UNITED STATES SUPREME COURT DECISIONS ON-LINE

As between creditor and stockholder, the provision of the Constitution of Kansas that "dues from corporations shall be secured by individual liability of the stockholders to an additional amount equal to the stock owned by each stockholder" applies to indebtedness incurred in the legitimate and contemplated business of the corporation.

Where a judgment has been rendered in Kansas against a corporation of that state, by default, on contracts which the corporation had no power to make, a stockholder when sued by virtue of the Constitution and laws of Kansas in that behalf, may insist, in defense, on the invalidity of the contracts.

On the facts found, the judgment below is correct, and is affirmed.

September 12, 1888, S. S. Hite and Mary L. Hite executed and delivered to one J. E. Ethell their promissory notes in writing of that date, whereby, for value received, they promised to pay to the order of Ethell on September 12, 1892, the principal sum named in each, with interest thereon at the rate of seven percent per annum, payable semiannually, according to the tenor of eight interest coupons bearing interest and attached to each of the notes, and afterwards and before the maturity of the notes, Ethell indorsed, transferred, and delivered clubjuris

Page 186 U. S. 143

them to Ward. At that time, the Western Investment Loan & Trust Company, a corporation of Kansas, guaranteed in writing the payment of the notes in the following words indorsed on each:

"For a valuable consideration, the Western Investment Loan & Trust Company hereby guarantees payment of the within obligation, both principal and interest at maturity."

The notes not having been satisfied, Ward brought suit against the Western Investment Loan & Trust Company on the guaranties in the District Court of Smith County, Kansas, and recovered judgment against the company by default, and execution having been issued on the judgment and returned nulla bona, Ward brought this action December 15, 1896, against Edward Joslin in the Circuit Court of the United States for the District of New Hampshire to recover of him as a stockholder in said Western Investment Loan & Trust Company an amount equal to the amount of stock owned by him in said corporation.

The declaration contained two counts. The first alleged the recovery of judgment; the issue of execution and return nulla bona; insolvency of the company July 1, 1894, and its want of "property or assets of any kind or value whatever," that defendant was the owner of one hundred shares of stock, and that,

"by reason of the premises and by virtue of the Constitution and statutes of the State of Kansas in such case made and provided, a right of action hath accrued"

to plaintiff.

The second count alleged that the loan and trust company

"was a corporation chartered and organized for the purpose of transacting a general investment loan and trust business, and under its charter, as it was authorized to do, indorsed and guaranteed the payment of notes and obligations negotiated by it;"

that these notes and coupons "were in fact negotiated by said corporation, the Western Investment Loan & Trust Company, in the regular course of its business;" that judgment was recovered and execution returned nulla bona; "and that, by reason of the premises and by virtue of the Constitution, statutes, and laws of the State of Kansas in such case made and provided," the right of action had accrued. clubjuris

Page 186 U. S. 144

Among other special matters set up in defense was

"that the claim against the Western Investment Loan & Trust Company, upon which a judgment in favor of the plaintiff against said company was founded, was not a due from or debt of said corporation, for which the defendant as a stockholder in said corporation was liable under the Constitution and laws of Kansas."

And that the Western Investment Loan & Trust Company

"never had any authority to indorse the said promissory notes and obligations in the second count in plaintiff's declaration described, or to guarantee the payment of said notes and obligations."

A jury was waived and the cause submitted to the circuit court for trial, and the court made and filed its findings of fact and conclusions of law.

After finding that the defendant was a stockholder of one hundred shares of the par value of fifty dollars each in the company in question, the findings thus continued:

"I find as a matter of fact, upon the evidence contained in the record and upon the arguments, that Ward's claim against the trust company was upon a guaranty given upon a valuable consideration, of the payment of certain promissory notes from one third party to another, and was not a guaranty of the payment of securities negotiated by the company."

"I find that the plaintiff brought an action at law in the District Court of Smith County, in the State of Kansas, against the trust company, on December 23, 1892, on these guaranties, by a writ served upon the president of said corporation, and on March, 1893, recovered judgment thereon against the company for $9,787.50, with interest at 12 percent, and as shown in the record on December 11, 1893, $4,924.75 was paid thereon, and on September 14, 1896, an execution issued for the balance and was returned wholly unsatisfied as shown by the officer's return printed in the record."

