11 Del. Ch. 286 | New York Court of Chancery | 1917
The Arlington Hotel Company has been adjudged by this court to be insolvent, receivers have been appointed for it, the creditors of the company have proved in this court their claims, and they have been allowed, all the stockholders having had notice of the filing of the claims and been given an opportunity to contest them by exceptions to be taken thereto. It appears as a fact proven in the case that the aggregate of .the debts and the estimated cost of administration of the receivership, including the cost of litigation with stockholders to recover from them moneys due and unpaid on shares of stock held by them, exceeds the amounts claimed to
The first question to be considered is the one raised as to the jurisdiction of the court respecting the proceeding against the shareholders. It is contended for the shareholders, that even assuming that there is an unpaid balance due from them on their stock up to the par value thereof (which is denied), their liability is to the creditors and not to the company, or its receiver; and that it cannot be enforced by the receivers, at all; and if at all, then in no other way than by the method of procedure prescribed by the statute which imposed the liability, though counsel are hot more specific as to the method of procedure. In general the Delaware Incorporation Act authorizes the corporation to obtain subscriptions to stock when the whole capital stock has not been subscribed (section 21); and provides to the directors remedies for enforcing payment of the subscriptions (section 22). These sections are applicable to a corporation while it is a going concern and seem to have no bearing on the questions here raised.
When the assets of the corporation are insufficient to pay its creditors, and the whole capital stock of the company has not been paid in, then by section 20 it is declared that each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of the par value of such share, or such proportion of that sum as shall be required to satisfy the debts of the company. It is not declared in the Act to whom this liability is due, and certainly it is no.t declared that the liability is to creditors only, to the exclusion of the corporation, or to the exclusion of a receiver therefor appointed
There are other sections in the act which relate to the powers and duties of receivers or trustees of corporations, and to the method of winding up the affairs of the company, including the filing and allowance of claims of creditors and distribution of moneys of the company by the receivers. But these have generally been considered to refer not to the receivers appointed by the court on the ground of insolvency, or for any other reason than the dissolution of the company, receivers after dissolution being substituted for directors, who wind up the affairs of the company. These provisions are unimportant in this case. In order to ensure uniformity of procedure in the administrative details in liquidations it is enacted in the rules of the Court of Chancery, adopted pursuant, as is believed, to legislative authority, the rules are made applicable to all receivers qt corporations whether dissolved or not.
When a corporation becomes insolvent the liability of a stockholder to pay for his stock is either fixed by section 20, or that section states a liability existing independent of the statute; and it is not now necessary to declare whether they are substantially the same, or what the differences between them are if they are not the same. Obviously the purpose, and the only purpose, of these requirements of the statute is to furnish proof that the debt is due and that the company is insolvent, as the basis of further proceedings against stock
The conclusions as stated above are not in conflict with either the letter or spirit of the statute, and on the contrary are clearly in accord with the spirit thereof. That they are based on the peculiar functions and powers of a Court of Chancery is too obvious to need enlargement. But as the question of jurisdiction is here raised for the first time, the reasons may be amplified.
Clearly section 49 provides alternative remedies of either a direct action at law by a creditor against a stockholder, or a remedy by bill in Chancery, for that is the express language of the section. There is, moreover, a good reason for providing alternative remedies. A direct action may be not only an efficient but a just remedy, as, for instance, if but one stockholder was delinquent in paying for his stock and there be but one creditor of the company whose debt was unpaid. In that case only the two persons would be interested, and there would be no need to adjust liabilities among several in proportion to the number of shares held, or other equities between several classes of delinquent stockholders. On the other hand, if there are several creditors and several stockholders the adjustment of benefits and liabilities between them is properly cognizable in a Court of Chancery, which has suitable machinery to bring before it all parties interested on both sides of or having an interest in the cause, and secure to each his advantage and justly apportion his liability to pay. There is no requirement that the remedy of the creditor by bill shall be directly against the stockholders, for it is not prescribed against whom or even by whom it be filed. The language of the act is broad and general enough to include a bill for the appointment of a receiver of a corporation wherein its insolvency is adjudicated.
Furthermore, .this contingent liability of stockholders for debts-of the company is an equitable asset which vests in the receivers, or at least enforcible by such receivers, for .the benefit of all creditors of the company who come into the cause. Besides, independent of the statute, the unpaid capital due from stockholders always was and is a part of the assets of the company, and so belongs to the company and not to the creditors. In Sanger v. Upton, 91 U. S. 56, 60, 23 L. Ed. 220, the court said:
“Unpaid stock is as much a part of this pledge, and as much part of the assets of the company, as the cash which has been paid in upon it. Creditors have the same right to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due to the company. As regards creditors, there is no distinction as between such a demand and any other asset which form a part of the property and effects of the corporation.”
. Judge Bradford in Irvine v. Elliott, (D. C.) 203 Fed. 82, 104, pointed out the difference in this regard between the statutory double liability of stockholders and the liability for unpaid subscriptions to stock.
Furthermore, this liability is more effectively enforced through a receiver; for a Delaware receiver may now sue anywhere to enforce an assessment when made. This is surely a consequence of the act of 1913 (27 Del. Laws, p. 479; Revised Code, par. 3884), which in effect makes a receiver a quasi assignee and' so removes the limitation of an ordinary receiver to the territorial limits of the jurisdiction wherein he was appointed. Bernheimer v. Converse, 206 U. S. 516, 531, 534, 27 Sup.
