133 U.S.

30
10 S.Ct. 280
133 U.S. 49
33 L.Ed. 516

WASHBURN et al.
v.
GREEN et al.
January 13, 1890.

L. D. Morris, for appellants.

Dan. S. Hays, T. J. O'Brien, D. A. McKnight, J. Hubley Ashton, H. T.
Dechert, and Henry M. Dechert, for appellees.
LAMAR, J.

This is a suit in equity, originally brought in the circuit court of the United
States for the western district of Michigan by Ashbel Green and William Bond,
trustees, against the Chicago, Saginaw & Canada Railroad Company, a
corporation organized under the laws of the state of Michigan, to foreclose a
mortgage given by that company on all its property and effects of whatsoever
description to the plaintiffs, to secure the payment of 5,500 of its bonds of
$1,000 each, payable to said trustees or bearer. The suit was commenced on the
16th of November, 1876. A receiver was at once appointed. The company
made no defense, but numerous parties, holders of the bonds thus secured, and
others with claims of various kinds against the company, with leave of the
court, intervened in the case, and were allowed to prove their respective claims.
The controversy resolved itself into a contest for priority among the respective
claimants in the distribution of the proceeds of the sale of the mortgaged
property thereafter to be made. On the 30th of June, 1882, a decree was
rendered that the bill was well filed, and that the complainants were entitled to
a foreclosure. The matter was referred to a master to take testimony and report
upon the validity, and also the priority, of the various claims filed. On the 6th
of November, 1882, the master filed his report, in which he divided the claims
presented into jour classes, numbered A, B, C, and D, respectively. In class C
he placed t e claims secured by the first mortgage bonds, and the amount of
said security. In this class was the claim of Benjamin Richardson for money

furnished to aid in the construction of the road, amounting, with interest, to

$273,282.87, secured, as the master found, by 200 bonds, amounting to
$374,904. Exceptions to this report were filed by nearly all of the parties
interested, but, in the main, it was confirmed by the court, and, on the 3d of
May, 1883, a decree was entered on the question of priority among the
respective claimants in the distribution of the fund arising from the sale of the
mortgaged property, which had occurred. This decree, among other things,
provided that, after certain expenses and certificates given by the receiver had
been paid, the remainder of the fund should be ratably divided among the bond
claimants, and where the bonds were held as collateral security no greater
amount should be allowed than sufficient to satisfy the debt thus secured.
Benjamin Richardson's claim is in this class. It was for 600 bonds claimed as
collateral security for the amount of money advanced by him for the
construction of the road, and for 1,105 other bonds which he alleged he had
redeemed from certain bankers in London; and, in another form, was for 3,574
bonds which he had purchased at an execution sale in New York city that was
had to satisfy a judgment he had obtained against the railroad company in the
court of common pleas for the city and county of New York for the amount of
his debt, with interest. The decree allowed Richardson's claim as respects 200
of the 600 bonds, but rejected it as to the other bonds claimed by him.
Subsequently that decree was amended by the decree of October 8, 1883, so as
to correct certain mistakes in the calculation of interest upon the bonds. The
effect of this latter decree was to reduce Richardson's share of the proceeds by
$2,173.91 from what the original decree of May 3, 1883, had made it; and also
to reduce in like manner the share of one of the other intervening parties, the
Wrought-Iron Bridge Company of Canton, Ohio, by the sum of $183,60. Four
separate appeals were taken from the decree of May 3, 1883, and an appeal was
also taken by Richardson and his assignee, Henry Day, from the amended
decree of October 8, 1883. At the last term of the court all the appeals were
dismissed except that of Richardson and Day, from the decree of October 8,
1883. Richardson v. Green, 130 U. S. 104, 9 Sup. Ct. Rep. 443. Before the
decision at the last term of the court was rendered Richardson died, and his
legal representatives are now prosecuting the appeal. As a decision upon the
questions presented by this appeal affects the distribution decreed by the court
below of $137,154.94 among the other claimants, it becomes necessary to
examine the facts, and to give consideration to the equities which relate to the
claims of all those parties.
2

The Chicago, Saginaw & Canada Railroad Company was organized about the
4th of December, 1872, under an act of the Michigan legislature approved April
18, 1871, with a capital stock of $4,200,000, divided into 4,200 shares, for the
purpose of building a railroad from St. Clair, in the eastern part of the state, to

