156 Ky. 356 | Ky. Ct. App. | 1913
Opinion op the Court by
Affirming.
The appellee, Bethel Grove Camp Ground Association, was incorporated July 12, 1901, to provide a place for holding religions services, on grounds secured by it, for all classes of people; and especially to hold camp meetings and cultivate a better fraternal feeling between the different denominations. Its grounds are situated on the Licking Biver, near Yisalia, in Kenton County. They contain an auditorium, dining hall, and a number of cottages, in use for the meetings held by the association.
As originally adopted, the articles of incorporation fixed the capital stock of the association at $4,000.00, divided into 400 shares of $10.00 each. The business of the corporation was under the control of a board composed of seven directors, ¿vho were empowered to elect from their own number a president, vice-president, secretary and treasurer. To prevent loss to the stockholders, the articles of incorporation expressly provided that the highest amount of indebtedness which the corporation could incur, should not exceed one-half of the amount of its paid-up capital stock, and that the individual, or private, property of the stockholders should be exempt from liability for the debts of the corporation. There were originally 220 shares subscribed aggregating $2,200.00; therefore, the limit of indebtedness which' could be incurred was $1,100.00.
By amended articles of incorporation, duly adopted and recorded February 13, 1904, the amount of the capital stock was reduced to $3,000.00, divided into three hundred shares of $10.00 each, and the highest amount of indebtedness which the corporation could, at any time, incur was limited to $2,500.00. As appellee, at the, time of making this change in its articles of incorporation, was owing a part of the purchase price for its grounds, and for necessary improvements which had been erected thereon, its board of directors were, by
It appears from the record that, instead of being relieved of its financial embarrassments by the sale of the bonds, appellee’s indebtedness was further increased until its affairs became so involved that it failed to pay the semi-annual interest, which ^became due on its bonds April 1,1908, and not having paid same within sixty days after maturity, Feltman, the trustee named in the mortgage, brought suit in the Kenton Circuit Court to recover the amount thereof and enforce the mortgage lien for the benefit of the bondholders. At the succeeding term of the court, he obtained judgment as prayed, and thereafter, the mortgaged property was sold by the master commissioner and purchased by the appellant, Ed. H. Croninger, at a price sufficient to pay the aggregate amount of the bonds, principal and interest, and leave a surplus of $1,191.00, in the hands of the master commissioner.
Following this sale and the confirmation thereof, appellant brought this action in the Kenton Circuit Court, seeking to recover of appellee an indebtedness of $509.70, alleged to be due him for money expended, as alleged, at its request, and upon.its promise to repay same, in making certain necessary repairs upon the property covered by the mortgage executed to Feltman, trustee, for the benefit of the holders of its bonds. The several items going to make up the aggregate amount sued for
It appears from the record that shortly after the issuance of the bonds and execution of the mortgage by appellee, the appellant became one of its board of directors and also its treasurer, and it is alleged in the answer and counterclaim of appellee, that as such treasurer, appellant received $226.23' belonging to appellee, for which he failed to account. Appellant, by reply, denied that he had received as treasurer for appellee $226.23, but admitted in an amended reply, that he had received $200.00 for which he had not accounted. The answer denied appellant’s right to subject the surplus in the hands of the master commissioner to the payment of his demands, or any of them, and alleged that same should be distributed pro rata among its stockholders. It was further alleged in the answer that the items of expenditure, sought to be recovered by appellant, created no legal indebtedness on the part of appellee or its stockholders; and that the contract authorizing such expenditures was ultra vires, as it was intended to, and did, burden appellee with a liability in excess of the limit of indebtednesss allowed by its articles of incorporation. The contract in question was made November 23, 1901, and is contained in the following writing:
“The Bethel Grove Camp Ground Association, Inc., of Visalia, desires to make certain repairs and improvements, viz.: to roof the auditorium, to make a new cistern, to repair an old one at the auditorium, and to put in gutters and pipes connecting same in order to have a good water supply. • Mr. E. II. Croninger, of Covington, Ily., being desirous of the prosperity of said association agrees to pay for these repairs and improvements as stated, with the understanding that the money so advanced will be returned to him with interest out of the first surplus remaining from the earnings after provision for current expenses and interest on bonded debt. He declares himself cognizant of the fact that the association cannot legally contract any larger debt than it has at the present time; that the above prospective
On the hearing, the circuit court dismissed the appellant’s petition and gave appellee judgment against him on its counterclaim for the $200.00, which he admitted he had received and had not accounted for. From the judgment entered in accordance with these conclusions, this appeal is prosecuted.
