1 McCrary's Cir. Ct. Rpts 86 | U.S. Circuit Court for the District of Iowa | 1877
No doctrine of equity is more firmly established upon solid foundations of reason and authority, than the principle that the capital stock, property and assets of a corporation are to be deemed a trust fund sacredly pledged for the payment of the debts of the corporation. This doctrine was most forcibly expounded by Judge Story in the case of Wood v. Dummer [Case No. 17,944]. That ease grew out of the insolvency of the Haiowell and Augusta Bank, in which the defendant, a stockholder, withdrew from the bank his proportion of stock, when the bank was indebted on bills previously issued. Judge Story, among other things, said that he “viewed the stockholders as having the full benefit of the profits made by the establishment, and as being unable to take any portion of the fund until all the other claims on it were extinguished, and that their rights were not to the capital stock, but to the residuum, after all demands were paid; and further, that upon a dissolution of the corporation, although the billholders and stockholders had each equitable claims, yet those of the billholders had the prior equity. On the principle, then,” he continued, “that the capital stock was a trust fund, it was clear that it might be followed by creditors into the hands of any person having notice of the trust attached to it, and that as to tne stockholders themselves there could be no pretense to say that in law and in fact they were not affected by the most ample notice.” Judge Story laid down the same doctrine in Mumma v. Potomac Co., 8 Pet. [33 U. S.] 286.
In Curran v. State of Arkansas, reported in 15 How. [56 U. S.] 304, the supreme court of the United States held that on the dissolution of corporations its effects are a trust fund for the payment of its creditors, who may follow them into the hands of any one not a bona fide creditor or purchaser, without notice; and a state law which deprives creditors of this right, and appropriates the property to other uses, impairs the obligation of their contracts and is invalid; and the fact that a state is the sole owner of the stock of a corporation does not affect the rights of its creditors. And Judge Curtis, in delivering the opinion in this case, quotes with approbation from Story’s Equity the following language: “To this head of implied trusts we may refer that class of cases where the stock and other property of private corporations is deemed a trust fund for the payment of the debts of the corporation, so that the creditors have a lien or right of priority of payment on it in preference to any of the stockholders of the corporation; and no stockholder can entitle himself to any dividend or share of such capital stock until all the debts are paid; and if the capital stock should be divided, leaving any debts unpaid, every stockholder receiving his share would, in equity, be held liable pro rata to contribution to discharge such debts out of the funds in his hands.” And Judge Curtis adds, that in conformity with this doctrine the following cases were decided in the state courts: Wright v. Petrie, 1 Smedes & M. Ch. 319; Nevit v. Bank of Port Gibson, 6 Smedes & M. Ch. 513; Hightower v. Thornton, 8 Ga. 493; Nathan v. Whitlock, 3 Edw. Ch. 215, affirmed by the chancellor in 9 Paige, 152.
In Nathan v. Whitlock, 9 Paige, 152, the case was that the directors of an insurance company agreed among themselves to take a majority of the stock and to give their stock notes for the same, secured by an hypothe-cation of the stock, and after the company had become embarrassed, one of the directors agreed with the president to give him $6,000 if he would take his stock and substitute his own note in lieu of the stock note of the director, which was accordingly done. It was held to be a fraud upon the creditors of the company and the other stockholders who had paid their stock, and an action was sustain-, ed against the director upon the note delivered up. The court held that in all cases where the capital stock or assets of a corporation have been distributed to the stockholders without providing for the payment of the debts, a court of equity will allow the creditor to sustain a bill against the shareholders to compel contribution to the payment of the debts of the company to the extent of the funds obtained by them, whether directly from the company or through some substitution of useless securities for those that were good.
The defendant in the case now before the court was both a director and stockholder of the indebted corporation. As a director he aided in the passage of a resolution by which, as a stockholder, he appropriated the bonds in question, which were assets of the company, in a certain proportion to his paid up stock. This was a wrongful act on his part. It resulted in diverting to his own use a part of the trust property which he as a trustee was bound to apply to the payment of debts. This he had no right to do, so long as the debts remained unpaid. The diversion of the trust fund was a breach of trust and a fraud upon creditors. As against the creditors he thereby acquired no title to the bonds in question. A trastee can certainly acquire no title to any part of the trust fund for his own use by a breach of trust and a fraud upon creditors. The defendant, notwithstanding the transfer of bonds to himself, stood seized of them, subject to the trust in favor of creditors. The creditors had a perfect right to pursue the bonds in the hands of the defendant, and have them applied in payment of their claims against the corporation. This defendant, in the next place, as a director of the corporation, assisted in the passage of a resolution by which an assessment was made of thirty per cent, upon the capital stock of the company, and another resolution, providing that the treasurer should be authorized to receive from him and others, in payment of this assessment, the very bonds which they had wrongfully appropriated. The defendant did not own the bonds with which he paid up his stock. These bonds weré the property of the corporation, in trust for the creditors. The defendant paid what he owed the corporation by the delivery of bonds which belonged to them. He gave to the