Opinion
No. 31878.
January 6, 1936. Suggestion of Error Overruled January 20, 1936.
1. BANKRUPTCY.
Trustee in bankruptcy represents both bankrupt and his creditors, and has same rights and may pursue same remedies in behalf of creditors as creditors would have been entitled to if there had been no adjudication in bankruptcy, including rights enforceable under state laws (Bankr. Act, section 47a(2), as amended in 1910, 11 U.S.C.A., section 75(a) (2)).
2. CORPORATIONS.
Capital stock of corporation is fund set apart to pay debts of corporation, and cannot be withdrawn by stockholders until all debts of corporation have been paid.
3. BANKRUPTCY.
Under statute providing that stockholder should be individually liable for debts of corporation contracted during ownership of stock for amount remaining unpaid on stock subscription, trustee in bankruptcy of corporation held entitled to maintain suit on notes executed by stockholders for balance due on subscriptions for additional stock (Bankr. Act, section 47a(2), as amended in 1910, 11 U.S.C.A., section 75 (a)(2); Code 1930, sections 4148, 4153).
4. BANKRUPTCY.
Cancellation and surrender of notes, given by stockholders for purchase of additional stock by president of corporation without authorization of board of directors while corporation was hopelessly insolvent and less than one month before filing of petition in bankruptcy, held ineffectual to discharge liability of stockholder for balance due on stock as against trustee in bankruptcy of corporation (Bankr. Act, section 47a(2), as amended in 1910, 11 U.S.C.A., section 75(a)(2); Code 1930, sections 4148, 4149, 4153).
APPEAL from the circuit court of Sunflower county; HON.W.H. COX, Judge.
Maynard, FitzGerald Venable, of Clarksdale, for appellant.
The propriety of refusing the appellant and granting to appellees a peremptory instruction is the question presented by this appeal. On such a question, all facts proven and all facts reasonably inferable must be taken to be established.
Dean v. Brannon, 139 Miss. 312; McKinnon v. Braddock, 139 Miss. 424; Wise v. Peugh, 140 Miss. 479; Yates v. Houston Murray, 141 Miss. 881.
The defendants were stockholders in the Gilmer Grocery Company. Book is evidence of who is stockholder.
Lehman Durr Co. v. Glenn, 6 So. 44; Walsh v. State, 74 So. 45; Oden v. Vaughn, 85 So. 779.
Appellants are estopped to deny their status as stockholders for they ratified all transactions relating to stock, stock subscriptions and dealing with notes in that they knowingly received dividends from the corporation as stockholders, and, pursuant to agreement, had the dividends applied in partial payment of the stock, conduct inconsistent with non-ownership of stock.
Perkins v. Bank, 103 Miss. 179; Turnbull v. Payson, 95 U.S. 419, 24 L.Ed. 437.
Persons holding stock are estopped as against creditors to deny that they are legal stockholders.
Aldrich v. Rice, 161 Miss. 879; Davis v. Butler, 128 Miss. 847; Allen v. Edwards, 93 Miss. 719; Turnbull v. Payson, 95 U.S. 419, 24 L.Ed. 437; Thigpen v. Miss. Cent. R. Co., 32 Miss. 347.
The company was insolvent at the time the notes were cancelled without payment or consideration given and delivered to appellants.
The company was adjudicated as such by the federal bankruptcy court for the proper district.
Freeman on Judgments (5 Ed.), sec. 1476; Gratiot County Bank v. Johnson, 249 U.S. 246, 63 L.Ed. 587.
Such an adjudication is binding on a stockholder who is necessarily a party because where, as here, the directors, agents of the stockholders, voted to file the petition, they were acting within this authority.
14A C.J., Corporations, secs. 3104 and 3108; U.S.C.A., Title 11, sec. 1.
A trustee in bankruptcy has the right to bring suit and enforce payment for unpaid subscriptions for stock if needed to pay debts.
