82 A.D. 289 | N.Y. App. Div. | 1903
Lead Opinion
The American Loan and Trust Company was incorporated by chapter 868 of the Laws of 1872, which' act was subsequently amended by chapter 486 of the Laws of 1874, chapter 189 of the Laws of 1880, chapter 391 of the Laws of 1882, and chapter 260 of the Laws of 1884. ■ The corporate powers of the company were vested in a board of directors consisting of not less than nine nor more than thirty-one members. The first board of directors was named in the act, and their successors were to be annually elected by the stockholders. Section 11 of the act provided that “ no person shall be a director of this corporation unless he shall hold in his own right fifty shares of its stock, and every director shall be personally. liable for debts incurred by the corporation during his administration to an amount not exceeding five thousand dollars.” ■ Under this charter the corporation was organized and for several years transacted business in the city of Hew York.
In March, June and July, 1890, the plaintiff deposited various
It was then proved that the defendants originally named in the action were duly elected directors in the year 189Ó; that the defendants Tracy and Clark cjid' not accept the office of director to which they were elected at the annual meeting of stockholders on ‘the 14th day of May, 1889, and the 13th day of May, 1890, but the other defendants had qualified as directors and acted as such from the 13th day of May, 1890, until the dissolution of the said corporation ; that at the' time of the failure of the corporation there was due to preferred creditors for principal an amount exceeding $458,000, and to depositors and other unpreferred creditors for principal without interest an amount exceeding $500,000; that at the time of the trial all of the assets that had come into the hands of the receiver had been realized, with the exception of a claim against the Chesapeake and Decatur Railroad Company in which had been invested about $500,000 by the trust company; that this asset was of doubtful value, and it was impossible to determine what amount, if anything, would be realized from.it; that the other' assets.that had been realized were sufficient .to pay the principal of the preferred debts in ■ full, leaving a balance in the hands of the receiver of about $.74,000, from which would have to be deducted the expenses of the receivership; and that there was also due to the preferred creditors for interest about $75,000, leaving nothing for the .general creditors, except such amount as should be realized
Subsequently, the court rendered judgment against all of the defendants, except Tracy; Clark and Platt, directing the defendants against whom judgment was rendered to pay into court to the chamberlain of the city of Hew York the sum of $5,000 each, with interest from the 16th day of March, 1892, the date of the commencement of the action (except that the defendant Andrews was credited with an amount which he had paid to a creditor of the corporation prior to the commencement of the action), or so much thereof as may be necessary to pay the sum due to the plaintiff, the costs of this action to be taxed, and the sums which hereafter may
Several interesting questions are presented. The first to be discussed is that insisted upon by all the defendants, that no action in equity on behalf of all the creditors could be maintained to enforce the liability imposed upon the directors of this corporation by section 11 of the charter to which .attention has been called. The question as to the enforcement of a liability imposed upon stockholders or directors of á corporation to respond to the claims of creditors has been much discussed, and there has been a considerable diversity of opinion as to whether such liability is primary or secondary, and in what particular cases a liability can be enforced in equity by a creditor suing on behalf of himself and those similarly situated. It' would seem that the liability for the debts of a corporation imposed upon stockholders and directors may be divided into three classes : First, cases in which a penalty is. imposed for a failure of a director or stockholder to perform a duty imposed upon him by the law of the sovereignty which has given corporate exist- - ence to the corporation of which he is an officer or stockholder; as, for instance, liability for failure to file an annual report-; second, cases' where an unlimited liability for debts of the corporation is imposed upon a director' or stockholder, and, third, casés where a limitéd liability is imposed, viz., where the amount for which the. director or stockholder maybe liable is limited either by-a sum-fixed — an amount equal to the par value of- the capital stock owned by. the stockholder—or by the amount of the debts in excess of the capital stock of the corporation. Upon principle it would seem that in the first of these cases no resort to a court of equity is necessary or proper, as each creditor has a complete remedy at law against the-
In this ease there is imposed upon the directors a liability for all debts incurred by the corporation during their administration, upon each a liability to an amount not exceeding $5,000. They are not made liable for any particular debt incurred by the corporation; but the purport of the statute seems to be that each director should pay the sum of $5,000 towards the debts of the corporation incurred during the period that he occupied the office of director. There is no distinction between the different kinds of indebtedness for which the director is responsible, but every director is personally responsible for every debt incurred by the corporation during his administration; the total liability of the director, however, is not to exceed the sum of $5,000. .If this liability is to be enforced only in favor of the creditor who first commences his action against the director, that particular creditor exhausts the liability of the director and the other creditors have no recourse against him ; and yet the statute says that the liability is to be in favor of all the creditors. In other words, it seems to have been the intention in imposing this liability that the creditors as a whole should have the responsibility of the directors to them upon which to rely for the payment of the indebtedness of the corporation, and which could not be enforced if one creditor were allowed to sue and recover the whole amount of his debt from a director, as such a recovery would be a bar to any other creditors obtaining from such director any sum in satisfaction of his indebtedness.
