41 F. 531 | U.S. Circuit Court for the District of Middle Tennessee | 1890
The complainants, on behalf of themselves and all other creditors of the Clifton Coal Company who may choose to come in, bring this suit to reach and subject to the payment of their debts against the company the amounts remaining unpaid upon shares of the capital stock
The articles of incorporation were duly recorded .July 3, 1883, in the county court clerk’s office of Hopkins county, Ky., and the company’s principal place of business was established at Manington, in the adjacent-county of Christian. The capital stock, to the extent of $120,000, as to which no controversj'' arises in the present suit, was promptly subscribed for, and the company immediately commenced operations upon the lands it bad acquired, and proceeded to make large outlays and expenditures for machinery, buildings, merchandise, and labor connected with the mining and selling of coal for steam and grate purposes, to which its business was, for several years, chiefly confined. Early in 1886 experiments were made and opinions were expressed by experts, which led the stockholders and managers of the company to believe that the company’s coal could be profitably converted into iron-making coke. On March 31, 1886, a meeting of the stockholders was held, (all the stock being represented in person or by proxy,) at which, after reciting that $50,-000 was needed and required by the company with which to build coke-ovens, buildings, and structures of'various kinds, and to further develop the property, it was unanimously resolved to issue the bonds of the company to an amount not exceeding $50,000, in sums of $1,000 each, due at 30 yqars after April 1, 1886, bearing 6 per cent, interest, payable semi-annually, and secured by trust mortgage upon the company’s lands,
On the-day of May, 1886, a called meeting of the stockholders was held at Nashville, Tenn., 1,073 of the 1,200 shares being represented in person, when, “it was unanimously resolved that the capital stock of the company be increased to $200,000, as authorized by the charter; the purpose for which said stock is issued being the betterment of present plant, and the construction of a new plant for coking purposes.” The proceedings of this meeting were taken down at the time in pencil by the acting secretary, but, by inadvertence or oversight, the, resolution was not formally entered upon the minute book of the company until 1888, when the omission was discovered. But the fact of the meeting, of the stockholders who were present, and the adoption of the resolution, is fully and clearly established, aside from the pencil memorandum of the proceedings, and the subsequent entry thereof upon the minute book of the company. It was supposed and assumed that the increase of $80,000 to the capital stock of the company, notwithstanding the expressed purposes for which it was made, belonged proportionately to the existing stockholders, and that they could control, dispose of, distribute, and divide the same as they deemed proper. Acting upon this idea, and being advised by a hanker who had undertaken to see the company’s bonds that, in order to make them “go” more readily, it would be well to add.au equal amount of the stock,for distribution with each bond, the managing officers of the company, on December 30, 1886, with the knowledge and consent of all the stockholders then holding the original stock of $120,-000, prepared, and caused to be circulated, a subscription paper, as follows, viz.: “We, the undersigned, subscribe for the amount set opposite to our names, respectively, to bonds of the Clifton Coal Company, aggregating $50,000. It is agreed that $50,000 of the $200,000 capital stock he distributed pro rata among the subscribers to the above bonds.” The defendants Handley, Neely, McLester, Talbot, Fletcher, Buckner, James, Erwin, Lannom, D. T. & W. A. Rankin, Murray, Dibbrell & Co., Orr, Jackson & Co., and While, with others not served in the suit, became subscribers to said paper for different amounts of the bonds, to, the extent of $45,000, leaving $5,000 thereof untaken. The defendants Handley and Neely were existing holders of large portions of the old stock. The defendant White had been an original stockholder to the amount of $20,000, but had transferred his stock in November, 1885. He, with Neely and Sanford, was an indorser of the company’s note for $16,500,
Some of the other defendants, not previously connected with the company as stockholders, were led, as they state, to subscribe for said bonds on the supposition that the stock which was'to be distributed with the bonds was or would be a part of the old stock, which existing stockholders would surrender for their benefit. But no such representation was made by any agent or officer of the company. Mr. Handley, who was most active in procuring subscriptions for the bonds, appears to have acted in perfect good faith. His representations were to the effect that the company had concluded to bond its property for $50,000; that it had been ascertained that its coal would make coke; that, with the assurance of making coke, the property was first class; that under the charter it was allowed to increase its capital stock to $200,000; that $120,000 was already issued; that a resolution had been passed by stockholders to issue the remaining $80,000 of stock, a part of which would be given with the bonds; that the original $120,000 of stock would have no preference over the new, orincreased $80,000; andthatin hisopinion, with proper management, the stock would be at or above par in two or three years. He be
After paying for the bonds, there was issued to the several subscribers therefor, in January, 1887, equal amounts of the company’s capital, stock; the receipts for the certificates generally reciting that the stock was “issued with bonds for same amount as per agreement,” or “issued to go with $-bonds of company as per agreement of stockholders,” and upon the face of the certificate it was stated that the party named therein was entitled to so many shares “of the fully paid capital stock of Clifton Coal Co., which shares are transferable on the books of the company, either personally or by attorney, upon surrender of this certificate, free from all claims or demands on the part of the company.”