Ogilvie v. Knox, 22 How. 380, 16 L.Ed. 349; Sanger v. Upton, 91 U.S. 56, 23 L.Ed. 220; Scoville v. Thayer, 105 U.S. 155, 26 L.Ed. 968; Harrigan v. Bergdoll, 270 U.S. 500, 70 L.Ed. 733; Potts v. Wallace, 146 U.S. 689, 36 L.Ed. 1135.
The suit must be brought by the trustee and in a state court of proper venue and at law.
Kelly v. Gill, 246 U.S. 116, 62 L.Ed. 185; Freeman v. Winchester, 10 S. M. 577.
The trustee in bankruptcy must sue in his own name and not in that of the corporation, because he sues in his own right, since cause of action is in him.
Reagan v. Midland Packing Co., 8 F.2d 954.
It is the settled doctrine of the Supreme Court of the United States and the American states generally, that the capital of an insolvent corporation is a trust fund, at least sub modo, for creditors for the payments of debts; that the law implies a promise by original subscribers to stock to pay for the stock for this purpose.
Camden v. Stuart, 144 U.S. 104; Fogg v. Blair, 139 U.S. 118; Handley v. Stutz, 139 U.S. 417; Morgan County v. Allen, 103 U.S. 498; Sanger v. Upton, 91 U.S. 56; Upton v. Tribilcock, 91 U.S. 45; 2 Thompson on Corporation, sec. 3911; Payne v. Bullard, 23 Miss. 88; Kimbrough v. Davis, 104 Miss. 722; Bank of Laurel v. Pearson, 109 Miss. 638; Sections 4148, 4149 and 4153, Code of 1930.
It is the duty of a receiver to collect the unpaid subscriptions to its capital stock, which becomes a trust fund in his hands for the benefit of creditors.
Campbell v. Chapman, 31 So. 101; Kretchmar v. Stone, 90 Miss. 375; Reagan v. Midland Packing Co., 8 F.2d 954.
Section 4153, Code of 1930, provides that each stockholder shall be individually liable for the debts of the corporation contracted during his ownership of stock for the balance that may remain due and unpaid for the stock subscribed, and may be sued by any creditor of the corporation.
Vick v. LaRochelle, 57 Miss. 602; Robinett v. Starling, 72 Miss. 652; Payne v. Bullard, 23 Miss. 88.
As to creditors the obligation for unpaid subscriptions is unconditional.
Vermont Marble Co. v. Granite Co., 135 Cal. 579, 56 L.R.A. 728; Quartz Glass Mfg. Co. v. Joyce, 27 Cal.App. 523, 150 P. 648.
A subscription to stock in a corporation is not only an agreement between the corporation, but is such also as to other subscribers who have the right to suppose that all subscribers are treated alike.
Meyer v. Blair, 109 N.Y. 600, 4 A.S.R. 500; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 A.R. 199; White Mountains R. Co. v. Eastman, 34 N.H. 124; Jackson, etc., County v. Walls, 105 La. 89.
The cases are unanimous in support of the rule that an extrinsic or collateral agreement between a particular subscriber to corporate stock and the corporation or its agents whereby the subscriber is not to be held liable is invalid and void, as it constitutes a fraud upon creditors, other subscribers and stockholders.
Reiff v. Nebraska-California Colony Co., 277 Fed. 417; Jones v. Dodge, 97 Ark. 248, L.R.A. 1915A, 472; Faris v. Beck, 74 Colo. 480, 222 P. 652; Melvin v. Lamar Ins. Co., 80 Ill. 446, 22 A.R. 199; Sarbach v. Kansas Fiscal Agency Co., 86 Kan. 734, Ann. Cas. 1913C, 415; Thompson v. Rec. Savings Bank, 19 Nev. 103, 3 A.S.R. 797; Wetherbee v. Baker, 35 N.Y. Eq. 501; Industrial Profit Sharing Bank v. Curkale, 158 S.C. 21; Meyer v. Blair, 109 N.Y. 600, 4 A.S.R. 500; Robinson v. Pittsburg, etc., Ry. Co., 32 Pa. 334, 72 A.D. 792; Galena S.W.R. Co. v. Ennor, 116 Ill. 55, 4 N.E. 762; Morrell v. Martin, 23 N.M. 563, 170 P. 45; York Park Bldg. Assn. v. Barnes, 39 Neb. 834, 58 N.W. 440; Jackson F. M. Ins. Co. v. Walls, 105 La. 89, 29 So. 503.
