Opinion of the Court. would give the project some hope of success. The increase stock was by resolution treated as treasury stock, and ordered to be sold by the treasurer of the company. It was thus sold, and the proceeds, instead of being paid over to Rickerson and his associates, were paid into the treasury of the company as capital stock of the company. The assignment by Rickerson of March 1, 1883, heretofore set out, was in accordance with the agreement originally made with him, and was no broader than originally contemplated. The second defense is that this increase of stock was for the purpose of restoring the impaired capital of the Rickerson Roller Mill Company; that the case was that of a going, active corporation, whose capital had become impaired and whose stock was on the market worth only fifty cents on the dollar, and that as the stock was actually sold in good faith for its actual market value neither the corporation nor its creditors are injured, and neither can call upon such a purchaser for the difference between the sum actually paid and the par of the stock. For this counsel cite Handley v. Stutz, 139 U. S. 417, Clark v. Bever, 139 U. S. 96, Fogg v. Blair, 139 U. S. 118, Morrow v. Iron and Steel Co., 3 Pickle (Tenn.), 262, and Young v. The Erie Iron Company, 65 Michigan, 111. Were the circumstances such as to enable a purchaser of these increased shares to buy them from the company at less than their par value without incurring a liability to the creditors for the difference between the par of the stock and the price actually paid? The case for decision certainly differs most materially from Clark v. Bever and Fogg v. Blair. These shares were not, as in those cases, the shares of an insolvent corporation received by a creditor in payment and discharge of his debt at less than par and at a value in excess of the actual market value. In neither of the cases above referred to was the stock taken in any sense as an investment or for the purpose of enabling the company to enlarge or increase its business, but was accepted by the creditor in each instance as the best settlement obtainable from an insolvent corporation; neither is this the case of a going corporation whose capital stock had become impaired or diminished by losses Opinion of the Court. or misfortunes. It is true that in some sense this corporation. had been doing business in a small way for a month or more before this new stock was issued; but there is no evidence that its capital stock had been impaired by losses. Upon the contrary the Messrs. Fox were admitted as shareholders in consequence of the necessity for increasing the capital stock of the company and enabling it to begin the business for which it had been organized. Their purchase of these shares was in accordance with the original scheme of the promoters, and they were bought as an investment in a manufacturing corporation which had not yet acquired a plant or begun the business for which it had been organized. The arrangement by which they were to buy these shares from the corporation and pay but fifty per cent of the par value of the stock was subject to the contingency that they would be liable in the event of the insolvency of the corpora tion to creditors who should become such in ignorance of the arrangement and who had a right to suppose that this increased stock had been paid in full or was subject to call. The stock taken by Rickerson and his original associates stands upon a very different footing. That was issued in payment for the Rickerson patents upon a value estimated by the parties to be fair and reasonable. When fully paid stock is issued by a corporation having power to receive property in payment for stock subscriptions there must be actual fraud in the transaction to authorize creditors of the corporation to call upon the subscriber for the difference between the actual value and that at which it was received. Coit v. Gold Amalgamating Company, 119 U. S. 343, 345; Young v. The Erie Iron Co., 65 Michigan, 111. A gross and obvious overvaluation of property would be strong evidence of fraud. Coit v. Gold Amalgamating Company, supra; Boynton v. Hatch, 47 N. Y. 225; Kelley Brothers v. Fletcher, 10 Pickle (Tenn.), 1, 6. A creditor seeking to compel a subscriber who has received nonassessable stock in payment for property transferred must in his pleadings distinctly aver the colorable character of the transaction. Jones, Assignee, v. Whitworth, 10 Pickle (Tenn.), 602. So a stockholder paying his stock sub Opinion of the Court. scription in property at an agreed value is not liable in equity to a creditor of the corporation who had knowledge of, and assented to, the transaction at the time when it took place solely upon the ground that the real value turned out to be less than was agreed upon. Bank of Fort Madison v. Alden, 129 U. S. 372. In Handley v. Stutz, 139 U. S. 417, the facts were that the capital of a going concern had by losses become impaired so that both its actual and market value were much below par. The court in that case held that under such circumstances the sale of increased stock in good faith at its actual value operated neither as a fraud upon the corporation nor upon existing or future creditors. In the subsequent case of Camden v. Stuart, 144 U. S. 104, 113, Mr. Justice Brown, who announced the opinion of the court in Handley v. Stutz, reasserted the doctrine that "the trust arising in favor of creditors by subscriptions to the stock of a corporation cannot be defeated by a simulated payment of such subscription, nor by any device short of an actual payment in good faith." Touching the case of Clark v. Bever, 139 