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defendant corporation, or otherwise, or at which is and must be, under the theory of all, upon the individual defendants, or upon the law, assets in the hands of the corporaany of them, for the sums respectively sub- tion, is worth only one-half that amount, scribed by them, and alleged by the com- the corporation is to that extent doing busiplaint not to have been paid; citing Elder- ness under false colors, and is obtaining kin v. Peterson, 8 Wash. 674, 36 Pac. 1089, credit upon the faith of an asserted estate which case was also an action by a receiver which is purely fictitious. And where, by against a stockholder, and is therefore not any arrangement between the shareholders in point. The creditor has no control over and the corporation, the stock is issued as the corporation or its business; is not sup- fully paid up, when in fact it has not been posed to know whether calls have been regu- paid to the full amount of its face value, larly made or made at all. So it will be but has been paid in property of a fictitious readily seen that while this may be a duty or inflated value, a court of equity will comof the corporation itself, in suing one of its pel a payment by the stockholder, for the members over whom it has control, the duty benefit of the creditor who has dealt with should not be imposed upon a creditor. That the corporation relying upon the asserted no calls are necessary before an action can value of its assets, to the full amount or face be commenced by a creditor against the value of the stock. Such is almost the unistockholder, see 2 Mor. Priv. Corp. § 821, versal holding of the courts of the present where the distinctions above referred to are day. See First Nat. Bank of Deadwood v. commented on at length. We think the com- Gustin Minerva Con. Min. Co. (Minn.) 44 plaint, in all respects, was sufficient.

