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court of equity will, on a proper application, afford the requisite relief. This is an American doctrine, being first enunciated by Mr. Justice Story.

1 Wood v. Dummer, (1824) 3 Mason, 308, per Story; Burke v. Smith, (1872) 16 Wall. 390; New Albany v. Burke, (1870) 11 Wall. 96; Barry v. Merchants' Exchange Co., 1 Sandf. Ch. 280; Dalton &c. R. Co. v. McDaniel, 56 Ga. 191, saying, “Principle and sound reason accord with authority that equity will grant relief in all such cases;" Germantown &c. Ry. Co. v. Titler, (1869) 60 Pa. St. 124; Crawford v. Rohrer, (1882) 59 Md. 599; Lewis v. Robertson, (1850) 21 Miss. 558; Hatch v. Dana, 101 U. S. 205, 215, where the court said, "In the English courts, a mandamus is sometimes awarded to compel the directors to make the necessary calls; .. but this remedy can avail only where there are directors. The remedy in equity is more complete, and is well recognized. (Ward v. Griswoldville M. Co., 16 Conn. 593.) In such cases it is nowhere held, so far as we know, that a formal call must be made before a bill can be filed. Indeed, the filing of the bill is equivalent to a call." County of Morgan v. Allen, (1880) 103 U. S. 498; Marsh v. Burroughs, 1 Woods, 463, 468; Curran v. Arkansas, (1853) 15 How. 304; Mississippi &c. R. Co. v. Howard, 7 Wall. 392, 409; Thompson v. Reno Savings Bank, (1885) 19 Nev. 242; s. c. 3 Am. St. Rep. 883.

2 In Wood v. Dummer, (1824) 3 Mason, 308, 311, per Story, where he said in speaking of a banking company: "The capital stock of banks is to be deemed a pledge or trust fund for the payment of the debts contracted by the bank. The public, as well as the legislature, have always supposed this to be a fund appropriated for such purpose. The

And since his day has been

individual stockholders are not liable for the debts of the bank in their private capacities. The charter relieves them from personal responsibility, and substitutes the capital stock in its stead. Credit is universally given to this fund by the public as the only means of repayment. During the existence of the corporation it is the sole property of the corporation, and can be applied only according to its charter, that is, as a fund for payment of its debts, upon the security of which it may discount and circulate notes. Why, otherwise, is any capital stock required by our charters? If the stock may, the next day after it is paid in, be withdrawn by the stockholders without payment of the debts of the corporation, why is its amount so studiously provided for, and its payment by the stockholders so diligently required? To me this point appears so plain, upon principles of law as well as common sense, that I can not be brought into any doubt that the charters of our banks make the capital stock a trust fund for the payment of all the debts of the corporation. The bill-holders and other creditors have the first claims upon it, and the stockholders have no rights until all the other creditors are satisfied." Cf. Vose v. Grant, (1819) 15 Mass. 505; Spear v. Grant, (1819) 16 Mass. 9; Baker . Atlas Bank, (1845) 9 Metc. 182; Briggs v. Penniman, (1826) 8 Cowen, 387; Ex parte Jefferson, (1870) L. R. 11 Eq. 115; Spackman v. Evans, (1868) L. R. 3 H. of L. 198; Osgood v. King, (1876) 42 Iowa, 478; Chisholm v. Forny, 65 Iowa, 333; Jackson v. Traer, 64 Iowa, 469.

repeatedly expounded and firmly established in the jurispru dence of the American States. "When we consider the rapid development of corporations as instrumentalities of the commercial and business world in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exigencies of this business, it is no solid objection to such a principle that it is modern, for the occasion for it could not sooner have arisen."2 The interest of the general creditors of a company in the unpaid subscriptions of its members is not impaired by a mortgage of "the property, rights, privileges and franchises" of the corporation.3

§ 117. Applications of the "trust fund" doctrine(a) Liability upon assets of the company distributed among shareholders. It is necessary in speaking of the assets of an insolvent corporation as constituting a trust fund to under

