Republic Iron & Steel Co. v. Carlton

• Decision Date: 23 June 1911
• Citation: 189 F. 126
• Parties: REPUBLIC IRON & STEEL CO. v. CARLTON.
• Court: U.S. Court of Appeals — Fourth Circuit

189 F. 126

REPUBLIC IRON & STEEL CO. v. CARLTON.

United States Circuit Court, D. Maryland.

June 23, 1911

[Copyrighted Material Omitted]

J. Kemp Bartlett and L. B. Keene Claggett, for plaintiff.

Moses R. Walter, Joseph C. France, and J. Southgate Lemmon, for defendant.

ROSE District Judge.

This is an action at law. The Republic Iron & Steel Company is the plaintiff. It is a New Jersey corporation. It will be called the plaintiff. Howard Carlton is the defendant. He is a citizen of Maryland. He will be styled the defendant. The suit is brought to recover from the defendant unpaid installments of subscriptions alleged to have been made by him to the capital stock of the South Baltimore Steel Car &amp Foundry Company. It is a Maryland corporation. It will be spoken of as the company.

The defendant demurs to the declaration. The facts admitted by the demurrer are as follows: The company owes the plaintiff $15,839.12 for merchandise sold and delivered. The defendant became a stockholder of the company before such indebtedness was incurred. He remained a stockholder until the suit was brought. He held 360 shares of the preferred and 718 of the common capital stock of the company, the aggregate par value of which was $107,800. The stock was acquired by the defendant from the company by subscription or purchase. The company received for it $89,200. $18,600 of the par value of said stock has never been paid into the company's treasury. As to said shares the defendant was an original stockholder. He knew that said stock was not fully paid and of the extent of such nonpayment. The declaration asserts that the 360 shares of preferred stock held by the defendant were not of the class known as ordinary or pure preferred capital stock, and were not issued under and in accordance with section 408 of article 23 of the Code of Public General Laws of Maryland 1904.

In support of his demurrer the defendant says, first, the declaration is bad in substance; second, it states no cause of action of the plaintiff against the defendant; third, the exclusive remedy for the enforcement by the plaintiff against the defendant of the rights it may have against the defendant as set forth in the declaration is by a bill in equity in the nature of a creditors' bill filed against the stockholders of the company by one or more of its creditors on behalf of themselves and of all its other creditors who may come in and make themselves parties thereto.

The objections to the declaration intended to be raised by the first and second grounds of demurrer, other than the one specifically set up by the third, are: First. There may be circumstances under which a person may subscribe for the stock of a corporation or buy such stock from the corporation for less than its par value without becoming liable to pay anything further upon such stock. Handley v. Stutz, 139 U.S. 417, 11 Sup.Ct. 530, 35 L.Ed. 227; Clark v. Bever, 139 U.S. 96, 11 Sup.Ct. 468, 35 L.Ed. 88; Fogg v. Blair, 139 U.S. 118, 11 Sup.Ct. 476, 35 L.Ed. 104; Rickerson R.M. Co. v. Farrell Foundry & Machine Co., 75 F. 554, 23 C.C.A. 302. The declaration does not negative the existence of such circumstances. Second. The declaration alleges that 360 shares of stock held by the defendant of the par value of $36,000 is preferred stock. The total difference between the aggregate par value of the stock, common and preferred, held by the defendant and the amount he paid for the same may have been due to his getting the preferred stock at less than par. By section 408 of article 23 of the Code of Public General Laws of Maryland 1904, a corporation may dispose of its preferred stock by sale on such terms as it may prescribe. In another case in this court Judge Morris has held that this company had the right to dispose of its preferred stock upon such terms as seemed to it best. The declaration says that the preferred stock held by the defendant was not preferred stock issued under section 408 of article 23 of the Code. The defendant answers that all preferred stock issued by a Maryland corporation is necessarily issued under that section. It is not necessary to pass upon either of these contentions. Such defenses are not open in all cases. When they are defendant may set them up by plea. To require the plaintiff to negative them in advance leads to unnecessary prolixity in pleading.

