Lavell v. Bullock,

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| N.D. | Aug 2, 1919

Lead Opinion

Bobinson, J.

This is an appeal from a judgment under the statute which makes a stockholder liable for the unpaid balance due on his corporate stock. As trustee in bankruptcy the plaintiff brings this action to recover from appellant $700 as the balance due on fourteen shares of common stock in “Everybody’s Store.” The Constitution says that no corporation shall issue stock or bonds except for money, labor done, or money or property actually received. § 138. The statute says, “Each stockholder in 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.” Comp. Laws 1913, § 4554. In the consideration of this case it is not necessary to enter upon any debatable grounds or to discuss any nice points of law. The purpose of the statute is to protect parties who deal with and trust corporations relying on obligations of stockholders to pay what they owe to their corporation. Under the statute a stockholder is not merely a person who picks up and holds stock that he may find lying on the street. He is a person who takes the stock under a contract to pay for it. When the corporation has received its pay for stock it may be sold and transferred the same as any chattel or .chose in action. Neither a corporation nor its trustee or assignee can maintain an action for a balance due on stock unless there is a balance due the corporation. In this case the proof does not show any balance due the corporation. All the common stock was bought and paid for by the president of the company. Then he traded some of it to Barney, who transferred to appellant fourteen shares of his common stock, which reads on its face that it is fully paid and nonassessable. And it is stipulated that ap*142pellant paid full and fair value for this stock. He is a purchaser in good faith.

Here is the history of the case: — In October, 1913, at Fargo, one II. M. Cornell opened a trading house known as “Everybody’s Store.” At the end of three months he was in debt about $12,500 with assets of $25,000. Then he concluded to unload his debts and assets by turning himself into a trading corporation. Accordingly in the name of himself, his wife, and one E. C. Hamilton, he filed with the secretary of- state articles of incorporation fixing the capital stock at $100,000. This included 500 shares of preferred stock at $100 a share, and 1,000 shares of common stock at $50 a share. The purpose of the corporation was to do a general trading business, to assume debts and liabilities, and to borrow money in unlimited amounts.

The company at once proceeded to assume the debts and obligations of Cornell and took over his business. The 1,000 shares of common stock it issued to Cornell in payment of his lease and the good will of his business; 250 shares of preferred stock it issued to Cornell in payment of all his assets. Cornell at once elected himself president and treasurer. To his good wife, who became a director, he gave 20 shares of common stock; to E. C. Hamilton, 125 shares; to one Flick of Minneapolis, 125 shares. On the books of the company — the journal and the ledger — it does appear on several pages that for the lease and good will of the business the company was charged $50,000. On the trial the books were put in evidence. Cornell was called as a witness for plaintiff and testified that he bought over the common stock in exchange for the lease and good will of the business. He says, “I gave for the common stock my lease and the good will of the business, the location and establishment of the business.” (17.)

Q. “What were the 250 shares of common stock issued to Flick and Hamilton for?”

A. “That really belonged to me and I turned them off to them gratis. (17.) The 20 shares of stock issued to my wife I just gave her as a present.”

Q. “What was the value of the good will and lease ?”

A. “I figured it was worth what we sold it to the company for, $50,-000. I think we figured it at $50,000. We estimated it was worth that amount.” (102.)

*143In a written contract on December 29, 1913, it is recited and agreed that Cornell sold to tbe company tbe good will of tbe business and tbe lease of the premises and property amounting to $25,000. That in consideration of such sale tbe company, agreed to issue to tbe seller certain certificates of fully paid stock to tbe amount of $75,000, namely, 250 shares of preferred stock and 1,000 shares of common stock. In a subsequent written agreement of January 2, 1914, it is recited that tbe corporation has sold and delivered to Cornell 1,000 shares of common stock and be agrees to replace in tbe bands of tbe treasurer 250 shares of tbe common stock to be retained by tbe treasurer and allotted to purchasers of preferred treasury stock as an inducement to buy tbe preferred treasury stock. Doubtless tbe company assumed tbe great load of debts and paid too much for its whistle. But that was tbe purpose of its organization and this is not an action to rescind tbe contract of sale, and tbe mere inadequacy of tbe price does not make tbe contract void. As tbe record shows, Mr. Cornell purchased and paid for all tbe common stock, which reads on its face that it is fully paid and nonassessable. Then be transferred to one Barney 15 shares of stock and Barney transferred 14 of bis shares to appellant. But on said 14 shares there is nothing due to tbe corporation. It never had any cause of action against tbe appellant. It bad no dealings with him.