N. W. 198; Tayl. Priv. Corp. § 702. The It is not necessary, in discussing the mer- latter authority lays down the rule as folits of this case, to set out in full the an- lows: “To issue shares, as fully paid up, swer of the defendants, for the real conten- for property known to the corporation and tion must be whether or not the stock sub- the shareholder receiving them to be mate. scribed for was paid for in cash or its equiv- rially below their par value, is a fraud on alent. The doctrine that the stock of a cor- creditors, for whose benefit the shareholder poration is a trust fund for the benefit of to whom the shares are issued may be comCreditors is one which is founded in equity pelled to make up the difference." See, also, and fair dealing, and, in any event, has be- Wetherbee v. Baker, 35 N. J. Eq. 501; Cook, come so well established in this country that Stock & S. $ 652; Redmond v. Dickerson, 9 it can no longer be gainsaid. This doctrine N. J. Eq. 507; Higgins v. Lansingh (Ill. Sup.) was announced by Chancellor Kent, as early 40 N. E. 362; Scovill v. Thayer, 105 U. S. as 1824, in Wood v. Dummer, 3 Mason, 309, 143; Boynton v. Andrews, 63 N. Y, 93; GilFed. Cas. No. 17,944, and since that time kie & Anson Co. v. Dawson Town & Gas Co. has become the established law of this (Neb.) 64 N. W. 978; Mor. Priv. Corp. 8 812, country, and is termed the "American doc- and cases cited. trine," although, as shown in the case above So the question to be determined, so far as referred to, the same doctrine had long been this branch of the case is concerned, is, was established in England; and so universally the $55,000 worth of stock subscribed for by has this doctrine been accepted in America, the defendants in this action, who were the especially, that the citation of authorities shareholders, paid for in money or its equivaseems a work of supererogation. We will, lent? This question must be decisively decidhowever, quote from 2 Mor. Priv. Corp. § ed in the negative. If the most that is con820, the rule which is announced as follows: tended for by the respondents (defendants) in **Debts due a corporation are equitable as- regard to the payment of this stock be acceptsets, and may be reached by creditors ed as fact, the payments would amount to through the aid of a court of chancery, if only $28,600, instead of $55,000, the face value the legal assets which can be reached by of the stock subscribed for, and which was is. execution prove insufficient. The liability sued as paid-up stock; for it is only contended of shareholders to contribute the amount of that the shareholders were to pay for this their shares as capital is treated in equity $55,000 worth of stock a certain site for the as assets, like other legal claims belonging factory, of the estimated value of $14,000; to the corporation. This liability, together the factory and its machinery, which were with the capital actually contributed, con- found by the court to be of the value of $9,100; stitutes the trust fund, which in equity is and $5,000, to be paid in cash, as a working deemed pledged for the payment of the cor- capital. The testimony, however, shows that porate debts.” This being true, then it must there was really never anything paid but the necessarily follow, for the protection of cred- factory, which was found by the court-and itors who dealt with these corporations, that we think properly-to be of the value of $9,100. the stock subscribed for must be paid in An option on the land which was sought to be cash, or in property of an equivalent value. purchased was obtained for $3,500. It seems, In other words, the corporation must be in however, that, instead of the shareholders ad. the actual condition which it represents it- vancing the money for this option, a note was self to be in financially. If it were allowed given by the corporation to the Pacific Nationto hold itself out as having a capital stock al Bank for the same. It does not appear that of $100,000, when in reality the capital stock, this note was ever paid by the shareholders, or, in fact, that it was ever paid at all, al. and by the findings. After the court found though one of the defendants testified that he that the value of the building and machinery was satisfied that it had been paid; at all was only $9,100, it found, as a conclusion of events, that the bank did not claim such an law, that the subscriptions by the defendants indebtedness. However that may be, there were fully paid and satisfied before the comis nothing to show that it was ever paid by mencement of this action, and that all of the the shareholders, and, if paid at all, was evi- capital stock of the defendant corporation had dently paid out of the funds of the corporation. been fully paid for in cash and in property reThe $5,000 which was to be advanced as a ceived and accepted by said corporation in payworking capital was obtained in the same ment for its said stock. The second finding way,-by giving a note of the corporation in- might be true, and still would not justify the dorsed by the individual shareholders. This judgment that the plaintiff had no remedy note, with the exception of the interest, has against the defendants. There is no question, never been paid, and the corporation finally under the record, but that the stock was paid gave a mortgage on its corporate property for for in property received and accepted by the the satisfaction of this debt, which mortgage corporation in payment for the stock; but, as is still alive and is a lien upon the property we have before intimated, while this would pledged. The land itself, upon which the be a binding contract between the corporation option was obtained, has reverted to the orig- and its shareholders, it does not meet the reinal owners. So that in fact, so faras the testi- quirements of the law where creditors are mony shows,-and it was gone into at great concerned. length,-the only thing of value which the But there is another phase of this case corporation had ever received for the paid-up which will compel the affirmance of the judgsbares to the extent of $55,000 was the build- ment, although it was not the ground upon ing, which, as we have before said, was cor- which the court below acted. While the docrectly found to be worth $9,100. This case, trine of trust fund is accepted in its broadest then, falls squarely within the rule which we sense, it is well settled that a trust will not have announced above; and, if there were no be impressed upon the stock of the corporation estoppels, the creditor would undoubtedly in the hands of the stockholders, for the benehave the right to pursue this trust fund into fit of creditors who dealt with the corporation the hands of the stockholders. In fact, there with knowledge of the fact that the stock is no contention on the part of the respondents had been paid for in property the value of who testified in the action that the property which was less than the face value of the turned in by them was of the actual value of stock. As was well said in First Nat. Bank of $35,000. Mr. Manning, one of the defendant Deadwood v. Gustin Minerva Con. Min. Co., stockholders, in testifying as to the value of supra: "The whole doctrine that the capital the property, stated that they regarded the stock of corporations is a trust fund for the whole property as worth the amount of money payment of creditors rests upon the equitable represented by the stock; but, in answer to consideration that the distribution of the capthe following question by the attorney for the ital among stockholders without making aderespondents, “That is to say, the patents and quate provision for the payment of debts, or the building, and all those things, were esti- the issue of fictitiously paid up stock, is a mated to be worth about $100,000?" said: fraud upon creditors who contract with the "Well, I don't know as we figured it worth corporation in reliance upon its capital reas much as that. We thought it was worth as maining intact, or in reliance upon the professmuch as the stock was.” Now, this is alto- ed capital having been in fact paid up in fuil. gether another proposition. It may have been But when the reason for the rule does not worth as much as the stock, and doubtless exist the rule itself ceases to apply. * that was the theory upon which these stock- It is only those creditors who can fairly allege holders acted when they subscribed for the that they have relied, or whom the law prestock; and as between themselves, in buying sumes to have relied, upon the amount of or selling stock, they would have a right to capital stock of the company, who have a right place any value they saw fit upon it, and place to make such inquiry, or in whose favor equity any value they saw fit upon the property will impress a trust upon the subscription to which they were trading for the stock. But the stock, and set aside a fictitious arrangeunder the trust doctrine, which we have an- ment for its payment.” In cases where parnounced above, it is not enough that the prop- ties have actual notice of the conditions existerty which the corporation receives for the ing in the corporation, it must be conceded that stock which it issues is worth as much as the as to them no fraud, actual or constructive, stock; it must be worth the face value of the has been committed by the shareholders and stock; and the fact, as testified to by the wit- the corporation in receiving property at fictiness, that he thought it was worth as much tious values in exchange for the stock of the as the stock, does not tend to sustain the asser- corporation. This was the doctrine also antion that the property received was worth the nounced by this court in Turner v. Bailey, 12 face value of the stock. The findings of the Wash. 634, 42 Pac. 115. It was further held court are peculiar, and we think, in many in that case that the stockholders whose capiinstances, unwarranted, and the conclusions tal stock had been fully paid by transfer of of the court are unwarranted by the testimony certain properties, considered in good faith by