The defendant's third ground of demurrer is based on the provisions of chapter 305 of the Acts of 1908. This act declares that the exclusive remedy for the enforcement by creditors of the liability of a stockholder for unpaid subscriptions to capital stock of a corporation shall be as against stockholders residing in Maryland by a bill in equity in the nature of a creditors' bill filed against such stockholders by creditors in the county or city of the principal office of the corporation. The act became law April 6, 1908. It declared that it should be operative as of July 1, 1907. It abated all actions at law brought since July 1, 1907, against stockholders to enforce liability for unpaid subscriptions to capital stock. The plaintiff says that so much of this act as declared that it should go into effect nine months before it was passed, and directed the abatement of suits which had been properly instituted before its passage, is unconstitutional. In this case it is immaterial whether the plaintiff is right or not.

Its suit was brought April 20, 1908, two weeks after the passage of the law. The provisions of the enactment which direct the abatement of previously instituted suits do not affect the plaintiff. It is not proper, therefore, to pass upon their validity in this case. Southern Railway Co. v. King, 217 U.S. 534, 30 Sup.Ct. 594, 54 L.Ed. 868; Engel v. O'Malley, 219 U.S. 135, 31 Sup.Ct. 190, 55 L.Ed. 128.

In the case of Knickerbocker Trust Co. v. Myers, 133 F. 766, in the Circuit Court, and in the same case in the Circuit Court of Appeals for the Third Circuit as reported in 139 F. 111, 71 C.C.A. 199, 1 L.R.A. (N.S.) 1171, the Maryland act declared unconstitutional was not passed until after the suit sought to be abated by it had been instituted.

The plaintiff says that when the defendant subscribed for his stock and when the company became the plaintiff's debtor the plaintiff had a right to sue the defendant at law. Any judgment recovered in such suit would be for the plaintiff's exclusive benefit. The right so to sue, it asserts, became vested at the time the company became indebted to it. Legislation taking from it such a right and compelling it to proceed in a court of equity against all the stockholders for the benefit ratably to all the creditors, it argues, impairs the obligation of its contract, and is, therefore, invalid.

In Maryland the liability of a stockholder to a creditor of a corporation is one founded on contract. Norris v. Wrenschall, 34 Md. 499; Coulbourn v. Boulton, 100 Md. 351, 59 A. 711; Brant v. Ehlen, 59 Md. 27; Steel Co. v. Equitable Society, 113 Md. 80, 77 A. 255. It follows that the plaintiff has a right to insist that the obligation of that contract shall not be impaired by subsequent legislation. Nor may the state so change the remedy as substantially to impair or lessen the value of the contract. Seibert v. Lewis, 122 U.S. 284, 7 Sup.Ct. 1190, 30 L.Ed. 1161. Whether the act of Assembly of Maryland relied on by the defendant does either of these things depends, first, on what was the contract upon which the defendant is sought to be held; and second, what remedies the plaintiff had for the enforcement of such contract at the time it became a creditor of the company. These questions will necessarily be considered together.

The contract of the defendant was that he should pay the full par value of his stock to the company. Until he did, he remained liable to pay such balance to the creditors of the company. There have been and still are other obligations, contractual in their nature, under which by the Maryland law a stockholder in some kinds of companies may come to its creditors. Article 3, Sec. 39, of the state Constitution, makes the stockholders of any banking corporation liable to the amount of their respective share or shares of stock for all the corporation's debts and liabilities upon note, bill or otherwise. Prior to the passage of chapter 101 of the Acts of 1904, stockholders in safe deposit, trust, guaranty and fidelity companies were liable to the depositors and creditors of such corporation for double the amount of stock at par value held by such stockholders in such corporations. This liability, originally imposed in most instances upon stockholders of particular companies by special act of the Legislature, was expressly made applicable to all such companies by section 85L of chapter 109 of the Acts of 1892. This liability was reduced by chapter 101 of the Acts of 1904 to the amount of each stockholder's stock at the par value thereof in addition to the amount invested in the stock.

The contract, under which the stockholders in banking and trust companies became liable to the creditors, is not in any sense a contract with the corporation. The liability of the stockholders was not an asset of the corporation. The right to enforce it did not vest in the receiver of the corporation. Colton v. Mayer, 90 Md. 712, 45 A. 874, 47 L.R.A. 617, 78 Am.St.Rep. 456.

In the absence of special statutory provisions such liability of stockholders never is an asset of the corporation. It does not pass to a receiver nor to a trustee in bankruptcy. In re Jassoy Co., 178 F. 515, 101 C.C.A. 641. It was the liability imposed by section 85L of chapter 109 of the Acts of 1892 which was in question in Knickerbocker Trust Co. v Myers, supra. In Maryland such liability could not at the time the ...