Grand Haven, on Lake Michigan, a distance of about 210 miles. The original
incorporators each subscribed for 210 shares of this capital stock, 5 per cent of
which was paid in. This was all the stock ever subscribed, and all the money
paid in on any stock. Nine of these corporators were elected directors, all but
three of whom resigned in 1873, transferring their stock, it is supposed, to those
three. The stock subscribed and the money paid on it may, for all practical
purposes, be considered as having afterwards disappeared from the
organization. For the purpose of raising funds to build the road and equip it the
corporation executed a mortgage, and issued 5,500 7 per cent. bonds, of $1,000
each, due in 30 years, with interest payable semi-annually, and placed them in
the hands of its executive commit ee to be put upon the market. Before selling
any of its bonds, however, the corporation borrowedconsiderable money from
various parties, giving the bonds as security, at the rate of two dollars in bonds
for every dollar borrowed, and also giving, as a bonus, to the parties from
whom the money was borrowed, a large amount of capital stock. These loans
were negotiated with the following persons: (1) With a syndicate offour persons
in Philadelphia, designated in the record as the 'Philadelphia parties,' who
advanced money to the company on the terms above stated, until the amount
aggregated, according to the report of the master, $143,629.62. The number of
bonds pledged to the syndicate, as collateral security for this loan, was 462. The
Philadelphia parties claimed before the court below to be entitled to prove all
the bonds held by them to the full amount of principal and accrued interest, and
to a share in the proceeds of the fund derived from the sale of the mortgaged
property to the extent of their loans and the interest thereon. The decree of the
court allowed their claim, to the extent of 287.26 bonds only, that number being
twice the amount of the principal advanced. The second party from whom the
company obtained a loan was the appellant Richardson, upon terms hereinafter
stated. The third party was George G. Sickles, of New York, who loaned the
company $100,000 upon a pledge of 250 of the bonds, as collateral, and also a
bonus of $100,000 full-paid stock. Afterwards his son, Daniel E. Sickles,
bought 163 of the bonds for the consideration that he would assume and pay the
debt due his father, which he afterwards did. The bonds held by the elder
Sickles were then returned to the company. Daniel E. Sickles claimed that, as
an innocent purchaser, he was entitled to priority over the other collateral
bondholders, who were the directors, officers, and promoters of the company.
His demand for priority was disallowed by the court, and the only part of his
claim that was allowed was that, as innocent purchaser of the 163 bonds, he
might prove them to the full amount of his principal and interest.
3

After the negotiation for the three loans above named, Thomas M. Nelson
contracted with the company to ballast and iron the first 20 miles of the road
from the town of St. Louis west, etc. This contract he substantially performed.

Two months afterwards he entered into another contract with the company to
clear, grub, and grade the road, and build bridges and culverts on the second
division thereof to Lakeview. Part of this second contract was assigned to the
claimant Soule. This contract also, with the exception of a part of the grading,
was performed by these parties. They had no security for the payment for their
services. They relied on the solvency of the company, and the assurances of
Richardson, who was then a director and the treasurer of it, that arrangements
were perfected for the payment of the work as fast as it progressed. The
company failed to pay the amount due on these contracts. Suits were brought,
judgments obtained, and executions issued which were returned nulla bona.
They presented their claims to the master, who reported in their favor, and
allowed them priority over the bondholders to the amount of $16,342.68.
Exceptions to this finding, having been filed, were sustained by the court
below, which allowed their debt, but put it in the fourth class, to be paid pro
rata from any surplus remaining after the bondholders were paid. The claim of
the Wrought-Iron Bridge Company was based upon a contract with the railroad
company, under which it built an iron bridge across the Saginaw river, which
was sold by the receiver for the sum of $20,000. This claimant was allowed a
share in the proceeds of the sale on the basis of the 66 bonds of which it had
become the actual owner. The claim of Stevens was based upon a bona fide
loan made to the company by him. By the decree of the court below he was
allowed a share in the funds to the extent of 32 bonds. Any modif cation of the
decree of the court below favorable to the contention of the appellants herein
will correspondingly reduce the allowances made to the above-mentioned
claimants. The loan of $100,000 by Richardson to the railroad company, on
which he obtained the first 200 bonds, as collateral, was made by him on the
31st of March, 1875, under a contract with the company, in which he agreed to
lend the corporation that amount upon certain terms, which, among others,
were (1) that the company should deliver to him 200 mortgage bonds, of $1,000
each; (2) that, within 14 days, he should be elected a director of the company;
(3) that John A. Elwell, of New York city, should be employed by the company
at a salary of $2,500, and his personal expenses, for the purpose of
superintending the construction of the road and of looking after the interests of
Richardson; (4) that, as a further collateral security, the company should lease
the first 20 miles of the road as soon as it should be completed, and assign such
lease to Richardson, and should also assign to him all the subsidy notes
pertaining to that division of the road, he to retain all the money derived from
the lease and subsidy notes, and render unto the company, at final settlement, 7
per cent. interest upon the money so received; and (5) that the company should
execute and deliver to Richardson 1,250 full-paid shares of capital stock, of
$100 each. Although on its face, this was to be fully paid up stock, it was
understood that no money was to be actually paid for it; the consideration, as
recited in the agreement, being Richardson's services, good offices, and

