Wick National Bank v. Union National Bank 62 Ohio St. 446

The Wick National Bank v. The Union National Bank et al.

Corporation stockholder’s liability — Transfer of stock — Transferee insolvent — Liability of assignor subject to payment of debts accruing while he held stock, when — Assessments .on solvent stockholders to be applied pro rata upon debts of corporation, when — Rights of corporation creditors.

1. Where the holder of stock in a corporation has transferred his stock in good faith to one who, at the time of subjecting the stockholders’ liability to the payment of the debts of the corporation, is insolvent, the liability of such assignor of stock may, subject to the rule established in Harpold v. Stobart, 46 Ohio St., 397, be subjected to the payment of debts which accrued while he held the stock in case a sufficient fund is not raised by assessment upon solvent stockholders to satisfy all creditors.

2. In such case the fund arising from assessments on solvent persons who are stockholders at the time of the decree should be applied pro rata upon all the debts of the corporation; and funds arising from assessments on persons who had been stockholders, but had assigned their stock in good faith before the insolvency of the corporation, should be applied to the residue, if any, owing to those who were creditors at the time such stock was' assigned.

(Decided April 24, 1900).

Error to the Circuit Court of Cuyahoga county.

Williamson, Cushing & Clarke; C. D Hine; Webster c6 Cook; Garfield, Garfield & Howe, and J. J. Sullivan, for plaintiffs in error.

*447 Horsley & Bclzer, and Squire, Banders & Dempsey, for defendants in error.

Brief of Williamson, Cushing & Clarice.

Upon the facts shown hy the record the sole question is: Where a solvent stockholder transfers his shares to one who is insolvent at the time of the subjecting of the stockholders’ liability to the payment of debts, shall the fund derived from such transferring solvent holders of stock be applied exclusively to the payment of the debts which accrued before such transfer, or shall such proceeds go into a common fund to be distributed pro rata among all of the creditors of the corporation?

The courts below decreed that such fund should go only to the creditors whose claims accrued prior to such transfer. We respectfully contend that such fund should be distributed pro rata among all of the persons creditors at the time of the winding up of the corporation.

The syllabus of Ulmsted v. Buskirk, 17 Ohio St., 114, establishes unequivocally the position for which we contend in these words: “The liability on the part of stockholders is several in its nature, but the right arising out of this liability is intended for the common and equal benefit of all the creditors.” Candor, however, compels the admission that the point was not pressed upon the court in such manner in that case as to make the decision an entirely authoritative, and final one. While, therefore, we cannot claim that there is an express decision in favor of our claim by this court, we can say, with entire confidence, that no decision can be produced in Ohio, giving warrant for the position taken by the courts below. And a close reading of the cases relating to the subject decided in this state, leads us to say, that no *448principle has been announced either by the supreme court, or by any circuit court of the state, from which a rule of law sustaining such a distribution as decreed in this case can properly be derived.

The liability created by sec. 3, of art. 13, of the constitution, and by sec. 3258 of the Revised Statutes, is expressly “to the creditors of the corporation”— not to a part of them, nor to those whose debts were created at any given time, but to all of the creditors. This liability is to secure “payment of the debts and liabilities of the corporation” — not some of them, but all of them; not such as may be contracted at some given period, but without restriction all of the debts and liabilities of the corporation.

The only cases sufficiently analogous to the one at bar to be considered are the following: (1.) Brown v. Hitchcock, 36 Ohio St., 667. This case decided only, (a) the individual or personal liability of stockholders attaches in favor of the creditors when the' debt is contracted; (b) transferees of stock are under an implied obligation to indemnify their transferors against all liability for debts of the corporation. But if the amount due from such stockholders is not collectible because of insolvency the transferor of the stock up to the. time the liability attached may be charged with the deficiency. This case surely does not reach the point of the case at bar. It is concerned with, and only with, the liability of the stockholder, and not at all with the application of what he may pay. It lays down the rule for creating a fund for “the creditors of the corporation,” but does not pretend to provide a rule for its distribution.

