§ 811. Part payment and stock dividends. There is but little difficulty in ascertaining either the relative rights of the parties or the extent of the stockholders' liability in cases of part payment, and unwarranted issue of stock dividends. But where the stock is issued as fully paid up in consideration for services or property at an over-valuation, an additional question arises, namely, What is such an over-valuation as will justify the setting aside of the transaction? The authorities are not agreed whether, when it is ascertained that the agreement was actually fraudulent, it should be annulled ab initio and full payment for the stock exacted, or it shall be allowed to stand and the whole liability credited with the reasonable value of the property. The weight of authority, however, is that the transaction should stand or fall altogether.

But the question remains, What is such an overvaluation as will defeat a plea of payment in services or property? The correct rule on this point, as gathered from the authorities, is to the effect that mere over-valuation will not vitiate the transaction in favor of creditors, but that there must have been either an intentional over-valuation or such an actual and gross over-valuation as to justify an inference of fraud.1

It is well established, both on authority and principle, that the party cannot be held as a stockholder. He can only be compelled to restore the stock and take back his property or its reasonable value from the cor

1 The creditors must prove that there was an over-valuation at the time. Subsequent depreciation will not be considered. Coit v. North Carolina Gold Amal. Co., 14 Fed. Rep. 12; s. c. 119 U. S. 343. "The contract is valid and binding upon the corporation and the original shareholders unless it is rescinded or set aside for fraud. While the contract stands unimpeached, the courts, even where the rights of creditors are involved, will treat that as a payment which the parties have agreed shall be payment." Phelan v. Hazard, 3 Dill. 4, per DILLON, J. See also Brant v. Ehlen, 59 Md. 1.

poration. The party may also be required to restore any dividends received by him.1

§ 812. Stock in itself owned by corporation. And where the corporation has acquired title to its own stock by any means by which it is authorized to do so, it may, like an individual holder, sell it for any price it chooses to set upon it. A stock donation may be disposed of at any price the corporation pleases to accept.3

1 Four Mile, etc., R. R. Co. v. Bailey, 18 O. St. 208. In an English caseAnderson's Case, L. R. 7 Ch. D. 75-the rule was clearly established that while setting aside the transaction for fraud the stockholders cannot be held liable for the difference between the value of the property and the par value of the stock as for unpaid capital, the court saying: "You cannot alter the contract to such an extent as to say, though you have bargained for paid up shares, we will change that into a bargain to take shares not paid up and put you on the list of contributors on that ground. If you set aside

this allotment of shares, you must set it aside altogether, and then you cannot make them a contributory, and if you do not set it aside altogether, you must adopt it, and the utmost you can do is, as I have said before, that you can take away any profit from the person who has improperly made it," pp. 94, 105.

2 Otto v. Brevoort, etc. Co., 50 Barb. 247; McAvity v. Lincoln P. & P. Co., 82 Me. 504; Ramwell's Case, 50 L. J. Ch. 827. In the last case the stock came to the corporation by forfeiture.

3 Holmes v. Newcastle, etc. Co., 45 L. J. Ch. 383 was a case where the stock had been distributed without consideration among the stockholders. Christensen v. Eno, 106 N. Y. 97, holds contrary to the doctrine of Skrainka v. Allen, 7 Mo. App. 434, and the case just noticed that unissued shares of stock may be issued gratuitously to stockholders as well as bonds of the company, and that the recipients of such stock are not liable for the par value or any part thereof, either to the corporation or its creditors in the absence of an agreement to that effect, or a statutory requirement on the subject. But a distinction was made between such a transaction and a subscription, and the subscriber declared liable on his contract for the par value. In this case, however, the creditor was chargeable with notice of the real nature of the transaction.

The court speaking of the defendant stockholders' rights in the premises said: "Shall he be capriciously punished by being made liable ex contractu upon a contract which he never made? If the defendant has participated in a fraud, whereby creditors of the corporation who exercised ordinary business sagacity had suffered damages, whatever orders such creditors may now obtain while their representative retains the defendant's property must be sought by an action ex delicto." There are a few cases which seem to conflict with the rule stated in the text, but a closer examination will show that they are merely exceptions which may well be allowed without a disturbance of the established doctrine. In Wetherbee v. Baker, 35 N. J. Eq. 501, the property pretended to

§ 813. Bona fide purchasers not liable. The right of creditors to have stock which the corporation was authorized to issue, but which was fraudulently issued as fully paid up, without consideration or on part payment in cash, or for property at a gross over-valuation, does not extend beyond the original parties to the transaction so as to affect bona fide purchasers of the stock for value and without previous knowledge of the fraud. And it has been held that though such purchaser have notice, yet if his vendor be a bona fide purchaser without notice the purchaser is protected from liability.1

As to what will and will not amount to notice, is generally a question for the jury; but it is held that a representation by the agents of the corporation that the full par value will not be required; 2 or the fact that the words "non-assessable" are stamped or printed or written on the face of the certificate, where the certificate shows in addition that only twenty per cent. has been paid thereon,3 will not be sufficient. But the purchaser will be protected as bona fide where the face of the certificate contains a statement that it is paid up stock.

