Mr. Presiding Justice Gary
delivered the opinion of the Court.
This case presents a question, arising not infrequently,, and of great and permanent interest.
It was once decided in this'court, but without the aid of the exhaustive argument that is now presented, and without that degree of consideration which we have now given it; and if that decision was wrong, we ought not to follow it.
That question is whether—in the absence of fraud— stockholders to whom stock is issued as full paid, in exchange for property of known less value than the nominal value of the stock, can be made liable to creditors of the corporation for the difference.
It has,never, so far as we are advised, been expressly decided in this State that stock could be paid for in anything but money.
It is assumed, in Coleman v. Howe, 154 Ill. 458, that it may.
Referring to Section 7 of the Corporation Act, we said in Alling v. Wenzell, 35 Ill. App. 246, that “it probably never entered into the contemplation of the legislature that stock in a corporation was to be issued by it for any other consideration than money equal to the par of the stock, paid or liable to be called for as provided in that section,”
That probability would seem to be increased when it is seen that as to railroads and limited partnerships, express provisions are made for contributions in property. Art. II, Sec. 13, Cons.; Ch. 114, Sec. 22 and Ch. 84, Secs. 2 and 7, B. S.
Without denying that payment for stock might be made in property, we held in Thayer v. El Plomo Mining Co., 40 Ill. App. 344, that as to creditors it was payment only to the extent of the value of the property; and that “no fiction, however innocently adopted among themselves (the stockholders) is a defense against creditors.” Disquisitions upon questions of fraud and trust, upon the knowledge ..creditors had of the terms upon which stock had been issued, or as to what they relied upon for payment, do not seem pertinent to the question whether creditors are entitled to an enforcement of the simple and unambiguous words in Sec. 25, Ch. 32, that “ each stockholder may be required to pay his pro rata share of such debts or liabilities to the extent of the unpaid portion of his stock, after exhausting the assets of such corporation.”
' In the case last cited, we regard the words “ unpaid portion,” as having reference to an actual, not constructive, fact; an equivalent in value was payment; anything short of an equivalent in value was payment; and so we directed that “ an account should be taken, and the ratio of payment ascertained.”
And in Alling v. Wenzell, 27 Ill. App. 511, we held that stockholders from whom the corporation had accepted property in payment, were, in stating an account, entitled to • credit for the value of the property; but without any statement of how that value was to be ascertained, or as of what date.
• The appellants here are creditors of the Pacific Bailway Company, an Illinois corporation, but not a railroad corporation under the laws of this State, notwithstanding its name. It was organized in this State solely for purposes stated in a circular as follows:
“ Important to Shareholders in the Los Angeles Cable Railway Company.
Chicago, III., August 15, 1889.
Dear Sir : Every shareholder in any corporation organized under the laws of California is responsible for a pro rata proportion of all indebtedness incurred by the corporation during the time that he is a stockholder of record therein; nor is the obligation relieved by the sale and transfer of the stock, but he remains during the life of the corporation, personally liable for such a proportion of the indebtedness incurred while he was a shareholder, as the amount of his stock bears to the entire capital stock of the corporation. California is the only State in the Union which has such a peculiar law.
' At a meeting of gentlemen who are stockholders in the Los Angeles Cable Railway Company, and representing a large majority in the stock of that company, held at the Grand Pacific Hotel in this city, on the 5th inst., the matter was thoroughly discussed, and it was unanimously resolved that a corporation be organized under the laws of the State of Illinois, with $2,500,000 of capital stock, being the same amount of the capital stock of the Los Angeles Cable Railway Company, and that all holders of shares in the latter company be requested to exchange their shares for an equal number in the Illinois corporation.
