the absence of controlling statutes, will, in cases of watered stock, limit this original liability of the share by applying the "good faith" rule: the doctrine of "holding out," and the defense of "purchaser without knowledge." Outlining the discussion in this and the following sections, it may be said: (1) Except where the aim of the statute is merely to ensure payment for the share at par, statutory is extra liability; and it is collectible regardless of whether or not the shares are in fact full paid. (2) Statutes sometimes authorize a corporation, which is a going concern, to make good an impairment of capital stock by assessing even the full-paid shares ; but, normally, the extra liability is collectible only when and to the extent that the corporate assets, upon insolvency, are insufficient to pay creditors. (3) The statute law governing shares and their liability, is that of the state creating the corporation; shareholders residing in other states are bound by this law; and in a special case it has been held that they may be bound by the law of the state where the principal business of the corporation is, under its charter, to be done. Something will be said generally about statutes which aim merely to ensure full payment of the stock; next will be taken up, as typical, the extra liability in favor of creditors imposed upon shareholders in national banks; and finally the statutory law of Maryland will be considered.

Ensuring full payment of capital stock. Two types may be mentioned: (a) The former statute of Virginia, construed in the numerous Glenn cases hereinbefore noted.

1 There is such a provision in the national banking act,-for

which see Bank v. Weinhard, 192 U. S. 243.

2 Pinney v. Nelson, 183 U. S. 144 and post, § 131.

3 Ante, § 115, and post, Chapter XVII-Transfer of Stock.

Here the purpose and effect were to abrogate the doctrine of novation, by providing that even a bona fide transfer of shares should not absolve the transferor from liability for future calls. (b) The existing law of New Jersey which, as construed by the courts of that state, abrogates, in the case of watered stock, the good faith rule and the general principle that a creditor who has prior notice, actual or constructive, of the transaction, cannot afterwards complain that the actual value of property received in payment was less than the par or nominal value of the shares. The New Jersey statute provides, in effect, that the judgment of the directors on the question of valuation, if exercised in good faith, shall be final. In See v. Heppenheimer, 69 N. J. Eq. 36, the promoter of the corporation had acquired some thirty-nine different plants for the manufacture of straw paper, at an aggregate price of two and a quarter millions of dollars. These were turned into the corporation for shares at the par value of five millions. In a suit by the receiver against a stockholder with knowledge, the contention was that the profits resulting from economies brought about by consolidation could be capitalized, and that there had been no bad faith or actual fraud upon the part of either the directors who fixed the value or the stockholders who took the shares. The court said: "Nor is it necessary that conscious over-valuation or any other form of fraudulent conduct on the part of these primary valuers should be shown to justify judicial interposition. Their honest judgment, if reached without due examination into the elements of value, or if based in part upon an estimate of matters which really are not property, or if plainly warped by self-interest, may lead to a violation of the statutory rule as surely as would corrupt motive."

In

Easton National Bank v. American Brick and Tile Company, 70 N. J. Eq. 732, and reported with notes in 8 L. R. A. (N. S.) 271, a promoter-creditor, who had himself taken a large part of the watered stock, was seeking, in liquidation proceedings, to make his fellow adventurers pay the difference between the value of the property and the par of the shares. It was held that the New Jersey statute, properly interpreted, superseded both the good faith rule and the rule that a creditor with prior notice cannot complain; and that the statute absolutely prohibits "agreements for the issue of stock for a less consideration than its par value" and affords relief "to all creditors without distinction."

Limited to public service companies; and, in other cases, to the initial issue of stock, where no public record is required showing what property has been received and how much stock has been given therefor, there is sound sense in the decision. But applied universally the rule is too broad and works more injustice than it prevents. As has already been shown, the theory of the earlier law practically prevented the exercise of corporate powers until the authorized stock was taken and paid for. If it were practical or desirable to revive this theory, the prospective creditor would be sure that the corporation had once started with a given capital in money or money's worth; but such knowledge would be no practical basis for a present credit. He would still be concerned with the question of mortgage and other indebtedness, and would do what he now does in a doubtful case when credit is asked,-get the commercial rating of the intending debtor. And just as the creditor is charged with record notice of mortgages and other liens, so he ought to be bound where the transaction showing payment in property has been made a matter of public record. Except

where the number of shares issued has some bearing on prices, the public is not interested in their nominal value; and where the stock of a going concern needing money or property is worth less than par, no sound principle of public policy is expressed by the rule which forbids the issue of such stock at its real value. 1

1 Recently (February 19, 1913, and since the decisions noted in the text), the New Jersey statutes have been amended. The relevant provision, not clearly worded, is as follows:

"Any corporation formed under this act may purchase property, real and personal, and the stock of any corporation, necessary for its business, and issue stock to the amount of the value thereof in payment therefor, subject to the provisions hereinafter set forth, and the stock so issued shall be full paid stock, and not liable to any further call; and said corporation may also issue stock for the amount it actually pays for labor performed. Provided, that when property is purchased the purchasing corporation must receive in property or stock what the same is reasonably worth in money at a fair bona fide valuation; and provided further, that no fictitious stock shall be issued; that no stock shall be issued for profits not yet earned, but only anticipated; and provided further, that when stock is issued on the basis of the stock of any other corporation it may purchase, no stock shall be issued thereon for an amount greater than the sum it actually pays for such stock in cash or its equivalent; and provided further, that the property purchased or the property owned by the corporation whose stock is purchased shall be cognate in character and use to the property used or contemplated to be used by the purchasing corporation in the direct conduct of its own proper business; and in all cases when stock is to be issued for property purchased, or for the stock of other corporations purchased, a statement in writing, signed by the directors of the purchasing company or by a majority of them, shall be filed in the office of the Secretary of State, showing what property has been purchased, and what stock of any other corporation has been purchased, and the amount actually paid therefor."

Where a statute forbids the issuance of shares other than for money or money's worth, a subscriber to preferred and common

§ 119. National banks. The federal statutes governing the extra liability of shareholders in national banking associations, have an importance beyond that of the subject matter. In contrast with the scheme embodied in the older state legislation, the liability is collected by the liquidator of the corporation for the equal benefit of all creditors; and there is no opportunity for what some of the earlier judges called, with approval, a "race of diligence" among creditors. The decisions of the Supreme Court on the statutes have, as a whole, displayed practical good sense; and they have worked out a method which is simple, economical and efficient. The result is that in many states the older methods have been superseded by legislation substantially like that governing national banks. The important provisions, being sections 5151 and 5152 of the Revised Statutes, are as follows:

5151. The shareholders of every national banking association shall be individually responsible, equally and ratably and not one for another, for all contracts, debts and engagements of such association to the amount of their stock therein at the par value thereof, in addition to the amount invested in such shares.

5152. Persons holding stock as executors, administrators, guardians or trustees, shall not be personally subject to any liability as stockholders; but the estates and funds. in their hands shall be liable in like manner and to the same extent as the testator, intestate, ward or person interested

stock, who was to pay for the former at par and receive the latter as a bonus, can not be held to his subscription. Trent Import Co. v. Wheelwright, 118 Md. 249,-construing a statute of New York.

1 Norris v. Johnson, 34 Md. 491. The inside creditors with knowledge of impending insolvency, of course, had the start; and the race was usually over before the others knew anything about it.