Gager v. Paul

87 N.W. 875, 111 Wis. 638, 1901 Wisc. LEXIS 79

• Court: Wisconsin Supreme Court
• Decided: November 5, 1901
• Status: Published

Opinion

Dod&e, J.

This appeal presents a few of the very numerous questions that are liable to arise for solution by the courts in working out the policy of the general closing-up action upon insolvency of corporations, especially of banking corporations whose stockholders are chargeable with the so-called additional statutory liability for the par value of their stock. The recoveries here sought are of three classes: (1) The statutory liability above mentioned; (2) the liability of a stockholder for the amount of his stock subscription where, by reason of contract with the corporation, it has not been paid for in full, either in money or its equivalent; and (3) the liability of a stockholder for dividends received by him practically out of the capital of the corporation,— that is, paid and received at a time when there were no earnings or profits out of which they could be paid. Some of these questions are further involved by the peculiar circumstance that the action is against a residuary legatee of a stockholder, brought after the completed settlement of his estate.

1. Statutory Liability. This rests upon two sections of the banking act, now included as subdivisions under sec. 2024, Stats. 1898. These are subsecs. 47 and 16 [pp. 1537, 1539], Subsec. 47 provides: “The stockholders in every corporation or association organized under the provisions of this act shall be individually responsible to the amount of their respective share or shares of stock for all its indebtedness and liabilities of every kind.” Subsec. 16 provides that “ each and every person owning or holding stock in any bank or banking association who shall sell, transfer or assign his stock, . . . shall be held and remain for the term of sis months from and after such sale ... . personally liable to the amount of the stock so as aforesaid sold . . . for the payment of all debts and liabilities of such bank or banking association existing at the time of such sale, transfer or assignment.” That appellant’s testator was a stockholder, and that the stock remained in his estate, and the property in trust of his executors, until May 6, 1897, and was then transferred, is conceded; also, that this action was commenced under secs.. 3218, 3219, by Mars-den as a stockholder merely on October 19th, that his complaint was amended so as to allege that he was also a creditor on November' 8th, and that further amendment joining Eebecca Morgan as a party defendant and service of summons upon her occurred March 11, 1898. It is contended on the one hand that no suit can be maintained on this liability if it had expired by the statutory six-months limitation before the commencement of the action, and that the action was not commenced against the party sought to be charged until after that period had expired. On the other hand, it is contended that the general action, which might involve the enforcement of this liability, having been commenced on October 19th, within six months after the transfer of I. P. Morgan’s stock, the creditors are entitled to hold the estate of I. P. Morgan, and, that having been distributed, to' bold the residuary legatee, Rebecca Morgan, and, she having since died, to hold her administrator.

The maintenance of such an action as this in the circuit court against the estate of the deceased person, instead of the presentation of claim in the county court against that estate, has already received adequate discussion and decision in Gianella v. Bigelow, 96 Wis. 185; and we entertain no doubt that the rights of recovery of this liability are the same against the appellant as they would have been against I. P. Morgan if living. We must therefore proceed to consider the force of our statutes above mentioned.

Subsec. 16 differs radically from the provisions on the same general subject in other states, and there are cited to us no decisions- from other states helpful upon its construction. Some statutes with more or less clearness extend the liability of a transferrer, not to the then creditors for a term of six months* but to all who shall become creditors within a term of six months; thus warranting a construction to the effect that the class to whom liability shall exist only is limited by that term, and the liability, having arisen, may be enforced when the creditors choose, subject only to the general limitations upon actions. Such construction is clearly excluded by our statute. The liability is limited to those who are creditors at the time of the transfer, and, if that liability were intended to be enforceable at any time within the ordinary period for bringing actions, the clause “ for a term of six months ” would be meaningless. That clause can have but one significance, and that its obvious one,— namely, that at any moment within the specified period there exists a liability from the transferring stockholder to each and all of the defined class of creditors on which suit can be brought (the form of such suit needing to be in compliance with the holdings of this court from Coleman v. White, 14 Wis. 700, to Eau Claire Nat. Bank v. Benson, 106 Wis. 624), and that after such six months he is not liable at all. Hence tbe only reasonable construction seems to be that, if a suit is commenced while that liability exists, the creditors are entitled to recover, but, after such liability has expired, no action can be maintained or serve to revive it. '