48 P.-27



all parties concerned in the promotion of the law will not impute to the defendants any corporation as equivalent in value to the fraud, so far as this plaintiff is concerned. amount of its capital stock, could not be ren- Consequently, no trust will be impressed upon dered individually liable to creditors from the the subscription for its benefit. The judgment fact that by subsequent depreciation in values will be affirmed. the property applied in payment of the capital stock became greatly impaired in value. But SCOTT, C. J., and ANDERS, REAVIS, one of the prominent features of that case was

and GORDON, JJ., concur. the fact that the claimants were present at the meeting of stockholders at the time the stock was received, that the question of the

(30 Or. 577) liabilities under the circumstances was dis- J. D. SPRECKELS & BROS. CO. v. cussed, and that the claimants had actual no

BENDER. tice of the value of the stock. The record in (Supreme Court of Oregon. April 5, 1897.) the case at bar shows that Holbrook, who NOTES ACTION BY INDORSER SUBSEQUENT INwas a disinterested witness, not having been

DORSEMESTS- ERASURE – PRESUMPTION - E71made a party to the action, was on friendly

DENCE--ConSIDERATION-APPEAL-WAIVER. terms with the Adamant Manufacturing Com

1. In an action on notes which have been spe

cially indorsed, where plaintiff holder is an inpany of America, the plaintiff; that he pur- termediate indorser, he may strike out his own chased the patent right of the plaintiff; that name and subsequent indorsements, so as to inthe members of plaintiff corporation advised

vest himself with the legal title.

2. In an action on notes, a letter written by him to form this corporation, rather than to

plaintiff to his attorney after the delivery of the sell the patent; that they proposed that they notes for collection is not admissible to show deed the patent directly to the defendant cor- why the notes had been specially indorsed to poration, the right having been retransferred

another by plaintiff.

3. Where the presumption of ownership raisby Holbrook to the plaintiff corporation for ed by plaintiff's possession has not been rethat purpose; that they advised him to have butted, error in the admission of evidence to the controlling interest; that he afterwards in

establish plaintiff's title is without prejudice to formed them that he was not able to obtain


4. Certain persons agreed to pay to a railroad the controiling interest, but informed them

company certain amounts, in installments, prowhat interest he did obtain; that they figured vided the road was completed to a certain with him about what the building and factory

point by a day named. The company failed to would cost, and gave him their estimate of the

perform the condition. The subscribers there

upon entered into another agreement with the amount necessary to establish the plant, and company, whereby they made their notes for suggested that it would be a good plan to have the unpaid subscriptions, and deposited them about $5,000 besides for working capital. He

in escrow, to be delivered to the company if the

road were completed by a new date agreed on. testified that he had made a statement to the Held, that the failure of the railroad company company of its financial condition, which to comply with the conditions of the first agreestatement is set forth in the record, showing

ment was taken out of the case by the subsethe assets and liabilities of the company ex

quent contract.