It may be urged that since under statute the taking of a note for stock is illegal, the note cannot be collected by creditors. The subscriber is estopped as against creditors to plead the violation of the statute.
Aldridge v. Rice, 161 Miss. 879; Allen v. Edwards, 93 Miss. 719.
Neill Clark and Allen Allen, all of Indianola, for appellees.
The plaintiff, trustee in bankruptcy, only acquired such rights as were vested in the Gilmer Grocery Company, whose estate he represents, and does not acquire any interest in any claim that any of the creditors of the Gilmer Grocery Company may have had against its stockholders.
3 U.S. Digest, Bankruptcy, page 1085, sec. 79; U.S.C.A., Title 11, Bankruptcy, sec. 10-a; 7 C.J., sec. 219, page 130, and sec. 226, page 133; Section 4153, Code of 1930.
In Coder, Trustee, v. Arts, 213 U.S. 223, it was held, that the necessary effect upon other creditors, of a mortgage executed by an insolvent within four months of the filing of the petition in bankruptcy, to secure a preexisting debt, does not dispense with the necessity of showing an actual intent on his part to hinder, delay, or defraud creditors, which is essential under the bankruptcy act of July 1, 1898, sec. 67 E.
3 Thompson on Corporations, section 3430, page 2485; 7 C.J., sec. 281-h, page 177.
It appears therefore that until the trustee shall have proceeded in equity to have the transaction between the Gilmer Grocery Company and its stockholders, the appellees here, set aside, and the debt and notes sued on re-established, that no legal title to the debts and notes could be vested in the trustee.
All of the authorities seem to hold that a suit at law can be maintained only in the name of the holder of the legal right of action.
47 C.J., sec. 35, page 23; Wilson v. McElroy, 2 S. M. 241; Vanhouten v. Riley, 6 S. M. 440; Lake v. Hastings, 24 Miss. 490.
The legal title to the respective causes of action sued on not being held by the trustee, we conclude that no action is maintainable.
Appellees are purchasers of stock and not subscribers; in the absence of the proof of tender or delivery of the stock, we conclude that there is no right of recovery.
14 C.J., sec. 754, page 508, and sec. 826, page 551.
A note, obligation or security of any kind given or transferred by any subscriber for stock in any corporation shall not be considered, taken, or held as payment of any part of the capital stock of the company.
Section 4148, Code of 1930; Montjoy v. Delta Bank, 24 So. 870; Ellis Jones Drug Co. v. Williams, 103 So. 810.
Purchaser knowing notes were given for corporation stock in violation of statute could not recover thereon.
Aldridge v. Rice, 138 So. 570.
The notes and debt here sued on being for stock in the Gilmer Grocery Company conferred no right upon the corporation against the makers of the notes, appellees here, are utterly void as to the makers, and cannot be recovered upon in this suit.
We admit that under the law and authorities that the rule would be different if this were a suit on behalf of creditors, but we insist that the trustee in bankruptcy stands in the same shoes as the Gilmer Grocery Company, and has no statutory right.
There can be no question of estoppel in the present case because the Gilmer Grocery Company had knowledge of all the facts, with which knowledge the trustee in bankruptcy is legally charged, and the defenses set up, that the notes were in violation of the statute, and were to be paid only from dividends of the company, are good defenses as against the corporation, Gilmer Grocery Company, and against the trustee in bankruptcy herein.
