## Facts

- The Clifton Coal Company, a Kentucky corporation, was formed with $120,000 capital stock and authority to increase capital to $200,000 by stockholder vote.
- In May 1886, all stockholders met and unanimously voted to increase capital to $200,000 (an additional 800 shares at $100 par).
- Shares from the increase were issued to certain stockholders, including Handley; the creditors alleged these shares were issued as “full paid” without payment of par value.
- In December 1886, the company issued $50,000 in bonds and, to induce purchasers, distributed newly created shares as a gratuitous “bonus” tied to bond subscriptions, without separate payment for the stock.
- The company’s business failed, its capital became impaired, and it became insolvent.
- Multiple creditors obtained judgments; some debts were incurred before the stock increase, and others after it.
- Creditors filed an equity suit seeking an assessment against holders of unpaid and “bonus” shares, asserting the capital stock was a trust fund for corporate debts.

## Issues

1. Whether irregularities in corporate procedure (delayed entry of the vote in corporate records, holding the meeting outside Kentucky, and failure to record/publish an amendment) invalidated the stock increase.
2. Whether shareholders who received “full paid” stock without paying for it must pay par value when pursued by creditors under a trust-fund theory.
3. Whether any such equitable liability runs to all creditors or only to creditors whose claims arose after the stock increase and issuance.
4. Whether good-faith purchasers who obtain newly issued stock for less than par value (including stock used as an inducement in a bond sale) are subject to trust-fund liability to creditors.

## Decision

- The Supreme Court reversed the decree for the creditors and remanded.
- The failure to record the stockholder vote contemporaneously did not invalidate the vote increasing capital.
- A stock-increase resolution adopted at an out-of-state meeting was binding on the stockholders present and voting for it.
- The stock increase was not invalid merely because recording/publication steps required by state law were not completed, where the increase was within the statutory limit and not declared void for noncompliance.
- Shareholders who assented to a gratuitous distribution of increased stock and received it as “full paid” incurred an equitable obligation to pay for it in full only when called upon by creditors whose debts were incurred after authorization of the increase.
- That equitable obligation did not exist in favor of creditors whose debts were contracted before the increase.
- An active corporation with impaired capital could issue new stock and sell it for the best obtainable price; no trust-fund liability arises against a good-faith purchaser who buys for less than par.

## Legal Principles

- Corporate action increasing capital stock is not invalidated by a mere delay or omission in recording the stockholders’ vote in the corporate minutes.
- Stockholders present and voting can be bound by corporate action taken at a stockholders’ meeting held outside the state of incorporation, absent a controlling prohibition.
- Noncompliance with certain statutory recording/publication requirements does not necessarily void an otherwise authorized stock increase within statutory limits, absent a clear voiding consequence.
- Under the trust-fund concept, issuing “full paid” shares without consideration can create an equitable duty for recipients to pay par value to protect creditors, but only for creditors who became such after the misleading capitalization was created.
- Pre-increase creditors generally cannot claim reliance on the later increased capital and therefore cannot compel payment on gratuitously issued increased shares on that theory.
- A corporation attempting to raise capital after losses may sell newly issued shares below par at a market price; good-faith purchasers for value are not automatically liable to creditors for the par-value shortfall.

## Conclusion

The Court upheld the stock increase despite procedural irregularities, but limited trust-fund recovery on unpaid or gratuitously issued “full paid” shares to creditors whose claims arose after the increase, and protected good-faith purchasers who acquired newly issued stock below par as part of legitimate capital-raising efforts.


Handley v. Stutz, 139 U.S. 417 (1891)