175 N.E. 177 | NY | 1931
Lead Opinion
The defendants have been indicted for the crime of participating as directors in the fraudulent insolvency of a moneyed corporation in contravention of Penal Law, section 297, subdivision 1. There were demurrers to the indictment which the trial court allowed. The Appellate Division unanimously affirmed.
Penal Law, section 297, read as follows:
"Every director of a moneyed corporation who:
"1. In case of the fraudulent insolvency of such corporation, shall have participated in such fraud; or,
"2. Willfully does any act as such director which is expressly forbidden by law, or willfully omits to perform any duty imposed upon him as such director by law,
"Is guilty of a misdemeanor, if no other punishment is prescribed therefor by law.
"The insolvency of a moneyed corporation is deemed fraudulent unless its affairs appear upon investigation to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe." (cf. Penal Code, § 603; Laws of 1892, ch. 692; Penal Code, § 604; Laws of 1881, ch. 676.)
The last paragraph of this section is a re-enactment of a like provision in the Revised Statutes of 1829 (Part I, ch. XVIII, tit. II, art. 1, § 14) which added, however, another paragraph as follows: "And it shall be *468 incumbent on the directors and stockholders of every such insolvent corporation to repel, by proof, the presumption of fraud." This paragraph, repealed in 1830 (Laws of 1830, ch. 71), disappeared from the statute books of New York, and has not been re-enacted.
It disappeared from the statute books of New York, but was copied elsewhere. In particular, it reappeared in Georgia. By the Banking Act of that State, "every insolvency of a bank shall be deemed fraudulent, and the president and directors shall be severally punished by imprisonment and labor in the penitentiary for not less than one (1) year nor longer than ten (10) years; provided that the defendant * * * may repel the presumption of fraud by showing that the affairs of the bank have been fairly and legally administered, and generally, with the same care and diligence that agents receiving a commission for their services are required and bound by law to observe; and upon such showing the jury shall acquit the prisoner" (Georgia Banking Act of 1919, art. XX, § 28). The Supreme Court of the United States had before it, in Manley v. Georgia (
Upon the authority of that decision, these demurrers were allowed.
"The insolvency of a moneyed corporation is deemed fraudulent unless its affairs appear upon investigation to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe" (Penal Law, § 297). This provision is more than a presumption, if indeed it is that at all. It is also a definition. It defines the standard of conduct to be attained by directors if they are to avoid the imputation *469 of sharing in a fraudulent insolvency. To the extent that it establishes a presumption in favor of the People, it is arbitrary and void (Manley v. Georgia, supra). To the extent that it establishes a definition of a fraudulent insolvency, it is valid, unless the standard of conduct is too vague to give warning to directors of the rule to be obeyed.
The statute, as we read it, is not subject to that reproach. It appeals to common-law standards of diligence and duty, standards to which business men and fiduciaries have accommodated themselves for centuries. It gives warning to directors that they must manage the affairs of a moneyed corporation fairly and legally and with the same care and diligence that is owing from paid agents, and that if they fail to do this, and by reason of such omission insolvency supervenes, they will be guilty of a misdemeanor. "Fairly," we interpret as meaning "in good faith." If that branch of the definition is to be excluded as indefinite, there still is left enough to fix the meaning and the duty. The definition will not be suffered to fail as an entirety. "Legally," we interpret as referring to the statutes of the State, and particularly the statutes regulating the management of banks. Finally, supplementing the test of good faith and illegality, there is another test more definite, one that is capable of standing by itself if both others be rejected, the test of reasonable diligence. Here the duty is prescribed with clearness and precision. The test established by the statute, the diligence that is expected of agents in receipt of compensation for their services, is a legislative recognition of a standard of diligence long known to the common law. The diligent director is the one who exhibit in the performance of his trust "the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs" (Hun v. Cary,
The act is not shorn of certainty of meaning by its reference to a standard of customary diligence. The power of the Legislature to make it a crime for banking officers to be so neglectful of their duties as to involve their banks in ruin is hardly to be doubted. The power existing, one is at a loss to imagine how the prohibited omissions could be more accurately stated, without a catalogue of particulars not susceptible of enumeration in advance of the event (cf. International HarvesterCo. v. Kentucky,
Manley v. Georgia (supra) is not a ruling to the contrary. The decision in that case was not rendered on demurrer. There had been a judgment of conviction after a trial at which the statutory presumption had been applied in all its rigor. What was said in the opinion must be read in the light of the question to be answered. Not even by way of dictum, however, was there an intimation of a belief that the statute was too vague in its definition of care and diligence. At most the intimation was that there was too much of uncertainty in the tests of good faith and illegality. No discrimination had been made in the conduct of the trial between one standard and another. In the statute now before us, the test of care and diligence would stand though those of good faith and illegality *472