Not only is the present method of giving to the creditors their statutory right against stockholders who have not paid in full for their stock the rriost efficient way, so far as creditors are concerned, and the most just way so far as the stockholders are concerned; but it is also the way permitted by the statute. One creditor may file the bill, or one or more or all creditors may join in one bill, or one may act for all of them. So here, one creditor as a step to enforce the stockholders’ liability to him has a bill filed in his own and their behalf established insolvency, had receivers appointed, and he and the other creditors have established their claims against the company. The liability will be ascertained by this assessment, individual defenses of a limited character excepted, and the liability when established is binding on all stockholders, and enforcible by the receivers wherever the stockholders and their property may be reached.
It is not a reasonable interpretation of the statute to hold that no creditor can have his debt paid from the unpaid balance due on shares of stock unless he has obtained a judgment against the company and an execution thereon has been returned unsatisfied. Obviously the only purpose of the judgment against the company and the execution on it is to determine that the debt is owing and that there is no property of the company from which it can be collected, or in other words, that the company is insolvent. Both of these elements may be determined in a Court of Chancery by a bill brought by one or more creditors, or as here by a judgment creditor, and the claims of all other creditors allowed, and their priorities, if any, determined, the assets collected and the deficiency of assets over liabilities determined (which has in fact already been done in this case), as well as determining in a proceeding like that of the pending petition the proportionate liability of all stockholders to meet such deficiency in such way as to bind both creditors and stockholders here and elsewhere.
In Cook v. Carpenter, 212 Pa. St. 165, 61 Atl. 799, 1 L. R. A. (N. S.) 900, 108 Am. St. Rep. 854, 4 Ann. Cas. 723, a court of
This present method of enforcing delinquent stockholders’ liability to creditors is perfectly fair, because they have notice of every step taken in it. It is equally beneficial to them, because it consolidates proceedings, saves costs and expenses, and gives each a right to contest every step including the rights of creditors and the liabilities of the other stockholders.
The jurisdiction of this court to determine in this method the matters raised by the petition of the receivers is therefore upheld.
In reaching conclusions as to the other questions in the case, great weight has been given to the decisions of the courts of New Jersey, because of the practical identity of the language of the statutes in the two states, and it is not necessary to go so far as to hold that they are binding as authorative interpretations of a statute adopted by this State from New Jersey. True, by the New Jersey statute the remedy against delinquent stockholders on behalf of creditors is expressly given to the receiver in case of insolvency, and there is no statement there as to the form of the remedy to be used. But as herein pointed out, a receiver of a Delaware corporation has the same right inferentially and the form of the remedy mentioned in the Delaware statute is like that used in New Jersey without express statutory authority. Interpretations of the New Jersey statute and practice under it are cogent to influence the Delaware courts in like cases.
Having determined that the present proceeding is a proper one, and that the court has power to make or authorize the assessment on delinquent stockholders for the benefit of creditors, it is desirable to state the general theory of the character of the liability of such stockholders as distinct from the procedure to enforce it. If there were no statute on the subject it might bé important to consider the several theories which have been advocated and adopted as to the origin, nature and
“The doctrine that corporate stock issued, outstanding and unpaid for is a trust fund for the benefit of creditors, is a hard and fast rule imbedded in the decisions of the courts of this and other states, and is never relaxed. In this State [New Jersey], however, the stockholder’s liability to creditors no longer depends alone upon the trust fund theory, but is. held to be statutory. Easton, etc., Bank v. American, etc., Co., 70 N. J. Eq. 732 [64 Atl. 917, L. R. A. (N. S.) 271, 10 Ann. Cas. 84].”
Indeed in an earlier case the Court of Errors and Appeals, in New Jersey had held the same thing, viz: Easton, etc., Bank v. American, etc., Co., 70 N. J. Eq. 732, where the court said:
“But in this State the stockholders' liability to creditors does not depend alone or chiefly upon the theory of ‘holding out.’ It depends upon the stockholders’ voluntary acceptance, for consideration touching his own interest, of a statutory scheme to which watered stock, under whatever device issued, is absolutely alien, and which requires stock subscriptions to be made good for the benefit of creditors of insolvent companies, without distinction between creditors who had notice and those who had' none.”
■ The same view was taken by the United States District. Court of Connecticut in a case where the liability of stockholders under a statute of Connecticut similar to that of New Jersey was being enforced. Rosoff v. Gilbert, etc., Co., (D. C.)
A Delaware corporation cannot make a subscription contract which will free the subscriber from the statutory liability, for that statute is notice to all who make such contracts, and is read into and becomes a part of every stock subscription contract. The fundamental principle is that shares of stock in a corporation are a substitute for the personal liability of partners, and the liability to pay for stock taken up to the par value thereof is a fund for the benefit of creditors of the company, and whoever takes shares of stock of a Delaware corporation assumes that liability for the benefit of creditors in case of insolvency of the company. Upon holders of preferred stock, who took the shares pursuant to a subscription contract, and' upon those who acquired shares of common stock without a formal subscription, the statutory liability is of course imposed. However acquired the constitutional and statutory provisions as to what constitutes payment for stock are part of the contract, express or implied, respecting both kinds of stock. As to creditors, there is no difference between the liability of holders of stock and subscribers to stock, for both are liable.
