John W. Clendenin, trustee in bankruptcy of the Nevling Elevator Company, which was adjudged bankrupt on August 6, 1912, brought a suit in equity and recovered á decree for $4,500, interest thereon, and costs against J. M. Ratcliff for amounts paid to him as one of its stockholders by the Elevator Company in 1909, 1910, and 1911.
[1] The first specification of error is that the court overruled Rat-cliff’s demurrer to the complaint on the ground that it disclosed the fact that he had an adequate remedy at law. But the suit was brought against Nevling, the president and manager of the corporation, and also against Ratcjiff. The trustee alleged that some of the creditors
[2] The second specification is that the court erroneously struck out the counterclaim of the defendant Ratcliff. Ratcliff made a separate answer. He denied the alleged conspiracy, denied the averments of the complaint as to tixe existence and continuance of the claims of the creditors of the corporation, denied that he was ever a director or officer of the Elevator Company, denied that he knew anything about its insolvency, or the impairment of its capital, or its financial condition, prior to March, 1912, and alleged that he always supposed and believed it to he solvent and prosperous; and he alleged in his answer that this was his relation to the corporation. Nevling was -its president and general manager; Ratcliff was a farmer and stockman, who knew nothing about the financial condition of this or other corporations, and who did not know how to examine their financial condition. Nevling told him that the Elevator Company was solvent and prosperous; that if he would put $25,000 into it he (Nevling) and the Elevator Company would guarantee him interest on it at 10 per cent, per annum ; that in reliance upon these representations he paid into the corporation, on or about July, 1908, $25,000, and received for it certificates for 250 shares of its stock, of the par value of $100 per share; and
His counterclaim consisted of a restatement of his investment of his $25,000 in reliance upon tire statements and. representations of Nevling, an averment that he first learned of the insolvency of the Elevator Company in March, 1912, an offer to bring into, court -.and surrender his certificates of stock and his interest in the capital stock of the company, and a prayer for an equitable lien on the assets of the Elevator Company for the difference between the $4,500 which he received from it and the $25,000 he paid to it. But he bought his stock in July, 1908, he first discovered the insolvency of the Elevator. Company in March, 1912, that company was adjudged bankrupt on August 6, 1912, and the first appearance of his attempt to rescind his purchase of his stock in July, 1908, was in March, 1913, about 4% years after his purchase. Meanwhile the Elevator .Company had incurred many of the claims now represented by the trustee. Ratcliff’s attempt to rescind 'his purchase of his stock, though induced by the fraud of the Elevator Company, or of its president, comes too late, and there was no error in striking his counterclaim from his answer. A stoclc-holder’who is induced by fraud to purchase the stock of a corporation, and who for years, while the corporation is a going concern and is incurring debts to creditors, which still exist, receives dividends or income from his purchase of the stock, is estopped, after the corporation becomes insolvent, has ceased to be a going concern, and is adjudged a bankrupt, from rescinding his purchase of the stock against a protest of its creditors. Upton v. Tribilcock, 91 U. S. 45, 23 L. Ed. 203; Webster v. Upton, 91 U. S. 65, 23 L. Ed. 384; Sanger v. Upton, 91 U. S. 56, 23 L. Ed. 220; Chubb v. Upton, 95 U. S. 665, 667, 24 L. Ed. 523; Scott v. Deweese, 181 U. S. 202, 213, 21 Sup. Ct. 585, 45 L. Ed. 822; Lantry v. Wallace, 182 U. S. 536, 548, 549, 554, 21 Sup. Ct. 878, 45 L. Ed. 1218; Rand v. Columbia National Bank, 94 Fed. 349, 351, 36 C. C. A. 292; Scott v. Latimer, 89 Fed. 843, 33 C. C. A. 1.
[3] Finally, it is specified as error that the court rendered a decree against Ratcliff for the $4,500 which he received from the Elevator Company, interest upon it, and the costs of the suit. This was a suit in equity by the trustee in bankruptcy of the Elevator Company to recover this $4,500 of Ratcliff, a stockholder, in the right of creditors of the corporation who held claims against the corporation which were incurred before that $4,500 was paid out, on the theory that this $4,500 was money of the insolvent corporation which was held by its officers in trust for its creditors when it was paid to Ratcliff, and that Ratcliff knew this fact and procuréd the payment of this money to him without giving any consideration therefor. Facts essential to this cause of action which the trustee pleaded were, first, that there were creditors of the Elevator Company represented by the trustee who held claims allowed against the estate of the bankrupt which were incurred by the corporation before' at least some of this $4,500 was paid over to Ratcliff, for creditors having claims which
The Nevling Elevator Company was a corporation owned and operated by a single man, Nevling, who was the president and manager thereof, and who conducted all its affairs without any action of any board of directors, or of any other person, except those persons whose action he directed. He continued in absolute control and management of its affairs from the inception of the transaction related in this suit in July, 1908, until the adjudication in bankruptcy in August, 1912. About July 7, 1908, he induced Ratcliff to pay into' the corporation $25,000 and to take 250 shares of its stock by representing to him that the corporation was solvent and prosperous, and by either stating, as Nevling testifies, or by guaranteeing by the corporation and by Nevling, as Ratcliff testifies, that Ratcliff should receive from this investment interest at 10 per cent, per annum on his $25,000. In payment of this interest or income on