were rejected as indefinite. To what extent a severance of good from bad is permissible with a view to the preservation of a statute is a question of construction as to which the courts of the State, and not the Federal courts, must speak with ultimate authority (People ex rel. Alpha P.C. Co. v. Knapp,
We have said that the definition of fraud implicit in the statute may be severed from any presumption whereby fraud must be repelled. Whether there was in truth a purpose to establish such a presumption is at least not free from doubt. Section 297 of the Penal Law is descended from section 604 of the Penal Code, enacted in 1881 (ch. 676), which in turn derives from the Revised Statutes. One finds it hard to understand why the Legislature in re-enacting the Revised Statutes left out the old provision creating a presumption in terms too clear for misconstruction, if the purpose still was that the presumption should survive. Also one finds it hard to understand why, if such was the purpose, a provision should have been added that the defendant must be proved to have participated in the fraud. Much may be said in support of the contention that what was re-enacted in the new statute was meant to be a definition and no more.* Where two meanings are reasonable, the preference is given to the one that sustains a statute rather than to the one that overturns it. If, however, this principle be disregarded, and the statute interpreted as continuing the old presumption, the result will not be changed. The act will then be read as if its provisions were as follows: "The insolvency of a moneyed corporation is fraudulent unless its affairs have been administered by its directors *473
fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe (cf. Banking Law, secs.
Plainly the presumption under a statute so framed is susceptible of severance from the accompanying definition. We think it is equally severable under the statute as enacted. Something more is here than "a mere speculation" (Meyer v.Wells, Fargo Co., supra) whether the Legislature would have been willing to adopt the statute as remodeled. The failure to re-enact the original presumption in all its former length and breadth is in itself a token of the likely choice. It is persuasive evidence that whatever presumption may have been left surviving as the result of bungling phraseology was not thought of by the lawmakers as constituting the essence of the plan. We shall be laying "a doctrinaire emphasis on the possible rather than the probable" (People ex rel. Alpha P.C. Co. v. Knapp,supra, p. 62) if we make a contrary assumption the basis of our ruling. The whole tendency during recent years, at least in this court, has been to apply the principle of severance with increasing liberality. "Severance," we have said (People ex rel.Alpha P.C. Co. v. Knapp, supra, p. 60), "does not depend upon the separation of the good from the bad by paragraphs or sentences in the text of the enactment (Loeb v. ColumbiaTownship Trustees, supra). The principle of division is not a principle of form. It is a principle of function." "Our duty is to save unless in saving we pervert" (Ibid, p. 63).
The argument is made, however, that the definition itself, though it be severable from the presumption, must be severed once again into elements legal and illegal, and that this secondary severance exceeds the limits of our power. The suggested limitation to our thinking is *474 without sufficient basis in reason or authority. For a secondary severance as for a primary one, the test remains the same. "The question is in every case whether the Legislature, if partial invalidity had been foreseen, would have wished the statute to be enforced with the invalid part exscinded, or rejected altogether" (People ex rel. Alpha P.C. Co. v. Knapp, supra, p. 60). The Legislature has said that insolvency shall be classified as fraudulent unless there shall be good faith and obedience to the law and reasonable diligence. The prosecution is not required to prove the absence of all these elements. If that were the requirement, a different conclusion would be necessary. The prosecution prevails (according to the letter of the statute) if it proves the absence of any one of them. This being the definition, the only consequence of eliminating the element of good faith or even the element of compliance with the law is not to increase the defendant's burden but rather to reduce it. By the statute as enacted a threefold standard is prescribed. By the statute as divided the Legislature is deemed to say that if one or more of the standards be rejected as indefinite, the proof shall be confined to the one that satisfies the test of certainty. We are to figure the situation as it will exist at the conclusion of the trial. Let us assume that the People shall succeed in proving that the insolvency is the consequence of a failure on the part of the defendants to direct the affairs of the bank with reasonable diligence. Is it conceivable that the Legislature would have wished such a prosecution to fail because the jury must be told that if due diligence has been exercised, guilt may not be found for transgression of a vague command to run the business "fairly?" The question carries its own answer.
