author: GRAVES, J. BOND, J.

text:
    CITY OF ST. JOSEPH v. ST. JOSEPH TERMINAL RAILROAD COMPANY, Appellant.
    In Banc,
    June 2, 1916.
    1. EQUITABLE ESTOPPEL: Application to Municipalities. Courts apply with much caution the doctrine of equitable estoppel to municipal corporations in matters pertaining to their governmental functions; but it will be so applied when to refuse to do so would result in the destruction of valuable private property and would in the strictest and strongest sense be inequitable.

      Held, by BOND, J., that a.city has no power to part with the title to its streets except by valid vacation; and that no estoppel of any kind can ever arise in any case where the city undertakes to do an act in violation of the general law or of its charter, for such an act would be in a strict sense ultra vires and therefore could not be the basis of estoppel.
    2. -: -: Terminal Railroad Yards: Abandoned Streets. •A certain street is shown by a plat recorded in 1858, but was then unusable, and at no time was improved. In 1887 the city by ordinance vacated parts of neighboring streets, but did not vacate the part of this street, now in suit. One section of the ordinance reserved to the city the right to take possession of and reopen the said streets in case the defendant terminal railroad company failed to construct and operate a roundhouse and machine shops upon said streets and the grounds adjoining within six months, and a part of the adjoining ground was that part of the street in suit. The city at no time made any effort to improve the streets for public use, and soon after the ordinance was passed the company constructed and now owns and-operates roundhouses and machine shops of the value of more than a half million dollars, which would be destroyed if the city is permitted to oust the company from the part of the street sued for by the city. The city was at all times fully advised of the improvements, and made no objection, and the fact that, the part of the platted street sued for was not included in the vacating ordinance can be accounted for only on the theory that both the city and the company proceeded in the belief that it had been disowned and abandoned by the city. Since the improvements have been made the property has been mortgaged to secure bonds, which have passed into the hands of innocent persons, and to permit the city to recover would be to destroy that security. Held, that the rule of equitable estoppel is a complete bar to a recovery in ejectment by the city.

      Held, by BOND, J., dissenting, with whom WALKER, J., concurs, that, as the city at no time attempted to vacate the portion of the street occupied by defendant company and at no time gave defendant any color of right to cross it with its tracks, and as the city, on the contrary, treated it as a public street by running sewers and water pipes underneath it and exempting it from benefit assessments therefor, and as the defendant did not rely upon any affirmative act of the city, the city is not barred by estoppel in pais from asserting title to the property.
    Appeal from Buchanan Circuit Court. — Hon. William D. Rush, Judge.
    Reversed and remanded (with directions).

      Robert A. Brown and Richard L. Douglas for appellant.
    Under the law and the evidence the respondent is estopped to deny the abandonment of that portion of Seventh Street occupied by appellant and is estopped to deny appellant the right to occupy and use said street. The doctrine of equitable estoppel applies to municipalities the same in all respects as it applies to individuals when facts and circumstances warrant its application. Knight v. Railroad, 70 Mo. 231; Hovehnan v. Railroad, 79 Mo. 632; Senter v. Lumber Co., 255 Mo. 590; Wilson v. Drainage District, 257 Mo. 266; Railroad y. Marion County, 36 Mo. 294; Edwards v. Kirkwood, 147 Mo. App. 599; Depot Co. v. St. Louis, 76 Mo. 393; Simpson v. Stoddard County, 173 Mo. 421; State v. Dent, 18 Mo. 313; O’Leary v. Met. St. Ry. Co., 87 Kan. 22; Leavenworth v. Douglas, 56 Kan. 416; City Ry. Co. v. Railroad, 166 U. S. 558; Sanitary Disk v. Railroad, 89 N. E. 800; Chicago v. Railroad, 244 111. 220; Lumber Co. v. Oshkosh, 89 Wis. 449; Colorado Springs v. Colorado City, 42 Colo. 75; Sioux City v. Railroad, 129 Iowa, 694; In re Melon St., 192 Pa. St. 331; Baldwin v. Trimble, 85 Md. 396, 36 L. R. A. 489; Simplot v. Railroad, 16 Fed. 350'; Davies v. Hnebner, 45 Iowa, 574; Helia vl Scbolte, 24 Iowa, 298; Lee v. Monnd Station, 118 111. 304; Railroad v. Joliet, 79 111. 26; Gregory v. Knight, 50 Mich. 61; State v. Carr, 191 Fed. 257; Meltzer v. Chicago, 152 111. App. 334.

      Charles L. Faust and Merrill E. Otis for respondent.
    The doctrine of equitable estoppel applies generally to a municipality in its private capacity, yet the doctrine that a municipality can be estopped to assert the rights of the people to the public streets and highways of the State which the municipality holds as a trustee for the public has received the attention of the courts in a great number of cases. The decisions differ according to the policy of the different States in regard to the rights of the public to such highways. We think Missouri has vigorously denied this doctrine, and that estoppel cannot be successfully relied upon in this State to retain the possession of a street unlawfully obtained, and that out of nonuser or lapse of time estoppel does not arise. Dunklin County v. Chouteau, 120 Mo. 595; Wright v. Doniphan, 169 Mo. 601; Gaskins"v.- Williams, 235 Mo. 563; St. Louis v. Railroad, 114 Mo. 23; State ex rel. v. Cape Girardeau, 207 Mo. 85; Tracy v. Bittie, 213 Mo. 302; Clay Products Co. v. St. Louis, 246 Mo. 446; Wolfe v. Sullivan, 133 Ind. 331; Sims v. Frank-ford, 79 Ind. 446; Tainter v. Morristown, 19 N. J. Eq. 46; Commission v. Morehead, 118 Pa. 344; Webb v. Demopolis, 95 Ala. 116.
   GRAVES, J.

— The petition herein is in two

counts: (1) an action to enjoin the defendant for obstructing a certain described portion of Seventh Street in the city of St. Joseph, and (2) an action in ejectment to recover the possession of that portion of said street. In the trial nisi the plaintiff had judgment upon both counts of the petition, and from such judgment the defendant has appealed. The first count charged the unlawful use and obstruction of said street by the defendant in that:

“The defendant has constructed and now maintains thereon its railroad tracks, turntables, roundhouses and water tanks and has erected and now maintains across said Seventh Street, as herein described, a fence by which all of said portion of said Seventh Street has been wholly áppropriated to its own use and benefit, and is now used by said defendant as its railroad yards.”

By its prayer said count thus concluded:

“Wherefore, plaintiff prays that the defendant, its agents, servants, and employees, be perpetually restrained and enjoined from entering upon or exercising any right or authority over said portion of said Seventh Street hereinbefore described, or doing any other act in said street tending to obstruct, in any way, the free and common use thereof, as a highway in the city of St. Joseph, and that it be enjoined and restrained from maintaining any obstruction on said street which will in any manner interfere with the use of said street, as it was laid out and established for the use of the public generally, and for its costs in this behalf expended.”

