DILLON, Circuit Judge.
It is not necessary to decide whether the company’s contract with Warren Fisher, Jr., for the construction of the road, would have been held valid if it had been assailed by non-concurring shareholders or by the creditors of the company. A contract for the construction of the whole road seems, however, to have been contemplated as permissible by the 19th section of the company’s charter; and the 17th and 29th sections contained express authority to receive subscriptions for stock, “payable in labor or materials in and for the road;” * * * “bond being taken to the company, with security, for the faithful performance of the work or furnishing of the materials.” But it is not necessary to pass upon the validity of the Fisher contract, for the reason that the complainants’ bills do not attack It either as being fraudulent or ultra vires. Nor has it been assailed in argument on either of these grounds, or' on any ground, by the learned counsel for the complainants. In these causes the validity of that contract, so far as it authorized the issue of stock in payment for work done by Fisher, must, there[1151]*1151fore, be assumed. Stock was thus issued, purporting to be full-paid stock.
On September 2d, 1869. the directors of the company ordered the secretary to issue $35,t O00 in the common stock of the company, at liar, “on account of work done and materials furnished under the contract for the construction of the road, previous to September 1st, 1869.”
On February Sth, 1870, the engineers of the company were instructed, by the unanimous vote of the directors, to make a detailed estimate of all work done and materials furnished by Fisher, and report; and in July, 1870, the report having been made, the directors unanimously authorized the delivery to Fisher of $787,500 first mortgage bonds, $1,125,000 land grant bonds. $675,000 in the preferred stock, and $675,000 in the common stock of the company; “such being the estimate of the consulting engineer of the company of the amount now due him on his contract.” It was also resolved, at the same meeting, “that • the president might, in his discretion, advance to Fisher any greater amount of bonds or stock, upon his giving good and sufficient security under his contract.”
On November 15th, 1870, the directors authorized the executive committee to issue to Fisher “stock and bonds of this road in such amounts and at such times as they may deem expedient.” Some stock was advanced, under authority thus conferred, without security being required; but this latter fact does not appear on the records of the company. The stock earned under the contract, and that issued in advance of being earned, was in the same form, and alike purported to be paid-up stock.
The defendants, Atkins and Converse, never made an original subscription to the stock of the company, and they became holders of its shares by the purchase of the same in Boston, through brokers in the market, without any actual knowledge of the facts connected with its issue. The shares thus purchased by the defendants, Atkins and Converse, were shares which had been issued to Fisher by the company, under the resolutions and circumstances hereinbefore set forth: but whether these shares were shares which had been fully earned by Fisher, or shares which had been advanced to him in anticipation of work to be done, does not appear, nor is it possible, as counsel concede, ever to ascertain.
The ground of liability on the part of the defendants, Atkins and Converse, is that, in point of fact, none of the shares issued to Fisher were ever paid for; that he had received in bonds more in value than the work he performed under his contract was worth; that, not having complied with his contract, his agreement, contained in his construction contract with the company, to take the shares, must now be regarded and treated as an agreement to pay for the shares in cash; and that shares, not being negotiable in the sense of the law merchant, are open, in the hands of every holder, to all the equities which attach to them in the hands of the original taker; and, therefore, since Fisher, if he held the shares, could be compelled to pay for them by the company, or, at all events, by its creditors, the present holders of such shares, although they are holders for value, and without actual notice of the equities in respect thereto as between Fisher and the company, are necessarily charged with the obligations which attach to the original subscriber or holder of the shares.
There is no allegation in the bills of complaint that the defendants, Atkins and Converse, were in any way interested in, or parties to, the contracts under which said shares of stock were issued, or that they had any knowledge of such contracts when they purchased their shares of stock. Neither is there any allegation in the bills of complaint that said defendants were parties or privies to any over-issue or over-payment of bonds or stock by said company to Fisher, Jr.,- or that the defendants had any knowledge or information that such alleged over-issues or over-payments had been made. Neither is there any allegation that the defendants had any knowledge or information that the shares of stock owned by them had not been paid for in full, or that they had any knowledge or information that their certificates of stock were issued in fraud of the rights of creditors.
