Ossipee Hosiery & Woolen Manufacturing Co. v. Canney

54 N.H. 295 | N.H. | 1874

Per curiam.

I. This is an action in the name of an insolvent corporation, to collect an assessment levied for the purpose of paying their debts. The creditors of the corporation are the parties likely to be principally benefited by a recovery in this suit. Although the action is not prosecuted in the name of an assignee or receiver, we think the interest of the creditors is to be so far regarded, that no defence grounded on defects in the plaintiffs’ organization can be maintained in this suit, unless it could have been successfully set up in answer to a creditor’s bill against the stockholders to enforce their personal liability.

The defendant contends that the corporation lias never had a legal existence. The charter provides that any three of the grantees “may call the first meeting of the corporation, by publishing a notice of the time and place of meeting *' * at least fifteen day prior thereto.” Only fourteen days’ notice was given of the first meeting. Ordinarily such a provision in regard to the time of notice would be regarded as merely directory, and a literal compliance with it Would not be held an essential prerequisite, a condition precedent to the existence of the corporation; — see Narragansett Bank v. Atlantic Silk Co., 3 Met. 282, pp. 288-9. The purpose of the provision was, “ to secure the rights conferred by the charter to those to whom it was granted, among themselves, by providing an orderly method of organization.” Hoar, J., in Newcomb v. Reed, 12 Allen 362, p. 364; and see Walworth v. Brackett, 98 Mass. 98. If neither the grantors of the charter (i. e. the state), nor any of the grantees, complained of the defect in the preliminary notice, it would seem that the objection could not be subsequently raised by this defendant who. has taken stock in the corporation, thereby recognizing the corporate existence and manifesting his purpose to participate in the profits thereof. Angell & Ames on Corporations, 7th ed., secs. 83, 94, 524, 635; Methodist E. U. Church v. Pickett, 19 N. Y. 482; Eaton v. Aspinwall, 19 N. Y. 119; Appleton M. F. I. Co. v. Jesser, 5 Allen 446, p. 448; Black River & Utica R. Co. v. Clarke, 25 N. Y. 208; Congregational Society v. Perry, 6 N. H. 164; Haynes v. Brown, 36 N. H. 545, pp. 562-3.

The defendant, however, relies on sec. 35 of ch. 147, Comp. Stats.,, which provides that “ any act of incorporation,” for a dividend-paying corporation, “ shall become null and taken to be wholly void at the expiration of three years from and after the passage of such act, unless the grantees or corporators in the act named, * * shall have, within said time, accepted such act or charter, organized as a company under it, and entered in good faith upon the proper business of the corporation.” The argument apparently is, that “ organized as a company under it ” means “ organized in literal compliance with all the provisions of the charter, whether merely directory or otherwise.” Wo think it means rather, — organized under color of the authority of the charter, with the bona fide purpose of acting under and according to the charter. The statute was not found to allow corporations, or their members, after professing to organize under the charter, and after acting under such organization, to repudiate their debts by setting up their own “ neglect of duty ” in a matter respecting which the public at large are not interested nor likely to be well informed. The object of the statute was.rather to limit the time within which bona fide action should be taken by the grantees to avail themselves of the privileges of the charter. A de facto organization, formed and operated in good faith, under color of the charter, is an organization under the charter, within the meaning of the statute.

The present case differs from Unity Ins. Co. v. Cram, 48 N. H. 636. The so-called “ Unity Insurance Company ” was an association “ which had undertaken to assume corporate powers ” under a general act,— ch. 152, Comp. Stats.,—a portion of which is as follows: Sec. 1. “Any persons may voluntarily associate themselves together, and have all the powers of a corporation, for either of the following purposes: * * to organize a fire engine company, or a mutual fire insurance company.” “ Sec. 2. Every such association shall be formed by written articles specifying the objects of the association, and the conditions on which it is formed, and subscribed by each member thereof.” The articles of association were‘not signed by the members. ^* It was rightly held that the subscription of the articles was a condition precedent to the creation of a corporation or to the exercise of corporate rights. “ It is the basis on which all subsequent proceedings are to rest, and is designed to take the place of a charter or act of incorporation, by which corporate rights and privileges are usually granted. If there were no such requirement, there would be an absence of any provisions by which the right to exercise corporate power could be definitely fixed and established. * * It is not a case of a defective organization under a charter or act of incorporation, * * but there is an absolute want of proof that any corporation was ever called into being, which had the power of contracting debts or of rendering persons liable therefor as stockholders.” Bigelow, J., in Utley v. Union Tool Co., 11 Gray 139, pp. 141, 142. “ We think these reasons have no application to the case now before us. In this there was an act of incorporation from the legislature. There is no question that the corporate powers which it conferred were assumed by the persons by whom, it was intended that they should be enjoyed, so far as they chose to avail themselves of them. * * The evidence was ample to show that the persons named in the act of incorporation with their associates, or at least all of them who desired to do so, have accepted the act,” organized under its authority, “ issued stock, elected officers who have acted and served in that capacity, carried on business, contracted debts, and exercised all the functions of corporate existence. It is therefore too late ” for a stockholder “ to deny that the corporation ever had any legal existence * * .” Hoar, J., in Newcomb v. Reed, 12 Allen 362, p. 364; and see Walworth v. Brackett, 98 Mass. 98. In Unity Ins. Co. v. Cram, it seems to have also been held, that the giving of the notice prescribed by statute was essential to the creation of the corporation. If this part of the decision was correct, the foregoing observations seem to show its inapplicability to the present case.