All the defendants that thus took stock with the bonds appear upon the company’s books as stockholders; all of them still hold said stock; and all, except White, have, either in person or by proxy, voted the same at subsequent meeting of the stockholders. In March and April, 1887, $30,000 of the new or increased stock -was distributed pro rata among the holders of the old stock, thereby increasing their respective shares or holdings 25 per cent. This increase of their stock was effected by simply surrendering their certificates of old stock, and taking new certificates for the larger amount. Thus the defendant Handley, in lieu of certificate No. 1 of old stock for 200 shares taken up, received, on March 8, 1887, new certificate No. 16 for 250 shares. So with other certificates surrendered by him, making his proportion of the increased stock 861 shares. The defendant Neely, who had 300 shares of the old stock, knew of the arrangement to issue an equal amount of stock with the bonds, and to distribute $30,000 of the increased stock ordered by the resolution of May, 1886; and on April 5, 1887, executed his power of attorney to Samuel R. Sanford, authorizing the latter, for him and in his name, to receipt “to the Clifton Coal Company for stock in my name, and transfer and sell the same as if I were there present.” Under this power of attorney Sanford surrendered Neely’s old certificate for 300
This disposition which was made of the increased or new stock, in distributing $45,000'thereof to the subscribers for bonds, and $30,000 thereof among the old stockholders, proportionately, does not appear to to have been authorized or directed by any expressed corporate action. The books of the company in evidence show no action, either by the directors or stockholders, on the subject. It is, however, established by the proof that all the old' stockholders knew of and acquiesced in the disposition of the new stock as made; that such increased stock was represented and voted at subsequent meetings of stockholders; and that it was recognized and held out to the public as a part of the capital stock of the company.
The debts due the several complainants were contracted by the company after its bonds, as directed by the resolutions of March 31, 1886, were issued, and after its capital stock ivas increased to $200,000 by the resolution-of May, 1886. On January 11,1887, the company executed its note to complainant Stutz for $3,266.87, payable April 11, 1887, being for the balance due him for certain patented coal-washing machinery furnished the company under contract made in June, 1886, to prepare the coal for coking. He obtained judgment against the company on said note'in-the United States circuit court at Louisville on March 8, 1888, for $3,466.20, on which execution was duly issued,-and returned mulin''bo'ria. The complainants Ragon Bros, and Louis Stix & Co. severally obtained judgments against the company in the circuit court of Hopkins county, Ky., for their respective demands, in October 1887, on which executions were issued, and also returned nulla bona. Their judgments were' founded upon claims for merchandise furnished the company, at its request, between March and August, 1887. The debt due Ragon Bros, is fully established, aside from their judgment, the validity of which is attacked for want of proper service. But we think their judgment is valid, the summons having been served upon Allen, the
No valid objection can be raised to the form of the suit. The bill is properly filed, under the authority of Hatch v. Dana, 101 U. S. 205. Its object being to reach and subject a trust fund, complainants wore not even required to have reduced their claims to judgments, and exhausted their remedy at law after the insolvency of the company. Case v. Beauregard, Id. 688-690.