Suing as tbe representative of tbe corporation and its creditors of course tbe plaintiff can assume no rights only such as belong to the corporation and its creditors. Furthermore, tbe purpose of tbe statute is to protect parties who deal with and give credit to a corporation on tbe faith and credit of its stockholders, to tbe amount of their corporate stock. In this case it appears that after tbe incorporation the business taken over was conducted in tbe same name and in tbe same manner as before tbe incorporation. And there is no showing that tbe creditors in dealing with the corporation knew that it was a corporation or that it bad any stockholders. Certainly there is nothing to show that they were in any way deceived in regard to tbe holders of tbe common stock. Tbe records of tbe company were open to them, and those records were very brief. They clearly showed that Cornell bad purchased and paid for all the common stock; and that on such stock no balance *144was due to the company. Hence the judgment must be reversed and the action dismissed, with costs.

Bronson, J., concurs.

Concurrence Opinion

Birdzell, J., and Hanley, Special Judge

(concurring specially). The certificates of stock involved in this case were issued without consideration. It was bonus stock for which no consideration was given, promised, or expected; it being stock that was used by the corporation as an inducement to purchasers to buy the preferred treasury stock. The Constitution of this state provides: “No corporation shall issue stock or bonds except for money, labor done, or money or property actually received; and all fictitious increases or indebtedness shall be void.” Const. § 138. The Code provides: “. . . No corporation shall issue any certificate or stock under an agreement or with an understanding that full par value shall not be paid.” Comp. Laws 1913, § 4527. Also, “No corporation shall issue stock or bonds except for money, labor done or property estimated at its true money value actually received for it.” Comp. Laws 1913, § 4528. When the Constitution and laws passed in conformity thereto forbid corporations to issue stock except for labor done, services performed, or money or property actually received, and make all fictitious increases of stock void, such an issue of stock is fraudulent; and persons to whom it is issued, for which' they do not pay or do not expect to pay .anything, do not thereby become shareholders of the corporation in any sense. 4 Thomp. Corp. p. 154; Arkansas River Land, Town & Canal Co. v. Farmers’ Loan & T. Co. 13 Colo. 587" court="Colo." date_filed="1889-09-15" href="https://app.midpage.ai/document/arkansas-river-land-town--canal-co-v-farmers-loan--trust-co-6561870?utm_source=webapp" opinion_id="6561870">13 Colo. 587, 22 Pac. 954. The instant case is not one in which stock.was subscribed for any payment agreed upon and full payment not made, nor a case in which stock was issued for more than the value of the property, money, or labor turned over. If such were the facts then a different proposition would be presented and the cases cited by the respondent would be in point. However, since the question is fully argued, it will be later considered. In this case, there is no subscription for the common stock, no agreement to pay, but the stock involved in this action was, as shown by the record, set aside by the corporation *145to be “used as an inducement to purchasers to buy the preferred treasury stock of the company.” It is bonus stock and clearly comes within the prohibition of the Constitution and the statutes above cited. The meaning and language of the constitutional provision is clear and unmistakable. If stock is issued “except for money, labor done, or money or property actually received,” such issue is in direct violation of the Constitution and the statutes, and is ipso facto invalid. The object of the provision in the Constitution is to prevent reckless and unscrupulous speculators from fraudulently issuing and putting on the market stocks that do not and are not intended to represent money or property of any kind. Arkansas River Land, Town & Canal Co. v. Farmers’ Loan & T. Co. supra. The Colorado court in that case cites with approval the language of the Wisconsin court in the case of Clarke v. Lincoln Lumber Co. 59 Wis. 655" court="Wis." date_filed="1884-02-19" href="https://app.midpage.ai/document/clarke-v-lincoln-lumber-co-6604332?utm_source=webapp" opinion_id="6604332">59 Wis. 655, 18 N. W. 492, to the effect that such constitutional and statutory provisions are clearly in the interest of public morals and tend to the protection of those dealing with corporations. Most of the corporations created under the laws of this state have no fund or capital which their creditors can reach except that derived from the issuance and sale of their stock; and, if this law be strictly followed, in every case corporations will not have credit upon the false pretense of having a large paid up capital when in fact only a small percentage of the par value of the stock issued has ever come into the treasury of the company. The law is undoubtedly a salutary one, and its violation is clearly an illegal act. In none of the cases cited by respondent’s counsel do we find that the stock involved was strictly bonus stock, and the eases are not in point for that reason.