Upon the allegations of the plaintiffs’ bills,, as well as upon the proofs, these defendants are to be treated as the bona fide purchasers and holders of the shares of stock by them severally owned.
The plaintiffs nowhere allege, indeed, that any shares of stock were issued to said Fisher, Jr., by said corporation, otherwise than in accordance with the terms of said contract, or that any shares were issued in excess ot the stipulations of said contract.
It is our judgment, especially in view of the provisions of sections 17, 19, and 29 of the company’s charter, before adverted to, that shares of stock issued as full-paid shares by -authority of the board of directors, under the construction contract, which was never questioned by the company or its shareholders or creditors, and which is not assailed or impeached by the pleadings in the cause, and sold by the contractor as full-paid shares, to purchasers for value, without actual notice of the equities between the contractor and the company, if any there be, cannot be held subject to such equities, and to a liability to have shares thus issued and thus purchased treated as unpaid stock. ■ No case holding such a doctrine was referred to by the learned counsel for the complainants, and it is confidently believed that no such judgment has ever been pronounced. It is difficult to perceive any principle of reason or law on which such a judgment could rest. The. com[1152]*1152pany have the power to issue its shares. It cannot, without special authority from the legislature, issue its shares as full-paid without actual payment in money, or, at least, in money’s worth. A leading object of the creation of corporations and the issue of shares is that the shares may be transferred with all practicable facility. Bank v. Lanier, 11 Wall. [78 U. S.) 369; New York, etc., R. Co. v. Schuyler, 34 N. Y. 30, 82.
The company's directors and officers are the guardians of the company’s rights. They ought not to issue shares in violation of their duty. They know whether the shares have been paid for or not. This the public have no means of knowing, and no effectual means for ascertaining.
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DILLON, Circuit Judge.
It is not necessary to decide whether the company’s contract with Warren Fisher, Jr., for the construction of the road, would have been held valid if it had been assailed by non-concurring shareholders or by the creditors of the company. A contract for the construction of the whole road seems, however, to have been contemplated as permissible by the 19th section of the company’s charter; and the 17th and 29th sections contained express authority to receive subscriptions for stock, “payable in labor or materials in and for the road;” * * * “bond being taken to the company, with security, for the faithful performance of the work or furnishing of the materials.” But it is not necessary to pass upon the validity of the Fisher contract, for the reason that the complainants’ bills do not attack It either as being fraudulent or ultra vires. Nor has it been assailed in argument on either of these grounds, or' on any ground, by the learned counsel for the complainants. In these causes the validity of that contract, so far as it authorized the issue of stock in payment for work done by Fisher, must, there[1151]*1151fore, be assumed. Stock was thus issued, purporting to be full-paid stock.
On September 2d, 1869. the directors of the company ordered the secretary to issue $35,t O00 in the common stock of the company, at liar, “on account of work done and materials furnished under the contract for the construction of the road, previous to September 1st, 1869.”
On February Sth, 1870, the engineers of the company were instructed, by the unanimous vote of the directors, to make a detailed estimate of all work done and materials furnished by Fisher, and report; and in July, 1870, the report having been made, the directors unanimously authorized the delivery to Fisher of $787,500 first mortgage bonds, $1,125,000 land grant bonds. $675,000 in the preferred stock, and $675,000 in the common stock of the company; “such being the estimate of the consulting engineer of the company of the amount now due him on his contract.” It was also resolved, at the same meeting, “that • the president might, in his discretion, advance to Fisher any greater amount of bonds or stock, upon his giving good and sufficient security under his contract.”
On November 15th, 1870, the directors authorized the executive committee to issue to Fisher “stock and bonds of this road in such amounts and at such times as they may deem expedient.” Some stock was advanced, under authority thus conferred, without security being required; but this latter fact does not appear on the records of the company. The stock earned under the contract, and that issued in advance of being earned, was in the same form, and alike purported to be paid-up stock.
