example of the statutes above referred to, attention is called to the provisions of the New Jersey Act, which reads as follows:

"The certificate of incorporation may also contain any provision which the incorporators may choose to insert for the regulation of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting, and regulating the powers of the corporation, the directors, and the stockholders or any class or classes of stockholders." 1

Without such statutory authority State officials are unquestionably justified in refusing to allow articles of incorporation to be filed containing such clauses as are here referred to.2

The Court of Appeals of New York in an early case, commenting upon the legal effect of the insertion of provisions in the articles not authorized by the incorporation act, spoke as follows:

"The want of authority for this provision would not affect the validity of the corporation. The articles must contain the statements. affirmatively required by the act, because those statements constitute. the conditions precedent to the right of the company to become incorporated. If unauthorized provisions are added, all the acts done. pursuant to such provisions will be void, but until the company is proceeded against for abuse of its franchises its rights as a corporation will not be affected by such unauthorized provisions."

The more modern view in regard to such matters is that where State officials are either expressly or impliedly empowered to pass upon the validity of articles of incorporation submitted to them. with a view to filing in their office, the approval of such State official once obtained renders such clauses as are here referred to valid as against all but the State, even when their insertion in the articles is not expressly authorized.*

§ 122. Liability of Stockholders for Debts of the Corporation. The general subject of stockholders' liability may be best discussed under three heads: (a) Liability for unpaid stock subscriptions; (b) Double liability as established by statute in certain

1 New Jersey Session Laws of 1896, chap. 185, sec. 8, subdivision 7.

2 In re Stevedores' Beneficial Ass'n, 14 Phila. Pa. 130; see ante, sec. 5.

8 Eastern Plank Road Co. v. Vaughan, 14 N. Y. 551.

4 See ante, sec. 6.

States; (c) Special liability as established by statute in certain States.

(a) Liability for unpaid stock subscription. The statutes which exist in nearly every Commonwealth in the Union making stockholders liable for unpaid stock subscriptions are merely declaratory of the common law. The liability of stockholders of corporations for unpaid stock subscriptions with reference to creditors is oftentimes confused with their liability to the corporation itself. The latter liability is directory and the right to enforce it may be waived by the corporation. In the absence of such waiver the subscribing stockholders are bound by the contract of subscription to pay the full value of their shares in such instalments and in such manner as may be prescribed by the laws of the State or bylaws of the corporation. In such cases the liability may be enforced by the ordinary remedies. The corporation usually has a lien upon the stock, and may sell the same in satisfaction of the debt, and may collect the deficiency, if any, by action against the delinquent stockholders.

On the other hand, as the corporation is a legal entity distinct from the stockholders who constitute it, no debts or obligations incurred by it can, in the absence of a direct statutory provision, impose any lawful liability upon the stockholders. But in equity, under what is termed the "trust fund doctrine," the debts of the stockholders to the corporation are regarded as equitable assets of the corporation and may be reached by the creditors if the legal assets prove insufficient. This trust fund doctrine derives its main support at the present time from the Supreme Court of the United States, but it has secured recognition in many jurisdictions.

As stated in Sanger v. Upton,2" The capital stock of an incorporated company is a fund set apart for payment of its debts. It is publicly pledged to those who deal with the corporation for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company as the cash which has been paid in.

"The stockholders thus become individually liable for the debts of the corporation, to the extent of the unpaid balance on their stock. They are also in some States subject to other statutory liabilities hereinafter set forth. The statutory remedy is usually States by an action at law.

by equitable action, but in some

1 Taylor v. Cummings, 127 Fed. 108.

2 91 U. S. 60.

Under nearly all such statutory provisions, the liability of stockholders is intended merely as a secondary security for creditors in case the assets of the corporation are insufficient to meet its debts, but in special cases stockholders may be made parties defendant in an original action, and if they are obliged to pay any debt of the corporation they may bring an action against the cor、 poration for the amount so paid, and are usually entitled also to exact contribution from the other stockholders."

The only other questions which are of practical importance in connection with the present subject may be restricted to two classes: one relates to the liability for unpaid stock subscriptions to creditors as between the transferor and the transferee, and the other relates to the liability to creditors of pledgees and trustees of stock.

With reference to the first question it may be said that the question depends upon the law of the State in which the stockholder may reside and in which action may be brought. In most States transferors of stock are not subject to stockholders' liability, and are thereafter released from liability for assessments made by the corporation.2

In the absence of statutory provision to the contrary, a bona fide transfer of stock perfected on the books of the corporation, discharges the transferor from any further liability either to the corporation or to creditors for calls made after the transfer and for calls made prior thereto, and the transferee takes his place and becomes liable for calls made after the transfer but not for calls made before. The distinction which clearly obtains between one who holds his stock by transfer and one who is an original subscriber to the stock of the corporation, must be carefully noted. The former may in good faith discharge himself from liability for unpaid instalments by due transfer of his shares, while the latter cannot obtain immunity in this way. The subscriptions for stock and the acceptance of a certificate for the shares constitute a contract between the subscriber and the corporation by which he engages to pay the remaining instalments on demand from the corporation. From this agreement the subscriber cannot recede without the consent of the corporation. In some of the States.

1 Glenn v. Hunt, 120 Mo. 330; 25 S. W. 181.

2 M L. T. Co. v. Ward, 13 Ohio, 120. 8 Pullman v. Upton, 96 U. S. 328; see

also Sigua Iron Co. v. Brown, 171 N. Y. 488; 64 N. E. 194.

