Corporations — Dissolution — Charters — Building and Loan Association — Shareholder — Judgment Creditors — Supplementary Proceedings — Fraud and Collusion — Limitations — The Code — Usury.
1. A judgment, whether just or unjust, conscionable or unconscionable, if regularly taken in a court of competent jurisdiction, may be enforced by execution or proceedings supplementary thereto, and the judgment cannot be attacked by any member of the defendant corporation or its creditors, except for fraud or collusion.
2. The corporation represents the shareholders in defending actions involving their rights and obligations, and a judgment against it, in the absence of fraud, binds them.
3. The action of the plaintiff, a judgment creditor, is not barred in three years after the corporation has ceased to do its regular business.
4. The Code, sec. 667, relates to corporations whose charters shall expire by limitation, or be annulled by forfeiture or otherwise.
5. The defendant corporation could not settle with its members by the application of assets to the retirement or redemption of the stock of the shareholders until it had first settled and discharged all its liabilities, and any agreement among the shareholders looking to such arrangement will be void as to creditors.
6. Where there is a valid judgment against the defendant corporation, from which no appeal was ever perfected, this Court will not consider whether the plaintiff is confined in his remedy to particular assets, such as certain equities in land held by it. The judgment affects all the assets until it is impeached for fraud or collusion.
7. Where the defense of usury was not set up by the defendant corporation to resist an action by the plaintiff, its creditor: Held, that the assignee, a shareholder, interested in the administration of the assets and in preventing an attempted priority given to the plaintiff, is estopped to impeach or to show such judgment was void on such ground.
8. The orders drawn in favor of the shareholders after the defendant had ceased to do its regular business as a corporation are not an equitable assignment, or equitable execution, or supplemental proceedings, to subject the stock so drawn upon the payment of the debt thereby created, nor do such orders so drawn constitute the owner of them a bona fide creditor.
9. The right to buy in and cancel its own stock may sometimes be exercised by a corporation, but not in derogation of the rights of bona fide creditors.
10. The owner of orders for the payment of shares of stock in a corporation cannot be allowed to interplead in supplementary proceedings by a plaintiff judgment creditor who has obtained his judgment.
11. Discussion by Davis, J., of the relative rights of creditors and shareholders of a corporation.
DAVIS, J.
Whatever may have been the nature of the plaintiff's claim, whether just or unjust, conscionable or unconscionable, his judgment, if regularly taken in a court of competent jurisdiction, and in accordance with the course and practice of the court, created a lien upon any property owned by the defendant corporation, and its payment may be enforced by execution, or, if execution be returned, unsatisfied, by proceedings supplementary to execution, as prescribed by section 488 et seq. of The Code, and the judgment cannot be attacked or impeached by any member of the defendant association, or its creditors, except for fraud or collusion.
The corporation represents the share-owners in defending actions involving the rights and obligations of the corporation, and, in the absence of fraud or collusion, binds them, and individual stockholders cannot assert or defend the rights of the corporation. Moore v. (591) Mining Co., 104 N.C. 534; Cook on Stock and Stockholders, sec. 678; Foundry Co. v. Killian, 99 N.C. 501.
The plaintiff having obtained his judgment against the defendant association, the liability and rights of the corporation and of its members in relation thereto are settled.
But counsel for Mrs. Cheatham insist that the plaintiff's judgment is "irregular and void," because the action in which it was rendered was commenced in July, 1884, "more than three years after the dissolution of the corporation, and more than three years after it had ceased to do business under its charter, etc., . . . and no receiver was ever appointed," and for this he cites The Code, sec. 667, et seq.; VonGlahn v. DeRosset, 81 N.C. 467, and Dobson v. Simonton, 86 N.C. 492. This is a misapprehension. It is admitted that the company had ceased to do business under its charter, and that, in 1876, as stated in the affidavit of Mr. Hays, "it took measures for closing its business, and making settlement with its members as speedily as practicable," and this, as appears from the affidavit, was by applying the accumulated assets in the hands of the treasurer to the payment of the stockholders, to redeem or retire their stock, which procedure was, as it not unnaturally would be, "generally acceptable to the membership of the association," but the corporation could not settle with its members by the application of its assets to the retirement or redemption of the stock of the shareholders until it had first settled and discharged all of its liabilities. It is well settled, at least in this country, that the capital stock of the corporation is a trust fund, to be preserved for the benefit of corporate creditors, and no agreement or arrangement between a corporation and its stockholders, whereby the latter are to be released from indebtedness on their subscriptions, will be valid or of any force as against creditors. Waterman on the Law of Corporations, pages 126 et seq.; Cook on Stock and Stockholders, sec. 42; Foundry Co. v. Killian, supra. A fortiori, would any arrangement or agreement by which the (592) assets of the corporation should be divided and distributed among the shareholders in payment for their stock, before its liabilities to creditors are settled, be void as to creditors?
