## Facts

- A state-chartered bank was incorporated with a stated capital stock of $200,000 and a limited corporate term later extended to wind up and pay debts.
- Before the bank satisfied its obligations, shareholders voted distributions totaling about three-fourths of the bank’s stated capital.
- The bank’s notes continued to circulate until payment was refused on notes held by creditors, leaving substantial unpaid obligations.
- The bank was insolvent; much capital was unpaid or lost, and directors were unable to satisfy liabilities.
- Creditors holding unpaid bearer notes filed a bill in equity against certain shareholders who had received the distributions, seeking restitution of the distributed capital to pay the notes.
- Shareholders denied wrongdoing and raised objections based on federal jurisdiction and failure to join all shareholders.

## Issues

1. Whether a corporation’s capital stock is a trust fund pledged for payment of corporate debts, allowing creditors to pursue distributed capital in shareholders’ hands.
2. Whether unpaid noteholders may sue shareholders in equity to compel restoration of corporate capital distributed as dividends before debts were paid.
3. Whether the federal circuit court had jurisdiction over the equitable claim despite bearer notes and changes in note ownership.
4. Whether all shareholders were necessary parties, or whether suit could proceed against only some shareholders when joinder was impracticable.
5. What relief is available: full recovery from named shareholders or liability limited to the amount each received from distributed capital.

## Decision

- The court held that the bank’s capital stock was a pledge or trust fund for payment of the corporation’s debts.
- Creditors could follow misapplied capital into the hands of shareholders who received it with notice of its character as capital.
- Creditors could maintain a bill in equity directly against shareholders to recover distributed capital to the extent received.
- The court sustained federal jurisdiction over the equitable trust-fund claim.
- The suit was allowed to proceed without joining all shareholders because equity does not require impracticable joinder that would defeat relief.
- The decree required defendants to account for and refund the amounts they received from the distributed capital, limited to sums actually received, to be applied toward payment of the creditors’ notes.

## Legal Principles

- Corporate capital stock, especially for a bank, is held out as security for creditors and is treated in equity as a trust fund for payment of corporate debts.
- Shareholders may receive dividends from profits, but capital cannot be withdrawn and appropriated to shareholders’ use until corporate debts are paid.
- Creditors may trace and recover trust property in equity from recipients who are not bona fide purchasers without notice, including shareholders who participated in or benefited from the distribution.
- Equity may dispense with joinder of all similarly situated parties when they are numerous and joinder is impracticable, permitting suit against some in aid of the common interest.
- Shareholder liability in this setting is restitutionary and pro tanto: limited to disgorgement of improperly distributed capital actually received, not unlimited personal responsibility for all corporate debts.

## Conclusion

The court treated bank capital as a creditor-protective trust fund and allowed unpaid noteholders to recover misdistributed capital from shareholders in equity, limiting recovery to the amount of capital each shareholder had received and permitting the action to proceed without joining all shareholders.


Wood v. Dummer, 30 F. Cas. 435 (C.C.D. Me. 1824)