upon the demurrers. He heard argument, and reported, July 14, 1891, that the demurrers should be overruled, and it was so ordered. The defendants appealed to this court.
Among the defendants was the St. Paul Trust Company, as executor of the last will of Norman W. Kittson, who died May 10, 1888, and who at his death held $ 50,000 of said common stock. This executor contended that this claim should have been presented to and proved before the probate court of Ramsey county, the domicile of deceased at his death.
Order reversed.
Lusk, Bunn & Hadley, for some appellants.
We submit the following propositions, believing that all of them can be sustained on principle, and admitting that some of them are opposed to considerable American authority:
First. Creditors cannot recover on the ground of contract where the corporation could not. Their right to recover in such cases must be grounded on tort or fraud.
Second. There is no distinction between unpaid capital and paid capital, between subscriptions and any other assets of the corporation, as regards the alleged rule that the capital is a trust fund.
Third. Neither subscriptions nor any other assets of a corporation are, in any proper sense, a trust fund. They are both subject to absolute control and disposition by the corporation.
Fourth. This power of control and disposition as to corporate assets is precisely equivalent to the same power in a natural person, as to his property; and creditors can interfere with the corporate power of disposal on the identical principles which enable them to question dispositions of property by a natural person.
Fifth. The complaint in this case must be tested by the same rules which would be applied to a creditors' bill to reach assets of a natural person, fraudulently disposed of. Tested by those rules, the bill is insufficient, for it does not show a fraud on, or injury to, complainant or other creditors.
This is a case where the contract between the corporation and the taker of its shares is clear and specific that the shares shall not be paid for. On principle, there is no ground for implying a contract that the taker of shares of stock shall pay par for them, where the parties have explicitly agreed that no such implication shall be made, and that the shares shall not be paid for. Logically, no such contract can be implied. In re Dronfield, etc., Co., 17 Ch. Div. 76, 97; Waterhouse v. Jamieson, L. R. 2 H. L. Sc. 29; Christensen v. Eno, 106 N.Y. 97, 102.
In England, since the act of 1867, there is, indeed, an implied contract in such cases, which no express contract can negative. That act says every share in any company shall be deemed and be taken to have been issued and to be held subject to the payment of the whole amount thereof in cash, etc. This creates a contract by statute, and makes every contrary contract void. In re Johannesburg Hotel Co., [1891] 1 Ch. Div. 119, 126; In re Addlestone Linoleum Co., 58 Law T. R. (N. S.) 428.
This is rational ground. It does not rest on the trust-fund doctrine, nor on any implication of a contract contrary to the real one; and it does not violate the rule, always adhered to in England, that creditors have only the rights of the corporation.
It cannot be said that such a contract can be implied by virtue of any statute of Minnesota. We have no statute equivalent to the provision quoted from the English act of 1867. In the manufacturing corporation act of 1873, under which the car company was incorporated, there is no prohibition of bonus stock. But, supposing that our law forbids such issues, the result is, logically, that the same are ultra vires and void. The transaction can, at most, be held void or rescinded, and the bonus stock canceled. Anderson's Case, 7 Ch. Div. 75; In re Plaskynaston Tube Co., (In re Ince Hall Rolling Mills Co.,) 23 Ch. Div. 545, note; Currie's Case, 3 De Gex, J. & S. 366; Baron de Beville's Case, L. R. 7 Eq. 11; Phelan v. Hazard, 5 Dill. 45; Brant v. Ehlen, 59 Md. 1; Coffin v. Ransdell, 110 Ind. 422. So far as this point is concerned, there is no rational ground of distinguishing cases like this, where the stock is wholly a bonus, from cases where overvalued property is exchanged for stock, and the stock consequently partly a bonus. In either case, if the transaction is illegal, it ought merely to be set aside; the court ought not to create a contract the direct reverse of that which the parties have actually made.
Much confusion exists in stating the trust-fund doctrine. Some case...
To continue reading
Request your trial