5. Where a note is introduced in evidence, inclusively. This statement was called for by dorsed by “G., Manager," proof that such inthe plaintiff, evidently for the purpose of rely

dorsement was made by the manager is waived ing upon it in negotiating sales to the defend

by failing to object on that ground to the intro

duction of the note. ant. The witness testified that the members of the plaintiff corporation frequently asked

Appeal from circuit court, Coos county; J. him for the condition of the affairs, and that

C. Fullerton, Judge. he gave it to them; that he gave them full

Action by J. D. Spreckels & Bros. Company facts and figures in connection with it. In an

against Edward Bender. From a judgment swer to the following question by the court,

in favor of plaintiff, defendant appeals. Af"Right in that connection, did they know this

firmed. stock was paid up in this way?” witness said, This is an action to recover on three prom"Oh, yes.” “They knew of that?" "Oh, yes." | issory notes executed by the defendant, and The testimony shows that the letters which made payable to the Coos Bay, Roseburg & the witness Holbrook, while he was manager Eastern Railroad & Navigation Company or of the corporation, wrote to the plaintiff in order. The circumstances attending and relation to the business standing of the defend- which induced their execution are as folant corporation, and in relation to the manner lows: In May, 1890, the defendant, with in which it was organized, had been received others, executed a certain subsidy agreeby the plaintiff corporation or its officers, for ment, whereby he agreed to pay the said letters were received in reply acknowledging railroad company $1,230, in installments, as their receipt. It is impossible to set out this certain definite portions of a railroad were testimony in detail, but we think the record constructed eastward from Marshtield; the fairly shows that this information was con- last payment to be made when it was comveyed to the plaintiff; that it was aware of the pleted to Myrtle Point. There was a stipuconditions and terms upon which this stock lation that the road should be completed to was issued. In fact, there is no testimony to Myrtle Point May 1, 1891, and to Roseburg the contrary. And, being so aware of the December 31, 1891, and that the company terms upon which the stock was issued, the should maintain a depot within the corporate limits of the former place. The road not, these notes, and contends that its indorsehaving been completed as required by the ment thereon to the railroad company shows subsidy agreement, the subscribers thereto, prima facie that it is not the owner, but that including the defendant, on March 21, 1893, the railroad company is, and that the letentered into another agreement with the ter from plaintiff to its attorney was inadcompany, whereby, after reciting that the missible, because written by the party in subscribers bad given their notes for their whose behalf it was offered. The defend respective unpaid subscriptions, although the ant's objection to the letter was evidently notes in question were not in fact signed un- well taken. It contains matter not germane til April 27, 1893, it was agreed that the com- to the purpose for which the notes were depany and the makers of such notes should livered to the attorney, and, not being sent elect a trustee, with whom the notes should with them, it cannot be considered as a deche deposited, and delivered by him to the laration accompanying the act of such decompany when it completed its road to Myr- livery. Proof of plaintiff's declarations as tle Point, established depot grounds, and had to why and for what purpose it indorsed the cars running thereto, provided these con- notes to the railroad company was undoubtditions were performed by the company on edly inadmissible in its own behalf over the or before September 15, 1893; otherwise to objection of the defendant, but we are of be returned to the makers. The notes in the opinion that the letter did him no harm. question were delivered to one Dodge, who It is laid down in Dugan v. U. S., 3 Wheat. had been elected the trustee in pursuance of 172, 181, as a rule of law, "that if any perthe agreement. After the completion of the son who indorses a bill of exchange to anroad to Myrtle Point, and the establish- other, whether for value or for the purpose ment of a depot at that place, prior to Sep- of collection, shall come to the possession tember 15, 1893, the notes sued on were, thereof again, he shall be regarded, unless with the consent of the defendant, delivered the contrary appear in evidence, as the bona to the railroad company, and were intro- fide holder and proprietor of such bill, and duced in evidence at the trial, indorsed as shall be entitled to recover, notwithstanding follows: "Pay to the order of J. D. Spreck- there may be on it one or more indorseels Bros. Co. The Coos Bay, Roseburg and ments in full, subsequent to the one