The judgment of the circuit court rests upon the theory that the contract under which appellant made the expenditures in question was ultra vires, as it contemplated a liability in excess of the limit of indebtedness-permitted by appellee’s articles of incorporation, and that this was, at the time, known to appellant, as a director and officer of the corporation; and that in the writing evidencing the contract, he expressly declared himself cognizant of the fact that appellee could not legally make such a contract and his willingness to look alone to the earning power of the association to discharge the debt.
Section 538, sub-section 8, Kentucky Statutes, requires corporations of this State to specify in their articles of incorporation “the highest amount of indebtedness or liability which the corporation may at any time incur”; and sub-section 9, “whether the private property of the stockholders, not subject by the provisions of the law under which it is organized, shall be subject to the payment of corporate debts, and if so, to what extent.” As a matter of law, the articles of incorporation constitute the contract between the stockholders of the corporation and is binding alike upon the stockholders and officers of the corporation, therefore, both the stockholders and officers are chargeable with knowledge of all the provisions of the articles of incorporation. This is not a case in which a creditor, not a stockholder of the corporation, is attempting to enforce a contract which, by its terms, is ultra vires; but a case in which a derelict director and officer is trying to enforce a contract, admittedly ultra vires, made with the board of directors of the corporation. As its amended articles of incorporation provided that appellee should not incur an indebtedness exceeding $2,500.00, and this limit had been reached by the issuance and sale of the bonds aggregating that amount, secured by mortgage
In Kauffman & Co., v. Loventhal, 8 Rep., 62, a teacher was employed by the trustees of an academy to teach its school, under an agreement that he was to be paid for his services out of what remained of tuition collected after paying all expenses. It was held that a creditor, who sought to subject the amount due the teacher from the academy trustees, must allege and prove that they had collected more than enough to pay all expenses, or that there was- more than enough for that purpose that could he collected, and that there had been sufficient time to make the collection; and as this would have been so, had the teacher himself been suing to recover his compensation, a creditor seeking to subject the debt due him from the trustees of the academy would have no greater right than the teacher himself could have asserted and enforced. Ledford v. Smith, 6 Bush, 130; Anderson v. Ewing, 3 Litt., 247; In re Spanish Prospecting Co. Ltd., 20 Am. & Eng. Annotated Cases, 677; Macculskey v. Klosterman, 10 L. R. A., 787.
The language of the contract descriptive of the fund for which appellant was to be paid can have no other meaning than that he was to be paid out of the net profits of the corporation; and if this should be treated as a case looking to a liquidation of appellee’s affairs, there could be no surplus of earnings or net profits until its debts had been paid and the value of the capital stock restored to the stockholders, who advanced its equivalent in money to carry on the corporation’s business. In point of fact, the business of the corporation was conducted at a loss to the stockholders, and the amount in the commissioner’s hands is not sufficient to repair this loss.