The, second count, as stated, is one in ejectment. The answer sets up an equitable estoppel, in this language:

“Comes now the defendant in the above entitled cause, and for its amended answer to plaintiff’s petition filed therein, admits that it is a corporation and admits that it does occupy the particular strip of land in plaintiff’s petition described, in the manner and for the nses and purposes therein stated.
' “Further answering the defendant states that said strip of land is not now nor has it ever been used as a public street or highway by the city of St. Joseph or the inhabitants thereof; that it is inaccessible and wholly unfit for street or highway purposes and would not serve any purpose as a street if opened; that it has been occupied by the defendant in the manner and for the purposes stated in plaintiff’s petition for more than twenty-five years; that the defendant has erected upon said strip of land valuable and expensive improvements which are now and have been used in connection with its railroad shops and other facilities adjacent thereto for more than twenty-five years; that the defendant has during the entire period it has occupied said strip of land claimed to own the same as its absolute property, openly and adversely to plaintiff and all others; that its occupancy of said strip of land for the purposes stated has been with the knowledge, consent and approval of plaintiff.
“Defendant states that plaintiff stood by and invited it to expend and saw it expend large sums of money in erecting roundhouses, machine shops, terminal facilities and in making other improvements on said strip of ground and the grounds adjacent thereto, and that all of said facilities will be useless and defendant will be damaged in a sum in excess of five hundred thousand dollars if it is denied the use of said strip of ground; that plaintiff knew when said improvements were made that they would - be useless unless said strip of ground could be occupied by defendant; that both plaintiff and defendant treated said portion of Seventh Street the same as though it had been vacated when other streets in that immediate vicinity were vacated for the use of the defendant, and it is apparent that it was a mere oversight that said street was not formally vacated.
“Defendant states that if said strip of land was ever dedicated for public use as a street it has been abandoned by plaintiff as such street or highway, and plaintiff is now estopped to claim title to said strip of land as a public street or highway or for other purposes, and is estopped from complaining of or in any wise interfering with defendant’s occupancy of said strip of ground.”

The evidence introduced shows that South St. Joseph Addition to the city of St. Joseph was platted in 1858. That among the several streets in said addition were Sixth, Seventh and Eight Streets running north and south, said Sixth being to the west of Seventh Street. Running east and west, among other streets, were Duncan, Doniphan, Jackson, Scott, Pacific, Sycamore. In naming these streets we have begun with the one on the north and followed them in order to the south. Next north of Duncan Street is Monteray Street and next south of Sycamore is Hickory Street.

In January, 1887, the city of St. Joseph by ordinance duly vacated certain parts of Duncan, Doniphan, Jackson and Scott Streets and this ordinance reads in conclusion as follows:

“Section 5. The city reserves the right to repeal this ordinance and, without cost to the city, take possession of and reopen said street in case the St. Joseph Terminal Railroad Company shall fail to commence the’ construction of a roundhouse and machine shops upon said streets and the grounds adjoining the same within six months and complete the same in a condition for operation within two years after the date of the approval of this ordinance, or shall fail to maintain or operate a roundhouse and machine shops on said grounds.”

These vacations left a clear field for defendant’s terminals, from Monteray Street on the north to' Pacific Street on the south. It is clear from the concluding section of this ordinance that the vacations were made for the purpose of having these terminals located in the city.

It would appear that Seventh Street was only platted as far north as Pacific Street. The defendant constructed ’ its terminals between Monteray Street on the north to Hickory Street on the south, and between Sixth and Eighth streets, although not running as far east as Eighth Street. In doing so the roundhouse was made to front on Pacific Street just east of Sixth Street and in front of the northern terminus of Seventh Street. A portion of the turntable in this roundhouse projected into Pacific Street. Tracks cross Seventh Street and Pacific Street in getting into this roundhouse. In Seventh Street, in addition to the tracks, there was constructed an ash pit and water tank, as a part of these terminals.

The cost of the plant was something like $600,000 and it has been bonded for $500,000, which bonds are secured by mortgage on this property, including these streets, both Pacific and Seventh, as well as the regularly vacated streets. This construction and this expenditure were shortly after the passage of the ordinance aforesaid and in compliance therewith. Later a private individual bought property on the west side of what is called Seventh Street, and began the agitation for opening that street, ■ and this suit was the outgrowth. The evidence shows that the opening of the streets is not a public necessity.

From the date of the plat to the date of the suit, the city has made no effort to improve these streets, in order to open them for public use. The destruction of these tracks across Seventh and Pacific streets would destroy all egress and ingress to the roundhouse. In fact, the evidence shows that the opening of either of these two streets would actually destroy and render useless all of defendant’s property.of the value of a half million dollars or more. At the time of the dedication, and also at the date of the vacation ordinance, Pacific Street was a deep gully or creek through which flowed a stream of water into the Missouri River to the west. Seventh Street from Pacific Street on the north to Sycamore Street on the south was washed out and impassable for travel.

Under these conditions, after the passage of this ordinance in 1887, the defendant constructed its terminals as aforesaid, expending this large sum of money, and all to the evident knowledge of plaintiff’s officers. At first the defendant used a trestle over Pacific Street, and filled up Seventh Street, but later it built a large culvert or sewer in Sixth Street, and filled up over the same, so that its tracks would thus cross, instead of crossing over the trestle. It is clearly inferable that both parties contemplated that the defendant would use both these streets at the time the vacation ordinance was passed. The streets had never been used from 1858 to 1887, and it is evident the parties looked upon them as abandoned, and for that reason did not include them in the vacating ordinance.

Other facts, if material, will be stated in the course of the opinion.

I. The present action only involves Seventh Street, but in oral argument it was asserted that dependent upon this case was one in the rear, involving Pacific Street. The two streets have been used as indicated in the statement. That is, the tracks which enter the roundhouse have to cross the, streets at their intersection.

We shall not discuss the matter of adverse possession, because not in this case. What is said in the answer about the defendant having-been in possession for a great number of years is just an incidental fact in its real plea of equitable estoppel. Likewise, wbat is said of abandonment of tbe streets may be likewise classified. The answer taken as a whole presents a clean-cut case of equitable estoppel. That is the turning point in the case.

II. Courts apply with much caution the doctrine of equitable estoppel to municipal corporations in. matters pertaining to their governmental functions, and this is right. However, it will not do to say that the courts of this State never apply this rule of law to municipal corporations, as is seemingly urged by counsel for respondent. There are conditions under which the rule may be invoked as against municipal corporations. Vide Town of Montevallo v. Village School District of Montevallo, post, p. 217, and the cases therein cited.

If ever the doctrine of -equitable estoppel should be applied in a case brought by a municipal corporation, the one at bar is a case for such application. The reading of the last section of the ordinance vacating certain streets shows that the city was offering inducements to defendant to procure the establishment of its terminal facilities within the corporate limits of said city. The general plan of such terminals indicates that the city must have known and contemplated that defendant would have to use these two streets. The city had, under the then law, the power to vacate streets. The defendant had purchased abutting property on both sides of these two streets as well as the vacated streets. It is clear that the city was fully advised as to what improvements defendant expected to erect. The fact that these two streets were not included in the vacating ordinance, can only be accounted for on the theory that both the city and defendant were proceeding upon the idea that these two platted streets had long since been disowned and abandoned by the city. It is apparent that the city, in the rightful exercise of its legal powers, was attempting to make the way clear for the use of all this property by defendant.

The long silence of the city cannot be accounted for upon any other theory. The city stood by and encouraged the defendant in the expenditure of more than one-half million dollars, all to the city’s benefit and up-building. The city stood silently by until this property was mortgaged to secure its bonds, and until those bonds were in the hands of innocent parties. For the city to win would be to destroy the security for these bonds. To permit the city by a recovery in this suit to destroy defendant’s valuable property is inequitable in the strongest and strictest sense.

The public rights should not be allowed to destroy vast private rights under the peculiar facts we have here. There are many cases where public rights, through the doctrine of equitable estoppel, have been forced to give way to the more equitable rights of private parties. Vide “‘Town of Montevallo” case, supra, for a citation of the cases. The doctrine of equitable estoppel should be applied in this case, and when applied the judgment nisi is wrong. Let the judgment be reversed and the cause remanded with directions to enter an appropriate judgment for the defendant. It is so ordered.

