vantage to themselves, applies to prevent their giving it to one creditor over another.1

Preferences are sometimes given by statute and the proper distribution under such statutes is a mere matter of construction.2

§ 716. The right to follow funds further considered.—It has been seen that capital withdrawn or misappropriated, to the prejudice of the equitable rights of creditors, may be followed and subjected to their claims.

Whether a fund is withdrawn after insolvency or before, the trust in favor of creditors attaches in the hands of whoever comes into its possession, unless he be a bona fide purchaser for value. But the right to

1 Where a single creditor of an insolvent bank brought suit to have his equitable lien on the assets made effectual, it was held that he had no right to thus obtain priority and preference in the settlement of his claim, but that it was the duty of the officers to protect the rights of all the creditors to an equal distribution of the assets. Marr. v. B'k of W. Tenn., 4 Coldw. 471; Rouse v. Mer. Nat. B'k, 46 Ohio, 493; 22 N. E. Rep. 293; Krause v. Malaga Glass Co. (N. J.), 18 Atl. Rep. 367. Where a bank director makes a wrongful loan of money from which loss occurs, it is no defence to an action by the receiver of the bank against the director's estate that the insolvency of the person to whom the loan was made was not discovered until after the death of the director and the appointment of the receiver. Stephens v. Overstolz, 43 F. 465.

2 For constrution of New York Statute giving priority to certain claims, see Atty. Gen. v. Guar. Mut. Ins. Life Co., 5 N. Y. Supp. 84; People v. Remington 45 Hun, 329; Brown v. A. B. C. Fence Co., 52 Hun, 151.

3 Wood v. Dummer, 3 Mason, 308, 311; 5 N. Y. S. 95. See also Jones v. Ark. Mech. etc., Co., 38 Ark. 17; Curran v. State, 15 How. 307; S. F. W. Co. v. Pattee (Cal.), 25 P. 135; Union Nat. B'k v. Douglas, 1 McCrary 86; Marr v. B'k of West Tenn., 4 Coldw. (Tenn.) 282; Grantz v. Redd, 4 B. Monr. 178, 197; Wright v. Petrie, 1 Sm. & M. Ch. Miss. 282; Lexington, etc., R. R. Co. v. Bridges, 7 B. Monr. 556; National Trust Co. v. Miller, 33 N. J. Eq. 155, 163; Dabney v. B'k of South Car., 3 S. Car. 124; Tinkham v. Borst, 31 Barb. 407; Hollister v. Hollister B'k, 2 Abb. App. Dec. 367; Gillett v. Moody, 3 N. Y. 479; Bank of St. Mary's v. St. John, 25 Ala. 566; Bartlett v. Drew, 57 N. Y. 589; Reid v. Easton Mfg. Co., 40 Ga. 98, 104.

The same rule has been applied to English joint-stock companies. See Re National Funds Ass'n Co., L. R. 10 Ch. D. 118; Rance's Case, L. R. 6 Ch. 104 Where the withdrawal had been accomplished through connivance with the secretary, it was held that to redeem from purchases of the secretary, the corporation need repay him only his expenditures incurred in that behalf,

follow funds after insolvency is not restricted to the capital only, but extends to all assets, whether originally due on subscriptions or acquired in the regular course of business.1

There being no longer any surplus out of which to pay dividends, the shareholders cease to have any interest in the general assets, and they become a trust fund for the exclusive benefit of creditors.

§ 717. Remedies of creditors in case of withdrawal. The term "assets" has an extensive meaning. It includes not only visible and tangible property of a corporation, but causes of action which it may have against other parties, whether ex contractu or for torts affecting the value or title to its property. The latter are called equitable assets to distinguish them from those of which the corporation has the legal possession.

and not his claim for salary, as the payment of such claims would be giving him an advantage over the other creditors of the corporation. S. F. Water Co. v. Pattee (Cal.), 25 P. 135.

