162 Misc. 898 | N.Y. Sup. Ct. | 1936
This action is brought against the defendants as administrators c. t. a. of the estate of Abraham L. Erlanger to enforce the liability of the decedent as a stockholder of the Rialto Properties Company, a California corporation. The alleged liability is based on article XII, section 3, of the Constitution of California as it existed from 1879 until its repeal in 1930, and on section 322 of the Civil Code of California as it existed substantially from prior to 1879 until its repeal in 1931.
On December 31, 1928, Abraham L. Erlanger gave to one Saul J. Baron full power of attorney to act for him in connection with a corporation that was to be formed in California. A specific provision of the instrument authorized the giving of a waiver of the benefit of the Statute of Limitations relating to stockholders’ liability in connection with a financing operation to be undertaken by the corporation.
On January 17, 1929, the California corporation referred to in the power of attorney was incorporated as the Rialto Properties Company. Four days later the board of directors of that company, with the consent of the stockholders, voted to create a bonded indebtedness of $750,000 to be secured by a mortgage on the property to be acquired by. the company. The bonds were to be dated February 1, 1929, and were to bear interest from that date.
February 8, 1929, Baron, in response to a telegram from the attorney in California who was handling the affairs of the Rialto Company, sent a letter by air mail stating that Erlanger was willing to subscribe to twenty-five per cent of the stock issued. At the same time Baron inclosed a waiver, executed by him, of the Statute of Limitations relating to the stockholders’ liability in connection with the issue of the bonds. The board of directors of Rialto on February 16, 1929, voted to issue to Erlanger a certificate for 1,875 shares of stock. This certificate, dated February 16, 1929, was thereafter delivered in escrow to the Anglo and London Paris National Bank of San Francisco. The delivery was in accordance with the permit which the California Commissioner of Corporations gave to Rialto to issue capital stock. On February sixteenth Erlanger paid to Rialto $25,000 on his subscription to the company’s stock, and later paid $312.50 on the same account.
A default in the payment of interest on these bonds occurred November 1, 1931. On February 1, 1932, Rialto failed to pay $15,000 of principal of the bonds. On August 11, 1932, the plaintiff, which had been formed by a consolidation of the Anglo and London Bank and the Anglo-California Trust Company, and which had succeeded the first named bank as trustee, declared the whole principal of the bonds due.
A bondholders’ protective committee .which had been formed February 26, 1932, filed objections to the account of the proceedings of Saul J. Baron, temporary administrator of the estate of Erlanger who had died on March 7, 1930. The objections were filed in the Surrogate’s Court in New York city on September 13, 1932. The bondholders’ committee represented $271,500 of the $740,000 of bonds outstanding. (Ten thousand dollars of the bonds matured February 1, 1931, and were paid.) The objections to the account of the proceedings of the temporary administrator were treated as a claim against the estate. Notice to the committee to appear and prove its alleged claim was sent to its attorneys in California on October 28, 1932. The committee was dissolved in December, 1932, and did not appear to offer evidence in support of its claim. The claim was never rejected in writing. The referee disallowed the claim and his report was confirmed by the surrogate on July 10, 1934.
On February 1, 1933, the plaintiff commenced this action on behalf of all the bondholders, including the bonds held by the bondholders’ committee. When the action was commenced the property which was security for the bonds had not been foreclosed. On September 17, 1934, the property was sold on foreclosure for $122,500. At the trial the plaintiff amended its complaint to a lege that this sale had been held, and to credit the proceeds on the amount due.
The defendants contend in substance as follows: (1) The repeal of the provisions of the California Constitution and Civil Code relating to the liability of a stockholder for certain debts of his corporation is a bar to the present action. (2) The liability of
(1) The repeal of the provisions of the California Constitution and Civil Code relating to stockholders’ liability is not a bar to this action. Before its repeal on November 4, 1930, article XII, section 3, of the California Constitution read in part as follows: “ Each stockholder of a corporation, or joint-stock association, shall be individually and personally liable for such proportion of all its debts and liabilities contracted or incurred, during the time he was a stockholder, as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation or association.”