The defendants interpose various special and general defenses. They resist the right of complainant Stutz to enforce payment from them, on the ground that ho warranted or guarantied the coal-washing machinery which he furnished the company to accomplish certain results which it failed to do; that by reason of such failure there was a breach of his warranty or guaranty, whereby the company sustained great damage, which, it is claimed, exceed his claim, and should defeat his recovery. But this counter-claim for damages, sustained by the alleged broach of warranty or guaranty, was set up by the company as a defense to his suit in the United States circuit court, and was disallowed. It cannot be relitigated in this case, for the reason that the defendants, as shareholders, being represented by the corporation in that suit, have already had their clay in court on this question. The judgment in Stutz’s favor is conclusive against defendants, until reversed for error or impeached lor fraud. It cannot be collaterally attacked, or shown to be erroneous, in this suit. Mor. Priv. Corp. §§ 865, 886, and cases cited; Tayl. Corp. § 737. The defendants who accepted stock with their bonds sot up, as a special defense, that the stock which they thus acquired was understood to be, and was in fact, apart of the original $120,000 paid-up.
We come next to the consideration of the main defenses interposed by all the defendants, which are: First, that the increased stock was void, and neither conferred any rights nor imposed any liabilities upon them; and, second, that, if said increase was valid or binding upon them, they cannot, under the circumstances, be required to pay the amounts represented by their several holdings of such stock, in order to satisfy creditors of the company. It is urged that the attempted increase of stock ivas void, because the stockholders’meeting which authorized it was held in Tennessee .instead of Kentucky ; 'because no formal notice thereof was given; and because such increase of stock, being an amendment of the company’s charter, was not recorded in Kentucky, and notice of the same published, which it is claimed constituted conditions precedent to any valid increase of the stock. The charter of the Clifton Coal Company contains no express provision limiting the company, in its business transactions, to the territory of Kentucky. On the contrary, it was authorized to establish agencies and transact its business as well without as within the limits of that state. The charter contains no express inhibition against its directors and stockholders holding their meetings out of the state. It is settled that, in the absence of such prohibition in the charter or laws of the state creating the corporation, the directors may hold their meetings and transact the business of the company in another state. Railroad, Co. v. Cowdrey, 11 Wall. 476, 477. Stockholders’ meetings, however, should generally be held within the state by which, or under whose laws, the corporation is chartered, in order to be binding upon a dissenting minority. But no valid objection can be made to a stockholders’ meeting held in a foreign jurisdiction, provided all the shareholders give their consent to such meeting, or ratify its action. In the present case, every stockholder assented to and ratified the meeting held at Nashville, which directed the increase of stock; 1,073 of the existing shares were represented in person at the meeting, and the two holders of the remaining 127 shares ratified and approved of the action taken by said meeting. Under such circumstances, previous formal notice of the meeting was not necessary, and the increased stock their authorized, having been carried upon the books of the company, cannot
The remaining and chief ground on which the invalidity of the increased slock is rested is the failure to record and publish the fact that such increase had been authorized and made. It is contended, or this proposition assumes, that such recording and publication were conditions precedent to any valid increase of the capital stock; and sections 3, 5, and 6 of chapter 56 of the General Statutes of Kentucky are referred to as sustaining this view. By section 3, incorporators are required, before commencing any business other than organization, to adopt articles of incorporation, which, after being signed and acknowledged as deeds are executed, are to be recorded in a book kept for that purpose in the office of the clerk of the county where the company’s principal place of business is located.. By section 5, notice is to be published at least four weeks in some convenient newspaper, giving the name of the corporation, and its principal place of business; the general nature of the business proposed to be transacted; the amount of capital stock authorized; the time of its commencement and termination; by what officers its business is to be conducted; the highest amount of indebtedness to which the corporation is at any time to subject itself; and whether the private property of the stockholders is to be exempt from liability for the corporate debts. By section 6, the corporation may commence business as soon as the articles are filed for record in the proper office, and its acts are deemed valid if said publication is made. This section further provides that “no change in any of the foregoing particulars shall be valid, unless recorded and published as the original articles are required to be; nor shall any change be made at any time, or in any manner, which would be inconsistent with the provisions of this act.” In the case of Heinig v. Manufucturing Co., 81 Ky. 300, it was held that the publication and filing of articles of incorporation in the proper office for record, as required by said section, were conditions precedent to the validity of any acts of the corporation. But that decision was expressly overruled in the subsequent case of Walton v. Riley, 85 Ky. 413-421, 3 S. W. Rep. 605, in which it was held that the operation of section 6 must be restricted and confined, so far as it by implication declares the acts of the corporation invalid, to cases where it is sought to annul the charter or franchise as authorized by the seventeenth section of said act, which provides that “persons acting as a corporation, under the provisions of this act, shall be presumed to be legally organized, until the contrary is shown; and no such franchise shall be declared actually null or forfeited, except in a regular proceeding brought for that purpose.” By section 18, it is provided that “no persons, acting as a corporation under the provisions of this act, shall be permitted to set up or rely upon the want of a legal organization as a defense to action brought against them as a corporation; nor shall any person who may be sued on a contract made with such corporation, or sued for an injury done to its property, or for a wrong done to its interests, be permitted to roly upon such want of legal organization.”
