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defendant corporation, or otherwise, or at all, upon the individual defendants, or upon any of them, for the sums respectively subscribed by them, and alleged by the complaint not to have been paid; citing Elderkin v. Peterson, 8 Wash. 674, 36 Pac. 1089, which case was also an action by a receiver against a stockholder, and is therefore not in point. The creditor has no control over the corporation or its business; is not supposed to know whether calls have been regularly made or made at all. So it will be readily seen that while this may be a duty of the corporation itself, in suing one of its members over whom it has control, the duty should not be imposed upon a creditor. That no calls are necessary before an action can be commenced by a creditor against the stockholder, see 2 Mor. Priv. Corp. § 821, where the distinctions above referred to are commented on at length. We think the complaint, in all respects, was sufficient.

It is not necessary, in discussing the merits of this case, to set out in full the answer of the defendants, for the real contention must be whether or not the stock subscribed for was paid for in cash or its equivalent. The doctrine that the stock of a corporation is a trust fund for the benefit of creditors is one which is founded in equity and fair dealing, and, in any event, has become so well established in this country that it can no longer be gainsaid. This doctrine was announced by Chancellor Kent, as early as 1824, in Wood v. Dummer, 3 Mason, 309, Fed. Cas. No. 17,944, and since that time has become the established law of this country, and is termed the "American doctrine," although, as shown in the case above referred to, the same doctrine had long been established in England; and so universally has this doctrine been accepted in America, especially, that the citation of authorities seems a work of supererogation. We will, however, quote from 2 Mor. Priv. Corp. § 820, the rule which is announced as follows: "Debts due a corporation are equitable assets, and may be reached by creditors through the aid of a court of chancery, if the legal assets which can be reached by execution prove insufficient. The liability of shareholders to contribute the amount of their shares as capital is treated in equity as assets, like other legal claims belonging to the corporation. This liability, together with the capital actually contributed, constitutes the trust fund, which in equity is deemed pledged for the payment of the corporate debts." This being true, then it must necessarily follow, for the protection of creditors who dealt with these corporations, that the stock subscribed for must be paid in cash, or in property of an equivalent value. In other words, the corporation must be in the actual condition which it represents itself to be in financially. If it were allowed to hold itself out as having a capital stock of $100,000, when in reality the capital stock,

which is and must be, under the theory of the law, assets in the hands of the corporation, is worth only one-half that amount, the corporation is to that extent doing business under false colors, and is obtaining credit upon the faith of an asserted estate which is purely fictitious. And where, by any arrangement between the shareholders and the corporation, the stock is issued as fully paid up, when in fact it has not been paid to the full amount of its face value, but has been paid in property of a fictitious or inflated value, a court of equity will compel a payment by the stockholder, for the benefit of the creditor who has dealt with the corporation relying upon the asserted value of its assets, to the full amount or face value of the stock. Such is almost the universal holding of the courts of the present day. See First Nat. Bank of Deadwood v. Gustin Minerva Con. Min. Co. (Minn.) 44 N. W. 198; Tayl. Priv. Corp. § 702. The latter authority lays down the rule as follows: "To issue shares, as fully paid up, for property known to the corporation and the shareholder receiving them to be materially below their par value, is a fraud on creditors, for whose benefit the shareholder to whom the shares are issued may be compelled to make up the difference." See, also, Wetherbee v. Baker, 35 N. J. Eq. 501; Cook, Stock & S. § 652; Redmond v. Dickerson, 9 N. J. Eq. 507; Higgins v. Lansingh (Ill. Sup.) 40 N. E. 362; Scovill v. Thayer, 105 U. S. 143; Boynton v. Andrews, 63 N. Y. 93; Gilkie & Anson Co. v. Dawson Town & Gas Co. (Neb.) 64 N. W. 978; Mor. Priv. Corp. § 812, and cases cited.

So the question to be determined, so far as this branch of the case is concerned, is, was the $55,000 worth of stock subscribed for by the defendants in this action, who were the shareholders, paid for in money or its equivalent? This question must be decisively decided in the negative. If the most that is contended for by the respondents (defendants) in regard to the payment of this stock be accepted as fact, the payments would amount to only $28,600, instead of $55,000, the face value of the stock subscribed for, and which was issued as paid-up stock; for it is only contended that the shareholders were to pay for this $55,000 worth of stock a certain site for the factory, of the estimated value of $14,000; the factory and its machinery, which were found by the court to be of the value of $9,100; and $5,000, to be paid in cash, as a working capital. The testimony, however, shows that there was really never anything paid but the factory, which was found by the court-and we think properly-to be of the value of $9,100. An option on the land which was sought to be purchased was obtained for $3,500. It seems, however, that, instead of the shareholders ad vancing the money for this option, a note was given by the corporation to the Pacific National Bank for the same. It does not appear that this note was ever paid by the shareholders,

