Reagan v. Midland Packing Co.

• Decision Date: 22 April 1924
• Docket Number: 124.
• Citation: 298 F. 500
• Parties: REAGAN v. MIDLAND PACKING CO. et al.
• Court: U.S. District Court — Northern District of Iowa

298 F. 500

REAGAN v. MIDLAND PACKING CO. et al.

No. 124.

United States District Court, N.D. Iowa, Western Division.

April 22, 1924

Frederick G. Ingersoll, of St. Paul, Minn., and Robert J. Bannister, of Des Moines, Iowa, for complainant.

Jepson Struble, Anderson & Sifford, Kindig, McGill, Stewart &amp Hatfield, Burgess & Gill, Griffin, Griffin & Griffin, E. J Stason, and J. A. Berry, all of Sioux City, Iowa, Healey & Breen, of Ft. Dodge, Iowa, Mallory & Leming, of Hampton, Iowa, E. A. Morling, of Emmetsburg, Iowa, Riniker & Thomas, of Rock Rapids, Iowa, and North & Pollock, of Omaha, Neb., for certain defendants on objections to jurisdiction and motions to dismiss.

MUNGER District Judge.

The motions to dismiss, filed on behalf of many defendants, challenge the sufficiency of the bill. In brief, the bill alleges that the plaintiff, suing for his own benefit and for the benefit of others similarly situated who may wish to join in the suit, is a judgment creditor of the Midland Packing Company, and has had an execution returned unsatisfied. The company in 1918 was organized under the laws of Iowa as a corporation for pecuniary profit, to engage in the business at Sioux City, Iowa, of packing meat and similar activities, and it did engage in that business there. Its authorized capital stock was $3,500,000, and a later amendment to its articles authorized an increase of the capital to $8,000,000. It sold $5,000,000 of its common and preferred stock, and obtained subscriptions for stock to the amount of $3,000,000, on which $3,000,000 is unpaid. The Midland Packing Company is insolvent, and its property is in the hands of a receiver appointed in this court in the case of Havner v. Hegnes. The plaintiff alleges that each of the defendants signed, at some date in 1918, 1919, or 1920, a written agreement reading as follows (except that in each contract the number of shares, the kind of stock, whether common or preferred, the date of subscription, and the name of the witnesses to the signature were inserted):

'No. . . . .

No. Shares, . . . .

'Subscription Contract to Capital Stock.

'Midland Packing Company, Sioux City, Iowa.

'Authorized Capital Stock, $8,000,000.00 (Incorporated under the Laws of the State of Iowa.)

'Par Value, $100.00 per Share. Fully Paid and Nonassessable.

'I hereby subscribe for . . . shares of the capital stock of the Midland Packing Company, Sioux City, Iowa, and agree to pay therefor one hundred ($100.00) dollars per share, payable as follows: Not less than one-fourth cash, accompanying this application, and the balance thereof, as evidenced by my promissory note of this date, with interest at six per cent.

'This subscription is entered into with the understanding that the capital stock of said corporation is composed of cumulative participating preferred stock and common stock; that the stock hereby subscribed for is (common or preferred) stock, and the preferred stock is guaranteed seven (7%) per cent. dividend each year; after said preferred stock receives seven (7%) per cent. dividends for the current year and any accumulations thereon, the common stock shall receive seven (7%) per cent. for the current year.

'Any additional dividends paid in that year shall be paid at the same rate on all stock, both preferred and common, without distinction as to class. This contract is entered into with the further understanding that the voting power at all stockholders' meetings is lodged in the holders of common stock.

'It is further agreed that the preferred stock is subject to redemption at two hundred ($200.00) dollars per share, plus any earned dividends, at any time after ten (10) years from the date of its issuance, at the election of the board of directors. Each stockholder's liability is limited to any unpaid balance due on his stock.

'It is expressly agreed that no stock is to be issued until the amount of this subscription and note given therefor is paid in full in cash, and any payment becoming due on the stock hereby subscribed for, or any note given therefor, not paid within sixty days after due, shall, at the option of the corporation, cause this subscription and note or notes given therefor to become null and void, and all payments made on this subscription by the subscriber shall become the property of the corporation absolutely as liquidated damages for the failure of the subscriber to carry out this contract.

'The company may reject this application by refunding all moneys paid thereon. This subscription contract contains the entire contract between the subscriber and the company, and no agent or representative of the company or any other person has any power to change or alter the terms of this subscription.

