Page images

that in Cheever v. Wilson, 9 Wall. 108, 19 L. Ed. 604, the court held the rule to be applicable to the courts of the District of Columbia.

[4] It is contended that the purchase of the corporate stock by the appellants was not in violation of the law of Nevada. Section 68 of the Corporation Act of Nevada (Rev. Laws 1912, § 1169) provides that it shall not be lawful for the trustees or directors

"to divide or withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of the company, nor to reduce the capital stock unless in the manner prescribed in this act, or in accordance with the provisions of the certificate or articles of incorporation, and in case of any violation of this section, the directors or trustees under whose administration the same may have happened * * * shall in their individual and private capacities, be jointly and severally liable to the corporation, and [to] the creditors thereof, to the full amount so divided, withdrawn, or reduced, or paid out."

To pay to the stockholders the par value of their capital stock, as the court below found that the appellants did in exchange for the certificates of stock, is prohibited by the act when the payment is made out of the capital of the corporation and not out of its surplus. While it may not be said that the act prohibits the purchase of the shares of its stock by a corporation, it does prohibit the payment of any part of the capital for that purpose. A similar statute of the state of New York was under consideration in In re Castle Braid Co. (D. C.) 145 Fed. 224. The court held that the law did not broadly forbid the purchase by the corporation of its shares of stock held by its directors, and that such purchase was permissible if the transaction was fair and honest, and in the interest of the corporation and not of the selling directors. The court said of the statute:

"By implication it may forbid the purchase of any property of any description from the stockholders, and the payment therefor from the capital of the corporation; that is, from any funds except the surplus."

So in In re Tichenor-Grand Co. (D. C.) 203 Fed. 720, it was held that the New York statute, which prohibits a corporation from purchasing its own stock except out of the surplus, renders invalid a contract by a corporation with a subscriber to its stock, where the stock is issued and paid for, to repurchase the same after a stated time on notice of the subscriber's election. Other cases in point are Coleman v. Tepel, 230 Fed. 63, 144 C. C. A. 361; Hamor v. Taylor-Rice Engineering Co. (C. C.) 84 Fed. 392; Md. Trust Co. v. Mechanics Bank, 102 Md. 608, 63 Atl. 70; Tait v. Pigott, 32 Wash. 344, 73 Pac. 364; Tait v. Pigott, 38 Wash. 59, 80 Pac. 172; Martin v. Zellerbach, 38 Cal. 309, 99 Am. Dec. 365.

[5] The contention that the purchase of the stock was without the knowledge and against the instructions of the directors cannot be sustained. There was conflict in the testimony, and the court below found the facts against the appellants. The court in so finding was largely influenced by the fact that at each monthly meeting of the directors a statement of the financial condition of the corporation was presented and considered, and the fact that the records show that the directors expressly authorized in some instances the purchases of the stock, and that in other instances they approved purchases that had been made.

The whole tendency of the testimony is to show that the directors had knowledge of all the stock transactions.

[6] The appellants contend that the appellee cannot recover in this suit funds to pay creditors who were not such at the time when the dividend was declared and the stock was purchased, and cite cases such as Atlanta & Walworth B. & C. Ass'n v. Smith, 141 Wis. 377, 123 N. W. 106, 32 L. R. A. (N. S.) 137, 135 Am. St. Rep. 42. In that case it was held that the trust fund doctrine, that under all circumstances assets of a corporation constitute a trust fund for creditors, does not prevail in Wisconsin, and that as a general rule, unless plainly prohibited by statute, or its organic act, a corporation may buy its own stock, using its assets therefor, so long as it acts in good faith, pursuant to authorization of its governing body, and that this is true both as to past and future creditors. But in the case at bar the acts of the directors, as we have seen, were prohibted by statute, and were not performed in good faith. In Cook on Corporations (6th Ed.) § 548, it is said:

"Hence the rule has been firmly established that, where dividends are paid in whole or in part out of the capital stock, corporate creditors, being such when the dividend was declared, or becoming such at any subsequent time, may, to the extent of their claims, if such claims are not otherwise paid, compel the stockholders to whom the dividend has been paid to refund whatever portion of the dividend was taken out of the capital stock."