Ratcliff’s investment Nevling paid over to him out of the funds of the corporation the $4,500 here in issue in the following amounts: On October 13, 1909, $1,500; on January 24, 1910, $1,000; on July 3, 1911, $1,000; on July 21, 1911, $500; on August 26, 1911, $500. During the time of these payments the capital of the corporation varied from about $31,000 to $41,000 On June 30, 1907, the assets of the company were $58,675, its liabilities $38,-908.73, its assets exceeded its debts $19,766.33, and its capital was impaired $11,933.67; on June 30, 1908, its assets were $47,257.99, its liabilities $33,165.87, its assets exceeded its debts $14,092.12, and its capital was impaired $21,107.88; on July 6, 4909, its assets were $48,142.63, its debts were $27,557.07, its assets exceeded its debts $20,585.56, and its capital was impaired $20,414.14; on June 30, 1910, its assets were $57,922.79, its liabilities $45,368.71, its assets exceeded its liabilities $12,554.08, and its capital was impaired $28,445.92; on June 30, 1911, its assets were $58,454.28, its liabilities were $54,362.25, its assets exceeded its liabilities $4,092.03, and its capital was impaired $36,907.97. During all the time until its adjudication in bankruptcy the corporation was a going concern. At the first annual meeting of the corporation after Ratcliff made his investment Nevling made him a director of the corporation, but Ratcliff was not present, did not know that he was made a director until late in the year 1912, and never
[4] The result of these established facts is that, as the presumption was that the company, which was a going concern, was solvent, the plaintiff failed to prove that it was insolvent when any part of the. $4,500 was paid over to Ratcliff, for the test of the insolvency of a corporation is the sufficiency of its assets and its ability to pay its debts, and the sufficiency of its assets and its ability to pay its stockholders, the par value of their stock in addition to the payment of the debts of the corporation are irrelevant to the issue of insolvency. Hamilton v. Menominee Falls Quarry Co., 106 Wis. 352, 81 N. W. 876, 878: Banta v. Hubbell, 167 Mo. App. 38, 150 S. W. 1089, 1092; State of Kansas v. Myers, 54 Kan. 206, 217, 38 Pac. 296.
[5] As the plaintiff failed to prove that the Elevator Company was insolvent when the $4,500 was paid to Ratcliff, it failed to establish the fact that that sum or any part of it was ever charged with any enforceable trust or equitable lien in favor of any creditor of the corporation or in favor of the trustee in bankruptcy. A solvent corporation, like a solvent individual, holds its property free from any enforceable trust or equitable lien in favor of its creditors. It is only when it becomes insolvent that such a trust or lien in favor, first of its creditors, and second of its stockholders, attaches to its property. Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371, 383, 385, 14 Sup. Ct. 127, 37 L. Ed. 1113; McDonald v. Williams, 174 U. S. 397, 403, 19 Sup. Ct. 743, 43 L. Ed. 1022; Lawrence v. Greenup, 97 Fed. 906, 908, 909, 38 C. C. A. 546, 549; Great Western Min. & Mfg. Co. v. Harris, 128 Fed. 321, 331, 63 C. C. A. 51, 61; New Hampshire Sav. Bank v. Richey, 121 Fed. 956, 960, 58 C. C. A. 294, 298. So it was that the plaintiff failed to prove any of the essential elements of the cause of action he pleaded, and the record discloses no equity in his favor which entitles him to recover of the defendant.
[6] Counsel for the trustee, however, argue that there was no formal declaration of a dividend, that no other stockholder had an income like that of the defendant paid to him on his investment, that section 1741 of the General Statutes of Kansas of 1909 provides that the directors of a corporation shall “declare and make such dividends of the profits from the business of the corporation as they shall deem expedient, or as the by-laws may prescribe,” that this is in legal effect to prohibit and the general law of the community forbids the payment of dividends out of capital, that the capital of the Elevator Company was impaired when the payments were made to Ratcliff, that there were no profits, and that for these reasons the payment of the $4,500 was unlawful. The answers to this contention are many and conclusive; If the contention stated a cause of action, it was a cause of action that was neither pleaded nor tried in the court below. It does not state a cause of action in favor of any creditor whom the
[7] And, finally, the general principles of equity jurisprudence forbid the recovery of this $4,500 of Ratcliff, because his equity in it is superior to that of the trustee or of any of the creditors whom he represents. Ratcliff invested his $25,000 in the Elevator Company in good faith, in the justifiable belief that the corporation, which was a going concern, was solvent and prosperous, and that he should receive from it an income of 10 per cent, per annum on his investment. The corporation continued to be a going concern, apparently solvent and prosperous, until more than six months after the last of the $4,500 was paid to Ratcliff. He received the.payments in good faith, without notice that they were wrongfully made, and in the full belief that whether they were interest or dividends he was lawfully entitled to them. “A court of equity can act only on the conscience of a party. If he has done nothing that taints it no demand can attach upon it so as to give any jurisdiction.” Boone v. Chiles, 10 Pet. 177, 210, 9 L. Ed. 388. Ratcliff has done nothing that taints his conscience and no demand attaches upon it.
Where equities are equal the defendant prevails. Ratcliff was induced by Nevling to put $25,000 into the Elevator Company, and, in any event, can receive nothing on account of that investment but the $4,500 which has been paid to him as income. He must lose more
Let the decree below be reversed, and let the case be remanded to the court below, with instructions to render a decree o,f dismissal of the complaint on the merits.