Counsel for respondent argue that the principle involved has a different application where the action is brought by creditors to impose their right, as distinguished from an action brought by stockholders, and argue that the cases cited by the appellant are shareholder, and not creditor, actions. It seems clear, however, that constitutional provisions prohibiting such issues of stock are as available to the stockholders in defense of a creditor’s action as they are to a cause of action for stockholders against the corporation. And it is so expressly held in J. F. Lucey Co. v. McMullen, 178 Cal. 425" court="Cal." date_filed="1918-06-20" href="https://app.midpage.ai/document/j-f-lucey-co-v-mcmullen-3309171?utm_source=webapp" opinion_id="3309171">178 Cal. 425, 173 Pac. 1000. Nor does this constitutional provision making such shares of the stock void leave creditors without a remedy. For, under the laws of this *146state, officers of a corporation who issue stock in violation of the constitutional prohibition become liable to the creditors. Comp. Laws 1913, § 4528. It being clear that the shares of stock upon which this action is based were issued in violation of the Constitution and laws of this state, such shares are void, and, being void, no rights and no liabilities can be predicated thereon.

There is another conclusive reason why the present action cannot be maintained. The action is predicated upon the liability of a stockholder for the debts of the corporation as expressed in § 4554, Comp. Laws 1913. In so far as applicable to the present action that section provides that each stockholder is liable individually for the debts of the corporation “to the extent of the amount that is unpaid upon the stock held by him,” and the liability is determined by the amount unpaid at the time the action is commenced, which liability is not released by a subsequent transfer of the stock. The respondent argues that under this statute every stockholder is liable for corporate debts to the extent of the difference between the par value and what was originally paid to the corporation for the stock. Or, in other words, that the amount unpaid upon the stock within this statute is the amount originally unpaid to the corporation. If this construction is correct it would follow that every purchaser of stock from a stockholder in a corporation, regardless of the price he pays for it, whether par, below par, or above par, is liable for the corporate debts, if as a matter of fact the corporation did not receive full value when the stock was originally issued, and this liability would attach even though the subsequent purchaser had no notice of the circumstances surrounding the original issuance of the stock. It would also follow that no one would be safe in purchasing corporate stock, no difference how prosperous the corporation, without examining the transaction in which the stock was originally issued. Furthermore, no one would be safe in accepting corporate stock as a gift without a similar examination. We are of the opinion that the statute does not mean what the respondent contends it means, and that a different meaning is apparent from the section itself. (And especially so when considered in connection with the other statutes concerning the transfer of shares of stock.)

It will be observed that the liability provided in the statute is determined at the time the action is commenced. The clear implication *147from this provision is that one who was a stockholder prior to the com-" mencement of the action, but who had ceased to be such before the action was brought, is not liable for corporate debts. So, the statute does not purport to give to corporate creditors the right to collect from intermediate holders of stock which was originally not fully paid. It thus recognizes negotiability to the extent of making the stock salable and transferable before action brought upon the assumption of nonliability for corporate debts. In the light of this recognition in the statute itself and of the well-settled law aside from statutes, what is the meaning of the expression “the amount that is unpaid upon the stock held by him % ” It seems clear to us that it can mean but one thing, and that is the amount that a stockholder is owing to the corporation upon the stock which he holds.

Under fundamental principles of contract law, how does the stockholder become indebted to the corporation for stock ? He becomes indebted to the corporation when he subscribes for the stock for the amount of his subscription, or, if he purchases from a stockholder stock for which the latter has not paid the corporation and he has knowledge of the fact, he is liable.