In passing, it may be remarked that Unity Ins. Co. v. Cram is open to misapprehension in one respect. The court did not pass, and were not called upon to pass, upon the question whether a stockholder or contractor is estopped to deny the existence of a corporation. ^* The case was submitted under an agreement of the parties, which would seem to leave the question of estoppel out of the case. When parties agree that the decision of a single point shall determine the case, the court are not called on to consider whether any other point might have been successfully raised by either side. See Gleason v. Emerson, 51 N. H. 405. Unity Ins. Co. v. Cram was submitted under an agreement, p. 640,—“ That if the court shall be of opinion that the plaintiffs were a corporation, * * and as such had a right to issue a policy of insurance to the defendant, and that the assessment * * was legally made,judgment shall be rendered for the plaintiff; otherwise judgment shall be rendered for the defendant, with liberty of review to either party.”

Under our decision—Littleton Manf. Co. v. Parker, 14 N. H. 543; N. H. Central R. R. v. Johnson, 30 N. H. 390; Contoocook Valley R. R. v. Barker, 32 N. H. 363—the defendant could not have been compelled to pay his original subscription and accept the stock, until the whole entire eighty shares were subscribed for. But it was competent for him to waive his right of refusal; and he did so by paying for and accepting the. stock. He cannot raise now an objection, which, for aught that appears, might equally well have been taken then. In the absence of contrary evidence, it must be presumed that he would upon making reasonable inquiry have then ascertained the number of shares subscribed for.

II. The ruling as to the challenge was not open to exception—State v. Pike, 49 N. H. 399, p. 406—and was correct. McAllister v. Stewartstown Bridge Co., Coos, 1872, not reported.

III. The testimony of Quarles was properly admitted. To constitute a demand, it must ordinarily appear that what was said or done was intended as a demand by the one party, and was or ought to have been so understood by the other party. “ A demand may be made without words written or spoken. It is enough if both parties understand that a demand is made.” Norris v. Morrill, 40 N. H. 395, p. 401. The testimony of Quarles tends to show the understanding of the party (i. e., the corporation) on whom the demand was alleged to have been made. It is no objection to the evidence that it is only one link in a chain of proof. See Delano v. Goodwin, 48 N. H. 203, 206.

IV. The ruling, that the defendant’s letter was evidence competent to be submitted to the jury to show an admission of the defendant that payment of all the debts named in the assessment had been demanded, was correct.

V. The objection, that some of the debts were not binding on the corporation, comes too late. The defendant should have insisted on it before the jury. It seems effectually waived by the agreement, “that there were no questions of fact except the following,” etc. The facts now relied on by the defendant do not appear from the case reserved.

YI. We come now to the principal question in the case, which is one of very great practical importance, viz., whether the statutes of this state entitled the corporation to assess the defendant for the payment of debts after he has paid in the full amount of his subscription to the capital stock. “ Yery clearly, a corporation has not power as incident to it to assess for its own use a sum of money on the corporators, and compel them by action at law to the payment of it. The power must be derived from an express promise or from statute. * * Angell & Ames on Corp., 7th ed., sec. 544.

There is, in this case, no valid promise. The promise in the defendant’s letter was without consideration; there was no benefit received by the defendant, nor was there any loss or damage to the plaintiffs in consequence of the letter. It was written after the assessment, and after the liabilities had been incurred and the corporation had ceased to do business. There is no estoppel. It is unlike the case where a subscriber stands by and sees a corporation begin works and incur expenditures on the faith of his subscription. This case lacks one essential element of an estoppel, viz., change of position by the other party.

The question, then, as already intimated, turns on the construction of the statutes. The plaintiffs’ claim that the power to make this assessment was conferred by Rev. Stats., ch. 146,sec. 3, — substantially reenacted in Gen. Stats., ch. 136, sec. 4, as follows: “Upon demand of payment of any debt of a corporation being made, if the same shall not at once be paid, or unincumbered personal property sufficient to satisfy it be exposed, the officers of the corporation shall forthwith call a meeting of the stockholders to provide means for its payment, by assessments upon themselves or otherwise, within sixty days from the date of such demand ; and if any officer, whose duty it may be to call such meeting, shall unreasonably neglect or refuse to call the same, he shall forfeit one thousand dollars, to be recovered in an action of debt by any person injured.”