to him, Eastern Railroad and Navigation Company, without producing any receipt or indorsement R. A. Graham, General Manager.” “Pay to back from either of such indorsees, whose the order of the Coos Bay, Roseburg and names he, may strike from the bill, or not, Eastern Railroad and Navigation Company. as he may think proper." The reason of the J. D. Spreckels & Bros. Company, W. W. R. rule may be found in the presumption which Gibson, Treasurer.” John A. Gray, the at- accompanies the possession of commercial torney for plaintiff, while a witness in its paper. Where a payee or indorsee of such behalf, testified that he had received the paper has put it in circulation by an indorsepotes sued on from plaintiff for collection, ment in blank, the law will presume that and identified a letter written by plaintiff whoever is found in possession holds it rightto him from San Francisco, which was offer- fully, and he may bring an action upon it, ed in evidence with a view of showing for and at the trial fill up the blank indorsement what purpose the notes were sent by plain- | with his own name, and thus show a techtiff to its attorney, and was admitted over nical legal title in himself. So, also, where the objections of defendant. The following commercial paper has been specially inis a copy of the letter, viz.: "We have your dorsed, and is found in the hands of a payee letter of April 26th, stating that you have or an intermediate indorser, the law precommenced action against W. A. Borden and sumes that he has paid the amount of the E. Bender on the notes. Mr. Graham was note to the special indorsee, as it was his carrying out our instructions in giving you duty to do in case of nonpayment by the the notes. We wish you to push the collec- maker or prior indorser at naturity, and by tion of the notes in our name. We had in- reason thereof has become repossessed of the dorsed the notes to the railroad company for paper as rightful holder, and he will be percollection, they having declined to accept mitted at the trial to strike out his own them at their face value as a full transfer name and all subsequent indorsements, so in the account for the amounts of the notes." as to invest himself with the legal title to Error is predicated of the introduction of this the paper. Porter v. Cushman, 19 Ill. 572; letter, and of certain instructions of the Bond v. Storrs, 13 Conn. 411. In Pilmer v. court, the purport of which appear in the Bank, 19 Iowa, 112, a draft was introduced opinion. Judgment was for plaintiff, and with unerased indorsements similar to those defendant appeals.

on the notes in suit. The plaintiff was al.

lowed to testify that he had, on the draft be. A. M. Crawford and W. R. Willis, for ap

ing protested, taken it up, and was now the pellant. J. W. Hamilton, for respondent.

owner of it, of which the appellant com

plained. Dillon, J., speaking for the court, WOLVERTON, J. (after stating the facts). said: "Being in possession of the draft, the The defendant, by his denials, has put in is- plaintiff, prima facie, had the right to erase sue plaintiff's allegation of ownership of the prior indorsement, and recover as payem, without the evidence now objected to. That support of these views, see 1 Ror. R. R. the plaintiff produced more evidence than he 114; Henderson Railroad Co. v. Moss, 2 Duv. was bound to do is a matter for which the 242; O'Donald v. Railroad Co., 14 Ind. 259. defendant cannot claim a reversal.” There There is another objection to the court's are numerous authorities supporting the rule statement to the jury "that the notes them. as laid down in 3 Wheat., and, although there selves had been introduced in evidence, and are some to the contrary, we believe that show that there was an in'dorsement to J. D. case enunciates the better doctrine. See, al- Spreckels & Bros. Co. at one time by Mr. so, Reading v. Beardsley, 41 Mich. 123, 1 N. Graham, manager," and the alleged reason W. 965; Witherell v. Ela, 42 N. H. 295; for the objection is that there was no proof Nevins v. De Grand, 15 Mass. 435; Dollefus that such indorsement had been made by the v. Frosch, 1 Denio, 367. In the case at bar, manager of the railroad company. The recplaintiff's possession cast a presumption ord does not show whether this was the which established prima facie its legal title case or not, but it does show that the notes to the notes, although its indorsement to the and indorsements were introduced in evirailroad company appeared thereon. It had dence without objection by the defendant a perfect right to strike out this indorse- upon that ground, and there was no general ment, so as to show a technical title;' and the objection covering it; and, this being so, jury might have been instructed to find for such proof must be deemed to have been plaintiff upon this prima facie title, there waived. Affirmed. being no evidence to rebut it. The letter tended to show only what the possession of the notes proved prima facie, and hence its