It being essential, then, that the action be commenced against the ex-stockholder within six months after the transfer, we must consider what constitutes such commencement. The liability thus imposed is a personal and separate one of each stockholder, and while, for convenience, it can be properly ascertained and enforced only in an action which brings before the court all creditors and all stockholders upon whom the liability is to be fixed and among whom it is to be adjusted, yet in ultimate analysis it is a direct, personal, and legal liability of the individual. That it cannot be adjudicated and enforced against him without making him a party to the action is at least inferentially decided in Finney v. Guy, 106 Wis. 256. In that case a contrary doctrine, suggested by the Minnesota court in Harper v. Carroll, 62 Minn. 152, which is now urged upon us by the respondent, was repudiated. The necessity that the stockholder shall have been brought before the court by service of process as fully and completely as in any other action against him is recognized and certainly intimated by all our decisions on the subject, among which Foster v. Posson, 105 Wis. 99; Finney v. Guy, supra, and Eau Claire Nat. Bank v. Benson, supra, may be mentioned.

It must not be forgotten that, while proceedings in equity to close up a banking corporation may include recovery of stockholders’ statutory liability, they equally may not; for assets of the corporation or other liabilities to creditors, equitably prior to this, may satisfy all creditors. It is therefore an unwarranted presumption that an action seeking to enforce some of the rights of creditors is necessarily one to enforce all. Gager v. Marsden, 101 Wis. 598, 603. The only' safe course, which, while protecting diligent creditors, still gives full protection of this statute to stockholders, is to construe these actions like others,— measure the cause of action by the complaint, and deem them commenced against any defendant when, and only when, any other would be so deemed. On this subject sec. 4239, Stats. 1898, fixes the service of summons as the commencement of an action, except for cases where a diligent attempt to make service may suffice, under sec. 4240. This statute would seem sufficiently unambiguous to conclude the question. It is, however, confirmed by the holding in Levy v. Wilcox, 96 Wis. 127, that, however necessary a party may be ,to the general purpose of an action, it is not commenced against him until he is actually and by name brought in. The conclusion seems irresistible that no_suit was commenced to enforce the liability of I. P. Morgan’s estate- until March. 11, 1898, some four months after that liability had expired, and that, consequently, judgment therefor against the administrator of his residuary legatee is erroneous.

2. Stock Subscription Liability. It appeared and was found by the court that I. P. Morgan, in 1880 and 1885, received certificates of stock, purporting to be full-paid, for $1,000 par value, for which he in fact paid into the capital of the bank but $300. It quite clearly appears, however, that this was by contract between him and the corporation that he should not be under obligation to pay anything more. That contract is evidenced by the action of the corporation in 1885, when by resolution it attempted to pay for said stock with assets' of the corporation, treated and. declared as profits, but which were not profits. There can be no doubt whatever that, as between creditors and a stock subscriber, the latter is liable to make good any known or fraudulent deficit between the amount paid by him and the face value .of his stock; but the first question is whether, under such circumstances as here presented, this is a liability to the corporation, or a liability enforceable only by the creditors, in derogation of the contract between the corporation and its stockholder, as a fraud upon them. If the former it might perhaps be barred by statutes of limitation, or lost by failure to present in county court against the estate of I. P. Morgan. If the latter, no such defense could be urged. Eespondent has discussed the situation and appellant cited authorities as if the attempt here were to collect upon an actual contract to pay par value for subscribed stock, and as if the transfer to W. H. Morgan were of concededly part-paid stock. In that respect they are clearly wrong. As between the corporation and I. P. Morgan there was never anything due for these two shares of stock, certainly after 1885. As between it and a transferee for full value, relying on the certificate of full payment, no recovery could be had, though perhaps as to either the corporation might defensively raise the shield of our statute (sec. 1753, Stats. 1898) declaring such stock void. First Ave. L. Co. v. Parker, 111 Wis. 1. The corporation could bind itself to accept anything in full payment for stock, so that it could recover— nothing more. Wells v. Green Bay & M. C. Co. 90 Wis. 442, 452; Gilman v. Gross, 97 Wis. 224, 227; 2 Beach, Priv. Corp. §§ 559, 561. But any such contract between corporation and stockholders may be' attacked by subsequent creditors, and, if fraudulent as to them, they may demand its repudiation and payment by the stockholder as if it had never been made. Gogebic I. Co. v. Iron Chief M. Co. 78 Wis. 427. While by legal fiction it is said that in such proceeding the creditors recover in the right of the corporation, it is still true that they enforce rights which the corporation did not have, and are not precluded from their suit by statutes of limitation, nor by other omissions of the corporation to proceed against the stockholder. That the transaction between the corporation and the stockholder I. P. Morgan, whereby the • former accepted, in discharge of bis liability to pay money or its equivalent for Ms stock, his proportion of an entirely fictitious accumulation of profits, was fraudulent as to creditors, cannot be doubted.