If the clause “by assessments upon themselves or otherwise” had made its appearance in the General Statutes as a new provision, without having been previously incorporated into our legislation, one of the defendant’s arguments would be entitled to great and perhaps decisive weight. Under the General Statutes, stockholders are made personally liable to creditors for corporate debts only in limited and exceptional instances. Sec. 4, ch. 136, Gen. Stats., makes no distinction, in terms, between cases where stockholders are personally liable to the creditors, and cases where they are not so liable. But the clause in question was not new. It first appeared in the Rev. Stats, of 1842, ch. 146, sec. 3, as a part of a body of laws under which stockholders, instead of a liability only in exceptional instances, were made personally liable generally for all corporate debts ^* . By ch. 146, sec. 1, Rev. Stats., stockholder’s in corporations are made personally liable to pay the debts and civil liabilities of the corporation in the same manner and to the same extent as though the stock were owned and the business transacted by the stockholders as unincorporated copartners.

Section 2 provides that proper actions of debt, or assumpsit for the collection of such debts or liabilities, may be commenced and prosecuted against any one or more of said stockholders.

Section 3 provides that no suit against any stockholder for the collection of any such debt shall be commenced until after a legal demand of payment thereof shall have been made upon the company. Upon such demand being made, if officers or stockholders shall discharge such debt or liability, or expose unincumbered personal property of such company, liable to attachment, sufficient to satisfy such debt or liability and costs, so that the same may be attached in a suit against such company for the security of such debt or liability, then no suit shall be sustained thereon against the stockholders.

Whenever the officers or stockholders after demand shall not satisfy such debt or expose property to be attached, it is made the duty of the officers forthwith to call a meeting of the stockholders, and the company when met shall provide means for the payment of such debt or liability, either by assessments upon the stockholders or otherwise, within sixty days from the time when such demand was made.

And if such debt or liability shall not be discharged within sixty days, a suit may be sustained against the stockholders, as provided in sec. 2.

If the officers whose duty it may be to call such meeting shall unreasonably neglect to call the same, they shall severally forfeit the sum of SI,000, to be recovered in an action of debt by any person injured thereby.

In 1846, sec. 1 of ch. 146, Rev. Stats., was repealed by ch. 321, P. L., in terms.

The repeal of sec. 1 would leave secs. 2 and 3 practically inoperative. Did the repeal of these two sections follow as incident to the repeal of see. 1 ? This might be so, if there had been no further legislation in regard to the personal liability of individual stockholders.

The same legislature (of 1846), in the act (ch. 321, P. L.) in which they repealed sec. 1 of ch. 146, Rev. Stats., which imposed an unlimited personal liability on individual stockholders, made stockholders individually liable to a limited extent under the provisions of sec. 2 of the act of 1846.

Among other cases where stockholders were made individually liable under the act of 1846, was the provision that they should be so liable until the whole amount of the capital fixed and limited by the corporation shall have been paid in, and a certificate thereof shall have been made and recorded by the clerk of the town where such corporation has its place of business or is situated.

It is unnecessary to inquire under what other circumstances the stockholders were made individually liable. By section 4 of the act of 1846, the process and modes of proceeding against corporations, their officers and stockholders, who may become liable for their debts and civil liabilities, shall be the same as are provided by chaps. 141 and 146 of the Rev. Stats.; and the remedies of the officers and stockholders who have incurred such liabilities against such corporation, their officers and stockholders, shall be the same as are provided in said chapters in like cases.

It will thus be seen that the legislature made provision for enforcing the individual liability of stockholders, as created in the act of 1846, under secs. 2 and 8 of ch. 146 of the Rev. Stats.

Now, uuder what circumstances were stockholders liable to be proceeded against under secs. 2 and 3 of ch. 146 of the Rev. Stats. ? Their liability under section 1 had been repeáled, and it must be clear that they could only be proceeded against when liable under the act of 1846.

The provisions of the act of 1846 are substantially incorporated in ch. 136 of the Gen. Stats., while the provisions of sec. 3 of ch. 146 of the Rev. Stats, are substantially incorporated in ch. 136 of the Gen. Stats. What, then, has been the law on this subject since the revision of the statutes in 1867 ?

By sec. 8 of cli. 135, every stockholder, except in banks, is liable for all debts and contracts of the corporation until the whole amount of the capital fixed and limited by such corporation shall have been paid in, and a certificate thereof, under oath signed, etc., has been filed and recorded by the clerk of the city or town where such corporation has its principal place of business, and not afterward.

Chapter 136, Gen. Stats., provides, sec. 1, that a creditor may maintain a bill in chancery to enforce payment of a debt of a corporation against individual stockholders; but by sec. 2, not until sixty days after legal demand of payment. But he can only bring such bill when the stockholder is liable under ch. 135, Gen. Stats., and to that extent only. Sec. 3 provides for exposing property, that it may be attached to pay the debt of which payment is demanded. Sec. 4 provides for calling a meeting of the stockholders, who may provide means of payment by assessments, or otherwise, within sixty days from the date of the demand.

