tious and fraudulent disposal of certificates of stock and evidences of indebtedness as in case of an overissue. Whether having been printed ready for issue to bona fide subscribers, or redeemed by the corporation and afterwards purloined, or had the corporate signatures forged to them, or the cancellation marks erased, and been transferred to purchasers for value and without notice by an agent of the corporation, the innocent purchaser of such paper acquires no claim against the corporation. Neither does he incur any liability to the creditors of the corporation unless, in the case of certificates, they should be afterwards treated by the corporation as valid; and the holder of the same should, by mutual consent, be recognized and treated as a shareholder. Probably a purchaser without notice of their true character after their adoption as genuine paper, by the corporation, would be entitled to all the rights and incur all the liabilities to creditors of a regular stockholder, if, in the meantime, no member had exercised his right to proceed against the agents and the first purchaser to have them cancelled and for preventive relief.1

§ 807. Stock issued gratuitously. The unissued shares of stock of a corporation are not assets in its hands, and in the absence of any statutory provision, or provision of its charter, one to whom shares have been

1 In Jarvis v. Manhattan Beach Co., 53 Hun, 363, an authorized person in charge of the transfer office of a corporation in response to an inquiry had stated that a certificate of stock then presented which has the signatures of the proper officers of the corporation was properly indorsed for transfer, and that the person in charge was then willing to make such transfer. It was held that upon it appearing that the certificate was, in fact, an over-issue and was made out in the name of a fictitious person, through the fraud of the company's transfer clerk, and the person making the inquiry having sold the same with a guartantee of genuineness, they were entitled to indemnity at the hands of the corporation. See also Beach Co. v. Harned, 27 Fed. Rep. 484; Holbrook v. Zinc Co., 57 N. Y. 616.

transferred by it gratuitously does not by accepting them become a debtor to the company or make himself liable to pay the nominal face of the shares as upon a subscription. An action is not maintainable against him by a creditor of the corporation to compel him to pay for such shares.1 And a bona fide transferee stands in that respect in as good condition as the original

holder.2

§ 808. Proof of ratification.—What in any case will amount to a ratification so as to estop a party from denying the relation of stockholder against creditors is a question of evidence.3

It may be stated as a general rule resulting from what has been said in several connections that all who act and receive benefits as shareholders, and are accepted or received as such, will be estopped from denying that they are such in reality and held liable in that capacity to the corporation, other shareholders and creditors.*

1 Christensen v. Eno, 106 N. Y. 97; Christensen v. Quintard, 55 Hun, 608; 8 N. Y. S. 400.

2 Scoville v. Thayer, 105 U. S. 145; Union, etc., Co. v. Frear, etc., Co., 97 Ill. 537; Granite Roofing Co. v. Michael, 54 Md. 65; Re Auburn L. T., etc., Min. Co., L. R. 14 Ch. D. 390; Zirkel v. Joliet Opera House Co., 79 Ill. 334; Re British S. P. Co., L. R. 17 Ch. D. 467; Flinn v. Bagley, 7 Fed. Rep. 785; Re Glen Iron Works, 17 Fed. Rep. 34; Per contra, People v. Sterling Mfg. Co., 82 Ill. 457.

3 Chapman & Booker's Case, L. R. 3 Eq. 365; McClelland v. Whiteley, 15 Fed. Rep. 322.

4

♦ Holyoke B'k v. Goodman Paper Mfg. Co., 9 Cush. 576; Ross v. B’k, 20Nev. 191; 19 P. 243; Brown v. Finn, 34 F. 124; McHose v. Wheeler, 45 Pa. St. 32; Hager v. Cleveland, 36 Md. 476; Burnes v. Pennell, 2 N. L. C. 497. When a subscriber to the capital stock of a railroad company, who had been released from the obligation of his subscription, subsequently voted at an annual election for directors, was himself elected a director, acted as director, and as stockholder, and paid money to the company, his acts were held evidence of a subscription of some kind, and, in the absence of proofs of a special contract, to warrant the inference that he had reassumed his original obligation. But such acts are shorn of their importance where a special contract accounting for them is shown. Pittsburgh, etc., R. R. Co. v. Stewart, 41 Pa. 54.

§ 809. Liability when shareholder is a corporation. Where, by statutory provision, corporations are allowed to become stockholders in other corporations, their rights and liabilities as such are no greater or less than those of individuals. They are not liable for the negligences and contracts of the company whose shares they hold. And the rule is not altered or modified by the fact that the corporation is controlled and its directors elected by the shareholding company, nor because the directors of both corporations are the same persons.

§ 810. Liability on "watered" stock.-Analogous to fraudulent over-issues of stock, and often giving rise to a train of complicated and difficult questions, is an issue of stock for the issuance of which the corporation, though having authority under its charter, yet has received no adequate value or only a nominal value. In commercial parlance such inflations are termed "watered" stock. Such transactions are always fraud

1 Pullman Palace Car Co. v. Mo. Pac. R. Co., 115 U. S. 587; A.T. & S. F. R. Co. v. Cochran, 43 Kan. 225; 7 L. R. An. 414. In the first of these cases, Chief Justice WAITE said: "The Missouri Pacific Company has bought the stock of the St. Louis Iron Mt. & Southern Company and has effected a satisfactory election of directors; but this is all. It has all the advantages of a control of the road, but that is not, in law, the control itself. Practically, it may control the company, but the company alone controls its road. In a sense, the stockholders of a corporation own its property; but they are not the managers of its business, or in the immediate control of its affairs. Ordinarily, they elect the governing body of the corporation and that body controls its property. Such is the case here. If they (the agents) or the directors act contrary to the wishes of the Mo. Pac. Company, that company has no power to prevent it except by the election at the proper time and in the proper way of other directors, or by some judicial proceeding for the protection of its interests as a stockholder. Its rights and its powers are those of a stockholder only." Under the laws of Kansas a railroad company is authorized to own stock in companies owning the lines with which the lines of the former connect. Laws 1873. The second case cited decided that the shareholding company was not liable for an injury to a passenger on the line of the company a controlling interest of whose stock it held, although the ticket on which the passenger was travelling was sold by the common agent of both companies.

