5

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ation by special treaties or by the proclamations of some individual nation. (1) From the middle of the fourteenth to the middle of the sixteenth century the rule adopted by the Consolato del Mare 3 was generally enforced, at least by the continental countries that enemy goods were confiscable and neutral goods exempt wherever found. (2) For the next hundred years or so a far more stringent rule was maintained by the stronger belligerents, notably France and England, to the effect that enemy goods were confiscable wherever found and that neutral goods were also confiscable if found on enemy ships. (3) During the seventeenth century a strong reaction against such a belligerent policy set in, and several states, under the leadership of the Dutch, commenced to assert the maxim of "free ships, free goods," coupled with a concession which, due to its nicely balanced jingle, was generally considered a necessary corollary"enemy ships, enemy goods." Between 1650 and 1700 the Dutch induced other countries to sign no less than twelve treaties containing this provision. England, however, never assented to this principle, but during this period, apart from a few treaties, consistently enforced the law as it had been under the Consolato del Mare, holding that the ownership of the goods was alone material. The movement for "free ships, free goods" culminated in the First and Second Armed Neutralities in 1780 and 1800 by which the Northern Continental nations sought to force England to change her rule. Both these leagues had but a short life owing to the inability of the individual members to resist the temptation of departing from their principles when themselves drawn into a war. (4) The fourth and last period commenced with the signing of the Declaration of Paris on April 16, 1856, by which the provisional arrangement entered into between France and England in 1854 for the purpose of conducting the Crimean War was adopted by all the signatories." The Declaration exempted not only enemy property from capture in neutral ships but also neutral property in enemy ships. The only possible combination that has never been adopted as law is that which the United States has long insisted upon-complete immunity of private enemy property at sea as on land.

It is clear that in the light of this history the result of the Declaration of Paris was caused as much by a desire on the part of neutrals to protect their carrying trade in time of war as by any ideal of complete exemp

3 3 TWISS, BLACK BOOK OF THE ADMIRALTY, Chap. 231, p. 539.

With France this period extended into the eighteenth century. Moreover, her famous "ordonnances" of 1543, 1681, and 1704 extended the rights of belligerents even farther and declared that not only would an enemy ship make neutral property confis. cable but that a neutral ship carrying enemy property would also be condemned, → Robe d'ennemi confisque la robe d'ami. BONFILS, 7 ed., §§ 1502-04.

5 HALL, INT. LAW, 6 ed., 688.

• The Declaration was originally signed by England, France, Russia, Austria, Prussia, Turkey, and Sardinia. All other states were thereafter asked to accede to it. The only states possessing a seacoast that have withheld their tormal adherence are the United States, Spain, Mexico, and Venezuela. The only reason that the United States refused to sign was because she was unwilling to give up her privateering rights under the first paragraph unless the signatories would carry their reform further under the second and third paragraphs and accept the so-called Marcy Amendment, exempting all private enemy property at sea, except contraband. The Declaration was adhered to, moreover, by both sides in the Spanish-American war, as it was in the Russo-Japanese war, and is generally regarded as binding international law. See 2 WESTLAKE, 145.

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tion of enemy property at sea. This theory is borne out by the second paragraph of the Declaration's preamble. Many commentators have also taken this view of the Declaration. Under these circumstances the Judicial Committee of the Privy Council cannot with justice be criticised for adhering strictly to the wording of the second paragraph and holding in a recent case that private enemy property shipped before the war in a British vessel was not exempt. The Roumanian, 114 L. T. R. 3. The court was able, moreover, to refer to an elaborate dictum by Sir Samuel Evans in another recent case.10

On the other hand, considerations which might have led the court to a different conclusion cannot be overlooked. The result of this paragraph of the Declaration has been popularly expressed in the broader formula of "free ships, free goods," as we have seen, and the ship in question could well be argued to be "free." The wording of the paragraph in the terms of a familiar fiction as to the ship's flag might justify a conclusion that these goods, since not on an enemy ship, should be treated as though taken in the country whose flag the ship was flying." Moreover, the Declaration of Paris has been regarded by many as laying down a general rule for the immunity of all private enemy property from capture at sea, from which the case of enemy property on enemy ships is alone excepted.1 It is the more likely that this was the purpose of some of the continental signatories of the Declaration owing to the strength which Rousseau's doctrine had gained during the first half of the nine

7 This is particularly clear from a consideration of the agitation by the Dutch during the third period and of the activities of the Armed Neutralities.