After the commencement of this action several of the defendants demurred to the complaint on the ground that it did not state facts sufficient to constitute a cause of action, and that question was disposed of by the General Term of the Supreme Court (Bauer v. Platt, 72 Hun, 327). Mr. Justice Parker, now chief judge of the Court of Appeals, delivering the opinion of the court, held that this action was properly brought.. After discussing this section of the
In Brinckerhoff v. Bostwick (99 N. Y. 185) the action was commenced by a stockholder on behalf of himself and the other stockholders, alleging that during all the times mentioned the -defendants-had been directors of the bank, -and that by their misconduct, carelessness and negligence, and their inattention to .its affairs, the property and effects of the bank had been stolen; wasted and squandered, so -that the bank was rendered utterly insolvent, and its stockholders, were -thus greatly damaged, and relief was demanded that the damages which the stockholders had sustained by reason of the matters stated be ascertained and determined, and that the defendants, who-were directors of the bank, be adjudged to pay such damages, and that the defendant Bostwick, as receiver of such bank, recover, collect and receive such damages for the benefit of the creditors and stockholders of the bank. In discussing this liability, Judge Earl says: “ The action was commenced by Theodore Brinckerhoff, suing-
In Cochran, v. Wiechers (119 N. Y. 399) the plaintiffs were judgment creditors of the American Opera Company, Limited, a domestic corporation formed under chapter 611 of the Laws of 1875. .The capital stock of the company had not all been paid in, and no certificate to that effect had been filed. The action was in the nature of a creditor’s suit to settle the affairs • of the corporation and distribute its assets as well as the proceeds of the stockholders’ individual liability among the company’s creditors. The provision in the act of 1875 (§ 37), under which that corporation was incorporated, was that “ all the stockholders shall be severally individually liable' to the creditors of the company in which they are stockholders to an amount equal to the amount of stock held by them respectively for all debts and contracts made by such company, until the whole amount of capital stock fixed and limited by such company has been paid in and a certificate thereof has been made and recorded as hereinafter prescribed.” The court distinguished this liability from that of a trustee in neglecting to make a report, or for declaring dividends out of capital stock, or acts of a kindred character, saying : “ These are breaches of duty on the part of the managing agents of the corporation for which the Statute has made them liable, and this liability cannot be said to rest upon or grow out of a contract. The liability of a stockholder in the present case is different. Upon becoming the owner of the stock, he voluntarily assumes the obligations imposed by the statute, and the creditors of the corporation who trust it may be said to do so upon the faith of the statute which is part of the contract. The statutory obligation is inherent in and forms a part of every contract that the corporation makes with creditors prior to the time that the certificate required by the statute is filed.” We have here the distinct statement of the ground of the liability, that it is contractual in its nature and necessarily inures to the benefit of every creditor who makes a contract
In National Bank v. Dillingham (147 N. Y. 603) the action was brought by the plaintiff on its own behalf to obtain a judgment against the directors of a corporation upon the ground that when the indebtedness to -the plaintiff was incurred other debts had been created by the corporation which equalled and exceeded the amount of its paid up capital stock, and that the trustees, by assenting to. the making of the notes sought to be enforced in that action, became liable under the statute to the plaintiff for the amount and interest. The corporation was not made a party. One of the defendants demurred to the complaint, one of the grounds of demurrer being that there was a defect of parties, in that the other creditors of the company, and the company itself, were not parties to the action; and on the further ground that the complaint did not state facts sufficient to constitute a cause of action. The Supreme Court 'overruled the demurrer, which was affirmed by the General Term, but which was-reversed by the Court of Appeals. The statutory liability enforced in that case was: “ Ro stock corporation, except a monied corporation, shall create any debt, if thereby its total indebtedness not secured by mortgage shall exceed the amount of its paid-up capital stock, and the directors creating or consenting to the creation of any such debt shall be personally liable therefor to the- creditors of the corporation. If bonds or other obligations of the corporation, secured by mortgage, are issued in excess of the amount author-, ized by law, or in violation of law, the directors voting for such over-issue, or unlawful issue, shall be personally liable to the holders of the bonds or o.ther obligations illegally issued for the amount held, by them, and to all persons sustaining damage by such illegal issues for any damage caused thereby.” (Laws - of 1890, chap. 564, § 24, as amd. by Laws of 1892, chap. 688.) Judge O’Bbien, in delivering the- opinion of The court, says: “The- most important question, however, is with respect to the. parties who are entitled, in a proper case, to enforce this liability. The learned counsel for the plaintiff contends that the right of action is given..