1 A petition by a creditor of an insolvent company which alleged it transferred its assets to another company which agreed to pay its debts; that among the assets were 288 shares of corporate stock in a cattle company which certain defendants had acquired with full notice of the facts; that by reason thereof said defendants were trustees for the creditors of the insolvent corporation, but had transferred the stock and misapplied the proceeds—was held to state a cause of action as the second company took the assets subject to a lien in favor of the creditors of the old company. Nat. B'k v. Tex. Inv. Co., 74. Tex. 421; 12 S. W. Rep. 101. See also Christensen v. Ill. & St. L. Bridge Co., 52 Hun, 478; 5 N. Y. S. 925; Williams v. Colby, 6 N. Y. S. 459; 53 Hun, 687; Leathers v. Janney, 41 La. Ann. 884; 6 So. 1120; holding also that purchaser of corporate property in good faith is not bound to see that money paid is property appropriated. Before sale on execution of the property of an insolvent corporation, the creditors on whose judgments such executions were issued after by collusion with the directors they had obtained judgment by default against the corporation entered into an agreement among themselves to sell the property seized and divide the proceeds pro rata on the basis of the amounts of their several judgments or if the executions had been issued simultaneously. It was held that these acts rendered them joint tort feasors and that they were jointly liable for the property sold. Varnum v. Hart, 6 N. Y. S. 346; 53 Hun, 631. See also Brower v. Harbeck, 9 N. Y. 589; Kingsley v. Bank, 31 Hun, 329.

Aside from the remedies given by law for reaching assets in the hands of third parties, as by garnishee process, for instance, the only available means of making them available is in equity.' But under garnishee process, the validity of an alleged fraudulent transfer may be determined. But the obligation of the stockholder to the corporation with respect to unpaid capital is not a debt subject to garnishment at law, until a call has been issued for the same.3

And where the directors and stockholders have fraudulently divided among themselves the assets of a corporation, thereby rendering it insolvent, creditors. may proceed against them in equity by a direct proceeding, without first obtaining judgment at law.*

§ 718. Devices for absorption of corporate funds.-There are many devices to which stockholders and corporate officers have been known to resort, with the object of defeating creditors and abstracting the assets of the corporation, in violation of their rights and claim upon the capital as a trust fund. But courts of equity have,

1 See McLean v. Eastman, 21 Hun, 314; Vase v. Grant, 15 Mass. 505.

2 When, by technical collusion with directors, a party had become possessed of assets, it was held that he was liable as a debtor of the corporation, in his relation to the fund, which the creditors had a right to pursue, and as such was subject to garnishment. Eyerman v. Kriekhaus, 7 Mo. App. 455.

3 Bingham v. Rushing, 5 Ala. 403; Brown v. Union Ins. Co., 3 La. Ann. 177; Burnes' App., 105 Pa. St. 49; Coalfield Coal Co. v. Peck, 98 Ill. 139; McKelvey v. Crockett, 18 Nev. 238; 2 P. 386. See also, Meints v. East St. L.. etc., Co., 89 Ill. 48; Hughes v. Oregonian Ry. Co., 11 Or. 158; 2 P. 94; Peterson v. Sinclair, 83 Pa. St. 250; Langford v. Ottuma Water Power Co., 59 Ia. 283; 13 N. 303; Chandler v. Siddle, 10 N. B. R. 236; Hannah v. Moherly B'k, 67 Mo. 678; Simpson v. Reynolds, 71 Id. 594; Faull v. Alaska, etc. Min. Co., 8 Sawy. 420; Curry v. Woodward, 53 Ala. 371; Hays v. Lycoming, etc. Co., 99 Pa. St. 621; Rand v. White Mts. R. R. Co., 40 N. H. 79; Dean v. Biggs, 25 Hun, 122. • Bank of St. Mary's v. St. John, 25 Ala. 566. And in such cases the party wrongfully obtaining the assets with knowledge of the facts becomes a trustee and must account not only for the fund itself, but for all the profits he may have made by its use. Calhoun v. King. 5 Ala. 523; Hill on Trustees, 114, 534.

in most instances, been able to afford protection and relief in such cases. They will go very far to prevent such fraudulent schemes, and will set them aside in favor of creditors, if already consummated. In one case it was said, perhaps with more rhetorical strength than truth, that it was not within the ingenuity of man to devise a scheme to prevent courts of equity from enforcing the payment of unpaid subscriptions to capital stock for the benefit of corporate creditors.1 And if the fund to which his equitable lien has attached has passed beyond the reach of the creditor after exhausting his remedies against the corporation, he may proceed against the directors or other wrongdoers who may have caused fraudulent diversion. Every such act involves a breach of trust.2

