Shields v. Hobart

• Decision Date: 06 February 1903
• Docket Number: No. 9,411.,9,411.
• Citation: Shields v. Hobart, 172 Mo. 491, 72 S.W. 669, 95 Am. St. Rep. 529 (Mo. 1903)
• Parties: SHIELDS v. HOBART et al.
• Court: Missouri Supreme Court

72 S.W. 669

172 Mo. 491

SHIELDS v. HOBART et al.

No. 9,411.

Supreme Court of Missouri.

February 6, 1903.

CORPORATIONS — STOCKHOLDER'S LIABILITY — DIVIDENDS — VALIDITY — FRAUD — BURDEN OF PROOF.

1. A holder of corporate stock is liable to creditors of the corporation for any unpaid portion of his stock subscription.

2. In a suit in equity by a creditor of a corporation to enforce a stockholder's liability for unpaid stock subscriptions, it is not necessary to show fraud.

3. Though a going corporation may prefer one creditor to another, a corporation whose assets are insufficient to pay its debts cannot pay its debts to its own officers as against existing creditors.

4. In an equitable suit by a judgment creditor of a corporation against a stockholder to subject the stockholder's liability for an unpaid balance on his stock to the satisfaction of plaintiff's claim, the stockholder may set off a demand which he has against the corporation.

5. Where, in a suit by a judgment creditor of a corporation to reach a stockholder's unpaid stock subscription, defendant claimed a set-off to the extent of certain notes of the corporation, which he as indorser had paid, and the evidence showed that a part at least of the notes were given for money which was unlawfully distributed as dividends, the burden was on the defendant to show what, if any, of the notes were given for legitimate purposes.

6. Rev. St. 1889, § 2773, declares that, if the directors of a corporation pay any dividend which would diminish its capital stock, they shall be personally liable for corporate debts, etc. A corporation whose stock was issued as fully paid, but was in fact only partially so, distributed as dividends notes which it took for the sale of property which constituted its only real capital, and, when these notes fell due and were unpaid, the corporation gave its own notes in renewal, indorsed by stockholders who paid them. Held, that the distribution of dividends was illegal, both under the statute and the general law, and the stockholder's claim against the corporation arising from the payment of the notes they had indorsed could not be set off against their liability for unpaid stock subscriptions, in a suit by a judgment creditor to subject such unpaid stock subscriptions to his claim.

In banc. Appeal from circuit court, Greene county; Jas. T. Neville, Judge.

Suit by George H. Shields against Byron F. Hobart and others. From a judgment for defendants Hobart and Ambrose, plaintiff appeals. Reversed.

The following is the opinion of the court in division:

GANTT, J.

On or about the last days of February, 1887, Lucius Hubbell, of the real estate firm of Wooley, Porter & Hubbell of Springfield, Mo., for $1,000 cash paid, obtained an agreement from George M. Jones to convey to said Hubbell a tract of land adjoining the city of Springfield, containing about 160 acres of land, for the sum of $26,000, to be paid in 30 days. Before the expiration of the 30 days said Hubbell obtained the agreement of nine other parties to share said purchase with him, each to pay the sum of $2,600, and together they paid the $26,000, and on the 29th of March, 1887, said Jones conveyed the said land to said Hubbell. It was further agreed between the ten purchasers that they would organize a business corporation to take over said land, and that it should be capitalized at $100,000, and each of said ten purchasers should receive stock in said company of the par value of $10,000. On the 31st day of March, 1887, these same ten men signed and executed articles of association of the Real Estate Investment Company, reciting therein that the capital stock of $100,000 had been fully paid up and was in the hands of the persons named as the first board of directors, and that each of the ten signers, to wit, L. W. Hubbell, W. H. Biggs, Geo. A. C. Wooley, W. O. Gray, E. D. Pearce, T. E. Burlingame, J. S. Ambrose, B. F. Hobart, J. T. Gray, and W. G. Porter, Jr., held 20 shares, of the par value of $500 each. Articles of incorporation were duly filed, and a certificate of incorporation granted, and in due time stock of the par value of $10,000 was issued to each of said parties as fully paid. The testimony of Hubbell, the promoter, and of Biggs, one of the original board, and of Ramsay, the manager, establishes beyond question that none of these stockholders ever paid anything for their stock, except the $2,600 which they each paid into the fund to buy the land, which was at once conveyed to the corporation, on its organization, by Hubbell, for a recited consideration of $100,000, and which land was practically the only asset the company ever had, outside of a switch and a few lots purchased by it later on. As soon as practicable the company caused the land to be laid off as an addition to Springfield, conforming as near as possible to the streets of the city, and filed its plat and published maps of the addition. This was accomplished in September, 1887. The lots were rated from $150 to $400 each, according to desirability.