It will be noticed, however, that the statute in question says nothing concerning the liability of the original subscriber for the amount of his subscription, nor concerning the liability of an intermediate owner of the stock who purchased knowing of the unpaid subscription obligation and assuming it. These are liabilities which the corporation could clearly enforce. The first as the immediate party to the subscription contract, and the second as the beneficiary of a promise by the intermediate stockholder to pay the amount of the subscription. Such obligations are not discharged by a mere transfer of the stock. They rest upon well-established principles of contract law, and may be enforced by the corporation or made available to creditors. See §§ 4526 and 7998, Comp. Laws 1913. But where one buys in good faith relying Upon the representation that the stock is fully paid for, and the certificate of stock bears the indorsement that the statute requires to be placed upon fully paid stock (Comp. Laws 1913, § 4527), there is not as to him anything unpaid upon the stock. Ann. Cas. 1914B, 748, 755; 6 Fletcher, Cyc. Corp. § 3771; 3 Thomp. Corp. § 3222; 1 Cook, *148Stock & Stockholders, 3d ed. § 50; 7 R. C. L. § 389; Brant v. Ehlen, 59 Md. 1" court="Md." date_filed="1882-04-28" href="https://app.midpage.ai/document/brant-v-ehlen-7896133?utm_source=webapp" opinion_id="7896133">59 Md. 1.

We find nothing in the statute which fairly indicates a legislative intention to depart from the well-settled rule, that a bona fide transferee of stock which has been sold to him as fully paid is not liable for any portion of the unpaid subscription or for any difference there may be between the par value and the amount received by the corporation at the time the stock was originally issued. A similar question has been presented to the courts of last resort in at least two states, — Illinois and Washington.

Section 8 of the Illinois Corporation Act, which was passed in 1872 and which has been in force ever since, provides, among other things, that “every stockholder shall be liable for the debts of the corporation to the extent of the amount that may be unpaid upon the stock held by him.” And further provision is made for the joint liability of an assignor and assignee of stock “until the said stock be fully paid.” The language of this statute concerning the stockholders’ liability for debts is substantially the same as that contained in § 4-554, Comp. Laws 1913. In several well-considered cases arising under this statute, the supreme court of Illinois has held that a good-faith purchaser of stock which was issued as fully paid is not liable to corporate creditors for any unpaid balance. Coleman v. Howe, 154 Ill. 458" court="Ill." date_filed="1895-01-14" href="https://app.midpage.ai/document/coleman-v-howe-6966078?utm_source=webapp" opinion_id="6966078">154 Ill. 458 — 471, 45 Am. St. Rep. 133, 39 N.E. 725" court="Ill." date_filed="1895-01-14" href="https://app.midpage.ai/document/coleman-v-howe-6966078?utm_source=webapp" opinion_id="6966078">39 N. E. 725; Sprague v. National Bank, 172 Ill. 149" court="Ill." date_filed="1898-02-14" href="https://app.midpage.ai/document/sprague-v-national-bank-of-america-6967873?utm_source=webapp" opinion_id="6967873">172 Ill. 149-167, 42 L.R.A. 606, 64 Am. St. Rep. 17, 50 N. E. 19; Higgins v. Illinois Trust & Sav. Bank, 193 Ill. 394" court="Ill." date_filed="1901-12-18" href="https://app.midpage.ai/document/higgins-v-illinois-trust--savings-bank-6969972?utm_source=webapp" opinion_id="6969972">193 Ill. 394-399, 61 N. E. 1024; Gillett v. Chicago Title & T. Co. 230 Ill. 373" court="Ill." date_filed="1907-10-23" href="https://app.midpage.ai/document/gillett-v-chicago-title--trust-co-6973418?utm_source=webapp" opinion_id="6973418">230 Ill. 373-411, 82 N. E. 891.

