Hatch v. Dana

APPEAL from the Circuit Court of the United States for the Southern District of Illinois.

On April 12, 1871, Charles A. Dana recovered a judgment in the Circuit Court of the United States for the Northern District of Illinois, against the Chicago Republican Company, a corporation organized and existing under the laws of the State of Illinois, for the sum of $6,419.17 and costs.

An execution issued upon this judgment was by the marshal of the United States for that district returned nulla bona.

Thereupon, on Aug. 23, 1871, Dana, on behalf of himself and all other creditors of the company who might come in and seek relief by and contribute to the expense of the suit, exhibited in the Circuit Court of the United States for the Southern District of Illinois his bill in equity against the company, Hatch, Williams, and other resident stockholders, averring the incorporation of the company in February, 1865, with a capital stock of $500,000, divided into shares of $100 each; that at a meeting of the incorporators, held in Chicago in April, 1865, certain stock subscriptions were made, Hatch and Williams each subscribing for one hundred shares; that a complete organization of the company was effected, and an assessment of twenty per cent declared upon the stock subscribed, the company thereupon commencing business; that eighty per cent of the subscriptions to stock so made still remains unpaid; that in October, 1870, the company so organized sold and transferred all its tangible property, credits, and subscription lists to a corporation of a very similar name, and thereupon ceased to do business; that the company is wholly insolvent; avers the recovery of the judgment aforesaid, the issue and the return unsatisfied of an execution thereon; that there are no other unpaid creditors than the complainant. It prays that, upon an accounting of the amount unpaid upon the stock subscriptions of the stockholders named as defendants, they may be decreed to pay so much of the balance found unpaid on their respective subscriptions as will be sufficient to pay the ascertained debts of the corporation, including the judgment aforesaid; and for general relief.

The complainant dismissed the bill as to all of the defendants except Hatch and Williams. They, in their answer, admit the incorporation and organization of the company, as alleged in the bill; do not deny that they were of the original stockholders therein to the amount alleged in the bill, but aver that they paid in thirty per cent of the amount subscribed by them; admit the sale of its property in October, 1870, and that since then it has done no business; do not know whether it is indebted to the complainant or any other person, or whether or not it is insolvent; deny the recovery of the said judgment and call for full proof thereof, but admit that, if such judgment was lawfully rendered, it still remains in full force and unsatisfied; aver that about Aug. 1, 1866, the company determined to reduce its capital stock from $500,000 to $200,000, and did so, calling in all existing certificates, and reissuing to the holders thereof new certificates for two-fifths of the amount which they originally held, since which time various transfers of portions of the new or substituted stock have been made, but the respondents do not know to whom or by whom they have been made; state the names of certain persons who, together with the defendants, are holders and owners of portions of the stock; and ask that all said persons be made parties, and that an accounting be had, in conformity with the prayer of the bill.

A replications to the answers was filed.

The facts of the case are set out in the complainant's bill. A decree was rendered Jan. 6, 1879, that the complainant, Charles A. Dana, recover of Hatch and Williams the sum of $9,398.72, being the amount due on that day upon the said judgment, and that they pay the costs of the suit to be taxed; it being provided, however, that of the sum so decreed to be paid not more than $7,000, together with interest thereon from the date of the decree, at the rate of six per cent per annum, shall be made and collected from either said Hatch or Williams, the said sum of $7,000 being the amount the court finds each of them to owe and be indebted to the Chicago Republican Company.

From this decree Hatch and Williams appealed.

Mr. D. T. Littler for the appellants.

The remedy sought in this case by the complainant is in virtue alone of the general equity jurisdiction of the court in the rpemises.

A court of equity will never allow a trust to fail on account of the failure or refusal of a trustee to perform his duty. When, therefore, the creditors of a corporation are unable to obtain satisfaction in the ordinary mode, if the stockholders are indebted to the corporation on account of subscriptions made by them to the capital stock, and the board of directors fail or refuse to raise the money to pay such debts by making and enforcing against the members the necessary assessments, a court of equity will interfere, and either compel the directors to perform this duty, or, according to the modern practice, perform it by its own proper officers. The rights of creditors being superior, and partaking somewhat of the character of a lien, equity will regard and work them out by the same means by which the corporation itself should have done so. Adler v. Milwaukee Patent Brick Co., 13 Wis. 57; Ward v. Griswoldville Manufacturing Co., 16 Conn. 601; Henry v. Vermillion, 17 Ohio, 187. The court will either compel the board of directors to make an assessment, or it will exercise its power through its own officers and processes to accomplish the same substantial result.