The testimony of Hubbell and Ramsay, who were the managers at different periods, disclose the following modus operandi: The company would sell a lot, and, if the purchaser was not able to build, would advance him the money or materials for his house, and then take back notes, or "real estate bonds," as one of the witnesses denominated them, secured by a first deed of trust on the whole, and then the company would indorse this paper and sell it in the money market. In this manner something like 180 lots were sold in the first three or four years of the company's existence, or up to 1891 or 1892. The money received from the sale of these notes, and sometimes the notes themselves, were distributed as dividends to the corporators or stockholders, to the amount of $26,000, or near that sum; but the evidence shows that a large number of those notes were not paid by the makers or owners of the lots when due, and, as Hubbell testified, "it was not the policy of the company to allow them to default, and, when the purchasers of the lots failed to make payment, the company stepped in and paid them, so as to keep its paper good"; and it would seem that, to get the money to do this from time to time, the company would make its notes, indorsed by the directors and the banks of Springfield and St. Louis, and, when due, would renew again, until, toward the last, Hobart and Ambrose were compelled to pay them to protect their indorsements. In some instances the company would mortgage the property to raise the money and take second mortgages; but, when the panic of 1893 came, the second mortgages were wiped out completely by the decline in values. Ramsay testified that, when he became manager in 1891, there was from $12,000 to $18,000 of the company's paper outstanding, indorsed by Hobart and Ambrose, who were directors of the company, and in 1893 it had increased to about $34,000, which came about by paying off interest on the indebtedness, and on account of notes coming back on the company, which it had indorsed, and paying the running expenses and taking up the old notes that had been indorsed.

In February, 1893, the company issued its notes, secured by deeds of trust on unimproved lots, for $10,000, which it sold through the brokerage firm of H. M. Noell & Co., of St. Louis, $5,000 to plaintiff, George H. Shields, and $5,000 to Mrs. Breed. Default was made in the payment of these notes, the deeds of trust foreclosed by sales, and thereupon plaintiff brought suit in the Greene circuit court and obtained judgment for $6,055.50, the balance due him on the notes held by him. Execution issued on this judgment and was levied on real estate which had theretofore belonged to the company, but which had been sold under other deeds of trust of August 19, 1893, and plaintiff became the purchaser, and the execution was credited with $158.10, the proceeds of the sale. The five deeds of trust of August 19, 1893, had been made by the company, covering all the land it then owned, to secure certain notes which it had put up as collateral to its notes, already outstanding, which had been indorsed by Hobart and Ambrose, and in some instances by the other directors and stockholders. Hobart and Ambrose were ultimately compelled to pay the notes which they had indorsed, and thereupon caused these collateral deeds of trust to be foreclosed on September 23, 1897, and Ambrose got 60 of the 140 lots covered by these deeds of trust for $2,005, and Hobart bid $1,100 on certain of the lots and directed them to be conveyed to the Crescent Iron Company, and for certain other lots he bid $2,819 and caused them to be deeded to Mrs. Hobart, his wife; these sums being credited on their notes against the company, which they had paid for it. It appears that Hobart in this way paid $17,243.10 and Ambrose $6,310. Hobart also produced another note of the company for $1,000 which he loaned the company.

The plaintiff, in his endeavor to trace the origin of all this indebtedness, endeavored to get at the books; but the defendants did not produce them, and it appeared that Ramsay, the manager of the company, when he learned the plaintiff intended to levy on them, and had applied for an order to produce them, called in a negro porter, Henry Reed, at the Ozark Hotel, in Springfield, and turned over to him the journal, cash book, ledger, sales book, and stock book, which contained all the transactions of the Real Estate Investment Company for the years up to November, 1897, saying to the negro, at the time, they would probably be attached, and to get them out of his office; he "did not care what he did with them, so he took them out of his office"; and when, on that day, the order of the court to produce them was read to him, or delivered to him, he made return that they were not in his possession. The negro testified he put them in an elevator, where the rubbish around the Ozark House was dumped, and...