influence in favor of the company in the financial world.

4

In the contest for priority among the claimants before the master the judgment
creditors of the corporation claimed that they entered into the contracts with the
company whereon they obtained their judgments relying upon its resources,
which they were led to think were ample by reason of the amount of the
outstanding paid-up stock in the hands of such responsible stockholders and
owners as Richardson and the Philadelphia parties; and it was contended that
those stockholders should not be allowed to share in the proceeds arising from
the sale of the mortgaged property on the basis of the bonds held by them, as
collateral, unless they should first pay to the company the full amount of the
shares of stock of which they had held themselves out to the world as the
owners. The master concurred in this view, but because there was no proof of
the actual value of the stock, he declined to make any deduction from the
amount due to Richardson, but limited his claim to the 200 bonds. The
appellants received the amount which the decree allowed, but appealed to this
court from that decree, contending that they were entitled to a larger share of
the fund on the basis of the additional 400 bonds.

To determine the merits of the contention of the appellants, a somewhat minute

statement of the circumstances which led the board of directors to vote to
Richardson those 400 additional bonds becomes necessary. The 1,250 shares of
paid-up stock for which he paid nothing made him the largest stockholder in
the company. He and the Philadelphia parties held all the outstanding stock
with the exception of a few shares, and the entire and absolute control of the
corporation was thus in their hands. Richardson soon controlled a majority of
the board, and dominated its proceedings. He was at once made a director
according to the contract. He became chairman of its executive committee and
its managing director. The lease of the first 20 miles of the road was made to
him, and that part was turned over to his possession. He had John A. Elwell, his
coadjutor and representative, elected a director, who became, successively,
secretary, auditor, and a member of the executive committee of the board. He
afterwards caused Ambrose, Hamm, and Cooper to be put upon the board of
directors, to each of whom he assigned small portion of his stock to enable
them to vote in furtherance of his schemes and interests, and the 1,250 shares of
paid-up stock were in due time issued to him. At a meeting of the board of
directors held on the 5th of July, 1875, although he had advanced nothing
beyond his original loan already secured, he demanded 100 additional bonds,
representing $100,000, as collateral, and the board, yielding to his exactions,
unanimously adopted a resolution directing the secretary and treasurer to
deposit with him that number of bonds for such purpose. Within one month
afterwards, to-wit, August 5, 1875, Richardson was unanimously elected

treasurer of the company, to fill the vacancy caused by the resignation of E. P.

