The laws of a state required that before being organized, all
railroad companies should have a subscription to their stock of not
less than $50,000. Certain persons did subscribe more than this
(to-wit, $148,750), with a proviso, however, that if a certain city
in its corporate capacity subscribed $50,000 or upwards, the city
should accept what each of them had subscribed above a small sum
($300) named. The city did subscribe the $50,000, and much more
($400,000), when, A.D. 1853, the directors of the company -- these
directors being themselves persons who had subscribed part of the
$148,750 -- passed a resolution authorizing the original
subscribers to transfer to the city all stock subscribed by them
over $300 each, and that the stock thus transferred be merged in
the subscription made by the city.
As appeared by "an agreement of record" in which, without
signature of anybody attached, it was certified by the clerk that
it was admitted by the complainants
on the final hearing
that all the subscribers transferred, before July, 1854, their
stock (above $300) to the city; that none of the original
subscribers were ever charged on the books of the company with any
greater amount than $300; that this sum had been paid by each, and
accepted by the company in full satisfaction.
The company being insolvent in 1858, and the executions of
creditors being then returned unsatisfied, the creditors of the
company in 1868 filed a bill against the original subscribers to
make them pay up the excess over $300 which they had
subscribed.
Held:
1. That these subscribers could not be made liable for such
excess.
2. That the proceeding being one in equity and not at law, the
"agreement of record," though not made part of the record by the
pleadings, would be regarded as evidence.
3. That it proved the transfer and acceptance of the stock by
the city.
4. That the fact that the directors were original subscribers
did not affect the case, the transfer having been in accordance
with the conditions on which the original subscription was made,
and in itself fair.
Page 83 U. S. 391
5. That, independent of all this, the bill probably could not be
maintained because of laches.
Burke, Putnam, and others were the equitable owners of a
judgment recovered in 1857 against the New Albany & Sandusky
Railroad Company. Upon this judgment an execution was issued in
1858, which, on the 1st of December of that year, was returned
"
nulla bona." On the 29th of January, 1868 -- that is to
say, about ten years after the execution had been thus returned
unsatisfied -- they brought the present suit. It was a bill in
chancery against one Smith and some twenty-seven other defendants,
and, alleging the insolvency of the company, it sought to subject
to the payment of the judgment, rights which, it alleged, the
company had against the said defendants. It averred that the
defendants, on the 22d of August, 1853, under the general railroad
laws of Indiana, organized the above-named railroad company and
subscribed to its capital stock, severally, amounts which they had
never paid, and the object of the bill was to compel the payment of
the
debts thus incurred, and the application of the
payments to the satisfaction of the complainants' judgment. The
facts were these:
On the 22d of August, 1853, under the general railroad laws of
the state, the defendants, with others, united in forming articles
of association for the incorporation of the New Albany &
Sandusky Railroad Company, and severally subscribed to its capital
stock in sums varying from $1,000 to $5,000. [The railroad laws
referred to allow, it may be added, no organization of a road until
at least $50,000, or $1,000 for every mile of the proposed road,
shall have been established.] The articles of association contained
the following stipulation:
"
Provided, however, and it is hereby understood, that
if the City of New Albany, in its corporate capacity, shall
hereafter take stock in this corporation to the amount of $50,000
or upwards, inasmuch as the present subscribers, being residents
of
Page 83 U. S. 392
and owning property in said city, will then be under the
necessity of contributing still further to the corporation by way
of taxation, unless a portion of the present subscription is taken
off their hands, the said city shall accept, in part of the amount
to be subscribed in its corporate capacity, at its par value, a
transfer of any amount of stock now subscribed for by each
individual over and above the amount of six shares, or $300, which
each such individual may desire or request shall be so
transferred."
There were fifty-five original subscribers, and the aggregate
amount of the subscriptions was $148,750. With such a subscription
and under such articles of association, the subscribers became a
corporate body. After their incorporation, the City of New Albany
subscribed $400,000 to the capital stock of the company. [
Footnote 1] This subscription was made
on the 19th of November, 1853, and on the 31st of December next
following, the directors of the company adopted an order
"That the original subscribers to the articles of association be
permitted, in accordance with the stipulations contained in the
articles, to transfer any amount of the stock so originally
subscribed by them over and above the amount of six shares, or
$300, to the City of New Albany, said city having made a
subscription to the stock of said company to the amount of $50,000
and upwards, and that the stock thus transferred be merged in the
subscription already made by said city, so that the stock of said
city, under her present subscription, with the stock so
transferred, shall not exceed $400,000 as subscribed by her."