U. S. 96, and Fogg v. Blair, 139 U. S. 118, and Handley v. Stutz, 139 U. S. 417, the learned justice said that nothing was said in those cases "intended to overrule or qualify in any way the wholesome principle adopted by this court in the earlier cases, especially as applied to the original subscribers to stock. The later cases. were only intended to draw a line beyond which the court was unwilling to go in affixing a liability upon those who had purchased stock of the corporation or had taken it in good faith in satisfaction of their demands." The opinion in Handley v. Stutz carefully excludes a sale of stock under the circumstances we have here to deal with by saying: "The liability of a subscriber for the par value of increased stock taken by him may depend somewhat upon the circumstances under which, and the purposes for which, such increase was made. If it be merely for the purpose of adding to the original capital stock of the corporation, and enabling it to do a larger and more profitable business, such subscriber would stand practically upon the same basis as a subscriber to the original Opinion of the Court. capital. But we think that an active corporation may, for the purpose of paying its debts, and obtaining money for the successful prosecution of its business, issue its stock and dispose of it for the best price that can be obtained." On the facts of this case we hold that this increase of stock was merely for the purpose of increasing the capital and enabling the corporation to do business, and that this was well understood by the Messrs. Fox when they agreed to purchase the same. We see no reason why it should not stand upon the footing of original stock. It is next said that the Farrell Company had full notice of the terms and conditions of the sale of this increased stock to the Messrs. Fox, and extended credit thereafter with such knowledge, and is, therefore, not entitled to call upon them to contribute toward the payment of the debt thus created. The evidence establishes that early in February, 1884, the creditor corporation received full notice of the fact that $100,000 of the stock of this corporation had been issued to Rickerson and his associates in payment for their patent rights, and that the increase of $50,000 had been issued to the Messrs. Fox as paid-up stock and nonassessable for $25,000. Being thus fully cognizant of the fact that the actual capital of this corporation consisted in patent rights of unknown value and $25,000 in money, they continued to extend credit to it. When credit is extended to a corporation with full knowledge of special arrangements between the corporation and purchasers of the stock whereby nonassessable stock has been issued for less than its par value, it cannot be said that such credit has been extended in reliance that the stock has been fully paid subject to further calls by the corporation. In the absence of statutory or charter provisions, such as were approved in Morrow v. Iron and Steel Co., 3 Pickle (Tenn.), 262, requiring original stock subscriptions to be paid in full, there is no reason why the corporation should not be concluded by its contract to receive less than par in full payment for stock subscribed or sold. Such an agreement, though binding upon the corporation, is not valid as to creditors who become such in actual or presumed reliance that the capital stock is in fact Opinion of the Court. what it is represented as being. Sawyer v. Hoag, 17 Wall. 610; Scovill v. Thayer, 105 U. S. 143. The ground upon which such special arrangements between a corporation and its stockholders are invalid as against creditors was thus stated in Scovill v. Thayer: “But the doctrine of this court is, that such a contract, though binding on the company, is a fraud in law on its creditors, which they can set aside; that when their rights intervene and their claims are to be satisfied, the stockholders can be required to pay their stock in full. The reason is, that the stock subscribed is considered in equity as a trust fund for the payment of creditors. . . . It is so held out to the public, who have no means of knowing the private contracts made between the corporation and its stockholders. The creditor has, therefore, the right to presume that the stock subscribed has been or will be paid up, and if it is not, a court of equity will at his instance require it to be paid." In the subsequent case of Handley v. Stutz, 139 U. S. 417, the court held that none but subsequent creditors could call upon such a special subscriber to pay the difference between his actual payment and the par value of his stock, "since it is only they who could, by any legal presumption, have trusted the company upon the faith of the increased stock." See also First National Bank of Deadwood v. Gustin Minerva Consolidated Mining Company, 42 Minnesota, 327, Coit v. North Carolina Gold Amalgamating Co., 14 Fed. Rep. 12, Young v. The Erie Iron Company, 65 Michigan, 111, Whitehall v. Jacobs, 75 Wisconsin, 474, Walburn v. Chenault, 43 Kansas, 352, Robinson v. Bidwell, 22 California, 379, 2 Morawetz on Private Corporations (2d ed.), §§ 832, 833, 1 Beach on Private Corporations (1891), § 119. It is said, however, that the items of indebtedness for which the complainant's judgment was rendered consist in large part of debt contracted prior to notice of the terms and conditions upon which the Messrs. Fox acquired their shares, and that for this reason the decree against them should be affirmed. The items upon which the judgment was rendered were three in number, as follows: (1) A balance due upon open general account of $1,000; (2) a note made on March VOL. XLIII-30 |