(30 Or. 564) admission was harmless, as the verdict would

NESSLEY et al. v. LADD. have been the same in either event.

(Supreme Court of Oregon. April 5, 1897.) Now, as it regards the instructions to the

APPEAL-REHEARING. jury: The theory of the defense is that the

A motion will not lie in the supreme court notes sued on were given in consideration to grant a rehearing and open a decree below of the contract of May, 1890, and that, the

which has been affirmed, in order that newlyplaintiff having failed to comply with the

discovered evidence may be heard; the remedy

being by original suit to vacate the decree. terms and conditions thereof, the consideration failed; it being contended that the

On motion for rehearing. Denied. contract of March 21, 1893, did not absolve

For former opinion, see 45 Pac. 904. the plaintiff from performance under that of Baker & Baker and Cox, Cotton, Teal & 1890. A proper interpretation of the later | Minor, for the motion. T. H. Crawford, opcontract, however, supports neither the the- posed. ory nor the contention. The existence of the contract of May, 1890, and the fact that WOLVERTON, J. On the appeal in this certain conditions thereof remained unful- case there was an affirmance; and the appelfilled to the letter, undoubtedly constituted lants now move for a rehearing, and that the the inducement for the later agreement and decree of the court below be set aside, and the execution of the notes. The new con- the cause reopened for the consideration of tract provides for a deposit of the notes in newly-discovered evidence. The motion is escrow with a trustee, which were to be- supported by affidavits showing in purport come absolute upon its performing certain the evidence relied upon, which it is alleged conditions imposed thereby, and to be deliv- has been discovered since the decree was ered to plaintiff upon such performance. The affirmed. Prior to the appeal there was a conditions were complied with,—that is to say, motion filed in the circuit court by the same the road was completed to Myrtle Point, de- parties for a new trial, based upon alleged pot grounds were laid out, and cars were newly-discovered evidence, but the evidence running to that place, prior to September 15, here relied upon is not the same as there 1893; and the trustee, as he was in duty presented. The purpose of the motion, as bound to do, delivered the notes to plaintiff, stated by counsel, is to have this court reso that the obligation to pay in accordance open the case, and remand it to the lower with their terms became absolute and un- court, with directions to take this new eviconditional. The notes and the later con- dence into consideration with that originaltract completely supplanted the prior subsidy ly submitted, and from the whole to deteragreement. They left nothing to be perform- mine the cause ab initio. This is, in effect, ed of its conditions by either party, and it what was accomplished under the old equity does not now constitute a factor in the pres- practice by a bill in the nature of a bill of ent contention, except in so far as it con- review, accompanied by a petition to rehear stitutes a consideration for their support. It the original cause; and its purpose was to was therefore not error for the court to tell impeach a decree which had not been enthe jury that the question as to whether rolled, and was always preferred upon leave there was a failure on the part of the rail- of the court first had and obtained; Gib. road company to comply with the conditions Suit in Ch. § 1063. The form of such a bill of the subsidy agreement was taken out of resembled very nearly that of a bill of rethe case by the subsequent contract. In view, except as to the relief demanded, which

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