'I hereby agree that, before selling or agreeing to sell the stock hereby subscribed for, I will first offer same to the Midland Packing Company.

'All payments will be made to the Midland Packing Company at Sioux City, Iowa.

'Dated this . . . day of . . ., 1919.

' . . ., Subscriber. ' . . ., Residence. ' . . ., Occupation.

'Witness: . . . .'

It is alleged that the defendants are all of the persons residing in the Northern judicial district of Iowa who signed their agreements and who have not paid the amounts due, and that they owe the company a balance of $1,279,404.70 on such agreements, and that the general claims of the creditors who loaned money or sold goods to the company amount to $1,750,000. There are also claims of stockholders who have sued to rescind their subscriptions, amounting to over $2,000,000. The company's property, other than the balance due upon these agreements, is of but nominal value. The plaintiff asks for an accounting to fix the assets and liabilities of the company and the amount of its unpaid stock subscriptions, and a decree fixing a percentage that each of the stock subscribers should pay, and for a judgment against each defendant for such an amount of the balance unpaid by him on the written agreement signed by him as will be sufficient to pay the plaintiff's claim. The theory of the plaintiff is that the capital stock of the company is a fund to which the creditors may resort for the satisfaction of their claims. On behalf of some defendants the claim is made that the defendants are not stockholders, nor are they such subscribers to the capital stock as may be required to contribute to the payment of the plaintiff's claim, by the method of this suit in equity against them. It is not alleged that any of the defendants was a stockholder in the company, except so far as the written contract may have obligated him. There is no allegation of the receipt of certificates of stock, nor that any of the defendants had fully paid the amount he had agreed to pay for shares of stock, nor is there any allegation of estoppel by the defendants to deny that they were stockholders.

(1) The liability, under the Iowa laws, for payment of the full par value of stock in a corporation held by a stockholder is not created by the Iowa statutes, but depends on general principles of law. Clark v. Bever, 139 U.S. 96, 108, 11 Sup.Ct. 468, 35 L.Ed. 88; First Nat.

Bank v. Peavey (C.C.) 69 F. 455; Wishard v. Hansen, 99 Iowa, 307, 68 N.W. 691, 61 Am.St.Rep. 238.

(2) The capital stock of the company is a fund to which creditors may resort for satisfaction of their claims. Sawyer v. Hoag, 17 Wall. 610, 21 L.Ed. 731; Sanger v. Upton, 91 U.S. 56, 60, 23 L.Ed. 220; Scovill v. Thayer, 105 U.S. 143, 154, 26 L.Ed. 968; 14 Cor.Jur. 950; 6 Fletcher on Corps. Sec. 4095.

(3) Are the defendants, who signed in 1918, 1919, or 1920 the written agreement pleaded, subscribers to the capital stock, who may be held for the corporate debts to the extent of their unpaid subscriptions? There are decisions which make a distinction between subscriptions for shares in a corporation to be formed thereafter, and subscriptions for shares in a corporation already organized, and holding that, while in the former case the subscribers become stockholders when the corporation is organized, in the latter case the subscribers do not become stockholders nor liable to a creditors' suit, at least in the absence of a tender of the stock by the corporation to the subscriber, and are only liable for a breach of a contract of purchase of shares and only for the difference in value between the agreed price of the shares and their market value. Rhey v. Ebensburg Co., 27 Pa. 261; Bole v. Fulton, 233 Pa. 609, 82 A. 947. See, also, Baltimore City Pass. Ry. Co. v. Hambleton, 77 Md. 341, 26 A. 279.

But this is not the general view of the relation between subscribers to stock in a corporation, although the subscription is made after the charter is granted, or after the articles are filed under the laws of those states which authorize the company to begin business upon the filing of articles of incorporation. In Spear v. Crawford, 14 Wend. (N.Y.) 20, 28 Am.Dec. 513, Crawford as a creditor of the Harlaem Canal Company, a corporation, sued Spear as an alleged stockholder, under a New York statute making the corporate stockholders liable individually for corporate debts to the nominal amount of stock held by the stockholder, and allowing the creditor to sue one or more of the stockholders. The company had been previously incorporated and owned much property. Spear's liability depended on a written subscription which read:

'We, the subscribers, do severally agree to take the shares by us severally subscribed in the Harlaem Canal Company,'

-- to which his name was attached, and specifying 16 shares as the amount. The testimony disclosed that Spear had never met with the stockholders, nor done any act to make him a stockholder other than signing the subscription paper, and that there was no...