“In equity, and as against creditors, the acceptance of stock, without paying for it, places the acceptor in the position of a subscriber.” See v. Heppenheimer, 69 N. J. Eq. 36, 78, 61 Atl. 843, 860 (1905).
Inasmuch as there is a question common to all the holders of shares of common stock, whether holders of certificates of stock or of certificates of the voting trust, that question should be determined in this present proceeding. The question is: Was the total issue of common stock rightly issued as full paid and non-assessable stock so as to exempt all of it, however
Whether it be moral, legal or actual fraud, or not fraudulent at all, the obvious purpose in issuing all the common stock to' Howard, Andrews and Archibald, as set forth in the resolution of the directors at their first meeting on February 27, 1911, was to give them the stock without their having given the legal equivalent therefor. The most that could be claimed for it was that it was issued for services rendered and to be rendered, without stating what part of the $2,900,000.00 of common stock wa.s issued for past services rendered and what for future services to be rendered. Furthermore the action as to the common stock was taken in the earliest stage of corporate life, viz: at the first directors’ meeting after the formal organization meeting, and at the first time "when
o In the present case there was no valuation by the directors •of the services of the promoters, and there has been no proof offered as to the value of the services which had been rendered by Howard, Andrews-and Archibald at the time of the issue of the common stock to them, though opportunity to do so was •open to the stockholders. It was readily seen that $3,000,000.00 •of stock was such a gross and, therefore, unlawful overvaluation that counsel did not pretend that there was any appraisement by the directors, or if they had made such a valuation that any
Are any of the holders of common stock who have appeared in the proceeding innocent purchasers for value without notice? Coleman du Pont is not, for he was present as a director at the meeting when the resolution as to the issue of the stock was adopted, and voted for it. Almost all of the holders of preferred stock had notice that the common stock had not been paid for, because they received voting trust certificates for bonus stock, and bonus stock means stock issued gratuitously ancf without payment therefor being made or expected. All to whom the voting trust certificates were issued are for the-purposes of this proceeding liable as thoughjhar^^^common stock to which they wefe^entitledmnder the terms of the trust,, were actually issued to them andjstoodHn their names. The beneficial owners of the stock held by the votingHrustees are-holders of the voting trust certificates and no interest in the stock is held by the trustees except such* as are necessary to enable them to execute their trust. O’Grady v. U. S., etc., Co., (N. J.) 71 Atl. 1040, 21 L. R. A. (N. S.) 732, 734, 735. In the-case just cited the holder of a voting trust certificate was regarded as the beneficial owner of the stock represented by it
Here all who took voting trust certificates were put on inquiry respecting the common stock, and were not entitled to rely upon a statement therein that it was full paid. They did not purchase their stock in the market, but were subscribers to stock of a new enterprise and took with their preferred stock some common stock, the prima facie evidence being that thereby they knew it was bonus stock, i. e., stock for which no legal equivalent was given. There was in the resolution of the directors authorizing the voting trust evidence that the common stock was to be given as a "bonus to subscribers to preferred stock. The statement on the certificate of shares of common stock that they were full paid and non-assessable does not relieve from liability to pay therefor any holder or taker thereof, except those without notice of the fact. An agreement between a corporation and its stockholders that corporate stock shall be issued otherwise than for money paid, or other statutory equivalent, is void. Easton, etc., Bank v. American, etc., Co., 70 N. J. Eq. 732, 64 Atl. 917, 8 L. R. A. (N. S.) 271, 10 Ann. Cas. 84; Holcombe v. Trenton, etc., Co., 80 N. J. Eq. 122, 141, 82 Atl. 618; Rosoff v. Gilbert Transportation Co., (D. C.) 221 Fed. 972.
To establish the liability of holders of common stock it is not necessary to allude to the suspicion as to the good faith in the transaction which arises when directors of a- company make for the company contracts with themselves as promoters or otherwise, for the transaction is clearly shown .to be an attempt to issue and distribute bonus stock.