“The attempted increase was therefore illegal, but the respondent insists that nevertheless, as against the creditors of the company, the defendant stockholders, by accepting their proportion of the increased stock by voting for its increase by taking dividends upon it, and holding it out to those dealing with the company as an actual component of its capital, are estopped from ■denying the legal validity of the increase, and must be held responsible, as if it was valid. The authorities for this doctrine are numerous and strong. Eaton v. Aspinwall, 19 N. Y 119; Chubb v. Upton, 95 U. S. 665; Aspinwall v. Saochi, 57 N. Y. 331; Railroad Co. v. Cary, 26 N. Y. 75; Kent v. Mining Co., 78 N. Y. 159; Sheldon H. B. Co. v. Eickemeyer H. B. M. Co., 90 N. Y. 613. The answer made to them is that an act absolutely and wholly void, because under the law incapable of being performed, cannot be made valid by estoppel. This is true where under the law there is an entire lack of power to do the act which is brought in question. The distinction is well illustrated in Scovill v. Thayer, 105 U. S. 143. Under the law of Kansas, no company like that then before the court could increase its capital to more than double an amount originally authorized. The capital was sought to be increased in excess of that amount. As against creditors, it was claimed to be a valid increase, by the operation of an estoppel, but the’court ruled otherwise,.and justly; for the very foundation of an estoppel, the misleading of creditor’s to their injury, was wanting. The latter knew', and were bound to know, that no power existed to so increase the capital, and therefore that it was not increased; and hence they were not and could not be misled. But where, as in the present case, the abstract power did exist, and there was a way in which the increase coiild lawfully be made, and the creditors could, without fault, believe that the increase had been lawfully effected, and the necessary steps had been taken, then the doctrine of estoppel may apply, and the increased stock be deemed valid, as to the creditors.”
So it is said in Morawetz on Private Corporations, § 763, that “if a corporation is authorized by law' to increase its capital stock, upon complying with certain prescribed forms or conditions, and the corporation or its agents appear to have endeavored to comply with the prescribed forms or conditions,.and have in fact increased the company’s capital stock by issuing new shares, on the assumption that the legal right to increase the capital stock had been acquired, and if the holder of such new shares has acted as a shareholder, and enjoyed the rights of a shareholder, then the creation of such new shares will be recognized by the courts, and given effect according to the intention of the parties, although the statutory forms or conditions were not complied with, and no legal right to create the new shares was in fact obtained.” Chubb v. Upton, 95 U. S. 668, is to the same effect, where it is said that, “if it be conceded that its increased stock was but de facto, and that it could have been annulled or suppressed by the action of the attorney general, as acting under an irregular organization, the defendant derives no aid from the admission. The cases cited are clear to the point that he cannot make the objection, but must perform the engagement he has made.”
