Lester v. Bemis Lumber Co.

• Decision Date: 09 May 1903
• Citation: 74 S.W. 518,71 Ark. 379
• Parties: LESTER v. BEMIS LUMBER COMPANY
• Court: Arkansas Supreme Court

74 S.W. 518

71 Ark. 379

LESTER v. BEMIS LUMBER COMPANY

Supreme Court of Arkansas

May 9, 1903

Appeal from Nevada Circuit Court in Chancery, JOEL D. CONWAY, Judge.

Reversed.

STATEMENT BY THE COURT.

On the 5th day of February, 1895, the firm of Lester & Haltom recovered a judgment in Bowie county, Texas, against the Bemis Lumber Company, a Texas corporation, for the sum of $ 232.75 and $ 10 for costs. An execution was issued on the judgment, which was never returned.

Lester & Haltom on the 12th of February, 1900, began an action in this state against the same company to subject certain property, which they alleged belonged to the company, to the satisfaction of their judgment. Afterwards, on July 25, 1901 they filed an amended complaint in the action in which the lumber company and H. E. Bemis and W. N. Bemis were made defendants. Plaintiffs alleged that they had recovered a judgment against Bemis Lumber Company; that the company was insolvent, and the judgment unpaid. They alleged that the company was organized in Texas, under a statute of that state, on the 19th day of December, 1891, with a nominal capital of $ 50,000; that H. E. Bemis subscribed for $ 48,600 of the capital stock; that the other stockholders were all non-residents except H. N. Bemis, who was the owner of a small amount of stock. They further alleged that the capital stock which H. E. and W. N. Bemis subscribed for had never been paid for; that H. E. Bemis had pretended to pay for his stock by the delivery to the company of stock of the Kildare Lumber Company; but they alleged that the Kildare Company was insolvent, and its stock of no value; that Bemis is entitled to no credit on that account; and that both of the defendants are still due the full amount of their subscription He asked judgment against them for the amount of his debt.

Defendants answered, and pleaded the statute of limitations. For further answer they admitted that the capital stock subscribed by H E. Bemis has by agreement with the other stockholders been paid by the delivery of stock of the Kildare Company, but denied that it was worthless, and alleged that the Kildare Company's property was at that time worth about $ 300,000 and that the stock was delivered and accepted at its face value in good faith, and constituted a valid payment of the subscription.

On the hearing the chancellor decided in favor of the defendants, on the ground that the action of plaintiffs was barred by statute of Imitations. Plaintiffs appealed.

Judgment reversed and cause remanded.

W. V Tompkins, for appellants.

Unpaid subscriptions due by stockholders may be reached in equity by creditors of an insolvent corporation. 34 Ark. 323; 101 U.S. 210; 3 Am. St. 797. No necessity exists for making all stockholders parties. 22 Wall. 380. Defect of parties can not be taken advantage of on appeal unless raised below. 32 Ark. 465. The stock and assets of a corporation constitute a trust fund for creditors, and it may be followed into the hands of stockholders. 143 Mo. 109; 65 Ia. 333; 78 Ia. 460; 144 U.S. 113; 17 Wall. 617; 54 Ark. 580; 91 U.S. 45; 133 Ill. 264; 15 How. 304; 5 L. R. A. 649; 3 Mass. 308; Cook, Corporations (3d ed.), § 199. Stock issued in excess of property is a badge of fraud. 2 Mor. Corp. 826; 154 Ill. 458; 143 Mo. 109. A subscription by one corporation to the capital stock of another is ultra vires, and also contrary to public policy. 46 Oh. St. 44; Mor. Corp. § 433; 18 L. R. A. 252; 139 U.S. 24; 160 U.S. 514; 36 Am. St. 130; 130 Ill. 268. The law of the forum governs as to statute of limitations. 18 Ark. 384; 21 Ark. 287; 34 L R. A. 736; 48 L. R. A. 625; 19 Utah 212. Appellant's right of action did not accrue until the execution was returned nulla bona. 62 Ark. 406. Or until the company had permanently abandoned business. 105 U.S. 158; 62 Ark. 406; 55 Am. Dec. 75. Or until the corporation became insolvent. 15 L. R. A. 470; 53 L. R. A. 471. The statute of limitation does not run on a fraud until it is discovered. 46 Ark. 25; 54 Am. St. 491.