The bill must be filed against all the shareholders, unless some valid excuse is shown for not bringing them in. This must necessarily be so; otherwise the main object of asserting the jurisdiction of equty, the equalizing of the burden of the shareholders, and the preventing of a multiplicity of suits would be defeated. Under such a bill an account will be taken of the debts and assets of the corporation, of the amount of capital not paid in, and of the amount due from each shareholder. A receiver appointed in a creditor's suit against a corporation cannot maintain a bill in equity against a single shareholder to collect what is unpaid on his subscription. Thompson, Liability of Stockholders, sect. 353; Wood v. Dummer, 3 Mas. 312; Hadley v. Russell, 40 N. H. 109; Erickson v. Nismith, 46 id. 371; Mann v. Pentz, 3 N. Y. 415; Pierce v. ''Milwaukee Con. Co., 38 Wis. 253; Adler v. Milwaukee Patent Brick Co.'', 13 id. 57; Coleman v. White, 14 id. 700; Carpenter v. Marine Bank, id. 705; Umsted v. Buskirk, 17 Ohio St. 113; Story, Eq. Jur., sect. 1252; Pollard v. Bailey, 20 Wall. 520; Terry v. Tubman, 92 U.S. 156.

In 2 Story, Eq. Jur., sect. 1252, it is said: 'The property of private corporations is deemed a trust fund, and the creditors may enforce their claims against it into whosesoever hands it may come, as well before as after dissolution, unless it may have come to the hands of a bona fide purchaser. Upon the like ground the capital stock of an incorporated bank is deemed a trust fund for all the debts 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 of the capital would in equity be held liable pro rata to contribute to the discharge of such debts out of the funds in his own hands. This, however, is a remedy which can be obtained in equity only; for a court of common law is incapable of administering any just relief, since it has no power of bringing all the proper parties before the court, or of ascertaining the full amount of the debts, the mode of contribution, the number of the contributors, or the cross equities and liabilities which may be absolutely required for a proper adjustment of the rights of all parties, as well as of the creditors,' citing Wood v. Dummer, supra; Vose v. Grant, 16 Mass. 9; Carson v. African Company, 1 Vern. 121.

The unpaid subscriptions for stock in an insolvent corporation constitute a trust fund for the benefit of all creditors of the corporation alike or pro rata, and it is not permissible to one creditor to absorb the same to the exclusion of others.

The bill as framed and filed in this cause properly recognizes the above rule. It is in form a general creditor's bill, under which, if opportunity had been afforded by the court, all creditors might have come in and sought relief, subject to the condition of contributing to the expense of the suit. But no such opportunity was afforded them. There was neither a reference for ascertaining them, nor notice to them to come in.

Although the complainant was not bound to hunt up the creditors, it was incumbent upon the court to refer the cause to a master, with directions to cause notice, by publication or otherwise, to be given to all creditors before proceeding to a final decree appropriating the whole fund to complainant.

'The general rule is that a creditor who proceeds in chancery to subject the liability of the shareholders of an insolvent corporation must bring his bill on behalf of all other creditors who may come in and establish their debts according to the course of a court of chancery. Whilst liens and legal priorities are preserved, he does not obtain a preference over other creditors by the filing of such a bill; but the property of the corporation, or the sums due from shareholders in respect of their individual liability, are sequestered for the ratable benefit of all the creditors.' 2 Story, Eq. Jur., sect. 1252; Wood v. Dummer, supra; Morgan v. New York Railroad Co., 10 Paige (N. Y.), 290; Mann v. Pentz, 3 N. Y. 415; Masters v. Ressis L. Mining Co., 2 Sandf. (N. Y.) 301; Coleman v. White, 14 Wis. 700; Carpenter v. Marine Bank, id. 705; Crea v. Babcock, 10 Metc. (Mass.) 525; Umsted v. Buskirk, 17 Ohio St. 113; Pollard v. Bailey, 20 Wall. 520; Terry v. Tubman, 92 U.S. 156.

Mr. E. B. McCagg, contra.

1. Dana's judgment, the insolvency of the company and its withdrawal from business, entitled him to enforce from its delinquent stockholders, for his benefit, the collection of their unpaid stock subscriptions. Dalton & Morganton Railroad Co. v. McDaniel, 56 Ga. 191; Henry v. V. & A. R. R. Co., 17 Ohio, 187; Ogilvie v. Knox Insurance Co., 22 How. 380; Upton, Assignee, v. Tribilcock, 91 U.S. 45; Angell & Ames, Corporations, sect. 602.

2. It was not necessary to make all the delinquent stockholders parties defendant to his bill. Ogilvie v. Knox Insurance Co., supra; Bartlett v. Drew, 57 N. Y. 587.

MR. JUSTICE STRONG delivered the opinion of the court.