It seems to me that this reasoning is applicable to and controlling of this case. The liability imposed by the statute in the Dillingham case was that the directors should be personally and individually liable for such excess to the creditors of the company. In this case every director is personally liable for the debts incurred by the corporation during his administration to an amount not exceeding $5,000. In both cases the liability is to all the creditors, not to any particular creditor, and it is that liability that the court said “ must be enforced in equity in a suit where all the creditors and the cor-, poration itself are parties.”
In Marsh v. Kaye (168 N. Y. 196) this principle is discussed, and both the prevailing and the dissenting opinions quote the opinion of Mr. Justice Pabkeb. in this case at General Term and expressly approve it.' That action was brought to enforce the liability for corporate debts payable within a year imposed upon the directors of charitable corporations organized under chapter 319 of the Laws of
Where the statute imposes upon a stockholder, or director a liability for all the debts of the company, making the director’s liability as broad as the liability of the corporation, then each creditor has his remedy against the corporation and the director, and there is no more reason for- allowing him to come into equity to enforce it ' against the director than- for allowing him to enforce it in equity against the corporation. Both the director and the corporation are liable for all the debts, and that liability is a common-law liability to be enforced in an action, at law. Where, however, the statute imposes upon directors and stockholders - a liability which is not measured by the debts of the corporation, but is measured either by an. arbitrary amount fixed by the statute, by an amount to be ascer- ' tained by the par value of the stockholders’ stock or by the amount of debts in excess of the capital of the corporation, or by any other method not fixed by the amount of indebtedness of the corporation,
This presents the next question in this case, which arises from the failure of the plaintiff to make the receiver a party, his failure to serve three of the defendants who. were parties, and his release of Mr. Merrill, who was also a party, and the discontinuance of the action against him. The plaintiff made all the directors for the year 1890 parties to the action, and the. action was brought on behalf of all the creditors of the corporation. It appeared from the evidence that there were directors of the corporation for the years 1888 and 1889 who were not‘parties to the action. This defect of parties is not alleged in any of the. answers and is not available. Three of the directors for the year 1890 were made parties defendant, but were not served with process. Upon that fact being called to the attention of the court, a motion was made upon affidavit for a severance of the action as to these three defendants who had been served and were before the court. There were presented to the court facts tending to show that when the action was commenced these three defendants were non-residents, and although one of them had an office in the city of Hew York, it had been impossible for some days to find him in that office. There was no sufficient evidence that when the action came on for trial, or at any time subsequent to the time when the effort to serve the defendants was made, the service could not have been effectuated. This motion, however, was granted, and the action was severed, and then the defendants were allowed to amend their answers by setting up the defect of parties
But the affirmative act of the plaintiff in releasing Mr. Merrill, who was á party to the action and was served, and in discontinuing the action against him, released from the action a necessary party for the complete determination of the question involved ; and that fact was, by leave of the court and without objection,., set up by an amendment to the answers allowed upon the trial, and is, I think, fatal to this judgment. • After the action had been discontinued as against Mr. Merrill it must be treated as if he had never been made a party defendant. , Each defendant had the right to have all of the directors who were liable parties to this action. He was bound to contribute only the $5,000, the amount fixed by the statute, as his liability in case the total amount of liability of all the directors was insufficient to pay all of the indebtedness incurred during the period that he was a director.. There is nothing to show that the indebtedness of the company which had not been paid by the receiver was contracted during the period -that these defendants were directors; so that, so far as appears, the only amount that these defendants were liable for was the $10,000 and interest which was owing to the plaintiff. In that case, each director would be bound to. contribute his proportion of that indebtedness, and the plaintiff could do no act which would discharge one director and hold the others. It is quite true that until some other creditor should come in and be made a party to the action,' or until the entry of judgment, the plaintiff had control of the suit and could' discontinue it at his pleas