All concur, except Bond and Walker, JJ., who dissent in an opinion by Bond, J.

I.

BOND, J.

(dissenting). — This case was assigned to me in Division and an opinion prepared in which two of the judges concurred and two dissented, wherefore the case was transferred to Banc, wherein the divisional opinion not being adopted, the , _ — , _ • -• cause was re-assigiied and is now disposed of in the majority opinion written by onr brother Graves.

I am unable to concur in the views expressed m that opinion. The material facts as they are shown in the record in this case are undisputed.

The streets sought to be recovered by the city in this action were formally dedicated to it by a recorded plat in 1858. They are known as portions of Seventh Street and Pacific Street. Across the intersection of these streets the defendant has laid tracks connecting its roundhouse, situated on abutting property, with other property owned by it, on which latter property its main tracks are laid. These connecting tracks are used for access and exit from the roundhouse. Defendant never at any time sought or obtained any franchise or right from the city of St. Joseph to make any use of the portions of Pacific and Seventh streets over which it laid such connecting tracks. Defendant, however, fenced' off that portion of these streets and placed in the inclosure an ash pit and a water tank. Defendant has never at any time paid any sort of taxes on the portions of the streets thus occupied by it. In 1899 the plaintiff city, at its own expense, built a district sewer along Seventh Street and that portion of it occupied by defendant. In assessing the cost of this improvement, Seventh Street was excluded from any assessment for the reason that it was a public street, tin? entire cost being paid by the city and other abutting property owners. In 1904, the plaintiff city constructed in a similar manner a sewer on Pacific Street and under the portion in possession of defendant. These improvements by the city, from the burden of which Seventh Street was thus exempted, are undisputed and were made with the knowledge of the defendant. Otherwise than such use of the streets by the city, the defendant has held possession of them for about twenty-five years. The abutting' property on which defendant established its roundhouse and other permanent improvements was acquired by it after a vacation of the streets running through it by the city. But the defendant did not, at .that time, seek to obtain a vacation of the portions of Pacific and Seventh Streets subsequently used by it and has never received any authority, either written or oral, from the city or any of its representatives to make such use of that property. None of the substantial improvements made by defendant are located on the portions of Seventh and Pacific Streets over which it subsequently placed its connecting tracks.

The president of the defendant company testified, in substance, that if it should be deprived of the facility of entering its roundhouse, afforded by its connecting tracks running across portions of Seventh and Pacific Streets, it might be necessary to remove its terminal plant from the city or to suffer a loss equal to its value, which he estimated at five or six hundred thousand dollars. The present suit concerns only a portion of Seventh Street. The defendant set up no title to the property, hut pleaded estoppel and abandonment against the city.

Upon the submission of the case a decree was rendered for plaintiff and writ of restitution ordered, from which defendant appealed.

II.

The character of the possession of defendant cuts no figure in the solution of the question presented by this appeal; for since the statute which took effect August 1, 1860 (R. S. 1909, sec. 1886), no title resting on adverse holding can be created against the lands of the State or their auxiliaries in government, municipal corporations. [City of St. Louis v. Mo. Pac. Ry. Co., 114 Mo. l. c. 24; Brown v. City of Carthage, 128 Mo. 10; Columbia v. Bright, 179 Mo. l. c. 454; Wright v. Doniphan, 169 Mo. l. c. 614; State ex rel. v. Road Co., 207 Mo. l. c. 106.]

Nor can a city vacate its streets except in the exercise of a power given in express terms or by necessary implication. [2 Elliott on Roads and Streets (3 Ed.), sec. 1177; Bingham v. Kollman, 256 Mo. l. c. 591.]

The Legislature has thought proper to prescribe a different rule with reference to “county roads,’’- for after providing for their establishment and legal status as such, the statute concludes, to-wit: “And non-user by the public for a period of ten years continuously o'f any public road shall he deemed an abandonment of the same.” [R. S. 1909, sec. 10446.] That statute was applied in a suit involving a county road (Johnson v. Rasmus, 237 Mo. l. c. 591) and also in a case where it appeared that Kansas City had "acquired the territory over which a road passed whose legal existence was claimed to have lapsed while it was a county road. Kansas City passed an ordinance for the grading of this road. Thereupon the adjoining property owners denied there was any such road in existence at the time of the enactment of the ordinance. The city had taken no steps after its acquisition of the property to open and establish a street over the line of the old road. Hence it was ruled that the issue thus joined was one of abandonment of a public road within the purview of the statute and cases cited in Kansas City v. Smith, 238 Mo. l. c. 336. In each of the above cases the statute 'was applied according to its terms to public roads established in a county and nothing was ruled affecting the application of that statute to the streets of a city. Indeed, the obvious fact that it has not application in such cases was noted in Clay Products Co. v. St. Louis, 246 Mo. l. c. 461, in which case it was ruled that a city is not estopped to assert title to its street by the written statement of the street commissioner that the street does not exist, nor by its own ordinance condemning a right of way over it for sewers and water pipes.

The result of the cases in this State is that a city has no power to part with the title to its streets which it holds in trust for the public except by a valid vacation.

III.

The learned counsel for appellant insists that plaintiff’s recovery is barred under the doctrine of equitable estoppel. The rule on this subject is that a municipal corporation in the attempt to exercise its lawful powers may encounter the preelusion of an estoppel under the same conditions which would make it a defense ' against an individual, if it should turn out that the act of the corporation was irregularly or imperfectly performed and that it would be against right and justice or a fraud to permit its disavowal against one who in good faith relied upon its validity and in consequence was injured. And that is as far as the rule has been carried in this State or in correct decisions elsewhere. [See cases cited in appellant’s brief.] No estoppel of any kind can ever arise in any case where the municipal corporation undertakes to do any act in violation of the general law or in contravention of its charter. Such an act would be in a strict sense ultra vires and, therefore, could not be the basis of any estoppel against its repudiation.

In the instant case the City of St. Joseph never attempted at any time to exercise its lawful power to vacate the portion of the street occupied by the defendant and never gave defendant any color of right to cross them with its tracks. The city was under no duty to grade, pave or improve these parts of its streets until such time as the growth of population and expansion of the city should render it necessary in the judgment of the municipal authorities that the streets should he put in a condition suitable for use by the public. Such improvement of its streets is, however, a matter wholly within the discretion of the city authorities and inaction on their part does not affect the right of the city to assert its title as trustees of the street for the public and to eject any intruders. [City of St. Louis v. Mo. Pac. Ry. Co., supra, l. c. 24.]

The defendant knew, from its terms, that the vacation ordinance of 1887 did not include either Seventh or Pacific Streets and it had actual knowledge of their location, for it purchased property adjoining and bounded by these streets. Besides, the law imputes knowledge of the existence of streets to all persons concerned. [Wright v. Doniphan, supra, l. c. 613.]

The city officials never stated to defendant that the property in question was not a public street, but on the contrary treated it as such by -running sewers and water pipes underneath it and exempting the property from any assessment therefor, on the ground that it was a public street, and this necessarily to the knowledge of defendant who was in the occupancy at the time. The bare facts of the record are that defendant has occupied these parts of these streets by crossing them with its tracks and afterwards fencing them off for twenty-five years and without any authority granted so to do and with knowledge at all times of the title of the city, and if now dispossessed, might suffer whatever injury might result from losing a track connection between its roundhouse and other property which it established, not in reliance on any affirmative act or representation on the part of the city, but in its own wrong.