C. C. Hamby, for appellees.

The state only may complain of ultra vires acts of corporations. 68 Tex. 646; 94 N.C. 37; 53 Ia. 101; 8 Otto, 621, 630. The value of property turned in on stock subscriptions, at the time of the transfer, must govern. 12 Wash. 624; 19 Wash. 96. No fraud is shown. 45 Ill.App. 226; 94 Tenn. 602; 58 Minn. 247; 43 U. S. App. 452; 75 F. 554; 75 Wis. 474. The holding of stock by one corporation in another is not illegal if to the advantage of the investing corporation. 62 F. 335; 91 Ky. 395. Insolvency may be proved otherwise than by execution returned nulla bona. 3 How. 533; 12 Pet. 497; 2 Otto, 156-161; 7 Otto, 171-181.

OPINION

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

This is an action in equity by Lester & Haltom, creditors of the Bemis Lumber Company, an insolvent Texas corporation, to compel two resident stockholders of that company to account for and pay over sums alleged to be due from them on subscriptions for stock.

The first question presented is whether the action of plaintiffs is barred by the statute of limitations. The general rule is that, before a creditor of a corporation can maintain an action against a stockholder of the corporation to compel him to pay money due on his subscription, he must first exhaust his remedies against the corporation. To maintain his action, he must, as a general rule, allege that the corporation is insolvent, and prove it by showing that he has recovered judgment against it, and that an execution has been issued against the corporation and returned unsatisfied. 1 Cook, Corporations (6th ed), § 200. But a statute of this state now permits the insolvency of the corporation to be shown by any competent evidence, and it is no longer required to sustain such an action that an execution should have been issued against the corporation and returned unsatisfied, for the action is in the nature of an equitable garnishment, and is governed by the statute in reference thereto. Sand. & H. Dig. § 3134; Fletcher v. Bank of Lonoke, ante, p. 1, 71 Ark. 1, 69 S.W. 580; Euclid Avenue National Bank v. Judkins, 66 Ark. 486, 51 S.W. 632.

The action in this case being based on the written subscription of the stockholder, the period of limitation is five years, under our statute, and the statute would commence to run against the creditor in favor of the stockholder of an insolvent corporation so soon as an execution had been issued on a judgment against the corporation and returned unsatisfied, or, if no execution had been issued and returned, it would commence to run whenever the creditor had notice that the corporation was insolvent, and notice to the creditor of this fact would probably be presumed as soon as the insolvency of the company became a matter of general notoriety. As no execution had been returned on the judgment against the Bemis Lumber Company, the question of whether the action is barred by the statute turns on the question whether the plaintiffs had notice that the company was insolvent more than five years before they brought suit.

Now, it plainly appears from the evidence that, though the Bemis Lumber Company may have been insolvent for five years before this suit was brought, yet that fact was not generally known, for the evidence shows that it was not known even to the stockholders of the company, much less to its creditors. One of the defendant stockholders, vice president and general manager of the company, testified that he himself had supposed that the company was solvent as late as the year 1899, not over two years before this action was commenced, but had learned since that it was insolvent at an earlier date. There is nothing to show that the plaintiffs had information regarding the affairs of the company superior or even equal to that of the general manager of the company, and we therefore conclude that they had no notice of its insolvency five years before the commencement of the action. It follows, from what we have said, that in our opinion the action is not barred.

The evidence shows that the amount of the capital stock of the Bemis Lumber Company as named in the articles of incorporation was $ 50,000. H. E. Bemis subscribed for $ 48,600 of the amount, leaving $ 1,400 remaining, which was subscribed for by W. N. Bemis and the other incorporators. None of the subscriptions for stock was paid at the organization of the company, but several months afterwards H. E. Bemis delivered to the company, in payment of his subscription, stock of the Kildare Lumber Company of the face value of $ 50.000.

The question whether the Bemis Company had the right to receive payment for its capital stock in the stock of another company is thus presented for our consideration.

Counsel for defendant contend that the power to take stock in payment for subscriptions is expressly granted to corporations by the constitution of Texas, where this corporation was organized. The provision of the constitution referred to is as follows "No corporation shall issue stock or bonds except for money paid, labor done, or property actually received, and all fictitious increase of stock shall be void." Texas Const., art. 12, § 6. It is said that, as this provision permits a corporation to take property in payment of subscriptions for its stock, the corporation may accept property of any kind, as no particular kind is designated by the constitution. But we are of the opinion that this is not a correct interpretation of this provision of the Texas constitution. The intention of this provision, it seems to us, was to forbid corporations from issuing stock of bonds without a valuable consideration therefor. In other words, it is a prohibition against the practice of issuing what is termed "watered" stock; that...