The capital stock of the latter company will be full paid, inasmuch as it holds as its assets the capital stock of the Los Angeles Cable Railway Company, turned into it at the agreed price of $2,500,000. In this way the Illinois company, as a corporation, becomes responsible under the laws of California, and not the individual holders of the Los Angeles stock, and the individual shareholders will, in this way, be .relieved of personal liability, which, though it may be regarded by some as remote, does, nevertheless, exist, and in case many years from now, after the present stockholders have disposed of their holdings, the road shall fall into incompetent hands, or into the ownership of those who might not properly guard its indebtedness, the tangible property of the company might be sold for a much less amount than would cover its bonded indebtedness, and in that case, the present shareholders would be personally responsible for their fro rata amount of such deficiency. It is proposed to pay off out of the proceeds from the sale of bonds of the new company, hereinafter described, all indebtedness for construction and equipment, leaving absolutely no liability, actual or prospective, resting upon the stockholders who exchange their stock, as suggested above.
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Mr. Presiding Justice Gary
delivered the opinion of the Court.
This case presents a question, arising not infrequently,, and of great and permanent interest.
It was once decided in this'court, but without the aid of the exhaustive argument that is now presented, and without that degree of consideration which we have now given it; and if that decision was wrong, we ought not to follow it.
That question is whether—in the absence of fraud— stockholders to whom stock is issued as full paid, in exchange for property of known less value than the nominal value of the stock, can be made liable to creditors of the corporation for the difference.
It has,never, so far as we are advised, been expressly decided in this State that stock could be paid for in anything but money.
It is assumed, in Coleman v. Howe, 154 Ill. 458, that it may.
Referring to Section 7 of the Corporation Act, we said in Alling v. Wenzell, 35 Ill. App. 246, that “it probably never entered into the contemplation of the legislature that stock in a corporation was to be issued by it for any other consideration than money equal to the par of the stock, paid or liable to be called for as provided in that section,”
That probability would seem to be increased when it is seen that as to railroads and limited partnerships, express provisions are made for contributions in property. Art. II, Sec. 13, Cons.; Ch. 114, Sec. 22 and Ch. 84, Secs. 2 and 7, B. S.
Without denying that payment for stock might be made in property, we held in Thayer v. El Plomo Mining Co., 40 Ill. App. 344, that as to creditors it was payment only to the extent of the value of the property; and that “no fiction, however innocently adopted among themselves (the stockholders) is a defense against creditors.” Disquisitions upon questions of fraud and trust, upon the knowledge ..creditors had of the terms upon which stock had been issued, or as to what they relied upon for payment, do not seem pertinent to the question whether creditors are entitled to an enforcement of the simple and unambiguous words in Sec. 25, Ch. 32, that “ each stockholder may be required to pay his pro rata share of such debts or liabilities to the extent of the unpaid portion of his stock, after exhausting the assets of such corporation.”
' In the case last cited, we regard the words “ unpaid portion,” as having reference to an actual, not constructive, fact; an equivalent in value was payment; anything short of an equivalent in value was payment; and so we directed that “ an account should be taken, and the ratio of payment ascertained.”
And in Alling v. Wenzell, 27 Ill. App. 511, we held that stockholders from whom the corporation had accepted property in payment, were, in stating an account, entitled to • credit for the value of the property; but without any statement of how that value was to be ascertained, or as of what date.
• The appellants here are creditors of the Pacific Bailway Company, an Illinois corporation, but not a railroad corporation under the laws of this State, notwithstanding its name. It was organized in this State solely for purposes stated in a circular as follows:
“ Important to Shareholders in the Los Angeles Cable Railway Company.
Chicago, III., August 15, 1889.
Dear Sir : Every shareholder in any corporation organized under the laws of California is responsible for a pro rata proportion of all indebtedness incurred by the corporation during the time that he is a stockholder of record therein; nor is the obligation relieved by the sale and transfer of the stock, but he remains during the life of the corporation, personally liable for such a proportion of the indebtedness incurred while he was a shareholder, as the amount of his stock bears to the entire capital stock of the corporation. California is the only State in the Union which has such a peculiar law.