Before its repeal on August 14, 1931, section 322 of the Civil Code, so far as is pertinent here, provided that “ Each stockholder of a corporation is individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation.”
The repeal of the constitutional provision did not repeal section 322 of the Civil Code. This was expressly held by the Supreme Court of California in Kaysser v. McNaughton (6 Cal. [2d] 248; 57 P. [2d] 927 [1936]). With respect to the repeal of section 322, a saving clause was enacted providing:
“ Section 1. Sections 322 and 322a of the Civil Code are hereby repealed.
“ Section 2. The repeal of said sections shall not in any way impair or affect any remedy or any cause of action for any liability incurred or accrued under said sections prior to the time this act takes effect.” (California Statutes of 1931, chap. 257.)
The defendants argue that this savng clause does not apply in the present case since no default had occurred before August
(2) The liability of stockholders becoming such after February 1, 1929, was not waived. This defense is predicated on the fact that the resolution creating a bonded indebtedness declared that it was to consist of bonds “ all bearing date as of February 1, 1929,” and all bearing “ interest from said first day of February, 1929; ’ that the deed of trust stated: “ This indenture * * * made and entered into as o the first day of February,” and that the permanent bonds issued by the company were expressed to have been executed “ as of the 1st day of February, 1929.”
These declarations fail to support the contention of the defendants. The fact that February first is adopted in the ■ various documents is capable of explanation on grounds other than the assumption that the selection of this date was intended as a waiver of the liability of stockholders becoming such after February 1, 1929. The defendants’ contention is especially difficult to maintain in view of the provision of the indenture, pursuant to which the bonds were issued, placing upon the Rialto Company the duty of obtaining a waiver of any statutes of limita Lion constituting a defense against the liability on the bonds “ from the holders of not ess than ninety per cent of the whole of its issued and/or subscribed capital stock outstanding at the time of the issuance of the bonds to be issued hereunder.” And in the waiver of the Statute of Limitations signed by Erlanger’s attorney on February 8, 1929, to satisfy the demand of the trustee, it is stated that all the bonds in question are to be dated as of February 1, 1929. The indebted- ' ness was actually incurred on February twentieth, four days after Erlanger’s subscription to the stock was accepted by the board of directors of Rialto.
(3) The cause of action is not barred by the Statute of Limitations. The time within which an action may be brought is to be decided by the law of the forum. (3 Beale, Conflict of Laws, § 603.1.) Section 13 of the Civil Practice Act of this State provides that “ Where a cause of action arises outside of this State, an action cannot be brought in a court of this State to enforce such cause of action after the expiration of the time limited by the laws of a State or country where the cause of action arose, for bringing an action upon such a cause of action, except where the cause of action originally accrued in favor of a resident of this State.”
Accordingly, the relevant provisions of the California law must be examined in order to determine whether the cause of action is barred in the State where it arose. The period limited by the statutes of California for the commencement of an action to enforce a stockholder’s liability is three years from the time the liability was incurred. (Cal. Code Civ. Proc. § 359.) Under such provision the time for bringing this action has expired. The stockholder in this case, however, executed a waiver of the benefit of the Statute of Limitations. Under the California law this waiver is effective although it was executed at or before the inception of any liability. (Dexter v. Pierson, 214 Cal. 247; 4 P. [2d] 932; Brownrigg v. DeFrees, 196 Cal. 534; 238 P. 714; Hammell v. Atkinson, 79 Cal. App. 708; 250 P. 1117.)