Much that is said in Gogebic I. Co. v. Iron Chief M. Co., supra, is directly applicable; but the present case is even stronger. While the acceptance of property, real or personal, mining rights and the like, at an agreed valuation, is to be viewed with consideration of the fact that opinions as to the value of such property differ widely, and that there is possibility that the parties honestly met and dealt upon an estimate of value widely different from that which may appear to the court, it cannot be believed that the corporation and its stockholders are free from fraud against creditors when they indulge in the destruction of the rights of the former by mere manipulation of accounts. If the corporation is insolvent, they know it, or are chargeable with knowledge of it. They must act in peril of that fact, and no intendment or presumption can be indulged that, with the most complete knowledge of the assets and liabilities of the bank, they can have believed in the existence of a surplus when there was none. The transaction is further distinguished from mere acceptance of property, in that it is manipulation of existing conditions only. No new article of property comes into the ownership of the corporation, as to the value of which opinions might differ. Merely by entries upon the books, that which the bank before had as representing $25,000 of capital is called $50,000, and the public invited to become creditors on the faith of the declaration of that fact. We think it plain, therefore, that the demand now made for payment to the receiver or to the creditors of enough to make up the original par value of the two shares of stock of I. P. Morgan is fully sustained by the facts, and that it is a cause of action which never existed in the corporation, and which the creditors never had an opportunity to enforce against the estate of I. P. Morgan, for the reason that they never had a cause of action at law,, but merely a right to sue in equity, where they must necessarily join the corporation and proceed in a manner not possible in county court. Gianella v. Bigelow, 96 Wis. 185; Morey v. Fish Bros. W. Co. 108 Wis. 520. Hence no obstacle exists to its enforcement now against the residuary legatee, to whom has passed that portion of his estate out of which should be paid any liabilities resting upon her testator. The award of judgment against the appellant for the $700 and-interest upon this liability was correct.

3. Dividends. These were paid to I. P. Morgan and to his executors from 1890 to 1896, during all of which time, not only was the corporate capital impaired, but the corporation was actually insolvent. Such payments were prohibited by subsec. 40 of the banking act, as, indeed, by the general principles of the law governing corporations. But the question at once arises as to the effect of disobedience of such prohibition. Of course, the stockholder receiving such dividends unlawfully has no right to retain them; but is his liability to repay owed to the corporation and enforceable by it, or can he only be called to account at the suit of creditors defrauded by the payment? The question seems to have been answered by this court, though perhaps not on the fullest consideration. In Hurlbut v. Marshall, 62 Wis. 590, 606, in speaking of liability for unlawful receipt of dividends, it is said:

“ If the officers, directors, or stockholders, or any one else, have taken and carried away and converted the property or funds of the bank wrongfully and unlawfully or criminally, they are trustees of the bank and remotely of the creditors,— trustees de son tort, it maybe, but nevertheless trustees,— and may be compelled in this suit to account therefor.”

In Hurlbut v. Tayler, 62 Wis. 607, 615, it is said of such a stockholder:

“ The respondent is liable in this action, like all other persons who have unlawfully become possessed of the funds of this insolvent bank, to ret/u/rn them to the ba/nk for the benefit of its creditors.”

In Killen v. Barnes, 106 Wis. 546, the liability for unlawful dividends is treated as owing to the corporation and to its assignee. Sec. 1765, which prohibits payment of dividends by insolvent corporations generally, seems to recognize that, in case of breach, liability is to the corporation, by providing that such liability is to restore the full amount, except in certain cases. Restoration can 'be made only to the source from which the dividends came. Mr. Thompson assumes, as of course, that the corporation can reclaim an ultra vires dividend. Thomp. Corp. §§ 2135, 3555. See, also, Lexington L., F. & M. Ins. Co. v. Page, 17 B. Mon. 412; Hayden v. Thompson, 71 Fed. Rep. 60, 65. We see no reason to hesitate in adopting the views thus stated and intimated. The dividends received by a stockholder contrary to law are but property of the corporation unlawfully taken into the possession of another, and upon every principle of law and every reason of its policy the owner should have the right to recover it by direct action. This view in no wise militates against the right of one interested either as creditor or stockholder'to invoke the aid of a court of equity to compel restitution of such unlawful dividends when the corporation will not reclaim them; but, when he does so, he merely enforces the right which the corporation has, and the relief granted must be measured by that right. Insisting upon that view, appellant urges that the right of the corporation to recover those dividends paid more than six years before the commencement of the action is barred by the statute of limitations. The answer of the appellant administrator, however, did not plead the statute, and if he were defending in his own right it would be waived. This suggests the interesting question whether, when the circuit court, in the exercise of its equity powers, takes jurisdiction to adjudicate claims against estates of decedents, it ought not to limit itself in allowing them by the policy of sec. 3841, providing as to county courts that “ no claim barred by the statute of limitations shall be allowed by the court in favor of or against the estate, as a setoff or otherwise.”