There is no occasion to consider whether certainty would be lacking if the Legislature had done something which it did not try to do, had prohibited participation in a "fraudulent insolvency" without definition of the *475 term. Enough for present purposes that nothing of the kind was done.
We think the statute is not invalid. That objection failing, we think the negligent and illegal acts and omissions enumerated in the indictment are sufficiently stated to have been factors leading to insolvency and ruin.
Proof there must be of a causal connection between the wrong and the collapse before negligence will charge with a penal liability.
In brief, the insolvency of a moneyed corporation resulting from the failure to administer its affairs with reasonable care and diligence is a fraudulent insolvency within the definition of the statute, and a director participates in the fraud when he participates in the negligence with ruin as the consequence (cf. Banking Law, §§ 123-130).
Other limitations may be found to be essential in connection with a trial. We are not required to go farther to dispose of the demurrers.
The order of the Appellate Division and that of the trial court should be reversed and the demurrers overruled.
Concurrence Opinion
The defendants, indicted for the crime of participating as directors in the fraudulent insolvency of a moneyed corporation, attack the indictment on the ground that section 297 of the Penal Law, which makes the acts charged criminal, is invalid and unconstitutional. That section provides in part that
"Every director of a moneyed corporation who:
"1. In case of the fraudulent insolvency of such corporation, shall have participated in such fraud * * *
"Is guilty of a misdemeanor, if no other punishment is prescribed therefor by law."
The Legislature has not left to the court the definition of what constitutes a "fraudulent insolvency." It has *476 provided in the same section that "The insolvency of a moneyed corporation is deemed fraudulent unless its affairs appear upon investigation to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to observe."
We are told that this provision is not a definition but the creation of a presumption. A definition it certainly is, even though it may include a presumption. It gives a content to the words "fraudulent insolvency" which those words might not otherwise have. It marks the line which divides innocent insolvency from fraudulent insolvency. True, its language is open to the contention that the Legislature intended also that the insolvency of a moneyed corporation should give rise, in the absence of evidence to the contrary, to the presumption that the insolvency is fraudulent. The Legislature cannot, it is said, create such a presumption. (Manley v. Georgia,
We may assume that this provision does attempt, not merely to define "fraudulent insolvency," but to create a presumption of fraud from the insolvency itself. As Chief Judge CARDOZO has pointed out, it is a re-enactment of a like provision in the Revised Statutes of 1829. There it certainly was intended to include a presumption, for it was followed by another clause, "and it shall be incumbent on the directors and stockholders of every such insolvent corporation to repel by proof the presumption of fraud." Then definition and presumption were to be applied, not in the determination of penal liability but of civil liability and that, too, of a civil liability which might be incurred, at least by a stockholder, without fault on his part. "If the monies remaining due to the creditors of a corporation whose insolvency shall be adjudged fraudulent after the distribution of its effects shall not be collected in whole or in part from the directors liable for their reimbursement, the deficiency shall be *477 made good by the contribution of the stockholders of the company." (Revised Statutes of 1829, Part I, ch. XVIII, tit. II, art. 1, § 14.) The provisions for civil liability of directors or stockholders in case of fraudulent insolvency were repealed in 1830 and with them the definition of fraudulent insolvency and the presumption, in the absence of evidence to the contrary, that an insolvency is fraudulent. The provisions for civil liability have never been re-enacted, but the clause, now under consideration, reappeared in section 604 of the Penal Code of 1881, from which section 297 of the Penal Law is derived.
