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ANGLO-AMERICAN LAND, MORTGAGE & AGENCY CO., Limited, v. LOMBARD (two cases).

RAMSDEN v. CHESHIRE PROVIDENT INST.

SAME v. KEENE FIVE CENT SAV. BANK.

(Circuit Court of Appeals, Eighth Circuit. July 16, 1904.)
Nos. 1858-1861.

1. CORPORATIONS-ACTION TO ENFORCE STATUTORY LIABILITY OF STOCKHOLDER

-NATURE.

The double liability imposed by the Constitution and statutes of Kansas on stockholders of other than railway, charitable, and religious corporations is contractual in its nature, is to the creditors individually and not to the corporations, and a right of action for its enforcement is legal, and not equitable.

2. SAME-VOID OR FRAUDULENT TRANSFER OF STOCK NO OBSTACLE TO ENFORCEMENT OF STOCKHOLDERS' LIABILITY IN ACTION AT LAW.

A transfer of corporate stock, which is ultra vires of the transferee or is fraudulent as to creditors, is not an obstacle to the enforcement of the liability of the transferring stockholder in an action at law. 8. SAME CONSTRUCTION OF PLEADING.

The fact that the petition, in an action by a creditor of a Kansas corporation against a stockholder to enforce his statutory double liability. charges that defendant and the other stockholders made a colorable transfer of their stock to another corporation, for the purpose of escaping such liability, which transaction is alleged to have been fraudulent as to creditors, ultra vires of the transferee, and ineffectual to relieve defendant of liability, does not make the action one in equity and not at law; such allegations not being made the basis for any equitable relief.

4. SAME-ACTION AT LAW IN FEDERAL COURT-EQUITABLE SET-OFF.

In an action at law in a federal court to enforce the constitutional and statutory liability of a stockholder in a Kansas corporation to its creditors, the defendant cannot set off an indebtedness from the corporation to him; such defense being only cognizable in equity, and the distinction between legal and equitable causes of action and defenses being carefully preserved in courts of the United States.

5. ESTOPPEL IN PAIS-AVAILABILITY AS DEFENSE IN ACTION AT LAW.

An estoppel by matter in pais, sometimes called an equitable estoppel, is available as a defense in'an action at law.

6. FEDERAL COURTS-TRIAL TO COURT-SPECIAL FINDING.

A special finding by a Circuit Court in an action at law tried by stipulation without a jury, to meet the requirements of Rev. St. 88 649, 700 [U. S. Comp. St. 1901, pp. 525, 570], must be the equivalent of a special verdict of a jury. It should cover all the issues, and state all the ultimate facts, so that in the event of proceedings in error only questions of law will be presented; and if the trial court's conclusions of law are deemed incorrect, and if the proceedings are otherwise without error, the appellate court may, under section 701, direct such judgment as the special finding requires, without the necessity of awarding a new trial. When such finding is imperfect in that respect, responding to only a part of the issues, and the facts found are not decisive of the case, the judgment must be reversed, and a new trial awarded.

7. CORPORATIONS LIABILITY OF STOCKHOLDERS-RECEIPT OF STOCK DIVIDENDS. Where a corporation, without a legitimate basis therefor, declares a stock dividend, an implied promise on the part of stockholders receiving

¶ 7. Stockholders' liability to creditors in equity, see notes to Rickerson Roller Mill Co. v. Farwell Foundry & M. Co., 23 C. C. A. 815; Scott v. Latimer, 83 O. C. A. 23.

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such additional stock to pay therefor arises only in favor of subsequent creditors of the corporation, who are presumed to have become such on the faith of the increased stock, and such liability cannot be enforced by a prior creditor.

8. SAME-DUTY TO EXERCISE POWERS AND CARRY ON BUSINESS THROUGH THEIR OWN OFFICERS AND EMPLOYÉS.

Where it is not otherwise provided, the implication in a grant of corporate power and life is that the corporation shall exercise its powers and carry on its business through its own officers and employés, and not indirectly through another corporation operated under its control, and that it shall maintain an independent corporate existence, and not surrender the control of its affairs or the exercise of its powers to another corporation.