It is held, therefore, that the common stock, was not rightly issued as full paid^stock, but was issued without value given, and still remains unpaid, notwithstanding the statement on the face thereof to the contrary; and further, that all the original takers of the stock and holders of voting trust certificates are prima facie liable as holders of common stock, subject to such
It has been claimed that the company had no right to issue preferred stock.' One of the subscribers'to ten shares of preferred stock, Z. D. Blackistone, who paid one hundred and fifty dollars on account thereof, claims that he is not liable to pay the balance of his subscription, on the ground that the company had no power to' accept subscriptions for or issue preferred stock. This contention is based on section 13 of the act, which provides a way by which shares of stock could be classified into common and preferred stock with a proviso that “at no time shall the total amount of The preferred stock exceed two-thirds of the actual capital paid in cash or property. ’ ’ It is claimed that no actual capital was paid to the company in cash or property, all the common stock having been issued for services rendered and to be rendered, and none of it actually
By use of the word “capital” instead of the words “capital stock,” the section does more than fix the proportion between common and preferred stock. “Capital” means property and “capital stock” means the aggregate of the interests of the stockholders in the property of the company after its debts are paid. In Person, etc., Co. v. Lipps, 219 Pa. St. 99, 67 Atl. 1081, where a company incorporated under the laws of New Jersey had sued a subscriber for preferred stock, and the defense was that made by Blackistone, the court added into the appraised value of the property of the company the par value of the common stock issued to the defendant Lipps and another, in order to ascertain whether the requirements of the statute were complied with, though it did not appear that the common
Cases óf over-issue of stock were cited to support the contention. In such cases the courts say creditors may know when stock is over-issued, and so cannot claim to have been deceived. For the same reason creditors have á right to assume that all the common stock issued was paid in cash or property, and so had a right to assume that the proper proportion between common and preferred stock was thereby maintained. The provision in section 13 that “in no event shall a holder of preferred stock be personally liable for the debts of the corporation,” does not exempt holders of preferred stock from calls or assessments for the benefit of creditors up to the par value, but was intended to exempt them only from liability beyond the par value for the needs of creditors in insolvency as stated in section 20, -which relates to all shareholders without regard to classes. The amount of capital paid in cash or property fluctuates and the proportion of classes of stock fluctuates accordingly. It is imposing on creditors too great a burden to expect them to know whether the proportion has been always maintained. If sometimes hot maintained, then'is all common stock before or thereafter issued void? A' strict interpretation of the statute involves possible entanglements of interests. A safer rule is to permit creditors to look to subscriptions or holdings of common stock as equal to payment in cash or property for the purposes of determining the proportion to be observed between common and preferred stock.
It is contended by some of the stockholders that sub
It is contended for some of the stockholders that the assessment cannot be made for the benefit of those creditors who at the time of extending credit to the company knew the circumstances as to the issue of the common stock, viz: that it was issued in payment for services rendered and to be rendered, and as full paid. There was evidence offered to show such knowledge on the part of some of the creditors who have filed claims, and who will be benefitted by an assessment when made and collected. This may not be the time to ascertain the facts as to such knowlédge, for those creditors are not directly present in this proceeding. They are here represented by the receivers, and have had no notice of the contention against them, or opportunity to defend themselves against it. Furthermore, it may be that these matters may better be passed on when the fund for creditors has been gathered in and its distribution is open to adjustment. This seems to be the view of the court in the case cited by the solicitor for the receivers. Selig v. Hamilton, 234 U. S. 652, 656, 34 Sup. Ct. 926, 58 L. Ed. 1518, Ann. Cas. 1917A, 104. But inasmuch as the right of such creditors to look to the stockholders for payment of their claims has been much discussed, and the determination of the question probably has an important bearing on the rate of assessment to be made (if any be made) it will be considered now.
In New Jersey it is settled beyond controversy that creditors having at the time of giving credit notice that shares
The same point was decided by the United States District Court in Connecticut in a case respecting a Connecticut corporation, the statute of Connecticut being “quite similar,” as the court said, to the New Jersey statute, viz: In Rosoff v. Gilbert Transportation Co., (D. C.) 221 Fed. 972 (1915):
“There is no suggestion (in the statute) that certain creditors can enforce this liability and that certain other creditors cannot. The statute clearly contemplates that all creditors are entitled to be paid, and that stockholders are bound to pay them if the stock- held by them has not been paid for in full.”
In Gillet v. Chicago, etc., Co., 230 Ill. 373, 82 N. E. 891, which followed Sprague v. National Bank of America, 172 Ill. 149, 50 N. E. 19, 42 L. R. A. 606, 64 Am. St. Rep. 17, the same view was taken of the Illinois statute, similar to New Jersey and Delaware, which gave the right to creditors against unpaid stock.
In July, 1913, the company made a call upon holders of preferred stock to pay the amounts due on the shares subscribed for. Does this, of itself, bar this court from making a call or assessment in this case, in this proceeding? In the case of Brown v. Allebach, (C. C.) 166 Fed. 488, 496, it was held that a receiver may collect amounts due on unpaid stock even though a call had been levied by the directors of the company while it was a going concern, and even though suits by the company to enforce the call were still pending. This view is manifestly a sound one.
Should the assessment be made against all delinquent stockholders, whether solvent or insolvent, and whether residents of Delaware, or not? There is ample authority, as well as good reason, for excluding the insolvent stockholders, and the reasons are obvious. Rosoff v. Gilbert Transportation Co., (D. C.) 221 Fed. 972. In this particular proceeding it is not an important matter, for. there is no clear and satisfactory proof that any of those defaulting shareholders on the list submitted by the receivers are insolvent, except one J. William Henry, who was a subscriber to shares of preferred stock of par value of $2,250, and proved to have been adjudicated a bankrupt since making the subscription. None of the stockholders of either class will be excluded from the assessment on account of financial inability to respond thereto, except J. William Henry.
The defense of the statute of limitations is also raised so far as the liability of holders of preferred stock is concerned. It is claimed that on July 15, 1913, the holders of preferred stock were called on by vote Of the directors to pay the-balance of their subscriptions on or before September 15, 1913, and that the statute then began to run; and if it be a bar against the corporation it is also a bar against the receivers acting on behalf of the corporation’s creditors. This defense is clearly one to be raised when suits are brought against the stockholders after the assessment and it seems, to be so settled in such cases. Therefore no opinion is expressed on this point.