In the .case of Higgins v. Illinois Trust & Sav. Bank, 193 Ill. 400, 42 L.R.A. 606" court="Ill." date_filed="1898-02-14" href="https://app.midpage.ai/document/sprague-v-national-bank-of-america-6967873?utm_source=webapp" opinion_id="6967873">42 L.R.A. 606, 64 Am. St. Rep. 17, 50 N. E. 19, the court refers specifically to the rule and to the statute, saying:' “If, however, the stock has been issued as fully paid and the assignee has acquired the same in good faith, and without notice that it has not been fully paid, he is not liable to the creditors of the corporation for any unpaid balance due upon the stock. 3 Thomp. Corp. § 3222; Kellogg v. Stockwell, 75 Ill. 68" court="Ill." date_filed="1874-09-15" href="https://app.midpage.ai/document/kellogg-v-stockwell-6957844?utm_source=webapp" opinion_id="6957844">75 Ill. 68; Thebus v. Smiley, 110 Ill. 316" court="Ill." date_filed="1884-06-13" href="https://app.midpage.ai/document/thebus-v-smiley-6962415?utm_source=webapp" opinion_id="6962415">110 Ill. 316; Coleman v. Howe, 154 Ill. 458" court="Ill." date_filed="1895-01-14" href="https://app.midpage.ai/document/coleman-v-howe-6966078?utm_source=webapp" opinion_id="6966078">154 Ill. 458, 45 Am. St. Rep. 133, 39 N.E. 725" court="Ill." date_filed="1895-01-14" href="https://app.midpage.ai/document/coleman-v-howe-6966078?utm_source=webapp" opinion_id="6966078">39 N. E. 725; Sprague v. National Bank, 172 Ill. 149" court="Ill." date_filed="1898-02-14" href="https://app.midpage.ai/document/sprague-v-national-bank-of-america-6967873?utm_source=webapp" opinion_id="6967873">172 Ill. 149, 42 L.R.A. 606, 64 Am. St. Rep. 17, 50 N. E. 19; Webster v. Upton, 91 U.S. 65" court="SCOTUS" date_filed="1876-02-18" href="https://app.midpage.ai/document/webster-v-upton-89148?utm_source=webapp" opinion_id="89148">91 U. S. 65, 23 L. ed. 384. Nor is this rule changed *149by § 8 of tbe Corporation Act, which only fixes the liability of assignors and assignees to the corporation, and not between themselvesThus, where the liability to the corporation depends upon the contract of parties other than the corporation, and where, by its express intendment, no such liability arises, the statute does not change the relation of the parties to the contract and impose an uncontemplated burden upon the purchaser. The rights of the corporation and of creditors to this extent remain derivative.

In Davies v. Ball, 64 Wash. 292" court="Wash." date_filed="1911-07-24" href="https://app.midpage.ai/document/davies-v-ball-4731001?utm_source=webapp" opinion_id="4731001">64 Wash. 292, 116 Pac. 833, Ann. Cas. 1914B, 750, the rule of nonliability of a bona fide purchaser was adhered to and the decision was made in the light of the state Constitution, § 4, article 12, which provided that “each stockholder should be liable for the debts of the corporation to the amount of his unpaid stock.” See also Wishard & Cole v. Hansen, 99 Iowa, 307" court="Iowa" date_filed="1896-10-17" href="https://app.midpage.ai/document/wishard-v-hansen-7107419?utm_source=webapp" opinion_id="7107419">99 Iowa, 307, 61 Am. St. Rep. 238, 68 N.W. 691" court="Iowa" date_filed="1896-10-17" href="https://app.midpage.ai/document/wishard-v-hansen-7107419?utm_source=webapp" opinion_id="7107419">68 N. W. 691.

We are of the opinion that the expression in our statute, § 4554, “the amount that is unpaid upon the stock held by him,” refers to the amount which a stockholder has rendered himself liable to pay to the corporation upon principles of contract or in conformity with public policy where he has notice of nonpayment, and that it does not impose a liability upon a bona fide purchaser which is entirely outside of his contract of purchase. If any other meaning had been intended it would seem that the statute would have rendered every intermediate holder of the stock liable until the capital were fully paid in.

In so far as the respondent’s argument is based upon § 4527, Compiled Laws 1913, which renders officers issuing stock in violation of the provision requiring payment in money, property or services, liable to purchasers in good faith, we deem it founded upon a misconception of the statute. The argument is that there would be no occasion to provide for such officers being liable to purchasers of stock unless it were contemplated that good-faith purchasers might sustain damages by reason of being held liable to creditors. This assumption is unfounded. It is manifest that a good-faith purchaser of stock, taking it upon representation that it is fully paid for, may be damaged by reason of becoming a co-owner of the corporate assets which are represented to be, or to have been, equivalent to the par value of the stock, when as a matter of fact the corporation never had been the recipient *150of assets to this measure. So, the damage' a good-faith purchaser of stock might sustain would be the difference between the value of his interest in a corporation upon the assumption that it had received money, property or services equivalent to the par value of the stock issued and the value of his interest in the same corporation whose stock was actually issued without receiving such an equivalent. This is a damage that would be occasioned by the breach of a duty imposed upon the officers, and the statute makes them liable therefor. See Van Slochem v. Villard, 154 App. Div. 161, 138 N. Y. Supp. 852.

For the foregoing reasons we concur in the order of reversal.

Bronson, J., concurs. Christianson, Ch. J., being disqualified, did not participate, Honorable J. M. Hanley, Judge Twelfth Judicial District, sitting in his stead.

Concurrence Opinion

Grace, J.

I concur in the result.