9. SAME POWERS-PURCHASE OF STOCK OF ANOTHER CORPORATION.

In the absence of express authority in its charter, a corporation has no power to acquire all the stock of another corporation for the purpose of controlling its affairs or exercising its powers through the use of its name, and such a purchase is ultra vires and void.

10. SAME TRUST COMPANY-POWERS UNDER MISSOURI STATUTE.

The power given by Rev. St. Mo. 1889, § 2839, subd. 9, to trust companies organized thereunder, "to buy and sell all kinds of government, state, municipal and other bonds, and all kinds of negotiable and nonnegotiable paper, stocks and other investment securities," does not authorize such a corporation to purchase all the stock of another corporation for the purpose of controlling its management.

11. SAME-CONTRACT ULTRA VIRES.

A contract of a corporation which is ultra vires in a proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the Legislature, is not voidable only, but wholly void and of no legal effect, and it cannot be validated by estoppel.

12. SAME.

A transaction between two corporations which is ultra vires as to one is equally as invalid as though beyond the corporate powers of both. 18. SAME-STATUTORY LIABILITY OF STOCKHOLDERS-TRANSFER OF STOCK AND ASSETS OF CORPORATIONS.

A Kansas corporation, which was largely indebted on direct obligations, and also as guarantor of securities taken by it and transferred to others, transferred all of its assets to a Missouri corporation, which assumed its obligations, and its stockholders at the same time exchanged all of its stock for stock of the Missouri corporation. Held, that the transaction did not affect the liability of the stockholders of the Kansas corporation to its creditors, under the Constitution and statutes of the state, because the acquisition of the stock of the Kansas corporation was ultra vires of the Missouri corporation, and also because the transfer of the assets of the Kansas corporation operated as a legal fraud on its creditors, by de priving it of all power to pay its debts.

14. SAME ESTOPPEL OF CREDITORS.

The fact that creditors of a corporation proved their claims in insolvency proceedings against a second corporation, which had obtained the assets and assumed the liabilities of the first, and received dividends thereon, did not estop them from enforcing the statutory liability of the stockholders of the first corporation for the balance remaining due them, nor from asserting the invalidity of the transfer of the stock to the second corporation as a part of the same transaction by which it assumed the indebtedness; the creditors never having released the first corporation, but having continued to assert its liability.

19. See Corporations, vol. 12, Cent. Dig. §§ 1532, 2322.

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15. ESTOPPEL-DEBTOB AND CREDITOR.

A creditor who collects a portion of his claim from a third person, who after the debt is contracted agrees with the debtor to pay it, does not thereby discharge the debtor or become estopped from collecting the balance from a surety or guarantor.

16. CORPORATION-ACTION AGAINST STOCKHOLDERS-LIMITATION.

An action by a holder of securities on which an insolvent Kansas corporation was guarantor, to enforce the statutory liability of a stockholder, is not barred by limitation until the lapse of the prescribed period after the guaranties ripened into actual debts.

On Petition for Rehearing.

17. FEDERAL COURTS-TRIAL TO COURT-REVIEW

Under Rev. St. 88 649, 700 [U. S. Comp. St. 1901, pp. 525, 570], a written stipulation which clearly contemplates the trial to the court of an action at law and requests a special finding is a sufficient waiver of a jury to authorize a determination, upon writ of error, of the sufficiency of the facts found to support the judgment.

18. CORPORATIONS-VALIDITY AND EFFECT OF CORPORATE ACTS IS QUESTION OF LOCAL LAW.

Each state may determine what powers shall be possessed by corporations organized under its authority and what effect shall attach to acts done by such corporations beyond their powers. The question is one of state policy, and therefore a matter of local and not general law.

19. FEDERAL COURTS-CONCLUSIVE EFFECT OF DECISIONS OF STATE COURTS UPON QUESTIONS OF LOCAL LAW.

A fixed and settled rule of decision in a state court of last resort establishes the law of the state in such manner as to bind the federal courts in all matters controlled by the state law; but the opinions of intermediate appellate courts, while entitled to great respect and regarded as persuasive authority, are not controlling upon the federal courts, because they do not settle the law of the state.

20. CORPORATIONS-IN MISSOURI CONTRACTS WHICH ARE ULTRA VIRES ARE NOT RENDERED ENFORCEABLE BY PARTIAL PERFORMANCE-NO ESTOPPEL.