It is impossible that these facts comprise the essential elements creating an estoppel in pais against the enforcement by the city of its rights to the use of its streets. [Blodgett v. Perry, 97 Mo. l. c. 273; Austin v. Loring, 63 Mo. l. c. 19; Spence v. Renfro, 179 Mo. l. c. 422; Bank v. Nichols, 235 Mo. l. c. 412; Bigelow on Estoppel (3 Ed.), 484.] Neither can the city be deprived of redress for the violation of its legal rights by defendant because the restitution of its property might inflict a substantial loss on the disseisor. [Steinmetz v. Federal Lead Co., 176 S. W. 1049.]

IV.

The learned majority opinion seems to rest its conclusion that the city has lost the title to the portion of its public street under the facts in this record, upon the doctrine of equitable estoppel. The fault with that conclusion is, not that such doctrine may not be applied in exceptional cases (where the city has imperfectly executed a power not forbidden in reliance upon which another has acted to his detriment), but that the opinion has wholly overlooked the undisputed facts in the present record which would preclude the application of that doctrine, not only in the limited instance in which such a defense may be interposed to a suit by a city or other auxiliary to the State government for the recovery of its streets, but would preclude its application to transactions between other persons wherein it is allowed the fullest latitude. The authority cited in the learned majority opinion is the “Town of Montevallo v. Village School District of Montevallo” post, p. 217. A mere glance at the conceded facts in that case will disclose that they are not clearly connoted in the learned majority opinion. In that case the issue between the Town of Montevallo and the School District of that town was the title to a public square (three hundred feet square) lying in the center of the plat which was dedicated in 1866 as the site of a future town. On the property thus dedicated, the town grew up and was incorporated in 1871. The dedication was properly recorded. Thereafter (in 1881 the board of trustees of the incorporated town entered an order of record on the town records, “ceding” the public square to the directors of the Village School District of Montevallo, for school purposes. Upon the' faith of this affirmative attempt to grant the land to it, the school board took possession of the property and erected thereon a stone school building costing three thousand dollars. About twenty-five years thereafter the town brought a suit to recover the public square which it had thus attempted to vacate to the use of the school district. It is perfectly evident from this brief recital of the material facts in the case of Town of Montevallo v. Village School District, that they only resemble the real facts of the present case, in the way that a resemblance can be claimed between things which are contradictory of each other. In the Montevallo case, the town, by affirmative action, entered upon its own records, endeavored to part with its title to a public square; in effect, attempted to make a deed to the school district and turned over the possession of the property to the school district for the purpose of enabling it to erect, at great expense, a stone building, and permitted it to hold the possession and use of it for about twenty-five years. Such a transaction is the exact opposite of what was done in the instant ease. In that case the city met with the estoppel of its deed or attempted deed. Here an estoppel is sought to be created against the city without the existence of any deed or affirmative action on its part whatever. Nor was there a scrap of paper denoting any intention on the part of the city of St. Joseph to part with its title to the small portion of Seventh Street which defendant has appropriated; neither is there a ray of evidence that the city, through any of its representatives, ever, at any time, gave the defendant any right or title to that portion of Seventh Street. In this state of facts there was no act or deed by the city upon which defendant could have relied as giving it title to the street and none is pointed out in the learned majority opinion.

Therefore I think that opinion contravenes the settled law conserving the right of a city to the use of the property held by it in trust for the people of the' State, and wholly misconceives the true basis upon which in exceptional instances an equitable estoppel may be invoked against it, and has undertaken to apply that rule, as against a city, to a state of facts which would not make it applicable as against an individual. For these reasons I cannot agree with the views expressed in the prevailing opinion.

Walker, J., concurs in these views.


source: Caselaw Access Project

author: RAILEY, C. PER CURIAM.

license: Public Domain

text:
    FRANK B. COLEMAN, Trustee of Estate of GEORGE D. ALLEN PAPER COMPANY, a Bankrupt, v. LOUIS F. BOOTH et al., Executors of Estate of CHARLES D. GARNETT, Appellants.
    Division One,
    June 2, 1916.
    1. CORPORATION: Assets: Good Will: Fraud. Tlie good will of a corporation, which has been honest in the conduct of its business is property and a valuable asset; hut good will which is fictitious and has no actuality, and has been- brought into existence by deceit and fraud is not legal. Where two individuals merged their separate businesses, organized a corporation with a capital of $50,000, put in $20,000 in property as part payment, and carried $30,000 by way of good will, as a credit instead of debit, and designated it on the boohs as undivided surplus, which was never replaced by either money or property; and later, organized a new company with a nominal capital of $250,000, and in order to make a good showing and to induce others to buy its stock carried into the new company, In payment of its capital stock, the capital of the old, as of the value of $50,000, and the properties of a subsidiary company, owned by them, of the value of $81,981.86, and the remainder of $118,018.14 as good will or undivided surplus, thereby making a total false credit of $148,018.14, the padding of the capital stock with this fictitious credit was an unvarnished fraud upon the public, and those directors who participated in it by borrowing money from the company to pay for stock, first sold to others by the company at its face value as fully paid up, and later bought back by them, are liable,- as are their estates, to the trustee in bankruptcy of the insolvent corporation.
    2. -: -: -: Dividend: Unjustified. A corporation is not justified in declaring a dividend of twenty-five per cent when more than one-half of its capital stock is good will (much of it fictitious) and carried on its books as undivided surplus, and, excluding good will, otherwise impaired to an amount in excess of one-fourth.
    3. --: ——: In the Form of Notes. And when said dividend is put in the form of notes, which, with full knowledge by the payee of the false credit given the company by the fictitious good will carried as assets. and undivided surplus, are afterwards paid, the payee, or his estate, is liable to the corporation, or its trustee in bankruptcy, for the amount thereof.
    4. -: -: -: Suit By Trustee in Bankruptcy. The extensive powers given to a trustee in bankruptcy are for the purpose of enabling him to uncover the fraudulent acts of a corporation whose padding of its capital stock has enabled it to obtain a fictitious credit; and, in such case, he can maintain a suit to recover dividends fraudulently paid to participating directors, whether the debts allowed against the bankrupt corporation were in existence when the fraudulent acts weTe done or subsequently made.
    •5. -: Right of Creditors. A creditor of a corporation has the right to assume that its capital stock is paid up, when the company so advertises; and in dealing with and giving credit to it, he is authorized to assume that its capital stock is intact, and has not been impaired by unauthorized or fraudulent dividends or a fictitious capitalization.

      Appeal from St. Louis City Circuit Court. — Hon. Daniel D. Fisher, Judge.
    Affirmed.

