tage of his own wrong; for behind his promissory note stands his contract of subscription and his general obligation to keep faith according to his contract of subscription.1 It is therefore unnecessary, in order to hold the subscriber in such a case liable on his note, to resort to the weak and fanciful reason of an early court that, although the contract of subscription was void, since the commissioners had power only to receive subscriptions in cash, yet the note would be regarded as having been given for the purchase of so much stock, and hence binding. A bolder and more sensible view, taken in the case of a railroad company, was that, by virtue of the inherent powers of such companies to take and negotiate promissory notes in the ordinary course of their business, a promissory note may be received in payment of subscriptions to their capital stock.3 $1658. Effect of Such Payment or Settlement.- Where the subscriber gives his note in settlement of his subscription, and stock is issued to him therefor as fully paid up, the note is of course supported by a valuable consideration. Such notes form, of course, a part of the assets of the corporation, and, as such, are a trust fund for its creditors. For instance, certain stockholders subscribed for their stock in an insurance company; they paid twenty per cent. in cash, and gave their notes to the company for the balance, without interest, payable upon demand when needed to pay losses. Dividends, from time to time declared by the company, were applied upon these notes, until, at the time of the great Chicago fire, October 9, 1871, only thirty-five per cent. remained unpaid on such notes. After the fire, the company becoming insolvent, each of these stockholders purchased policies from other persons, procured their adjustment by the company, taking certificates of loss for the amount, which certificates they then surrendered to the treasurer at par, in payment of their stock notes. In an action against such 1 Ante, § 1220. Hayne v. Beauchamp, 5 Smed. & M. (Miss.) 515. 3 Goodrich v. Reynolds, 31 Ill. 490; 3. c. 83 Am. Dec. 240. That a note stock subscription is valid even in the hands of a corporation, was asserted in Magee v. Badger, 30 Barb. (N. Y.) 246. 4 Alexander v. Horner, 1 McCrary given to a corporation in payment of a (U. S.), 641. stockholders by the assignee of the company, it was held that these stock notes were a part of the capital stock of the company, and as such were a trust fund for the creditors; that they were in effect cash, which should have been paid in money into the treasury of the company for distribution among its creditors; that the notes were withdrawn from the treasury of the company by collusion with its officers; that the surrender of the certificates of losses to the treasurer at par, in payment of the stock notes, and their transfer to the stockholders were a fraud, such as would be set aside by the court without special reference to the provisions of the bankrupt law. The fact that some of these stockholders were also officers of the company made no difference, and those also who were only stockholders were held equally liable. The company cannot, it would seem, retain the note and sue the shareholder for original assessments, but its remedy is upon the note; and it has been held that a subscriber who has given his note in settlement of his subscription, is not liable for assessments on the stock, where the certificates have been placed in escrow in the hands of a third person to be delivered to the subscriber when the note is paid, where the note has not been paid nor the stock transferred. After the company has exercised its right to forfeit the stock — a subject hereafter considered by reason of the note not being paid at maturity, it cannot maintain an action upon the note, since it cannot have both the shares themselves and what the subscriber has agreed 1 Jenkins v. Armour, 6 Biss. (U. S.) 312. Upon the point as to the time when interest should begin to run on these stock notes, whether from the date of demand by the assignee, or of the exchange by the stockholders, of the certificates of loss for their notes, it was held that, as against the company, if it had continued solvent, interest would only run from the time of a proper demand; but that, inasmuch as the liability of the stockholders arose from their own acts, under circumstances where they were properly chargeable as trustees who had wrongfully converted to their own use the assets of the company, when they made their exchange of certificates of loss for their notes, the effect was the same as though they had at that time taken and converted the amount in cash from the coffers of the company; and therefore they came within the rule that a trustee must pay interest from the date of the conversion, and judgment was rendered in each case with interest at six per cent. from date of the withdrawal of the stock notes. Ibid. 2 Cormac v. Western White Bronze Co., 77 Iowa, 32; s. c. 41 N. W. Rep. 480. 