§ 836. Whether intention of incorporators can be inquired into collaterally.-It has been held that if the purposes for which the corporation was formed be lawful upon the face of the articles, the intention for which it was formed cannot be inquired into collaterally.1

But it would be a strange doctrine that parties may avail themselves of the mere forms of law to perpetrate frauds and other wrongs upon innocent parties who, not having notice of the wrongful and immoral intent with which they have combined, and have been misled and injured by appearances held out as part and parcel of the scheme, if the injured party should then be debarred by these very false appearances from setting them aside and reaching the really guilty parties. Among several good reasons against it, it would be allowing wrongdoers to take advantage of their own wrong.

§ 837. Only promoters and actual organizers liable.Persons who are induced by persons who have engaged in business under an illegal or fraudulent corporate organization to subscribe for stock or enter into contracts of membership in it, or sign its articles of incorporation, and who have not participated in the proceedings or fraudulent acts, are not partners with those who have held forth the corporation as having been legally organized.

Not only are they not liable, but they may recover back any money paid the promoters and directors, or which the latter have obtained on the subscriptions or

Importing, etc., Co. v. Locke, 50 Ala. 332. The doctrine of this case was repudiated in Lewarne v. Meyer, 38 F. 191.

2 Ward v. Brigham, 117 Mass. 24. See also, Duke v. Andrews, 2 Ex. 290; Hutton v. Thompson, 3 H. L. Cas. 161.

contracts so induced. In an In an English case the court said: "There seems to be no doubt that the plaintiff, having paid his money for shares in the concern which never came into existence, or a scheme which was abandoned before it was carried into execution, has paid it on a consideration which has failed, and may recover it back as money had and received to his use, unless he can be shown to have consented to or acquiesced in the application of the money which the directors have made." He may either sue at law for damages or by bill in equity for rescission and restitution.3

2

1

But where there has been no incorporation, a subscriber cannot sue at law other subscribers for damages caused by a non-fulfillment of a contract to purchase his property. The directors and promoters cannot in an action by a subscriber to recover back money set off any part of the expenses incurred in conducting the illegal enterprise. Still the principle

5

Ashpitel v. Lacombe, 5 Ex. 147. See also, Nockels v. Crosby, 3 B. & C. 841; Borne v. Freith, 9 B. & C. 632; 1 Lindley on Partnership (4th Ed.), 119; Moore v. Garwood, 4 Ex. 681; Walstab v. Spottiswoode, 15 M. & W. 501; Ward v. Londesborough, 12 C. B. 252; Coupland v. Challis, 5 C. B. 115; Mowatt v. Londesborough, 3 E. & B. 307.

2 Butt v. Monteaux, 1 K. & J. 98; Cooper v. Welb, 1 De G. & S. 454; Apperly v. Page, 1 Phillips, 775; Wilson v. Stanhope, 2 Coll. 627; Clements v. Bowes, 17 Sim. 167; Sheppard v. Oxenford, 1 K. & J. 491.

32 Lindley on Partnership, (4th Ed.), 954; Harvey v. Collett, 15 Sim. 332; Colt v. Wallaston, 2 P. Wms. 154.

4 Crow v. Green, 111 Pa. St. 637; 5 A. 23.

5 Munson v. Syracuse, etc., R. R. Co., 103 N. Y. 58, 75; Ex parte Hirshel, 15 Jur. 924. It was held that under 3 Rev. St. N. Y. (8th Ed.), p. 1958, § 15, providing that, if any certificates made by the officers of any company in pursuance of the provisions of this act shall be false in any material representation, all the officers who shall have signed the same shall be jointly and severally liable to creditors, etc., that the officers and trustees of a company who made and signed a certificate that stock of the value of $1,500,000 had been issued as full-paid stock in payment of certain property, and that said stock had been issued to the amount of the value of the property, are liable for debts contracted to the full amount of the capital stock so represented as paid up, where the true value of such property did not, as they knew, exceed $150,000, though there was no in

already discussed that participation in organizing an illegal or irregular body renders the participant liable to creditors relying on the same to the extent of his apparent or assumed interest applies in these as in other cases.1