      George W. Lubke and George W. Lubke, Jr., for appellants.
    (1) Good-will is recognized as a species of property which may have great value. As such it has been held to be taxable by the State. State ex rel. v. Jones, 51 Ohio St. 492; Express Co. v. Ohio State Auditor, 165 U. S. 194; People ex rel. v. Roberts, 154 N. Y. 101; Beebe v. Hatfield, 67 Mo. App. 609; White v. Jones, 79 App. Div. (N. Y.) 373; Washburn v. Wall Paper Co., 81 Fed. 17. (2) Even though a corporation may not have a cash surplus, if it has accumulated property in excess of .its. capital, such excess may be treated as a surplus for the purpose of declaring dividends. Roberts v. Robert Wicks Co., 184 N. Y. 257. Net profits for the purpose of dividends are the difference between the present value of all corporate assets and the sum of all liabilities and the capital stock. Russell v. Bristol, 49 Conn. 251; Phillips v. Railroad, 138 Mass. 122. Even though no actual profits have been earned in a given year,. a dividend may nevertheless be declared out of a surplus accumulated out of the profits of previous years. Beers v. Spring Co., 42 Conn. 17; Williams v. Tel. Co., 92 N. Y. 102. Whether a dividend may be properly declared must be determined by the'condition of the corporation' at the time the dividend is ordered. Thompson on Corporations (2 Ed.), sec. 5309; Reid v. Mfg. Co., 40 Ga. 103. When a dividend has been declared, the right of the stockholders thereto becomes vested and cannot be changed without their consent. McLaran v. Planing Mill Co., 117 Mo. App. 40. Nor can the insolvency of the corporation arising after the dividend has been declared defeat the right of the stock holders-to take it from the. corporation as against creditors. Le Roy v. Ins. Co., 2 Edw. CL (N. Y.) 657; In re Le Blanc,' 14 Hun (N. Y.), 8. (3) But even if there was no surplus and a dividend had been declared and paid which impaired the capital, under the statute there is a liability on the part of the directors participating in the action only for such debts as existed at the time or were thereafter contracted while they were in office. There was no evidence in this case that any of the debts now owed by the bankrupt existed on June 9, 1909, and no allegation to that effect appeared in the petition. R. S; 1909, sec. 3348; Shields v. Hobart, 172 Mo. 491.

      Grant & Grant and Leahy, Saunders & Barth for respondent.
    (1) A trustee in bankruptcy is the successor to all the rights of creditors under the State law. Remington on Bankruptcy (2 Ed.), secs. 1207-8. (2) The facts in this case, as found both by the referee and lower court, shows that the scheme devised was a fraud upon creditors of the company because: (a) The money of the corporation was used to pay the individual debt of one of its officers, with the knowledge of the creditor receiving it, a former director, vice-president, secretary and chief stockholder, who had arranged to have it done, and then resigned, selling his stock at the same time, (b) The fictitious dividend declared rendered the company insolvent, (c) This fictitious dividend diminished the capital stock of the company, which was never paid in full, and the creditor receiving such dividend, the vice-president in active charge, secretary, and chief stockholder of the company, when the scheme was devised, had reason to know both that the company would become insolvent and that its capital stock would be diminished by the payment of such dividend to him. (d) The said creditor also knew that the company had been ■steadily losing money and he was very anxious to sever Ms connection with the company provided he could devise some scheme, which he did, to get par for his stock, to be paid from the company’s assets. (3) It is the settled law in this State and elsewhere that it is unlawful for an officer or employee to use the funds of a corporation to pay his individual debt, also that if the creditors, receiving the funds, have knowledge, actual or imputed, that the funds used belong to the corporation, they may be recovered back from such creditor. Bank v. Investment Co., 160 Mo. App. 379; Bank v. 'Edwards, 243 Mo. 567. (4) As was said in the ease of Chrisman-Sawyer Banking Company v. Mfg. Co., 168 Mo. 634, when a corporation is sent forth into the commercial world, accredited by them, the stockholders, as possessed of a capital stock in money or its equivalent in property, equal to the par value of its capital stock, every person dealing with it, unless otherwise advised, has a right to extend credit to it on the faith of the fact that its capital stock has been so paid, and that the money, or its equivalent in property, will be forthcoming in response to his legitimate demand. See, also, Meyer v. Mining Co., 192 Mo. 189, and Boley v. Development Co., 126 Mo. App. 119. Our claim is: First, that dividends cannot be declared when, in order to create a surplus out of which to pay the dividends, good will must be considered in estimating the assets of the corporation. Secondly, that the good will of George D. Allen Paper Company, even if it could be considered in estimating the assets, was of practically no value. Dividends can lawfully be paid only out of profits actually earned. Any dividend which would diminish the amount of the capital stock of the corporation is , expressly prohibited by our statute. R. S. 1909, sec. 3348; Railroad v. State of Tennessee, 153 U. S. 486. (5) The term “profits” denotes what remains after defraying every expense, including loans falling due as well as the interest on such loans. Corry v. Londonberry & E. R. Co., 29 Beav. 263; St. John v. Railroad, 10 Blatch. 279; Miller v. Brodish, 69 Iowa, 278; Hubbard v. Weaver, 79 La. 678; Thompson on Corporations, sec. 5305. (6) “An officer, or director of a corporation, becomes a trustee for the benefit of all parties interested, when he obtains property of the corporation in a manner inconsistent with his duty to the corporation.” Broussard v. Mason, 187 Mo. App. 292.
   RAILEY, C.

— This action was begun in the circuit court of St. Louis City, on September 15, 1911, by respondent, Prank B. Coleman, as trustee in bank-' ruptcy of the estate of the George D. Allen Paper Company, to recover against appellants, as executor and executrix of the estate of - Charles D. Garnett, deceased, the sum of $80,487.

It is admitted that Coleman was appointed trustee in bankruptcy of said estate, and that the defendants were duly appointed as executor and executrix of the estate of Charles D. Garnett, deceased.

It appears from the record that Charles D. Gar-nett and George D. Allen were separately engaged in the paper business in St. Louis, Missouri. They concluded to join , their interests, and in 1897 they organized under the laws of this State as a corporation by the name of The Garnett & Allen Paper Company, with a capital stock of $50,000. Twenty thousand dollars of property belonging to Garnett and Allen was put in as part of said capital stock, and the remaining $30,000 was carried as good will, and designated on the books of said company as “undivided surplus.” No part of this $30,000 was ever checked off or replaced with either money or property.

In 1905, in order to induce one Grubb to buy stock in said company, Garnett and Allen conceived the idea of increasing the capital stock to $250,000. They had an auxiliary paper company — which really belonged to the Garnett & Allen Paper Company— which had made large profits from 1897 to said date, and this property was sold and from the proceeds thereof, Garnett and Allen realized in the neighborhood of $81,000 in money and property. The capital stock of $250,000 was made up of the $50,000 heretofore mentioned, and by the addition thereto of the $81,000 realized from the sale of the paper company property. The remaining $118,018.14 was carried upon the books of the company as good will and designated thereon as “undivided surplus.” There were 2500 shares of this stock divided between Gar-nett, Allen and others. Each share was of the denomination of one hundred dollars. Garnett owned 1110 shares; Booth, 233 shares; Dana, 50 shares; Cavanaugh, 50 shares; Collins, 5 shares; Dwyer, 2 shares, and Allen 1050 shares.

It does not appear that anything was paid upon said stock when the capital was raised to $250,000 aside from that heretofore mentioned. It does not appear that -any part of the $118,018.14, carried as good will, or “undivided surplus,” was ever replaced by money or property at any time. The company, when the capital stock was increased to $250,000, was then known as the Garnett, Allen & Grubb Paper Company. Grubb remained a member of said firm but a short time, and sold his stock to Garnett, Allen and Booth. Garnett and Booth borrowed from the above company $15,673 with which to pay Grubb for their share of the stock purchased, and executed to the paper company their joint note for said sum. Allen likewise borrowed from the paper company the money with which to pay for his share of the stock purchased from Grubb, and he executed to the paper company his note therefor.

