Ratcliff v. Clendenin

• Decision Date: 24 February 1916
• Docket Number: 4466.
• Citation: 232 F. 61
• Parties: RATCLIFF v. CLENDENIN.
• Court: U.S. Court of Appeals — Eighth Circuit

232 F. 61

RATCLIFF v. CLENDENIN.

No. 4466.

United States Court of Appeals, Eighth Circuit.

February 24, 1916

On Motion for Rehearing, May 1, 1916.

T. A Noftzger, of Wichita, Kan. (George L. Hay, of Kingman, Kan on the brief), for appellant.

Charles G. Yankey, of Wichita, Kan. (R. R. Vermilion, Earle W. Evans J. G. Carey, R. L. Holmes, and W. E. Holmes, all of Wichita, Kan., on the brief), for appellee.

Before SANBORN and CARLAND, Circuit Judges, and TRIEBER, District judge.

SANBORN Circuit Judge.

John W. Clendenin, trustee in bankruptcy of the Nevling Elevator Company, which was adjudged bankrupt on August 6, 1912, brought a suit in equity and recovered a decree for $4,500, interest thereon, and costs against J. M. Ratcliff for amounts paid to him as one of its stockholders by the Elevator Company in 1909, 1910, and 1911.

The first specification of error is that the court overruled Ratcliff's demurrer to the complaint on the ground that it disclosed the fact that he had an adequate remedy at law. But the suit was brought against Nevling, the president and manager of the corporation, and also against Ratcliff. The trustee alleged that some of the creditors who have claims against the estate of the bankrupt were continuously its creditors during the years 1909, 1910, and 1911, that the corporation was continuously indebted during those years to an amount in excess of $35,000 and was continuously impairing its capital, that the creditors were ignorant of these facts and believed it to be solvent and prosperous, while it was in truth insolvent for years prior to 1912, that Nevling and Ratcliff, who were stockholders and directors of the corporation with knowledge of its insolvency, conspired together to take the funds of the corporation and to pay them to Ratcliff without any consideration, that pursuant to that conspiracy they paid over to him out of the funds of the corporation $4,500 during the years 1909, 1910, and 1911, and that at other times they paid out of the funds of the corporation to Ratcliff additional and further sums the amounts of which were unknown to the plaintiff, and the trustee prayed that the defendants might be required to set forth what sums belonging to the corporation had been transferred to Ratcliff, and to account for and pay over these sums to the trustee. The property of an insolvent corporation constitutes a trust fund held by its officers, first for its creditors, and second for its stockholders, and the execution of a trust and the following and administering of trust funds are immemorial heads of equity jurisprudence. The allegations that the existing creditors still hold claims which were owing to them when the funds of the corporation were paid over to Ratcliff without consideration, that the corporation was insolvent when these payments were made and Ratcliff knew it, that the insolvency was unknown to the creditors, and that other unknown sums had been misappropriated to the benefit of Ratcliff in the same way, stated a complete cause of action in equity for the enforcement of the trust, the discovery of the unknown sums, and the recovery by the trustee of both the known and the unknown sums. There was no error in overruling the demurrer to this complaint. Hayden v. Thompson, 71 F. 60, 62, 63, 17 C.C.A. 592, 594, 595.

The second specification is that the court erroneously struck out the counterclaim of the defendant Ratcliff. Ratcliff made a separate answer. He denied the alleged conspiracy, denied the averments of the complaint as to the existence and continuance of the claims of the creditors of the corporation, denied that he was ever a director or officer of the Elevator Company, denied that he knew anything about its insolvency, or the impairment of its capital, or its financial condition, prior to March, 1912, and alleged that he always supposed and believed it to be solvent and prosperous; and he alleged in his answer that this was his relation to the corporation. Nevling was its president and general manager; Ratcliff was a farmer and stockman, who knew nothing about the financial condition of this or other corporations, and who did not know how to examine their financial condition. Nevling told him that the Elevator Company was solvent and prosperous; that if he would put $25,000 into it he (Nevling) and the Elevator Company would guarantee him interest on it at 10 per cent. per annum; that in reliance upon these representations he paid into the corporation, on or about July, 1908, $25,000, and received for it certificates for 250 shares of its stock, of the par value of $100 per share; and that he received the sums alleged in the complaint, aggregating $4,500, during the years 1909, 1910, and 1911, in payment of the interest or income on his investment in good faith, in the belief that the Elevator Company was solvent and prosperous, and that in law and equity he was entitled to receive these payments.