Upon the question whether a contract of a corporation which is not within the scope of its corporate powers, and is therefore prohibited, can have or be given the effect of placing upon the corporation an enforceable executory obligation, the decisions of the Supreme Court of Missouri are considered and held to establish the rule that, where the contract has been fully performed on both sides, what has been done will not be undone at the suit of either party, but where any part of the contract remains executory its invalidity may be effectually asserted, notwithstanding its partial performance, because the power to enter into the contract or to make it obligatory at all has been withheld by the authority which created the corporation and defined its powers.

21. PLEADING OBJECTION RAISED FOR FIRST TIME IN APPELLATe Court.

An objection that the petition in an action to enforce the liability of a stockholder is indefinite, in that it does not disclose whether the corporate obligations upon which the action is founded were unconditional or were guaranties, and therefore conditional, cannot be raised in an appellate court, where no objection was taken in the trial court and the record discloses that there was no purpose in that court to make any point upon the indefinite statement in the pleading.

22. VENUE-CAUSE OF ACTION-PLACE WHERE IT ARISES.

The place where a cause of action arises is determined by inquiring, not where it may be enforced, but where the act or breach occurs which gives the cause of complaint and creates the necessity for bringing an action.

28. SAME-RIGHT OF ACTION AGAINST STOCKHOLDER.

The cause or right of action given by the Constitution and laws of Kansas to a creditor against a stockholder, where a corporation of that

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state suspends business for more than one year without paying its debts, arises in that state, and not in the state of the stockholder's residence, because it is created by the Constitution and laws of Kansas operating upon conditions and occurrences within that state.

In Error to the Circuit Court of the United States for the District of Kansas.

These were actions at law prosecuted by plaintiffs in error, as creditors of the Lombard Investment Company, a Kansas corporation (called herein the "Kansas Company"), against defendants in error, as stockholders of that company, to enforce the additional or double liability imposed by the Constitution and statutes of Kansas upon stockholders in corporations organized under the laws of. that state, and to enforce a claimed unpaid subscription to additional stock issued by the corporation.

The petitions allege, in effect, that all of the assets and property of the Kansas Company were placed in the possession of a receiver or receivers appointed in a creditors' suit commenced September 18, 1893, against that company and the Missouri Company, hereinafter mentioned, in the Circuit Court of the United States for the Western District of Missouri; that the bill in the creditors' suit prayed, in addition to the appointment of a receiver, an adjudication of the claims against the Kansas Company, a sale of its property, and the application of the proceeds upon the claims allowed; that the Anglo-American Company and the assignors of Ramsden intervened in the suit, and procured an adjudication of their claims against the Kansas Company; that the assets and property of the company were sold, and the proceeds distributed among the creditors, pursuant to a final decree entered May 22, 1895, in which the company was adjudged to have been insolvent at and subsequent to the time of the filing of the bill; that the orders and decree in the suit in the Western District of Missouri were confirmed by like proceedings in an ancillary suit in the Circuit Court of the United States for the District of Kansas; that since said proceedings and sale the company has been wholly without any assets or property of any kind; that about August 1, 1890, the company, with its officers, permanently left the state of Kansas, and removed its offices therefrom; that at the same time the stockholders of the Kansas Company transferred the entire stock of that company, amounting to $1,875,000, to the Lombard Investment Company of Missouri, a newly organized Missouri corporation (called herein the "Missouri Company"), in exchange for a like amount of the stock of the latter company, the total of which was $4,000,000; that this transfer and exchange were merely colorable, and made for the purpose of escaping the liability imposed upon stockholders by the Constitution and laws of the state of Kansas; that the transfer and exchange were therefore void, and in nowise relieved the stockholders of the Kansas Company from such liability; that defendants were at all of these times, and are now, stockholders of the Kansas Company; that plaintiffs are severally creditors of the Kansas Company upon claims allowed and adjudicated in the creditors' suit, as before stated; and that the amounts claimed by plaintiffs are due to them, respectively, after deducting the distributive shares or dividends received through the sale made under the decree in the creditors' suit. The prayer in each case is for a money judgment.