Ferry, which he had tendered to take effect when his accounts should be
adjusted by the executive committee, and when the personal obligations he had
made should be settled, or he be relieved therefrom. The board of directors also
voted to Richardson 300 additional first mortgage bonds as collateral. How he
accomplished these results, to-wit, the resignation of Ferry, his own election as
Ferry's successor, and also the vote to himself of the 300 bonds, is very fully
explained by the testimony of the directors and of Richardson himself. Ferry
thus states why he resigned: 'Mr. Richardson said to me that he thought that,
advancing as much money as he did, he not only should have all the moneys of
the company in his hands, as treasurer, to see that they were properly disbursed,
but also the securities of the company under his control.' In explanation of his
tendering his resignation, to take effect upon being settled with and relieved
from personal responsibility, he says: 'I had indorsed the company's notes to the
amount of about $20,000 and furnished them with money, both. I had advanced
the company, as treasurer, from my own funds, in the neighborhood of
$10,000. I think it was $9,000 and something.' He further stated that Mr.
Richardson assured him that the adjustment and release asked for should be
effected. He also stated that Richardson had never performed those promises.
The vote of 300 bonds to Richardson is thus explained by himself: 'I demanded
of the board 300 more bonds, and got them by resolution of the board.' The
resolution directed a conveyance to Richardson of 300 of the first mortgage
bonds of the company upon the consideration of advances made and to be made
by him. The fact is, that the sum actually advanced by him in addition to his
original loan, for which these 400 bonds were successively voted to him,
amounted to a little over $31,000. The terms upon which he made the demand
for these additional bonds are stated by Ferry and Elwell. At this same meeting,
held August 3, 1875, Richardson introduced the following resolution:
'Resolved, that the president and secretary be, and they are hereby, authorized
to execute a contract for the purpose of grading, tying, and bridging the
company's located road from its western terminus to Lakeview.'
6

Elwell testifies that Richardson stated to the board that if they would, by
resolution, authorize him to receive 300 additional bonds of the company, of
$1,000 each, he would make further advances to a sufficient amount for the
company to go on with the extension and equipment of the road to Lakeview. It
was in consideration of these promised advances that the resolution was
adopted directing the 300 bonds to be conveyed to him. This promise was never
fulfilled by Richardson. Elwell testifies that he advanced no money for the
extension or equipment of the road to Lakeview, nor did he purchase any iron
or other material to be used on that part of the road. Both Richardson and Ferry,
according to their own testimony, considered that the action of the board of

directors placed Richardson, as treasurer, in the shoes of Ferry, at least with

regard to the custody of the unissued bonds of the company. These bonds,
2,985 in number, were deposited with a safe-deposit company in New York
city, subject to the cont ol of Ferry. Ferry immediately drew an order on that
company authorizing it to deliver to Richardson all the bonds belonging to the
railroad company deposited with it, and, through Elwell, gave to Richardson
the key to the vault in which they were kept, in order that he (Richardson)
might take possession of them. Armed with this order to the trust company to
deliver the bonds to him, as treasurer, Richardson, on the 20th of August, 1875,
in company with Messrs. O. W. Child and M. J. Baney, proceeded to the place
of business of the trust company, and, his order having been accepted by that
company, took possession of all the unissued bonds there belonging to the
railroad company, Messrs. Child and Baney counting them, and making a
memorandum of them. This memorandum of the number counted included the
400 now claimed by the appellants, as collateral security. On the following day
Richardson, claiming to act under the authority of the aforesaid resolutions of
the board of directors voting the 400 bonds to him as collateral security, and the
order of the president of the company to Ferry, separated 400 of the bonds from
the remainder, (Child and Baney assisting him,) and placed them in a tin box,
which he afterwards kept in his personal possession. On the 11th of October,
1875, Richardson was appointed managing director, irrevocable, and chairman
of the executive committee; and, on the 12th of the same month, he gave to
Ferry the following receipt: 'Received of Edward P. Ferry, treasurer of the
Chicago, Saginaw & Canada Railroad Co., twenty-two hundred and eighty-nine
(2,289) of the first mortgage bonds of the company, numbered as detailed by
the memorandum above, dated New York, Aug. 20, '75, and signed by O. W.
Child & M. J. Baney, placed in my custody as chairman of the executive
committee of said R. R. Co., in accordance with the resolution of the board of
directors passed Oct. 11, '75, for custody, disposal, or sale. BENJAMIN
RICHARDSON. [Indorsed:] Benjamin Richardson. Receipt,2,289 bonds.
Oct. 12, 1875.' The list thus receipted for by Richardson, as chairman of the
executive committee, included the 400 bonds numbered from 3,201 to 3,600,
inclusive, which he previously, as before stated, had separated from the original
number, and claimed had been pledged to him as collateral security. It is safe to
say, too, we think, that no one interested in the affairs of the company, except
Elwell and Richardson, knew, at that time, that Richardson was holding those
400 bonds in any other capacity than as treasurer of the company. Elwell
testified that at the meeting of October 11, 1875, none of the other parties knew
that Richardson had those bonds. W. J. Kelley testified that, at a meeting of the
board of directors on that day, the understanding of the board derived from
Richardson's statement was that he had in his possession only the original 200
bonds as collateral. Secured in the possession of the company's bonds,
Richardson refused to comply with the conditions on which Ferry had resigned.

