or stock and bonds, substituted for the real tangible assets of the old corporation,24 and this is so even though the stock, or stock and bonds, had actually been held intact by the selling company.2 25 Especially is this true where the stock, or stock and bonds, are distributed among nonresidents of the state.26 However, the purchasing corporation is liable only to the extent of the value of the assets actually received by it.27 This rule has been held the proper one even though the assets are not to be considered as a trust fund except by way of analogy or metaphor.28 Moreover, absolute proof that the stock given in exchange passed directly to the stockholders of the selling company, or to its officers for their own benefit, is not necessary to charge the purchasing corporation with notice of the necessary or probable effect upon creditors.29 But it may be, it has been said, that a "creditor cannot complain when the shares of stock of the purchasing corporation are received and held by the selling corporation as assets and property of the latter corporation, except on the ground that the consideration was not valuable nor adequate, upon the same ground that he might complain of any other consideration." 30 In Utah, it is held that "a transaction whereby one corporation sells and transfers all its property and franchises, except the franchise to be a corporation, upon an agreement that the proceeds or consideration of the sale should be distributed to the stockholders of the selling corporation, and where the proceeds are so distributed in accordance with such agreement entered into between the two corporations, is, as to creditors of the selling corporation, not only fraudulent but also unlawful" where a statute forbids corporation officers "to divide, withdraw, or in any manner except by law, pay to the stockholders, or any of them, any part of the capital stock of the corporation.' 31 24 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088. 25 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088. 26 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088. 27 Mahaffey Co. v. Russell & Butler, 100 Miss. 122, 54 So. 807, 945, and see § 4758, infra. 28 Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 32 L. R. A. (N. S.) 29 Altoona v. Richardson Gas & Oil Co., 81 Kan. 717, 721, 26 L. R. A. (N. S.) 651, 106 Pac. 1025. 30 Cooper v. Utah Light & Railway Co., 35 Utah 570, 591, 136 Am. St. Rep. 1075, 102 Pac. 202. 31 Cooper v. Utah Light & Railway Co., 35 Utah 570, 592, 136 Am. St. Rep. 1075, 102 Pac. 202. But a sale of part of the property of a corporation, although for stock in the purchasing company, is not fraudulent as to creditors where enough assets are left in the hands of the selling company to pay all its debts.32 A peculiar situation arose in one case where one corporation took over the assets of another to which all the stockholders of the latter assented, under an agreement whereby the delivery of shares of stock in the one company to the shareholders of the other company was to be "a full discharge of each of the parties thereto." The only indebtedness of the old company at the time was owing to certain of its stockholders. One of them sued the new company to recover his debt, but it was held that he was estopped by his own contract from asserting any claim against the new company, where he had agreed that his claim should be paid from dividends on the stock.33 § 4757. Property as subject to equitable lien. The question sometimes arises whether a creditor of a selling corporation has a lien on the property purchased by the other company, as security for his debt, on the trust fund theory, independently of any question as to whether the purchasing company is personally liable for the debts of the selling company.34 One line of authorities holds that if one corporation transfers all its assets to another, and thus practically ceases to exist, without having paid its debts, the purchasing company takes the property subject to an equitable lien or charge in favor of the creditors of the selling company.35 Another line of authorities announces the modified doctrine that a creditor of a corporation may follow its assets or property into the hands of anyone who is not a good faith holder for value in the ordinary course of business,36 as 32 Hurd v. New York & Commercial Steam Laundry Co., 52 N. Y. App. Div. 467, 65 N. Y. Supp. 125, rev'g 29 N. Y. Misc. 183, 60 N. Y. Supp. 813. 33 Codman v. Lloyd, 236 Fed. 534, aff 'g 227 Fed. 942. 34 For excellent discussion of this subject, see Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 32 L. R. A. (N. S.) 616, 118 N. W. 456. 35 See Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 32 L. R. A. (N. S.) 616, 118 N. W. 456. In Kentucky, it is said that "the doctrine is well settled that where one corporation transfers all its assets to another corporation, and practically ceases to exist, without having paid its debts, the purchasing corporation takes the property subject to an equitable lien or charge in favor of the creditors of the selling corporation.'' Carter Coal Co. v. Clouse, 163 Ky. 337, 173 S. W. 794. 36 Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 32 L. R. A. (N. S.) 616, 118 N. W. 456; Hurd v. New York & C. Steam Laundry Co., 167 N. Y. 89, 60 N. E. 327; Cole v. Millerton Iron Co., 133 N. Y. 164, 28 Am. St. Rep. 615, 30 N. E. 847. [§ 4759 where one corporation takes over the assets of another without paying any consideration therefor,37 or, it is generally held, where the stockholders of the selling company are paid in stock of the purchasing company.38 So the rule is often stated that the assets of an incorporated company are a trust fund for the payment of its debts which may be followed into the hands of any person acquiring them with notice of the trust.39 In one case, the owner of all the stock in one insolvent corporation sold its assets to another corporation of which he was president and owned four-fifths of the stock, in consideration of an exchange of stock, and it was held that the new company could not be considered an innocent purchaser but was liable to the extent of the value of the assets received from the old company.40 § 4758. - -Liability as limited to value of property received. Where one company turns its property over to another company, the liability of the latter for the debts of the former, conceding the existence of such liability, is often held to be limited to the value of the property received from such corporation.41 Of course, this is not true where the transferee company has assumed the debts of the other company,42 nor, it seems, where the transfer is in reality a consolidation or merger.43 But it does appear to be the rule where the liability is imposed on the ground that the transfer was in fact or in law a fraud on the creditors of the transferee company.44 § 4759. Personal liability of officers. Where the property of a corporation is sold to another company, and the consideration did not pass to the selling company but to its trustees and for their bene 37 Harbison-Walker Refractories Co. v. McFarland's Adm'r, 156 Ky. 44, 160 S. W. 798. 