181 Ky. 722
Court of Appeals of Kentucky.
Oct. 25, 1918.
ACTION: Affirmed in part, reversed in part, and remanded, with directions.

Appeal from Circuit Court, Knox County.
Action by H. W. Bowman against W. M. Jones and others. From adverse judgments, defendant Jones appeals.

The appellee H. W. Bowman recovered a judgment against the Jones-Hughes Coal Company, for $542 and costs, amounting to $31. The Jones-Hughes Coal Company was a corporation, which was organized under the laws of this state, for the purpose of mining and selling coal. The capital stock authorized was $20,000 divided into 200 shares, of the par value of $100 per share. The stockholders were the appellant, W. M. Jones, the appellee E. E. Evans, T. J. Payne, and Mrs. S. E. Hughes. Jones, Evans, and Payne each subscribed for and received 33 shares, of the par value of $3,300. Mrs. Hughes held 1 share. These were the stockholders when the debt was created for which Bowman recovered his judgment, and were the only stockholders when the judgment was recovered.

After having an execution of fieri facias issued upon his judgment against the Jones-Hughes Coal Company, and a return by the sheriff that there was no property found to satisfy it, Bowman instituted this action against Jones, Evans, and Mrs. Hughes, in an endeavor to have them adjudged liable for his judgment and to recover it against them. He alleged, as the ground of his recovery, that the corporation was insolvent, and had no property, and had ceased to do business, and that Jones and Evans, each, owed the corporation, for the stock which they owned, in the sum of $3,300 each, and that Mrs. Hughes owed it, for her stock, the sum of $100; it being averred that neither of these persons had ever paid the corporation for any of the stock owned by them. T. J. Payne was not sued, because he had, since the debt was created by the corporation, made application for and received a discharge as a bankrupt.

Each of the defendants filed answers. Jones and Hughes contented themselves with denying that they had never paid for the stock owned by them, or that they, either of them, yet owed the corporation for any of the stock held by them. Evans, in addition to denying that he owed anything to the corporation for his stock, affirmatively alleged that he had sold and transferred his stock to Jones, or to Jones and John Moore, more than two years before the institution of this action, and relied upon the limitation provided by section 547, Ky. Stat., as a bar to any recovery against him. He made his answer a cross-petition against Jones and John Moore, and averred that he transferred his stock to Moore at the instance and direction and by the procurement of Jones, and that he did not know whether Jones had procured the transfer to Moore, for his own benefit, or for the benefit of Moore, but by the transfer Jones and Moore became the holders and owners of his stock, and succeeded to all the rights and liabilities of Evans as the prior holder of the stock, and were bound for any indebtedness of the corporation to Bowman, and prayed that, in the event the court should adjudge that he (Evans) was liable for the debt held by Bowman, he have a judgment over against Jones and Moore for the amount of any judgment against him. Jones, by reply, denied any liability in any event to Evans, or that he was the owner or holder of the stock formerly owned by Evans.

Bowman denied, by reply, the sale or transfer by Evans of his stock, or his release from liability upon that account. After the taking and filing of a great deal of evidence, by way of depositions, the action was submitted for trial and judgment.

The court adjudged that Jones and Evans were stockholders in the corporation at the time the Bowman debt was created, and at the time he recovered a judgment upon it against the corporation; that each of them were the owners of $3,300, par value, of the stock, and had never paid the corporation only $50 each for the stock, and that each of them yet owed it $3,250 for the stock subscribed for and received by each of them; and that Bowman recover against them, individually, the amount of his judgment, but that whatever sum Evans was required to pay of the judgment he should recover of Jones, and might have an execution against Jones therefor. The petition, as to Mrs. Hughes, was dismissed, as there was no evidence which conduced to prove that she had not fully paid for her stock. Evans, however, has never appealed from the judgment in favor of Bowman against him and Jones, and hence the matters relied upon by Evans as a defense to the action are not here for consideration. Jones has appealed from both judgments.