(2.) Harpold v. Stobart, 46 Ohio St., 397. This case decides only that a transferor of stock is liable for such proportion only of the debts created while *449lie owned the stock as the stock owned by him bears to that owned by the solvent stockholders liable to contribute to the same indebtedness. Surely this does not touch the point in controversy in this case. It determines only the method of calculating the amount of the liability of the stockholder, and is not concerned with determining to whom the money shall go when paid. It relates solely to the creation of a fund, not to the distribution of it.

(3.) Peter v. The Union Man’g Co., 56 Ohio St., 181. This case decides only that if a person sells or gives away stock for the express purpose of avoiding liability for the future indebtedness that may be contracted, such transfer is valid and he is not liable for subsequently contracted debts. These are the only cases from which the rule applied in this case can by any possibility of loose thinking be derived. But when they are attentively considered it seems very clear that not the slightest warrant of authority can be found in these decisions for the decree of the lower courts in this case.

Not only is the express letter of the statute thus against the law of the decree in this case, but time and again expressions of judges of this court, of highest character, upon the point have been distinctly favorable to our contention, with the concurrence in two instances at least of the whole bench,' such that it makes the utterances of highest authority short of actual decision. In what follows it is important to note that “we are not materially aided in making answer (to such question as is here proposed) either by text books, or by decisions of courts outside our own.” Harpold v. Stobart, supra.

Brown v. Hitchcock, supra. Here Judge Mcllvaine, than whom it would be hard to produce higher individual authority, in dissenting from the majority *450of the court upon points decided in the case uses this language: “There is no disagreement between the members of the court, in this: that the aggregate security for the dues of a corporation thus provided is the aggregate stock of the corporation, and all amounts unpaid thereon, together with a further sum equal to the total amount of the stock, and no more; nor is there any disagreement between us as to the rule that the security thus provided, when realized, must be distributed pro rata among all the creditors of the corporation, without regard to the time when the credit was given, and without respect to persons who owned the stock when the debt was contracted.”

Here the precise question which we seek to present was distinctly in the mind of the judge writing the opinion, had obviously been under discussion by the whole court, and the conclusion was unanimous in favor of the contention which we here set up.

In Harpold v. Stobart, supra, Judge Spear uses this language: “This right against the stockholders is intended for the common and equal benefit of all creditors.

From Ulmsted v. Buskirk, supra, we have given one paragraph of the syllabus. We add the 4th paragraph : “A right to contribute grows out of the organic relation existing between stockholders. As between them and the creditors each stockholder is severally liable to.all of the creditor’s; as between themselves each stockholder is bound to pay in proportion to his stock.”

Thus in the three most elaborately and carefully considered stockholder cases decided in this state the various judges are united in repeatedly declaring in favor of the claim which we make. In this last case the decisive language is found in the syllabus and so' as in the first is the opinion of the entire bench. We *451can not bring ourselves to think that the judges of this court, through a period of more than thirty years, have been so careless of precision in the use of language that the citations given do not constitute all but conclusive authority to the point of our contention. 1

Passing now from the decided cases to the general-principles that should be considered in reaching a conclusion upon this question. We are limited in speculation as to what should be, as distinguished from what is, the law in such cases as this, by the fact that the liability has its origin neither in principles of equity nor in the common law. ' “The individual liability of stockholders in a corporation is always a creature of statute. It does not exist at common law. The first thing to be determined, therefore, in all such cases, is what liability has been created.” Terry v. Little, 101 U. S., 216. Whatever conclusions, therefore, we may think pointed out by “correct thinking,” or by “substantial justice,” or considerations expressed by equivalent phrases, must, after all, find warrant for their enforcement in the language of the statute.

With this in mind, some suggestions may not be improper.