The directors of the company, who made this order, were
themselves subscribers, like the defendants, for more than six
shares, or sums above $300.
So far, there was no controversy respecting the facts. And there
was also an "agreement of record" -- a document certified by the
clerk of the court below, with the bill, answers, depositions
&c., as part of the full,
true, and
Page 83 U. S. 393
complete copy and transcript of the record and proceedings in
the case -- that the defendants transferred to the City of New
Albany all the stock subscribed by them in excess of $300 for each,
in compliance with the stipulation contained in the original
articles of association; that the transfers were made before the
1st day of July, 1854; that none of these original subscribers were
ever charged on the books of the railroad company with any greater
amount of stock than $300; that the amount of stock charged against
each (
viz., $300) had been fully paid long before the
filing of this bill, and when called by the company, and that such
payments had been accepted by the company as full satisfaction of
the respective subscriptions.
The question was whether the defendants were debtors to the
railroad company for any excess of their subscriptions above
$300.
The court below was of opinion that they were not, and dismissed
the bill against them.
The complainants appealed.
Page 83 U. S. 394
MR. JUSTICE STRONG delivered the opinion of the Court.
The question to be solved is whether the appellees are debtors
to the railroad company for the excess of the subscriptions above
$300, made by them to the articles of association. If they are, the
complainants have an equitable right to subject those debts to the
payment of the judgment they have against the railroad company. And
it must also be conceded that if the company has, in fraud of its
creditors, released subscribers to its stock from the payment of
their subscriptions, the release is inoperative to protect
those
Page 83 U. S. 395
subscribers against claims of the creditors. Under the law of
the state, all railroad companies are required to have a
subscription to their capital stock not less than $1,000 for every
mile of their proposed roads before they may exercise corporate
powers. This requirement is intended as a protection to the public,
and to the creditors of the companies. And it is clear that the
directors of a company, organized under the law, have no power to
destroy it, to give away its funds, or deprive it of any means
which it possesses to accomplish the purposes for which it was
incorporated. The stock subscribed is the capital of the company,
its means for performing its duty to the commonwealth, and to those
who deal with it. Accordingly it has been settled by very numerous
decisions that the directors of a company are incompetent to
release an original subscriber to its capital stock or to make any
arrangement with him by which the company, its creditors, or the
state shall lose any of the benefit of his subscription. Every such
arrangement is regarded in equity not merely as
ultra
vires, but as a fraud upon the other stockholders, upon the
public, and upon the creditors of the company.
It is upon these principles that the appellants in this case
rely, and the question is whether they are applicable to the facts
as found.
That the subscriptions made by the appellees to the articles of
association for the incorporation of the company were, according to
their terms, not absolute engagements to pay for a greater amount
of stock than $300 for each subscriber is undeniable. They were
engagements to pay for the number of shares subscribed only on the
contingency that the City of New Albany should not afterwards take
stock in the corporation to the amount of $50,000 or upwards, or,
if such stock should be taken, on the contingency that they failed
to transfer a part of their subscriptions to the city. Such was the
letter and the spirit of the contract entered into by each
subscriber. Whether the law permitted it to have such a legal
effect we will presently consider. But that such was its meaning,
independently of any rule
Page 83 U. S. 396
of legal policy, is very plain. It is the very language of the
articles of association. When, therefore, the directors of the
company, on the 31st of December, 1853, ordered that the original
subscribers to the articles, in accordance with the stipulation
contained therein, be permitted to transfer any amount of the stock
(exceeding six shares) subscribed by them to the City of New Albany
(that city having made a subscription exceeding $50,000), and
ordered that the stock thus transferred be merged in the stock
subscribed by the city, the order was no more than allowing the
contract to be performed as made. It was no release of any rights
which the company had; no abandonment of any resources of the
corporation. It was no more than the subscribers, in view of the
provisions of their contract, had a right to demand. Unless the
contract must be held to have been an absolute undertaking that
each subscriber would himself pay for all the stock subscribed by
him, it was fully performed by the payment of $300 and the transfer
of the excess to the city to be merged in its larger
subscription.
