81 N.Y.S. 995 | N.Y. App. Div. | 1903
Lead Opinion
The American Loan & Trust Company was incorporated by chapter 868, p. 2115, of the Laws of 1872, which act was subsequently amended by chapter 486, p. 628, of the Laws of 1874, chapter 189, p. 305, of the Laws of 1880, chapter 391, p. 551,. of the Laws of 1882, and chapter 260, p. 325, of the Laws of 1884. The corporate powers of the company were vested in a board of directors consisting of not less than 9 nor more than 31 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
In March, June, and July, 1890, the plaintiff' deposited various sums of money with the trust company, and received therefor certificates of deposit aggregating $10,000. It also appeared that about February 18, 1891, the corporation ceased doing business, and subsequently an action was commenced in the Supreme Court by the people of the state against the said trust company, in which judgment was asked dissolving the corporation on the ground of its insolvency; that on March 7, 1891, an order was made appointing J. Edward Simmons, of the city of New York, temporary receiver of the said corporation, and he thereupon duly qualified as such receiver, and entered into the discharge of his duties, and on the 8th day of May, 1891, final judgment in that action was entered dissolving the corporation, and forfeiting its corporate rights, privileges, and franchises, and continuing the appointment of Mr. Simmons as receiver; that on March 17, 1892, this action was commenced, the plaintiff suing in his own behalf and in behalf of all other creditors similarly situated who should come in and contribute to the expenses of the action against the defendants, who were the directors of the corporation for the year 1890. The complaint alleged the incorporation of the American Loan & Trust Company, the deposit by the plaintiff of various sums of money before mentioned, and the receipt by him of certificates of deposit of the said trust company, and asked on behalf of the plaintiff and of all other creditors similarly situated that an account be had of the creditors of the trust company who may have a cause of action against the defendants under section ix of the charter, to which attention has been called, and of the amounts due them, respectively, and of the amount due by the directors of the said company pursuant to section 11 of its said charter; that the liability of the directors to the creditors of the company be ascertained and determined and enforced, and that they be adjudged to pay such amounts, respectively, to .the plaintiff and to the other creditors, and that the defendants be enjoined and restrained from paying to any creditor of the American Loan & Trust Company any sum of money whatever as a liability under section 11 of the charter of the company. The defendants answered separately, all of the answers alleging that there was a defect of parties defendant, in that the said J. Edward Simmons, as receiver of the said American Loan & Trust Company, was not made a party defendant.
The case coming on for trial at Special Term, counsel for the defendants objected to proceeding to trial on the ground that three of the defendants had not been brought before the court by service of process upon them, whereupon the plaintiff moved upon affidavit to sever the action, and for a separate trial as to the defendants who had been served, and this motion was granted, to which all the de
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 a 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 existence 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, cases where a limited liability is imposed, viz., where the amount for which the director or stockholder may be 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
In this case there is imposed upon the directors a liability for all debts incurred by the corporation during their administration 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, as interpreted by the court, 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 commenced 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, séveral 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, 25 N. Y. Supp. 426. Judge 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 clause of the charter, he says:
“The purpose of the provision was not only to insure vigilance on the part of the directors, but to further assure to the creditors of the company payment of their claims. It has for its object the protection of all creditors, not a portion of them. The result might not be effectuated if each creditor should be compelled to resort to an action at law. The liability of each director does not exceed $5,000. If, then, each director should suffer judgment to go against him by default, the creditors first suing might recover their entire claims, while others less prompt would not receive anything. * * * As the statute was intended for the benefit of all creditors, and all of them, as well as some of them, must be presumed to have trusted in part to the protection assured them by its provisions, it is no more than just that each*1000 creditor should share ratably in the fund which an enforcement of the liability of the directors will produce.”
This opinion oí Judge Parker has recently received the approval of the Court of Appeals in a case to which attention will be called. It would seem to follow that no action could be maintained by an individual creditor of the corporation to recover from a director the full amount of his indebtedness, for such a recovery would defeat the object of the statute that the liability of the director should inure to all the creditors, and not to any particular one; and this proposition is not only the result of the enforcement of an action imposed for the. benefit of all stockholders, but seems to be sustained by the authorities.
In Brinckerhoff v. Bostwick, 99 N. Y. 185, 1 N. E. 663, 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 on his own behalf and for the benefit of the other stockholders of the bank; and therefore, for the purpose of the statute of limitations, the action must be treated as if all the stockholders were plaintiffs. The action is really the action of all the stockholders, as it was necessarily commenced in their behalf and for their benefit. It could not have been commenced by one stockholder for himself alone.”
In Cochran v. Wiechers, 119 N. Y. 399, 23 N. E. 803, 7 L. R. A. 553, the plaintiff was a judgment creditor of the American Opera Company, Limited, a domestic corporation formed under chapter 611, p. 755, 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 creditors’ 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, under which that corporation was incorporated, was that “all the stockholders shall be severally and 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
“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, 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 with the corporation when the statutory liability applies; and a liability which thus enters into every contract made with the corporation is necessarily for the benefit of each of the creditors, and not for the creditor who first commences his action against the director.
In Nat. Bank v. Dillingham, 147 N. Y. 603, 42 N. E. 338, 49 Am. St. Rep. 692, 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 equaled 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 (34 N. Y. Supp. 267), but which was reversed by the Court of Appeals. The statutory liability enforced in that case was:
“If the indebtedness of any such company shall at any time exceed the amount of its capital stock, the trustees of such company assenting thereto shall be personally and individually liable for such excess to the creditors of the company.”