1 Coffin v. Ransdell, (1887) 110 Ind. 417; Macungie Savings Bank v. Bastian, 11 The Reporter, 785; Ohio Life Ins. & T. Co. v. Merchants' Ins. & T. Co., 11 Humph. 1; s. c. 53 Am. Dec. 742; Adler v. Milwaukee Patent Brick Manuf. Co., 13 Wis. 57, 60; Winans v. McKean &c. R. Co., 6 Blatchf. 215, 222; Union Nat. Bank v. Douglass, 1 McCrary, 86; Holmes v. Sherwood, 3 McCrary, 405, 408; s. c. 16 Fed. Rep. 725, 727; De Peyster v. American Fire Ins. Co., (1837) 6 Paige, 486; Morgan v. New York &c. R. Co., (1843) 10 Paige, 290; Thompson on Liability of Stockholders, 10; 2 Morawetz on Corporations, § 820; Taylor on Corporations, 654 et seq.; 2 Waterman on Corporations, § 208; 2 Story's Eq. Jur., § 1252, and cases cited in preceding notes. "The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private co-partnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied otherwise than

upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation, for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company, as the cash which has been paid in upon it. Creditors have the same right to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due to the company. As regards creditors, there is no distinction between such a demand and any other asset which may form a part of the property and effects of the corporation." Sanger v. Upton, 91 U. S. 56, 60.

2 Sawyer v. Hoag, (1873) 17 Wall. 610, 620, per Mr. Justice Miller.

3 Dean v. Biggs, (1881) 25 Hun, 122.

stand precisely what is meant by the courts. No one will pretend for a moment that in subscribing to the stock of a company, the purpose is to create a trust fund for creditors. On the contrary, the object primarily, is to furnish means to carry on its business, and to share the profits earned by the corporation; and so long as it is a going concern, it has the right, and indeed it is its duty, to manage and dispose of its assets, including stock subscriptions for the promotion of its own interest. If it ceases to do business, or if it becomes insolvent, then all assets which it has or owns, including paid and unpaid subscriptions, either in the hands of the original subscriber, or in the hands of his assignee with notice, become a trust fund for the payment of creditors, and they have the right to follow the property constituting this fund and subject it to the payment of their debts, unless it has passed into the hands of a bona fide purchaser without notice. The shareholders of a corporation are conclusively charged with notice of the trust character which attaches to the capital stock. As to it, they can not occupy the status of innocent purchasers, but they are to all intents and purposes privies to the trust. When, therefore, they have in their hands any of this trust fund, they hold it cum onere, subject to all the equities which attach to it. So where persons became stockholders of a corporation with the understanding that calls were not to exceed a certain per cent., and afterwards calls were made in excess of that amount, but by way of compensation second mortgage bonds were issued to them, they were held to be liable to the creditors of the corporation to the amount realized by the sale of the bonds. And where a company has distributed a portion of the capital stock among its stockholders, they may be compelled to return it. The bare fact that a man holds shares in the capital stock of a corporation gives him no legal title to the property of the corporation. That remains in the corporation and not in the shareholders.

1 Brant v. Ehlen, 59 Md. 1.

The shares simply rep

Holmes v. Newcastle &c. Co., 45 L.

215 Cent. Law. J. 19, citing Clapp J. Ch. 383.

v. Peterson, (1882) 104 Ill. 26.

5 Gorham v. Gilson, 28 Cal. 484;

3 Skrainka v. Allen, (1883) 76 Mo. Gashwiler v. Willis, 33 Cal. 19;

384.

4 Kohl v. Lilienthal, (1889) 7 Ry. & Corp. L. J. 152; s. c. 81 Cal. 378;

Ditch Co. v. Zellerbach, 37 Cal. 591;
Wright v. Mining Co., 40 Cal. 20;
Clark v. San Francisco, 53 Cal. 311;

resent the proportion to which the respective shareholders, who may be such at the date of distribution, are severally entitled in the distribution of profits arising from the corporate business which may be made from time to time, and in the final distribution of the estate of the corporation, when from any cause it shall cease to exist, and its estate shall have been fully administered. This event may happen at the expiration of the term of its corporate existence, or it may be accomplished earlier, with the consent of the holders of two-thirds of its shares, and upon the judgment of a court of competent jurisdiction. As a general rule, to which they are few if any

Johnson v. Kirby, 65 Cal. 483; McCormick v. Insurance Co., 66 Cal. 363.