1 Upton v. Hansbrough, 3 Biss. 417, 425. An arrangement entered into between the corporation and the stockholders, after it was ascertained that the corporation was insolvent, to buy in depreciated and repudiated claims against the company and thus extinguish their indebtedness for unpaid capital, was held fraudulent and void. Goodwin v. McGehee, 15 Ala. 232. See also, Thompson v. Meisser, 108 Ill. 359. It was held that a subscriber cannot pay for his stock by purchasing full paid stock and having this substituted for his subscription. Marshall, etc., Co. v. Killian, 99 N. Car. 501; 6 S. E. Rep. 680. The court set aside in favor of creditors a fraudulent device by which he paid his subscription by a note and subsequently obtained the note, at a large discount. Bouton v. Dement, 123 Ill. 142; 14 N. W. Rep. 62. In Sawyer v. Hoag, 17 Wall. 610, the terms of the vicious arrangement which was set aside, was a payment in full for stock followed by an immediate loan of the purchase price by the corporation to the subscriber. It is immaterial whether the transaction relates to the original capital stock or to the increase whether authorized or unauthorized. Chubb v. Upton, 95 U. S. 665. See also, Vender v. Mudgett, 95 N. Y. 295; Pacific Nat. B'k Cas., 118 U. S. 635. But where stock was sold for services at one-third its par value, it was held that unless actual injury to creditors was shown the transaction was valid and binding. Arapahoe C. & L. Co. v. Stevens, 13 Colo. 534; 22 P. 823. Creditors are not concluded in such cases by the filing of a certificate declaring the entire capital stock to have been paid in. Barn Nat. B'k v. Hingham Mfg. Co., 127 Mass. 563; Wheeler v. Miller, 90 N. Y. 353; Thompson v. Reno Sav. B'k, 19 Nev., infra, 7 P. 68, 870; 9 P. 121, 882, 883.

2 Bank of St. Mary's v. St. John, 25 Ala. 566, 610, 619; Lexington, etc., R. R. Co. v. Bridges, 7 B. Monr. 556; Re National Funds Ass'n Co., L. R. 10 Ch.

The fact that the parties who have received the benefit of the wrongful act, are also liable would be no defence in an action against the immediate wrongdoers.1 Before insolvency, directors are under no positive obligations to creditors; but after a corporation has become insolvent they would probably be liable in equity to make good any loss to creditors resulting from negligence or bad faith, in the discharge of their duties as quasi trustees, notwithstanding the cumulative right of creditors to follow the fund into the hands of those obtaining it with notice of the trust. They would certainly be liable if the parties to whom they made the fraudulent disbursements were insolvent at the time the fraud was discovered.2

§ 719. A court of equity furnishes the remedy.—The remedy against the directors under these circumstances is purely equitable. The law does not recognize any relation between the directors of a corporation and its creditors. Hence the former could only be reached by the latter by bill in equity. No action at law for damages would lie.3

The action may be brought as well by a receiver appointed to wind up a company, when authorized by

D. 118; Moses v. Oscocee Bank, 1 Lea (Tenn.), 398. The creditor may proceed against the participating stockholders as well as against the directors. Schley v. Dixon, 24 Ga. 273.

1 See cases cited in last note.

2 See Lexington, etc., R. R. Co. v. Bridges, 7 B. Monr. 556, 562.

3 Winter v. Baker, 34 How. Pr. 183; s. c. 50 Barb. 432; Branch v. Roberts, 50 Barb. 435; Zinn v. Mendel, 9 W. Pa. 580; Fusz v. Spaunhorst, 67 Mo. 264; Holmes, etc., Manuf'g Co. v. Holmes, etc., Metal Co. (N. Y.), 27 N. E. 831 (Aug., 1891); Sherman Center Town Co. v. Fletcher (Kan.), 26 P. 951 (Aug., 1891); First Nat. Bank v. Strang (Ill.), 27 N. E. 903 (Aug., 1891); principle applied to prevent a subscriber to capital stock from denying power of corporation to make the contract. Columbia, etc., Co. v. Dixon (Minn.), 49 N. W. 244 (Aug., 1891).