The Code, sec. 667, relied upon by counsel, relates to corporations whose charters shall expire by limitation, or be annulled by forfeiture, or otherwise, and provides that such corporations shall be continued as bodies corporate for three years for the purposes mentioned in that and the following sections, and has no application to a case like the present, in which the charter granted in 1872 had not expired or been annulled, and it appears from the record that payments were made by the corporation to Mrs. Cheatham after 1876 and as late as 7 February, 1889. Besides, H. C. Hicks, as appears by Mr. Hays' affidavit, "declined to have his stock (which was unredeemed) retired, . . . but insisted that the association should continue to do business in the manner indicated by the charter and by-laws until it should run its course to the end," and it would be singular if he, or one succeeding to his stock, could be allowed, at a much later period, to avail himself of that section of The Code, not only to defeat the application of the assets of the defendant corporation to the payment and satisfaction of a judgment against, but to subject the assets to the payment or (as the corporation considered it) the redemption or retirement of his stock, for which, as stated by Mrs. Cheatham in her complaint, he had not "paid in full the amount" of his subscription. What amount had been assessed and paid by the shareholders upon their stock does not appear, but the full amounts had not been paid.
It is further insisted for Mrs. Cheatham that it appears from the account stated, and upon which judgment was rendered in favor of the plaintiff against the defendant association, that the defendant association had been more than paid, and there was no necessity for the sale of the land, and the plaintiff's "remedy was against the land, (593) to recover it," and not against the association. Whether the plaintiff might have had such a remedy against the land we need not consider, as there was a judgment in his favor, in a court of competent jurisdiction, from which, though an appeal was taken, no appeal was ever prosecuted, and no member or creditor of the defendant association can attack or impeach it except for fraud or collusion, and there is not only no allegation of this but the whole record precludes all suspicion of it.
It is further contended by counsel for Mrs. Cheatham that C. C. Heggie, having been a member of the defendant corporation, was estopped, being in pari delicto, and could not allege usury against it, as was held in Latham v. B. and L. Assn., 77 N.C. 145; and the plaintiff assignee of his equity of redemption was also estopped, and this defense was not set up by the defendant association, and Mrs. Cheatham, "being interested in the administration of the assets, and in preventing the priority attempted to be given to the plaintiff," and "not being a party to plaintiff's action, is not estopped to show the invalidity of his judgment," and that it is void. If invalid and void, as insisted by counsel, the authorities cited were not needed to show that it might be "set aside at any time." That is well settled. But, as we have seen, in the case before us the judgment was not void. It was regularly rendered by a court of competent jurisdiction, both as to the parties and the subject-matter, and no fraud or collusion is alleged or shown.
In Dobson v. Simonton, 86 N.C. 492, cited by counsel, the judgments impeached were nullities, having been rendered when there was no such corporation as the Bank of Statesville in existence, either in law or in fact. No such bank ever had a de jure existence, and its de facto existence ceased on 1 June, 1876, a receiver was appointed, and judgments (594) rendered on process which issued after the de facto existence of the corporation had ceased, and served upon its former de facto officers, were not valid, and might be impeached by any person interested in the administration of its assets. The case before us is, as we have seen, very different. Its charter had not expired or been annulled, and it was acting under the control of its regularly and legally constituted officers, with whom the appellant, herself a member of the association, was dealing as such, and who, so far from acting in concert or collusion with the plaintiff, resisted his claim, denied its validity and insisted "that there were no other or just claims against the association" except those of appellant.
Of course, if anything has been realized upon the execution in the hands of the sheriff, the defendant will be entitled to credit therefor.
It is further contended for appellant that the orders on which her action was commenced in November, 1889, are an equitable assignment of the funds on which they were drawn, and that her action "is an equitable execution or supplemental proceeding" to subject the same, which "appellant individually did receive in full payment of all her stock from the defendant John W. Hays, then acting for the defendant corporation, on 20 August, 1881, and she has not, in fact, since that day been a member of said corporation," which constituted her a bona fide creditor of the defendant corporation (which she insists was then defunct), with a lien upon its assets, she being a purchaser of said orders for value.
As we have seen, the orders were issued in payment for stock held by her and her intestates as stockholders "in said corporation," and not only the assets, but the capital stock as well, constituted a trust fund for the benefit of corporate creditors, and the corporation could not pay or assign to a stockholder, nor could a stockholder receive, any of the assets from the corporation for the retirement or redemption of his stock till after all the liabilities of the corporation have been (595) discharged.