Under these authorities, and under the provision of section 18 of chapter 56 of the General Statutes of Kentucky, and the construction
The second and remaining general ground of defense to be considered is that, even if the increased stock was valid, or its validity cannot he impeached by the holders thereof, still the defendants who accepted and hold portions of such new stock cannot, under the circumstances of this case, be required to pay up the amounts represented by their shares; because the holders made and entered into no contract or agreement to pay for the same, and because it is not shown that complainants, or any other creditor on whose behalf the suit is brought, either trusted or dealt with the company upon the faith of this increased stock, or of defendant’s ownership thereof. How far is this defense, which presents the most important question in the case, available to the old stockholders, such as defendants Handley and Neely, to whom $30,000 of the increased stock was distributed proportionately ? And how far is it available to those defendants who accepted portions of such new stock along with the bonds they subscribed for? The former class stand upon a somewhat different footing from the latter, although neither understood oi; expected that they would or could be called upon, in any event, to pay lor the new shares of stock received by them respectively. The old or existing stockholders, without any contract or agreement with the corporation, but under a tacit understanding among themselves, and upon the idea or assumption that the increased capital stock belonged to them, distributed 300 shares thereof “pro rata” among themselves, while the subscribers for the company’s bonds, with the assent of the old stockholders, received of such increased stock shares equal in amount to their bonds. The old stockholders were clearly mistaken in supposing that all or any portion of the new stock belonged to, or could be appropriated by, them as “non-assessable” or paid-up stock; nor can they, after the insolvency of the company, escape liability to creditors for the amounts represented by the increased stock accepted and held by them, upon the ground of such mistake, or for the reason that the certificates which they received for the new shares recited that the stock was fully paid up.
There is nothing in the charter of the Clifton Coal Company, or in the General Statutes of Kentucky, under which the corporation was organized, sanctioning or authorizing its members to appropriate any portion of its capital stock, without paying or being liable to pay therefor. On the contrary, the charter implicitly prohibits such a distribution in providing that the directors may determine the times and conditions upon which the stock is to he paid in, and in allowing the company to receive real and household estates, mining rights, etc., in payment for stock; while section 14 of chapter 56 expressly declares that nothing in the act conferring corporate franchises, or permitting the organization of corpora
The wholesome and well-established doctrine that the capital stock of a corporation is a trust fund for the payment of corporate debts is utterly inconsistent with the idea that original holders of stock can¡ by any contract, contrivance, or device between themselves, or between themselves and the corporation, acquire and retain shares in the company without incurring liability to pay therefor, whenever such payment is needed to meet the demands of creditors. The original holders of unpaid capital stock are affected with duties towards creditors which constitute or create trust relations between them, to the extent that such unpaid shares held by the former are required to satisfy the claims of the latter. “The law is accordingly settled that any condition or arrangement attached to the contract of a shareholder in a corporation, which, if carried out, would lessen the amount of capital held out to creditors as their security, is a fraud upon creditors, and will therefore be denied effect.” 2 Mor. Priv. Corp. § 842, and cases cited.
It is not material that there was no express contract or agreement on the part of said defendants to subscribe and pay for the increased stock received by them, or that the certificates issued to them therefor recited that the shares were paid up. The untrue statement in the certificate, that the shares are paid up, cannot discharge the shareholder, who has not paid for the same, from liability thereon. It has no greater effect than the unauthorized delivery of an untrue receipt to a person indebted to the corporation. The debtor of the company, obtaining such a receipt without actual payment, would certainly not be discharged, even as to the corporation. Neither can the original holder of unpaid shares avoid liability therefor, by reason of the false recital in the certificate issued to him that the stock was fully paid up. A bona fide purchaser or transferee, without notice from the original holder of such a certificate,
“We see no qualification of this result in the word ‘ non-assessable,’assuming it to be incorporated into and to form a part of the contract. ■ It is quite extravagant to allege that this word operates as a waiver of the obligation, created by the acceptance and holding of a certificate, to pay the amount due upon the shares. A promise to take shares of stock imports a promise to pay for them. The same effect results from an acceptance and holding of a certificate.”
The rale thus laid down, which .was reaffirmed in the subsequent cases of Sanger v. Upton, 91 U. S. 64; Webster v. Upton, Id. 67, 71; Chubb v. Upton, 95 U. S. 666; and Hawley v. Upton, 102 U. S. 316, — establishes the liability of defendants Handley and Neely for the 86 and 75 shares of the new stock, for which they respectively accepted and held certificates.