The evidence tends to show that from 1897 to 1908 large profits were made by these companies, said to aggregate in the neighborhood of' $375,000. It is claimed that out of this sum there was paid about $141,000 of dividends, leaving a balance of $234,000 of property, good vdll. _etc.. belonging to the Garnett & Allen Paper Company, which had succeeded the former company of Garnett, Allen & Grubb. The profits during the years 1908 and 1909 had fallen off and were gradually growing less, until those for the year 1909 were less than $6000. The productive plant known as “The Columbia Paper Company,” which produced such large revenues during the years heretofore mentioned, had been sold before the capital stock was raised to $250,000.

During the early part of the year 1909, some disagreements had arisen between Garnett and Allen in regard to the conduct of the company’s business, Garnett purchased the stock of Booth, and this gave him the controlling interest in said corporation. Booth, however, remained as a director until the first of-January, 1910. Finally, Allen concluded to purchase the 1343 shares of stock then owned by Garnett, and accordingly, oh the 8th of June, 1909,' a meeting was had of the board of directors of said Garnett & Allen Paper Company, for the purpose of carrying out the agreement made between Garnett and Allen, in regard to the purchase of Garnett’s stock. At this meeting, a resolution was offered and carried, to the effect that $125,000 should be carried upon the books of said company as good mil, and the same was entered in accordance with said resolution. Another resolution was offered and carried at the same time, to the effect that a dividend of twenty-five per cent, or $62,500, should be declared; and in order to fulfill the contract of purchase between Garnett and Allen, it was provided at said meeting that the $62,500 should be represented by non-negotiable notes of said paper company without interest, and that these notes, when so executed, should be delivered to Garnett as collateral security for the payment of the $134,300 due him from George D. Allen, for the 1343 shares of stock purchased by Allen from Garnett. As a part of this agreement*between Garnett and Allen, the latter, after getting control of Garnett’s stock, agreed to turn over to Garnett the $15,673 note executed by Garnett and Booth to the paper company aforesaid.

The evidence tends to show that when this meeting was held, on the 8th of June, 1909, the paper company then owed $30,000 to one of the banks, besides that which was due for current expenses. It also appears that, with the $30,000 carried as good will in 1897 and the $30,000 owed to the hank, the paper company, at the time of said meeting, had only $174,-000 of property and assets, including the $118,018.14 of good will heretofore mentioned.

The referee found,- and the evidence tends to show, that Garnett was fully cognizant of all the facts aforesaid, and had full knowledge of everything that was going on during all of these transactions. The evidence likewise tends to show, and the referee found, that Garnett ultimately received from the Garnett & Allen Paper Company, including the $15,673 note, $80,487 belonging to the Garnett & Allen Paper Company.

It is insisted by appellant, that on account of the matters aforesaid, he is entitled to recover from defendants, as executor and executrix of Garnett’s estate, the above sum of $80,487, on account of the dissipation of the company’s capital stock aforesaid, etc.

Appellants in the court below filed exceptions to the report of the referee, which were overruled, and judgment entered in favor of respondent for the amount aforesaid, which was ordered certified to the probate court of the city of St. Louis for allowance against the estate of said Charles D. Garnett. Appellants filed motion for a new trial within the time authorized by law, which was overruled and the cause duly appealed to this court;

I. On June 8, 1909, Charles D. Garnett, George D. Allen and Louis F. Booth were the directors of the Garnett & Allen Paper Company, a Missouri corporation, and held a directors’ meeting in St. Louis, Missouri, on the date aforesaid. At said meeting they undertook to increase the assets of said company, by the adoption of the following resolution:

“Whereas, the good will of the Garnett & Allen Paper Company is a valuable asset, which, in the judgment of the board of directors, is of the fair market value of $125,000, and has not heretofore been entered upon the books as an asset'of said company: Now, therefore, be it resolved that the good will of the company shall be carried upon the books as an asset in the amount of $125,000 and be credited to the surplus account.”

It is insisted by appellants that the action of said board in thus attempting to increase the assets of said company, is valid; and that the conclusion reached by the referee and trial court in respect to this matter is erroneous.

In order to determine the legality of said proceeding, it will be necessary to consider certain facts in regard to the previous history of said company. In 1897, Charles D. Garnett and George D. Allen were separately engaged in the paper business, and concluded to unite their interests. They accordingly organized a Missouri corporation in May, 1897, and called it the Garnett & Allen Paper Company. Its capital stock was named at $50,000, but they put in about $20,000 in property as part payment of said, capital stock, and carried the $30,000 by way of good will, as a credit instead'of debit. 'It does not appear from the record, that said $30,000 designated as “undivided surplus,” was ever replaced by either money or property, at any time, before the above meeting of June 8, 1909, or at any other time.

In 1905, in order to make a good showing, for the purpose of inducing Mr. Grubb to take stock in the company, Garnett and Allen concluded to increase the capital stock to $250,000. They already had the $50,000 capital stock arranged as above indicated, by the use of $20,000 worth of personal property and $30,000 of good will, or undivided surplus. The remaining $200,000 of capital was paid, by turning over money and property of the Columbia Paper Company, which really belonged to the Garnett & Allen Paper Company, of the estimated value of $81,981.86; and the remaining $118,018.14 was carried as good will, or undivided surplus, and placed as a credit, instead of debit.

We have not been able to find any place in the record indicating that the above good will or undivided surplus, was ever, at any time; replaced by money or property belonging to said company.

After this progressive raise in the capital stock to $250,000, Garnett and Allen sold Grubb some stock and changed the name of the corporation to Garnett, Allen & Grubb Paper Company. Grubb remained in the firm but a short time, and sold his stock to Gar-nett, Allen and Booth for $30,000. Garnett and Booth borrowed from the company $15,673 to pay Grubb for their share of the stock bought from him, and executed their note to the company for the amount thus borrowed. Allen likewise borrowed from the company the money to pay for his share of the stock bought from Grubb, and executed his note to the company therefor. The name of the corporation was then changed to the Garnett & Allen Paper Company.

Even if it be conceded that good will, in a proper case, may be considered in estimating the value of a plant and its assets, yet the act of Garnett and Allen, in attempting to cover np the deficit of $30,000 of unpaid capital stock in 1897, when they first organized the Garnett & Allen Paper Company, by carrying it as good will, or undivided surplus, and as a credit instead of a deficit, was a plain, unvarnished fraud upon the public, and exhibited an utter disregard of the obligations which they owed the State and community in which they were proposing to do business. They had just commenced operations together. They had not at that time established a reputation or business which, under the authorities cited by appellants, entitled them to have taxed up as a part of their assets, the goo.d will of the corporation. It should not be forgotten in passing, that Charles D. Garnett was one of the prime movers in establishing this method of false bookkeeping, by the use of good will as an asset, in order to cover up the deficiency in their original capital stock of $50,000.

Defendant Booth, in respect to this matter, testified:

“Mr. Allen had contracts to furnish different publications and they put them in as part of the assets which we estimated at about $20,000, and the rest of it was called good will, which, by the way, was never put on the books, however.
“Q. That was $30,000 that they put in for good will? A. Yes, sir.”

We are justified, from the evidence before us, in holding that Garnett, before he retired from the Gar-nett & Allen Paper Company as a director and stockholder on June 8, 1909, was fully aware of the fact that this $30,000 of pure “wind” was still carried as a part of the capital stock of said company, and that it had never been replaced with either property or money, although the corporation had earned extensive profits up to April, 1898, when they began to fall off, and continued to grow less, until April, 1009, when the profits were only $5963.58.