First. If the three transferring stockholders had not transferred their stock at all, the three creditbrs receiving the entire fund in this case would have come in for their pro rata share only, with all of the other creditors.

Second. If the transfer had been to solvent persons, no liability would have attached to the three transferring, and now contributing, stockholders, because, under Brown v. Hitchcock, supra, the transferees would have been under implied contract to indemnify or discharge the transferors from the liabil*452ity which, attached to them as stockholders while they held the stock, and the collection would have been made from them.

Third. It may be said again that the three creditors trusted to the fund to be derived from the then stockholders, while later creditors trusted others, and that each should have the benefit of his judgment as to the responsibility of the persons who were to pay. Judge Johnson, in Brown v. Hitchcock, supra, expressed the truth with respect to this claim, saying: “Much stress has been laid upon the assumed, not actual, fact that every creditor looks to the stockholder when he trusts a corporation.” But, supposing that to be reality, .which is, in truth, fiction, if stock held by insolvents when debts were contracted should be transferred to solvent holders, a share of the fund derived from these last would be promptly claimed by the person’s creditors before the transfer, and the statute would, be searched in vain for bar to such claim. The superior judgment of the later creditors in selecting whom they should trust would be of no avail as an argument against this claim. It is a poor rule of natural equity that does not work both ways.

Fourth. Again, if the guide to the conclusion upon this question is to found in this trust reposed by creditors in the solvency of stockholders at the time the debt is contracted, the statute, if natural justice be the pursuit of construction, should be so construed as to confine the security to the then holders of stock, and, following such considerations of justice as lie in this suggestion, such creditors should surely not be allowed to share in any fund that might be derived from holders of stock that was not in existence when such debt was contracted. Yet, if any stock be issued after contracting of debts, the *453holders of such new stock must contribute to such old debts precisely as if contracted after such stock was issued. Barrick v. Gifford, 47 Ohio St., 181— though it was thought earlier such should not be the law. Bonewitz v. Bank, 41 Ohio St., 78.

Sixth. It may be argued that the amount to be paid into court by the transferring stockholder is determined by the amount of the indebtedness before the transfer, and that such payment should therefore be applied to the liquidating of such indebtedness. But the amount of such indebtedness is but one factor in determining what shall be paid by transferring stockholders' upon it. Harpold v. Stobart, supra. Therefore the argument that the amount to be paid by these stockholders is to be determined wholly by the amount of the indebtedness, and that therefore the entire sum should be applied to the indebtedness existing before the transfer, should fail.

Seventh. It is said in some of the cases that the transferring stockholders should not be called upon to pay anything upon account of debts contracted subsequent to the transfer, and that any rule that causes them to make such payment is obviously incorrect. We assent to this, but say, that the rule for which we contend does not call for payment by the transferring stockholder upon the account of any such subsequent debts. That amount is determined wholly by the ratio of the transferred stock to the solvent stock contributing to the same indebtedness. The fact that a part of this fund may go to later creditors under the express terms of the statute does not make that part payable by the stockholder upon the account of such debt. If .later debts are not a factor in determining the amount to be paid, the sole question is, shall the sum, after being paid, go to all ered*454itors, as the statute directs, or shall the courts enact a new statute sending it elsewhere?

We may sum up this argument by saying that, by the construction for which we contend, the three creditors preferred by the decree of the court below would get precisely the same amount that they would have reecived on their claims if no transfer had been made by the stockholders at all; they would get precisely the same amount as if the transfer had been made to solvent persons; and we cannot conceive how, from the language of the statute, words can be raised, by construction, to make a different rule of distribution when the transfer happens to be made to an insolvent person, from that which governs when no transfer at all is made, or when it is made to a solvent person. We cannot believe that the most perfect master of condensed expression could- write the two rules thus made necessary by the construction of the court below in the same number of words found in the entire statute governing this subject. To sanction an importing of language into a statute, amounting to more than a re-writing of it, does not seem to us 'to be construction, but to be the enacting of judicial legislation — as business courts are always very slow to enter upon.