Courts, in construing the effect of statutes similar to section 13 of the Civil Practice Act, which borrow the period of limitation of the State where the cause of action arose, have generally held that the law of that State applies with respect to other matters affecting the running of the period of limitation. (Mechanics’ Sav. Bank v. Fidelity Insurance, 91 Fed. 456; Klemme v. Long, 184 Minn. 97; 237 N. W. 882; see 35 Col. L. Rev. 762, 770.) The courts of this State have applied the law of the State where the cause of action arose to determine the effect of absence of the defendant from the latter State (Hanna v. Stedman, 230 N. Y. 326; Isenberg
The effect of a waiver of the Statute of Limitations should, under the circumstances of this case, be determined by the law of the State where the cause of action arose. The provisions of the California law with respect to stockholders’ liability were forcefully presented to the parties. An express duty was placed upon the Rialto Company to procure waivers of the benefit of the Statute of Limitations, and this constituted an inducing cause, and part of the security, for the creation of the bonded indebtedness. The entire transaction was carried on in California with the exception of the signature of the waiver of the benefit of the statute; and even after the waiver was signed certain blanks were left in it and the necessary data inserted in California. It is clear that all the parties were acting with the understanding that the California law would control. It would be manifestly unjust, therefore, to refer to the California law to determine the period of limitation and to ignore that law with respect to a waiver of the benefit of that period. Since the three-year Statute of Limitations in California runs from the date the debt is incurred, the statutory liability of stockholders of California corporations would be rendered nugatory in this State in all cases of long term corporate obligations unless effect were here given'to a waiver of the benefit of the limitations statute.
A waiver of the Statute of Limitations which is executed before the inception of liability may not be valid with respect to a transaction that has all its contacts in New York. (Shapley v. Abbott, 42 N. Y. 443; Watertown National Bank v. Bagley, 134 App. Div. 831; Crocker v. Ireland, 235 id. 760; Mutual Life Ins. Co. v. United States Hotel Co., 82 Misc. 632; St. Andrews Parish v. Gallagher, 121 id. 167.) ' These cases are persuasive authority, although none of them is a decisive holding on the point, that the rule in New York makes such waivers ineffective. There is no such strong policy, however,- against a waive. of the. Statute of Limitations that a New York court should refuse to enforce a waiver that is. valid in the State where the cause of action arose and where substantially the- entire transaction took place.
One of the cardinal purposes of applying the New York period of limitation as a secondary restriction is to prevent the prosecution of stale claims in the courts of this State. (3 Beale, Conflict of Laws, § 603.1) The laws of this State place upon the stockholders of a New York corporation no such liability as is involved in the present case. Consequently there is no period of limitation contained in the statutes of New York specifically directed at such a liability.
The action in the present case may be considered one to enforce a contractual liability (Aronson & Co. v. Pearson, 199 Cal. 286; 249 P. 188; Kaysser v. McNaughton, 6 Cal. [2d] 248; 57 P. [2d] 927, 932; cf. Howarth v. Angle, 162 N. Y. 179) or an action to enforce a liability created by statute. (Cf. Platt v. Wilmot, 193 U. S. 602.) In either event the cause of action in the present case cannot be considered stale since the action was commenced well within the provisions of section 48 of our Civil Practice Act:
“ The following actions must be commenced within six years after the cause of action has accrued
“ 1. An action upon a contract obligation or liability express or implied, except a judgment or sealed instrument.
“ 2. An action to recover upon a liability created by statute, except a penalty or forfeiture.”
No greater effect is given to the waiver of the Statute of Limitations in the present case than to extend the three-year period limited by the California statutes. The waiver need not be construed to extend the period which the Legislature of this State has laid down as marking the time within which a claim may be considered worthy of pursuit. Accordingly, the present action, which would not be barred in California, is not barred in this State.
Adverse to the defendants’ contention is the case of Bank of America Nat. Trust & Savings Assn. v. Cryer (83 Cal. A. D. 57; 49 P. [2d] 864, 865), decided after the decision in Bank of Italy Nat. Trust & Savings Assn. v. Bentley (supra). In the Cryer case the stockholders were sued before the mortgage had been foreclosed. The court said: “ It is contended that the action was prematurely commenced, since the mortgage had not been foreclosed when the complaint was filed. This contention cannot be upheld. A stockholder’s liability is enforceable independently of proceedings against the corporation. It was not necessary to first foreclose the mortgage in order to recover against the stockholders. Aronson & Co. v. Pearson, 199 Cal. 286; 249 P. 188; 51 A. L. R. 1380; Chambers v. Farnham, 182 Cal. 191; 187 P. 732; Fry v. Baltimore Hotel Co., 80 Cal. App. 415; 252 P. 752; 6 Cal. Jur. 995. Respondent stockholders argue that the corporation guaranteed only the amount to be found due by a deficiency judgment. We cannot take this view. The language used in the instrument is clearly a promise to pay the obligation as a whole, without qualification and without limitation to a possible deficiency. Although the right to sue is not affected thereby, it might be added that the mortgage was in fact foreclosed before the present action was brought to trial, and the judgment rendered against defendants is for the respective amounts due on the deficiency after sale of the property. These matters are set forth in a supplemental complaint.” (See, also, 6 Cal. [2d] 485; 58 P. [2d] 643.)