We aré not unmindful of the rule of law that a corporation, in dealing with an ordinary creditor, cannot retain the benefit of an ultra vires contract and at the same time refuse to perform its part of the obligation imposed by its terms. Albin Co. v. Commonwealth, 128 Ky., 295; Page on Contracts, section 1084. So, if appellant had been an ordinary creditor, appellee would not be heard to say that the contract in question was ultra vires. But, as previously intimated, appellant is not an ordinary creditor, but a director, who knowingly made a contract which imposed upon the corporation a liability in excess of the corporate limit of indebtedness. It is, however, contended by counsel for appellant that Ms relation as a director and officer of the corporation cannot affect the validity of the contract, as he was guilty of no fraud in its procurement and it did not result in profit to him. This, however, does not alter the fact that the contract was not within the corporate powers; in other words, his fault was in dealing with a corporation in a matter which he, as a director and officer, was bound to know was beyond its powers. As well stated in the written opinion of the circuit court: “A director is a trustee for the stockholders; it is his duty to conduct the business of the corporation in ac
“Now if the directors or the association could be held liable for a claim such as Mr. Croninger presents it would be absurd to contend that he, a director, could have any claim against the corporation. And this is especially true when the corporation is without assets other than a small part of its capital stock. * * * It may be that, if there was a surplus over and above the capital stock, plaintiff might have been paid out of such surplus, but I think the law is clear that plaintiff’s claim cannot be preferred over that of the stockholders. The terms of the contract show that plaintiff had no intention of making his claim a charge against the corporation. All of the directors realized that they could not bind the corporation in the matter of this claim, and fearing that they might be held personally responsible, required plaintiff to release them from such liability. * # # > >
Section 548, Kentucky Statutes, prohibits directors of any incorporated company from declaring or paying any dividend, when the corporation is insolvent or when the payment of such dividend would render it insolvent or diminish the amount of its capital stock, and makes them jointly and severally individually liable for all debts of the corporation then existing or that may thereafter be incurred while they, or a majority of them, continue in office; and section 550 provides, “If the directors or officers of any corporation shall fail or refuse to comply with, or shall violate any of the provisions of, this article, those so failing, refusing or violating, shall be jointly and severally individually liable for any loss or damage resulting to any person from such failure, refusal or violation, and, in addition thereto, all persons
In Randolph v. Ballard County Bank, 142 Ky., 145, the Ballard County News Printing Company, which was an incorporated company under the laws of this State with a limit of indebtedness fixed by its articles of incorporation at $5,000.00 was, together with its directors, sued by the bank upon two notes, one for $300.00 and the other for $1,429.31. The corporation had made an assignment for the benefit of creditors and its assets amounted to only $200.00. The petition sought to recover on the notes against the corporation to the extent of $500.00 and against the directors to recover the balance of the notes, because of their violation of section 550, -Kentucky Statutes. The directors, save one Purdy who was cashier of the bank, by answer, contested their liability, alleging that the indebtedness on behalf of the printing company to the bank was created by Purdy alone and without their consent or knowledge, admitting’, however, that they consented to the execution of the larger note, which was for an overdraft, on the assurance of Purdy that it was desired for appearance’s sake to prevent trouble with the bank examiner, who was shortly expected, and under the promise by Purdy to finally cancel and return the note. The court sustained a demurrer to the answer and rendered judgment
‘ ‘ The law now as before creates the corporate being, endows it with power and sets upon it limitations. It may not exceed either. * * * To engage in the business as a corporation without becoming incorporated under the statute is to violate the provisions of the article on corporations. To exceed that which the statute allows is not less a violation of the same. So, when the articles of incorporation place a limit on the indebtedness which the corporation may incur, to exceed the limit is to violate the chapter on incorporations, as it would be to engage in a business not authorized by its charter, or the statute. * * *”
“The aim of this advanced legislation could not have been to curtail the duty of corporate directors, or even to (preserve the immunity that they enjoyed at the common law. It was intended, we think, to enlarge duty by extending responsibility. Stockholders have little or no direct control of the corporation’s affairs, the public dealing with' it have none. Directors alone have the power of control. If directors allow managing officers of the corporation to exceed, or otherwise violate the charter of the company, or any provision of the statute regulating corporations (which are to be regarded as being read into the charter of each corporation doing business under the statute) it is intended by section 550, supra, to hold them personally liable for the defection. They are immune from personal liability when they do their duty imposed by the statute; when they neglect that duty, or willfully violate it, they are made liable for the consequences. * * *”
