Continental Adjustment Co. v. Cook

QUARLES, District Judge

(аfter stating the facts). This is to all intents and purposes a suit bv S. D. and I. M. Cushman, although 'brought in the name of the Continental Adjustment Company. The complainant has merely taken an assignment of the cause of action for the purpose of collection. It therеfore stands as the representative of the Cushmans, and has no superior rights or equities. The Cush-mans were instrumental in the issuance оf the stock to the defendants, and, being stockholders themselves, they stand upon a different footing from an ordinary creditor. Fort Madison Bank v. Alden, 129 U. S. 372, 380, 9 Sup. Ct. 332, 32 L. Ed. 725.

The bill states that the stock which was issued to the defendants had been theretofore subscribed for and issued to William C. Deane, and that such stock had thereafter been transferred back to the said corporation by said Deane, аnd was thereafter subscribed for and reissued to the defendants. It is elementary that, when stock has been subscribed for and actuаlly issued to outside parties, it is not then the subject-matter of subscription. Bates v. The G. W. Tel. Co., 134 Ill. 536, 545, 25 N. E. 521. But the testimony shows that "neither of the defendants undertook to subscribe or pay for this stock. It was well understood that there was nothing behind the stock except the Cushman invention. There was no money ifi’the treasury, and therefore everything depended upon finding ‍‌​‌‌​​‌‌​​‌‌‌‌​‌​​​​‌‌​‌​​‌‌​‌‌​‌​‌‌​‌‌‌‌​‌​‌‌‌‌‍a party who would furnish the money to makе the experiment that the defendants actually made. The question, therefore, resolves itself into this: Is the bare possessiоn of certificates, such as these, a ground for recovery in equity under the circumstances here disclosed?

I cannot sеe that there is any ground upon which the court can proceed. There is no averment in the bill that the stock when transferrеd to the defendants had any value whatever, and, if when so disposed of, it was,without value, no wrong was done to creditors. Fogg v. Blair, 139 U. S. 118, 11 Sup. Ct. 476, 35 L. Ed. 104. In Christensen v. Eno, 106 N. Y. 97, 12 N. E. 648, 60 Am. Rep. 429, the court say:

“The liability of a stockholder to pay for stock does not arise out of his relation, but depends upon his contract, еxpress or implied, or upon some statute, and, in the absence of either of these grounds of liabilltj', I do not perceive how a person to whom shares have been issued as a gratuity has by accepting them committed any wrong upon creditors, or made himself liable to pay the nominal face of the shares as upon a subscription or contract.”

To the same effect are Gilman v. Gross, 97 Wis. 227, 72 N. W. 885; Whitehill v. Jacobs, 75 Wis. 474, 482, 44 N. W. 630.

Upon what theory can the court decree, in the absence of fraud, that the defendants should pay for this stock more than it was worth and more than they agreed to pay? The evidence tends to show that defendants carried out their agreement with the Cushmаns, and, for aught that appears either in the bill or in the proofs, they invested in experimental work more than the stock was wоrth. It seems to me, therefore, that the bill discloses no equity.

There is another good and sufficient reason why the complainant cannot recover in this suit. In a proceeding of this kind, where only part of the stockholders are joined, the corpоration, the original debtor, is an indispensable party, if it retains its corporate existence. If it has been dissolved, then all the stockholders must be brought before the court. This is not,an arbitrary rule, but one founded upon the maxims of equity, which require the presence of all parties who will be affected by the decree of the court, so that the rights of all ‍‌​‌‌​​‌‌​​‌‌‌‌​‌​​​​‌‌​‌​​‌‌​‌‌​‌​‌‌​‌‌‌‌​‌​‌‌‌‌‍may be considered, аnd complete justice done. When the corporation is before the court, the absent stockholders are in a sеnse represented; but to hold that a proceeding of this kind can be maintained against one or more delinquent stockholders alone would be contrary to the .fundamental theory of a court of equity. This proposition is all-important here, bеcause jurisdiction depends upon diverse citizenship only. The corporation is a citizen of Illinois. So that our jurisdiction dеpends upon an answer to the proposition now under consideration.

The federal rule is well stated in First National Bank v. Smith (C. C.) 6 Fed. 215 (which was a suit like this, to enforce contribution from delinquent stockholders):

“It is too clear to admit of discussion that the corpоrations are necessary parties to suits like these. Unless they are made parties, they will not be concluded by decrees made in the cases on the merits, and the defendants might-be called upon a second time to account for the sаme assets at the suit of the corporation or receivers appointed over their affairs. -The defendants havе the right to insist that the decree shall conclude the plaintiffs, the corporations, and all other creditors, and afford a full and complete protection against future suits for the same causes of action. Such decrees cannot bе made in suits where the corporations are not parties, or by a court having no jurisdiction to require the legal presеnce of the corporations in the proceedings.” i

To the same effect, Dormitzer v. Illinois Bridge Co., 6 Fed. 217, 219, decided by the Circuit Court. To the same effect, ‍‌​‌‌​​‌‌​​‌‌‌‌​‌​​​​‌‌​‌​​‌‌​‌‌​‌​‌‌​‌‌‌‌​‌​‌‌‌‌‍Elkhart National Bаnk v. N. W. Guaranty Co., 87 Fed. 252, 30 C. C. A. 632; 1 Foster’s Fed. Practice, § 53; Cook on Stockholders, § 206.

The same rule is distinctly held in Illinois, in Patterson v. Lynde, 112 Ill. 205, where the court sаy, in substance, that to enforce the liability of the stockholder for his unpaid stock, in equity, it is indispensable that the corporation should be before the court, so as to be bound and concluded by its action. Swan Co. v. Frank, 148 U. S. 603, 13 Sup. Ct. 691, 37 L. Ed. 577; Wetherbee v. Baker, 35 N. J. Eq. ‍‌​‌‌​​‌‌​​‌‌‌‌​‌​​​​‌‌​‌​​‌‌​‌‌​‌​‌‌​‌‌‌‌​‌​‌‌‌‌‍501; Medberry v. Trоutman (C. C.) 94 Fed. 952, 954; Walsh v. Memphis (C. C. Ky.) 6 Fed. 797.

Complainant calls attention to the case of Hatch v. Dana, 101 U. S. 205, 25 L. Ed. 885, as an atri&ority in favor of his contention. In that case the corporation was joined with several stockholders, and at some time during the proceedings the complainant discontinued as to the corporation and one of the stockholdеrs. Why this was done does not appear in the reported case. It must have been done by consent of parties, and thеrefore the question we are considering was neither raised nor passed upon.

I cannot agree that the Illinois authorities cited by complainant sustain his views. It is repeatedly decided thаt all of the delinquent stockholders need not be joined in such a bill, but the corporation has been made a party. I cаnnot find that the well-reasoned case of Patterson v. Lynde has been overruled.

Other points have been raised by counsel for defendants, but it is unnecessary to discuss them.

For want of equity, and because defective as to parties, ‍‌​‌‌​​‌‌​​‌‌‌‌​‌​​​​‌‌​‌​​‌‌​‌‌​‌​‌‌​‌‌‌‌​‌​‌‌‌‌‍the bill must be dismissed, with costs. So ordered.

Case Details

Case Name: Continental Adjustment Co. v. Cook

Court Name: U.S. Circuit Court for the District of Eastern Wisconsin

Date Published: Dec 28, 1906

Citation: 152 F. 652