In Coleman v. Tepel, 230 Fed. 63, 144 C. C. A. 361, it was held that where a corporation was rendered insolvent by purchasing its own stock, and giving a mortgage for the indebtedness thereby created, the transaction was void as to subsequent, as well as to prior, creditors, although there was no fraudulent intent. The court said:

"It has been urged that, if the transaction is void, it is void only as to existing creditors, and not as to those with whom the corporation subsequently incurred obligations, upon the ground that, to avoid a transfer of property in fraud of future creditors, there must be present actual intent to defraud. * * * We are inclined to hold, upon the reasoning of well-considered authorities, that the void character of such a transaction as to future creditors does not depend upon fraudulent intent, and that when a stockholder, with the knowledge he has, or with that with which he is charged, concerning the financial condition of the corporation, engages in a transaction which results in a depletion for his advantage of corporate assets below the subscribed capital, or below existing liabilities, as the law may be, and becomes a party to the solvent appearance of a business that is intended to be continued, he is bound by his act, both to existing and future creditors, when its direct object or immediate consequence is the insolvency of the corporation and injury to creditors."

In Coleman v. Booth, 268 Mo. 64, 186 S. W. 1021, the Supreme Court of Missouri held that the trustee in bankruptcy of a corporation. may recover the amount received by a director through transactions with the corporation which resulted in wrongful depletion of its capital stock, even though all claims of creditors occurred subsequent to such transaction. Said the court:

"It makes no difference, in respect to this matter, whether the debts represented by the trustee were contracted before or after the illegal acts complained of."

To the same effect is North v. Union Savings & Loan Ass'n, 59 Or. 483, 117 Pac. 822; and in Atlanta & Walworth B. & C. Ass'n v. Smith, so cited by appellants, the court said:

"We are not unmindful that the rule, in general, as to avoidance of a transfer of property in fraud of future creditors, applies only in case of actual intent to defraud them. * * * It is too restrictive, as generally stated, to apply to the situation we have here, and should, it is thought, be extended to include it, upon the theory that the duty of the stockholder not to deplete for his advantage corporate assets below the subscribed capital, and become a party to a continuance of solvent appearance, supplies the need for actual intent to defraud, where the natural and probable effect is to prejudice persons subsequently dealing with the corporation as solvent."

These decisions suggest the reason why recovery on behalf of subsequent creditors is permissible-the reason which is pointed out by Lord Watson in Trevor v. Whitworth, 12 App. Cas. 409, that persons dealing with a corporation

"are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business."

[7] One of the defenses pleaded by the appellants was accord and satisfaction, arising out of the following facts: On March 13, 1911, E. T. Barnette, who had been the president of the corporation, presented to the court below a petition, referring to the condition of the bank, the receivership, and the petitioner's desire to pay the money due and owing to depositors, and offering as security for that purpose the conveyance of certain real estate to the receivers. On March 20, 1911, the receivers applied to the court for instructions, expressing their opinion that, if the deeds were accepted, it would be impracticable to proceed as contemplated to fix liability against Barnette in favor of the creditors of the bank. On March 29, 1911, the judge of the court below made an order to the effect that the receivers accept the property on the conditions expressed in Barnette's petition. One of those conditions was that, after the payment of the balance of the claims and demands of the depositors and owners of unpaid drafts, the remainder of the property, if any, be returned to the petitioner. The amount realized from the rents and sale of said property up to May 1, 1914, was $30,905.65.

The contention of the appellants is that the acceptance of the property by the receivers was satisfaction and extinguishment of all liability of Barnette, and that thereby all persons jointly liable with him were released, or at least that the acceptance of the property by the receivers was a covenant not to sue Barnette, and that it operated to extinguish the causes of action against the appellants, and constituted a compromise of a tort. To this it is to be said that there is nothing in the record to show that Barnette stipulated for release from liability for his own acts, or for the acts of his associates, in the management of the bank. He stipulated in one of his deeds that the receivers were not to take possession of the property conveyed, nor the rents, issues, and profits thereof, nor have any right to the possession or use thereof, at any time prior to November 18, 1914. In the other deed it was provided that the grantees might at any time in their discretion sell the

property therein described and apply the proceeds to the payment of depositors and the owners of unpaid drafts, and there was coupled with it the further provision that the grantees might so sell and dispose of the proceeds if on November 18, 1914, the demands of depositors and owners of unpaid drafts had not been fully paid and satisfied. By the terms of both deeds all creditors were excluded from the benefit thereof save depositors and owners of unpaid drafts. The receivers considered that their acceptance of the conveyances obligated them not to sue Barnette before November 18, 1914, and the appellee so pleaded their effect in the reply.

