U.S. Supreme Court
Sawyer v. Hoag, 84 U.S. 17 Wall. 610 610 (1873)
Sawyer v. Hoag
84 U.S. (17 Wall.) 610
1. Capital stock or shares of a corporation -- especially the unpaid subscriptions to such stock or shares -- constitute a trust fund for the benefit of the general creditors of the corporation.
2. This trust cannot be defeated by a simulated payment of the stock subscription, nor by any device short of an actual payment in good faith.
3. An arrangement by which the stock is nominally paid, and the money immediately taken back as a loan to the stockholder, is a device to change the debt from a stock debt to a loan, and is not a valid payment its against creditors of the corporation, though it may be good as between the Company and the stockholder.
4. The twentieth section of the Bankrupt Act was not intended to enlarge the doctrine of setoff beyond what the principles of legal or equitable setoff previously authorized.
5. A stockholder indebted to an insolvent corporation for unpaid shares cannot set off against this trust fund for creditors a debt due him by the corporation. The fund arising from such unpaid-shares must be equally divided among all the creditors.
6. The relations of a stockholder to the corporation, and to the public who deal with the latter, are such as to require good faith and fair dealing in every transaction between him and the corporation, of which he is part owner and controller, which may injuriously affect the rights of creditors or of the general public, and a rigid scrutiny will be made into all such transactions in the interest of creditors.
About the 1st of April, 1865, and prior, therefore, to the passage of the Bankrupt Act of 1867, the directors of the Lumberman's Insurance Company of Chicago -- a company then recently incorporated and authorized to begin business on a capital of $100,000, of which not less than one-tenth should be paid in, the residue to be secured -- invited subscriptions to the capital stock of the company; stating, in most instances, to those whom they invited to subscribe, that only 15 percent would be required to be paid down in cash, and that the remaining 85 percent would be lent back to the subscriber, and a note taken therefor, payable in five years, with 7 percent interest, payable semiannually, secured chanrobles.com-red
by collateral security satisfactory to the directors of the company.
In this state of things one Sawyer about the said 1st of April, 1865, at the solicitation of one of the directors, subscribed for fifty shares of stock. When called upon to close his subscription, he was informed, as indeed all the subscribers were, that the matter would be closed on the plan above mentioned.
Sawyer accordingly complied with the requirements, and gave his check to the company for $5,000, the full amount of his stock, and his note payable to it in five years from date, for $4,250, that is to say, for 85 percent of the par value of the stock, with interest, payable as aforesaid, and delivered to the company as collateral security for the payment of his note satisfactory securities, and received from the company a check for $4,250 or 85 percent of the par value of the stock, by way of, and as for a loan thereof from the company. At the same time, Sawyer gave a written authority to the company to sell the securities at public auction, for cash, in case default should be made in the payment of the note and the interest thereon.
Sawyer subsequently took up this note and gave in substitution therefor another note, and new securities as collateral, with power, as in the case of the former ones, to sell them on default of payment of the note or interest.
At the time when the said original and substituted notes were made, money was worth and could have been lent in Chicago at from 8 to 10 percent interest per annum, payable semiannually, on good security.
The original transaction was regarded and treated by the company and by Sawyer as a loan by the company to him, and his stock was treated as fully paid for. At various times after the giving of the original note, the company reported to the authorities of the state of Illinois and of other states that its capital stock was fully paid.
On the 8th and 9th day of October, A.D. 1871, a great fire devastated the city of Chicago and rendered the Lumberman's Insurance Company insolvent; and on the 25th of chanrobles.com-red
January, 1872 -- it being at that time a notorious fact, one well understood by the public, and one which Sawyer had good reason to believe, that the said company was insolvent and unable to pay its liabilities -- Sawyer purchased of a certain Hayes a certificate of an adjusted loss for $5,000 against the company for 33 percent of its par value.
In June, 1872, after Sawyer had purchased this certificate of adjusted loss, a petition in bankruptcy was filed against the company, and it having been adjudicated a bankrupt, one Hoag was appointed its assignee.
The thirteenth section of the Bankrupt Act enacts "that after the adjudication in bankruptcy the creditors shall choose one or more assignees of the debtor." And the fourteenth section, under the marginal head of, "What is to be vested in the assignee by the adjudication of bankruptcy," &c., enacts that:
"All the property conveyed by the bankrupt in fraud of his creditors, all rights in equity, choses in action . . . all debts due him or any person for his use, and all liens and securities therefor, and all his rights of action for property or estate . . . and for any cause of action which the bankrupt had against any person . . . with the like right, title, power, and authority to sell, manage, dispose of, sue for and recover the same, as the bankrupt might or could have had if no assignment had been made, shall, in virtue of the adjudication of bankruptcy and the appointment of his assignee, be at once vested in such assignee: and he may sue for and recover the said estate, debts and effects, and may prosecute and defend all suits at law and equity, . . . in the same manner and with the like effect as they might have been prosecuted or defended by such bankrupt."
The fifteenth section of the act enacts:
"That the assignee shall demand and receive from any and all persons holding the same all the estate assigned or intended to be assigned under the provisions of this act."
The sixteenth section enacts:
"That the assignee shall have the like remedy to recover all said estate, debts and effects, in his own name, as the debtor
might have had if the decree in bankruptcy had not been rendered and no assignment had been made."
Among the effects of the company, which came into Hoag's hands as assignee, was the already-mentioned note of Sawyer for $4,250, with the securities assigned as collateral. Hoag demanding of Sawyer payment of this note, Sawyer produced his certificate of adjusted loss for $5,000 and insisted on setting it off against the demand; asserting a right to do this under the twentieth section of the Bankrupt Act, a section in these words:
"In all cases of mutual debts or mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed or paid, but no setoff shall be allowed of a claim in its nature not provable against the estate:"
"Provided, that no setoff shall be allowed in favor of any debtor to the bankrupt of a claim purchased by or transferred to him after the filing of the petition."
Hoag refused to allow the setoff, and was about to sell the collateral securities in accordance with the power given to him. Hereupon Sawyer filed a bill in the court below to enforce the setoff, in which he alleged, among other things, that the note given by him to the insurance company was for money lent to him.
The assignee, in his answer, denied that the note was for money lent, and averred that it was in fact for a balance due by Sawyer for his stock subscription, which had never been paid, and insisted that such balances constituted a trust fund for the benefit of all creditors of the insolvent corporation, which could not be made the subject of a setoff against an ordinary debt due by the company to one of its creditors. After the general replication, the case was submitted to the court below on an agreed statement of facts. That court decreed against the complainant, and from that decree the case was brought by the present appeal to this Court. chanrobles.com-red