
    Case 86 — PETITION EQUITY
    May 3.
    Bush, &c., v. Robinson.
    APPEAL PROM.CLARK CIRCUIT COURT.
    1. Corporations — Individual Liability op Stockholders. — The stockholders of a corporation organized underchapter 56 of the General Statutes are personally liable for the debts of the corporation to the amount of the unpaid installments on the stock subscribed by them; but a creditor of the corporation may, by special contract, waive his right to look to the individual stockholders, and oral testimony is competent to show such a contract.
    2. Same. — Where the capital stock of a corporation was to be represented by land to be conveyed to the corporation, and it was provided in the articles of incorporation that upon the land being conveyed to the corporation the stockholders should be entitled to have issued to them as paid-up the full amount of stock subscribed, this provision might, as between the stockholders and the corporation, be valid, but it is not so as to creditors, and hut for a special contract with the vendor of the land exempting the stockholders from personal liability they would, to the extent of the unpaid installments due upon their subscriptions, he liable to the vendor for the unpaid purchase price of the land.
    GRUBBS & MORANOY for appellants.
    1. Where stock is paid for at less than par under a fair understanding between the corporation and the stockholders, the contract is valid and there is no debt. (Scoville v. Thayer, 105 U. S., 143.)
    2. There being no debt the stockholders (appellants) can not be sued for an assessment until the assets of the corporation have been exhausted-And tbe proof in this case showing that no effort has been made to exhaust the assets of the corporation, this action is premature. (Scoville v. Thayer, 105 U. S., 143; Jones’ Assignee v. Johnson, 10 Bush, 649; Hardeman v. Ainslie, 82 Ky., 395; Thompson v. Reno, 3 Am. St. Rep., 814; Bell’s Appeal, 115 Pa. St., 88 (2 Am. St. Rep., 532); Cook on Stock and Stockholders, sec. 200; Morawetz on Corporations, vol. 2, sec. 820.)
    3. The capital stock having been paid for in land at a fair valuation, and this fact being known to the appellee, he can not now hold the appellants to an assessment. (Bank of Port Madison v. Allen, 129 U. S., 373; Morawetz, vol. 2, secs. 829 and 871; Cook on Stock and Stockholders, secs. 44, 45, 46; Coit v. North Carolina Gold Amalgamating Co., 119 U. S., 343; Haldeman v. Ainslie, 82 Ky., 395.)
    4. The contract to look to' the lands al'one and not to the incorporators or stockholders was a binding contract between the parties. (Cook on Stock and Stockholders, sec. 216; Morawetz, sec. 871; Thompson v. Reno Savings Bank, 3 Am. St. Rep., 814; Brashear v. Porbes, 36 Md., 164; Brown v. Eastern S. Co., 134 Mass., 59.)
    5. The petition did not contain allegations sufficient to bring this case within section 14 of chapter 56, General Statutes. ■
    ¥M. LINDSAY and BECKNER & JOTJETT of counsel on same SIDE.
    J. M. BENTON foe appellee.
    1. The unpaid installments on subscriptions to stock are liable for the debts of a corporation; and the stockholders can not by a private arrangement between each other, or between them and the corporation, relieve themselves from liability to the full extent of the capital stock. (2 Morawetz on Private Corporations, see. 824; Hatch v. Dana, 101 TJ. S., 205, 215; 2 Beach on Private Corporations, sec. 561; Scoville v. Thayer, 105 TJ. S., 154; Note to Thompson v. Reno Savings Bank, 3 Am. St. Rep., 819.)
    
      2. Appellee can not be charged with knowledge of or prejudiced by the private arrangement disclosed for the first time when the answers were filed. Such an arrangement is void and can not be relied upon for any purpose. (Union Mutual Life Ins. Co. v. Prear Stone M’f’g Co., 37 Am. Rep., 129.)
    3. Bush and Coleman can not set off against their liability the amount of the corporation’s indebtedness to them. (2 Beach, sec. 727; 2 Morawetz, sec. 861; Reno Savings Bank v. Thompson, 3 Am. St. Rep., .826; Thompson’s Liability of Stockholders, sec. 382.)
    4. The statute gives the creditors of a corporation a new remedy and enables them to reach the assets of the crrporation remaining in the hands of the subscribers to its stock in an original and direct proceeding. (Gen. Stats., chap. 56, sec. 14; Marine and River Phosphate Mining and Manufacturing Co., &c., v. Bradley, 105 U. S., 175-183; Rev Stats, of South Carolina, chap. 64, sec. 36; Civil Code of California, sec. 322; Barnes v. Babcock, 29 Am. St. Rep., 158; Revised Statutes of Missouri (1879), sec. 736; Tatum v. Rosenthal, 29 Am. St. Rep., «97; Hatch v. Dana, 101 U. S., 205-215; Civil Code of Ky., sec. 92, suhsec. 4.)
    5. While it is competent for a person contracting with a corporation to-agree that he will not hold the stockholders liable in their individual capacities, even to the extent of unpaid subscriptions of stock, yet such a waiver must be clearly shown, which was not done in this case.
    J. S’. W1NÍT ON SAME SIDE IN PETITION DOB REHEARING.
   JUDGE LEWIS

DELIVERED TH^OPINION ON THE COURT.

March 17, 1890, R. T. Coleman and H. "W. Clark associated and became incorporated under chapter 56, General Statutes; name of the corporation being “‘Grand Boulevard Residence Company,” and its principal place of business, Louisville. The articles of incorporation contain the following clauses: “ 1. That the general nature of business to be transacted is to buy, sell and deal in lands in Kentucky, to lay off same into boulevards, lots, streets, etc. 2. The amount of capital stock authorized is $30,000, to be issued in shares of $100 each, which is fully paid up, represented by the conveyance of about forty-three acres of land, near Winchester, Clark County, and when said land is so conveyed to, and accepted by, the corporation, said amount of stock shall be issued fully paid up and non-assessable for any purpose. 3. The private property of the stockholders, directors and incorporators shall be exempt from corporate debts.”