Mid. Const. Co. v. Beasley, 70 So. 373; State Bank v. Cook, 100 N.W. 72.
A trustee of the bankrupt corporation is vested with no better right and title than the corporation to a note given by a subscriber for corporate stock, and cannot enforce the payment of such note if the corporation could not do so, regardless of rights in equity which the creditors of the corporation may have had against the subscriber.
Terrell v. Warten, 89 So. 297; Re: Hoffman-Salvar Co., 234 Fed. 798; Overloch v. Jerome-Portland Mind. Co., 29 Ariz. 560, 243 P. 400; Hirschfeld v. McKinley, 78 F.2d 124.
We respectfully urge that in the light of the above authorities the trustee in bankruptcy cannot recover on the actions here sued on.
T.A. Frazier, trustee in bankruptcy of Gilmer Grocery Company, a bankrupt corporation, brought two suits in the circuit court of Sunflower county, one against Mrs. Joe Zachariah, and the other against Mrs. M.E. Gilmer, for a balance alleged to be due by each of these defendants for stock in said corporation. The declaration in each case was in two counts, the first being for the amount of the stock subscription as such, and the second on a promissory note executed for the balance due on said stock. By agreement the two cases were consolidated and heard as one, the facts being identical except as to the amounts sued for and the number of shares for which the notes were given.
On February 13, 1928, the Gilmer Grocery Company, by its president, forwarded a letter to its stockholders notifying them that an increase of the company's capital stock had been authorized, under a plan whereby each stockholder would be expected to take an additional share for each share then owned by such stockholder, while an additional one hundred thousand dollars worth of stock would be sold to employees of the company and the general public. In the plan thus outlined to the stockholders, it was provided that in order that they would receive the benefit of the premium that their stock was then worth, a stock dividend of fifty per cent of the then outstanding stock would be declared, leaving to be paid for only fifty per cent of the new stock to be issued to each stockholder, and further that: "Should any particular stockholder feel that he is not financially able to pay cash for his stock, we would accept his note with the new stock as collateral with the understanding, and inserting the same on the face of the note, that the dividends from all of that stockholder's stock be applied against the payment of this note and the balance of note to be renewed from year to year, until the dividends pay it out, the note to carry 8% interest."
The defendants herein accepted this proposal, and each of them executed a promissory note for the balance due on the purchase price of the stock allotted to her, and the stock was issued and attached to the notes as collateral security therefor, the notes reciting the following: "Secured by Gilmer Grocery Company stock certificate (giving the number of the certificate and number of shares in each case) attached. The maker hereby agrees to apply all of his or her dividends from Gilmer Grocery stock of record as of this date in payment of this note, and Gilmer Grocery Company agrees to renew the balance from year to year until paid."
The note executed by Mrs. M.E. Gilmer and sued on herein is for five thousand dollars, dated January 1, 1930, due December 1, 1930, and bearing interest at eight per cent per annum, and providing for ten per cent attorney's fee if placed in the hands of an attorney for collection, while the stock certificate attached thereto and made an exhibit to the declaration is for one hundred shares of the par value of one hundred dollars per share. The note of Mrs. Joe Zachariah herein sued on is for the sum of one hundred ninety-nine dollars and sixty cents, with the same provisions for interest and attorney's fee, and there is attached thereto as collateral security a certificate for twenty-two shares of stock in the Gilmer Grocery Company.
To the declaration the appellees pleaded the general issue to both counts and gave notice thereunder in defense, (1) the stipulation in the notes that they would be renewed and paid by application of dividends, (2) that the notes had been paid from dividends, (3) an agreement that there was to be no personal liability, and (4) that the stock represented accumulated profits and was not to be paid otherwise. Appellees also filed special pleas of nil debit; lack of consideration; three-year statute of limitation, applicable only to count 1; the statute of frauds relating to sale of personal property, applicable only to count 1; that the subscription of stock and execution of the notes were conditioned on being paid out of dividends, and consequently bankruptcy of the corporation discharged the obligation since dividends could not be earned or applied; plea of non est factum sworn to, and that the notes were illegal and unenforceable as being in violation of section 4148, Code of 1930.