or, in fact, that it was ever paid at all, although one of the defendants testified that he was satisfied that it had been paid; at all events, that the bank did not claim such an indebtedness. However that may be, there is nothing to show that it was ever paid by the shareholders, and, if paid at all, was evidently paid out of the funds of the corporation. The $5,000 which was to be advanced as a working capital was obtained in the same way, by giving a note of the corporation indorsed by the individual shareholders. This note, with the exception of the interest, has never been paid, and the corporation finally gave a mortgage on its corporate property for the satisfaction of this debt, which mortgage is still alive and is a lien upon the property pledged. The land itself, upon which the option was obtained, has reverted to the original owners. So that in fact, so far as the testimony shows,-and it was gone into at great length, the only thing of value which the corporation had ever received for the paid-up shares to the extent of $55,000 was the building, which, as we have before said, was correctly found to be worth $9,100. This case, then, falls squarely within the rule which we have announced above; and, if there were no estoppels, the creditor would undoubtedly have the right to pursue this trust fund into the hands of the stockholders. In fact, there is no contention on the part of the respondents who testified in the action that the property turned in by them was of the actual value of $55,000. Mr. Manning, one of the defendant stockholders, in testifying as to the value of the property, stated that they regarded the whole property as worth the amount of money represented by the stock; but, in answer to the following question by the attorney for the respondents, "That is to say, the patents and the building, and all those things, were estimated to be worth about $100,000?" said: "Well, I don't know as we figured it worth as much as that. We thought it was worth as much as the stock was." Now, this is altogether another proposition. It may have been worth as much as the stock, and doubtless that was the theory upon which these stockholders acted when they subscribed for the stock; and as between themselves, in buying or selling stock, they would have a right to place any value they saw fit upon it, and place any value they saw fit upon the property which they were trading for the stock. But under the trust doctrine, which we have announced above, it is not enough that the property which the corporation receives for the stock which it issues is worth as much as the stock; it must be worth the face value of the stock; and the fact, as testified to by the witness, that he thought it was worth as much as the stock, does not tend to sustain the assertion that the property received was worth the face value of the stock. The findings of the court are peculiar, and we think, in many instances, unwarranted, and the conclusions of the court are unwarranted by the testimony 48 P.-27

and by the findings. After the court found that the value of the building and machinery was only $9,100, it found, as a conclusion of law, that the subscriptions by the defendants were fully paid and satisfied before the commencement of this action, and that all of the capital stock of the defendant corporation had been fully paid for in cash and in property received and accepted by said corporation in payment for its said stock. The second finding might be true, and still would not justify the judgment that the plaintiff had no remedy against the defendants. There is no question, under the record, but that the stock was paid for in property received and accepted by the corporation in payment for the stock; but, as we have before intimated, while this would be a binding contract between the corporation and its shareholders, it does not meet the requirements of the law where creditors are concerned.

But there is another phase of this case which will compel the affirmance of the judgment, although it was not the ground upon which the court below acted. While the doctrine of trust fund is accepted in its broadest sense, it is well settled that a trust will not be impressed upon the stock of the corporation in the hands of the stockholders, for the benefit of creditors who dealt with the corporation with knowledge of the fact that the stock had been paid for in property the value of which was less than the face value of the stock. As was well said in First Nat. Bank of Deadwood v. Gustin Minerva Con. Min. Co., supra: "The whole doctrine that the capital stock of corporations is a trust fund for the payment of creditors rests upon the equitable consideration that the distribution of the capital among stockholders without making adequate provision for the payment of debts, or the issue of fictitiously paid up stock, is a fraud upon creditors who contract with the corporation in reliance upon its capital remaining intact, or in reliance upon the professed capital having been in fact paid up in fuil. But when the reason for the rule does not exist the rule itself ceases to apply. * ** It is only those creditors who can fairly allege that they have relied, or whom the law presumes to have relied, upon the amount of capital stock of the company, who have a right to make such inquiry, or in whose favor equity will impress a trust upon the subscription to the stock, and set aside a fictitious arrangement for its payment." In cases where parties have actual notice of the conditions existing in the corporation, it must be conceded that as to them no fraud, actual or constructive, has been committed by the shareholders and the corporation in receiving property at fictitious values in exchange for the stock of the corporation. This was the doctrine also announced by this court in Turner v. Bailey, 12 Wash. 634, 42 Pac. 115. It was further held in that case that the stockholders whose capital stock had been fully paid by transfer of certain properties, considered in good faith by

