Marion Trust Company v. Blish

• Decision Date: 26 May 1908
• Docket Number: 21,281
• Citation: 84 N.E. 814,170 Ind. 686
• Parties: Marion Trust Company, Receiver, v. Blish
• Court: Indiana Supreme Court

84 N.E. 814

170 Ind. 686

Marion Trust Company, Receiver, v. Blish

No. 21,281

Supreme Court of Indiana

May 26, 1908

Rehearing Denied July 2, 1908, Reported at: 170 Ind. 686 at 700.

From Jackson Circuit Court; Thomas B. Buskirk, Judge.

Action by the Marion Trust Company, as receiver of the Vernon Insurance & Trust Company, against Tipton S. Blish. From a judgment for defendant, plaintiff appeals. Transferred from Appellate Court under cl. 2, § 1394 Burns 1908, Acts 1901, p. 565, § 10.

Affirmed.

James W. Noel, Shea & Wood and Oscar L. Pond, for appellant.

Baker & Daniels, for appellee.

Gillett C. J. Montgomery, J., did not participate.

OPINION

Gillett, C. J.

This was an action by the receiver of the Vernon Insurance & Trust Company, a corporation which had been engaged in the insurance business under a special charter from the State of Indiana, to enforce the collection of a stock subscription note executed to said corporation by appellee. The latter answered, setting up false and fraudulent representations inducing the making of the contract. After unsuccessfully demurring to the latter paragraph, appellant filed a reply in the nature of a confession and avoidance. A counterclaim was also filed by appellee, which set up substantially the same facts as were alleged in his answer, to recover the amount of a partial payment on said note. Appellant filed an answer to the counterclaim, alleging facts not materially different from those set forth in its said reply. A demurrer was sustained to said reply and to appellant's said answer, and, as appellant refused to plead further, electing to abide its exceptions, judgment followed.

So far as necessary to refer to the complaint, it may be said that, in addition to alleging the appointment of a receiver, at the suit of the prosecuting attorney of Marion county, and the granting by the court of authority to sue, the pleading alleged: "That said note is now in the possession of plaintiff as receiver of said Vernon Insurance & Trust Company, and is a part of the assets thereof; * * * that plaintiff is winding up the affairs of said Vernon Insurance & Trust Company under order of the court, and is administering the assets thereof for the benefit of the creditors of said corporation, and that the valid claims against said corporation are very much more than can be realized from said assets, and that if all of the stock subscriptions and stock notes and all of the other assets of said association can be converted into money, a large portion of the valid claims against said corporation will yet remain unpaid, and that said valid and unpaid claims against said corporation are long past due; * * * that, notwithstanding said note provides for the payment of the same in instalments, all of the same is now due for the benefit of creditors, and said creditors have no other assets to rely upon for the payment of their said claims."

For reasons hereinafter stated, it is unnecessary to indicate with greater particularity the nature of the special answer and the counterclaim, and we shall therefore proceed to make a brief statement of the contents of the reply. That pleading shows that the Vernon Insurance & Trust Company was engaged in insuring property against fire between the date of the execution of the note and the appointment of the receiver, during which time appellee was a holder of the stock for which the note was given; that during said time said corporation incurred liabilities on account of fire losses in the sum of $ 46,000, and, upon the appointment of the receiver there was entered an order of court to cancel the policies of said company, and it became liable for over $ 35,000, on account of unearned premiums written within said time, all of which constitute valid and enforceable claims against the corporation. The reply then alleges that said claims are unpaid and constitute a charge against the assets of the company, which are not sufficient to pay its debts; that the debts were contracted and the owners thereof became creditors of the company after the making, "and upon the faith of said stock subscription"; that the assets of said company are not sufficient to pay the claims aforesaid; that the defendant is still the owner and holder of the stock certificate; that the same has never been returned, and no demand has ever been made for the cancelation of the stock certificate or for the return of the stock note. The reply to the counterclaim is not substantially different from the reply to the answer.