Any other rule would destroy the transferable nature of shares altogether. And it has been held

have been conveyed to the corporation by the defendant did not belong to him, and he might well have been held liable in assumpsit in an action by the corporation for the par value of the stock. Chisholm v. Forney, 65 Ia. 140, was decided on similar principles, the consideration being a patent right which turned out to be entirely worthless. In Jackson v. Frear, 64 Ia. 469, the stock was issued in payment of an ascertained debt, thus coming within the principle of the cases where there is an actual balance due in cash. Other cases are in direct conflict with the rule stated in the text, and all of the authorities cited. These are: Osgood v. King, 42 Ia. 478; Shickle v. Watts, 94 Mo. 410; 7 S. W. Rep. 276; Preston v. Clncinnati R. R. Co., 36 Fed. Rep. 54; Sayler Assignee v. Simpson, 45 O. St. 325; 4 Ry. & Corp. L. J. 195.

1 Barrow's Case, L. R. 14 Ch. D. 432.

2 Webster v. Upton, 91 U. S. 65; Upton v. Tribilcock, Id. 45.

3 Webster v. Upton, supra; Sanger v. Upton, 91 U. S. 56.

4 In re British Farmers' Pure Linseed, etc., Co., L. R. 7 Ch. D. 533; aff'd L. R. 3 App. Cas. 1004; Waterhouse v. Jamieson, L. R. 2 H. L. (S. C.) 29; Young

that a purchaser may rely upon statements in the stock books of the corporation to the effect that the stock is paid up.1 But where a subscriber who has not yet taken out his certificate under an original allotment of stock instructs the corporation to issue the certificate to a designated transferee, whether the latter becomes the original allottee of that stock, and as such chargeable with notice of irregularities in its issue, seems not to be settled upon authority.2

§ 814. When held in trust for the corporation, trustee not liable.-Though it has been held that shares having been placed in the name of a party as trustee for the corporation, he was liable to creditors for the capital represented by such shares the same as in other cases of persons holding the legal title, yet the more reasonable doctrine of later cases is to the effect that no such liability arises. The reason upon which the holder is held not liable in such cases seems to be convincing. The corporation cannot be a shareholder in itself; consequently, another cannot be a trustee for it in that capacity. The case is not the same as that of a trustee for an outside party; for to entitle such party to the beneficial interest of a shareholder, the shares must be issued.5

v. Erie Iron Co., 65 Mich. 111; 31 N. W. Rep. 814; Brant v. Ehlen, 59 Md. 1; Steacy v. L. R. & Ft. S. R. Co., 5 Dill. 348; Burkinshaw v. Nickels, L. R. 3 App. Cas. 1004; Foreman v. Bigelow, 4 Cliff. 508; McCracken v. McIntyre, 1 Dur. (Canada) 479; Jackson v. Sligo, etc., Co., 1 Lea. 210. Contra, Myers v. Seeley, 10 Nat. B'k Reg. 411; Protec. L. Ins. Co. v. Osgood, 93 Ill. 69.

Erskine v. Loewenstein, 11 Mo. App. 595.

2 Such transferee was held not to be a bona fide purchaser without notice. in Rowland's Case, 42 L. T. N. S. 785; Pattee's Appeal, Wkly. Notes, 81; Re Vulcan Iron Wks., Law Times, 1885, 61. Contra, Young v. Erie Iron Co., 65 Mich. 111; Carling's Case, L. R. 1 Ch. D. 115.

298.

See Griswold v. Seligman, 72 Mo. 110; also Wheelock v. Kost, 77 Ill.

* See Burgess v. Seligman, 107 U. S. 20, and authorities cited.

In the Seligman cases in Mo., supra, wherein the supreme court of the United States held, contrary to cotemporaneous decisions in the state courts,

But where the shares are placed by the corporation in the hands of a pledgee as security for a loan, they cannot be deemed to have been really issued until, by failure to redeem them, they become the property of the pledgee by forfeiture. Until that occurs they cannot be assessed by the corporation, and do not represent any portion of the capital stock to which creditors have a right to look as security, unless the pledgee does some act by which they are misled to give credit on account of the shares, such as receiving dividends or otherwise participating in the affairs of the corporation as a member. Transactions of this character, however, should be strictly guarded, as they furnish a means by which the confidence of persons dealing with the corporation is exceedingly liable to be abused. It is the duty of the parties to an arrangement of that kind to see that the books which are open to the inspection of persons liable to be misled properly represent the terms upon which shares are held. And for any misrepresentation or gross neglect in that matter, the guilty parties would be bound to make good the resulting loss.

§ 815. Secret trusts and collateral agreements do not bind creditors. A pledge made of the stock as security for a debt of the owner or an assignment to a trustee for his benefit will not relieve him of liability either to

that defendants were not liable, the stock was issued to them "in escrow," and the evidence showed that there never was any intention that they should become stockholders, but should hold the stock for the double purpose of securing advances to the company and to enable them to control the operations of the corporation; and that they participated and voted at shareholders' meetings. As in the case of Russell v. Bristol, 49 Conn. 251, neither of the grounds of liability in favor of creditors existed. They had not contracted to become members of the corporation, nor did the entry of the transaction on the company's books represent them as such. See also, Pease v. Peck, 18 How. 595; Morgan v. Curtenius, 20 How. 1; McMahon v. Macy, 51 N. Y. 155; Matthews v. Albert, 24 Md. 527.