8.44 that the uncertainty of the law and of the duties in such a matter, gives rise to differences of opinion between neutrals and belligerents which may occasion serious difficulties, and even conflicts. 7 MOORE'S DIGEST, 561 (italics ours).

9 Sir Travers Twiss says that its motive "was a desire to render war, as a state of international relations, as little onerous as possible to neutrals." BELLIGEREnt Right ON THE HIGH SEAS SINCE THE DECLARATION OF PARIS, 3. Mr. Seward wrote of it to Mr. Adams as "endeavoring to effect some modifications of the law of nations in regard to the rights of neutrals in maritime war." 7 MOORE'S DIGEST, 570.

10 The Miramichi, 112 L. T. R. 349, 352. There is another dictum in accord with the present case. The Mashona, 10 Cape Times L. R. 163, 178. In that case the goods had been shipped after the war, so the vessel was not innocent as in the present case, owing to the prohibition against trading with the enemy.

11 Private property of the enemy found in the country at the outbreak of war is never confiscated, though the United States has always been careful to assert that the right existed, but that it should never be exercised. Wolff v. Oxholm, 6 M. & S. 92; Brown v. U. S., 8 Cranch 110; SCOTT'S CASES ON INTERNATIONAL LAW, 481-97.

12 Thus, President Pierce in his annual message to Congress on December 2, 1856, in explaining why the United States would not accede to the Declaration, said: "Their proposition was doubtless intended to imply approval of the principle that private property upon the ocean, although it might belong to the citizens of a belligerent state, should be exempted from capture; and had that proposition been so framed as to give full effect to the principle, it would have received my ready assent on behalf of the United States." 7 MOORE'S DIGEST, 564. See also HAUTEFEUILLE, QUELQUES QUESTIONS DE DROIT INTERNATIONAL MARITIME, 59 (1861): "Depuis le commencement du dixseptième siècle, toutes les nations ont reconnu que l on devait agir sur l'océan de la même manière qu'à terre." There is apparently no evidence to be gained as to the motives behind the Declaration from the deliberations of the plenipotentiaries. It was signed eight days after it was proposed by Count Walewski. See BOWLES, THE DECLARATION OF PARIS, Chap. XII. Any discussion there may have been was kept secret, together with the other deliberations of the Congress. See GOURDON, HISTOIRE DU CONGRÈS DE PARIS, 113, 485-86.

teenth century that war is a relation between states and not between the private individuals composing the states.13 As the result of all these reasons, at least one English authority on international law has stated the effect of the Declaration in its broadest terms.14

But it is not surprising that, in spite of all these arguments, the English court was unwilling to take any step which would in the least extend the scope of the Declaration of Paris, when the conventional English attitude toward the Declaration is borne in mind.15 The United States, on the other hand, would naturally be disappointed with anything but the broadest possible interpretation of the Declaration, in view of the fact that this country has for over a hundred years contended unswervingly for the complete immunity of private property at sea, and that England is virtually the only country which is still firmly opposed to this principle.16

THE NATURE OF THE STOCKHOLDER'S LIABILITY FOR STOCK ISSUED AT A DISCOUNT. When a corporation issues its stock at a discount, the original holder has been held liable to creditors of the corporation, in the event of insolvency, for the difference between the par value and the amount actually paid in, if that amount is needed to satisfy its creditors.1 Various theories have been advanced to explain this result. Under the "trust fund" theory, the capital stock, including unpaid balances on 13 A good account of the development of this theory on the continent and its reception by England and the United States is given by F. R. Stark, 8 COLUMBIA STUDIES IN HISTORY, ECONOMICS, AND PUBLIC LAW, [232-57]. Hall, on the other hand, virtually brands the doctrine as a mere fiction invented to attack the legality of private enemy property at sea. HALL, INT. LAW, 6 ed., 63-70. See also Dana's Note 171 to WHEATON.

14 "We may therefore conclude that enemy ships and enemy goods on board them are now, by international law, the only enemy property which, as such, is capturable at sea. 2 WESTLAKE, 145.