Judge O’Brien, 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 by the statute to creditors holding debts created in violation of its provisions, and to those alone. We think that this is "not the correct construction of the statute. The benefit of its provisions is given in terms to the ‘creditors of the corporation,’ and not to a part of them. The language includes all the creditors. * * * When the statute requires the trustees creating or assenting to debts in excess of capital virtually to put back into the corporate treasury a sum equal to such excess in certain contingencies, all of the creditors have in equity and justice an equal claim upon the fund. The rule that in such cases equality is equity would be violated by allowing the later*1002 creditors to absorb this fund to the prejudice of the earlier ones. We think that the fair construction of the statute is that it imposes a liability upon the trustees creating or assenting to debts in excess of the capital, to the extent of such excess, not for the benefit of any particular creditor, but for the benefit of all, and their liability is in equity a fund to which ail the creditors may resort for the satisfaction of such debts as the corporation itself fails to pay, to be shared in by all in proportion to the debt remaining unpaid. It follows that it must be enforced in equity in a suit where all the creditors and the corporation itself are parties or represented, where an accounting can be had, all the facts ascertained, and the equities adjusted.”
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 corporation itself are parties.”
In Marsh v. Kaye, 168 N. Y. 196, 61 N. E. 177, this principle is discussed, and both the prevailing and the dissenting opinions quote the opinion of Chief Judge Parker 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, p. 447, of the Laws of 1848, and continued under the general membership law (chapter 559, p. 329, Laws 1895). That was an unlimited liability, whereby the directors of the corporation were expressly made liable for all debts of the corporation that were contracted while they were directors, and were payable within one year. Judge Cullen, in delivering the opinion of the court, says:
“There is no fund to be distributed among the creditors, except such as may proceed from the conversion of the assets of the corporation. No protection for those assets is required. The court has already, in an appropriate action, appointed a receiver, and the fund will be distributed in that action, not in this. The only thing to be reached in this action is the personal liability of the directors, which is absolute and unlimited. This in no sense constitutes a fund to be protected or preserved for the creditors, or to be distributed among them. The status of these creditors of the corporation, and therefore creditors of all the directors, does not differ from that of other creditors of the directors personally. * * * Nor is the action necessary to protect the directors. There can be no apportionment of liability between the directors, for each is liable for all debts, not for his share of them.”
And this case, it seems to me, well illustrates the principle indicated by the Gourt of Appeals by which the cases in which an action in equity can be brought is distinguished from those in which each creditor must resort to his action at law to enforce the liability.
Where the statute imposes upon a stockholder or director a liability for all the debts of the company, making the directors’ 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
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, and that the action be tried-as to the other 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 nonresidents, and, although one of them had an office in this city, 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 defendant, in that these three defendants were not parties to the action then on trial. It may be that, upon proper proof that these three defendants were nonresidents, and without the jurisdiction of the court, and that it had been im
But the affirmative act of the plaintiff in releasing Mr. Merrill, who was a 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 t& 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 pleasure; but he could not discontinue it against one of these obligors, and hold the others for the full amount of their liability. To do that would be to allow him to impose a liability upon some of the directors, and not upon others, when the only liability that was imposed upon the directors was the indebtedness that had been incurred during the period that they were in office. This is the settled rule in equity actions. In Mahr v. N. U. F. Ins. Co., 127 N. Y. 452, 28 N. E. 391, Judge Vann says:
“The general rule in equity requires that all persons interested in the subject of the action should be made parties, in order to prevent a multiplicity of suits, and secure a final determination of their rights. * * * The burden is on the plaintiff to secure the presence of all such persons, and it is his misfortune if he is unable to do so.”
In Osterhoudt v. Board of Supervisors, 98 N. Y. 239, the court said:
“When persons who are necessary parties are not joined, the court will not proceed until they are brought in.”
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, Judge Parker reached the conclusion that the demurrer that there was a defect of parties defendant, in that the American Loan Sr 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, and 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 Nat. Bank v. Dillingham, supra, Judge O’Brien, in speaking of a cause of action to enforce this liability, said:
“It follows that it must be enforced in equity in a suit where all the creditors and the corporation itself are parties or represented, where an accounting can be had, all the facts ascertained, and the equities adjusted.”
So that, when the objection was properly taken, and it appeared that, although the corporation had been dissolved prior to the commencement of the action, a receiver had been appointed, who had liquidated certain debts of the corporation, and was in possession of its assets, it is clear that under this ruling the receiver was a necessary party.
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., and PATTERSON and HATCH, JJ., concur.
. f 3. See Parties, vol. 37, Cent. Dig. §§ 167, 171.
Dissenting Opinion
(dissenting). 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, 25 N. Y. Supp. 430, wherein a demurrer to a complaint was interposed by a director, it was said:
“Now, applying these rules, we find, first, that the corporation has no rights ±0 be ascertained and settled before the rights of the parties to the suit*1006 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 to-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- ' therein held that the point was not well taken, because it did not appear upon the face of the complaint that the corporation had assets which could be applied in payment of its creditors. Here the proof is that on the 17th day of January, 1896, after five years of administration of the assets by the receiver, there was due general depositors and in payment of other claims $500,000, to meet which there was then in the hands of the said receiver the sum of $74,217.27. Whether, therefore, it rested with the plaintiff or with the defendants to-prove that there was a sufficiency or an insufficiency of assets, I think the facts justified the inference that they were insufficient, and hence that this ground for reversing the judgment is untenable.
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 nonresidents, 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 release or composition, further provides:
“An instrument specified in this section does not impair the creditor’s right of action against any other joint debtor, or his right to take any proceeding against the latter; unless an intent to release or exonerate him appears affirmatively upon the face thereof.”
These are the grounds, as I read the opinion of Mr. Justice IN-GRAHAM, upon which it is proposed to reverse the judgment, and,