What debt can they thus assess themselves to pay ? Clearly, only those of which payment can be legally demanded under sec. 2; that is, such debts as the stockholders are individually liable for under ch„ 135. They cannot go beyond this, because then stockholders would be individually liable beyond the limit established by statute; and we have no doubt the legislature intended to give to the stockholders the power to assess themselves to this extent in order to have a prompt, decisive, and effectual remedy for the payment of their debts, and to avoid and prevent a multiplicity of suits by creditor's, with tlie necessary costs and delay. What other means can an insolvent corporation adopt to pay its debts, or the stockholders to relieve themselves from suits ? The legislature intended to give such power to the corporation to make stockholders liable to pay, in the form of an assessment, debts which the creditors could have collected by a direct suit against the stockholders; and there are strong reasons of convenience and expediency in giving them power to assess themselves to pay this liability.

Hobbs, for the defendant,

having applied to the judge who tried the cause to amend the case by adding the following, — “ the debts and liabilities for which the assessment was made exceeded in amount the property and assets of said corporation and all its capital stock paid in or limited,” — asked for a rehearing upon the point that such debts, as to the stockholder, are ultra vires. The case was thereupon continued for further argument and consideration upon this point.

As the case finds that the capital stock of this corporation was fixed and limited at $8,000, and that only $7,600 of the same has ever been paid in, the stockholders are individually liable under sec. 8 of ch. 135 of the Gen. Stats.; and the assessment having been legally voted, the defendant is liable.

But it is further suggested that the only remedy, or at least the primary remedy, for the collection of the assessment is a sale of the shares. This might in the absence of a promise be true, so far as regards assessments made under sec. 11, ch. 141, Rev. Stats., to collect the sum subscribed for the original capital stock — see N. H. Central R. R. v. Johnson, 30 N. H. 390, p. 403, and sec. 12, ch. 141, Rev. Stats.; but this cannot ordinarily be an effectual remedy for the collection of assessments to pay debts after a failure to expose unincumbered attachable personal property. It is presumable that the shares would generally be unsalable under such circumstances. We think that the legislature, in authorizing assessments in such cases, must be taken to have authorized the use of prompt and effectual means to collect the same — Broom’s Maxims 471; and that assumpsit is maintainable against a delinquent stockholder. The law often allows that action to be maintained “ for the sake of the remedy ” where there is no promise in fact, and even in the face of a party’s refusal to perform his duty. Sceca v. True, 53 N. H. 627. In our view, sec. 16 of ch. 134, Gen. Stats., relates only to the collection of such assessments as have been levied under the authority of sec. 15, ch. 134. In Franklin Glass Co. v. White, 14 Mass. 286, cited by the defendant, the same statute that conferred power to make the assessment, provided a remedy by sale of the shares, which the court held exclusive. But here, the statute conferring the power to make the assessment provides no remedy by sale. That remedy is given in another statute as a means of collecting the assessments authorized in that other statute, not this class of assessments.

According to these views there must be

Judgment on the verdict.

Holbs (with whom were Allen and L. JD. Sawyer), for the defendant.

The amount of debt exceeds one half of the capital stock paid in, with all the corporate property. This debt was contracted by the corporation, when it is expressly prohibited from so doing by secs. 4 and 5, Gen. Stats., and the act of 1846. While the officers who violate secs. 4 and 5 are made liable for contracting such debts, it seems impossible that they can have any right to assess a stockholder to pay such illegally contracted debts. Is not such a debt, as against a stockholder, ultra vires, — at least, as between him and the corporation or directors ? Both of the latter are prohibited from contracting such a debt. Have they authority to contract it ? If so, where do they get it ? If not, how can they call on the defendant to pay any part'! To hold otherwise is to imperil the fortunes of every one who has a share of stock in a New Hampshire corporation. Rich v. Errol, 51 N. H. It certainly would be a singular construction which should hold that a legislature that adopted the restrictions of the act of 1846 (an act expressly repealing the antecedent copartnership liability provision of the Revised Statutes), in passing the General Statutes, did not intend that those limitations should have any force; or which should hold that the legislature of 1868, in adopting the provision of sec. 3, ch. 146, Rev. Stats., adopted it with reference to sec. 1, that had long before been repealed by the act of 1846, ch. 321, rather than in reference to the act of 1846 itself, which was the existing law in 1868 when the General Statutes were adopted. The scope of the act of 1846 is to limit the risk of the stockholder, and render its extent certain even as against the creditor; and while democratic jealousy toward corporations gave the creditor enlarged rights, by chapter 146 cited above, it restricted the corporation’s power as to all parties, and in a few years relaxed its policy between creditors and stockholders, and by the act of 1846 limited and defined the cases in which he can be held; and the whole argument from the intent of the legislations is, that, as to the powers of the corporation, the legislation was restrictive, from early dates to this time, as to every one ; and hence we find, in the act of 1846, the prohibition as to creating debts beyond half the capital stock paid in, etc. The other general position is, that, as between the creditor and the stockholder, the legislature favored the creditor up to the act of 1846, when the current was changed. And it is somewhat remarkable to see how clearly the legislature have always marked the distinction between the right of a creditor to sue a stockholder to collect his debts, and the right of the corporation to assess the stockholder for the purpose of paying those debts.