15 This attitude is exemplified by Mr. Bowles' book on the Declaration of Paris referred to above. An idea of his point of view may be gathered from the title of Chap. XII- "The Declaration of Paris - Unauthorized Contradictory - False - And no Part of the Law of Nations." For an admirable defense of this part of the Declaration, see 144 Edinburgh RevieW, 353, 358-69 (1876).

16 As early as 1785 the United States concluded a treaty with Prussia providing for the immunity of all private property at sea. She made the same proposition in 1823 to England, Russia, and France. She contended for the same doctrine in the Marcy Amendment after the Declaration of Paris. On the continent, Italy in 1865 incorporated the doctrine in her marine code and concluded a treaty on this basis with the United States in 1871. Austria and Prussia asserted the doctrine in their war of 1866. Prussia announced it at the outbreak of the Franco-Prussian war. See HALL, INT. LAW, 5 ed., 438-39, 441, n. 1; 7 MOORE'S DIGEST, 461 et seq. Even in England the best opinion is not all in favor of the old belligerent rule. For a good statement of England's arguments against the new doctrine, based on the theory that her naval supremacy would be rendered useless, see Sir Edward Grey's instructions to the English delegates to the Hague Conference in 1907. HIGGINS, THE HAGUE PEACE CONFERENCES, 2 ed., 619-21. For the arguments on the other side, based on the growth of England's commerce, her dependence on it, and the danger of the malevolent neutrality of continental nations if her attitude continues, see 26 CONTemporary Rev. 735, 737-51 (1875); LOREBURN, CAPTURE AT SEA, Chaps. II and III.

1 Scovill v. Thayer, 105 U. S. 143. See WARREN, Cases on CorPORATIONS, 2 ed.,

stock issued at a discount, is said to be a fund for the benefit of all the creditors of the corporation. Under the "holding out" theory, the liability is based upon a reliance by creditors on a representation of the stockholder that the stock has been fully paid up, and only such subsequent creditors can benefit. It is to be observed, therefore, that the class of creditors entitled to recover varies according to the theory upon which the court proceeds. Another illustration of the variant results reached according to the theory adopted is presented by the recent case of Courteney v. Georger, 228 Fed. 859. A Minnesota corporation issued stock, with a par value of one hundred dollars, for ten dollars per share, under an agreement that it should be regarded as fully paid up and non-assessable. The corporation became bankrupt and its trustee in bankruptcy, in pursuance of an order of the referee, issued a call upon holders of this stock in order to pay the debts of the corporation. The trustee sued, in the federal court, certain stockholders living in New York. It was held that he was not the proper person to maintain the action. The court based its decision upon the fact that in Minnesota, under the doctrine of Hospes v. Northwestern Mfg. & Car Co., the stockholder's liability is based upon a fraudulent representation and that only subsequent creditors who relied upon this representation can recover; that the liability is not an asset of the corporation, and therefore the bankruptcy act does not give the trustee the right to sue on behalf of the creditors who are injured. This result is by no means desirable, for the bankruptcy court is peculiarly fitted to wind up the whole matter, yet under the Minnesota theory of the stockholder's liability, the court could not have reached a different conclusion. Under the "trust fund" theory, however, the liability of the stockholder to pay the balance would have been implied, the agreement to the contrary held void, and this asset would have passed to the trustee in bankruptcy. Has the Hospes case, then, in rejecting the "trust fund" theory as logically unsound, placed the stockholder's liability upon a more satisfactory basis?

Under both the "trust fund" theory and the "holding out" theory of the stockholder's liability for the unpaid balance, there is a feeling that "watered" stock is a wicked thing. There are two classes of persons who may be deceived by its existence, subsequent purchasers of

2 Wood v. Dummer, 3 Mason 308; Sawyer v. Hoag, 17 Wall (U. S.) 610.

3 Hospes v. Northwestern Mfg. & Car. Co., 48 Minn. 174, 50 N. W. 1117.

4 See RECENT CASES, p. 877

5 48 Minn. 174, 50 N. W. 1117.

• In re Jassoy, 101 C. C. A. 641, 178 Fed. 515.

7 The court treats the liability in the same manner as the double liability of a stockholder imposed by statute, making the stockholder a surety for the corporation. Such a liability is not provable against the corporation in bankruptcy. See Alsop v. Conway, 110 C. C. A. 366, 188 Fed. 568; In re Beachy & Co., 170 Fed. 825. But see Stocker v. Davidson, 74 Kan. 214, 86 Pac. 136, where the statute expressly made the liability of the stockholder an asset of the corporation in event of insolvency.