Turning to the alleged increase of the capital stock in 1905 from $50000 to $250,000:, we find from the testimony of Booth, who had the journal of the company before him, how it was transacted. He testified as follows:

“Q. Now, will you turn to the journal, page 197? A. Yes, sir, I have it here (Indicating).
“Q. And read the statment as you find it there with reference to the Columbia Paper Stock Company’s business under date of September 30, 1905? A. ‘September 30, 1905, Sundries, to Capital Stock, Paper Stock Department. Sundries, Capital Stock, $200,000 Paper Stock Department, $81,981.86. Book Value Columbia Paper Stock Company business, September 30, 1905, merged into the G. A. & G. Paper Company. ’ ,
“Q. And the next two words? A. ‘Undivided Surplus, $118,018.14. ’
‘■‘Q. And what do those entries mean? A. Why, it was made to put my books in shape so that it would show a capital stock of $250,000.
“Q. Well, what does that item, ‘Book value of the Columbia Paper Stock business, $118,018.14,’ mean? A. That is not a part of it; that was the charge against the undivided surplus account; as I said before, that undivided surplus account was a flexible account that we charged or credited to, to make trial balances come out every time right.
“Q. In other words, then, there was an increase there of $200,000 capital stock? A. Yes, sir.
“Q. Part of that was paid up by the Paper Stock Department to the extent of $81,981.86? A. Yes, sir.
“Q. And then that left a deficit in capital stock to the extent of $118,018.14, which had to be paid up in some other manner? A. Yes, but the surplus account on the Garnett & Allen books was a credit. ’ ’

This was the second time Mr. Garnett attempted, in the conduct of his company’s business, to deceive the public, by giving the latter to understand that the capital stock of said company for $250,000 was fully paid up, when he well knew that $30,000 of false credit was entered in 1897, and $118,018.14 in 1905, making a total false credit as to said capital stock, of $148,018.14, and only $101,981.86 of money and property put in to make up the entire capital stock of $250,000.

When the 8th of June, 1909, arrived, the Garnett & Allen Baper Company was still carrying said $148,-018.14 as part of its capital stock. Garnett knew at that time that this fictitious credit was. still being used to pad the capital stock, and that as a matter of fact only $101,981.86 in money and property had actually been set apart as a portion of said capital stock. Mr. Garnett and his co-directors having participated in this progressive and reckless species of “high finance,” were in no position to have the assets of their company still increased to the extent of $125,000 by way of good will, based upon the reputation which they had established in behalf of their company.

Counsel for appellants in their brief, in discussing this question, say:

“A well reasoned Federal case speaks of goodwill thus:
“ ‘ There is nothing marvelous or mysterious about it. When an individual or a firm or a corporation has gone on for an unbroken series of years conducting a particular business, and has been so scrupulous in fulfilling every obligation, so careful in maintaining the standard of the goods dealt in, so absolutely honest and fair in all business dealings that customers of the concern have become convinced that their experience in the ffiture will be as satisfactory as it has been in the past, while such customers’ good report of their own experience tends continually to bring new customers to the same concern, there has 'been produced an element of value quite as important —in some cases, perhaps, far more important — than the plant or machinery with which the business is carried on. That it is property is abundantly settled by authority, and, indeed, is not disputed. That in some cases it may be very valuable property is manifest. The individual who has created it by years of hard work and fair business dealing usually experiences.no difficulty in finding men willing to pay him for it, if he be willing to sell it to them. Legislation devised to restrict the accumulation of the fruits of industry may impair its value by denying to its producer the right to enter into a contract enforceable at law not to interfere with its enjoyment by the purchaser, but, so long as any belief in human honesty remains, there will be found some persons willing to buy such property, the very existence of which implies honest business dealing in the past. And so long as it remains salable it is valuable.’ [Washburn v. National Wall Paper Co., 81 Fed. 17.]”

The above opinion, like all others which uphold the right to consider as assets the good will of a corporation, is based upon the -idea that it has been honest in the conduct of its business. No court of justice would recognize as legal, good will, brought about through either fraud or deceit. A corporation, or an individual, might through dishonesty and false dealing, build up a lucrative and paying business, but ■ the good will of same would not be recognized as of any legal value, when challenged in a court of justice. The hypothetical questions propounded to Forrester and Woodson in respect to the value of good will as an asset, did not comprehend the dealings of Garnett and others heretofore criticised, and especially the fact that good will had already been twice entered and carried as a credit. Hence their testimony is of little practical value in passing upon the merits of the controversy before us.

Upon a thorough consideration of the above question, we have reached the conclusion that the action of the board of directors of the Garnett & Allen Paper Company, on June 8, 1909, in attempting to increase the value of the assets of said company by adding thereto $125,000 for good will, was. without authority of law and void.

II. It is insisted by appellants that the directors of the Garnett, & Allen Paper Company on June 8, 1909, were justified, in view of the financial condition sa^ company, in declaring a dividend of twenty-five per cent, or $62,500, payable out of the alleged surplus of said company.

The facts disclosed in the record do not sustain the above contention. On the other hand, we cannot escape the conclusion that Garnett and the other directors, when they were undertaking to declaré this dividend, knew that there was no surplus of said company out of which to pay the same, and likewise knew that the company did not then have sufficient assets of any kind or description to make good the capital stock of $250,000. Even conceding that the directors, when they increased the capital stock to $250,000 in 1905, had reason to believe that the extensive business theretofore done would warrant the carrying of the $118.018.14 as good will, still there was absolutely no excuse for their undertaking to carry as good will the $30,000.00 used for that purpose in 1897, when the company first commenced doing business, and when it had established no reputation which entitled it to. any such asset.

Taking then, the undisputed facts, which were known to the directors on the 8th of June aforesaid, we find from the testimony of Booth that there was .on hand at that time, according to the books of the company, that which is designated assets, amounting to $234,000. It does not appear that the $148,000 theretofore carried as good will had ever been checked off or replaced by either money or property, bnt on the contrary it had been carried as a credit of the company to that extent. The $30,000 therefore allowed as good will in 1897 conld not be sustained even from the viewpoint of Garnett and others, for the reason heretofore stated. If then this sum had been deducted from the $234,000, it would only have left $204,000 of good, bad and indifferent assets and property, as well as good will, on hand on the 8ttí day of June aforesaid.

It is conceded that on said date, and prior thereto, the company owed the Meehanics-American Bank $30,000, besides the current expenses due for carrying on the ordinary business. This $30,000 due the bank, taken from the $204,000 supra, leaves only $174,-000 belonging to said company, of property, assets, good will and everything combined on hand at the time of the meeting of said board on the above date. Said sum of $174,000, if taken from the capital stock of $250,000, left the company with $76,000 of property, good will, etc. less than the capital stock.

"We are at a loss to know how Garnett and others could have figured out that the company was entitled to a third application of good will when they had already taxed up two others, as a part of their business. Even if it be conceded that they were equitably entitled to the $118,018.14 used as good will when the capital stock was raised to $250,000 in 1905, then they clearly could not have understood from the course of business that another raise of the same character for $125,000 would be admissible for any purpose.

- It is plain, therefore, that these directors at their meeting in June aforesaid, when Garnett retired, knew there were no assets or surplus of the company out of which a dividend of twenty-five per cent, or any other amount, could be declared. They likewise knew that unless the $125,000 should be added as good will for the third time the assets of every kind and description were not sufficient by $76,000 to cover. the capital stock. The action of said board, therefore, in declaring this dividend, was neither justified by the law nor facts.

III. ' The dividend heretofore mentioned as having been declared for $62,500 on June 8, 1909, was put in the form of non-negotiable notes and ultimately found its way as collateral security into the hands of G-arnett, and was given to him as such by Allen to secure the purchase money which the latter owed Garnett, for the stock bought from him.