Again, the property was not all surrendered absolutely for the payment of the depositors and holders of unpaid drafts, but a portion thereof was surrendered only for the payment of a deficit to be thereafter ascertained as between the amounts due depositors and owners of unpaid drafts and the amount realized by the receivers out of the property and assets of the bank. None of the proceeds of the property so surrendered by Barnette in the first deed can be applied to payment of depositors and holders of unpaid drafts until all the property and assets of the bank shall have been realized on and devoted to liquidation. There was imposed upon the receivers, by their acceptance of the conveyances, the obligation to pursue all available remedies to recover the assets, including, we think, the assets which may be recovered in the present suit. While it is true that the deeds to the receivers recited that the receivers are about to commence an action on behalf of creditors against Barnette to recover from him the amount of any deficit that may be ascertained between the claims of creditors and the amount realized out of the property and assets of the bank, said action to be based on the liability of Barnette to said creditors "arising out of his management of the affairs thereof," there is nothing in the evidence. to show that the deeds were accepted in accord and satisfaction of the claims of the corporation against Barnette or any of the appellants. The court below was of this opinion, and said that the transfer"did not operate to release any of the defendants, and was not accepted by the receiver in satisfaction of the claims of the corporation or its creditors against any of the defendants, but such transaction was in effect an agreement not to sue Barnette prior to the expiration of the trust agreement, and instead of preventing the receiver from proceeding against these defendants, it rather rendered it necessary for him to take all proper steps to recover whatever possible upon the liabilities of any other person to the corporation or its creditors."

[8] "Accord and satisfaction requires an agreement, an aggregatio mentium, and it must finally and definitely close the matter covered by it. Nothing of or pertaining to that matter must be left unsettled, or open to further question or arrangement." 1 C. J. 527, § 12. "To constitute an accord and satisfaction, it is necessary that the money should be offered in full satisfaction of the demand, and be accompanied by such acts and declarations as amount to a condition that the money, if accepted, is accepted in satisfaction; and it must be such that the party to whom it is offered is bound to understand there from that if he takes it he takes it subject to such conditions." 1 Cyc. 332. We find no error. The decree is affirmed.


(Circuit Court of Appeals, Sixth Circuit. August 1, 1917.)

No. 2966.


A suit in admiralty by a seaman to recover for an injury alleged to have been caused by defective machinery or appliances on the ship is governed by the admiralty law.



A shipowner owes to his seamen a positive and nondelegable duty to see that the ship is seaworthy and her equipment in safe condition for use when she starts on a voyage, and a seaman, injured through failure to perform this duty, is entitled to compensation.


Libelant was assistant engineer on respondent's steamer. Soon after starting on a trip, the feed pump stopped and libelant attempted to start it, as had been done before, by forcing a piston back into the cylinder with a pinchbar; but it immediately flew back, causing the pinchbar to strike and injure libelant's head. Shortly after the injury the cylinders were opened, and the piston was found to be broken in two or three pieces. The pump had not worked well for two years, and it had frequently been necessary to start it when it stopped by external means; but during that time the cylinders had not been opened to ascertain the trouble. Held, that the evidence, while it did not show definitely the defect which caused the piston to fly back, was sufficient to support a finding by the trial court that the defect existed at the time the ship left port, rendering her unseaworthy, and that respondent was negligent in not ascertaining and remedying it, and was liable for libelant's injury. 4. SEAMEN 29(5)—SUIT FOR PERSONAL INJURY EVIDENCE.

In determining the negligence of respondent in maintaining the pump in an unsafe condition, the fact and nature of the accident might properly be taken into account, in connection with all other circumstances of the case.


The risk of injury from the flying back of the piston, when forced into the cylinder, was not one assumed by libelant, who had a right to assume that the owner would keep the pump in a safe condition.


In the absence of knowledge that the piston was likely to fly back, libelant was not chargeable with contributory negligence in taking a customary method of forcing it into the cylinder.


A finding on a question of fact by an admiralty court, which heard the witnesses, will be accepted by the appellate court, unless the evidence greatly preponderates against it.


A shipowner, whose negligence contributed to the injury of a seaman, is liable therefor, notwithstanding the concurring negligence of another.

Appeal from the District Court of the United States for the Eastern District of Michigan; Arthur J. Tuttle, Judge.

In Admiralty. Suit by Henry Moss against the Globe Steamship Company, owner of the steamer Frank C. Ball. Decree for libelant, and respondent appeals. Affirmed.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

« PreviousContinue »