8 Sawyer v. Hoag, 14 Wall. (U. S.) 610; Scovill v. Thayer, 105 U. S. 143. "Watered' and 'bonus' stock is one of the greatest abuses connected with the management of modern corporations." Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 196, 50 N. W. 1117, 1120. "The idea that the capital of a corporation is a football to be thrown into the market for the purposes of speculation, that its value may be elevated or depressed to advance the interests of its managers, is a modern and wicked invention." Upton v. Tribilcock, 91 U. S. 45, 48.

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the stock and creditors of the corporation who become such after the stock has been issued. Various attempts have been made to protect the unwary purchaser from deception by vendors of stock with no property behind it,1o but it is safe to say that no business man would think of paying one hundred dollars for a share of stock simply because that amount is embossed upon the certificate. And it is doubtful whether a business man would give a corporation credit simply because of the amount of capital stock it purports to have. If, however, that were all there is to the problem, the theory adopted in the Hospes case would be ample protection for such creditors, and there would therefore be no quarrel with that explanation of the liability. And perhaps to-day, by the weight of authority, recovery is restricted to subsequent creditors who are presumed to have relied upon the false representations of the stockholders." But behind the feeling that "watered" stock is objectionable is a deeper reason. The courts and legislatures have felt that the stockholder with his limited liability is given a tremendous boon. It is therefore no more than common business decency that he should risk all that he has purported to risk. If the holder of a share of stock is to have his liability limited to one hundred dollars, it must be unlimited up to that amount.i It is not considered fair for him to have the benefit of prosperity and throw the risk of adversity upon the creditors of the corporation. In order to clothe this commercial demand in juristic garb, the "trust fund" theory was first advanced; then its too apparent inaccuracies led to the substitution of the "holding out" theory. This, however, gives no remedy to the prior creditor nor to subsequent creditors with notice of the issue at a discount, and to them the risk of failure of the enterprise is shifted. And this discrimination is made only by a forced presumption of reliance, that would be difficult to prove.13 The truth is that the liability of the stockholder to pay in full for his stock is an obligation placed upon him because of his relation to the corporation.14 Incidents of this obligation are that the corporation cannot change it or release the stockholder from its binding effect, and that the stockholder cannot avoid the obligation by the means available in the case of an ordinary debt.15 On this theory the prin

10 See Alabama, etc. Co. v. Doyle, 210 Fed. 173, 175; 75 CENT. L. J. 221.

12

11 Lea v. Iron Belt Co., 147 Ala. 421, 42 So. 415; State Trust Co. v. Turner, 111 Ga. 664, 36 S. E. 900; Hospes v. Northwestern Mfg. & Car. Co., 48 Minn. 174, 50 N. W. 1117; Gogebic Improvement Co. v. Iron Chief Mining Co., 78 Wis. 427, 47 N. W. 726. Contra, Easton National Bank v. American Brick Co., 70 N. J. Eq. 732, 64 Atl. 917; Sprague v. Nat'l Bank of Am., 172 Ill. 149, 50 N. E. 19; cf. Jones v. Whitworth, 94 Tenn. 602, 30 S. W. 736. But see Bent v. Underdown, 156, Ind. 516, 60 N. E. 307, where the creditors were held affected with constructive notice of a provision in the articles of association that only fifteen per cent of the par value should be paid.

12 See Geo. W. Pepper, "Rights of Stockholders and Creditors in the Property of the Corporation," 34 AM. L. REG. (N. S.) 448, 456.

13 Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 198, 50 N. W. 1117, 1121; Randall Printing Co. v. Sanitas Mineral Water Co., 120 Minn. 268, 139 N. W. 606.

14 See Geo. W. Pepper, "Rights of Stockholders and Creditors in the Property of the Corporation," 34 AM. L. REG. (N. S.) 448, 459.

15 Thus he may not avail himself of the right of set-off. Sawyer v. Hoag, 17 Wall. (U. S.) 610; Babbit v. Read, 173 Fed. 712. And after insolvency of the corporation, the right to rescind because of fraud is cut off against subsequent creditors. Gress