all parties concerned in the promotion of the corporation as equivalent in value to the amount of its capital stock, could not be rendered individually liable to creditors from the fact that by subsequent depreciation in values the property applied in payment of the capital stock became greatly impaired in value. But one of the prominent features of that case was the fact that the claimants were present at the meeting of stockholders at the time the stock was received, that the question of the liabilities under the circumstances was discussed, and that the claimants had actual notice of the value of the stock. The record in the case at bar shows that Holbrook, who was a disinterested witness, not having been made a party to the action, was on friendly terms with the Adamant Manufacturing Company of America, the plaintiff; that he purchased the patent right of the plaintiff; that the members of plaintiff corporation advised him to form this corporation, rather than to sell the patent; that they proposed that they deed the patent directly to the defendant corporation, the right having been retransferred by Holbrook to the plaintiff corporation for that purpose; that they advised him to have the controlling interest; that he afterwards informed them that he was not able to obtain the controlling interest, but informed them what interest he did obtain; that they figured with him about what the building and factory would cost, and gave him their estimate of the amount necessary to establish the plant, and suggested that it would be a good plan to have about $5,000 besides for working capital. He testified that he had made a statement to the company of its financial condition, which statement is set forth in the record, showing the assets and liabilities of the company exclusively. This statement was called for by the plaintiff, evidently for the purpose of relying upon it in negotiating sales to the defendant. The witness testified that the members of the plaintiff corporation frequently asked him for the condition of the affairs, and that he gave it to them; that he gave them full facts and figures in connection with it. In answer to the following question by the court, "Right in that connection, did they know this stock was paid up in this way?" witness said, "Oh, yes." "They knew of that?" "Oh, yes." The testimony shows that the letters which the witness Holbrook, while he was manager of the corporation, wrote to the plaintiff in relation to the business standing of the defendant corporation, and in relation to the manner in which it was organized, had been received by the plaintiff corporation or its officers, for letters were received in reply acknowledging their receipt. It is impossible to set out this testimony in detail, but we think the record fairly shows that this information was conveyed to the plaintiff; that it was aware of the conditions and terms upon which this stock was issued. In fact, there is no testimony to the contrary. And, being so aware of the terms upon which the stock was issued, the

law will not impute to the defendants any fraud, so far as this plaintiff is concerned. Consequently, no trust will be impressed upon the subscription for its benefit. The judgment will be affirmed.

SCOTT, C. J., and ANDERS, REAVIS, and GORDON, JJ., concur.

(30 Or. 577)



1. In an action on notes which have been specially indorsed, where plaintiff holder is an intermediate indorser, he may strike out his own name and subsequent indorsements, so as to invest himself with the legal title.

2. In an action on notes, a letter written by plaintiff to his attorney after the delivery of the notes for collection is not admissible to show why the notes had been specially indorsed to another by plaintiff.

3. Where the presumption of ownership raised by plaintiff's possession has not been rebutted, error in the admission of evidence to establish plaintiff's title is without prejudice to defendant.

4. Certain persons agreed to pay to a railroad company certain amounts, in installments, provided the road was completed to a certaint point by a day named. The company failed to perform the condition. The subscribers thereupon entered into another agreement with the company, whereby they made their notes for the unpaid subscriptions, and deposited them in escrow, to be delivered to the company if the road were completed by a new date agreed on. Held, that the failure of the railroad company to comply with the conditions of the first agreement was taken out of the case by the subsequent contract.

5. Where a note is introduced in evidence, indorsed by "G., Manager." proof that such indorsement was made by the manager is waived by failing to object on that ground to the introduction of the note.

Appeal from circuit court, Coos county; J. C. Fullerton, Judge.

Action by J. D. Spreckels & Bros. Company against Edward Bender. From a judgment in favor of plaintiff, defendant appeals. Affirmed.