We entertain grave doubts as to the power of a creditor to collect of the stockholder debts contracted beyond one half of the capital stock, etc. The debt is ultra vires, and perhaps, under Rich v. Errol, as the corporation has power to contract for some purpose, a creditor would not be estopped unless it appeared that he knew that the limit established by the statute had been exceeded. But when the question comes, Can the corporation or directors assess to pay such a debt, even if the par value has not been paid in ? a different conclusion must be reached; for the right to assess to pay debts means legal debts, etc., such debts as the corporation had the right to contract with a view of having them paid by stockholders, but not such debts as both the “ corporation and directors” are forbade to incur under a heavy penalty. To hold otherwise is to negate the whole protection the law has attempted to give to the stockholder. The intent of this provision is benign and wise. It is intended that, as soon as the corporation has become so reduced as to owe one half its value, the directors must cease to further involve the stockholders; and if they are deprived of all power as against the stockholders to hire money or buy on credit, an immediate stop to unprofitable and unskilful efforts will take place: and hence we find, in sec. 15, Gen. Stats. 135, and long before, that a director or officer who had violated this limitation and had been forced by a creditor to pay the debts, could not have contribution from the other stockholders. Are the court prepared to hold, nevertheless, that they can assess such other stockholders to pay such debts ? The case makes the books used as evidence part of the case, and they show that the directors were present, and authorized the contracting of these debts, and that Canney (as the case finds) had nothing to do with it, nor knew anything about the condition of the corporation.

How, then, is he estopped to say that he could not be assessed until all the shares were taken up and paid for ? He had no knowledge but what they were all taken up, and his letter meant legal assessment, as was held in 14N.H. 548,30 N.H. 390, and 32N.H. 369. We have failed to find anything in the case showing bad faith on the defendant’s part. Living in Massachusetts, he could not be expected to know that all the shares were not taken up, but we say, thinking they had been, he wrote the letter in the case at bar. The case at bar is a much stronger case for the defendant than the one just cited, for in this case the assessment was not made on the faith of the defendant’s promise, but the assessment had been made before the letter. If the defendant understood that all the shares had been taken, and under this misapprehension wrote the letter, he is not to be liolden, unless the cases cited are inapplicable or bad law; — see, also, act of 1856, p. 1769, sec. 1, ch. 1852.

Debts were included as to which no demand was made, and many of the debts could not be assessed at all, nor be collected of the corpoi'ation or stockholder by the creditor. Under sec. 4, p. 281, Gen. Stats., the corporation could not contract debts exceeding one half its capital stock paid in, and its other property, etc. Any contract beyond that is ultra vires, and binds neither the corporation nor stockholder; and the creditor, dealing with an agent of a corporation, must see for himself that the agent acts within the scope'of his authority, and an act ultra vires cannot be ratified. The assessment is made for an amount greater than all of the plaintiffs’ capital stock and other property, and certainly includes debts that the agent and directors could not, within the scope of them authority, contract; that the corporation could not, for the statute forbids it under a heavy penalty. Sec. 5, p. 281. This section does not make the corporation liable, but charges the directors for a contract made in the name of the corporation. It is idle to say that a stockholder can be assessed for a debt not binding upon the corporation. One half of the claims in the case at bar, at least, were not legal claims of the company. The assessment is illegal for that reason. Rich v. JErrol, 51 N. H., is decisive on this point. The plaintiffs should have voted to sell all the corporate property under the term “ or otherwise ” to pay its legal liabilities. It could not do that to pay debts contracted ultra vires, and, as the defendant claims in his fourth ground of nonsuit, having paid the par value of his share, he cannot be assessed to pay debts, especially when they are not debts the corporation are bound to pay. If section 4 gives any right of assessment, it is perfectly clear that that right is not restricted to those cases where the stockholder is individually liable, but applies as well to those cases where he is not personally liable. A consideration of this fact sufficiently demonstrates the utter absurdity of the plaintiffs’ theory.