We also-think that the objection that there was a defect of parties defendant in that the receiver was a necessary party should have been sustained. It is true that in the case of Bauer v. Platt (supra) Mr. Justice Parker reached the conclusion that the demurrer that there was a defect of parties defendant, in that the American Loan and Trust Company was not made a defendant, was not well taken; but all that he there held was that it did not appear upon the face of the complaint that the corporation was a necessary party. He said: “ It may well be that after the pleadings are all in, it will appear to be a necessity to make the corporation a party, then the- court, in the exercise of its equitable jurisdiction and in pursuance of the authority conferred by the Code of Civil Procedure, will bring in the corporation, and such other parties, if any there be, which it may deem needful in order to secure a final and equitable adjustment of the matters in controversy.” And undoubtedly that was quite true in the situation that was then presented. Subsequent to the decision of that case, in National Bank v. Dillingham (supra),
It ■ follows that, although the action was properly brought, the necessary parties were not before the court for a complete determination of all the questions involved, • and for that reason the judgment was erroneous. The judgment appealed from should, therefore, be reversed and a new trial ordered, with costs to the. appellants to abide the event.
Van Brunt, P. J., Patterson and Hatch, JJ., concurred; O’Brien, J., dissented.
Dissenting Opinion
I agree in the. view that this action is maintainable in equity, but do not assent to the grounds upon which it is proposed to reverse the judgment. '
The first of these is that the receiver should have been made a party. In Bauer v. Platt (72 Hun, 332), wherein a demurrer to a complaint was interposed by a director, it was said: “How, applying these rules, we find first, that the corporation has no rights to be ascertained and settled before the rights of the parties to the suit can be determined. The liability of the directors is not created for the benefit of the corporation, but rather for that of its creditors. It is not an asset of the corporation and cannot be enforced by it, nor by a receiver of its assets, appointed in an action for a dissolution of the corporation. The liability is to the creditors and they alone can compel its payment.”
The demurrer in that case also brought' up the. question as t.o whether a director had an interest in having the corporation made a party for the purpose of showing how much its assets could pay on the claim of the plaintiff and others similarly'situated, and it was
It is further suggested that the record does not show that the three directors who were, omitted as parties defendant could not be served. As I read it, however, it does appear that they were non-residents, and that although some of them had an office in this State for the transaction of business, the effort to serve them with process therein was unsuccessful. I do not understand that, having made an honest effort to serve these directors, the plaintiff was prevented from ever bringing his action if he could never serve them. There being proof, therefore, that an earnest effort was made to serve them, which was ineffectual, the plaintiff, I think, had the right to proceed with the action without those directors as parties defendant.
The most serious ground, in my opinion, relied upon for reversing the judgment, is the release of one of the directors, Mr. Merrill, who was originally joined and who, upon the payment of $1,500, obtained a release and was subsequently, on motion, stricken out of the action as a party defendant. I think, however, that to the suggestion that this release freed all the other defendants, there is an answer. If we regard the liability as several, then clearly the release of one of the defendants would not discharge the others. If, on the other hand, we regard it as joint, then section 1942 of the Code of Civil Procedure applies, which provides that “ a joint debtor may make a separate composition with his creditor * * *. Such a composition discharges the debtor making it, and him only.” And that section, with respect to the construction to be placed upon a
These are the grounds, as I read the opinion of Mr. Justice Ingraham, upon which it is proposed to reverse the judgment, and-as I cannot concur in his reasoning, 1 dissent from such reversal. It is proper, however, to say that I have examined the other "points presented by the appellant, but it appears to me that the strongest grounds are those which are discussed by Mr. Justice Ingraham in his opinion, and that I regard neither them nor the others as tenable, and think that the judgment should be affirmed, with costs. "
Judgment reversed, new trial ordered, costs to appellants to abide event.