On the 16th of August, 1875, Elwell inclosed in a letter to Richardson two

renewal notes to be substituted for those on which Ferry had been indorser,
saying: 'Mr. Ferry demands that before he resigns his office of treasurer, and
turns everything over to you, that you shall indorse the renewal notes
personally, as he did the original ones, and it is for that purpose that I send
them; and they ought to be returned to Mr. Ferry immediately, so as to reach
him the last of this week, to be used in the bank next Monday. * * * Mr. Ferry
gave me one of his envelopes stamped, in which you had better inclose the
notes to him. * * * Mr. Ferry has agreed to turn over to you, or to deliver to me
for you on your order, all books, accounts, vouchers, etc., in his possession as
treasurer, upon the two notes being returned to him indorsed.' Richardson
remonstrated with Elwell against this, and on the 21st of the same month he
replied to Elwell's next letter, declining to sign the notes, and declaring himself
indifferent to Elwell's retention of the books and papers pertaining to the office
of treasurer, inasmuch as he (Richardson) had already become, not only the
treasurer, but also the receiver, advancer, and chief controller of the company.
On that day the board of directors voted 120 bonds to Richardson as a bonus.
Counsel for the appellants insist in their brief that this was done in his absence,
and that he repudiated this resolution, and refused to take those bonds. This
statement is in conflict with that of Kelley, president of the company, who
testifies that Mr. Richardson was present, and, so far from objecting to the vote
of the bonus to him of 120 bonds, he insisted upon it; but, as they make no
claim on these bonds as a bonus, it is not necessary to add anything further,
except the remark that the action of the board illustrates the readiness of the
directors to subserve all Richardson's wishes.
7

At the meeting of July 8, 1876, the board, in anticipation of the foreclosure of

the mortgage then determined on, passed resolutions auditing the entire account
of Richardson against the company, and declared the sum of $185,584.18 to be
due to him from it. Another resolution, unanimously adopted, ratified and
approved the bonds issued to him for that aggregate sum. A third resolution
was adopted, directing the secretary to execute and deliver to him the notes of
the company at 7 per cent., payable at such times as could be agreed on with
Richardson, and that there should be embodied in the note an authority to the
holder, in default of payment, to sell such bonds without notice, and with the
right to become himself the purchaser if sold at public sale. On the same day,
immediately after the meeting, Elwell, the secretary, gave to Richardson those
notes, in which were recited the numbers of the 600 bonds under discussion. On
the same day, Richardson and Ferry addressed to the mortgage trustees a
written request to institute proceedings to foreclose the mortgage. These notes,
on the 17th of July, at the request of Richardson, were torn up by Elwell, and
demand notes, bearing the same date, substituted therefor. Forthwith

Richardson commenced suit against the corporation in the court of common

pleas of the city of New York on those notes, and on the 12th of August
obtained the judgment hereinbefore mentioned. Execution was issued on that
judgment, and, as the proofs clearly show, the sheriff levied upon and sold all
the bonds of the company which had been placed in Richardson's custody,
namely, the 600 bonds which he claimed had been pledged to him as aforesaid,
and 2,974 other bonds, including 1,105 which he claimed to have redeemed
from a bank in London. At the sale Richardson purchased all those bonds at the
price of $50 each, $178,700. A short time after this sale and purchase, to-wit,
November 16, 1876, this suit for foreclosure was commenced, and as an
intervenor therein he claimed that by virtue of his purchase at the sheriff's sale
he became the absolute owner of the entire 3,574 bonds. Afterwards he appears
to have confined his claim to the 600 bonds alleged to have been held by him
originally as collateral security and the 1,105 bonds just referred to. It would
seem, from the briefs filed in this court by counsel on behalf of appellants, that
the claim here is confined to the 400 bonds above described.
8

In view of all the facts and circumstances presented by this record, we are
unable to see any such superior equity arising out of the transactions of
Richardson with this company as entitles him to a priority over the other
creditors in the distribution of the fund in question, or anything in his mode of
getting possession of the 400 bonds which gives him a better claim to them than
that of the other creditors. While we may not be prepared to concur with the
master in some of the reasons upon which he based his report, yet we do not
think either that report, or the decree of the court below confirming it, contains
any error of which the appel ants can complain.