This is an action to recover on three promissory notes executed by the defendant, and made payable to the Coos Bay, Roseburg & Eastern Railroad & Navigation Company or order. The circumstances attending and which induced their execution are as follows: In May, 1890, the defendant, with others, executed a certain subsidy agreement, whereby he agreed to pay the said railroad company $1,250, in installments, as certain definite portions of a railroad were constructed eastward from Marshfield; the last payment to be made when it was completed to Myrtle Point. There was a stipulation that the road should be completed to Myrtle Point May 1, 1891, and to Roseburg December 31. 1891, and that the company should maintain a depot within the corporate

limits of the former place. The road not having been completed as required by the subsidy agreement, the subscribers thereto, including the defendant, on March 21, 1893, entered into another agreement with the company, whereby, after reciting that the subscribers had given their notes for their respective unpaid subscriptions, although the notes in question were not in fact signed until April 27, 1893, it was agreed that the company and the makers of such notes should elect a trustee, with whom the notes should be deposited, and delivered by him to the company when it completed its road to Myrtle Point, established depot grounds, and had cars running thereto, provided these conditions were performed by the company on or before September 15, 1893; otherwise to be returned to the makers. The notes in question were delivered to one Dodge, who had been elected the trustee in pursuance of the agreement. After the completion of the road to Myrtle Point, and the establishment of a depot at that place, prior to September 15, 1893, the notes sued on were, with the consent of the defendant, delivered to the railroad company, and were introduced in evidence at the rial, indorsed as follows: "Pay to the order of J. D. Spreckels Bros. Co. The Coos Bay, Roseburg and Eastern Railroad and Navigation Company, R. A. Graham, General Manager." "Pay to the order of the Coos Bay, Roseburg and Eastern Railroad and Navigation Company. J. D. Spreckels & Bros. Company, W. W. R. Gibson, Treasurer." John A. Gray, the attorney for plaintiff, while a witness in its behalf, testified that he had received the notes sued on from plaintiff for collection, and identified a letter written by plaintiff to him from San Francisco, which was offered in evidence with a view of showing for what purpose the notes were sent by plaintiff to its attorney, and was admitted over the objections of defendant. The following is a copy of the letter, viz.: "We have your letter of April 26th, stating that you have commenced action against W. A. Borden and E. Bender on the notes. Mr. Graham was carrying out our instructions in giving you the notes. We wish you to push the collection of the notes in our name. We had indorsed the notes to the railroad company for collection, they having declined to accept them at their face value as a full transfer in the account for the amounts of the notes." Error is predicated of the introduction of this letter, and of certain instructions of the court, the purport of which appear in the opinion. Judgment was for plaintiff, and defendant appeals.

A. M. Crawford and W. R. Willis, for appellant. J. W. Hamilton, for respondent.

WOLVERTON, J. (after stating the facts). The defendant, by his denials, has put in issue plaintiff's allegation of ownership of

these notes, and contends that its indorsement thereon to the railroad company shows prima facie that it is not the owner, but that the railroad company is, and that the letter from plaintiff to its attorney was inadmissible, because written by the party in whose behalf it was offered. The defendant's objection to the letter was evidently well taken. It contains matter not germane to the purpose for which the notes were delivered to the attorney, and, not being sent with them, it cannot be considered as a declaration accompanying the act of such delivery. Proof of plaintiff's declarations as to why and for what purpose it indorsed the notes to the railroad company was undoubtedly inadmissible in its own behalf over the objection of the defendant, but we are of the opinion that the letter did him no harm. It is laid down in Dugan v. U. S., 3 Wheat. 172, 181, as a rule of law, "that if any person who indorses a bill of exchange to another, whether for value or for the purpose of collection, shall come to the possession thereof again, he shall be regarded, unless the contrary appear in evidence, as the bona fide holder and proprietor of such bill, and shall be entitled to recover, notwithstanding there may be on it one or more indorsements in full, subsequent to the one to him, without producing any receipt or indorsement back from either of such indorsees, whose names he may strike from the bill, or not, as he may think proper." The reason of the rule may be found in the presumption which accompanies the possession of commercial paper. Where a payee or indorsee of such paper has put it in circulation by an indorsement in blank, th law will presume that whoever is found in possession holds it rightfully, and he may bring an action upon it, and at the trial fill up the blank indorsement with his own name, and thus show a technical legal title in himself. So, also, where commercial paper has been specially indorsed, and is found in the hands of a payee or an intermediate indorser, the law presumes that he has paid the amount of the note to the special indorsee, as it was his duty to do in case of nonpayment by the maker or prior indorser at maturity, and by reason thereof has become repossessed of the paper as rightful holder, and he will be permitted at the trial to strike out his own name and all subsequent indorsements, so as to invest himself with the legal title to the paper. Porter v. Cushman, 19 Ill. 572; Bond v. Storrs, 13 Conn. 411. In Pilmer v. Bank, 19 Iowa, 112, a draft was introduced with unerased indorsements similar to those on the notes in suit. The plaintiff was al lowed to testify that he had, on the draft being protested, taken it up, and was now the owner of it, of which the appellant complained. Dillon, J., speaking for the court, said: "Being in possession of the draft, the plaintiff, prima facie, had the right to erase the prior indorsement, and recover as payes,

