In re South Mountain Consol. Min. Co.

• Decision Date: 10 January 1881
• Citation: 5 F. 403
• Court: United States Circuit Court, District of California
• Parties: In re SOUTH MOUNTAIN CONSOLIDATED MINING CO., Bankrupt.

5 F. 403

In re SOUTH MOUNTAIN CONSOLIDATED MINING CO., Bankrupt.

United States Circuit Court, D. California.

January 10, 1881

James A. Waymire, for creditors.

McAllister & Bergin, for William Willis.

HOFFMAN D.J.

At the request of counsel I indicate the grounds for the denial of the application heretofore made to order an assessment to be levied on the shareholders of the above corporation. The assessment is asked for with the object of collecting the same by suits in personam against delinquent shareholders. The question whether they are personally liable must therefore, first be determined. I do not question the power of the court to compel contribution of unpaid subscriptions to the capital stock of an insolvent corporation for the purpose of paying its debts. Upton v. Tribilcock, 91 U.S. 48; Sanger v. Upton, Id. 60; Chubb v Upton, 95 U.S. 665; Pullman v. Upton, 96 U.S 328; Turnbull v. Payson, 95 U.S. 420; Bank v. Case, 99 U.S. 528; Hatch v. Dana, 101 U.S. 205. Nor do I deny that a promise to pay for shares of stock will be implied from the fact of subscribing for them. Spear v. Crawford, 14 Wend. 20; H. & N.H.R. Co. v. Kennedy, 12 Conn. 499; Fry v. L. & B.S.R. Co. 2 Metc. (Ky.) 314; Klein v. A. & S.R. Co. 13 Ill. 514; Banet v. A. & S.R. Co. Id. 504. And the acceptance and holding of a certificate of stock will have the same effect. Upton v. Tribilcock, 91 U.S. 48; Sanger v. Upton, Id. 60. Nor is it necessary to create a liability as stockholder that a certificate shall have been issued. Chaffin v. Cummings, 37 Me. 76; Chase v. Merrimack Bank, 19 Pick. 564; Silver v. Magruder, 32 Md. 393; Burr v. Wilcox, 22 N.Y. 551; Chester Glass Co. v. Dewey, 16 Mass. 94. Payment of assessments will estop an unregistered transferee of shares from denying his liability as a shareholder. Serving as director, or voting at stockholders' meetings, will have the same effect. Frost v. Walker, 60 Me. 468; M. & T.R. Co. v. Harris, 36 Miss. 17; Gaff v. P. & S.R. Co. 31 Pa.St. 489; Hays v. P. & S.R. Co. 38 Pa.St. 81; Harrison v. Heathorn, 6 Man. & Gr. 81. The acceptance of an assignment of a certificate in blank will fix the liability as stockholder. Upton v. Burnham, 3 Biss. 524. If a subscription is obtained by fraud, it must be promptly repudiated. Upton v. Tribilcock, 91 U.S. 45; Chubb v. Upton, 95 U.S. 667. Nor will ignorance of the law relieve the stockholder. Upton v. Tribilcock, 91 U.S. 45. Nor can the corporation release the stockholder from his liability, so far as creditors are concerned; nor can it accept any other mode of payment than money, unless full value be given. Sanger v. Upton, 91 U.S. 60; Troy, T. & R. Co. v. McChesney, 21 Wend. 296; Lake Ont. R. Co. v. Mason, 16 N.Y. 459. The fact that the company may forfeit and sell the shares of a delinquent stockholder does not impair the rights of a creditor against him. Ang. & Ames on Corp. Secs. 549-50; Thompson on Liab. of Stockh. Sec. 193, and cases cited.

All these positions, which the counsel for petitioners have maintained in their able and elaborate brief, I concede. These principles apply to all cases where an obligation has been created or incurred on the part of the stockholder to pay to the corporation a certain sum, being the par value of the capital stock subscribed for or transferred to him. The liability thus created grows out of contract, express or implied, and the creditors of the corporation may avail themselves of it, as of any other chose in action or equitable assets of the corporation, on well-settled and familiar principles.