1 Kohl v. Lilienthal, (Cal. 1890) 22 Pacif. Rep. 689; s. c. (1889) 7 Ry. & Corp. L. J. 152, where the court said: "But this event has not happened in this case. The Head Center Company has sold its mine to a new corporation for 100,000 shares of the stock of such new corporation; but it has not ceased to exist as a corporation, and does not propose to do so. It remains a corporation, with full corporate power and capacity, and is also exercising those powers. The mine which it sold constituted the bulk of its capital or 'capital stock. The stock which it received in exchange for its mine stands in the place and stead of the mine, precisely the same as if it had been money or any other kind of property, instead of stock; and by the plain terms of the section of the Code cited (Cal. Code Civ. Proc. §§ 1227, 1233) the directors are forbidden to divide it among the stockholders. But it is said that this section operates only to restrain the directors, and does not prevent the stockholders from doing by agreement what the directors are forbidden to do. As already shown, we do not think the evidence proves any such agree

ment by the stockholders; but if it did, we hold that even the unanimous assent or agreement of the stockholders would not authorize such a distribution. The inhibition runs against the directors because they are, under the law, the managers of the business of the corporation." In Ashton v. Dashaway Assoc., (Cal. 1890) 22 Pacif. Rep. 660, it appeared that a temperance society, owning improved land, was incorporated, without capital stock, "for the purpose of promoting the cause of temperance," under Hitt. Gen. Laws Cal. § 1024 et seq., providing for the incorporation of "relig ious, social, benevolent, and learned associations." Some years afterwards, the membership having greatly decreased, a resolution was passed that the trustees sell the property, pay off some outstanding indebtedness, and "purchase other cheaper property suitable for the use and purposes of the association." A petition asking for leave to sell, and stating, among other things, that the corporation was "purely and solely for the benevolent and laudable purpose of aiding and promoting the cause of temperance, and not pecuniary profit," was accordingly filed in the superior court, which granted the prayer of the petition, reciting the

exceptions, a stockholder who conveys or assigns his shares to the corporation without reference to the intent or object of the transfer and receives in exchange a portion of the capital stock, holds the money so received subject to the superior equities of corporate creditors, being a trustee for them quoad hoc.1 A statute making directors of a corporation liable for the amount of dividends paid out of the capital stock, does not exempt stockholders from the same general equitable liability. In a bill to recover such dividends from the stockholders, it is not necessary to aver that any of the present debts existed, or that there are not enough assets now to pay the debts. In New York it has been held that a creditor of a corporation can not compel a shareholder to account for the proceeds of mortgage bonds of the company, received by him on the distribution of the same among stockholders, pursuant to a resolution of the board of directors. There being no liability to account for such bonds to the corporation, there is none to its creditors."

§ 118. (b) Liability upon shares issued below par.- The "trust fund" doctrine stated above, has permeated to a great extent the whole law of corporations as expounded by our American courts, and innumerable illustrations of its application are met with in the State and federal reports. It is upon this principle that when the stock of a corporation is not subscribed for up to the minimum amount of capital fixed by the charter, and none of it is paid in, if the corporators organize, elect themselves officers, proceed to business, and contract

of corporate funds, and that any member not a party thereto could maintain a suit to compel a restoration.

1 Crandall v. Lincoln, 52 Conn. 73, 100. Cf. Zuleta's Claim, L. R. 5 Ch. 444.

resolution in its order of sale. The
property was sold, and a portion of
the proceeds divided among a part
of the members, including the
trustees, pursuant to a motion" that
the association donate to each mem-
ber in good standing the sum of
$1,500 for past services, on signing a
receipt for the same;" but it was
admitted on the trial that no serv-
ices had been rendered other than
being good and efficient members of
the organization. It was held that
this constituted a misappropriation N. Y. 97.

2 Williams v. Boice, 38 N. J. Eq. 364, decided under N. J. Rev. Stat. 178.

3 Williams v. Boice, 38 N. J. Eq.

364.

4 Christensen v. Eno, (1887) 106

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