without the evidence now objected to. That the plaintiff produced more evidence than he was bound to do is a matter for which the defendant cannot claim a reversal." There are numerous authorities supporting the rule as laid down in 3 Wheat., and, although there are some to the contrary, we believe that case enunciates the better doctrine. See, also, Reading v. Beardsley, 41 Mich. 123, 1 N. W. 965; Witherell v. Ela, 42 N. H. 295; Nevins v. De Grand, 15 Mass. 435; Dollefus v. Frosch, 1 Denio, 367. In the case at bar, plaintiff's possession cast a presumption which established prima facie its legal title to the notes, although its indorsement to the railroad company appeared thereon. It had a perfect right to strike out this indorsement, so as to show a technical title; and the jury might have been instructed to find for plaintiff upon this prima facie title, there being no evidence to rebut it. The letter tended to show only what the possession of the notes proved prima facie, and hence its admission was harmless, as the verdict would have been the same in either event.

support of these views, see 1 Ror. R. R. 114; Henderson Railroad Co. v. Moss, 2 Duv. 242; O'Donald v. Railroad Co., 14 Ind. 259.

There is another objection to the court's statement to the jury "that the notes themselves had been introduced in evidence, and show that there was an indorsement to J. D. Spreckels & Bros. Co. at one time by Mr. Graham, manager," and the alleged reason for the objection is that there was no proof that such indorsement had been made by the manager of the railroad company. The record does not show whether this was the case or not, but it does show that the notes and indorsements were introduced in evidence without objection by the defendant upon that ground, and there was no general objection covering it; and, this being so, such proof must be deemed to have been waived. Affirmed.

Now, as it regards the instructions to the jury: The theory of the defense is that the notes sued on were given in consideration of the contract of May, 1890, and that, the plaintiff having failed to comply with the terms and conditions thereof, the consideration failed; it being contended that the contract of March 21, 1893, did not absolve the plaintiff from performance under that of 1890. A proper interpretation of the later contract, however, supports neither the theory nor the contention. The existence of the contract of May, 1890, and the fact that certain conditions thereof remained unfulfilled to the letter, undoubtedly constituted the inducement for the later agreement and the execution of the notes. The new contract provides for a deposit of the notes in escrow with a trustee, which were to become absolute upon its performing certain conditions imposed thereby, and to be delivered to plaintiff upon such performance. The conditions were complied with,-that is to say, the road was completed to Myrtle Point, depot grounds were laid out, and cars were running to that place, prior to September 15, 1893; and the trustee, as he was in duty bound to do, delivered the notes to plaintiff, so that the obligation to pay in accordance with their terms became absolute and unconditional. The notes and the later contract completely supplanted the prior subsidy agreement. They left nothing to be performed of its conditions by either party, and it does not now constitute a factor in the present contention, except in so far as it constitutes a consideration for their support. It was therefore not error for the court to tell the jury that the question as to whether there was a failure on the part of the railroad company to comply with the conditions of the subsidy agreement was taken out of the case by the subsequent contract. In

(30 Or. 564)

NESSLEY et al. v. LADD.

(Supreme Court of Oregon. April 5, 1897.) APPEAL-REHEARING.

A motion will not lie in the supreme court to grant a rehearing and open a decree below which has been affirmed, in order that newlydiscovered evidence may be heard; the remedy being by original suit to vacate the decree.

On motion for rehearing. Denied. For former opinion, see 45 Pac. 904.

Baker & Baker and Cox, Cotton, Teal & Minor, for the motion. T. H. Crawford, opposed.

WOLVERTON, J. On the appeal in this case there was an affirmance; and the appellants now move for a rehearing, and that the decree of the court below be set aside, and the cause reopened for the consideration of newly-discovered evidence. The motion is supported by affidavits showing in purport the evidence relied upon, which it is alleged has been discovered since the decree was affirmed. Prior to the appeal there was a motion filed in the circuit court by the same parties for a new trial, based upon alleged newly-discovered evidence, but the evidence here relied upon is not the same as there presented. The purpose of the motion, as stated by counsel, is to have this court reopen the case, and remand it to the lower court, with directions to take this new evidence into consideration with that originally submitted, and from the whole to determine the cause ab initio. This is, in effect, what was accomplished under the old equity practice by a bill in the nature of a bill of review, accompanied by a petition to rehear the original cause; and its purpose was to impeach a decree which had not been enrolled, and was always preferred upon leave of the court first had and obtained: Gib. Suit in Ch. § 1063. The form of such a bill resembled very nearly that of a bill of review, except as to the relief demanded, which

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