Should the creditors of the company who have proved their claims be allowed in addition thereto interest as against the stockholders? As against the assets of an insolvent com-pony when its affairs are being administered by a Chancery receiver, interest is not allowed beyond the date of the appointment of the receiver, except on liens which bear interest. This is the practice in this court, as fixed by the rules of court. In a sense the contingent statutory diability of stockholders to corporation creditors is analogous to other assets of the company. But I am inclined to the view that the stockholders’ liability has elements which justify charging them with a duty to contribute enough to pay interest to creditors. Interest is denied by the rules of court as an administrative measure, because if there is not enough of assets to pay all the principal the addition of interest does not increase the dividends. In case
Without undertaking to calculate the exact amount of interest on each claim to a fixed date, it is sufficient for the present purposes to estimate the aggregate of interest. If interest for five years be allowed, it will approximately be sufficient for. all. Interest at six per cent, on $466,739.42 for five years is about $140,000.00. That sum is therefore to be added to the principal, and estimated expenses, and makes the grand total to Be assessed$706,739.42..
The general theory as to what should be determined by the court in a proceeding such as this is well settled. It determines that an assessment is necessary; and that involves a judicial determination of the exhaustion of the assets of the company, the adjudication of the claims of the creditors and the aggregate of the amounts due to them. To this is added the costs of the receivership in collecting the assessment, including counsel fees and legal expenses in suits against stockholders, and compensation to the receivers. These latter items are necessarily estimated, and are liable to reduction according to the conduct of stockholders in resisting payment. As to all these matters, and perhaps others, stockholders are so far an integral part of the- corporation that in the view of the law they are to that extent privy to proceedings by a receiver of an insolvent company on behalf of its creditors to enforce payment for stock not paid for, and cannot question the propriety of the assessment when made. Cumberland, etc., Co. v. Clinton, etc., Co., 57 N. J. Eq. 627, 42 Atl. 585; s. c. 64 N. J. Eq. 517, 54 Atl. 450; Gilson v. Appleby, 79 N. J. Eq. 590, 81 Atl. 925; Wolcott v. Waldstein, (1916) 86 N. J. Eq. 63, 97 Atl. 951. This is true whether the stockholders have or have not had notice of the proceeding (Brown v. Allebach, [C. C.] 156 Fed. 697), though that is not important in this case.
Having disposed of all the questions raised which relate to all of the creditors or to the stockholders as a class or to classes thereof, it will be necessary to consider some special defenses which have been raised.
Coleman du Pont, who was a subscriber to preferred stock and in whose name shares of common stock stand as the owner thereof, by his answer to the petition claims a credit on the preferred stock of $101,650.00 paid thereon; and that the common stock in his name was not acquired from the company, but was assigned to him for a valuable consideration and upon representation by the company that the same was full paid and non-assessable. He also says that on July 15, 1913, a call for $103,350.00, the balance of his subscription to preferred stock, was made by the company, and that any claim now made by 'the receivers for such balance is barred by the statute of limitations. There were other defenses set up in the answer, which are applicable to all holders of both kinds of stock, and these general defenses have already been disposed of. It was also shown at the hearing that on his subscription in writing to the $480,000.00 of preferred stock a notation made by him, the effect of which was to release him from an obligation to pay the amount subscribed for in case the money received from
William H. Fenn, in addition to some defenses open to all holders of common stock, sets out some special grounds of defense, which are personal to him and will not therefore be considered. Under the latter head is.the representation in his answer that in order to qualify him as director a certificate for one hundred shares of common stock, marked as full paid, was issued, and exhibited to him, and an assignment thereof was endorsed thereon; that he had not and never had the certificates in his possession; and did not and does not know whether or
It may be well to here call attention to the view of the present Chancellor in another case, which indicates that Mr. Fenn did not relieve himself of liability in this present proceeding by assigning the shares of common stock which .had been transferred to him to qualify him to bé a director of the company. Recently this court has announced the view that when one takes shares of stock of a corporation in order to qualify him to be a director of the company, he thereby holds himself out as being the owner of the stock in his own right, and cannot escape liability as the record owner of the stock for an assessment made thereon for the benefit of creditors of the company by showing that he never had a beneficial interest in the stock, but held it as the agent for another, to whom he had delivered the certificate for the shares of stock with a transfer thereof endorsed thereon. This was so decided in a proceeding by the receiver of Securities Company of North America, a dissolved corporation, to enforce for the benefit of creditors the liability of stockholders to pay in full for their shares of stock, where the question arose respecting stock standing on the books of the company in the name of William M. Pyle, a director of the company. Fell v. Securities Co. of North America, Court of Chancery, New Castle County, 1917, ante p. 234, 100 Atl. 788. As Mr. Fenn is the record owner of the stock not paid for, the receivers have made out such a case' as to justify the court .in including his name as one of the stockholders liable to assessment, leaving his special defenses to be settled in the suit to be brought by the receivers.
Albert L. Stavely does not set up any defense not already considered, and denies all' allegations as to the common stock, and has paid in full for his subscription to preferred stock. His answer does not at this time require further particular consideration by this Court.