His counterclaim consisted of a restatement of his investment of his $25,000 in reliance upon the statements and representations of Nevling, and averment that he first learned of the insolvency of the Elevator Company in March, 1912, an offer to bring into court and surrender his certificates of stock and his interest in the capital stock of the company, and a prayer for an equitable lien on the assets of the Elevator Company for the difference between the $4,500 which he received from it and the $25,000 he paid to it. But he bought his stock in July, 1908, he first discovered the insolvency of the Elevator Company in March, 1912, that company was adjudged bankrupt on August 6, 1912, and the first appearance of his attempt to rescind his purchase of his stock in July, 1908, was in March, 1913, about 4 1/2 years after his purchase. Meanwhile the Elevator Company had incurred many of the claims now represented by the trustee. Ratcliff's attempt to rescind his purchase of his stock, though induced by the fraud of the Elevator Company, or of its president, comes too late, and there was no error in striking his counterclaim from his answer. A stockholder who is induced by fraud to purchase the stock of a corporation, and who for years, while the corporation is a going concern and is incurring debts to creditors, which still exist, receives dividends or income from his purchase of the stock, is estopped, after the corporation becomes insolvent, has ceased to be a going concern, and is adjudged a bankrupt, from rescinding his purchase of the stock against a protest of its creditors. Upton v. Tribilcock, 91 U.S. 45, 23 L.Ed. 203; Webster v. Upton, 91 U.S. 65, 23 L.Ed. 384; Sanger v. Upton, 91 U.S. 56, 23 L.Ed. 220; Chubb v. Upton, 95 U.S. 665, 667, 24 L.Ed. 523; Scott v. Deweese, 181 U.S. 202, 213, 21 Sup.Ct. 585, 45 L.Ed. 822; Lantry v. Wallace, 182 U.S. 536, 548, 549, 554, 21 Sup.Ct. 878, 45 L.Ed. 1218; Rand v. Columbia National Bank, 94 F. 349, 351, 36 C.C.A. 292; Scott v. Latimer, 89 F. 843, 33 C.C.A. 1.

Finally it is specified as error that the court rendered a decree against Ratcliff for the $4,500 which he received from the Elevator Company, interest upon it, and the costs of the suit. This was a suit in equity by the trustee in bankruptcy of the Elevator Company to recover this $4,500 of Ratcliff, a stockholder, in the right of creditors of the corporation who held claims against the corporation which were incurred before that $4,500 was paid out, on the theory that this $4,500 was money of the insolvent corporation which was held by its officers in trust for its creditors when it was paid to Ratcliff, and that Ratcliff knew this fact and procured the payment of this money to him without giving any consideration therefor. Facts essential to this cause of action which the trustee pleaded were, first, that there were creditors of the Elevator Company represented by the trustee who held claims allowed against the estate of the bankrupt which were incurred by the corporation before at least some of this $4,500 was paid over to Ratcliff, for creditors having claims which accrued after those payments have no equity in any of this $4,500 superior to the equity of Ratcliff. Hamilton v. Menominee Falls Quarry Co., 106 Wis. 352, 81 N.W. 876, 879. But the answer of Ratcliff denied that there were any claims of any creditors which accrued before all of the $4,500 was paid over to him by alleging that he had no knowledge or information sufficient to form a belief on that subject. The burden, therefore, was on the plaintiff to prove its averment of this essential fact and it made no proof thereof whatever. In the second place, the trustee averred that the Elevator Company was insolvent when this $4,500 was paid, and that this money was a fund held in trust for the creditors of the corporation; that Ratcliff knew this fact...