' At a meeting of gentlemen who are stockholders in the Los Angeles Cable Railway Company, and representing a large majority in the stock of that company, held at the Grand Pacific Hotel in this city, on the 5th inst., the matter was thoroughly discussed, and it was unanimously resolved that a corporation be organized under the laws of the State of Illinois, with $2,500,000 of capital stock, being the same amount of the capital stock of the Los Angeles Cable Railway Company, and that all holders of shares in the latter company be requested to exchange their shares for an equal number in the Illinois corporation.
The capital stock of the latter company will be full paid, inasmuch as it holds as its assets the capital stock of the Los Angeles Cable Railway Company, turned into it at the agreed price of $2,500,000. In this way the Illinois company, as a corporation, becomes responsible under the laws of California, and not the individual holders of the Los Angeles stock, and the individual shareholders will, in this way, be .relieved of personal liability, which, though it may be regarded by some as remote, does, nevertheless, exist, and in case many years from now, after the present stockholders have disposed of their holdings, the road shall fall into incompetent hands, or into the ownership of those who might not properly guard its indebtedness, the tangible property of the company might be sold for a much less amount than would cover its bonded indebtedness, and in that case, the present shareholders would be personally responsible for their fro rata amount of such deficiency. It is proposed to pay off out of the proceeds from the sale of bonds of the new company, hereinafter described, all indebtedness for construction and equipment, leaving absolutely no liability, actual or prospective, resting upon the stockholders who exchange their stock, as suggested above.
Another difficulty has also been encountered, namely: When the trust deed was issued by the former owners of the road it ivas believed that $1,500,000, the limit of said trust deed, would be sufficient to construct the twenty miles of cable road which is now almost finished; but the actual cost of such construction will be about $2,000,000, and in a city which has grown from 10,000 people eight years ago to some 88,000 people at the present time, it is almost certain that additional cars, and probably extensions of lines, will be required in the near future, and no provisions what-' ever was made for this under the trust deed heretofore issued; consequently, at the meeting held on the 5th inst. it was the unanimous opinion of the gentlemen present that when the new corporation should be organized an issue of $2,500,000 of bonds should be provided for, secured by suitable trust deed; $836,000 of these bonds not to be issued by the trustee, except for thepurpose of taking up and canceling an equal amount of the bonds of the- Los Angeles Cable Kail way Company, that amount being all of the bonds of that company which have been sold, and that after reserving the said $836,000 in the hands of the trustee, bonds be issued for an amount sufficient to pay the cost of constructing the cable road and properly equipping, it, and the balance of the bonds, amounting in round numbers to $500,000, be not issued, except at such times and in such amounts as in the judgment of the board of directors of the'new company shall be necessary to meet the payment of such additional equipment and extensions as the interest of the new company shall render desirable.
It is believed that every shareholder of the Los Angeles Cable Railway Company will see that it is for his interest to join with the majority in carrying out this arrangement, as by so doing he retains precisely the same relation to the property that he now does—he does not lose anything whatever, but is at the same time relieved of personal liability in the premises. If any shareholder does not see it to be for his interest to join in this arrangement, the only method of paying the present floating indebtedness, which, upon the completion of the construction now in hand, on or about the first day of September, will reach the sum of $1,200,000, will be to follow the method prescribed by the laws of California, namely, to assess the stock a sufficient amount to pay the indebtedness. This assessment will be paid by the new corporation for all those persons who shall have exchanged their stock for stock in the Illinois corporation, and persons holding stock in the Los Angeles Cable Railway Company, and not exchanged for stock in the Illinois company, will be obliged to pay the assessment on their stock, or the same will be sold to pay said assessment, according to the statute in such cases made and provided.
In pursuance of the recommendation made at the meeting as indicated above, a new corporation has been organized under the laws of the State of Illinois, entitled “ The Pacific Railway Company,” with the following .named persons as directors for the first year, viz.: John J. Mitchell, Morton B. Hull, Alexander Geddes, James L. Houghteling and Charles B. Holmes.