Hood v. McNaughton, 54 N. J. Law, 425; 24 Atl. 497.

this matter is regulated by statute. In Maine, Massachusetts, North Carolina, West Virginia, the original subscriber alone is liable. In Illinois, Iowa, Nebraska, New Hampshire, Rhode Island, and Virginia the original subscriber remains liable as well as the transferee. In Georgia, Ohio, Tennessee, and Oregon the original subscriber is liable upon default in payment by the transferee. In Mississippi and Wisconsin the original subscriber remains liable for the debts contracted before his ownership or those contracted thereafter. In California, Indiana, Kentucky, Maryland, Michigan, Minnesota, New York, and Tennessee the original subscriber remains liable for the debts of the corporation contracted during his ownership and not for debts contracted after such transfer. In Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Idaho, Kansas, Louisiana, Massachusetts, Minnesota, Missouri, Montana, New Jersey, North Dakota, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Vermont, Washington, and Wyoming upon the transfer of stock the transferee becomes liable for all debts contracted both before and after transfer, and the transferor is discharged in all these States as to debts contracted after such transfer, and in some of these States from liability for debts contracted before such transfer as well.2

Turning now to the question of liability of pledgees and trustees of stock, it may be said that unless protected by statute, as is the case in New York, Missouri, California, and Michigan, the prevailing rule seems to be that pledgees and trustees of stock are liable thereon to the extent of the unpaid portion of the stock held by them.3

On the other hand the Supreme Court of the United States has enunciated a different doctrine to the effect that a pledgee of stock taken as collateral security or as a loan is not subject to personal liability for the debts of the corporation imposed on other shareholders unless he has either become the owner of the shares in fact or has held himself out to be the owner, and thereby estopped himself from denying his personal liability as such.4

1 White v. Greene (Iowa), 70 N. W. 182; Sprague v. Bank, 172 Ill. 149; 50 N. E. 190.

2 Van Cott v. Van Brunt, 82 N. Y. 535. 8 Hole v. Walker, 31 Ia. 344; Union Savings Ass'n v. Seligman, 92 Mo. 635;

65 S. W. 630; Germania National Bank v. Case, 99 U. S. 628; McMahon v. Macy, 51 N. Y. 155.

4 Rankin v. F. I. T. & D. Co., 189 U. S. 242.

(b) Double liability as established by statute in certain States. What is known as the "double liability " of stockholders for debts of the corporation which existed formerly in a large number of States, has now been so far removed by statute that it exists at the present time in the case of ordinary business corporations in only two States, to wit, California and Minnesota. In the lastmentioned State it does not exist in the case of corporations organized exclusively for the purpose of carrying on a manufacturing, mining, or mechanical business.2

(c) Special liability as established by statute in certain States. Stockholders at common law were not liable for debts of the corporation beyond their liability for unpaid stock subscriptions.3 Personal responsibility of stockholders is inconsistent with the conception of corporate liability at common law, and for this reason, if it exists at all, must rest upon some positive statute.1

The particular liability under consideration here arises by reason of the existence of statutory provisions that may be stated as follows: Liability of incorporators as partners through failure to legally organize the corporation. In Florida, Iowa, Minnesota, Nebraska, and Wisconsin stockholders are individually liable by statute for failure to comply with certain prescribed regulations in regard to organization and publicity. In a few of the States the courts construe the liability of incorporators where they have failed to legally organize the corporation, not as partners at all. This on the ground that no such relationship or liability is contemplated by the incorporators, and that the creditors' only remedy is against the officers and agents who actually made the contract. In Indiana, Massachusetts, Michigan, New York, North Dakota,

1 The liability may possibly still exist in Indiana and Kansas; see pages 257, 265. 2 Sacramento Bank v. Pacific Bank, 124 Cal. 147; 56 Pac. 787; Danielson v. Yoakum, 116 Cal. 382; 48 Pac. 322; N. H. H. N. Co. v. Company, 142 Mass. 349; 7 N. E. 773; Bates v. Day, 198 Pa. St. 513; 48 Atl. 407; Whitman v. Bank, 176 U. S. 559; Willis v. Mabon, 48 Minn. 140; 50 N. W. 1110; Marshall v. Sherman, 148 N. Y. 9; 42 N. E. 419; Tuttle v. National Bank, 161 Ill. 497; 44 N. E. 984.

8 Toner v. Faulkerson, 125 Ind. 224; 25 N. E. 218; Hood v. McNaughton, 54 N. J. L. 425; 24 Atl. 497.

S. L. C. N. Bank v. Hendrickson, 40

N. J. Law, 52; Ciar v. Iglehart, 3 O. St. 457.

5 Kaiser v. Bank, 56 Iowa, 104; 8 N. W. 772; Fuller v. Rowe, 57 N. Y. 23; Connor v. Abbot, 35 Ark. 366; Johnson v. Corser, 34 Minn. 355; 25 N. W. 799; Hurt v. Salisbury, 55 Mo. 310; Bergeron v. Hobbs, 96 Wis. 641; 71 N. W. 1056; Clegg v. Company, 61 Iowa, 121; 15 N. W. 365; Slocum v. Head, 105 Wis. 431; 81 N. W. 673.

6 Ward v. Brigham, 127 Mass. 24; Rutherford v. Hill, 22 Ore. 218; 25 Pac. 546; Canfield v. Gregory, 66 Conn. 9; 33 Atl. 536; Bank v. Hall, 35 O. St. 158.