The defendants, Atkins and Converse, never made an original subscription to the stock of the company, and they became holders of its shares by the purchase of the same in Boston, through brokers in the market, without any actual knowledge of the facts connected with its issue. The shares thus purchased by the defendants, Atkins and Converse, were shares which had been issued to Fisher by the company, under the resolutions and circumstances hereinbefore set forth: but whether these shares were shares which had been fully earned by Fisher, or shares which had been advanced to him in anticipation of work to be done, does not appear, nor is it possible, as counsel concede, ever to ascertain.
The ground of liability on the part of the defendants, Atkins and Converse, is that, in point of fact, none of the shares issued to Fisher were ever paid for; that he had received in bonds more in value than the work he performed under his contract was worth; that, not having complied with his contract, his agreement, contained in his construction contract with the company, to take the shares, must now be regarded and treated as an agreement to pay for the shares in cash; and that shares, not being negotiable in the sense of the law merchant, are open, in the hands of every holder, to all the equities which attach to them in the hands of the original taker; and, therefore, since Fisher, if he held the shares, could be compelled to pay for them by the company, or, at all events, by its creditors, the present holders of such shares, although they are holders for value, and without actual notice of the equities in respect thereto as between Fisher and the company, are necessarily charged with the obligations which attach to the original subscriber or holder of the shares.
There is no allegation in the bills of complaint that the defendants, Atkins and Converse, were in any way interested in, or parties to, the contracts under which said shares of stock were issued, or that they had any knowledge of such contracts when they purchased their shares of stock. Neither is there any allegation in the bills of complaint that said defendants were parties or privies to any over-issue or over-payment of bonds or stock by said company to Fisher, Jr.,- or that the defendants had any knowledge or information that such alleged over-issues or over-payments had been made. Neither is there any allegation that the defendants had any knowledge or information that the shares of stock owned by them had not been paid for in full, or that they had any knowledge or information that their certificates of stock were issued in fraud of the rights of creditors.
Upon the allegations of the plaintiffs’ bills,, as well as upon the proofs, these defendants are to be treated as the bona fide purchasers and holders of the shares of stock by them severally owned.
The plaintiffs nowhere allege, indeed, that any shares of stock were issued to said Fisher, Jr., by said corporation, otherwise than in accordance with the terms of said contract, or that any shares were issued in excess ot the stipulations of said contract.
It is our judgment, especially in view of the provisions of sections 17, 19, and 29 of the company’s charter, before adverted to, that shares of stock issued as full-paid shares by -authority of the board of directors, under the construction contract, which was never questioned by the company or its shareholders or creditors, and which is not assailed or impeached by the pleadings in the cause, and sold by the contractor as full-paid shares, to purchasers for value, without actual notice of the equities between the contractor and the company, if any there be, cannot be held subject to such equities, and to a liability to have shares thus issued and thus purchased treated as unpaid stock. ■ No case holding such a doctrine was referred to by the learned counsel for the complainants, and it is confidently believed that no such judgment has ever been pronounced. It is difficult to perceive any principle of reason or law on which such a judgment could rest. The. com[1152]*1152pany have the power to issue its shares. It cannot, without special authority from the legislature, issue its shares as full-paid without actual payment in money, or, at least, in money’s worth. A leading object of the creation of corporations and the issue of shares is that the shares may be transferred with all practicable facility. Bank v. Lanier, 11 Wall. [78 U. S.) 369; New York, etc., R. Co. v. Schuyler, 34 N. Y. 30, 82.
The company's directors and officers are the guardians of the company’s rights. They ought not to issue shares in violation of their duty. They know whether the shares have been paid for or not. This the public have no means of knowing, and no effectual means for ascertaining. If the company’s directors, or other authorized officers, commit a fraud upon the company in this respect, they are undoubtedly liable therefor. But can any one point out wherein the equities of the creditor of a company thus defrauded by its officers is superior to the equities of those who have acted upon the representations of such officers within the scope of their powers, accredited by resolutions of the directors and authenticated by the corporate seal, and upon such solemn assurances purchased the shares of the company ? Grant that the capital stock is a trust fund for the benefit of creditors, yet this trust cannot be followed, any more than other trusts, into the hands of bona fide purchasers for value. Per Swayne, J., in Sanger v. Upton, 91 U. S. 56, 60.
