The capital stock of an insolvent corporation is a trust fund for the páyment of its debts. If a stockholder has not paid his subscription in full, he is liable for the debts of the corporation to the extent of the unpaid portion of his "subscription. It is the duty of the directors of a corporation to manage its capital stock as a trust fund for the benefit of its shareholders while it exists and of its creditors in case of its dissolutian. This trust fund consists not only of the capital paid in, but also of that which the shareholder has promised to pay in. The unpaid stock is as much a part of the corporate' assets, as the money which has been paid upon the stock. The obligation of a subscriber to pay his subscription cannot be released or surrendered to him by the trustees of the corporation. Nor will stockholders be permitted to agree among themselves, that their shares shall be taken at a nominal value, or be non-assessable, when such agreement operates to the injury of creditors. (Upton v. Tribilcock, 91 U. S. 45; Sanger v. Upton, 91 id. 56). “Any device, by which the members of a corporation seek to avoid the liability which the law imposes upon them, is void as to creditors, whether-binding or not as between themselves. Of this character is an agreement among the members that the shares of the capital stock of the corporation shall be regarded as fully paid up,” when in fact they are not fully paid. (Union Ins. Co. v. Frear Stone Manf. Co. 97 Ill. 537). The question presents itself in this case, whether the stock held by the appellants was stock which had been in good faith fully paid up, or whether it must be regarded as stock upon which only fifty per cent had been paid, and upon which fifty per cent remained unpaid, as a fund liable to be subjected by the appellees to the payment of their judgments.
It is held, that stock may be paid for in property as well as in money. (2 Morawetz on Priv. Corp. sec. 825; 23 Am. & Eng. Enc. of Law, page 794). In the present case, the capital stock was paid for in property alone. Property worth not more than $75,000.00 was conveyed in exchange for capital stock amounting to $300,000.00. There was here an over-valuation of the property which formed the consideration for the issue of the stock. Cases may arise, where stock is issued for property taken at an over-valuation, which will justify the courts in compelling the stockholders to respond to the creditors for the, par value of the stock less the actual value of the property taken in exchange for it. Such will not be the case where there is entire good faith in making the valuation. But if the property contributed is not valued in good faith, the shares of stock will not be fully paid up, either in law or fact, by the contribution of such property. A declaration by the corporation that the shares are paid up will not avail against the creditors in case of insolvency. (2 Morawetz on Priv. Corp. sec. 825). “The courts have inflexibly enforced the rule, that payment of stock subscriptions is good as against creditors only where payment has been made in money, or what may be fairly considered as money’s worth.” (Wetherbee v. Baker, 35 N. J. Eq. 501).
Some of the cases hold, that over-valuation will not render the stockholder liable for the difference between the actual and accepted values unless there is affirmative proof of fraud aliunde. But other cases hold what we regard as the better view, namely, that, where property, whose value is well known or can be easily learned, is taken at an exaggerated estimate, a strong presumption is raised that the valuation is not in good faith and is made for a fraudulent purpose. This presumption will be conclusive unless rebutted by satisfactory evidence explanatory of the apparent fraud. Where the overvaluation is so great that the fraudulent intent appears on its face, and is not explained, the court will hold it to be fraudulent as matter of law. (1 Cook on Stock, etc. sec. 47; 23 Am. & Eng. Enc. of Law, pages 859, 860; Douglass v. Ireland, 73 N. Y. 104; Boynton v. Andrews, 63 id. 93; Boynton v. Hatch, 47 id. 232; Osgood v. King, 42 Iowa, 478). In Boynton v. Andrews, supra, stock for §100,000.00 was issued for property worth §50,000.00, and it was held that there was a gross over-valuation, and that the transaction was fraudulent in law on its face. In the case at bar, the proof shows clearly that stock for §300,000.00 was issued for property worth only §75,000.00, an overvaluation so gross that we cannot but regard it as fraudulent on its face; and its real value was well understood by the parties transferring it to the corporation. It is said, that there was value in certain patents held by Post, under which the machinery was manufactured, and in the prospect of future profits from the business, but these considerations were of small moment when it is remembered that the property was not conveyed clear of incumbrance, but was subject to $70,000.00 of firm debts before its transfer, and was still subject to them after the transfer by reason of the assumption of their payment by the corporation.