That question, however, we need not decide, since we have concluded that another and insuperable obstacle prevents recovery against this appellant or his decedent of any of these dividends. The action against Eebecca Morgan, revived against her administrator, could only be maintained by virtue of our statutes and upon the condition specified by sec. 3845: “ When no time has been fixed in which creditors may present their claims against the deceased for allowance or when no notice of such limitations has been ordered or given.” The complaint and record are both silent as to whether a time was limited for presentation of claims against the estate of 1. P. Morgan, deceased, or notice given. It is essential tbat one seeking to sue a legatee or next of kin on a claim that might have been proved in county court should allege and prove that these steps were not taken; otherwise, it will be presumed that they were. Lannon v. Hackett, 49 Wis. 261. That this demand in favor of the corporation was one provable in county court cannot be doubted. The distinctions in that respectare fully explained in Lannon v. Hackett; supra; Bostwick v. Estate of Dickson, 65 Wis. 593; Gianella v. Bigelow, 96 Wis. 185; and Morey v. Fish Bros. W. Co. 108 Wis. 520. The right of the corporation was to a mere money recovery for the amount of the unlawful dividends Morgan had received. Its adjudication involved no questions of contribution, and no parties defendant other than I. P. Morgan, nor did it require the exercise of equitable powers over specific property. It was a simple money claim, within the jurisdiction and power of the county court, and cannot be enforced against next of kin or legatees if opportunity to prove it against tbe estate was duly given. Of course, if these plaintiffs bad commenced their present action while the corporation still had a right of procedure and recovery against Morgan’s estate, a different situation would be presented. They would then have been permitted to sue in circuit court, because of the necessity of joining the corporation as a defendant. Morey v. Fish Bros. W. Co., supra. But they cannot now, after the liability to the corporation has been extinguished, recover in its right what it could not have recovered at the time their action was commenced. The award of judgment against appellant for the dividends was erroneous.

Appellant assigns error upon the taking of evidence at the time when the order to show cause was returnable, and cites us to rules and decisions against the taking of oral evidence upon a motion. This is a confusion of the situation. The court apparently disposed of the motion to authorize settlement, and then proceeded to the trial of the remaining issues in the cause by virtue of its presence on the calendar under due notice of trial. This was within the discretionary power of the court over its calendar, and was not an abuse of that discretion. No error is apparent in this respect.

There is some evidence that, when he took the first share of stock, I. P. Morgan gave a stock note, and there is no evidence what became of it. Appellant contends that the court should have presumed payment of the whole note, and held him liable for no more than the $500 for the second share of stock. If any such presumption results, it is entirely overcome by other evidence. It is in testimony ■that he paid but sixty .per cent, of the first $500 and none of the second, and the resolution of the stockholders in 1885, whereby the remaining forty per cent, of his first stock subscription was attempted to be paid out of his share of accumulated profits, is sufficient to justify the finding against the payment in any other manner of any more than sixty per cent, upon the stock.

Other assignments of error urged by the appellant are rendered immaterial by the conclusions which we have reached upon the several questions, as a result whereof it is apparent that the judgment against this appellant should be modified by striking out therefrom all except the $100 for the subscription price of the stock issued to I. P. Morgan, with interest thereon.

A brief is filed on behalf of W. H. Morgan, against whom certain liabilities were adjudged as an assignee of the same stock. A portion of this brief is devoted to a defense of the judgment against the appellant, John Paul. In that respect he stands in the attitude of a respondent; but another portion of the brief is devoted to criticism of the judgment as against him, and requests a modification and reduction thereof. Eor that purpose he has no standing, as he has not appealed, and cannot be heard to attack the judgment.

By the Court.— The judgment against the appellant, John Paul, as special administrator of Eebecca Morgan, deceased, is modified by striking therefrom all sums adjudged as damages against him,' either separately or jointly with another, except the sum of $134.39, and as so modified is affirmed; the appellant to recover costs of this appeal.