Lefker v. Harner

• Decision Date: 08 May 1916
• Docket Number: 379
• Citation: 186 S.W. 75,123 Ark. 575
• Parties: LEFKER v. HARNER
• Court: Arkansas Supreme Court

186 S.W. 75

123 Ark. 575

LEFKER v. HARNER

No. 379

Supreme Court of Arkansas

May 8, 1916

Appeal from Washington Chancery Court; T. H. Humphreys, Chancellor affirmed.

STATEMENT BY THE COURT.

Appellee instituted this suit against appellant, alleging that on June 20, 1911, appellant and others organized a corporation under the name of Ozark Trust Company, (having a paid-up capital stock, according to its articles of association, of $ 50,000 divided into five hundred shares of the value of $ 100 each of which appellant owned 239 shares), for the purpose of engaging in the business of a trust company, as provided by chapter 31, subdivision V, sections 887 to 891, inclusive, of Kirby's Digest; that the corporation so formed had its office and principal place of business in the City of Siloam Springs, where it solicited and received from the general public deposits of money in trust, subject to check or sight draft or order of depositors; that in August, 1911, appellant sold all his stock to the corporation in which he was a stockholder, transferring his certificates of stock to the corporation and endorsing on the certificates of stock that same were transferred to the corporation for value received that such corporation paid to appellant for his stock an amount of money which appellee alleges amounted to not less than $ 20,000; the exact amount she was unable to state; that neither at the time of this transaction nor at any other time before or after did the corporation have any surplus above its original capital, and that the money which was paid to appellant therefore came out of and depleted its capital stock; that by such purchase of stock from appellant the capital stock of the corporation was reduced to less than $ 30,000; that such depletion of the capital stock of the corporation resulted in its failure; that no certificates of the transfer of stock from appellant to the corporation was deposited with the clerk of Benton County, and there was no record of such transaction, and therefore no notice to the public; that no steps were taken as provided by section 860 of Kirby's Digest to reduce the capital stock of the corporation; that appellee, in September, 1911, deposited with the corporation the sum of $ 800; that some months thereafter the corporation became insolvent, paid over all its assets to its numerous creditors and ceased to do business; that appellee had been unable to reduce her claim to judgment against the corporation, and if she had been able to do so such course would be expensive and fruitless; that appellee believed at the time she made the deposit that the corporation was solvent and operating in full compliance with the law; that she had no knowledge to the contrary until its failure, and no knowledge of the sale of the stock of appellant to the corporation until some time during the year 1914; that appellant, after the sale of his stock to the corporation as above set forth, left the State and remained away for more than three years, his whereabouts during said period being unknown to the plaintiff, and that she exercised due diligence to locate him and was unable to do so; that the appellant and the corporation concealed from the appellee the fact that appellant had sold his stock to the corporation, as above alleged, and that hence appellee hitherto had been prevented from commencing any suit against him; that the sum of $ 500 of the amount deposited had never been paid to appellee. Wherefore she prayed judgment against the appellant in that sum.

The appellant demurred to the complaint. The court overruled the demurrer, and appellant, electing to stand upon his demurrer the record recites as follows: "Whereupon the cause was submitted to the court and the court having heard the evidence and being fully advised in the premises, finds that the allegations of the bill are true, and that the plaintiff should have and recover of and from the defendant the sum of $ 500, with interest, making a total sum of $ 620." Appellant duly prosecutes this appeal.

Decree affirmed.

A. L Smith, for appellant.

The complaint stated no cause of action. (1) It does not allege insolvency at the time of, or that the corporation was rendered insolvent by the purchase of the stock. (2) No bad faith or fraud is alleged. The corporation was authorized to buy and sell stocks, etc. The purchase of its own stock was not forbidden. No intent to defraud creditors was shown. Appellant was not liable under the allegations of the complaint and proof. 1 Cook on Corp. (8 ed.), §§ 311, 313; 75 Ark. 148; 77 Id. 12; 80 Ia. 380; 45 N.W. 1037; 11 Ariz. 334; 95 P. 95; 111 Wisc. 387; 87 N.W. 226; 1 Cook on Corp. (8 ed.), § 311, p. 850; 97 Ark. 374; 114 Ark. 344; 28 S.W. 431. An actual intent to defraud must be shown.

Williams & Williams, for appellee.