What contract did the defendants Atkins and Converse make? They made a contract to buy, and did buy, what the company had issued and represented to be full-paid shares, without notice that this representation was untrue. If the representation thus made is true, they are under no liability again to pay for the shares. If the shares had been represented to have been unpaid, non constat that they would have purchased them. Clearly the company would be estopped to make the claim here advanced by its creditors.
Again, we ask, in what consists the superior equity of the creditor over the obvious equities which exist in favor of such a purchaser of the company’s shares? The creditor trusted that the company’s officers would not violate their duty; the purchaser trusted that they had not violated their duty.
The rights and obligations of a bona fide transferee of shares purporting to be full-paid shares are different from the rights and obligations of the transferee of shares which do not purport to be full-paid. In cases where the certificates show on their face that the shares have been paid in part only, the law implies a promise by the transferee to pay the balance due upon the shares upon calls when he has come into privity with the company. Webster v. Upton, 91 U. S. 65, 69; Upton v. Tribilcock, Id. 45. Such an implied promise rests upon the reasonable and obvious ground that the transferee has knowingly and voluntarily assumed the liability of the transferrer. But upon what ground can the law raise a promise to pay the balance due upon shares when the company has asserted, and the purchaser acts tipon the assurance, that the shares have been fully paid?
The question here r ed by the complainants is settled by the universal practice of business men, as well as by the judgments of the courts. Millions of dollars of stocks are sold in this countrj- every week, and there is no practice on the part of purchasers and no understanding that the law requires of them that they shall ascertain aliunde the representations of the company's authorized officers that certificates of full-paid stock have in fact been fully paid. How could a purchaser ascertain this fact? Must he go to the records of the particular corporation, in a remote and distant state it may be, and make an examination before he can safely buy? What more value is to be placed upon facts stated in the records than upon those stated under the corporate seal, by the authorized officers, as respects matters infra vires? Officers'who would state a falsehood on the certificate of stock would state it on the corporate records, if this were necessary to make the intended fraud effectual. And, hence, the duty so much insisted on in argument, that a purchaser is bound to know the facts appearing on the corporate records, in addition to its being an impracticable duty, would, if discharged, be valueless as a guaranty against frauds upon creditors. Besides, on what principle is it that a purchaser of the company’s shares is to be held to be the guardian of the rights of the company’s creditors and bound to protect them? But the exigencies of this case do not require us to go so far, since, if we concede that a bona fide transferee for value of full-paid shares is charged with knowledge of all the facts concerning those shares appearing on the records of the corporation, there is nothing therein disclosed which shows that the shares purchased by Atkins and Converse had not been paid for by Fisher under his contract. The company’s records show that a large amount of stock had been earned by Fisher and ordered to be issued, and under the 29th section of the charter other stock was ordered to be advanced to him, on his giving bond to the company to pay for the same under his construction contract, the validity of which was not questioned by the company or any of its shareholders.
But the question here presented does not rest alone upon general reasoning. The subject was somewhat considered by the circuit court for the Eastern district of Missouri, in Phelan v. Hazard [Case No. 11,068], That was a suit brought by a single creditor of an insolvent corporation to enforce the liability of a stockholder for the unpaid balance of his stock.' The shares had been issued in payment for a mining property which the corporation had purchased. The plaintiff did not undertake to impeach as fraudulent this [1153]*1153transaction between tbe corporation and the original shareholders, but simply claimed that the shares of stock had not been paid for, either by the person to whom they were originally issued or by the defendant, the transferee and present holder of the shares. The court, after stating that the proof showed that the shares in question had been paid for precisely as they were originally agreed to be paid for, viz., by a conveyance of the mining property of the corporation, and that the conveyance had been received and recorded by the corporation, says: “Unless this agreement is rescinded or set aside for fraud, how can it be said that the stock has not been paid for? The parties have agreed that it has been paid for, and that agreement is conclusive, unless it is rescinded or impeached for fraud, and this cannot be done unless the attack is directly made. Undoubtedly such an attack could be made while the stock was in the hands of the original takers of it; but it is not so clear that it could be made by a subsequent creditor of the corporation against a transferee of the stock for value, who purchased the same in good faith as full-paid stock, relying upon the records of the corporation, which showed the shares to have been fully paid for, and the manner in which the payment had been made.”
