Allen v. Rhodes

TRIEBER, District Judge

(after stating the facts as above). Assuming that the agreement with Bement made his subscription fraudulent and void, the question to be determined upon this appeal is whether, owing to the fact that only $12,600 of the capital stock of the railway company, which was to be $1,000,000, was subscribed in good faith, the corporation had such existence as to make those who did subscribe liable to creditors of the company for the unpaid portions of their subscriptions.

The authorities arc conflicting whether subscriptions made to a corporation, when the full amount of the capital stock has not been subscribed, or, if subscribed, some of the subscriptions' are not in good faith, are collectible by the corporation, when the statutes of the state, under which the corporation was formed, are silent on the subject and the articles of incorporation do not contain such a provision. Neither the statutes of Nebraska nor the articles of incorporation make it a, condition precedent that they are to become effective oniy when the full amount of the capital stock is subscribed ifi good faith. But assuming, without deciding, that, until the entire capital stock is subscribed in good faith, the subscribers cannot be held liable to the corporation for the payment of assessment calls on their subscriptions, the question is whether that rule applies to an action by a receiver appointed on behalf of judgment creditors of the corporation.

[1] The appellants James R. Anderson, H. V. Byram, C. E. Barlow, Geo. M. Byram, G. H. Busse, P. 13. Gordon, Richard Lewis, and James P. Latta were directors and attended meetings as such. The following appellants attended and participated in stockholders’ meetings of the corporation: I. N. Holman, j. R. J. Mitten, H. G. Byram, C. E. Barlow, James McAllister, Charles Phipps, George Byram, Eugene L. Byram, G. H. Busse, J. E. Butts, P. B. Gordon, William B. Gregg, Richard Lewis, and Thos. Ashley. The following appellants paid the first assessment, and thereby recognized the existence of the corporation: James R. Anderson, J. E. Henry, J. R. J. Mitten, W. B. Watson, j. M. Comically, Cliloc R. Canfield, Eugene L. Byram, E. IT. Deman, A. K. Sears, and Neis P. Larson. These .appellants are clearly estopped, and as to them the decree must be affirmed, regardless of what conclusion we may reach as to the liability of the other appellants. 7 Ruling Case Law, p. 235; Planters’, etc., Packet Co. v. Webb, 144 Ala. 666, 39 South. 562; Lincoln Park Chapter v. Swatek, 204 Ill. 228, 68 N. E. 429.

[2] The record shows that, although but a small part of the capital stock of the corporation was subscribed, the subscribers organized the corporation by electing directors and other officers, entered into contracts, held directors’ and stockholders’ meetings for nearly five years, the first meeting being held on February 24, 1903, and the last on December 26, 1907, and that some of the subscribing defendants paid the first call of 10 per cent. These acts certainly make it a de facto corporation, if not de jure, and being a de facto corporation the subscribers to the stock are liable to creditors of the corporation for unpaid subscriptions. Tulare Irrigation District v. Shephard, 185 U. S. 1, 13, 22 Sup. Ct. 531, 536 (46 L. Ed. 773). It was there held:

“From the authorities, some oí which are above cited, it appears that the requisites to constitute a corporation de facto are three: (1) A charter or general law under which such a corporation as it purports to be might lawfully be organized; (2) an attempt to organize thereunder; and (3) actual user of the corporate franchise. * * * Being a de facto corporation, the general rule is that none but the state can call its existence in question.”

And the court held that, being a corporation de facto, a holder of its bonds could recover on them. See also Harrill v. Davis, 168 Fed. 187, 94 C. C. A. 47, 22 L. R. A. (N. S.) 1153, decided by this court.

In 5 Thompson on Corporations (2d Ed.) § 5183, it is said:

“The rule is believed to be without exception that a stockholder sued by or on behalf of the creditors after the corporation has become insolvent is estopped to question the legal existence of the corporation of which he was a stockholder.”

And in section 5184 the same author states:

“A stockholder cannot urge as a defense that the corporation was irregularly or illegally organized, since his liability is an incident to the liability of the corporation, and the corporation would, in most cases, be estopped to set up such a plea. It is enough that the corporation is a corporation de facto”— citing numerous authorities, which sustain the text.