§ 838. Summary.-From the foregoing, the following propositions are thought to be established upon all the authorities, though there is considerable conflict upon some of them. There are three distinct grounds upon which personal liability is incurred by persons who have done acts and made contracts in corporate form and name. 1. Where persons have been induced through the fraud of actual incorporators to give credit, or part with property money or rights in a corporation, set on foot as part of a general fraudulent or illegal scheme, 2. Where there has been a failure to comply with the positive requirements of law in the process of becoming incorporated. 3. Where there is either no law for the formation of the class of corporations to which the illegal corporation assumes to belong, or there being legal authority for it, no such powers as it assumes are conferred upon the class of corporations to which it belongs.

tention of defrauding anybody by the fictitious valuation. Chittenden v. Tannhauser, (Cir. Ct.) 47 F. 410.

1 Supra. Chap. III.

CHAPTER XXX.

PROCEEDINGS WITH RESPECT TO ASSETS IN HANDS OF

§ 839.

840.

841.

842.

843.

844.

845.

RECEIVER.

General functions and duties of receivers in corporation cases.
What facts will authorize appointment.

In the nature of an equitable execution.

Exercise of jurisdiction in corporation cases conferred by statute.
Jurisdiction under statutes.

The principle practically disregarded in railroad cases.
Further considered.

846. The power to appoint upon forfeiture not absolute.

847. The appointment not made as a punishment.

848. Common law jurisdiction where corporate managers have ceased or

refused to act.

849. Receiver not appointed where adequate legal remedy.

850. Appointment under New York statute.

851. An auxiliary not a principal remedy.

852. Mere breaches of trust or mismanagement no ground for the appointment.

853. Receiver may be appointed of a particular fund upon which creditors have a charge.

854. Of foreign corporations under special statute.

855. Magnitude of interests involved important.

856. Appointment not usually made without notice to the opposite party. 857. Appointment cannot be collaterally attacked.

858. When want of notice excused.

859. The fiduciary relation of receivers.

860. Parties and interests represented by receivers of insolvent corpora

867. Duties of receiver with respect to assessments and calls.

$68.

Possesses only power of corporation with respect to subscriptions.

869. Effect of appointment upon remedies of creditors.

870. Lien of judgment affects only interests of corporation. 871. Where supplies and material are furnished.

§ 872. Statutory liens not defeated.

873. Possession protected from attachment and execution.

874. Discretionary power with respect to doubtful and disputed claims. 875. Suits by receivers.

876. Effect of the appointment upon the rights of creditors, etc.

§ 839.-General functions and duties of receivers in corporation cases. It often becomes necessary, for the preservation of the property of the corporation and for the protection of the interests of shareholders and creditors, that a court in the exercise of an extraordinary remedial jurisdiction should take the fund into its possession and under its control. This is done by means of a receivership.

A receiver, when appointed, occupies a dual relation; first as an officer of the court, and second as a trustee of the stockholders and creditors. Being such officer, while he holds the property it is regarded as in custodio legis for the benefit of whoever may eventually establish title thereto. The expression that he is "the hand of the court," frequently applied to him, very aptly designates his functions as well as the relation which he sustains.

As a consequence of his purely instrumental

1 Receivers should be impartial between the parties in interest; and stockholders and directors of an insolvent railroad company should not be appointed receivers unless the case is exceptional and urgent, and then only on the consent of parties whose interests are to be intrusted to their charge. Atkins v. Wabash, St. L. & P. Ry. Co., 29 F. 161.

2 See Van Rensselaer v. Emery, 9 How. Pr. 135; Runyon v. Farmers' & Mechanics' Bank of New Brunswick, 3 Green Ch. 480; Williamson v. Wilson, 1 Bland, 418; Elliot v. Warford, 4 Md. 80; Farmers' Loan & T. Co. v. Burlington & S. W. R. Co., 32 F. 805.