Richardson's relation to the subject-matter of this controversy was threefold:

(1) That of a creditor of an insolvent corporation claiming for his debt priority
of payment over those of all other creditors, out of the fund arising from a
foreclosure sale of the mortgaged property; (2) that of a director and officer of
that corporation at the time his debt against it was created; and (3) that of the
largest shareholder of its capital stock. Undoubtedly his relation as a director
and officer, or as a stockholder of the company, does not preclude him from
entering into contracts with it, making loans to it, and taking its bonds as
collateral security; but courts of equity regard such personal transactions of a
party in either of these positions not, perhaps, with distrust, but with a large
measure of watchful care, and unless satisfied by the proof that the transaction
was entered into in good faith, with a view to the benefit of the company as
well as of its creditors, and not solely with a view to his own benefit, they
refuse to lend their aid to its enforcement. In Oil Co. v. Marbury, 91 U. S. 587,
588, Mr. Justice MILLER, delivering the opinion of the court, said: 'That a

director of a joint stock corporation occupies one of those fiduciary relations

where his dealings with the subject-matter of his trust or agency, and with the
beneficiary or party whose interest is confided to his care, is viewed with
jealousy by the courts, and may be set aside on slight grounds, is a doctrine
founded on the soundest morality, and which has received the clearest
recognition in this court and in others.' In relation to the rights and liabilities of
a stockholder, this court said in Sawyer v. Hoag, 17 Wall. 610, 620, Mr. Justice
MILLER again delivering the opinion of the court: 'We think it now well
established that the capital stock of a corporation, especially its unpaid
subscriptions, is a trust fund for the benefit of the general creditors of the
corporation.' Proceeding to show that 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, he concluded with these words: 'It is therefore but
just that, when the interest of the public or of strangers dealing with this
corporation is to be affected by any transaction between the stockholders who
own the corporation and the corporation itself, such transaction should be
subject to a rigid scrutiny, and if found to be infected with anything unfair
towards such third person, calculated to injure him, or designed intentionally
and inequitably to screen the stockholder from loss at the expense of the
general creditor, it should be disregarded or annulled so far as it may
inequitably affect him.' In the case last cited the stockholder nominally paid the
stock subscription, but the money was immediately taken back as a loan, and it
was claimed by him as a valid payment. The transaction was characterized by
the court as a 'fraud upon the public, who were expected to deal with them.' In
Graham v. Railroad Co., 102 U. S. 148, 161, this court said, Mr. Justice
BRADLEY delivering the opinion: 'When a corporation becomes insolvent, it
is so far civilly dead that its property may be administered as a trust-fund for
the benefit of its stockholders and creditors. A court of equity, at the instance of
the proper parties, will then make those funds trust funds, which, in other
circumstances, are as much the absolute property of the corporation as any
man's property is his.' In the more recent case of Railway Co. v. Ham, 114 U.
S. 587, 594, 5 Sup. Ct. Rep. 1081, it was said by this court, speaking throught
Mr. Justice GRAY: 'The property of a corporation is doubtless a trust fund for
the payment of its debts, in the sense that when the corporation is lawfully
dissolved and all its business wound up, or when it is insolvent, all its creditors
are entitled in equity to have their debts paid out of the corporate property
before any distribution thereof among the stockholders. It also true, in the
case of a corporation, as in that of a natural person, that any conveyance of
property of the debtor, without authority of law, and in fraud of existing
creditors, is void as against them.'
10

