Martin v. Clarke, 6351.

Decision Date16 February 1938
Docket NumberNo. 6351.,6351.
Citation95 F.2d 26
CourtU.S. Court of Appeals — Seventh Circuit

Frank R. Leonard, of Chicago, Ill., for plaintiff-appellee.

Walter H. Eckert, Tom Leeming, and Tim G. Lowry, all of Chicago, Ill., for defendant-appellant.

Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

Defendant appeals from a judgment of the District Court awarding damages to plaintiff as trustee in bankruptcy of a Delaware corporation for failure upon defendant's part to pay the balance due upon a subscription for stock in the bankrupt corporation. It is urged first that the court had no jurisdiction of the suit; second, that defendant, having received no certificate of stock, is not liable under the Delaware Code; third, that the corporation having breached the contract and being unable to comply with its provisions, plaintiff cannot recover.

Plaintiff, being the trustee in bankruptcy of a corporation organized under the laws of Delaware, is, for the purpose of determining the question of jurisdiction, a citizen and resident of that state. The defendant is a resident of the state of Illinois. The amount in controversy is in excess of $3,000. Section 23b of the Bankruptcy Act, as amended, 11 U.S.C.A. § 46(b), provides that suits by trustees for the recovery of money shall be brought or prosecuted only in the courts where the bankrupt whose estate is being administered by such trustee might have brought or prosecuted them if proceedings in bankruptcy had not been instituted.

The Supreme Court, in Bush v. Elliott, 202 U.S. 477, 26 S.Ct. 668, 50 L.Ed. 1114, has settled the specific question submitted to us. There the court held that where, by reason of the amount involved and the diverse citizenship of the parties, the bankrupt might have sued the defendant in the federal court, independent of the bankruptcy proceedings, under section 23, 11 U.S.C.A. § 46, aforesaid, the right is preserved to the trustee, and the citizenship of the latter is wholly immaterial to the jurisdiction of the court.

Defendant contends, however, that the suit is based upon dealings and transactions of the trustee himself subsequent to the adjudication in bankruptcy, and that the rule announced by the Supreme Court does not apply. True it is that section 23 does not purport to give to the federal court jurisdiction of controversies arising between the trustee and other persons having their origin in events occurring subsequent to the adjudication. McEldowney v. Card, C.C., 193 F. 475. Shaw v. Mining Co., 145 U.S. 444, 12 S.Ct. 935, 36 L.Ed. 768. But the demand here came into existence some years prior to bankruptcy. Defendant's subscription was entered into in 1929. Prior to the institution of bankruptcy proceedings, he paid more than two-thirds of the purchase price of the stock. He failed to pay the balance. The demand for the same was existent at the time bankruptcy intervened and his liability therefor was the property of the bankrupt corporation prior to its adjudication in bankruptcy. The parties' rights were fixed as of that date. Harrigan v. Bergdoll, 270 U.S. 560, 46 S.Ct. 413, 414, 70 L. Ed. 733. The action of the trustee in securing the entry of an order of an assessment upon showing of insolvency of the corporation was only an administrative step and there were reserved to defendant all of his existing defenses. Bush v. Elliott, supra, is decisive of the question of jurisdiction.

The Supreme Court, in Harrigan v. Bergdoll, supra, said: "The nature, the extent, and the condition of the liability of a stockholder on account of stock not full-paid depend primarily upon the law of the state or country by which the corporation was created. Glenn v. Liggett, 135 U.S. 533, 548, 10 S.Ct. 867, 34 L.Ed. 262. Compare Benedict v. Ratner, 268 U.S. 353, 359, 45 S.Ct. 566, 69 L.Ed. 991. That law determines whether the liability is to the corporation or is to creditors. Compare Converse v. Hamilton, 224 U.S. 243, 253, 32 S. Ct. 415, 56 L.Ed. 749, Ann.Cas.1913D, 1292; Selig v. Hamilton, 234 U.S. 652, 658, 34 S.Ct. 926, 58 L.Ed. 1518, Ann.Cas.1917A, 104. If the liability is to the corporation, it passes like other choses in action to the trustee in bankruptcy. The Bankruptcy Law * * * does not modify this right of action against the stockholder or create a new one. It merely provides that the right created by the state law shall pass to the trustee and be enforced by him for the benefit of creditors." Consequently, in view of defendant's contentions, it is imperative to examine the law of Delaware, for, though the subscription contract gives existence to the liability of the defendant, the nature and extent of that liability are determined by this statute. In Cooney Co. v. Arlington Hotel Co., 11 Del.Ch. 286, 101 A. 879, 887, in discussing liability under the Delaware statute, it is held that each stockholder is bound under the laws of that state to pay the sum necessary to complete the amount of par value of each share held by him as fixed by the charter of the company or its certificate of incorporation, or such proportion of that sum as shall be required to satisfy the debts of the company and that the recovery may be had by the receiver of the corporation. The court further held that a Delaware corporation cannot make a subscription contract which will free the subscriber from the statutory liability, for, as was said, that "statute is notice to all who make such contracts and is read into and becomes a part of every stock subscription contract. The fundamental principle is that shares of stock in a corporation are a substitute for the personal liability of partners, and the liability to pay for stock taken up to the par value thereof is a fund for the benefit of creditors of the company, and whoever takes shares of stock of a Delaware corporation assumes that liability for the benefit of creditors in case of insolvency of the company." See, also, Rosoff v. Gilbert, etc., Co., D.C., 221 F. 972; See v. Heppenheimer, 69 N.J.Eq. 36, 61 A. 843; DuPont v. Ball, 11 Del.Ch. 430, 106 A. 39, 7 A.L.R. 955.

Consequently, the contractual liability of the...

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4 cases
  • Young v. First Nat. Bank of Chicago, Civ. A. No. 48C680.
    • United States
    • U.S. District Court — Northern District of Illinois
    • June 21, 1949
    ...state court as he was then a resident and citizen of Illinois. There is persuasive authority in support of this argument. In Martin v. Clarke, 7 Cir., 95 F.2d 26, 27, certiorari denied Clarke v. Martin, 304 U.S. 584, 58 S.Ct. 1059, 82 L.Ed. 1545, it was argued that the court there had no ju......
  • Martin v. Clarke
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • August 9, 1939 this court, and filed in the District Court a bond for $50,000, on which Hildur F. Clarke was a surety. The judgment was affirmed, 7 Cir., 95 F.2d 26. Certiorari was denied, 304 U.S. 584, 58 S. Ct. 1059, 82 L.Ed. 1545. The judgment not having been paid, the plaintiff-appellant brought su......
  • Whitman v. Chicago & NW Ry. Co.
    • United States
    • U.S. District Court — District of Minnesota
    • January 29, 1947
    ...v. Gill, 245 U.S. 116, 38 S.Ct. 38, 62 L.Ed. 185; Stiefel v. 14th St. & Broadway Realty Corporation, 2 Cir., 48 F.2d 1041; Martin v. Clarke, 7 Cir., 95 F.2d 26. Finally, it may be stated that no Federal question is involved. The controversy does not pertain to the validity, construction or ......
  • Hadden v. Barrow, Wade, Guthrie & Co.
    • United States
    • U.S. District Court — Northern District of Ohio
    • May 23, 1952
    ...of citizenship. Since the district where plaintiff is doing business, Bankr.Act, § 23, sub. b, 11 U.S.C.A. § 46, sub. b; Martin v. Clarke, 7 Cir., 1938, 95 F.2d 26; certiorari denied 1938, 304 U.S. 584, 58 S.Ct. 1059, 82 L.Ed. 1545, is the "residence of the corporation for venue purposes", ......

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