In addition to a set-off pleaded in two cases, three defenses presented by the answers are insisted upon: (1) The relief sought by plaintiffs is equitable in character, and cannot be had in actions at law. (2) The Anglo-American Company and the assignors of Ramsden accepted the benefits of the transaction of which the transfer of stock was part, and, with full knowledge of all the facts, acquiesced mm, consented to, and affirmed, the transfer. In connection with this defense, the answers allege: "The Missouri Company bought and acquired all the stock of the Kansas Company and its entire assets and interests of every kind, nature, and description, and assumed all of its liabilities, with the same force and effect as if it had originally on its part created the obligation, and each and every creditor of the Kansas Company, including the then owner of the debt sought to be enforced in this action, agreed thereto, and consented to substitute the Missouri Company as the debtor in lieu of the Kan

sas Company, and to discharge and release the latter from any obligation upon its part. In substance, the transaction of 1890 took the form of the stockholders in the Kansas Company, who made the exchange, subscribing for stock in the Missouri Company, and paying therefor by a transfer of their stock in the Kansas Company. For all the stock in the Missouri Company in excess of the amount of the capital stock of the Kansas Company the subscribers paid a premium in cash in an amount exceeding the face value of the stock, aggregating about $2,200,000, all of which was paid into the treasury of the Missouri Company upon the faith of carrying out the plan hereinbefore stated, succeeding to the business of the Kansas Company, and having the owners of the stock of the Kansas Company transfer their stock to the Missouri Company. As a part of the consideration for the transfers hereinbefore set out, and for the subscription for the $4,000,000 of stock to the Missouri Company by several hundred investors, the Missouri Company agreed in writing to save the Kansas Company and all its stockholders harmless from any and all liability, no matter how arising, growing out of the business of the Kansas Company. This arrangement was consummated August 1, 1890, at which time the Kansas Company ceased to do business, being then superseded and succeeded by the Missouri Company, which from that date until the appointment of receivers, as hereinafter mentioned, transacted all the business theretofore carried on by the Kansas Company, and performed all of its obligations, met all of its liabilities, and succeeded to and enforced all of its rights; but the organization of the Kansas Company was kept alive for the purpose of aiding, if desired, the Missouri Company in its business by the execution of numerous deeds and transfers, as from time to time became necessary, but said Kansas Company did no business, and performed none of its obligations.

soever.

The receivers voted, controlled, and acted as owners of the stock of the Kansas Company, including the shares transferred by the defendant herein to the Missouri Company. The receivers officered the Kansas Company, and required these officers to join in the execution of deeds and conveyances, making title, and creating assets to be distributed in said proceedings." (3) The claims are barred by the statute of limitations. In their replies to these answers, plaintiffs fully put in issue the allegation that they agreed to the transfer, and consented to substitute the Missouri Company as the debtor in lieu of the Kansas Company, and to discharge and release the latter from any obligation upon its part. The replies also contain these allegations: "That the business of the Kansas Company was thereby transferred from the state of Kansas to the state of Missouri, and carried on by the same officers and in the same manner, pursuing the same course of business and the same character of business as had been theretofore pursued by the Kansas Company; the said Missouri Company representing and acting for and in behalf of the said Kansas Company in respect to all of its previous business, carrying the same on and continuing it without break or change in any manner or respect whatThat in making the said change of said corporation from the state of Kansas to the state of Missouri, the said Lombard Investment Company did not provide for the payment of the debts and obligations of the Kansas Company in any respect whatsoever, except the assumption of the indebtedness of the Kansas Company by the Missouri Company. * That the alleged transfer of all the assets and property of the Lombard Investment Company of Kansas to the Lombard Investment Company of Missouri, the exchange of the capital stock of the Kansas Company for stock of the Missouri Company, the alleged purchase of all of the stock of the Kansas Company by the Missouri Company, were carried on and conducted by the officers and directors and others interested in the Kansas Company. That said transfers and transactions upon the part of the said Kansas Company, as well as upon the part of the said Missouri Company, were without authority conferred upon said corporations by the laws of the states of Missouri and Kansas, respectively, and each and all of said acts were ultra vires of said corporations and of each of them, and were wholly null and void. * * Replying particularly with reference to the bar of the statute of limitations of the state of Kansas, the plaintiff avers that at all times during the said transactions the said defendant was a nonresident of, and absent from, the state of Kansas."

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