Can the transactions between Richardson and the insolvent corporation, of

which he was largely the owner and controller, especially with respect to the
claim he is urging in this case, stand the test of the fairness and good faith
which, as a director and stockholder, he owed to the corporation, its creditors
and bona fide bondholders? His very first transaction with the corporation, by
which he introduced himself into it as a stockholder, was an illegal and
fraudulent act. We refer to the agreement on the part of the company to issue to
Richardson 1,250 shares of bonus stock. At the time this agreement was made,
and the stock issued in pursuance thereof, the statutes of Michigan provided
'that it shall not be lawful for any railroad company, existing by virtue of the
laws of this state, nor for any officer of any such company, to sell, dispose of, or
pledge any shares in the capital stock of such company, nor to issue certificartes
of shares in the capital stock of such company, until the shares so sold,
disposed of, or pledged, and the shares for which such certificates are to be
issued, shall have been fully paid.' 2 Comp. Laws, par. 7757.
11

We have seen that all the acts of Richardson, as director, shockholder, chairman
of the executive committee, and treasurer, all of which offices he held at one
time, had their origin in this bonus stock. After having exercised all the
privileges and powers of a stockholder in the corporation, it cannot be seriously
contended that he is to be held exempt from the liabilities which would attach
to a bona fide shareholder who has taken shares purporting to be paid up, but
which in truth are not paid up. The case of Scovill v. Thayer, 105 U. S. 143,
153, 154, bears a close analogy to this. Mr. Justice WOODS, delivering the
opinion of the court in that case, said: 'The stock held by the defendant was
evidenced by certificates of full-paid shares. It is conceded to have been the
contract between him and the company that he should never be called upon to
pay any further assessments upon it. * * * But the doctrine of this court is that
such a contract, though binding on the company, is a fraud in law on its
creditors, which they can set aside; that when their rights intervene, and their
claims are to be satisfied, the stockholders can be required to pay their stock in
full.' The same rule is laid down in EX parte Daniell, 1 De Gex & J. 372. In that
case the directors of the company allotted to themselves a number of shares by
a resolution that the shares so allotted were to be treated as paid-up stock in full.
Daniell, one of the directors, was not present at the time the resolution was
adopted, but he afterwards accepted the shares allotted to him. An order having
been made for winding up the company, assessments were made upon those
shares for the purpose, it is supposed, of paying the debts of the company. It
was held that Daniell was liable to those assessments to the same extent as if
the resolution had not provided that the shares were to be treated as paid-up
stock.

12

The principle underlying all of the decisions which we have cited upon this

point is that the capital stock of a corporation, when it becomes insolvent, is in

law assets of the corporation, to be appropriated to the payment of its debts; and
that creditors have the right to assume that the stock issued by the corporation
and held by its stockholders as paid-up stock had been paid up, or, if unpaid,
that a court of equity, at the instance of the proper parties, could require it to be
paid up. In the case now before us, the bonds claimed by the appellants were
voted to Richardson by his associated directors, every one of whom owed his
election to the holders of this bonus stock alone. The total amount of the
advances made by him, for which these bonds are collateral, is very little larger
than one-half of the amount of the stock which he had as paid-up stock. If the
stock given to him and the Philadelphia parties had been really paid-up stock,
there would have been no insolvency on the part of this corporation.
Irrespective of the question whether he can be made liable for the face amount
of this stock, or for its proved value, the facts we have detailed certainly do not
entitle his claim to outrank that of any bona fide creditor, whether secured or
unsecured, in the matter of distribution.
13

The master found that the 400 bonds had never been delivered by the company
to Richardson in his individual capacity, in pledge as collateral security for the
moneys advanced. It is strenuously argued in behalf of appellants that the
evidence taken under the order of the court, after the findings of the master had
been made and his report filed, for the purpose of explaining the receipt given
by Richardson to his predecessor, Ferry, is sufficient to overturn the master's
report on that point. That evidence was before the court when it rendered the
decree complained of, and, so far as the decree shows, it was not regarded as
essentially modifying the facts as found by the master. We think the conclusion
of the court was correct. we do not deny that cases may arise in which, if
everything were admitted to be fairly done, with the knowledge and
acquiescence of the company, such a personal possession as that which
Richardson obtained, although not such an actual delivery as the board had
intended and directed, might be considered as equivalent to a legal delivery. But
under the special circumstances of this case, in view of the unfair means
employed by Richardson to have the entire body of the company's bonds
transferred from the custody of Ferry into his own custody, and the clandestine
manner in which he took out the 400 from that body, not only without notice of
the fact to the company, but with an implied, if not an expressed, denial of the
transactions, we do not think that he can be regarded as standing in the position
of a legal and equitabel pledgee, or that he ever acquired, as such pledgee, a
lien on the 400 bonds. But, even if there could be any doubt on this point,
Richardson himself, by his own act, has removed it. He waived and abandoned
all claim to any lien, as a pledgee, by his voluntary surrender and delivery of
the bonds to the sheriff of the county of New York, as the property of the

