Henley v. Myers/Opinion of the Court

The Federal question to be disposed of on this writ of error arises under the contract clause of the Constitution. The facts upon which this decision depends are not in dispute and may be thus summarized:

On the 3d day of August, 1887, the plaintiffs in error became respectively subscribers to and owners of capital stock in the Consolidated Barbed Wire Company, a Kansas corporation, engaged in the business of manufacturing wire. But, on the 15th day of January, 1899, they sold and transferred their stock, worth par, in good faith, to responsible parties, and thereafter had no interest in the company. The fact of such transfer was made to appear on the books of the company. On the same date the company sold all its property and the good will of its business, the proceeds of the sale being distributed among the defendants as stockholders in the proportion of the stock held by each. And on the day last named the company suspended and did not thereafter resume business.

In 1900, W. H. Stevenson obtained a judgment against the company upon which execution was issued and returned 'no property found.' In 1903, two other judgments-each of which, it is admitted, being based upon a cause of action sounding in tort-were recovered against the company, one by Briggs, administrator, and one by Maxwell. No execution was issued on either of those judgments.

In 1903, Myers, the defendant in error, was appointed receiver of the wire company. As such receiver, and by authority of existing statutes, he brought an action in one of the Kansas courts against the present plaintiffs in error as stockholders, to recover the amount of the above judgments. Upon final hearing, the trial court gave judgments against the defendants, respectively, in certain amounts, to be paid by them in proportion to the stock owned by each. The case was carried to the supreme court of Kansas, and the judgment was affirmed. A rehearing was granted, but the judgment was again affirmed. 76 Kan. 736, 17 L.R.A. (N.S.) 785, 93 Pac. 173.

At the time the defendants became stockholders in the wire company certain constitutional and statutory provisions relating to corporations were in force in Kansas. Those referred to by counsel are given, for convenience, in the margin. From an examination of those provisions it will be seen that when the defendants became the owners of stock in the company it was the law of Kansas: 1. That a stockholder in any corporation other than one for railroad, religious, or charitable purposes, should be liable for the dues of the corporation to the extent of every unpaid subscription, and for an additional amount equal to the par value of the stock owned by him. 2. That if an execution against a corporation was returned 'no property found,' then execution could go, on the order of court and after written notice, against any stockholder, to the extent equal in amount to his stock, together with the amount, if any, unpaid thereon. 3. That when a corporation became insolvent a receiver could be appointed on application to the proper court, to close its affairs; and it was made the duty of such receiver to immediately institute proceedings against all stockholders to collect unpaid subscriptions, together with the additional liability of such stockholders, equal to the par value of the stock held by each; all such collections to be for the benefit of creditors. 4. That the stock of the corporation should be transferable only on the books of the corporation in such manner as the law prescribed.

By an act passed in 1899, and which went into effect January 11th, 1899, before the defendants sold their stock, the previous statute (Gen. Stat. 1868, chap. 23, § 24) was so amended as to make it the duty of the president and secretary or the managing officer of each corporation for profit doing business in the state (other than banking, insurance, and railroad corporations), as soon as any transfer, sale, or change of ownership of stock is made, as shown on its books, 'to at once file with the secretary of state a statement of such change of ownership, giving the name and address of the new stockholder or stockholders, the number of shares so transferred, and the par value and the amount paid on such stock.' The same statute provided that 'no transfer of such stock shall be legal or binding until such statement is made as provided.' Laws of Kan. Special Sess. 1898, chap. 10, § 12, p. 33. It is not claimed that the above statement had been made or filed with the company prior to the sale by the defendants of their stock, or that it was ever filed; and the result is that the transfer made by the defendants of their stock (although the fact of such transfer may have been shown on the books of the wire company) was not legal or binding, if the statute was valid.

