Hospes v. Nw. Manuf'g & Car Co.

• Decision Date: 18 January 1892
• Parties: HOSPES ET AL. v NORTHWESTERN MANUF'G & CAR CO., (MINNESOTA THRESHER MANUF'G CO., INTERVENER. TWO CASES.)
• Court: Minnesota Supreme Court

48 Minn. 174

50 N.W. 1117

HOSPES ET AL.vNORTHWESTERN MANUF'G & CAR CO., (MINNESOTA THRESHER MANUF'G CO., INTERVENER. TWO CASES.)

Supreme Court of Minnesota.

Jan. 18, 1892.

(Syllabus by the Court.)

1. The equitable right of creditors of a corporation to compel the holders to pay for “bonus” stock may be enforced in a sequestration proceeding under chapter 76, Gen. St., upon the complaint of any interested creditor who has become a party to the proceeding.

2. The so-called “trust-fund” doctrine that “the capital of a corporation is a trust fund for the payment of its debts” considered and criticised.

3. The capital of a corporation is its own property, which it may use and dispose of, (if not prohibited by its charter,) the same as a natural person. It is not held in trust for creditors, except in the sense that there can be no distribution of it among stockholders without provision being first made for the payment of corporate debts, and that, as in the case of a natural person, any disposition of it in fraud of creditors is void; and in this respect there is no distinction between unpaid capital and paid capital, between “stock subscriptions” and any other assets of the corporation.

4. The right of creditors to compel the holders of “bonus” stock to pay for it contrary to their actual agreement with the corporation rests neither on implied contract nor upon any “trust-fund” doctrine, but upon the ground of fraud.

5. The fraud, in such case, consists in the misrepresentation as to the actual amount of capital upon the faith of which persons have dealt with the corporation and given it credit.

6. Hence it is only those creditors who have relied on, or who can fairly be presumed to have relied on, the stock representing actual capital in whose favor equity will enforce payment of such stock. Consequently payment can never be enforced in favor of one who became a creditor before the “bonus” stock was issued.

7. It is not necessary that a “subsequent” creditor should have alleged that when he dealt with the corporation he believed that the stock had been paid for, and that he gave credit on the faith of it. If in fact the creditor had knowledge of the arrangement by which the “bonus” stock was issued, that is a matter of defense to be set up by the defendant stockholder.

8. Where a creditor asks for such relief against a stockholder he should show his own equities entitling him to such relief. Hence, when it appears that he is not the original creditor, but had purchased the claims after the corporation had become insolvent, and its affairs had been placed in the hands of a receiver, he should state what he paid for the claims, or at least show that he paid a substantial consideration for them. Equity will not grant such relief for the benefit of those who have bought up claims against an insolvent corporation for a nominal consideration for the purpose of speculating on the liability of stockholders.

9. The right of action in favor of creditors against the holders of such bonus stock does not accrue until the corporation becomes insolvent.

10. A claim of this kind in favor of creditors against the estate of a deceased stockholder before the assets of the corporation are fully administered is a “contingent claim” within the meaning of chapter 53, Gen. St.

Appeal from district court, Washington county.

Sequestration proceedings by E. L. Hospes & Co. against the Northwestern Manufacturing & Car Company. The Minnesota Thresher Manufacturing Company intervened, and filed a complaint against George R. Finch and others, stockholders in the Northwestern Manufacturing & Car Company. From an order overruling demurrer to the intervener's supplemental complaint George R. Finch, the St. Paul Trust Company, executor, and others, appeal. Reversed.

Horace G. Stone, for appellants George R. Finch et al.

Harvey Officer, for appellant St. Paul Trust Company.

Lusk, Bunn & Hadley, for the other appellants.

Flandrau, Squires & Cutcheon and Davis, Kellogg & Severance, for respondent.

MITCHELL, J.