But the question in this case is: Does the acceptance of stock in a mining corporation, as they are usually formed in this state, create any obligation, either by contract or under the law, to pay to the corporation or to its creditors the nominal par value of the stock so accepted? The mode in which mining companies are formed in this state is familiar to us all. The owners of the property, or persons expecting to become such, by complying with a few simple formalities, form themselves, with such others as they may take into the association, into a corporation, to which the property is conveyed. The amount of the capital stock, which is required to be stated in the certificate of incorporation, is usually fixed at a purely arbitrary sum, and divided into as many shares as convenience or caprice may dictate. It neither bears, nor is intended nor supposed by the public to bear, the slightest relation to the real value of the property-- a value nearly always conjectural, and very often imaginary. It has recently become the practice to divide the capital stock into 100,000 shares of the value of $100 each, making $10,000,000 in all; a sum which, it is apparent, can have no reference to any estimate of the real or intrinsic value of what is usually a mere hole in the ground, supposed to afford favorable indications. A striking proof of this is afforded in the present case. Among the first acts of the corporation was to place (in effect) 5,000 shares of their stock on the market at the price of one dollar per share. The organization having been effected and the property conveyed to the company, the stock is issued to the former owners, to the amount which may have been previously agreed upon. The remainder is reserved for working capital, or disposed of in the market for such prices as the value and prospects of the enterprise may justify. The purchaser is, of course, careful to know into how many shares the stock is divided, but he is wholly regardless of the nominal and purely arbitrary par value attributed to the shares. No subscription paper, memorandum of association, deed of settlement, or other document, creating either expressly or impliedly any ex contractu obligation to take and pay for, at their nominal par value, any shares of stock, is signed by any of the shareholders. This general account of the mode of organizing mining companies in this state describes, with sufficient accuracy, what was done in the case as bar. The requirements of the statutes of this state with regard to mining corporations were strictly complied with. I am unable to perceive how any ex contractu obligation on the part of the shareholders to take and pay for their stock was created. It may be confidently affirmed that in no case of this description has such an obligation or liability been intended to be created. It has on all hands been supposed that the resources of such corporations were to be derived from the sale of reserved stock, or by levying assessments, with the power of selling delinquent stock. Creditors are protected by the personal liability of each shareholder for his pro rata share of the indebtedness of the corporation.

It was urged on the part of the stockholders that the shares held by them are to be treated as fully paid-up stock. I do not concur in this suggestion. It might have some plausibility in cases where all the stock has been distributed among the owners of the miner in proportion to their respective interests; but where stock has been reserved, and subsequently sold at perhaps one-hundredth part of its nominal par value, it can in no sense be called or treated as fully paid-up stock.

But, even in the case of shares distributed among the mine owners, the view suggested seems to me inadmissible. It is a pure fiction. The mine owners do not, in fact, agree to take the stock and pay for it at its nominal par value--payment to be made by conveying the mining ground at a valuation extravagantly in excess of its real value. If they had really contracted any obligation to take and pay for the stock, they could not acquit themselves of it by such a device. Sanger v. Upton, 91 U.S. 60; Troy T. & R. Co. v. McChesney, 21 Wend. 296; Lake Ont. R. Co. v. Mason, 16 N.Y. 459; Wilson v. United Ins. Co. 14 John. 228; Goshen & M. Turnpk. Co. v. Hurtin, 9 John. 217.

To call the stock fully paid up is to admit the obligation to take and pay for it, and to suppose that obligation to have been fulfilled in a mode the law will not permit. In my view no such obligation ex contractu was at any time created. If the liability to pay the nominal par value of the stock for the benefit of creditors exists, it must arise from the positive provisions of the statutes, and not from the contracts of the parties. This question I will now proceed to examine. The statutory provision by which this liability is supposed to be created is found in the 349th section of the Code of Civil Procedure. The previous sections of the article of the Code contained detailed and minute provisions regulating the levying of assessments; then to the sale of delinquent stock.

Section 349 provides that 'on the day...