Bank v. Globe Works, 101 Mass. 57, is not in point for the plaintiff's. In the case at bar, the suit is not against a corporation by a creditor, but is by a corporation to collect an assessment to pay debts the corporation had no right to contract. This is one radical ground of distinction. The second is, that some of the debts included in the assessment were incurred after the auditor’s report in 1869, when the corporation owed some $9,000, as the books show and the report states, and a part of this last amount is debts due to John Chick, treasurer and president of the company and a director, and to Levi Smith, a director, and to Pepper, and sundry stockholders. These parties, being officers of the corporation, are charged with knowledge of the matter of ultra vires at the time they in their capacity of directors allowed the corporation to become their debtor — 101 Mass. 58, near bottom of page; but in this state the restriction on the corporation in regard to incurring debts is a public penal statute, and every one is charged with knowledge of it. Can a corporation make an assessment to pay a debt which both the corporation and directors are prohibited from, contracting ?

Quarles, Wheeler, and Whipple, for the plaintiff's.

Isaac W. Smith, J. The questions raised in this case, as it ivas originally drawn, were decided by us at the adjourned term in March last.

By an amendment to the case, although the fact does not distinctly appear, it may be assumed that the debts and liabilities for which the assessment was made exceeded in amount the property and assets of the company, and one half of its capital stock paid in and limited. The defendant contends that for this reason the assessment was illegal, and that this action cannot be maintained.

Chapter 135, sec 4, of the General Statutes, provides that “ No corporation, banks and insurance companies excepted, shall contract debts or incur liabilities exceeding one half of its capital stock then actually paid in and unimpaired, and of its other property and assets.”

Section 5 of the same chapter provides that if any corporation, by vote or by its officers, shall violate the provisions of section 4, the directors shall be individually liable to the amount of the excess of debts and liabilities above half the capital stock paid in and of the other property and assets, for all the debts and contracts of the corporation then existing, or contracted while they respectively remain in office.

It is claimed by the defendant that as to any debt contracted beyond the amount limited in section 4, the contract is ultra vires, and binds neither corporation nor stockholder; and that a creditor, dealing with an agent of a corporation, must see for himself that the agent acts within the scope of his authority ; and that an act ultra vires cannot be ratified.

I. Is a debt thus contracted binding upon the corporation ?

It will be observed that by these provisions of the statute, debts contracted beyond the amount limited in the fourth section are not declared illegal and void. The penalty imposed for a violation of this provision of section 4 is, that the directors are made individually liable for all the debt and contracts of the corporation to the amount of such excess. The language is “ for all the debts and contracts of the corporation,” not for such debts and contracts contracted in excess of the amount limited. If they are not debts and contracts of the corporation, then there are no debts and contracts of the corporation for which the directors can be made individually liable in excess of the amount limited.

We think it is clear that the provisions of section 4 must be regarded as merely directory, although their violation may be culpable on the pai*t of the officers, and for this conduct of the corpoi’atioix the goverxxment might'probably seize their franchise upon due process.

We thixxk this view of the construction of sections 4 and 5 is confirmed by an examination of the cox’responding provisions of the statute in regard to banking corporations, clx. 153, sec. 9, which is as follows: “No such bank [authorized to issue bills, sec. 2] shall have in circulatioix its own bills to an amount greater tlxaxx the amount of the excess of its capital actually paid ixx above the amouxxt of loans xnade to its stockholder's on pledge of its own stock ; and in case of any excess, the directors, under whose administratioxx it shall happen, shall be jointly liable, to the extent of such excess, for all debts of the corporation then existing and that shall be contracted during their contlixuance in office, until the cix'culatioxx shall be reduced to the limit above described.”

Here the penalty is, not that the excess of circulation shall be null and void, thus punishing the innocent bill-holder, but the directors are made individually liable for all debts of the bank to the amount of such excess of circulatioxx, until the circulation shall he reduced to the limit prescribed. Reduced how ? By being redeemed, that is, paid by the bank that put the bills in circulation.

And by chapter 159 no foreign insurance company is permitted to transact any business in this state until certain requirements of the law are complied with ; but by section 10 any insurance made by any such company is made valid against them, though they have not complied with the requirement of the law.

Returning to chapter 135, there is another objection to holding that debts contracted in excess of the amount prescribed are not binding, and that is, the difficulty of ascertaining with readiness and accuracy the amount of the other property and assets of the corporation. It might consist of personal property widely scattered, debts or choses in actions of a doubtful character, and of real estate and machinery liable to rapid depreciation and loss. Before any creditor could safely deal with such a corporation, it would require an inventory of the property and assets to be frequently taken, to say nothing of the fluctuations of values in the market.