It must, however, be conceded that conditions attached to
subscriptions for the stock of a railroad company made before its
incorporation have, in many cases, been held to be void, and the
subscriptions have been treated as absolute. The question
respecting their validity has most frequently arisen when the
condition has been that the proposed road should be located in a
specified manner, or over a defined line. But other conditions have
been held invalid and have been disregarded by the courts. The
reasons for such a ruling are obvious, and they commend themselves
to universal approval. When a company is incorporated under general
laws, as the New Albany & Sandusky Railroad Company was, and
the law prescribes that a certain amount of stock shall be
subscribed before corporate powers shall be exercised, if
subscriptions, obtained before the organization was effected, may
be subsequently rendered unavailable by conditions attached to
them, the substantial requirements of the laws are defeated. The
purpose of such a requisition is that the state may be assured of
the successful prosecution
Page 83 U. S. 397
of the work and that creditors of the company may have, to the
extent at least of the required subscription, the means of
obtaining satisfaction of their claims. The grant of the franchise
is therefore made dependent upon securing a specified amount of
capital. If the subscriptions to the stock can be clogged with such
conditions as to render it impossible to collect the fund which the
state required to be provided before it would assent to the grant
of corporate powers, a charter might be obtained without any
available capital. Conditions attached to subscriptions which, if
valid, lessen the capital of the company, thus depriving the state
of the security it exacted that the railroad would be built and
diminishing the means intended for the protection of creditors, are
therefore a fraud upon the grantor of the franchise, and upon those
who may become creditors of the corporation. They are also a fraud
upon unconditional stockholders, who subscribed to the stock in the
faith that capital sufficient would be obtained to complete the
projected work, and who may be compelled to pay their subscriptions
though the enterprise has failed and their whole investment has
been lost. It is for these reasons that such conditions are denied
any effect.
But the reasons of the rule are totally inapplicable to the
present case. The appellees are not asking to diminish the capital
of the company by force of any condition attached to their
subscriptions. The action of the board of directors permitting a
transfer to the City of New Albany of all the stock originally
subscribed in excess of six shares by each subscriber, according to
the stipulations of the articles of association, was not a release
of any stock subscription, nor was it an attempt to lessen the
means of the company to build its road any pay its creditors. We
cannot, while recognizing the rule as a sound one, overlook the
peculiar facts of this case. Under the articles of association, the
original subscribers undertook not that they would respectively pay
at all events for all the shares mentioned in their several
subscriptions, but in substance and effect that such a number of
shares should be paid for, either by themselves
Page 83 U. S. 398
or by the City of New Albany if it became a subscriber. There
was no condition by which the number of shares subscribed and made
available could ever be reduced. Had the city taken no stock, they
would have been liable for all the shares taken by them. It is
impossible to see in this any fraud upon the state or upon the
creditors of the company. They have all the security in those
subscriptions which they would have had there been no right to
transfer to the city reserved. The capital stock is all that it was
represented to be when the company became incorporated. The only
change is that a part of it is pledged by the City of New Albany
instead of by these appellees. No capital has been lost by the
transfer.
If, then, the reason of the rule invoked by the appellants has
no applicability to the facts of this case, the rule itself fails,
there is no condition to be stricken from the subscription, and
there is no ground for holding the appellees liable beyond the
plain letter and spirit of their contract.
It is insisted, however, on behalf of the appellants that there
never was any transfer by these appellees to the city of the excess
above six shares for each of the stock mentioned in their
subscriptions, and it is denied that we can consider the admission
of such a transfer, which appears in the record, as any proof of
its having been made. It is said that the alleged admission is an
unauthorized certificate of the clerk, which constitutes no part of
the record, and we are referred to
Fisher v. Cockerell.
[
Footnote 2] But that case does
not support the appellants. It was an action at common law in which
it was said
"In cases at common law, the course of the Court has been
uniform not to consider any paper as part of the record which is
not made so by the pleadings, or by some opinion of the court
referring to it. . . . The unauthorized certificate of the clerk
that any document was read, or any evidence given to the jury,
cannot make that document or that evidence a part of the record, so
as to bring it to the cognizance of this Court. "
Page 83 U. S. 399
All the other cases cited were suits at law in which, of course,
the evidence could not come upon the record except in the regular
manner. A clerk's certificate could not bring it there. But this is
a bill in equity. In such a case no bill of exceptions in necessary
to bring upon the record the proofs and admissions of the parties.
