Shugart v. Maytag

• Decision Date: 23 March 1920
• Docket Number: No. 33152.,33152.
• Citation: 176 N.W. 886,188 Iowa 916
• Parties: SHUGART v. MAYTAG ET AL.
• Court: Iowa Supreme Court

188 Iowa 916

176 N.W. 886

SHUGART

v.MAYTAG ET AL.

No. 33152.

Supreme Court of Iowa.

March 23, 1920.

Appeal from District Court, Jasper County; K. E. Wilcockson, Judge.

Suit in equity by a creditor of a South Dakota corporation against certain stockholders who it is alleged have paid only a portion of the face value of the stock held by them. There was judgment and decree in the court below in favor of plaintiff. Defendants appeal. Affirmed.C. O. McLain, of Newton, for appellants Maytag.

Joe Kirby, of Sioux Falls, and Henderson, Fribourg & Hatfield, of Sioux City, for appellant Fantle.

Bert B. Welty, of Nevada, Iowa, Lee & Garfield, of Ames, and C. W. Garfield, of Humboldt, and J. E. Cross, of Newton, for appellee.

STEVENS, J.

The South Dakota Central Railway Company is a corporation organized under the laws of South Dakota, with its principal place of business at Sioux Falls, in that state. Plaintiff in 1914 performed services therefor, for which there was, on December 1, 1914, due and owing him the sum of $24,708.46. After the completion of the services for which he was employed the railway company went into the hands of a receiver, and all of its assets were sold on execution in favor of the bondholders. All defendants admit that plaintiff rendered the services claimed, and that the amount stated is due him from the corporation.

Plaintiff alleged in his petition that the contract for said services was oral and entered into in the state of South Dakota; that the defendants were, at the time of the commencement of this suit, the owners and holders of stock in said corporation, as follows: F. L. Maytag, 9,569 shares; E. H. Maytag, 52 shares; L. B. Maytag, 212 shares; and Sam Fantle, 340 shares; that the par value of said stock was $100, and that 87 1/2 per cent. thereof remained unpaid.

Plaintiff further alleged that section 441 of the Civil Code of South Dakota, copy of which is set out in the petition, makes each stockholder of a corporation individually and personally liable for the debts of the corporationto the extent of the amount unpaid upon the stock held by such stockholder. Other provisions of the Code are also set out in plaintiff's petition, which will be referred to hereafter. The Maytags and Fantle filed separate answers, in both of which it is alleged that section 441 contravenes the provisions of section 8, art. 17, of the Constitution of South Dakota, and that same is therefore void and of no effect. Other constitutional provisions are pleaded which it is unnecessary to set out at this time. Defendants also set up the statute of limitation, and the Mayags that they obained the stock without notice or knowledge that same had not been paid for in full. Other material issues and facts will be referred to in the course of the opinion. The trial resulted in a judgment against F. L. Maytag and Sam Fantle for the full amount of plaintiff's claim, and against E. H. Maytag for $4,719, and L. B. Maytag for $21,780.

I. The defendant Fantle, at the time the services were rendered by plaintiff, was a resident of Sioux Falls, S. D., where he has continued to reside. His plea of the statute of limitations is bottomed upon the thought that a cause of action in favor of the corporation for the unpaid portion of the purchase price of the stock arose immediately upon the sale thereof, and under section 60 of the Code of Civil Procedure of South Dakota became barred in six years, thereby ceasing to be an enforceable liability against the stockholders, and that, as the liability of the corporation to plaintiff grows out of the obligation of the stockholders to the corporation, the bar was complete when this suit was begun. All of the stock held by the defendants was issued and sold by the railway company more than six years before the services rendered by plaintiff were begun.

[1] On the other hand, counsel for appellee asserts that the statute did not commence to run until plaintiff's cause of action against the corporation matured. There may be some lack of harmony in the decisions upon this question, but the general rule undoubtedly is that the statute commences to run in favor of the stockholders from the time claims of creditors against the corporation mature. Under the law of South Dakota the liability of the holder of corporate stock to creditors of the corporation for the difference between the par value thereof and the amount actually paid thereon is primary, and a creditor is not required to first proceed against the corporation. It is stated in Cook on Corporations (7th Ed.) § 225, that “where the liability of the stockholder is immediate and primary, and not contingent on the obtaining of a judgment against the corporation, it is clear that the statute of limitations begins to run in favor of the stockholder when the debt matures against the corporation.”