38 Camden Interstate R. Co. v. Lee, 27 Ky. L. Rep. 75, 84 S. W. 332, and see § 4756, supra. 39 Wesco Supply Co. v. El Dorado Light & Water Co., 107 Ark. 424, 428, 155 S. W. 518. 40 Wesco Supply Co. v. El Dorado Light & Water Co., 107 Ark. 424, 155 S. W. 518. 41 Jackson v. Knights & Ladies of Orient, 101 Kan. 383, 466, 167 Pac. 1046, and see § 4757, supra. VII Priv. Corp.-68 Where one corporation takes over the assets of another company which has been dissolved, and it did not appear whether the former was created merely to take over such assets, it was nevertheless held that the new company was liable for debts of the old only to the extent of the value of the assets of the old company actually received by the new company. Mahaffey Co. v. Russell & Butler, 100 Miss. 122, 54 So. 807, 945. 42 See § 4741, supra. fit, it seems that such trustees are personally liable for the debts of the selling company, notwithstanding they were assumed by the purchasing company. § 4760. In case identity of corporation is unchanged. Many of the decisions do not show on their face whether the company purchasing or taking over the assets of another corporation is an existing corporation already engaged in business, or is one created for the express purpose of taking over the property, but it is assumed, where nothing is stated in regard thereto, that the purchasing corporation is an existing one already engaged in business, rather than a new one created for the purpose of taking over the property, and that the law governing the one case controls rather than the law governing the other case. In fact, in the latter case, what is accomplished is in reality a reorganization, and it is governed as to its effect by the rules relating to reorganization without a judicial sale or consent of the creditors, which rules ordinarily impose a greater liability on the new corporation than in case of a mere purchase by one corporation, already engaged in business, of the assets of another corporation.46 In other words, the rule that the purchasing company is not liable on claims against the selling company does not apply where the cir cumstances attending the creation of the new corporation and its succession to the business and property of the old corporation are of such a character as to warrant the finding that it is a mere continuation of the former.47 § 4761. In case of stock control of another company. A holding company is ordinarily not liable for the debts of the corporation whose stock it holds,48 and a railroad or other corporation which controls another by reason of its ownership of a majority of the stock ordinarily is not liable because thereof for the acts and contracts of the latter.49 But while even complete stock ownership of one corporation by another does not result in identity of corporate existence, yet any kind of controlling interest is a material circumstance in determining liability for a tort,50 and purchase of a controlling inter 45 Carstens & Earles v. Hofius, 41 Wash. 456, 87 Pac. 631. 46 Infra, chapter on Reorganization. 47 Infra, chapter on Reorganization. 48 Martin v. Development Co. of America, 240 Fed. 42. 49 Mathews v. Atchison, T. & S F. R. Co., 60 Kan. 11, 55 Pac. 282; At chison, T. & S. F. R. Co. v. Cochran, 43 Kan. 225, 7 L. R. A. 414, 19 Am. St. Rep. 129, 23 Pac. 151; Stone v. Cleveland, C., C. & St. L. R. Co., 202 N. Y. 352, 35 L. R. A. (N. S.) 770, 95 N. E. 816. See also § 1133, supra. Co. v. Krysienski, 238 50 Erie R. Fed. 142. est in the stock of another company and the resultant control of its business may make the purchaser liable for fraud or mismanagement of the subsidiary company,51 on the theory of agency. Where a corporation was formed by another company as an adjunct, and later its stock of goods was turned over to the parent company and it went out of business, and thereafter individuals connected with the parent company took its incorporation papers, reduced its capital stock, and engaged in business, the parent corporation is not liable for debts of the revived corporation created after the revival,52 § 4762. In case of lease of all the property. A lease ordinarily is not a consolidation or merger,53 and the lessee corporation ordinarily is not liable for the debts or torts of the lessor company prior to the lease.54 But a corporation cannot escape liability by leasing all its property to a dummy corporation and then obtaining a retransfer of the property when the lessee became financially embarrassed.55 § 4763. Liability of constituent or merged or selling companies. When a corporation sells its property and franchises, or they are sold under an execution, or under a decree foreclosing a mortgage thereon, the corporation is not thereby dissolved, unless there is some statutory provision to such effect, and it remains liable upon its debts. and its executory contracts, and for its torts, and may be sued, notwithstanding the sale. Whether or not the creditor may follow and subject the property in the hands of the purchaser depends upon the circumstances. The question has already been considered.56 If there is a statutory provision under which the sale and transfer amounts to a dissolution of the corporation,57 it cannot afterwards De sued, unless there is some provision by which its existence is continued for such a purpose.58 But even when there is a dissolution of the old corporation, its creditors may proceed in equity to reach and subject to the payment of their claims any of its assets which have not come into the hands of a bona fide purchaser for value.59 The old corporation is clearly not liable for any debts contracted 51 Cannon V. Brush Elec. Co., 96 Md. 446, 94 Am. St. Rep. 584, 54 Atl. 121. 52 Liebhardt v. Wilson, 38 Colo. 1, 120 Am. St. Rep. 97, 88 Pac. 173. 58 See § 4668, supra. 54 See $1262, supra. 55 Barrie v. United Rys. Co. of St. Louis, 138 Mo. App. 557, 119 S. W. 1020. 56 See § 4751, supra. 57 Infra, chapter on Dissolution. 58 Infra, chapter on Dissolution. 59 See § 4757, supra. |