There is the same reason for regarding the admission which appears
in this record a part of the record, as there is for considering
anyone of the depositions. It would be very extraordinary, if
parties to a proceeding in equity may not, at the hearing, make an
admission of facts, upon which the inferior court may act, and
which may be considered on appeal to this Court. And it would be
still more extraordinary, if appellants, under whose direction a
record in chancery had been made up, and who have filed it here
without objection, should be permitted to assert for the first time
on the argument that the clerk had certified improperly as a part
of the record, an admission at the hearing below, which was never
made, or which, if made, we are not at liberty to regard. It is not
denied that the admission of record, certified by the clerk, was
agreed to by the parties, that it was reduced to writing, and
entered upon the record, nor is it denied that it was considered by
the court below as evidence in the cause, and considered without
objection. We must, therefore, hold that it is to be treated as a
part of the record now, and if so, it establishes fully the
transfer of the stock to the city before July 1, 1854; that none of
the appellees were ever charged with it on the books of the
company, and that the transfer was made with the assent of the
corporation, constituting with the payment made for the six shares
not transferred, full satisfaction of the indebtedness of the
appellees, and accepted as such. It is true there appears to have
been no written transfer. None was necessary. The appellees had
received no certificates. They were not on the books as
stockholders for more than six shares each, and from the beginning
it was understood and agreed that for all liability beyond that,
the city, if it subscribed, was to step into their place.
Page 83 U. S. 400
It is next denied that the city accepted the transfer. To this
it may be answered that the acceptance is implied in the admission
of record. There could have been no transfer without the assent of
both parties. More than this. The other evidence tends strongly to
show that the mayor and some members of the councils of the city
knew of the transfers and assented to them, and the city never
dissented from the arrangement.
It is true that a mere assignment of his share by a subscriber
does not relieve him from liability until the assignee is
substituted in his place. But here the substitution was recognized
by the company. The stock was not charged to the appellees on the
books, and after the lapse of nine years it is too late to affirm
that the transfer was not accepted.
Again, it is argued that the directors of the company were
personally interested as original subscribers, and therefore that
their order of December 31, 1853, permitting the transfer was
illegal. But if, as we have endeavored to show, the original
subscriptions were valid as made, if the stipulation in the
articles of association was not prohibited by the law, it needed no
such order of the board of directors to validate the substitution
of the city for the original subscribers. It matters not then that
the directors were interested. Equity would have enjoined them
against interference to prevent a transfer, with all its stipulated
consequences. The substitution of the city was a matter over which
they had no discretionary power.
There is, then, we think, nothing, either in law or in the
facts, that can justify our holding that the appellees were
indebted to the company on their subscriptions when this bill was
filed; nothing to impeach the validity of the arrangement provided
for in the articles of association, and carried out afterwards with
the assent of the company, by which they were discharged from all
liability.
This is sufficient for the case, and if it were not it would be
a grave inquiry, whether the laches of the appellants has not been
such that they cannot now invoke equitable relief.
Page 83 U. S. 401
Their judgment was recovered in 1857, and the return of
nulla bona to their execution was made in December, 1858.
Before that time, the company had become insolvent, and some five
years before that time the arrangement had been consummated which
they now assail as a fraud upon the creditors. It is incredible
that they did not know of the arrangement. The articles of
association were on record open to their inspection. Those articles
exhibited in prospect precisely what was done. No one could have
seen them without having it suggested that the original subscribers
had not at first intended to pay for all the stock mentioned in
their subscription, and that it was intended the city should take
part of the stock off their hands. The company's books, which they
might have seen, would have told them the appellees had paid for
only six shares. This was quite sufficient to make inquiry a duty.
And had inquiry been made there was not the least difficulty in
ascertaining the facts. Yet the present suit was delayed until
1868. True, the appellants' bill alleges the indebtedness of the
appellees by force of their contracts. It does not charge a fraud.
But it is plain that unless the arrangement by which the
subscriptions were merged in that of the city was a fraud upon
them, their bill must fail. The court must set aside that
arrangement or they cannot recover. And the burden is upon them to
establish the fraud. Had their bill been framed to set aside the
arrangement because of fraud, it must have been held to have been
filed too late. The statute of limitations bars actions for fraud
in Indiana after six years, and equity acts or refuses to act in
analogy to the statute. Can a party evade the statute or escape in
equity from the rule that the analogy of the statute will be
followed by changing the form of his bill? We think not. We think a
court of equity will not be moved to set aside a fraudulent
transaction at the suit of one who has been quiescent during a
period longer than that fixed by the statute of limitations, after
he had knowledge of the fraud, or after he was put upon inquiry
with the means of knowledge accessible to him.
Page 83 U. S. 402
But pursue this branch of the case no further. We have already
said enough to show that, in our opinion, there was no error in the
decree of the court below.
Decree affirmed.
[
Footnote 1]
This subscription had not been paid in cash, but had been
settled between the railroad company and the city by a compromise.
See New Albany v.
Burke, 11 Wall. 98. -- REP.
[
Footnote 2]
30 U. S. 5 Pet.
248.