"I also find that the trust company was not a railway, religious, or charitable corporation, and the business which the corporation was authorized to do was"

"to buy and sell personal property, including stocks, bonds, bills, notes, real and

Page 186 U. S. 145

chattel mortgages, and choses in action of every kind and description, and to transact the business of a loan and trust company;"

"that sometime after the organization of the company, and before the defendant became a stockholder, the directors thereof resolved"

"that the president and secretary of the company be, and they hereby are, authorized to guarantee the payment of all securities negotiated by the company by indorsing upon any such security one of the following forms of a guaranty,"

"and the resolution of the corporation and the forms of guaranties printed in the record are referred to and made a part of the findings."

"Ascertaining the relations of the parties under the contract, which resulted from the Kansas Constitution and the statutes and the defendant's ownership of stock, I find, so far as it is a question of fact, that the dues to be secured by the superadded stockholders' liability were such as were within the reasonable and proper scope of the business as contemplated by the parties, and that a guaranty of this character was not intended by the defendant stockholder, and was not contemplated by the Kansas Constitution as a due or a debt within such scope. I also find, so far as it is a fact, that it was not within the scope of the resolution which assumed to authorize the president and secretary to guarantee securities negotiated by the company, and there is no evidence that the defendant stockholder had knowledge that the company was assuming, through its president and secretary, to guarantee the payment of claims not negotiated by itself, and there being no evidence of notice, I find, as a matter of fact, that he was not aware of it."

"I also make a general finding for the defendant."

The rulings of law were stated in the opinion of the court set forth in the record and reported 100 F.6d 6.

The circuit court ruled that

"the relations of the parties are contractual, and the term 'dues' in the Kansas Constitution ought to be accepted as applying only to claims resulting from the legitimate and contemplated business of the corporation or company, such as arise in respect of transaction within the reasonable scope of the business contemplated, and, as between the creditor and the stockholder, they should not be extended

Page 186 U. S. 146

to claims which arise from the transaction of unauthorized business."

That,

"while under paragraph 1192 of the General Statutes of Kansas providing a remedy, a judgment against the corporation may be accepted under proper limitations as conclusive in a proceeding against the stockholder as to the amount and liability of the company upon claims in respect to transactions within the contemplation of the Constitution and of the parties to the contract, it should not be accepted as conclusive upon the question of the nature and character of the claims, for the reason that paragraph 1192 is only intended to give a remedy to the creditor in respect to the kind of claims contemplated by the Constitution. The judgment on this ground is accepted as conclusive, because it relates to a corporate affair, and because the stockholder's interests are supposed to be represented by the officers of the bank in respect to affairs within the scope of its contemplated, legitimate, and authorized transactions,"

but the stockholder ought not to be concluded

"as to the question whether the foundation and nature of the claim were within the fair intendment of the constitutional provision and the contract between the parties upon the ground of representation, for the reason that such a question is not one which, in the natural and usual course of litigation between the bank and the creditor, would be presented or adjudicated."

That

"the contract under the Constitution is between the creditor and the stockholder, and the bank, in a proceeding against it by the creditor, to which the stockholder was not a party, would neither be called upon nor be expected or allowed to present such a question for adjudication."

That

"the amount of the bank's indebtedness, or its liability, on a question of this kind could and would be put in issue in a suit between the creditor and the corporation, but whether such a due is within the scope of the contract between the creditor and the stockholder under the Constitution would not and could not be put in issue in a suit between a creditor and the bank to which the stockholder is not a party."

That,

"in the original case against the bank by the creditor, the question as to the character of the claim -- whether it was one

Page 186 U. S. 147

contemplated by the contract between the creditor and the stockholder -- was neither presented nor litigated, nor was it in a situation to be presented or litigated, while, in the case now under consideration, the question is not whether the claim was an indebtedness or a due for which the bank was liable, which question was litigated and concluded by the judgment, but a question whether it was the kind of a debt or due which the statutory contract between the creditor and stockholder covered or contemplated. This precise question, as has been said, was not presented -- could not have been presented -- in that case, and therefore is not concluded."

That this judgment came within "an exception to the general rule that a judgment against the corporation is conclusive."

Plaintiff moved for a new trial, which was denied, and judgment entered for defendant. The case was taken on error to the United States Circuit Court of Appeals for the First Circuit, and the judgment affirmed. 105 F.2d 4. This writ of certiorari was then issued.