[2][3] We find upon examination of the authorities cited that much of the apparent lack of harmony appearing therein is due to the dissimilarity of the various statutory provisions considered. In some jurisdictions the statute does not commence to run against creditors until the insolvency of the corporation, but it makes no difference in this case whether the statute commenced to run from the maturity of plaintiff's claim against the railway company or its insolvency. The services were rendered before the appointment of the receiver. The cause of action which plaintiff seeks to enforce against the defendants is not, however, one that arose in favor of the corporation, but is a liability which, under the South Dakota statute, accrued directly to him. The capital stock of a corporation is a fund for the payment of debts--a trust fund. The doctrine of the so-called trust fund rests upon the proposition that, as the state has relieved the stockholder from general liability from the debts of the corporation, he ought, in good faith, to pay in money or its equivalent to the extent of the face value of the stock received. The corporation may never demand payment of any unpaid portion of the purchase price of said stock. Payment may not be necessary until the rights of creditors intervene and their claims must be met. Surely a cause of action which could not accrue until more than six years after the issuance of the stock held by the defendants cannot be barred by the statute of limitations, and the overwhelming weight of authority sustains the rule quoted from Cook on Corporations. Parmelee v. Price, 208 Ill. 544, 70 N. E. 725; Cook on Corporations (7th Ed.) vol. 1, § 225; Chapman v. Lynch, 156 N. Y. 551, 51 N. E. 276;West v. Topeka Savings Bank, 66 Kan. 524, 72 Pac. 252, 63 L. R. A. 137, 97 Am. St. Rep. 385;O'Neill v. Quarnstrom, 6 Cal. App. 469, 92 Pac. 391.

II. Section 441 of the Civil Code of South Dakota is as follows:

“Each stockholder of a corporation is individually and personally liable for the debts of the corporation to the extent of the amount that is unpaid upon the stock held by him. Any creditor of the corporation may institute joint or several actions against any of its stockholders that have not fully paid the capital stock held by him, and in such action the court must ascertain the amount that is unpaid upon the stock held by each stockholder and for which he is liable, and several judgment must be rendered against each in conformity therewith. The liability of each stockholder is determined by the amount unpaid upon the stock or shares owned by him at the time such action is commenced, and such liability is not released by any subsequent transfer of stock. And in no other case shall the stockholders be individually and personally liable for the debts of the corporation. The term ‘stockholder,’ as used in this section, shall apply not only to such persons as appear by the books of the corporation to be such, but also to every equitable owner of stock, although the same appear upon the books in the name of another.”

The provisions of the above section are assailed by counsel for appellant upon the ground that same contravene the provisions of section 8, art. 17, of the Constitution of South Dakota, which is as follows:

“No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void. The stock and indebtedness of corporations shall not be increased except in pursuance of general law, nor without the consent of the persons holding the larger amount in value of the stock first obtained, at a meeting to be held after sixty days' notice given in pursuance of law.”

And also of the Fourteenth Amendment to the Constitution of the United States, and therefore void. Section 423 of the Civil Code of South Dakota provides that--

“Whenever the capital stock of any corporation is divided into shares, and certificates therefor are issued, such shares of stock are personal property, and may be transferred by indorsement by the signature of the proprietor or his attorney or legal representative on delivery of the certificate; but such transfer is not valid except between the parties thereto, until the same is so entered upon the books of the corporation as to show the names of the parties, by and to whom transferred * * * or designation of shares, and the date of the transfer.”

We have been unable to find any decision of the Supreme Court of South Dakota wherein the constitutionality of section 441 has been passed upon or discussed; but counsel for appellee have cited numerous cases from other jurisdictions construing similar constitutional provisions, to which attention will be directed presently. However, the decision of the Supreme Court of South Dakota in Schiller Piano Co. v. Hyde, 39 S. D. 74, 162 N. W. 937, is based upon a related proposition. In that case the United Mercantile Agency, a South Dakota corporation, received $20,000 in notes in payment of the purchase price for certain shares of stock sold to the...