3 Post, 1792, et seq. to pay for them; 1 nor can it, after such a forfeiture, and especially after a material change has been made in its charter without the consent of the subscriber, by transferring the note to a third person, confer upon him a right of action against the subscriber. But where the note has been assigned in good faith before maturity, and the subscriber pays it in good faith to the holder, the company can have no further claim against him, either upon the note or on the original contract of subscription.3 § 1659. Such Notes When Negotiable. A note expressed to be "for value received in certificate of stock No. 650, for ten shares of the capital stock of the State Ins. Co.," and payable to the order of the treasurer “in installments not to exceed ten per cent. of each share, at thirty days' notice of calls from the board of directors," is a negotiable promissory note within the meaning of the Missouri Statute.1 If a If § 1660. How far Valid in the Hands of Indorsees. note given in payment for stock in a corporation is valid in the hands of the company, it is, of course, valid in the hands of any person to whom it is transferred by the company for value, with or without notice of the circumstances under which it was made. such a note is in form negotiable, it is, of course, valid in the hands of an indorsee for value before maturity without notice, unless there is a statutory prohibition which goes so far as to invalidate it in his hands." 1 Ashton v. Burbank, 2 Dill. (U. S.) 435. 2 Ibid. Of course the rule would be otherwise in case the note is transferred before maturity, for value and without notice to the transferee of the circumstances which create a failure of consideration. See next section. Magee v. Badger, 30 Barb. (N. Y.) 246. A second note given by such a subscriber, in settlement of an action brought to recover the amount due upon the original note, is also valid, it having a good consideration in the amount due upon the first. Ibid. 6 Ante, § 1659. 7 Alexander v. Horner, 1 McCrary Alexander v. Horner, 1 McCrary (U. S.), 641. It has been held that a (U.S.), 641. Stillwell. Craig, 58 Mo. 24; see also Washington Co. Mut. Ins. Co. v. Miller, 26 Vt. 77; President &c. v. Hurtin, 9 Johns. (N. Y.) 217; s. c. 6 Am. Dec. 273. note given to a corporation for stock is valid in the hands of an indorsee without notice, though the statute forbids the receiving of a note or other evidence of debt in payment of any installment actually called in and re § 1661. Indorsee entitled to Subrogation. Where the governing statute gives the corporation a lien on the shares for the unpaid balance due thereon, and a subscriber has given his note with an indorser in settlement of his subscription, the indorser, on the failure of the maker to pay the note, is entitled to have the stock applied in his exoneration.1 ARTICLE IV. NEW DOCTRINE THAT A CORPORATION CAN GIVE AWAY ITS UNISSUED SHARES. SECTION 1665. Cases denying or limiting the foregoing principle. 1666. New doctrine that a corporation 1667. Continued: doctrine that a cor- 1668. SECTION 1670. As shown in the Missouri case of Shickle v. Watts. 1671. And by other decisions in that State. 1672. Missouri decisions further con- 1673. As shown by a decision of the 1675. View that rule not applicable 1676. Nor to any person who gives credit with knowledge of the manner in which payment has been made or secured. § 1665. Cases Denying or Limiting the Foregoing Principles.2 Cases are not wanting which either deny entirely or essentially limit the principles discussed in the preceding articles. It has been held in a circuit court of the United States that a corporation may dispose of its stock for less than its face value, and that the transaction, as between the corporation and the purchaser, will be valid, unless prohibited by statute. At a 3 2 Some cases of the kind about to be discussed have been already considered. Ante, § 1586, et seq. 3 Harrison v. Arkansas Valley Ry. Co., 4 McCrary (U. S.), 264. later date, the Supreme Court of the United States let itself down to the view that an active corporation may, even as against its creditors, for the purpose of paying its debts and obtaining money for the successful prosecution of its business, issue new stock and sell it for the best price that can be obtained. Without accepting this principle, or conceding that the corporation, which is a trustee both for its shareholders 2 and for its creditors,3 cannot undo the wrong, we can easily understand that circumstances may exist under which a corporation may sell its own shares at their market value, although this is less than their par value. Thus, a corporation may lawfully take its own shares to save a debt. Suppose it does so, and finds itself in urgent need of the very money which should have been paid to it by its debtor instead of the shares, it would be a hard and perhaps a mischievous rule that would prevent it from reselling the shares at their market value. There is then no difficulty in concurring with a judicial expression in New York to the effect that an agreement by a corporation to sell shares of its own stock for less than par is not void when it does not appear how the company acquired the stock. But a decision of the highest court of that State to the effect that a railroad corporation may, in the absence of a prohibitory statute, pay for the construction of its road in its shares at their actual value, even though such actual value is less than their par value, is entirely opposed to sound principle. Nor will the legal profession readily concur in a decision of the highest Federal tribunal, which sanctioned the issuing by a railroad company of its unissued shares at 20 cents on the dollar in payment of a debt, and which in its reasoning goes to the wild length of holding that a corporation may, so far as the rights of its creditors are concerned, give away its unissued shares, provided they are worthless at the time." Another decision of the same court, rendered at the same term, sanctions the same principle, and holds that a railroad company can issue its shares to a contractor as a bonus, and that, the company sub 4 1 Handley v. Stutz, 139 U. S. 417; s. c. 35 L. ed. 227; 11 Sup. Ct. Rep. 530; 9 Rail. & Corp. L. J. 362. 2 Post, § 2486. Ante, § 1569 et seq. Otter v. Brevoort Petroleum Co., 50 Barb. (N. Y.) 247. 5 Van Cott v. Van Brunt, 82 N. Y. 535. 6 Clark v. Beaver, 139 U. S. 89, 112. |