On behalf of all the defendants who accepted and held certificates of the new stock, “'distributed” to them along with bonds, it is urged that they cannot he held liable thereon to creditors, because they were in no sense subscribers for such stock, and entered into no contract and assumed no obligation to pay therefor. It is claimed for them that neither the company nor the old stockholders could enforce such a liability upon or against them, and that creditors can assert no better or superior rights. Assuming that the subscription paper of December 30, 1886, which stated that “it is agreed that 550,000 of the §200,000 capital stock be distributed pro rata among the subscribers to the above bonds,” constituted a contract between the subscribers for the bonds and the corporation, rather than an agreement between themselves, made with the consent and approval of the old stockholders, are creditors, who dealt with the company without notice or knowledge of that arrangement, precluded from recovering of defendants who accepted and held certificates of stock thereunder? The property of the company was considered ample security for the payment of the bonds, and the distribution of stock to the subscribers for the bonds was not in fact, or by the terms of the subscription pa per, in any proper sense a sale of such stock at and for its market value,
“It is evident, therefore, that the issue of certificates for paid-up shares to a shareholder whose shares have not in fact been paid up is unauthorized. It would be a direct infringement of the rights of all existing shareholders in the company, and a source of fraud upon persons giving the company credit. * * * However, after the capital of a corporation has been reduced by losses, it would not be a wrong against the existing shareholders to issue certificates for paid-up shares on payment of less than their par value. Under these circumstances, fairness and equality would merely require that the new shares be issued at their actual or market value. If shares in a corporation could in no case be issued at less than their face value, it w'ould be practically impossible to increase the capital of a corporation by a sale of new shares after the value of its shares had fallen below par.”
It will be noticed that a sale of new shares at less than par, under the circumstances stated, would not be a wrong against existing shareholders. Whether it would be good against creditors is a different question. So far as the right of creditors are involved and affected, precisely the same objection exists1 against the subscriber for bonds of corporations taking increased stock as a bonus that exists against the taking of orig
In Sawyer v. Hoag, 17 Wall. 618, 619, tho transaction was valid as between the corporation and tho shareholders, but was held invalid as against the representatives of creditors. So in Hawley v. Upion, 102 F. S. 316, the shareholder’s express written agreement with the corporation was to pay $200 (or 20 per cent, of its par value) for 10 shares of the increased stock. As between him and the corporation, this would have been held valid, but as against creditors it was held not binding, and he was required to pay up the remaining 80 per cent; the court saying that, “as the company could not sell its stock at less than par, what was done amounted in law to a subscription for the stock, and nothing else. It is true the stock he took purported to be non-assessable; but that, in law, could only mean that no assessment would he made beyond the percentage he had specially bound himself to pay, unless tho legal liabilities of the company required it.” All the Upton Oases dealt with increased or new stock, and the supreme court, in favor of tho representative of creditors, disregarded the special contracts made between the corporation and the shareholders, and compelled the latter to pay in full for their shares. To the same effect, see the well-considered case of Flinn v. Bagley, 7 Fed. Rep. 785. In harmony with the principle enforced in these cases is the decision of the Kentucky court of appeals in the case of Haldeman v. Ainslie, 82 Ky. 395, in which the capital stock of tho corporation, organized under the same general law as the Clifton Coal
“Tlie effect of the limitation upon the amount to be paid by the subscribers for their stock would not exempt them from liability to a creditor who had dealt with the corporation in ignorance of the articles of association, limiting the amount of the indebtedness to be created by the corporation or those conducting it. * * * The public had the right to believe that each subscriber, taking 400 shares of stock at $100 per share, had either paid up his stock, or was liable for the amount; and when trusting the corporation upon the faith of its ability to pay, and without any knowledge as to the restrictions contained in the contract between the stockholders, a creditor of the corporation could compel the payment of the entire stock, if necessary to satisfy his demand. ”
I am unable to see any difference in principle between making a stockholder pay a larger per cent, on his shares than he has expressly agreed and undertaken to pay, and compelling a shareholder to pay up the whole amount represented by certificates which he has accepted, and holds under contract as paid-up shares, but which have not in fact been paid. If the unpaid balance may be reached and subjected to the paj^ment of corporate debts, in disregard of the contract, why may not the unpaid whole of outstanding shares be likewise reached and subjected, notwithstanding the agreement that they should be treated or considered as fully paid?