The proof shows, that the appellees Tracy, Smith, Mendenhall and Mrs. Coleman were fully aware of the over-valuation. Tracy knew the value of the plant. As a banker he had loaned the firm money upon the property as security. Smith had made a personal inspection of the property and was told about it by Post and by Tracy, the latter being his agent who invested in the stock for him. Mrs. Coleman not only inspected the plant and the books, but was informed by her husband of the exact condition of affairs. The same information was possessed by Mendenhall who conferred with both Post and Coleman. These parties cannot be regarded as innocent purchasers of the stock without notice of the real value of the property upon which it was based. The very fact that, before the corporation was organized and before any stock was subscribed for, they agreed in advance to pay only 50 cents on the dollar for the stock afterwards issued to them, shows that they knew of the over-valuation of the property by at least fifty per cent; for they were all aware that the original subscribers paid no money for their stock, but took it in exchange for the plant.
Counsel claim, that the stockholders cannot be held liable on account of the over-valuation, unless fraud is shown, and that, even if the proof shows a fraudulent over-valuation, there is no allegation of fraud in the bill. The bill distinctly charges that the corporation was organized with a capital stock of §300,000.00, and that the shares were not paid for in full by the original subscribers, and that appellants took their shares at 50 cents on the dollar, knowing that the original subscribers had not paid for them in full, and knowing that the debts of appellees existed against the corporation. The proof sustains the charge. If there is a fraudulent over-valuation of the property taken by the corporation for the stock, the stockholder is liable for the difference between the actual value and the accepted value of such property, and consequently his stock is regarded as unpaid stock to the extent of that difference. Hence, proof of fraudulent over-valuation is proof that the stock is unpaid. Under the allegation that the stock is unpaid, any proof that it is unpaid, even though it be proof of the unpaid difference referred to as growing out of a fraudulent overvaluation, may be legitimately introduced.
It is not necessary, however, to hold in this case that appellants are liable for more than fifty cents on the dollar of their stock as being unpaid. They received stock of the face value of §45,000.00 for which they paid only §22,500.00. The decree of the Circuit Court and the judgment of the Appellate Court have found them liable to pay about $20,000.00 of the sum of $22,500.00 toward the discharge of the judgments of appellees, upon the theory that the latter amount represented the extent to which the stock held by appellants was unpaid. Their claim, however, is that they cannot be regarded as original stockholders, or original subscribers to the stock, but that they purchased it at second hand as paid up stock from Mendenhall, trustee, at 50 cents on the dollar, and are, therefore, bond fide holders of it.
A purchaser or assignee of stock, which has not been fully paid, does not become liable to the corporate creditors for the unpaid balance, where the stock has been issued as fully paid, and he has acquired the same in good faith and without notice that it has not been fully paid. But where a person purchasing stock issued as paid up has notice that it has not been paid, his liability is the same as that of the party who transferred it to him. (1 Cook on Stock and Stockholders, — 3 ed. — secs. 49, 50; Jackson v. Traer, 64 Iowa, 469). The equitable doctrine, that the capital stock is a trust fund that may be followed by the creditors of the corporation, and that any balance remaining unpaid thereon may be reached by such creditors, applies not only to original subscribers to the stock, but also to purchasers or assignees with notice of the fact that all of the stock has not been paid for. We do not think that, under the evidence in this case, the appellants can be regarded as such bond fide purchasers without notice. In the first place, the stock was issued to them directly by the corporation, as belonging, not to the original subscribers, but to the corporation itself. In the second place, if it be regarded as having been issued by Mendenhall, the trustee, the scheme, by which it was placed in the hands of the trustee, was a mere device for evading the law, and for giving to the stock the appearance of being fully paid up, when one half of it was unpaid. As matter of fact, the original subscribers for the stock never really owned more than half of it; and that they were to get half of the original issue at 50 cents on the dollar was known to appellants before its issue. Not only was it understood, before the corporation was organized and before it acquired any property, that appellants were to take stock at 50 cents on the dollar, but the issue of all the stock to the promoters, and its surrender, and its re-issue tó them and to the appellants, and to the trustee, were steps taken with the knowledge of appellants, and by arrangement with them and with the trustee.
In Alling v. Wenzel, 133 Ill. 264, it appeared that, before stock was issued, it was transferred upon the books to the company itself and was called “treasury stock;” that the corporation sold portions of it at less than its par value; that the parties procuring it from the corporation knew, that the corporation was not receiving par value therefor, and took it from the company at less than its face value; and we held that “the plan * * * pursued was but a device to evade the law, and to defeat its useful and wholesome provisions.” The original subscribers for the $300,000.00 of stock surrendered it to the corporation. Half of it was re-issued to them, and the stock acquired by appellants was a part of the other half retained by the corporation. Not only were the certificates of stock issued directly to appellants by the corporation, but their names were entered on the stock book as original subscribers and not as transferees. They thereby became subrogated to the rights and assumed the liabilities of original subscribers to the stock. (Upton v. Hansbrough, 3 Biss. 429).