In this connection it may be of interest to add that the construction has been pushed with great energy, and the entire plant will be finished about the first of September, and it is fully believed that the expectations entertained of the property from the. beginning (that the earnings after paying all operating expenses and interest charges, will be sufficient to pay handsome dividends) will be realized.
The first section of cable line, extending from Grand avenue and 7th street to the center of the city, was opened on the 8th day of June last, and has operated continuously ever since without a single moment’s delay, and without requiring any change to be made in machinery or other parts of the plant. The second section, running from the center of the city to Boyle Heights, was opened to the public on the third day of the present month, and is operating with equal satisfaction. The balance of the road, including the extensions, are almost completed, and will be in the very best condition to take care of the vast volume of travel which it is believed the road will secure, not only from the present residents of Los Angeles, but from the multitude of visitors who will make that city their winter home.
If the plan outlined above meets your approval, you are requested to forward to the undersigned, at your earliest convenience, the certificates of stock held by you in the Los Angeles Cable Bailway Company, indorsed in blank on the back, and upon receipt of the same there will be forwarded to you certificates of stock in the new corporation for the same number of shares as was surrendered by you in the old. If any point in the foregoing statement is not made sufficiently clear we shall be most happy to answer any inquiries you may be pleased to make.
Bespectfully yours,
C. B. Holmes,
President Los Angeles Cable By. Co., 2020 State street, Chicago, Illinois.
We concur in the foregoing :
John J. Mitchell,
James L. Houghteling,
Mobton B. Hull,
Alexanbeb Geddes,
Chas. B. Holmes,
Directors Pacific Bailway Company.”
The scheme described in that circular was carried out, and the appellees here—other than the company itself—are stockholders, either as original, taking stock upon the terms stated in the circular, or as assignees of such.
This bill was filed by the appellants to obtain from the stockholders satisfaction of the debts due to the appellant from the company. The company has no assets, the property, which was of the Los Angeles Cable Bail way Company, having been all exhausted by prior claims. We shall not consider the question of ultra vires, though it is elaborately argued. On the stock of the cable company thirty-two per cent had been paid before the organization of the appellee company, and that is all that ever has been paid on the stock of either company.
The cause was referred to a master—as copied from the abstract—inter alia “ to inquire, take proof and report the number of shares of capital stock of Pacific Bail way Company held by defendants, or either of them, at and prior to filing a bill of complaint; also time and date at which certificates of stock were issued by Pacific Bailway Company to above defendants, or either of them, and what consideration, if any, defendants respectively paid therefor; also what amount, if any, of the number of said certificates or shares remained unpaid at date of filing of said bill.”
The master reported upon that subject—in part—as follows:
“ As regards the actual value of the property and rights of the Los Angeles Cable Bailwav, at the time of the sale to the Pacific Bailway Company, there is no evidence, except the price paid for the stock of the cable railway. I do not regard the price paid as the actual value at the time of the conveyance to the Pacific Bail way Company; additional licenses had been obtained from the city, and a large amount of work had been done to improve the system in various ways. I think it would be difficult to find two men who would place the same value on the road. I think the value placed on such a property would vary, just in proportion to the favor the person had for horse railroads. I think most men would ask what the road could earn, and determine its value from the net earnings. I think the income of the electric and cable reads in 1894, as shown by the evidence, justified the parties in believing the cable road to have been worth two millions and a half, but the item which no one considered and which could not have been foreseen (the California legislature), ruined the property.
Under such facts and circumstances I do not think the stockholders of the Pacific Bail way Company owe anything on account of their stock to any of the creditors in this suit; in other words, I do not think the stockholders are liable for any further payment on their stock to the creditors in this suit. The creditors were given all the information they asked for; there is nothing in the evidence which shows that any creditor asked for any information which was not given him or that any facts were misstated to him; and further he knew where the property was, and he was at entire liberty to make any examination he pleased. I can see no reason why they could not have ascertained the actual value of the property of the Pacific Bail way Company.