On the 8th of June, 1909, Garnett knew all about the financial condition of the company, and what had been done in respect to the foregoing matters. In the deal which he'made with Allen on said date, Garnett’s note of $15,673 due the company for borrowed money was to be returnd to him by Allen. When this was done, it represented a transfer to Garnett of this amount of the company’s assets. The evidence presented in the record sustains the conclusion reached by the referee and trial court, that G-arnett received from Allen the money of the company, due on the nonnegotiable notes of the company, held by Garnett as collateral security for Allen’s note to him for the unpaid purchase money of stock. G-arnett therefore knew that the money of the company was to be paid to him on account of said notes, and having received full payment from the company of the amount due thereon, it is clear that the finding of the referee, in regard to the amount of $80,487, is sustained by the record.

The action was only brought to recover the amount due as above stated. It does not take into account the fact that the $30,000 of good will which went into the transaction of 1807, to make np the unpaid capital stock, was never accounted for by Garnett and the other directors. The referee and trial court might well have held him for his proportionate part of said $30,000, in accordance with the number of shares which he held, leaving out of consideration the $118,018.14, carried as good will in 1905, but as no claim is made in respect to this matter, the judgment of the trial court is well sustained by the evidence in the case.

IY. It is contended by appellants that the trustee has no right to.maintain this action because it does not appear that the debts allowed against the bankrupt were in existence on the 8th of June, 1909, when the above transactions occurred.

Remington on Bankruptcy (2 Ed.), vol. 3, sec. 47, page 2704, in respect to powers of trustees, says that the trustee “ shall be deemed vested with all the rights, remedies and powers of a creditor holding a lien by legal or equitable proceedings thereon; and also, as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies and powers of a judgment creditor holding an execution duly returned unsatisfied.”

These extensive powers given to the trustee are for the purpose of enabling him to uncover just such transactions as we have before us, and to restore to the corporation its capital stock which was wrongfully dissipated by its officers. It makes no difference in respect to this matter whether the debts represented by the trustee were contracted before, or after the illegal acts complained of. Every creditor has a right, in the absence of proof to the contrary, to presume that the capital stock of every corporation has been paid in full, if advertised to that effect. In the case at bar, the company went into bankruptcy in less than two years after the proceedings on June 8, 1909, and claims aggregating more than $254,000 were allowed against the bankrupt estate. These creditors, regardless of when their debts were contracted, had the right to assume that the capital stock amounting to $250,000 was fully paid as advertised, as nothing appears to the contrary in the record.

Instead, then, of the capital stock being intact for $250,000, it was deficient on June 8, 1909, to the extent of $76,000 before a .dividend was undertaken to be declared. With the $80,487 added to the $76,000, it discloses that the capital stock, including all assets of the company when Garnett had been fully paid was less than $100,000. Again, it is manifest that Garnett knew on the 8th of June aforesaid that the company would be rendered insolvent by the deal which he was then making, for the company was then short on its capital stock to the extent of $76,000, and this deficiency was to be increased by the dealings which they then had to the extent of $80,487, supra.

In this connection, observations made by Finch, J., in People ex rel. U. T. Co. v. Coleman, 126 N. Y. l. c. 437-8, in regard to the relation between a corporation and a shareholder, are very appropriate. The question under consideration was one of taxation. He was considering the difference between capital stock and the shares of the corporation. On page 437, he said:

“Now, it is certain that the two things are neither identical nor equivalents. The capital stock of a company is one thing; that of the shareholders is another and a different thing. That of the company is simply its capital, existing in money or property, or both; while that of the shareholders is representative, not merely of that existing and tangible capital, but also of surplus, of dividend-earning power, of franchise and the good will of an established and prosperous business. The capital stock of the company is owned and held by the company in its corporate character; the capital stock of the shareholders they own and hold in different proportions as individuals. The one belongs to the corporation; the other to the corporators. The franchise of the company, which may be deemed its business opportunity and capacity, is the property of the corporation, but constitutes no part or element of its capital stock; while the same franchise does enter into and form part, and a very essential part, of the shareholder’s capital stock. While the nominal or par valué of the capital stock and of the share stock are the same, the actual value is often widely different. The capital stock of the company may be wholly in cash or in property, or both, which may be counted and valued. It may have in addition a surplus, consisting of some accumulated and reserved fund, or of undivided profits, or both, but that surplus is no part of the company’s capital stock, and, therefore, is not itself capital stock. The capital cannot be divided and distributed; the surplus may be. But that surplus does enter into and form part of the share stock, for that represents and absorbs into its own value surplus as well as capital, and the franchise in addition. So that the property of every company may consist of three separate and distinct things, which are its capital stock, its surplus, its franchise; but these three things, several in the ownership of the company, are united - in the. ownership of the shareholders.” On page 439, the same learned judge said: “There are reasons in abundance for the conclusion that by the phrase ‘capital stock’ the statute means not the share stock, but the capital owned by the corporation; the fund required to be paid in and kept intact as the basis of the business enterprise, and the chief factor in its safety.”

In Shields v. Hobart, 172 Mo. l. c. 517, Gantt, J., speaking for the Court in Banc, in discussing this question, said:

“Independently of this statute, which gives creditors an additional security against directors, it is a fundamental rule that dividends can.be paid only out of profits or the net increase of the capital of a corporation and cannot be drawn upon the capital contributed by the shareholders for the purpose of carrying on the company’s business.
“Neither the directors of a corporation, nor even the majority of the stockholders, have any authority to diminish the prescribed capital of the corporation by distributing a portion of it among the shareholders in the shape of dividends, for this would he a fraud upon creditors contracting with it on the faith of its capital stock. . . .
“Dividends can only he properly declared from the profits over and above the capital stock and the debts of the company. [Barry v. Exchange Co., 1 Sandf. Ch. l. c. 307; Williams v. Western U. Tel. Co., 93 N. Y. 162.]”

In Chrisman-Sawyer Banking Co. v. Independence Mfg. Co., 168 Mo. l. c. 615, where the demand due the creditor was contracted subsequently to the matter complained of, Marshall, J., in behalf of the Court in Banc, in which all concurred, said:

“So that the law is now well settled in Missouri, as well as by the weight of authority in America, that unpaid stock subscriptions constitute an asset of an incorporated company, which all creditors, without regard to when their debts were contracted, have a right to look to and which cannot be extinguished, released, given away, wiped out or impaired by any act of the corporation or the stockholder to the injury of the creditor, except by his consent.”

We are clearly of the opinion that, in a case of this character, where the trustee representing many creditors is suing, the law will presume, in the absence of evidence to the contrary, that such creditors in dealing with a corporation did so on the theory that the capital stock was paid up and remained intact, if so advertised by the company, in its dealings with the public. In the absence of evidence to tne contrary, it is fair to assume that every creditor, dealing with a corporation, and giving credit thereto, relies upon its capital stock as a means of safety to protect him in his investment.

Regardless of what may he held in other jurisdictions, we are of the opinion that the law as promulgated in the authorities above cited, announce correct principles of law as applied to the case in hand. We therefore hold that the respondent, as trustee of the bankrupt estate, is fully authorized to maintain this action.

Having discussed all the matters presented in appellant’s brief, we have reached the conclusion that the judgment of the trial court in sustaining the findings of the referee, is supported both by law and evidence. The judgment below is therefore affirmed.

Brown, C., concurs.

PER CURIAM.

— The foregoing opinion of Railey, C., is adopted as the opinion of the(court.

All the judges concur.