Subsequently the similar case of Foreman v. Bigelow [Case No. 4,934] came before the circuit court for Massachusetts, and it was decided that a bona fide purchaser of full-paid shares was not liable to be assessed upon his shares. The opinion of Mr. Justice Clifford is very full, and we forbear going over ground so exhaustively covered in his judgment.
A long line of English cases under the companies acts, refeiTed to in the opinions in the two American eases last cited, had established the principle that stock need not necessarily be paid for in cash — that it might be paid for in money’s worth. This doctrine had led to such abuses as to cause parliament to insert in the companies act of 1867 the following provision:
“Sec. 25. Every share in any company shall be deemed and taken to have been issued and to be held subject to the payment of the whole amount thereof in cash, unless the same shall have been otherwise determined by a contract duly made in writing and filed with the registrar of joint stock companies at or before the issue of such shares.”
The construction and effect of this section came before the court in Nicolls’ Case [In re British Farmers’ Pure Linseed Cake Co.], 7 Ch. Div. 533. In that case a. company issued certificates of shares as fully paid up, when in fact no payment had been made, nor contract registered, under the provisions of the companies act of 1SG7, (section 25). At the date of the winding up of the company, some of these shares were held by N., who had no notice that they were not- fully paid up. It was held (reversing the decision of Hall, viee-chancellor) that by the issue of the certificates the company were estopped from alleging that the shares were not paid up, and that N. could not be placed on the list of contributors in respect of them as unpaid shares.
An appeal was taken by the liquidator, and the appeal was dismissed by the house of lords. 26 Wkly. Rep. 819. In giving judgment, Lord Cairns, after quoting the aforementioned section 25 of the act of 1867, said: “The effect of the section is very simple. Before'the passing of the act it was open to any holder of shares to say, T have made a contract that I shall not be called on to pay up the value of these shares;’ but the abuse of such contracts led to a statutory provision, making it a condition that no shares be treated as fully paid unless their value is paid in cash, or unless publicity is insured by a written contract duly filed in the manner provided for. If Goulton had been called upon to pay up the value of his shares, this section would have deprived him of any defence; but we have now to consider the case of a bona fide transfer for value, and I want to know how the section can affect such a transaction. It leaves untouched the question of payment, and says nothing as to evidence of payment; but if the company gives a receipt for the amount of the shares, and this receipt passes to a purchaser who does not know that no actual payment has been made, his title must not be prejudiced by the statute. He receives a representation to the effect that the law has been complied with, and it would paralyze the whole trade in companies’ shares if a person taking shares with a representation that they are fully paid up must disregard this assertion and satisfy himself of the fact by personal inquiry, especially as he might have considerable difficulty in obtaining accurate information as to the fact of payment or non-payment. Much was said as to the burden of proof and as to the necessity for showing an absence of notice. If the shares come, in the regular course of business, into the hands of a purchaser for valuable consideration, those whc challenge the transaction must prove that such purchaser had notice of the fact.” Lords Hatherley, Selbourne. and Blackburn each gave opinions in concurrence, and Lord Gordon concurred without delivering a separate opinion.
As to other defendants, different questions are presented. Certain individuals and counties became original subscribers to the stock of the company. By the charter of the company it is provided that five per cent on each share shall be paid when subscribed, gnd subsequent payments shall be made upon calls by the board of directors, who are, however, required to give sixty days notice of each call, and are prohibited from making a call for more than ten per cent at any one time, and from making more than three calls in any one year. On December 2d, 1869, the stockholders voted that no further calls be made upon the original stock subscriptions, and that eertifi-[1154]*1154cates issue for stock to the extent to which the payment had been made, and that the balance of the subscriptions be cancelled; and on January 25th, 1870, the directors, pursuant to the above-mentioned vote of the stockholders, instructed the secretary “to cancel seventy-three per cent of the original individual and county subscriptions, and to issue certificates of stock to all stockholders whose accounts shall, on March 15th, 1870, show credits to the amount of twenty-seven per centum of the stock now standing in their names.” As respects certain individuals and counties made defendants, this was carried out.