The defendants contend, however, that section 322-a of the Civil Code of California, providing for subrogation of the stockholder to the rights of the creditor, makes it necessary to apply the rule in Bank of Italy Nat. Trust & Savings Assn. v. Bentley (supra) to a suit against the stockholder. If their contention is not adopted,
Before the trial of this action was commenced, the mortgaged property was sold, and at the trial the plaintiff amended its complaint to allege this sale. This corrects any defect in the complaint. Under the law as it stood before September 1, 1935, if no cause of action existed at the time the action was commenced, an amendment alleging facts occurring subsequently which would state a cause of action could not be allowed. (Trempe v. Perlman, 187 App. Div. 745; Lafayette Trust Co. v. Peck, 133 id. 370; Rummell v. Blanchard, 173 id. 695.) This is no longer the law. Under section 245-b of the Civil Practice Act, “ the court may in its discretion permit a party to serve a supplemental pleading to set up any facts which occurred after the commencement of the action.” The amended complaint alleged the sale and credited the proceeds thereof against the sum due on the bonds. The cause of action was thereby fully made out.
The amendment was allowed in the interests of justice. The defendants were not surprised by the amendment, nor did they request an adjournment. They amended their answer by pleading in substance as defenses: (1) That the foreclosure sale did not realize the fair and reasonable value of the mortgaged property; (2) that the failure of the plaintiff to bring suit for a deficiency judgment has barred the defendants from any action against the corporation should they be held liable in this case.
To substantiate their claim that the foreclosure sale did not realize the fair and reasonable value of the mortgaged property, the defendants assert that the assessed valuation of the property from July 1,1933, to July 1,1934, was'$293,415; that this sum must be considered in the light of the finding made by the State Board of Equalization, pursuant to section 11 of chapter 642 of the California Statutes of 1931, that the assessed value of property in San Francisco county was only 44.38% of the true value. The defendants maintain that the true value was, therefore, in excess of $600,000.
A “ true value ” of $600,000 for theatre property does not necessarily mean that a forced sale of that property for $122,500 was unfair or unreasonable. Foreclosure sales in recent years have seldom realized the reasonable value of the premises sold. Mere inadequacy of price is not a sufficient ground for setting aside a foreclosure sale. (Connick v. Hill, 127 Cal. 162; 59 P. 832; May v. Hatcher, 130 Cal. 627; 63 P. 33.) The defendants have offered no evidence that there was fraud or collusion in this sale, or that it was carried on otherwise than in the regular manner.
The defendants assume that this statute places the stockholders in the position of sureties with respect to the debts owed by the corporation to its creditors. The California law is, however, that the liability of the stockholders of a California corporation to the creditors is contractual in nature and is a direct and primary obligation. (Aronson v. Pearson, 199 Cal. 286; 249 P. 188; cf. Ellsworth v. Bradford, 186 Cal. 316; 199 P. 335; Neilson v. Crawford, 52 Cal. 248.) The fact that stockholders are given a right of subrogation does not place them in the position of sureties, so long regarded as favorites of the law.
In any event there is nothing to indicate that defendants have been prejudiced in any way by the failure to proceed for a deficiency judgment against the Rialto Company, their own corporation. Nothing is alleged to show that their corporation had any assets with which to meet such judgment.
(6) The plaintiff has the capacity to bring this suit. Defendants contend that the deed of trust contains no provision assigning to or vesting in the trustee any right to sue upon the liability of the stockholders to the bondholders. The plaintiff’s right to sue on behalf of the bondholders must be determined on the basis of the California law whether the matter be treated as the construction of an instrument relating to land (Galland v. Schubert Theatrical Co., 105 Misc. 185) or a determination of whether the right to sue the stockholders is vested in the plaintiff by way of assignment. (Jackson v. Tallmadge, 246 N. Y. 133.) The testimony of the experts on California law called by both sides was in direct conflict on this point.