1. There is no contention but what, as provided by section 547, Ky. Stat., Jones is liable to Bowman as a creditor of the corporation for the full amount of the unpaidfor stock which was subscribed for by him, and it is conceded that the amount of stock subscribed for by him and issued to him was 33 shares, of the par value of $100 per share. The only issue between him and Bowman was whether he had paid for the stock. Jones did not contend that he had paid for the stock subscribed for by him with money, but that he had paid for it by the transfer to the corporation of his interest in certain partnership property, consisting of a small stock of merchandise, mining tools, and machinery, and certain mining leases.

While it has been a subject of controversy, in certain jurisdictions, as to whether a subscription to the capital stock of a corporation can be paid otherwise than with money, and certain courts have held to that effect, the question is settled in this state, by section 193 of the Constitution and section 568, Ky. Stat. By the provisions of these sections the subscriptions to stock in corporations may be paid for by services or with property. When a payment for stock is undertaken to be shown to have been made with property, the property must have been "actually received" by the corporation and "applied to the purposes for which such corporation was created." Further, neither property nor services can be received in payment for stock "at a greater value than the market price at the time the said labor was done or property delivered." This is in accordance with the general rule, which is that the value of the property to be received in payment for stock must represent to the corporation the "just, lawful, and needed equivalent for the money subscribed."

Applying the rule fixed by the Constitution and the statute to determine the essentials to a payment for stock in a corporation with property, it is clear, from the evidence, that Jones' subscription to the stock was largely unpaid-- not to the extent that it was adjudged by the circuit court, but to an amount in excess of Bowman's debt. The evidence consisted of many facts and circumstances, requiring a large number of pages to record them, and it would not be profitable to recite them here.

2. The appellee Evans testifies that, something over two years before this action was filed by Bowman, he was then owing Jones a note, the balance unpaid upon which was then $100, and a note for $200; that he sold his stock to Jones, who directed him to transfer it to John Moore, which he did; that the consideration for his sale and transfer of his stock was that Jones turned over to him the $100 note, and promised him that, if he made that much out of handling the stock, he would give him the $200 note, but he afterwards paid off the $200 note to Jones. This seems to have been a sale of his stock, according to his own version of it, to Jones or to Moore, for a consideration agreed upon between him and Jones. There is neither claim nor proof that at the time of this sale, and as a part of the contract, Jones should hold Evans harmless in his liability either to the corporation or to its creditors as a holder of the stock which he was disposing of. The contention of Evans seems to be that under sections 545 and 547, Ky. Stat., if a subscriber to stock in a corporation should be made liable to a creditor of the corporation, because of having failed to pay for the stock, which he received, that he could recover from one to whom he had sold and transferred the stock the amount which he was required to pay the creditor. Manifestly this contention is not tenable. It would amount to a reward to a derelict subscriber for a failure to discharge his own obligation. It would seem to be more in accordance with equity that, if the innocent transferee was made liable to the corporation for the unpaid stock, he would be entitled to recoupment from the transferror.

A distinction must be drawn between a transfer of stock in those corporations where the owners of stock are subject to a liability in double the amount of the par value of their stock for the benefit of creditors, and in those corporations where the subscriber is made liable to creditors for the unpaid portion of his stock. The rule announced in Robinson-Petitt Co. v. Sapp, 160 Ky. 445, 169 S. W. 869, applies to the rights of transferee and transferror in those corporations where the owner of stock is liable to double the value of his stock for the benefit of creditors. Section 545, Ky. Stat., imposes the liabilities of a prior stockholder as a stockholder to the transferee; but it does not create any obligation upon the transferee in favor of a derelict subscriber of stock, who makes a transfer of it. Hence, without undertaking to determine what the obligations of transferees of unpaid stock are to the corporation or its creditors, we are of the opinion that the derelict subscriber has no cause of action against his transferee, when he is made to comply with his obligation to pay for the stock which he has sold.

The judgment in favor of Bowman against Jones is therefore affirmed, but the judgment in favor of Evans against Jones is reversed, and the cause remanded, with directions to set aside the judgment in favor of Evans, and to dismiss his counterclaim.

Ky.App. 1918.


205 S.W. 923, 181 Ky. 722

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