But the defendants insist that, as the statutes of Kansas did not, at the time they acquired their stock, require as a condition of its legal or binding transfer that a statement of such transfer should be filed with the secretary of state, by the president, secretary, or managing officer of the corporation, the subsequent statute imposing a condition of that kind impaired the obligation of the contract under which stockholders acquired their stock, in violation of the Constitution of the United States. The supreme court of Kansas rejected this view, and they were right.

In what way the transfer of the stock of a corporation shall be made and evidenced is a matter entirely within the govermental power of the state that creates the corporation, the state taking care that such power be not so exerted as to violate any right secured by the supreme law of the land. It was never contemplated by the framers of the Constitution that the national authorities should supervise the action of a state upon such a subject, so long as the state did not transgress that instrument, but kept within the limits of its reserved power to enact such reasonable laws or regulations as, in its judgment, were necessary or conducive to the general good. We can well understand how the state might have concluded that the statutory requirement in force when the defendants acquired their stock, to the effect that transfers of the stock of corporations created by the state (except certain corporations) should be transferable only on the books of the corporation, was not effective or sufficient; particularly, because such books might not be easily or at all accessible. And we can also well understand how the state might have reasonably concluded, in the interest of the public, particularly of purchasers of stock, and of stockholders as well, that the evidence of such transfers should appear from the records of some public office, like that of the secretary of state. Hence, perhaps, the enactment of the statute which went into effect January 11th, 1899. Such a requirement as that in the act of 1899 did not increase, in any degree whatever, the liability of stockholders as agreed to by them when becoming stockholders. On the contrary, it was in the interest of stockholders, as determining the fact of their ceasing to be stockholders on and after a particular date. Further, the statute did not forbid a sale of the stock upon such terms as might be agreed upon between a stockholder and any purchaser, the transfer, pursuant to such sale, being evidenced as prescribed by the statute. Nor, if sued as stockholders, did the act deprive defendants of any valid defense which they were entitled to make at the time they acquired their stock. It did nothing more than to prescribe, presumably in the interest of the parties immediately concerned and of the public, a rule under which a person owning and selling his stock in a corporation should be regarded as a stockholder, unless and until its sale and transfer were manifested by a statement of a particular kind, filed in a named public office. If it be said that the officers charged with the duty of making and filing that statement might fail or refuse to discharge the duty imposed upon them, the answer is that, if injury thereby came to the stockholder, those officers would be liable to him for such injury arising from neglect of duty. Besides, those officers could be compelled by proper proceedings to perform the duty put upon them by the statute. We hold that the defendants acquired their stock subject, necessarily, to the power of the state, having due regard to the legal rights of parties, to regulate the transfer of stocks in its own corporations. In its first opinion in this case, the supreme court of Kansas well said: 'Before the act [of 1899] was passed, one who had sold stock of a corporation, in order to relieve himself from liability for its debts, was obliged to see that the transfer was noted by its officer upon its books; the enactment merely imposed an additional duty to see that a similar notation was made upon a public record. The change imposed no restraint upon the transfer of the stock, but related only to the means by which it should be accomplished and the manner in which it might be evidenced. It is essentially a matter of method, of procedure, rather than of ultimate substantial rights.' [76 Kan. 735, 17 L.R.A.(N.S.) 785, 93 Pac. 173.]

Equally without merit is the contention that the statute of 1899 impaired the obligations of the stockholder's contract, in that it substituted for individual actions against them a suit im equity by a receiver appointed after judgment against the corporation. In becoming stockholders, the defendants did not acquire a vested right in any particular mode of procedure adopted for the purpose of enforcing their liability as stockholders. It is a well-established doctrine that mere methods of procedure in actions on contract, that do not affect the substantial rights of parties, are always within the control of the state. It is to be assumed that parties make their contracts with reference to the existence of such power in the state.

Without expressing any opinion as to questions of a local character, we hold, for the reasons stated, that the statute of 1899 furnishes no valid basis for the contention that it impaired the obligation of the contract by which defendants acquired their stock. This is the only Federal question of a substantial character presented on this writ of error, and the judgment of the Supreme Court of Kansas must be affirmed.

It is so ordered.