The material facts are without substantial dispute. The evidence shows that the appellees executed the notes sued on for balances due on their stock subscriptions, the stock certificates being issued and attached to the notes as collateral. On the 26th day of December, 1933, the board of directors of the Gilmer Grocery Company passed a resolution declaring that on account of losses, pending suits, judgments against it, and the financial depression it was unable to pay its debts, and directing that a petition in bankruptcy be filed, with the request that adjudication be stayed pending the acceptance of an offer of ten per cent net composition, and declaring further that if the composition be rejected the corporation recognized its insolvency and agreed to an adjudication in bankruptcy. The petition in bankruptcy was filed on December 27, 1933, and on December 31, 1933, a final statement, with the ten per cent offer of composition, was mailed to the creditors of the corporation, and on this statement "notes for stock, deferred payments, $97,547.64," were carried as assets. J.W. Gilmer, Jr., president of the bankrupt corporation, testified that from November 30, 1933, to the date of filing the petition in bankruptcy, purchases were made only for cash or its equivalent, and the company's bills payable were not increased, while the company's bookkeeper testified that there was no substantial change in its financial condition between November 30, 1933, and the date of the filing of the petition, and that the bankruptcy schedules showed debts of three hundred thirty-two thousand eight hundred fifteen dollars, and assets of one hundred seventy-one thousand seven hundred seven dollars and eighty-one cents. On January 24, 1934, the Gilmer Grocery Company was duly adjudicated bankrupt, and the appellant was elected and qualified as trustee.
On November 30, 1933, at a time when it clearly appears that the said company was hopelessly insolvent, J.W. Gilmer, Jr., president of the company, without any order or authority so to do, voluntarily canceled the appellees' notes and surrendered the same to them, and canceled their stock certificates to the extent of the unpaid balance due therefor. Creditors of the corporation at the time it was adjudicated a bankrupt became such after the execution of the notes by the appellants. At the conclusion of the evidence each party requested a peremptory instruction, and the instruction requested by the appellees was granted.
The entire argument of appellees in support of the judgment of the court below seems to be based upon the theory that the trustee in bankruptcy was vested only with the rights and title of the bankrupt, and since, under the agreement recited on the face of the notes, followed by the cancellation and surrender thereof, the Gilmer Grocery Company had no cause of action on the stock subscriptions or notes, the trustee has none. In line with this argument, it is further contended that the provision of section 4153, Code of 1930, that "in all corporations each stockholder shall be individually liable for the debts of the corporation contracted during his ownership of stock, for the amount or any balance that may remain unpaid for the stock subscribed for by him, and may be sued by any creditor of the corporation," is but a statutory right given to creditors of the corporation and does not inure to the trustee.
In the original Bankruptcy Act (section 47a(2)), title 11, U.S.C.A., section 75, note, provided that trustees should "collect and reduce to money the property of the estates for which they are trustees, under the direction of the court, and close up the estate as expeditiously as is compatible with the best interests of the parties in interest." By the act of June 25, 1910, section 8, the said subdivision a, clause (2) of the said section 47, was amended so as to read as follows: "(2) Collect and reduce to money the property of the estates for which they are trustees, under the direction of the court, and close up the estate as expeditiously as is compatible with the best interests of the parties in interest; and such trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereon; and also, as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied." 11 U.S.C.A., section 75(a)(2).