This appeal is from an order overruling a demurrer to the so-called “supplemental complaint” of the Minnesota Thresher Manufacturing Company. The Northwestern Manufacturing & Car Company was a manufacturing corporation organized in May, 1882. Upon the complaint of a judgment creditor, (Hospes & Co.,) after return of execution unsatisfied, judgment was rendered in May, 1884, sequestrating all its property, things in action, and effects, and appointing a receiver of the same. This receivership still continues, the affairs of the corporation being not yet fully administered; but it appears that it is hopelessly insolvent, and that all the assets that have come into the hands of the receiver will not be sufficient to pay any considerable part of the debts. The Minnesota Thresher Manufacturing Company, a corporation organized in November, 1884, as creditor, became a party to the sequestration proceeding, and proved its claims against the insolvent corporation. In October, 1889, in behalf of itself and all other creditors who have exhibited their claims, it filed this complaint against certain stockholders (these appellants) of the car company in pursuance of an order of court allowing it to do so, and requiring those thus impleaded to appear and answer the complaint. The object is to recover from these stockholders the amount of certain stock held by them, but alleged never to have been paid for. What was said in Meagher Case, 50 N. W. Rep. 1114, (just decided,) is equally applicable here as to the right to enforce such a liability in the sequestration proceeding upon the petition or complaint of creditors who have become parties to it There is nothing in this practice inconsistent with what was decided in Thresher Co. v. Langdon, 44 Minn. 37,46 N. W. Rep. 310. The complaint is not the commencement of an independent action by creditors in their own behalf antagonistic to the rights of the receiver, but is filed in the sequestration proceeding itself, and in aid of it.

The principal question in the case is whether the complaint states facts showing that the thresher company, as creditor, is entitled to the relief prayed for or, in other words, states a cause of action. Briefly stated, the allegations of the complaint are that on May 10, 1882, Seymour, Sabin & Co. owned property of the value of several million dollars, and a business then supposed to be profitable. That, in order to continue and enlarge this business, the parties interested in Seymour, Sabin & Co., with others, organized the car company, to which was sold the greater part of the assets of Seymour, Sabin & Co. at a valuation of $2,267,000, in payment of which there were issued to Seymour, Sabin & Co. shares of the preferred stock of the car company of the par value of $2,267,000, it being then and there agreed by both parties that this stock was in full payment of the property thus purchased. It is further alleged that the stockholders of Seymour, Sabin & Co., and the other persons who had agreed to become stockholders in the car company, were then desirous of issuing to themselves, and obtaining for their own benefit, a large amount or common stock of the car company, “without paying therefor, and without incurring any liability thereon or to pay therefor;” and for that purpose, and “in order to evade and set at naught the laws of this state,” they caused Seymour, Sabin & Co. to subscribe for and agree to take common stock of the car company of the par value of $1,500,000. That Seymour, Sabin & Co. thereupon subscribed for that amount of the common stock, but never paid therefor any consideration whatever, either in money or property. That thereafter these persons caused this stock to be issued to D. M. Sabin as trustee, to be by him distributed among them. That it was so distributed without receipt by him or the car company from any one of any consideration whatever, but was given by the car company and received by these parties entirely “gratuitously.” The car company was, at this time, free from debt, but afterwards became indebted to various persons for about $3,000,000. The thresher company, incorporated after the insolvency and receivership of the car company, for the purpose of securing possession of its assets, property, and business, and therewith engaging in and continuing the same kind of manufacturing, prior to October 27, 1887, purchased and became the owner of unsecured claims against the car company, “bona fide, and for a valuable consideration,” to the aggregate amount of $1,703,000. As creditor, standing on the purchase of these debts, which were contracted after the issue of this “bonus” stock, the thresher company files this complaint to recover the par value of the stock as never having been paid for. The complaint does not allege what the consideration of these debts was, nor to whom originally owing, nor what the intervener paid for them, nor whether any of the original creditors trusted the car company on the faith of the bonus stock having been paid for. Neither does it allege that either the thresher company or its assignors were ignorant of the bonus issue of stock, nor that they or any of them were deceived or damaged in fact by such issue, nor that the bonus stock was of any value. Neither is there any traversable allegation of any actual fraud or intent to deceive or injure creditors. A desire to get something without paying for it, and actually getting it, is not fraudulent or unlawful if the donor consents, and no one else is injured by it; and the general allegation that it was done “in order to evade and set at naught the laws of the state” of itself amounts to nothing but a mere conclusion of law. As a creditors' bill, in the ordinary sense, the complaint is manifestly insufficient. The thresher company, however, plants itself upon the so-called “trust-fund” doctrine that the capital stock of a corporation is a trust fund for...