ulent as to the public, the creditors of the corporation and the bona fide purchasers into whose hands they come. Whether the state may forfeit the charter for such abuses is a question depending upon the extent of the resulting public injury to be established by evidence,1

Whether the stock issued as fully paid up has been only paid for in part with cash, or in property at a grossly exaggerated value, or to represent dividends without any actual surplus to justify the same, it amounts to the same thing with respect to creditors who have given credit, after the issue presumably on the faith of so much capital added to the fund available in satisfaction of their demand. Now the only material question to be considered from the creditor's standpoint is, whether after the corporation has become insolvent the holders of such stock can be compelled to answer for unpaid capital for the difference between the face value thereof and the consideration actually received by the corporation, and for the full amount issued without consideration, as in case of an unwarranted stock dividend. It may be stated that all who accept such stock, knowing the facts, are not only liable to creditors for the unpaid value, but may be compelled to deliver up the stock for cancellation in certain cases by non-participating stockholders, or otherwise account to them.

The right of creditors to enforce payment, if needed, of the balance, where only a part has been paid in cash, is well settled.2 But where an active corporation, for

1 Infra, § Ch. XXXV.

2 This principle was first settled in the federal courts in the cases growing out of the failure of the Great Western Ins. Co. of Illinois, known as the Upton cases, the first of which was Upton v. Tribilcock 91 U. S. 45. See also, Babcock v. Schuylkill & L. V. R. Co., 15 N. Y. S. 193 (August, 1891); Flinn v. Bagley, 7 Fed. Rep. 785; In re Glen Iron Wks., 17 Fed. Rep. 374; Union M. L.

the purpose of paying its debts and obtaining money to prosecute its business, issued bonds, but, finding it impossible to negotiate them, it issued shares of capital stock in an amount equalling the par value of the bonds, as an additional inducement to their purchase, it was held that persons who purchased the bonds and stock at a price fairly representing their market value, without unfair dealing on the part of any one connected with the transaction, could not be called upon to respond for the par value of the stock, at the suit of the creditors of the corporation.1

any

Ins. Co. v. Frear Stone Mfg. Co., 97 Ill. 537; Hickling v. Wilson, 104 Ill. 54; Northrop v. Bushnell, 38 Conn. 498; Fisher v. Seligman, 7 Mo. App. 383; Eyerman v. Kreickhaus, 7 Mo. App. 455; Skrainka v. Allen, Id. 434; Pickering v. Templeton, 2 Id. 424; Christensen v. Eno, 21 Weekly Dig. 202; Mann v. Cook, 20 Conn. 178; Myers v. Suley, 10 Nat. B'k Reg. 411; Freeman's Assignee v. Stine, 15 Phil. 37; where directors issued to themselves all the stock at one-third of its par value, and upon an increase of capital voted to themselves for services in selling the increase one share for every two shares sold. A creditor, however, who accepted in payment of his claim stock at one-fifth of its par value was held not liable to other creditors for the balance, even though they became such after the issuance of the stock. Clark v. Bever, 31 Fed. Rep. 670. See also to the same effect Currie's Case, 3 De G. J. & S. 367; Barnett's Case, L. R. 18 Eq. 507; Van Cott v. Van Brunt, 82 N. Y. 535; Continental Tel. Co. v. Nelson, 18 Wkly. Dig. 48; s. c. 49 N. Y. Sup. Ct. 197; Crawford v. Rohrer, 59 Md. 599; Brant v. Ehlen, Id. 1; Morrison v. Globe Panorama Co., 28 Fed. Rep. 817. No judgment can be rendered in favor of the creditor until the transaction is set aside. Scoville v. Thayer, 105 U. S. 143, 156; Wood's Claim, 9 W. R. 366. In Coffin v. Ramsdell, 110 Ind. 417; 1 Ry. & Corp. L. J. 326, the decision rested upon the doctrine that, as in other ultra vires acts, ex contractu the transaction between the corporation and the party accepting the stock should be allowed to stand until set aside as a fraud upon creditors. A statute regulating the manner of increasing capital stock held not applicable to a reorganization of a railroad company by an issue of new stock to purchasers at foreclosure sale. Memphis & L. R. R. Co. v. Dow, 120 U. S. 287; 7 S. Ct. 482.

Where, however, the capital stock was reduced and stockholders took new stock to the extent of their payments in the old stock, cancelling their indebtedness on the old account, it was held that they were liable on the cancelled balances to persons who gave credit prior to the cancellation. In re State Ins. Co., 14 Fed. Rep. 28. See Clark v. Bever, 31 F. 670; Young v. Erie Iron Co., 65 Mich. 111; 31 N. W. 814; Coit v. N. C. G. A. Co., 119 U. S. 343; 7 S. Ct. 231; Hill v. Silvey, 81 Ga. 500; Dupont v. Tilden, 42 F. 87; Libby v. Tobey, 82 Me. 397; Nat. T. Wks. v. Gilfillan, 46 Hun, 248.

1

Reversing 41 F. 531, FULLER, C. J., and LAMAR, J., dissenting. Handley v. Stutz, 11 S. Ct. 530.