By this amendment the powers and duties of bankruptcy trustees were very materially enlarged. A trustee in bankruptcy represents both the bankrupt and his creditors, and has the same rights and may pursue the same remedies in behalf of creditors as they would have been entitled to if there had been no adjudication in bankruptcy. Hoskins v. Johnston, 205 Iowa, 1333, 219 N.W. 541. Creditors' rights which are enforceable under state laws accrue to a trustee in bankruptcy. Dean v. Shingle, 198 Cal. 652, 246 P. 1049, 46 A.L.R. 1156. In Campbell v. Chapman (Miss.), 31 So. 101, it was held that it was the duty of a receiver of a defunct corporation to collect the unpaid subscriptions to its capital stock, which becomes a trust fund in his hands for the benefit of creditors of the insolvent corporation; and in Kimbrough v. Davies, 104 Miss. 722, 61 So. 697, 698, the court said: "The capital stock of a corporation is a fund set apart, among other purposes, for that of paying the debts of the corporation; and whether or not it be a trust fund, impressed with all of the attributes of such a fund, it seems to be universally held, upon sound and plain principles of common honesty, that it cannot be withdrawn by the stockholders until all of the debts then owing by the corporation have been paid."
Section 4148, Code of 1930, provides that a note, obligation, or security of any kind given or transferred by any subscriber for stock in any corporation shall not be considered, taken, or held as payment of any part of the capital stock of the company. In considering the effect of this statute in Jones Drug Co. v. Williams, 139 Miss. 170, 103 So. 810, the court held that a note given in violation of this statute conferred no right on the corporation against the maker thereof, because "commercial paper cannot be based on any consideration expressly forbidden by a statute;" but in Allen v. Edwards, 93 Miss. 719, 47 So. 382, and again in Aldrich v. Rice, 161 Miss. 879, 138 So. 570, the court held that a defaulting subscriber to stock was estopped to set up this statute in defense of an action on behalf of creditors of the corporation.
Section 4153, Code of 1930, provides that each stockholder of a corporation "shall be individually liable for the debts of the corporation contracted during his ownership of stock, for the amount or any balance that may remain unpaid for the stock subscribed for by him, and may be sued by any creditor of the corporation," and we are of the opinion that the trustee in bankruptcy herein, as the representative of the creditors of the bankrupt corporation, can maintain suit on the notes executed for the balance due on appellees' subscriptions for stock in the corporation unless prevented from so doing by reason of the point herein next to be discussed.
It is contended that on account of the attempted cancellation of the notes and stock for which they were executed, and the surrender of the notes to appellees, the legal title to the debts and notes passed out of the insolvent corporation, and since the legal title was not vested in the corporation at the date of the adjudication of bankruptcy it did not pass to the trustee, and consequently no action can be maintained thereon by the trustee until he shall have first proceeded in equity to have this transaction between the insolvent corporation and its stockholders set aside and the debts and notes sued on re-established.
The president of the bankrupt corporation voluntarily canceled the notes and surrendered the same on November 30, 1933, at a time when, as shown by the evidence, the corporation was hopelessly insolvent. The cancellation and surrender of these notes was the act solely of this officer of the corporation without the attempted authorization of the board of directors. The capital stock of a corporation constitutes "the means of the company, on the faith of which credit is given," Vick v. LaRochelle, 57 Miss. 602, and section 4149, Code of 1930, provides that: "No part of the capital stock in any corporation shall be withdrawn or diverted from its purpose, nor a dividend declared, when the company is insolvent, or would be rendered insolvent by such withdrawal on the payment of such dividend; and the directors who assented to such withdrawal, or declared and paid such dividend, as well as the stockholders who received it, shall be jointly and severally liable to creditors whose debts then existed, to the extent of such withdrawal or dividend and interest." The act of the president of the insolvent corporation in attempting to withdraw this stock and divert it from its purpose at a time when the company was insolvent was wholly ineffectual to discharge or release the liability of appellees for the balance due for such stock.
We conclude, therefore, that the peremptory instruction requested by appellant should have been granted, and the judgment of the court below will be reversed, and judgment entered here for the amount of the notes with interest and attorney's fees.
Reversed, and judgment here for appellant.