The case as to the counties was submitted upon the bill and answers. The averments of the answers are- to be taken as true. The counties had paid twenty-seven per cent of their subscriptions. The release was directed by the stockholders themselves. The company was then solvent. The release was made a matter of record in 1870. There was no secrecy and no fraud intended. It is averred in the answers that the original subscriptions had been made before there was any legislative authority for that purpose. The company decided in 1870 that it was “inexpedient to attempt the further collection of calls upon the original individual and county subscriptions to the capital stock,” and ordered one share of 825 to issue for each $25 paid, “the stockholders to lose the fraction paid over a full share.” This arrangement, it may fairjy be inferred, was consented to by every person interested in the company. The amount of the old stock was thus ascertained, and the company had agreed to give the balance of its stock to the contractor for building its road, and undoubtedly the contractor knew of this arrangement and consented to it. The counties and the company acted on the faith of this release. The counties supposed they were out of the company, and subsequently had no voice and took no part in its affairs. No stockholder in the company ever complained of the action in releasing the counties. No creditors are in existence who were such at the time of the release of the counties, except those claiming under the Fisher contract; and no claim was made against the counties that they were liable as stockholders until 1877, nearly seven years after they were released, and long after the company was bankrupt and practically dissolved. Under the circumstances of the case as set forth in the answers of the counties, we are of opinion that the release was effectual; but if it is not, the counties ought to be protected by the creditors’ laches from the liability which, at this late day, the creditors are now seeking to enforce against them.
In disposing of the case it may be well briefly to express our views concerning the claim of the creditor based upon the double liability clause of the constitution of 1868. The charter of the railroad company contained this provision:
“Sec. 25. No stockholder in, this company shall be in any event responsible for losses of the company to any greater amount or extent in the whole than the amount of stock subscribed for and taken by him.”
Section 24 of the charter of the company was as follows: “The said company hereby reserves to itself the right either to accept or reject any act of the general assembly of this state, altering or amending this charter; which shall be decided by a vote of a majority of all the stock, exclusive of that taken by the state, at a meeting of the stockholders regularly convened for that purpose.”
Afterwards the constitution of 1868 was adopted, containing the following: “The general assembly shall pass no special act conferring corporate powers. Corporations may be formed under general laws; but all such laws may, from time to time, be altered or repealed. Dues from corporations shall be secured by such individual liability of the stockholders and other means as may be prescribed by law; but, in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum at least equal in amount to such stock. The property of corporations now existing or hereafter created shall forever be subject to taxation, the same as the property of individuals. No right of way shall be appropriated to the use of any corporation until full compensation therefor shall be first made in money, or first secured by a deposit of money, to the owner, irrespective of any benefit from any improvement proposed by such corporation; which compensation shall be ascertained by a jury of twelve men, in a court of record, as shall be prescribed by law.”
The provisions of the constitution were never accepted by the stockholders. .
As respects the claim in the bill based upon the double liability clause of the constitution of 1868, we remain of the opinion heretofore expressed, that the measure of liability of the stockholders, at whatever time they become such, is fixed by the 25th section of the charter, and was not increased by any act of the state not assented to by the corporation.
.The purpose of the provision in section 25 of the charter was not to declare a double liability, but to limit the liability of the stockholder to the duty of paying for the stock subscribed or held by him. The state has passed no act, so far as relates to the liability here sought to be enforced, to carry the constitutional provision into effect.
The defendants contend that the constitutional convention of 1868 did not intend to legislate upon this subject of the personal liability of stockholders in corporations, but to leave the whole subject to future legislatures. with a limitation upon their powers, which limitation was fixed by the clause in question; and that the sole object and purpose of such clause is to'declare the limita[1155]*1155tion, and not to create the liability. It cannot be denied that there are strong arguments in favor of this view.
I See Atkins v. Steacy, Case No. 603, published in 5 Dill. 387, as a note to this ease.)
If the constitutional provision is not self-executing, the same result is reached as that based upon sections 24 and 25 of the charter. Bill dismissed.