But suppose the limit to which this corporation could incur debts was $10,000, and that that limit had been reached on the first day of January, 1871; and suppose, on the second day of January, 1871, it had borrowed $15,000, and given its note therefor, payable in six months, and on the third day of January, 1871, had applied $10,000 of the sum so borrowed in payment of the debts outstanding January 1st: If the debt (note) contracted on the 2d was illegal and void, can it ever become a valid debt ? Can a void debt or contract ever become a valid and legal one ? And if this debt became legal in any sense when the debts that stood prior to it in age were paid, did the note become a valid note to the amount of $10,000, and did it remain an invalid note to the amount of $5,000 ? As fast as the debts, prior in point of time, are paid, do those incurred after the limit prescribed in the fourth section had been reached slide into their places to the amount of the older debts so paid ? and if so, which of a dozen or twenty invalid debts are so transposed into the list of valid debts ? and if those prior in age, which of two that might happen to have been contracted at the same moment ? or, if the oldest invalid claim happens to exceed in amount the place left for it to fill, will it become valid in part and remain invalid as to the rest ?

For these and other reasons that might be given, we find it impossible to hold that debts contracted beyond the amount limited by law are invalid as against- the corporation. There is, besides, the argument of justice in favor of holding that a corporation, equally with an individual, after having received the benefit of such contracts, shall not be permitted to repudiate them upon the ground that it has violated some statute provision in contracting them. Not only estoppels technically (so called), but estoppels in pais, operate both for and against a corporation. Ang. & Am. oil Oorp. 215.

Section 5 gives the creditor who lias been thus imposed upon an additional remedy for the collection of his debt. While the corporation remains liable for his debt, he can, if he shall choose, collect it of the directors; but it could not be the intention of the legislature to confine him to persons who might be unknown or irresponsible, or who might be skilful enough to conceal their property from legal process, and so leave him without remedy. It is not the policy of the law to visit the penalty for violation of laws upon the innocent, and allow the guilty to escape.

It is immaterial whether these debts were contracted by a vote of the corporation or by its officers, or whether the officers were authorized to contract them. If by the corporation, they arc valid, as we have seen, without reference to the fact whether the corporation having received the benefit of them is estopped to deny their validity; if by officers duly authorized, they are valid for the same reason ; and if the officers were unauthorized, they have been ratified by the corporation (1) by receiving and enjoying their benefit; (2) by the action of the corporation at the meeting Feb. 15, 1871, when the stockholders voted to assess themselves to pay these debts. Subsequent ratification is equivalent to an original authority. Rich, v. Errol, 51 N. H. 350. Ang. & Am. on Corp. 212, 216.

II. If, as there would seem to be no doubt, these debts in excess of the limit fixed in section 4 are valid debts against the corporation, it follows of necessity that the stockholders, acting as a corporation, may assess themselves under the provisions of sec. 4 of ch. 136 to pay such debts. The statute makes no distinction between these and any other debts of the corporation. The language of the statute is, “ upon demand of any debt of a corporation being made,” “ the officers of the corporation shall forthwith call a meeting of the stockholders to provide means for its payment by assessments upon themselves or otherwise,” etc.

We decided in Maz-ch last, in this case, that the stockholders can assess themselves only for such debts as can be legally demaiided to be paid, under sec. 2 of ch. 136, and we tlzizzk it is ezitirely clear that those creditors, whose debts were contz’acted after the limit fixed had been reached, can demand payment under that sectiozi and enforce payment under sectiozi 1. There is no exception made of such debts in the statute, and we can pez’ceive nothing in the statute that iizdicates that the legislature intended to put such creditors in any different position from tlie other creditoi's of a corporation.

There are many cases izi the books where it is held that a coz’poration cazmot czzfoz’ce contracts inconsistent with the purpose of its creation, because, being cz’eated for a specific purpose, it not only can make no contract forbidden by its charter’, but izz general can make no contract which is not necessary, directly or indirectly, to enable it to answer that end.

Thus,whez’ea company was cliai’tered for the conveyance of passengers between certain places, a contract by such company for the breaking of ice and towing of vessels through the track broken to another place is invalid, and cannot be enforced against them. Penn., &c., Co. v. Dandridge, 8 Gill & Johns. (Md.) 248.

So, where an insurance company, prohibited by its charter from doing banking business, brought a suit upon a promissory note as endorsee, which it had discounted, it was held that the note was void, as received by the corporation in the course of a transaction forbidden as a banking transaction by its charter. N. Y. Firemen's Ins. Co. v. Ely, 2 Cow. 678; Utica Ins. Co. v. Scott, 19 Johns. 1. But it was so held under that section of a restraining act, which declares that “ all notes and securities for the payment of money, or the delivery of property made or given to any such association, institution, or company not authorized for banking purposes, shall be void.”

It will be seen there is a wide difference between those cases and the case at bar. In New York the notes were declared by statute to be void. As to the debts involved in this suit, our statute does not pronounce them void, but makes the directors individually liable therefor.