In Haldeman, &c. v. Ainslie, &c., 82 Ky., 395, will be found a more elaborate discussion of the doctrine under consideration. The action was instituted in the Louisville Chancery Court by Edwin Thompson and a number of banks of the city and by Ainslie, Cochran & Company against Haldeman and others. During the pendency of the action, Mrs. George Ainslie, as the executrix of her husband, having paid off the debts asserted by the banks and Thompson against the defendants, was made the real plaintiff in interest, and the litigation resulted- in a judgment in her favor against the defendants (appel
The defense made in the court below by the appellants to the claims of the executrix was that the president of the corporation, Fitch, and George Ainslie, the decedent a director, without the consent of the stockholders of the corporation and without any authority from the board of directors, created this large indebtedness in direct violation of the terms of the charter. Ta what extent the directors, or any member of the corpora
“The effect of the limitation upon the amount to be paid by the subscribers for their stock, would not exempt them from liability to a creditor who had dealt with the corporation in ignorance of the articles of association, limiting the amount of the indebtedness to be created by the corporation or those conducting it. * * *
“In this case we think it clear that the banks could have recovered of the stockholders for the reason that those conducting the business of the corporation had created these debts for the benefit of the corporation. The banks could have pursued any of the parties to the bills, and required the individual members of the corporation, by a proceeding in equity, to pay up their stock in order that the debts might be satisfied. * * *
‘ ‘ The question presented in this case is: How, or by whom, were these debts contradicted? If by Fitch or Ainslie, in violation of the charter, and they, or either of them, subsequently paid off the debts, then it is maintained by the appellants that no right to contribution exists.
“It is plain that the parties to this association were endeavoring to protect themselves from liability when they inserted section six, providing that ‘the highest amount of indebtedness or liability to which this corporation is at any time to subject itself, shall be the sum of $15,000.’ This section is certainly not meaningless, and when the board of directors or any member of the corporation violates this provision of the charter, and seeks to make the stockholders personally liable, the consent of the stockholder must be shown or the liability will not attach. As between the stockholders, it cannot be said to be a corporate act, and neither the board of directors nor a majority of the members can make the individual stockholders' liable in such a case, although they may remove the limit by a majority vote. It is a con-' tract between them that no member, or a majority of the members, can repudiate so as to create a personal liability as between each other in excess of what they have agreed to pay. The restriction as to the liability for am amount less than the stock is binding between the' parties. * * *
“In this case, if the board of directors had authorized the creation of the debts in express terms, it would not be a corporate act because in excess of the authority conferred by the charter. The unanimous vote of the stockholders could alone authorize the act so as to bind the corporation or the shareholders. * * *
“As the case is presented, the equities of the banks will not protect Ainslie or his personal representative, as, but for Ainslie’s action, no such equities would have existed.
“His being a member of the association, with full knowledge of the protection to the shareholders by the charter under which they all derived their power, will preclude him or his representative from asking contribution, either on account of the moneys paid to the banks, or on the claim of Ainslie, Cochran & Company, of which Ainslie was an active member.”
For the reason indicated in the opinion, the judgment was reversed and cause remanded for a dismissal of the petition of Ainslie’3 executrix.
We regard the opinion in the case supra decisive of the instant case, for, if the executrix of Ainslie was es-topped in that case to recover of the stockholders of the corporation to the extent’ of their unpaid subscriptions, the moneys which he, as an officer and director thereof, had advanced in payment of its debts, on the ground that they were created by himself and another officer, in violation of the provisions of the charter of the corporation, for the same reason is the appellant in this case estopped to claim repayment from a fund belonging to the stockholders of the corporation, of moneys which he had paid out for it under an illegal contract creating an indebtedness against the corporation in ex
It would unduly extend the opinion to comment, in detail, upon the authorities cited by appellant in support of his contentions. It is sufficient to say that none of them presents a state of case in which a stockholder, director, or other officer of a corporation, attempted to enforce a contract made with the corporation which, upon its face, was admittedly ultra vires.
As, in our opinion, the rights of the parties to this litigation were properly determined by the court below, the judgment is affirmed.