We respectfully submit upon the authorities which we have cited, and upon the arguments which we have sought to advance, that the lower courts both erred in the decision of this case, and that their decision should be reversed.

Brief of Heisley & Belzer.

A suit to subject the statutory liability of stockholders in an Ohio, corporation is a proceeding in equity, and a court can render such decree as equity requires.

*455In Wright v. McCormick et al., 17 Ohio St., 86, Judge White in the opinion says: “The statute under which the liability arises contains no provision in regard to the manner in which the liability is to be enforced. It is a provision inuring to the benefit of the creditors of the corporation; but in what way, and on what principles of equity, as between creditors, and as between stockholders, it is to be made available, and under what circumstances resort may be had to it, are matters left for judicial determination.”

If the plaintiff in error had brought suit against the company and its. stockholders to subject the statutory liability of the stockholders to the payment of the company’s debts, and had not alleged that the suit was predicated upon a debt or liability incurred by the company before the stock was transferred, a demurrer by the transferring stockholders would have been sustained. In other words, if all of the debts Avere contracted after the defendants in error ceased to be stockholders, they would not be liable. Hoav can the plaintiffs in error get part of a fund that a creditor creates by suit against former stockholders Avhen plaintiffs in error could not themselves file a petition that would stand the test of a demurrer?

In Harpold v. Stobart, 46 Ohio St., 397, this court in the opinion says: “We are of the opinion that a stockholder who has, in good faith, sold and assigned his stock to one who becomes insolvent, is liable to the creditors of the corporation, for such portion only of the debts existing Avhile he held the stock, and remaining due (not in excess of the amount of stock assigned), as will be equal to the proportion which the capital stock assigned by him bears to the entire capital stock held by solvent stockholders, liable in re*456spect to the same debts, who are within the jurisdiction, to be ascertained at the time judgment is rendered.”

Let us assume that the transferring stockholders transferred stock in the amounts found by the court, but for the sake of the argument, that the debts of those creditors which existed at the time of the transfer were only one thousand dollars each; that is, they aggregated but three thousand dollars instead of over forty thousand dollars. In that case, the transferring stockholders would have to pay into court but three thousand dollars and the costs — their liability would be limited to the actual debts that the company owed at the time of transfers, and the three-creditors would be paid in full, would a court of equity then say to these three creditors, that while it was true, there was in the court’s hands money sufficient to pay their claims in full, yet, creditors whose debts had been contracted long after the transfers, claimed the right to participate in the fund, and the court thought it but equity to alloAV such participation? Surely not. The logical — the irresistible conclusion from the reasoning in Harpold v. Stobart, is: that stockholders, Avho in good faith, transfer stock to persons who become insolvent, can be held for their pro rata payment only of'the debts of the company contracted while they Avere stockholders. Following out this reasoning to its natural end, are Ave not forced to conclude that where the liability of transferring creditors is large enough to pay all debts .contracted before the transfers of stock, that persons holding such claims should be paid in full? And does not this lead us to conclude in the case at bar, that where a fund has been created by persons who transferred, paying in the amount for which they were liable, that the only ones entitled to participate *457in that fund, are those who were creditors at the time of the transfers? As was said by this court in Earpold v. Stobart, in commenting upon the liability of the transferring stockholders, and the rights of creditors existing at the time of the assignment — “They go together.”

The quotations in brief of plaintiffs in error from earlier decisions of this court cannot aid in the decision of the question we have here. Distribution was not involved in any of the cases. The expressions relied upon were outside of the cases, and in no way necessary to their determination.

If the contention of the plaintiffs in error be right, then the practice in this state from the day of the first statutory liability suit to the present has been all wrong. To establish the principle they maintain, as the law of Ohio, "would be to revolutionize the practice of the state. While there are no adjudicated cases disposing of a fund created as the fund in this case was, we respectfully submit, as these plaintiffs in error could not maintain an action against the transferring stockholders, it would be far from equity to permit them to participate in a fund they could not create.