Murray A. Cobb denies being a stockholder, though he served as director for a while and then resigned, or attempted to resign. But he appears of record to be a holder of ten shares
For the purposes of making this assessment, the following conclusions have been reached:
(1) That the company is insolvent; that its debts which are unpaid aggregate $466,739.42; that the interest to which creditors will be entitled will probably aggregate $140,000.00; that the costs and expenses of the receivership and of collecting the assessment including compensation to the receivers and their legal counsel, may be estimated at $100,000.00; and that the aggregate to be assessed upon and collected from the stockholders who are liable therefor is $706,739.42.
(2) That those liable to assessment as subscribers to preferred stock, and the amounts on which they are liable to assessment aggregating $479,210.00, are as follows (J. William Henry, the bankrupt, being omitted therefrom): [List of holders of preferred stock.]
(3) That those liable to assessment as holders of common stock, including those holding voting trust certificates and the amounts to which they are liable to assessment, aggregating $3,000,000.00, are as follows: [List of holders of common stock.]
Upon whom and in what proportions should the assessment be made? The amount to be raised being thus fixed, and the names of the delinquent stockholders and the amounts due from them severally having been thus settled, it remains to be decided as to who of them shall now be called on to bear the burden and the proportions in which it shall be borne. This is not an easy problem, and there seems to be no precedent to guide the court. There are eight distinct groups into which the stockholders may be arranged, viz:
(1) Subscribers to preferred stock who have paid in full for that stock and who also hold bonus common stock through the voting trust.
(2) Subscribers to preferred stock who have paid in part
(3) Subscribers to preferred stock who have paid nothing, and who hold bonus common stock.
(4) Subscribers to preferred stock who have paid nothing and who do not hold common stock.
(5) Subscribers to preferred stock who have paid in part only for that stock, and who do not hold common stock.
(6) Subscribers to preferred stock who paid in full and who hold common stock not by the voting trust.
(7) Holders of common stock only.
(8) Holders of common stock and holders of voting trust certificates, and who had paid nothing on either kind of stock. The only person in this class is Charles P. Taft, who holds $1,000.00 of common stock and $50,000.00 of voting trust certificates.
One simple method of assessment is this: The total- to be raised being about $706,000.00, and the aggregate of the liabilities of both preferred and common stockholders being about $3,479,000.00 (J. William Henry the bankrupt holder of $2,250.00 of preferred stock being omitted), an assessment of twenty per cent, on that aggregate liability will raise nearly $700,000.00. But some of the holders of preferred stock have paid in whole or in part for their shares, and the holders of common stock have paid nothing. Should there not be some preliminary equalization of payments exacted from the holders of common stock before the holders of preferred stock are called on? Other puzzling questions arise to vex one, in endeavoring to adjust equitably and proportionately the burden of the liability.
There is one very simple, direct and effective way, and that is to impose the whole burden on the resident stockholder. As hereinabove stated there is ample authority for so doing. So far as the records and proofs are concerned, there is but one stockholder shown to be a resident of Delaware and who has been identified and located, viz: Coleman du Pont. He has
Inasmuch as the question upon whom and in what proportions the assessment should be made, was not discussed by counsel, the court will, if it be desirable, hear counsel on the point before a decree is entered.
Supplemental Opitiion as to Form of Decree.
After the filing of the opinion a hearing was had as to stockholders, or classes of stockholders, upon whom the assessments should be laid primarily, the amount to be assessed, and the details of the substance and form of the decree.
It is clear that there should be no distinction between the delinquent holders of common and preferred stock, but that they should be treated as one class. Also that all stockholders, who had made payments on their stock in excess of their proportion of the amount due the creditors should be excluded, and that those stockholders who have made payments on account of their shares should be given credit therefor.
There are outstanding not paid for in full 5852 shares of preferred stock, and excluding the amount unpaid on the fifty shares of J. William Henry, the bankrupt, 5802 shares of preferred and 30,000 shares of common, a total of 35,802, with a par valuation of $3,580,200.00. An assessment of twenty percent. on the par would raise a sum about equal to the debts and expenses. Stockholders of the company who have páid in more than twenty per cent, of the par value of their stock should in equity be excluded from assessment. There are two holders of preferred stock who are in that class, John F. Wilkins, a subscriber for. two hundred and fifty shares, and John Auen, Jr.,, a subscriber of one thousand shares. Therefore they should equitably be excluded from the list of stockholders held liable to assessment, and the aggregate of the shares unpaid for being-4552 shares of preferred and 30,000 shares of common stock, a. total of 34,552 shares.
There is authority for allowing to those stockholders who pay promptly the amounts for which they are liable a credit thereon to the extent of the payment (Scovill v. Thayer, 105 U. S. 143, 26 L. Ed. 968) and this is equitable.
A decree will be entered in accordance with this and the earlier opinion.