On the same day a meeting was held for the purpose of organizing the company, when the capital stock of $30,-000 was subscribed for, and directed to be issued fully paid up and non-assessable, upon payment at rate of $15 per share by the subscribers, who were-R. T. Coleman, S. S. Bush, G. T. Berry and W. E. Bradley. The next day, March 18th, John Y. Robinson conveyed to “Boulevard Residence Company ” about, forty-three acres of land, the same mentioned in the articles of incorporation, at the price of $18,360, of which $4,590 was then paid, and for residue, notes, secured by lien on the land, were executed by the company through its president, S. S. Bush.

This action was brought by Robinson in Clark Circuit Court against the company and the stockholders named, to recover amount of said notes.' And personal judgment therefor was rendered not only against the company, that made no defense, but against Coleman and Bush, each to extent of $4,590, and against Berry and Bradley, each to the extent of $2,295.

Several grounds of defense to the action were relied upon in the lower court, as they are here, but we need consider only -that pleaded in paragraph six of the joint answer, as follows: “ There was an express contract and understanding with said Robinson that no personal liability was to attach to any officer or stockholder of the company by reason of said notes, or by reason of any indebtedness that might be due to the company from other sources, but that the contract was with the distinct understanding the only claim plaintiff Robinson had, was against the corporation and said tract of land, and not against any individual stockholder thereof.”

It appears that prior to organization of the company, S. S. Bush, being at "Winchester, had purchased, or obtained from Robinson, an option on twenty acres for Coleman, Bush & Co., a firm engaged in buying and selling lands, which was by telegram enlarged to forty-three acres. But -when he went back to consummate the trade, the deed was drawn so as to make the company vendee, and also sole obligor of the notes for deferred payments.' Besides Bush, two witnesses, having no interest in the action, state that when the deed was presented to Robinson, and the notes signed by the company, by Bush, its president, and tendered, it was fully and clearly explained to and understood by him, that the stockholders had paid of their subscriptions to the capital stock of the company, money enough to make the cash payment on the land, and did not intend to risk more, but that he was to look only to the corporation and the land, its only property or means, for payment of residue of purchase money, which he agreed to do.

The land was, as Robinson manifestly knew, purchased for purpose of mere speculation, at a time when what is called “ a real estate boom ” prevailed at Winchester and vicinity, and at a price three times as great as, according to evidence in this case, it will now bring, or probably would have brought very soon after the transaction. And it is an entirely reasonable belief Robinson was willing and did agree to waive recourse on the stockholders, rather than forego a sale whereby he would, without risk, obtain double the actual value of his land; and in our opinion, notwithstanding he testifies to the contrary, the evidence, clearly supports the allegation of the answer.

But, although the provision of articles of incorporation by which the stockholders were, upon the land being conveyed to the corporation, entitled to have issued to them as paid up the full amount of stock subscribed, might, as between them and it, be valid, it was not so as to creditors. For section 14, of chapter 56, General Statutes, in terms provides that stockholders of a corporation shall not be exempt from individual liability to the amount of the unpaid installments on the stock subscribed by them, or transferred by them for the purpose of defrauding creditors; and an execution against tlie company may to that extent be levied upon the private property of such individual. And having actually paid but $15 upon each share •of stock of the face value of $100, the defendants, now appellants, arc unquestionably liable for balance of purchase price of the land to the extent of the unpaid installments, unless released by the alleged agreement of appellee Robinson, and -whether they were, is the main question in this case.

In Cook on Stock and Stockholders, section 216, it is said: “A corporate creditor may, by express contract made when the debt was incurred, waive his right to collect from the stockholder debts which the corporation fails to pay.” . And in Morawetz on Corporations, section 871, is this language: “A statutory provision declaring that the shareholders in a corporation shall be individually liable to creditors, would not prevent the execution of contracts into which this liability does not enter. If a person contracting with the corporation should expressly agree to accept the obligation of the corporation without the special liability of its shareholders, he would not be able to charge the latter. Such provision is solely for benefit of those dealing with the corporation, and may be waived by them.” In support of the doctrine thus stated, the folio-wing cases are cited: Brown v. Eastern Slate Co., 134 Mass., 590; Basshor v. Forbes, 36 Md., 134; French v. Teschemaker, 24 Cal., 518; Robinson v. Bidwell, 22 Cal., 379.

In Brown v. Eastern Slate Co., the plaintiff accepted promissory notes of the corporation in payment of property sold to the company under a written contract. At the same time he orally agreed with the directors that the shareholders should incur no personal liabilities for the claim. And the court held the oral agreement was binding.

In Basshor v. Eorbes, a steam engine was purchased by a corporation, for which it gave notes, secured by mortgage on certain lands. And the action was brought on the notes against a stockholder alleged to be liable, because the whole amount of the capital stock of the company had not been paid in, and he was a stockholder thereof to* an amount greater than the demand sued on. But upon proof of an oral agreement the vendor was to look to the mortgage and not to stockholders, he was held not entitled to recover.

In both cases cited, the question of competency of oral testimony to prove such collateral agreement was considerd, and it was held that as it did not contradict or vary the -written contract, it was competent.

In our opinion the effect of the agreement by Robinson to look to the company and to the lien on the land and not to the stockholders for payment of the notes sued on,, was to exempt the latter from liability.

The judgment is therefore reversed, and cause remanded, for dismissal of the action against appellants.  