company, to be sold under execution. If the 400 bonds were not delivered to
Richardson, as we think the court below correctly held, it follows that the
unissued bonds were not subject to attachment or to execution as valid and
binding obligations against the company, and that Richardson's purchase at the
sheriff's sale vested in him no title or ownership in them. Counsel for the
appellants in their brief put not a little stress upon the fact that Richardson's
claim is based upon the advance of actual money for the enterprise to the full
amount of $185,584.18. The answer to this is that the decree of the court below
recognized his claim to the entire amount, and gave him his ratable share of the
proceeds of the sale, upon the footing of the 200 bonds delivered to him, up to
the amount of $273,282.87. We are of the opinion that that decree gave him the
fullest measure of allowance to which he could possibly be justly entitled.
14

It is hardly necessary to say much with respect to the claim of Richardson to the
1,105 bonds alleged by him to have been redeemed as aforesaid. Upon this
question the master says: 'The case is briefly this: The board of directors sent
one of their number as financial agent to Europe, with authority to negotiate a
sale of bonds. While there, to defray expenses, he borrowed a sum of money
from a Mr. Stevens, and pledged to him 50 of the bonds as collateral security.
These, together with the 1,105 bonds, this agent and Stevens deposited with the
Consolidated Bank of London with agreement that the bonds should not be
delivered to any one without the joint order or consent of the agent and Stevens.
The agent was withdrawn from Europe. The indebtedness due Stevens was
allowed to go to protest, and the directors were fearful Stevens would not only
sell the bonds pledged, but would also sell the 1,105, and the purchaser obtain
title to the whole, and thus render nearly valueless the securities held by the
directors. To prevent this calamity, Richardson advanced the money, charged it
to the company, and received its notes therefor. He then attempted to do what
he was fearful might have been done in London, namely, levy upon and sell the
1,105 bonds, and himself become the purchaser at a nominal sum, and thus
gain an unconscionable advantage over other bondholders. It is a general rule
that fraud or any gross misconduct on the part of the salvors in connection with
the property saved will work a forfeiture of the salvage, and the evidence in this
case with reference to the means employed to obtain a levy on the bonds in
question, and the sale thereof, fully justifies us in the conclusion which I have
reached, that no allowance ought to be made to Richardson, by way of
'equitable salvage,' for the moneys advanced by him to obtain the return of the
bonds to the company.' We fully agree with what is said by the master, and do
not deem it essential to add anything further on that point. As regards the
decree of October 8, 1883, we think it sufficient to say that the corrections
made by it, as regards the calculations of interest on the bonds, in the original
decree, were correct and proper, and were warranted by the law. The original

decree had allowed interest on some of the bonds owned and held as collateral
security from the date of their issue. The amendatory decree simply allowed
such interest to be calculated from the date when the bonds were actually
delivered to the owners and holders of them. Such correction was eminently
legal and just. The decree of the court below is affirmed.
15

In connection with this case, a motion has been made by Thomas M. Nelson,
one of the intervening petitioners in the suit, whose appeals were dismissed at
the last term of the court, to have refunded to him the sum of $450, deposited
with the clerk under the order of this court of January 14, 1889, requiring such
deposit to be made in order that his counsel might have two printed copies of
the record. This motion is based upon the following grounds: (1) That the
petitioner was not one of the principal litigants in the appeals, but was simply
an intervening judgment creditor, having no interest in the matter of the
controversy between the bondholders and the trustees; (2) that his demand is
quite small, when compared with the amount involved in the controversy
between the principal litigants; and (3) that he was not a necessary party to the
determination of the questions involved in the controversy between the main
parties to the litigation, but simply intervened, as the only manner in which he
could protect his rights under his judgment against the company for work and
labor performed for it in the construction of the road. The motion is granted to
the extent of $200.