Under the head of "points and authorities," appellant adduces but two general propositions, viz.: (1) "One who has subscribed to the capital stock of a corporation cannot escape payment of his subscription by pleading the fraud of the corporate officers or agents in securing the subscription, where the rights of creditors have attached. If others in the meantime have acted upon the faith of such subscription and the corporation has become insolvent, such fraud is no defense." (2) "The receiver in such case stands for the creditors, and may enforce collection of the subscription for the benefit of the creditors which it represents, even though the corporation could not itself have enforced the subscription. In such case the doctrine of estoppel will not hinder the receiver, although it may have prevented the corporation from asserting the claim."

The capital stock of a corporation is regarded, not alone as a fund for the transaction of corporate business, but also as a trust fund for the benefit of creditors. It is an essential part of this doctrine that money agreed to be paid into the treasury on account of shares is a part of the fund. 10 Cyc. Law and Proc., 653. Upon the insolvency of a corporation and the appointment of a receiver it is clear, in view of the fact that the capital stock constituted an asset of the corporation, and that the receiver represents all of the creditors, that he may be authorized to sue on account of unpaid stock subscriptions. Big Creek Stone Co. v. Seward (1886), 144 Ind. 205, 42 N.E. 464; Gainey v. Gilson (1897), 149 Ind. 58, 48 N.E. 633. We may assume, at least for present purposes, that the complaint herein stated a cause of action. It cannot, however, be treated as a complaint on behalf of any particular body of creditors. It counts on a right vested in the corporation, which would therefore inure to the creditors generally, and for that reason, we may also add, it appears to us that the special answer of fraud is not open to the objection that the rights of subsequent creditors have attached.

The essential question in the case arises upon the reply, wherein the receiver, in a sense at least, shifts his ground, and attempts to fortify his original cause of action by seeking to bring forward the rights of a certain class of creditors. If the receiver were by law authorized to, and could, consistently with his duty to the general creditors, represent this limited body of creditors, it might possibly be said that he was not bound to anticipate the defense of fraud when he filed his complaint, and that therefore the reply did not involve a departure (United States v. Morris [1822], Fed. Cas. No. 15,816), but if it be that in filing such reply he attempts to invoke the equities of persons whose rights he in nowise represents, it is clear that the reply does not state facts in avoidance of the answer.

While it is true, as we have shown, that the receiver may collect the assets for the benefit of the general creditors, yet back of this and of all other considerations lies the question as to the nature or source of his title for the purposes of litigation, as distinguished from those of administration, assuming that he has been appointed in an ordinary receivership proceeding for the purpose of administering upon the estate of an insolvent corporation, which would be the most favorable assumption to appellant.

There can be no doubt of the proposition that it is the general rule that in the ordinary receivership which is extended over the affairs of an insolvent corporation, the receiver can only sue in the right of the corporation, and that he is subject to all of the equities which would have been available against it. This rule is subject to the exception that the receiver so far represents the general creditors that he may avoid transactions in fraud of their rights. "Since the appointment of a receiver in limine does not affect any questions of right involved in the action, and does not change any contract relations or rights of action existing between parties, it follows as a general rule that in ordinary actions brought by a receiver in his official capacity, to recover upon an obligation or demand due to the person or estate which has passed under the receiver's control, the defendant may avail himself of any matter of defense which he might have urged had the action been brought by the original party instead of by his receiver." High, Receivers (3d ed.), § 245. In a subsequent section of the same work the author says "While the receiver of an insolvent corporation is thus treated as the representative of both creditors and shareholders, so far as any beneficial interest is concerned, yet, for the purpose of determining the nature and extent of his title, he is regarded as representing only the corporate body itself, and not its creditors or shareholders, being vested by law with the estate of the corporation, and deriving his own title under and through it. For purposes of litigation, therefore, he takes only the rights of the corporation, such as could be asserted in its own name, and upon that basis only can he litigate for the benefit of either shareholders or creditors, except when acts have been done in fraud of the...