• The recital in the certificates issued to and received by defendants, that the shares were “fully paid up, and free from all claims and demands on the part of the company,” cannot relieve them, under the authority of Hawley v. Hipton, 102 U. S. 316, from liability to creditors, even if valid against the corporation. The case of Coit v. Amalgamation Co., 14 Fed. Rep. 12-18, and the same case on appeal, reported in 119 U. S. 343-347, 7 Sup. Ct. Rep. 231, cited by counsel for the defense, is not in conflict with the foregoing authorities. In that case there was a new issue of stock, connected with the acquisition by the corporation of certain real estate, the title to which failing, or proving defective, the new stock was thereupon called in and canceled, and the transaction rescinded. The creditors, who after the cancellation of the transaction and this new stock sought to compel parties to whom portions of it were issued to pay up the same, knew of and acquiesced in the whole transaction. Mr. Justice Ebadley said, in deciding the case on the circuit, that “if a legal presumption did not arise that Mr. Coit [the creditor] knew of the transaction at that time, and there was no proof that he
“It seems to have been thought a matter of some moment that the plaintiff, so far as appeared on the trial, had not examined the stock ledger before he gave credit to the company. But there are other ways in which he may have learned that the defendants were stockholders, and, besides, 1 do not see that the liability of the stockholder has been made to depend on the fact that the creditor knew he could be reached. * * * As the defendants were in fact stockholders, they must answer to the plaintiff, although he may not have known at the time he trusted the company that the defendants could be reached.”
As stated in Haldeman v. Ainslie, 82 Ky. 395, the public had the right to believe that each holder of the increased stock had either paid for his share or was liable for the amount; and a creditor who trusts the corporation upon the faith of its ability to pay, and without any knowledge of the contract or arrangement between the stockholders and the company under which the stock is treated as paid up, may compel shareholders to make actual payment. The statement in section 833 of Morrawietz on Private Corporations, that subsequent creditors would have an equitable claim to have new shares paid up in full, “if it was expressly represented to the creditors that the new shares had actually been issued,” is hardly warranted by the authorities. I have found no case which imposes upon the creditors the burden of showing any such express representation that the.new shares had actually been issued, asa condition to his right to compel stockholders to pay up their unpaid shares. It being settled by the authorities referred to that the coal company could not lawfully give or distribute to defendants paid-up shares of its increased stock as a bonus to go with its bonds subscribed for by them, and it being further settled that the acceptance and holding of certificates for such shares of stock is, in effect, the same as a promise to take shares, which
Counsel for the defense called the attention of the court to several English cases, holding that shareholders, even as against creditors of the corporation, are entitled to stand upon their contract with the company. Those cases may not be specially discussed or reviewed, as the decisions of the suj>reme court of the United States and of Kentucky, under whose laws the Clifton'Coal Company was organized, proceed upon a different principle. The case of Christensen v. Eno, 106 N. Y. 97, 12 N. E. Rep. 648, is especially pressed as sustaining defendants’ position. That case is certainly an authority in favor of defendants, but it is not in harmony with the authorities above referred to. The facts of the case were that the Illinois & St. Louis Bridge Company issued to Eno 25 shares of its capital stock, upon which 40 per cent, was not paid, but was credited as paid when the stock was issued. The complainant, a judgment creditor of the corporation, sought to compel Eno to pay up the unpaid 40 per cent, towards the satisfaction of his debt. The court, following the •English cases cited by counsel for defendant, and without even referring to the decisions of the supreme court of the United States, held that the creditors could not recover, because Eno had entered into no contract with the company to pay the unpaid 40 per cent. I am unable to reconcile this decision with the principles announced and applied by the supreme court in the above-cited Upton Cases, which are binding upon and should be followed by this court.
The conclusion of the court is that all the defendants are liable to the complainants, and other creditors whose debts originated after the stock was increased, who may come in for the amount of their respective holdings of such increased stock, which must be paid up in full if necessary to satisfy such corporate liabilities. The amounts for which the defendants are thus liable, being a trust fund equitably applicable to the payment, not only of complainants’ claims, hut those of all other claims of the company in like position, such other creditors should have an opportunity to come in and share equally with complainants in said funds or assets. To this end the master is directed to give 30 days’ notice by publication made in some newspaper published in Nashville, Tenn., and in a newspaper published at or near the company’s principal place of business,