There is nothing in the record to show that the defendant corporation has ever been dissolved, or its corporate affairs settled in any way recognized by law and the appellant's stock continued to be liable for the corporate debts, and she and other stockholders were, and could only be, entitled by virtue of their stock, to share in the surplus after discharging all the liabilities of the corporation to its creditors.
It is further insisted by counsel for appellant that "the corporation had the right to buy, or to buy in and cancel its own stock, and to issue orders on its treasurer in payment therefor"; and for this position he cites a number of authorities; but upon examination it will be found that the authorities are not uniform, and, as is said in the note to sections 310 and 311 of Cook on Stock, etc., cited by counsel, quoting Cappin v. Grunbus, 38 O. St., 270, "we think the decided weight of authority, both in England and the United States, is against the existence of the power, unless conferred by express or clear implication," and the author, in the text, says: "If the sale is completed and the corporation afterwards becomes insolvent, the shareholder who sold the stock to the corporation is liable on the winding up, as though he never had made such sale." Cook, supra, and at section 309.
While the authorities cited hold that the corporation may purchase its own stock, the rule is subject to many restrictions, "one of which is that it shall not be done in such manner as to take away the security upon which the creditors of the corporation have a right to rely for the payment of their claims." It is further said, in one of the authorities cited: "In Illinois, the State where the right of the corporation to make such purchases is most clearly and decisively established, the collateral principle that such purchases are to be declared illegal and voidable at the instance of corporate creditors who are injured thereby, is distinctly stated and rigidly applied." Section 312; Frazer v. (596) Ritchie, 8 Brader (Ill.), 554. It is held by the cases cited that, conceding that, for legitimate purposes, the corporation can buy in its stock, we think no lien is created thereby upon its assets for the payment of the purchase-money, and none of the cases cited are in conflict with the well-settled principle that the corporation cannot buy in, or deal with its stock to the prejudice of creditors.
Counsel for the appellant further insists that, as shown by the affidavit of Mr. Hays, after the decision in Mills v. Building and Loan Association, the corporation adopted "a just and liberal method of settlement of its affairs," and "this is not an action to recover the price of stock subscribed for, but a contest between two creditors, the one attempting to enforce the payment of a just debt, the other to collect a penalty, which equity abhors, and which was recoverable by somebody else, if at all," and the assets sought to be recovered were the property of the appellant before the plaintiff recovered his judgment.
Whatever may have been the original merits of the plaintiff's claim, after he had obtained judgment he became a judgment creditor, with all the rights, as against the defendant corporation and its shareholders, that any other judgment creditor might have, and the appellant is seeking to recover the value of stock subscribed, and for which, as appears from the record, there had never been payment in full, and which, as we have seen was liable to the demands of creditors. As to creditors, the liability of shareholders, to the extent of their stock, begins with the subscription, and can only end with a bona fide sale and transfer or the settlement of the affairs of the corporation.
However fair and just may have been the measures adopted by the defendant corporation "for closing its business and making settlement with its members," it appears from the report of the referee that, on 21 June, 1873, Heggie executed a mortgage to secure advances; (597) that, on that day, he received $622.21, and on 19 July, 1873, he received $138.69; that payments were made thereon from time to time, till 1 May, 1874, when the payments made exceeded the amount borrowed, with interest thereon, to the amount of $77.55, and thereafter the defendant corporation foreclosed the mortgage executed 21 June, 1873, by sale, and received the amount of $1,086 from the sale, and it is for the amount of the excess, with interest, that the plaintiff obtained judgment, and not a "penalty," but the "fines, penalties and forfeitures," so severely denounced in the case of Mills v. Salisbury Building and Loan Association, constituted the claim and defense of the defendant corporation.
Lastly, counsel say "appellant can never compel contributions from other stockholders opposed to the corporation, if she only is required to pay plaintiff's claim." This is a misapprehension. The appellant is not required to pay plaintiff's claim, but the judgment is against the defendant corporation, and the plaintiff is only seeking to subject its assets, to which appellant has no rightful claim till its liabilities are discharged. If the corporation and its stockholders, who should deal justly and fairly with her, shall fail to do so, it may be her misfortune, but that cannot affect the legal rights of a judgment creditor of the corporation.
Affirmed.
Cited: Clayton v. Ore Knob Co., 109 N.C. 389; Harmon v. Hunt, 116 N.C. 682; Meroney v. Loan Asso., ib., 910; Pender v. Speight, 159 N.C. 616; Gilmore v. Smathers, 167 N.C. 444; Drug Co. v. Drug Co., 173 N.C. 508; Chatham v. Realty Co., 180 N.C. 503.
(598)
Comments