Cochran v. Monteith , 1920 Tex. App. LEXIS 541 ( 1920 )

The contention of the plaintiff in error is that he was entitled to have the sums he paid on account of the recovery the Houston National Exchange Bank had against him as surety for the Brown-Fitzpatrick Company and the amount of the two notes that company made to him referred to in the statement above set off against the balance remaining unpaid of his subscription to the capital stock of said company. As supporting his contention appellant cites 7 C.J. 143, where it is said that —

"A person who is indebted to the bankrupt is entitled, as against the trustee, to assert and enforce any set-off or counterclaim which he may have and which he might have asserted and enforced as against the bankrupt."

The statement quoted is supported, not only by other authorities cited by plaintiff in error, but by section 68 of the federal bankruptcy act of 1898 (Comp. St. § 9652), as follows:

"In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid."

But, as is said on page 144 of the volume of C.J. cited, the right of set-off conferred by the statute —

"does not apply to a creditor of a bankrupt corporation who is also a stockholder and is indebted to the corporation on an unpaid stock subscription."

The statement just quoted is abundantly supported by the authorities. Sawyer v. Hoag. 84 U.S. (17 Wall.) 610, 21 L. Ed. 731; Kiskadden v. Steinle, 203 F. 375, 121 C.C.A. 559; Bausman v. Kinnear, 79 F. 172, 24 C.C.A. 473; Handley v. Stutz, 139 U.S. 417, 11 S. Ct. 530,35 L. Ed. 227; In re Howe Mufg. Co. (D.C.) 193 F. 524; 1 Cook on Corporations (6th Ed.) § 193; Mathis v. Pridham, 1 Tex. Civ. App. 58, 20 S.W. 1016; Hardware Co. v. Mfg. Co., 86 Tex. 160, 24 S.W. 16, 22 L.R.A. (N.S.) 802; Burleson v. Davis, 141 S.W. 559; Davis v. Burns, 173 S.W. 476.

"The rule," says Mr. Cook in the volume of his work on Corporations cited above, "is founded in equity and public policy," and the "well-established" doctrine, the Supreme Court said in the Sawyer-Hoag Case, "that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the benefit of the general creditors of the corporation." "A stockholder, who is also a creditor of a corporation," said the court in the Bausman-Kinnear Case, "has no right to set-off as against his unpaid subscription, after the corporation has become insolvent, and a suit in equity has been brought to wind up its affairs and distribute its assets. The unpaid stock is held to be a trust fund for the purpose of paying the debts of the corporation, and as such it must be distributed among the creditors pro rata. The debt due to a stockholder is entitled to no preference over other debts, and he cannot require its payment by way of set-off to the exclusion or postponement of other claims. The reason usually assigned for this rule is that the debt owing by the stockholder to the corporation after insolvency and that owing from the corporation to him are not in the same right, the former being a debt payable to a trust fund. The decisions upon this proposition appear to be unanimous."

The judgment is affirmed.