1. A stockholder has no right to surrender his stock and receive payment out of the capital fund unless such right is distinctly specified in the charter. Kirby's Digest, § 839; Cook on Corp. (7 ed.), §§ 309, 311; 101 U.S. 71; 139 Id. 24; 86 F. 742; 95 Ark. 368; Kirby's Dig., §§ 888, subd. 9, 838, 848, 849, 858, 860-1, etc.; 54 Ark. 576; 91 U.S. 56; 69 Conn. 29; 48 Minn. 174; Morawetz on Corp. (2 ed.), § 112; 126 Ala. 449; 73 P. 364; 96 Ark. 1; etc.

2. Purchases of stock of its own by a corporation are illegal and the vendor is liable. 54 Ark. 576; 96 Id. 1; 84 F. 392; 68 S.W. 1026. The "trust fund" theory has been adopted in Arkansas. 139 U.S. 417; 160 F. 573; 201 Id. 647; 96 Ark. 1; 97 Ark. 248 and many others.

3. As against creditors without notice corporations which have no surplus, can not purchase their own stock. Cook on Corp. (7 ed.), § 311; 96 Ark. 1; 212 F. 357. The fact that the corporation was solvent does not justify such purchase when it impairs its capital. 104 Ill. 26; 28 So. 531; 44 Id. 592; 73 P. 364; 203 F. 720; 84 Id. 392; 212 Id. 357.

4. Specific intent to defraud is unnecessary to render the selling stockholder liable to creditors. 95 Ark. 368; 130 S.W. 162; 75 Ark. 148; 104 Ill. 26; 126 Ala. 449; 102 Md. 608; 212 F. 357, etc. Subsequent creditors who have no knowledge have recourse on the selling stockholder. 75 Ark. 148; 97 Id. 374; 114 Id. 344; 135 N.W. 329; 97 Ark. 248; 191 F. 97; etc.; Kirby's Digest, §§ 6127, 7823; 31 Ark. 441; 32 Id. 562; 35 Id. 565, etc.

OPINION

WOOD, J., (after stating the facts).

The law under which the Ozark Trust Company was organized provides that in no event shall the paid-up capital stock of such corporations be less than $ 50,000. Kirby's Digest, section 889.

The allegations of the complaint show that the transaction under review resulted in a depletion or reduction of the capital stock of the Ozark Trust Company to less than the amount required under our law. The transaction was therefore invalid. The purposes for which trust companies may be organized are set forth in chapter 31, subdivision V, section 888 Kirby's Digest. The ninth subdivision is as follows: "To buy and sell all kinds of government, State, municipal and other bonds, and all kinds of negotiable and non-negotiable paper, stocks and other investment securities." This statute does not authorize a transaction of the character set forth in the complaint, but refers to investments made by corporations in shares of stock of other corporations. The purpose of the law was to allow a trust company to make investments and to add to its assets, thereby increasing the value of the capital upon which it does business. But manifestly an investment of the capital stock of a corporation in its own shares of stock where these shares are not again reissued and sold, can have no other effect than to deplete or reduce the paid-up capital of the corporation by the shares thus taken up. While the transaction may be in the form of a sale, in reality it is an extinguishment of the company's capital by the amount turned over to the shareholder for his stock, and is, in legal effect, but a gift of the amount paid for the capital stock of the corporation to the individual shareholder whose shares are taken up in this way.

As is said by Mr. Morawetz: "A purchase by a corporation of shares of its own stock, in effect, amounts to a withdrawal of the shareholder whose shares are purchased from membership in the company, and a repayment of his proportionate share of the company's assets. There is no substitution of membership under these circumstances, as in case of a purchase and transfer of shares to a third person, but the members of the company and the amount of its capital are actually diminished. * * * Every continuing shareholder is injured by the reduction of the fund contributed for the common venture; and the creditors who have trusted the company upon the security of the capital originally subscribed, or who are entitled to expect that amount of security, are entitled to complain." Morawetz on Private Corp., § 112.

Mr. Thompson, quoting from a well known law writer, says:

"There is a great difference between dealing in the shares of other companies and in its own. The former is ordinary business, attended only with the usual risks of ordinary transactions but the latter tends inevitably to breaches of their duty on the part of the directors, and to fraud and rigging the market on the part of the corporation itself. Consequently, a corporation, to possess such power, must have it conferred by the plainest and most explicit language." 4 Thompson on Corp., section 4076; Green's Brice Ultra Vires, 95.

We are aware of the fact that where neither the charter nor the statute prohibits a corporation from purchasing its own shares of stock, and where there is no statute expressly authorizing it to do so, there is great contrariety among the authorities as to whether it...