Briefly, I find that the consideration which the defendants, to whom the stock of the Pacific Bailway Company was originally issued, paid for the same, was all the stock of the Los Angeles Cable Bailway Company, and all the prop- • erty, assets and rights of the said Los Angeles Cable Bail-way Company; that all of said creditors of the Pacific Bail-way Company at the time they first gave credit to the Pacific Baihvay Company, either knew that the stock of the Pacific Bail way Company had been issued or was to be issued as full paid stock in payment for the stock of the Los Angeles Cable Bailwav Company, and the conveyance and transfer to it of the property and assets of said Los Angeles Cable Bailway Company, and that there was no further liability on the part of the persons to whom such stock was issued to pay anything thereon; or are not in a position to claim in this case that any of the defendant stockholders are liable to pay anything further on the stock held by them respectively; that none of the said creditors in fact placed any reliance on the professed capital of the Pacific Bailway Company, or extended credit to the said company, from the belief that its stock was fully paid, or that there Avas any liability on the part of any of the stockholders to pay anything further for their stock; that all the stock of the Pacific Railway Company was fully paid by the property given to the company therefor, as hereinbefore stated, and that there was no fraud or fraudulent intent in the transaction by which said stock was made fully paid as aforesaid.”
Upon that report the Circuit Court dismissed the bill, and this appeal followed. That the company owes about a million and a quarter, besides interest, is an established fact in the case; that the creditors, or most of them, will never get a cent unless through this suit, is certain.
Subsequent events—other than the enforcement of the prior claims against the cable company—and which only omniscience could foresee, have made the stock of the cable company valueless.
That the stock of the cable company, upon which thirty-two per cent had been paid, and the holders of which were in fear of personal liability, as the circular shows, could have been believed by discreet, prudent business men to have been actually intrinsically worth par, is an unwarrantable conclusion. The legal conclusions of the master concurred in by the court, are erroneous. Such general incorporation acts as were in force in this State before the revision of 1872, would have permitted no such issue of stock.
The act of 1849, in section 14, provided that “ nothing but money shall be considered as payment of- any part of the capital stock.” The act of 1852, in section 3, provided that the directors might “call in and demand from the stockholders, respectively, all such sums of money by them subscribed,” etc.
The act of 1857, in section 12, provided that “ nothing but money shall be considered as payment of any part of the capital stock * * * except real estate and personal property, necessary to carry on the business * * * received as payment only at a cash valuation,” and carefully prescribing a method of appraisement.
The constitution of 1870, in article 11, shows the jealousy of the convention that framed it, of corporations.
The policy of the State, so far as is shown by its public acts for twenty-three years before the revision of 1872, was clear that stock of corporations should be on the basis of real values, and not imaginary or constructive, and untrue values.
We are not prepared to decide that stock can be paid for only in money, but do decide that if the payment be in something else, it is payment only to the extent of the value of that something at the time such payment is made.
What difference is there in principle between issuing full paid stock for a percentage of the par in cash, and issuing it for property worth only a percentage of the par ? Are not stockholders of the latter class, as well as of the former, within the rule that “they will be adjudged contributories, unless it shall appear they have given for such stock the equivalent in money or in money’s worth % ” Union Ins. Co. v. Frear Stone Mfg. Co., 97 Ill. 537.
And as they are to “ be adjudged contributories unless it shall appear they have given,” etc., it follows that the burden is upon them of making the fact of “ money or money’s worth ” appear.
The decree will be reversed and the cause remanded for the purpose of an account of the debts of the company, and of the stockholders’ liabilities on the basis that they are-liable to the extent of their several holdings—if necessary to pay the debts of the company-—less only what it shall be made to appear was, at the time they or their assignors, immediate or remote, took the stock, the fair actual value of what was given as payment for the stock. Reversed and remanded.