In accordance with the foregoing opinions the following decree was entered:
1. “On this fourth day of August, A. D. 1917, the petition of James Frank Ball, Aulick Palmer and Peyton Gordon, receivers appointed by this Court for the said Arlington Hotel Company, praying, among other things, that this Court levy an assessment on the stockholders of the said company requiring them to severally pay such amount of their several and unpaid subscriptions to the capital stock of the said company as the Court shall ascertain to be necessary to pay the debts of the said corporation with interest, and the expenses incident to the winding up of said corporation’s affairs by said receivers, having been filed in this cause on the thirtieth day of October, A. D. 1916, and on said date the- Chancellor having made an order directing that a rule of this Court be issued directed to the stockholders of said company whose names appear on the list thereof attached to said petition to appear at a time in said order fixed, and show cause, if any they have, why the said assessment should not be made, and further directing that said rule and order with a copy of said petition, excluding the exhibits attached thereto, be served on those stockholders of said company who were residents of the state of Delaware and that
2. “And due proof having been made before the Chancellor that service and notice of said rule and order had been made and given in compliance with said order;
3. “And answers to said petition having been filed by Murray A. Cobb, Z. D. Blackistone, Albert L. Stavely, William H. Fenn and T. Coleman du Pont, whose names appear on said list as stockholders of said company, and ho other stockholders of said company having appeared to said petition or rule, or filed any plea or answer thereto, or shown or averred any cause why the said assessment should not be made;
4. “ And the said petition and rule and the several answers thereto having come on to be heard by the Chancellor upon testimony presented and taken orally in open court before the Chancellor, and upon records and exhibits there produced, and the cause having been argued by the respective solicitors for said receivers and for said stockholders who had answered said petition, and the same having been duly considered and held under advisement until the date of this decree;
5. “And it appearing to and being found by the Chancellor from the record, proceedings and evidence in said cause and upon said petition and answers thereto, that the proof so taken together with the record of said cause, constitute full and complete evidence and proof of all of the findings of fact and full support for all the findings of law and for the orders of the Court in this decree contained;
6. “Andfurther, that the said Arlington Hotel Company is at, corporation of the State of Delaware, and has been duly adjudged by this court in this cause to be insolvent; and that the said James Frank Ball, Aulick Palmer and Peyton Gordon have been duly appointed by this court and qualified as receivers of said company;
[Here was inserted a list of the creditors of the company and the amounts due them respectively, aggregating $466,-739.42.]
8. “And further, that there are no funds or property of said corporation with which to pay the debts and claims, or any part thereof, except the moneys due to said corporation from the stockholders of the said corporation who have not paid in full for their shares of stock, and that an assessment or call should be made against said subscribers or holders of unpaid shares of stock of the said corporation to pay said debts and the expenses of the receivership;
• 9. “And further, that the debts of said company which are unpaid as aforesaid aggregate the sum of four hundred and sixty-six thousand seven hundred and thirty-nine dollars and forty-two cents ($466,739.42); that the interest to which creditors will be entitled will probably aggregate one hundred and forty thousand dollars ($140,000.00); that the costs and expenses of the receivership and of collecting the assessment, including compensation for the receivers and their legal counsel, are estimated at one hundred thousand dollars ($100,000.00); and that, therefore, the aggregate sum necessary to satisfy the debts of said corporation and to be assessed upon and collected from the stockholders who are liable therefor is seven hundred and six thousand seven hundred and thirty-nine dollars and forty-two cents ($706,739.42);
11. “And further, that the following is a list of the subscribers to the preferred stock of said company, ;who have not paid in full.therefor, showing the number of shares subscribed for by them respectively, the aggregate of the payments made by any of them respectively, and the amounts unpaid thereon respectively (the name of J. William Henry, a subscriber for fifty [50] shares, found to be a bankrupt, being omitted therefrom), and the aggregate of the amounts so stated as unpaid on said 5,802 shares of preferred stock being four hundred and seventy-nine thousand "two hundred and ten dollars ($479,-210.00)':
[Here was inserted “Schedule A,” showing the subscribers to preferred stock, number of. shares, amount subscribed, amount paid and balance due.]
■ 12. “And further, that all of the authorized common stock of said company, aggregating, three million dollars ($3,-000,000.00) had been issued without value given therefor, and that the amount remaining unpaid upon the common stock of said corporation is three million dollars ($3,000,000.00), and that the persons liable to assessment as holders of such common stock, including those holding trust certificates for shares of said common stock, and the amounts, aggregating three million dollars ($3,000,000.00), necessary to complete the amount of the par value of their shares and on which they are liable to assessment, are respectively, as follows:
[Here was inserted “Schedule B,” showing the subscribers to common stock, number of shares, amount subscribed and amount due.]
- 13. “And further, that an assessment of twenty per cent. (20%) upon all holders of shares of stock of said company, both
14. “And further, that said assessment should be equalized as near as may be between those stockholders who have paid in part for their shares and to the the extent thereof, and those who have paid nothing therefor; and for this purpose that an assessment of twenty dollars and fifty-two cents ($20.52) should be made on each of said thirty-four thousand five hundred and fifty-two shares; and those persons named in Schedule A who have made payments on account of their shares be credited with the amounts so paid by them, as against the amount which would otherwise be assessed against them as above stated;
15. “And further, that the following, Schedule C, is a list of the persons who as holders of shares of stock of said company, both preferred and common, are liable to said assessment; that the said schedule showns the number of shares held
[Here was inserted “Schedule C,” showing the subscribers to preferred and common stock, number of shares of each, and amount of assessment.]
