Wood v. Drummer

United States Circuit Court for the District of Maine · 1824 · Corporations

30 F. Cas. 435 (C.C.D. Me. 1824)

Updated August 22, 2026

Corporationscapital stocktrust fund doctrinebank creditorsstockholder dividendsinsolvencyequitynecessary parties

Facts

The Hallowell and Augusta Bank's original charter expired in 1812, but the legislature continued the corporation for the limited purpose of closing its concerns and dividing its capital stock, and later extended that period again. In 1813 the stockholders voted dividends totaling seventy-five percent of the bank's capital stock, even though a quarter of the stock had never been paid in and large debts were owed to the bank by directors who later became insolvent. The bank's notes continued circulating until late 1814, when the plaintiffs, holders of more than $29,000 in notes, presented them for payment and were refused. The plaintiffs then sought payment from defendants who held 320 shares and had received part of the distributed capital stock.

Issue

Whether the capital stock of a bank, after being distributed to stockholders, remains liable in equity for the bank's unpaid debts so that note holders may follow that fund into the stockholders' hands. Also, whether the suit could proceed despite pleading defects and the absence of all stockholders as parties.

Rule

The capital stock of a bank is a pledge or trust fund for payment of the corporation's debts, and creditors have a prior equitable claim to it over stockholders, whose rights extend only to the residuum after debts are paid. If that capital stock is distributed to stockholders, creditors may follow the fund into the hands of stockholders, who take it subject to the trust and with notice of it.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Bank, chartered in Vermont, voted to return 60% of its paid-in capital to shareholders while thousands of its circulating bearer notes remained outstanding. Six months later, the bank refused payment on notes held by Elena Ruiz in Portland, Maine, and it had no sufficient assets other than the distributed capital. Elena sues shareholder Martin Keene, who received part of the distribution.

Is Elena most likely entitled in equity to reach the funds Martin received?

Explanation. The majority treated bank capital stock as a pledge or trust fund for payment of the bank's debts. Creditors have a prior equitable claim, and shareholders are entitled only to the residuum after debts are paid. If capital is distributed, creditors may follow that fund into shareholders' hands because shareholders take with notice of the trust. Fraud was not required to sustain relief.