The transaction, by which the appellants received stock of the face value of $45,000.00 for one half that amount, amounted to nothing more than an agreement between them and the corporation, that the remaining fifty per cent of the stock should not be called for. Such an agreement cannot be sustained as against creditors. The issue of paid up shares at less than their par value is a fraud upon the creditors. (Union Mut. Life Ins. Co. v. Fr ear Stone Manf. Co. supra; Jewell v. Rock River Paper Co. 101 Ill. 57; Scovill v. Thayer, 105 U. S. 143; Jackson v. Traer, supra; Clapp v. Peterson, 104 Ill. 26).
There is evidence in the record, that Coleman told appellee, Loeb, the holder of the largest judgment against the corporation, that the new stockholders, the present appellants, had paid but fifty cents on the dollar for their stock, and were perfectly good for the other fifty cents. Loeb was thereby assured that his debt was secure, and did not press for the payment of his claim. Such representations were calculated to induce the creditors to rely upon the responsibility of the corporation, which had assumed the payment of their debts.
It is claimed that the decree was erroneous in assessing the entire amount of the claims of appellees against appellants, and assessing nothing against Coleman and Post. We understand counsel to abandon this objection so far as Reed is concerned. Reed could not be found and was not served, and the bill was dismissed as to him. In Hatch v. Dana, 101 U. S. 205, it was held that, where a creditor’s bill is filed upon return of execution nulla bona by the creditor' of a corporation to reach the unpaid balance due upon a subscription for stock, it is not necessary to make all the stockholders defendants. It is sufficient if those stockholders are defendants whose unpaid subscriptions it is sought to reach. It may be otherwise where the proceeding is under the statute to wind up the corporation, because there all the shareholders, so far as they can be ascertained, should be made parties, so that “complete justice may be done by equalizing the burdens, and in order to prevent a multiplicity of suits.” (Hatch v. Dana, supra). But the liability of a stockholder for un-1 paid stock is several, and not joint. In case of a suit by creditor’s bill to reach such unpaid stock, “there is not the same reason for requiring all the stockholders to be made defendants. In such a case no stockholder can be compelled to pay more than he owes (Idem;) “the creditor is subrogated to the place of the debtor corporation, and the proceeding is in the nature of an equitable attachment by which the debts due the company may be applied to the payment of its own debts.” (Patterson v. Lynde, 112 Ill. 196). The doctrine of the case of Hatch v. Dana has been substantially endorsed by this Court. (Clapp v. Peterson, 104 Ill. 26; Hickling v. Wilson, id. 54; Patterson v. Lynde, supra; Young v. Harwell, 139 Ill. 326). The stockholder, who is made a defendant to the creditor’s bill, may file a cross-bill and bring in the stockholders who are not parties, and enforce contributions from them. (Young v. Farwell, supra). But if he neglects to do so, the remedy against himself does not fail.
In the case at bar, Post and Coleman weye made defendants and served, and default was entered against them. The Appellate Court say in their opinion affirming this decree: “The first hearing resulted in a dismissal of the bill as to all the defendants. The present appellees brought that record to this court by a writ of error, and the only question then contested was as to the liability of the present appellants. The reversal opened the whole case, and when the cause was remanded it was to be heard anew. Notice of the motion to re-instate was served upon the appellants, but not upon Post, or upon Coleman in his personal capacity, and the cause proceeded to a second hearing in this shape, no further attention being paid to Post and Coleman. Whether this was by design or from mere oversight we cannot ascertain from the record, but it is hardly presumable that a matter so apparent was overlooked. * * * Reed was dropped out of the case early in its history. By going to a hearing upon re-instatement without notice to Coleman and Post the contesting parties dropped them also from the case. No other fair inference arises from such action, and having tried the case in this condition without suggestion of irregularity in the court below, neither side should be permitted to make objection on that account for the first time in this court.” Such being the condition of the record, appellants suffered no injury from the failure to take a decree against Coleman and Post inasmuch as the evidence shows that they were insolvent. If the liability of appellants upon their unpaid stock could be reached under a bill of this kind in case Coleman and Post had not been made parties at all, the result is practically the same- here under a decree, which does not embrace them within its terms, in view of their insolvency.
Even under the stricter rule which prevails where the proceeding is to wind up the corporation under section 25 of the Corporation Act, if any stockholder shall not have property enough to satisfy his portion of the debts, then the amount shall be divided equally among all the remaining stockholders. (1 Starr & Cur. Ann. Stat. page 618).
We find no error in the record which would justify us in reversing the judgment. Accordingly, the decree of the Circuit Court and the judgment of the Appellate Court are affirmed.
Judgment affirmed.