Brief of Squire, Sanders & Dempsey.

Starting with the conceded fact that the money in dispute was derived by assessing stockholders who ceased to be such before the plaintiffs became creditors, the first question naturally presenting itself is— who earned the fund? It will be conceded that, in the absence of fraud, a stockholder is liable to creditors of a corporation for his portion only of the debts existing while he held stock. If it is not conceded, the court has but to refer to the case of Harpold v. *458 Stobart, 46 Ohio St., 397. And it makes no difference how or for what reason the stockholders ceased to be snch by transferring his stock, so long as the transaction was carried out in good faith. And, in passing, we may say, no fraud or bad faith is claimed or found in this case. Such is the law as announced in Peter v. Union Man’g Co., 56 Ohio St., 181.

With these decisions in mind, and considering them in the light of conceded facts, that the fund, about the disposition of which complaint is made, was derived by assessing stock owned and transferred prior to the existence of the debt of the complaining creditors — it seems to us there can be but one answer to the question propounded, and that is— the fund was earned by the creditors to whom it is distributed. Putting it another way, would any fund be here to dispute over if the defendant creditors had not been such on September 15, 1895, and January 6, 1896? Surely under the decisions just quoted, it appearing that the stock had been actually transferred in good faith, the transferring stockholders would owe nothing to future creditors, that is, the complaining creditors, because their debts accrued after the transfer of the stock. This being so, the complaining creditors could not possibly have any claim against the stockholders in question, and, not having any claim, could not have raised any fund by assessing the stock owned and transferred prior to that time.

If, then, it is made clear that the complaining creditors had no claim against the stock or stockholders as they existed September 15, 1895, and January 6, 1896, upon what theory may they now ask that they be permitted to participate in the distribution of a fund which they had absolutely no legal right to create, and which accrued, as before sug*459gested, because it so happened that the defendant creditors were such prior to the time the stockholders parted with the stock. Under the law of assessments, if the stockholders existing at the time of the insolvency of the corporation do not own sufficient stock, are insolvent, or for any olffier reason an amount sufficient cannot be raised from them, then the law permits creditors to go back and trace the holdings of the stock to the time when the debts were created; and if any one along the line is found owning stock, and is solvent, the law permits an assessment in favor of the tracing creditors to be made against him.

If the complaining creditors had taken any part in the creation of these funds, different questions might arise; but so long as they are in this court confessing that they had nothing to do with the raising of the funds in question, and still are asking to participate in the distribution thereof, we have no fear that they will be permitted to do so, unless there is applied a different rule of equity than has ever been applied in any court of justice.

We close by calling the attention of this court to the case of Brown v. Hitchcock, 86 Ohio St., 667, quoting therefrom for the purpose of showing how the double liability is worked out by this court:

“After such liability attaches to a stockholder, it is not discharged by the subsequent assignment or transfer of his stock; but the successive assignees or holders, by accepting the stock and the benefits arising therefrom, impliedly undertake to indemnify or discharge the assignor from the liability which attached to him as stockholder while he held the stock.

. In a suit by creditors to enforce such liability against the stockholders of an insolvent corporation, the existing stockholders are severally chargeable *460with the payment of such liability. If, by reason of insolvency, the amount due from any stockholder is not collectible, the assignors of this stock up to the time the liability attached may be charged with the deficiency.”

At page 686, the court say: “The extent of the liability is not increased whether the stockholder-first liable retains his stock or transfers it; and the extent of the security of the creditors, both as to the stock and the personal liability, is the same as it would have been if no transfers had been made.” All which is approved and followed in Mason v. Alexander, 44 Ohio St., 318.

In the case at bar the courts below have strictly followed the rules above quoted.