“It is, therefore, adjudged, ordered and decreed BY THE COURT, aS follows:
16. “That the amount necessary to be raised to pay the principal of the claims of the creditors of the said Arlington Hotel Company found and allowed as aforesaid is four hundred and sixty-six thousand seven hundred and thirty-nine dollars and forty-two cents ($466,739.42), and the estimated interest .thereon to the date of payment is the sum of one hundred and forty thousand dollars ($140,000.00), and the estimated costs and expenses of the receivership, including the collection of the assessments hereinafter levied for the payment of said claims, amount to the sum of one hundred thousand dollars ($100,-000.00), and the total amount necessary to satisfy the debts of the said corporation and said costs and expenses is the sum of seven hundred and six thousand seven hundred and thirty-nine dollars and forty-two cents ($706,739.42);
17. “And further, that it is necessary to assess the said last mentioned sum upon the shares of stock of said company which have not been paid for in full, and upon the holders thereof, or upon the legal representatives of such of them as may be dead; that for said purpose the said sum is hereby assessed and levied upon said shares of stock and upon the holders thereof, or the legal representatives of such of them as may be dead; that for the said purpose an assessment of twenty dollars and fifty-two cents ($20.52) is hereby levied on each of said shares of stock, preferred and common, except the shares of preferred stock held by John F. Wilkins and John Auen, Jr.,
18. “And further, that the foregoing list, called Schedule C, contains the names of the holders of said shares, preferred and common, the number of shares held by them respectively, and the amounts so assessed against them as aforesaid, the holders of shares of preferred stock who have made payments on account thereof having been duly credited therewith as against said assessment;
19. “And further, that the said persons mentioned in said Schedule C, or the legal representatives of such of them as may be dead, pay to said receivers the said sums so assessed as stated in said Schedule C, within the time to be fixed herein;
20. “Provided, that with the consent of the receivers, or their solicitors, each and every stockholder liable under said assessment and levy who shall pay the amount assessed against him or them upon demand, or within the limit of time as hereinafter prescribed, shall be allowed a credit on the amount due as aforesaid of three per cent. (3%) upon his proportion of the amount so assessed and paid, which credit it is estijnated would equal the proportionate share payable by each stockholder of the total amount of the estimated costs and expenses of the receivership, and the collection of the assessment, including compensation for the receivers and their legal counsel, and also for accruing interest.
21. “And further, that the said receivers be and they are hereby authorized and directed to send within ten (10) days from the date of this decree by registered postpaid letter, addressed to each of the holders of shares of stock of said company as shown in said Schedule C, or to their legal representatives, a copy of this decree, with a demand for the payment on or before the seventeenth day of September, A. D. 1917, of the amounts severally due from them as shown by said Schedule C.
22. “And further, that in the event that any person or corporation liable as shareholders of the company, or the legal representative of any of them that may be dead, shall fail to
23. “And further, that the title to said sums severally assessed as aforesaid against said shares of stock and against said stockholders, or their legal representatives, and the right to sue therefor, is in the said receivers of said company.
“And it appearing to and being found by the Court that T. Coleman du Pont is the only stockholder of said company resident in the State of Delaware.
24. “It is further adjudged, ordered and decreed that in the event that at .the end of the period of time hereinbefore specified, the whole or any part of the said sum of seven hundred and six thousand seven hundred and thirty-nine dollars and forty-two cents ($706,739.42), remains unpaid by réason of the failure of any person or corporation liable as shareholder of the Arlington Hotel Company to pay within said specified time the amount hereby assessed upon or against the share or shares of said stock, preferred or common, owned or held by him, or upon or on account of which he is liable, said receivers are hereby authorized, empowered and directed to give to the said T. Coleman du Pont written notice of that fact, and of the amount so remaining unpaid, and to demand and require the said T. Coleman du Pont to pay to said receivers in addition to the amount hereinbefore assessed against him on account of the shares held by him, the balance of the total sum of seven
25. “And further, that the said T. Coleman du Pont, upon payment of the said sum so remaining unpaid, shall (except as to the amount assessed against him) be subrogated to the rights of the said receivers, to have and recover, by way of contribution, from the persons or corporations liable for or on account of said shares of preferred and common stock, the sums respectively assessed upon and due from each of them under the assessment hereinbefore made and levied; and shall also" have the right to institute and prosecute at his own expense, in the name of said receivers, but to his own use, any suit, action or proceeding for the recovery or collection of said sums so assessed as aforesaid, including any suit, action or proceedings brought by said receivers for said purpose, and shall be entitled to have any order of this Court necessary to effectuate such purpose; and all sums, if any, that may subsequent to ■ such payment by said T. Coleman du Pont, be received by said receivers from any such person or corporation, for or on account of such liability, shall be held subject to the further order of the Court, and for the use of said T. Coleman du Pont.
26. “And it is further adjudged, ordered and decreed, that said receivers be and they are hereby directed to hold all amounts collected under the terms of this decree subject to' the further order of the Chancellor herein.
[Signed] Chas. M. Curtis, Chancellor.”
Note. From this decree an appeal was taken by five of the stockholders, and the principles of law as stated by the Chancellor were affirmed by the Supreme Court, but the decree of the Chancellor was modified respecting the estimated amounts of costs, allowances to the receivers and their solicitors and interest. See post p. 430.