And so, too, there are numerous decisions, that where contracts with corporations are illegal, although the other party can maintain ho action against the corporation on the contract, he may recover back the consideration paid, the parties not being in pari delictu. White v. Franklin Bank, 22 Pick. 181; 2 Com. on Cont. 109; Howson v. Hancock, 8 T. R. 577; Robinson v. Bland, 2 Burr. 1077; Utica Ins. Co. v. Scott, 19 Johns. 1; same v. Cadwell, 3 Wend. 296; same v. Bloodgood, 4 Wend. 652; Little v. O'Brien, 9 Mass. 423; Epis. Soc. v. Epis. Ch. in Dedham, 1 Pick. 372; Rich v. Errol, 51 N. H. 361.

In Monument National Bank v. Globe Works, 101 Mass. 57, it is remarked by Hoar, J., with great clearness, that “The doctrine of tdtra vires has been carried much further in England than the courts in this country have been disposed to extend it; but with just limitations the principle cannot be questioned, that the limitations to the authority, powers, and liability of a corporation are to be found in the act creating it; and it no doubt follows, that when powers are conferred and defined by statute, every one dealing with the corporation is presumed to know the extent of those powers. But when the transaction is not the exercise of a power not conferred on a corporation, but the abuse of a general power in a particular instance, the abuse not being known to the other contracting party, the doctrine of ultra vires does not apply.”

In Bissell v. Railroad, 22 N. Y. 289, Selden, J., says, — “When the want of power is apparent upon comparing the act done with the terms of the charter, the party dealing with the corporation is presumed to have knowledge of the defect, and the defence of ultra vires is available against him. But such a defence would not be permitted to prevail against a party who cannot be presumed to have had any knowledge of the want of authority to make the contract. Hence, if the question of power depends not merely upon the law under which the corporation acts, but upon the existence of certain extrinsic facts resting peculiarly within the knowledge of the corporate officers, then the corporation would be estopped from denying that which by assuming to make the contract it had virtually affirmed.”

Applying this doctrine as thus laid down in the courts of Massachusetts and New York, it will, of course, be appai’ent that the general provisions of the statutes, in regard to the power of corporations to contract debts, are to have the same force as if incorporated in the charter of this corporation.

Every one, then, dealing with this corporation must be presumed to know the limitation imposed by sec. 4 of cli. 135 of the Gen. Stats, upon its power to contract debts. But, at the same time, it is equally clear that the contracting of these debts beyond the limit fixed by statute was not the exercise of a power not conferred on the corporation, but was the abuse of a general power in these particular instances, of which abuse the other contracting parties (the creditors) cannot ordinarily be presumed to have known ; nor can they be said to be put upon inquiry, because, supposing the inquiry to have been made, it would have been difficult, for reasons before given, to have ascertained the amount and value of the assets of the corporation with any certainty or definiteness. The value and amount of the assets and property of this corporation were extrinsic facts resting peculiarly within the knowledge of the corporation, and of which the creditors cannot be presumed to have had any knowledge or notice.

The books and documentary evidence used at the trial were made a part of this case, but none of them have been exhibited to us, and we only know their contents from statements made in the argument. It is represented “that some of the debts included in the assessment were incurred after the auditor’s report in 1869, when the corporation owed some $9,000, as the books show and the report states, and a part of this last amount is debts due to John Chick, treasurer and president of the corporation and a director, and to Levi Smith a director, and to Pepper, and to sundry stockholders.” These parties, being officers of the corporation, are charged with knowledge of the matter of ultra vires at the time they in their capacity of directors allowed the corporation to become their debtors.

Assuming these facts to be as stated in the defendant’s brief, it does not appear whether the sum of $9,000, which the corporation owed in 1869, was equal to or exceeded the limit fixed by the fourth section, nor to what extent the corporation was indebted to Chick, Smith, and Pepper, nor whether the same or other debts were due to them February 19, 1871, nor whether the corporation was indebted to them at all at that date. If the limit fixed by section 4 for contracting debts had not been reached in 1869, when the auditor’s report was made, then the debts due to Chick, Smith, and Pepper were valid debts. There is nothing in the case by which we can tell whether or not that limit had then been reached, and if reached, whether Chick’s, Smith’s, and Pepper’s debts were contracted before or after the limit had been reached. Nothing is to be presumed in favor of fraud ; and if we are to draw any inference in regard to their debts, it must be that they were properly contracted.

We have only briefly discussed the doctrine of ultra vires in this case, a further examination not being necessary to its decision. There is nothing, then, in this case that shows that any of the creditors had knowledge that, at the time tlieir respective debts against the corporation accrued, the corporation had already contracted debts or incurred liabilities exceeding one half of its capital stock then actually paid in and unimpaired, and of its other property and assets; and we are of the opinion that the debts were such debts as the stockholders could assess themselves to pay, under the provisions of chapter 136 of the General Statutes.

The exceptions must be overruled, and there must be

Judgment on the verdict.

Case Details

Case Name: Ossipee Hosiery & Woolen Manufacturing Co. v. Canney

Court Name: Supreme Court of New Hampshire

Date Published: Jun 15, 1874

Citation: 54 N.H. 295

Court Abbreviation: N.H.