The deed of trust contains a provision giving the trustees the right to “ institute foreclosure proceedings or take other legal or equitable action to collect the amount of said bonds with the interest thereon.” (Art. VI, § 6.) Section 11 of article VI of the trust deed provides: “ No remedy herein conferred upon or reserved
The remedy given to creditors against stockholders is conferred by statute. (Kaysser v. McNaughton, supra.) There is also an express covenant in the deed of trust to pay princ'pal and interest to the trustee. Moreover, the waiver of the Statute of Limitations contains a covenant running to the trustee as well as to the bondholders not to interpose the defense of the statute to an action by the trustee or by a bondholder. The construction is reasonable, therefore, that the remedy to collect from the stockholders on their liability may be invoked by the trustee, the plaintiff herein.
In opposition to this conclusion the case of Williams v. Carver (171 Cal. 658; 154 P. 472) is cited. In that case the Superintendent of Banks of California, who was liquidating an insolvent bank, was held not to have the capacity to sue the stockholders of the bank upon their liability to the creditors. A California statute “ to define and regulate the business of banking ” had given. to the Superintendent the right “ to enforce the individual liability of the stockholders.”
Three grounds were given by the court for this decision: 1. The Superintendent of Banks succeeds only to the rights and property of the bank; but the liability of stockholders to creditors is no part of such property or assets; the Superintendent, therefore, has no power to act for the creditors in pursuit of their claim against the stockholders. 2. The statute conferring on the Superintendent the right “ to enforce the individual liability of the stockholders,” means the liability of stockholders for assessments made by the bank, or for sums due on subscriptions to stock. 3. The Superintendent could not be entitled to sue the stockholders on their liability to the creditors without violating the constitutional provision that the title of each act must embrace its subject-matter. The liability of a stockholder to a creditor of the corporation has no relation to defining or regulating the business of banking.
Williams v. Carver (supra) is not' decisive of the instant case. The second and third grounds for the conclusion there reached have no application here. The first ground of that decision is met in this case by the covenant to pay which ran directly to the trustee. The trustee is, therefore, in the position of a creditor and not one who has merely succeeded to the property and assets of the corporation.
Where a guaranty ran both to the bondholders and to the trustee, it was held that the trustee could prove a claim in bankruptcy against the guarantor. (Matter of United Cigar Stores Co., 68
(7) The defendants also contend that they should not be held liable for the proportionate sum due on the $271,500 worth of bonds which were involved in the objections filed by the bondholders’ protective committee to the account of the proceedings of Saul J. Baron, temporary administrator of the Erlanger estate. These objections were treated as if they were a claim made against the estate, and a notice was sent to the committee to appear and prove its claim. The committee did not appear; no rejection in writing was ever made; the committee’s claim was disallowed. The defendants contend that those bondholders who were represented by the committee have had their day in court and, although the defense of res adjudicata is not pleaded, that the action of the trustee, to the extent that it includes these bonds, should not be allowed.
It is clear from the decree of the surrogate that the claim of the committee was not rejected on the merits. The action of the surrogate was in the nature of a nonsuit. Since there was no determination of the merits of the alleged claim made by the committee, the bondholders whom it represented are not barred from having their claim adjudicated in this action. (Richard v. American Union Bank, 253 N. Y. 166; Nudelman v. Borden's Condensed Milk Co., 77 Misc. 103.)
The plaintiff is entitled to judgment for the relief ■ demanded in the 'complaint. The plaintiff’s computation of damages is adopted except that the amounts claimed for legal expenses in prosecuting this action in the sum of $2,676.84, and for legal and trustees’ expenses of the foreclosure suit in the sum of $3,417.61, are disallowed. Judgment is accordingly directed in favor of the plaintiff for the sum of $212,562.54 with interest from November 30, 1936. Exception to the defendants who are allowed a stay of execution of thirty days, and sixty days to make a case. Settle order.