And this seems to be the. rule in the state of Nebraska, as established by the decisions of the Supreme Court of that state. In Lusk v. Riggs, 70 Neb. 713, 97 N. W. 1033, it was held that where the articles of incorporation have not been filed with the secretary of state, as required by the statutes of the state, the corporation, although having acted as such, would not be held liable, nor could it enforce its contracts; but upon a rehearing this decision was set aside, and the rule, recognized in other states, followed that, being a de facto corporation, persons who dealt with it as such cannot question its legal existence, nor can the corporation plead that it was never legally organized. 70 Neb. '718, 102 N. W. 88. The same rule is laid down in 10 Cyc. 494, 495.

A leading case on that subject is Minor v. Mechanics’ Bank, 1 Pet. 46, 65, 7 R. Ed. 47. In that case only $320,000 out of $500,000 of the capital authorized by the charter was subscribed in good faith, but the court did not regard tliis deficiency in tlie subscriptions as at all affecting the status of the corporation or the validity of its operations. In Aspinwall v. Butler, 133 U. S. 595, 10 Sup. Ct. 417, 33 L. Ed. 779, it was said:

“There was no express condition that the individual subscriptions should, be void if the whole $600,000 was not subscribed; and, in our judgment, there was no implied condition in law to that effect. Each subscriber, by paying the amount of his subscription, thereby indicated that it was noti made on any such condition. It is not libe the case of creditors signing a composition deed to take a certain proportion of their claims in discharge of their debtor. The fixed amount of capital stock In business corporations often remains unfilled, both as to the number of shares subscribed and as to payment of installments ; and the unsubscribed stock is issued from time to time as the exigencies of the company may require. The fact that some of the stock remains unsubscribed is not sufficient ground for a particular stockholder to withdraw his capital.”

To the same effect is Scott v. De Weese, 181 U. S. 202, 21 Sup. Ct. 585, 45 L. Ed. 822. In the Minor Case it was also held that a fraud between some of the original subscribers and commissioners, whereby their subscriptions were not made bona fide, but with the intention of not paying for the stock, could not be set up to the injury of creditors, who did not participate in nor have notice of the fraud. Cole v. Satsop R. R. Co., 9 Wash. 487, 37 Pac. 700, 43 Am. St. Rep. 858; Farnsworth v. Robbins, 36 Minn. 369, 31 N. W. 349; Morrison v. Dorsey, 48 Md. 468; Musgrave v. Morrison, 54 Md. 161.

[3] If debts are incurred by a de facto corporation, even if it has never been legally organized, the subscriber, standing by and making no objections, will be estopped from pleading the nonexistence of the corporation, when sued for the benefit of creditors. Homan v. Steele, 18 Neb. 652, 26 N. W. 472; Hudson v. Greenhill Seminary, 113 Ill. 618; International Fair Association v. Walker, 83 Mich. 386, 47 N. W. 338. In the last cited case there had only been a preliminary agreement to form the corporation, and it was held:

“The object sought to bo accomplished by this preliminary agreement was a lawful one; the promises contained in this preliminary agreement were mutual, and the acts done and the moneys expended were in reliance upon these original subscriptions; and there could be no difficulty in enforcing this agreement at the common law.”

In Gress v. Knight, 135 Ga. 60, 68 S. E. 834, 31 L. R. A. (N. S.) 900, it was well said:

''When a person becomes a stockholder of a corporation, be becomes a part of it. Its agents are in a sense his agents. They go out and deal with the public. If through their dealings debts are incurred, assuming both the stockholder and the creditor to be innocent and that one must suffer, the former, who put it in the power of the agents to do the wrong, should suffer rather than third parties, who dealt with such agents.”

There is no pretense that any fraud has been practiced on any of these appellants, who probably were influenced to subscribe to the stock of the corporation by the belief that it would greatly benefit them by affording them cheap and rapid transportation. During the entire time the corporation was alive, none of them ever objected to any acts of the directors, nor asked to be relieved of their subscriptions. The debts which have been allowed against the corporation have been found by a court of competent jurisdiction to be bona fide and justly duetto the parties, for services rendered in good faith, under contracts with the corporation, and we see no reason why the subscribers to the stock should'now be permitted to escape the consequences of their own acts, whether due to carelessness or ignorance.

The decree is right, and is affirmed.