It reappeared, but, as has been pointed out, without the additional clause "and it shall be incumbent on the directors and stockholders of every such insolvent corporation to repel by proof the presumption of fraud." The reason for the omission seems to me plain. Under the provisions of the Revised Statutes civil liability of a stockholder followed upon adjudication of fraudulent insolvency and the Legislature intended that the burden of producing evidence to show that an insolvency was not fraudulent should rest upon the defendant. In the Penal Law of New York, if the presumption, though arbitrary, is applied in full rigor, it would establish only the "fraudulent insolvency;" the People must still prove that the defendant as such director has "participated in such fraud." Participation cannot be proven without designation and proof of the specific acts in which the defendant participated. Practically the force of the provision under consideration is confined to the definition of what circumstances render the insolvency fraudulent. Designation and proof of the specific acts of fraud in which the defendant participated leaves little, if any, scope for the application of a general presumption that the insolvency was fraudulent. At most the Legislature has retained vestiges of an invalid presumption. Severance of the invalid from the valid may certainly be made in such case. *478
The question remains whether the statute, including the definition, imposes a standard of conduct too vague to give warning to directors of the rule to be obeyed. Though I cannot agree in whole with the construction placed in the prevailing opinion upon the statute, my own construction leads in this particular case to the same result. The statute punishes a director who "participates" in fraud which has resulted in the insolvency of a moneyed corporation. It defines what is meant by a "fraudulent insolvency," by specifying the conditions which will give to an insolvency a fraudulent quality. That definition determines the meaning of the word "fraud," as used in the statute. It does not in my opinion determine what shall constitute participation by a director. It is said that, perhaps, the provisions of the statute might be construed as if they read: "The insolvency of a moneyed corporation is fraudulent when it results from the failure of a director to administer its affairs fairly, legally and with the same care that agents receiving a compensation for their services are bound by law to observe, and the burden of proof shall be on the director, when insolvency is proved, to show that it was not fraudulent or that he did not participate in the fraud." I cannot find in the language or in the history of the statutory provision any basis for that construction. Perhaps, if the Legislature had seen fit to enact a statute which bears such a construction we might give it partial effect by severance of the invalid from the valid, as pointed out in the prevailing opinion. That I do not now consider. If the statute is given, as I think it should be, a more literal construction, claims of invalidity lose much of their force.
I have said that, while the court might, perhaps, find implicit in the definition of "fraudulent insolvency," a presumption, arising from proof of insolvency, that the insolvency was fraudulent, I cannot find that a further presumption is implied or expressed that a director, who might be charged with such offense, has "participated" *479 in that fraud. So now I say that I do not find in the language of the statute any intention that the definition of "fraudulent insolvency" was intended to define the acts or omissions of a director which might constitute participation in such fraud or to provide that a failure, while acting as a director, to use the "care and diligence that agents receiving a compensation for their services are bound, by law, to observe," shall as matter of law constitute participation by a director in such fraud.
At the outset I wish to point out again that in the Revised Statutes of 1829 the definition of fraudulent insolvency might from the basis for the imposition of a civil liability upon stockholders regardless of their fault. There, certainly, the liability was not confined to insolvency resulting from fraud of the directors. Such a construction I think would have been a perversion of the language of the statute. Corporate affairs are conducted by corporate agents. Where the agents of a moneyed corporation fail to conduct them honestly and legally and generally "with the care and diligence that agents receiving compensation for their services are bound, by law, to observe," the Legislature decreed that creditors may if necessary be reimbursed by contribution exacted from the stockholders. Quite evidently the Legislature intended such contribution might be exacted from stockholders if the agents were faithless even though the directors may have been without fault.
In re-enacting this provision as part of a penal statute applicable to directors alone, it seems to me that the Legislature can hardly have intended to change the meaning of its definition of "fraudulent insolvency" without changing its formulation. "Fraudulent insolvency," with participation of a director, received new consequences, but the meaning of "fraudulent insolvency" remained unchanged. The question, however, still remains whether the Legislature intended that the definition of what constitutes fraud in the insolvency of a *480 moneyed corporation shall also define the standard of conduct of a director who would avoid the charge of participation in the fraud.
The statute does not say so. Where do we find in the statute ground for holding that it is implied? Can we, indeed, apply to the conduct of a director the statutory standard of the "care and diligence that agents receiving a compensation for their services are required, by law, to observe?" It is said that this imposes upon a director the standard of "reasonable care" — the same standard which a director must observe to escape civil liability — in other words, that imprisonment and disgrace as well as civil liability may be visited upon a director who fails to exhibit in the performance of his trust "the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs." They are to be visited with fines and penalties if they fail to comply with their undertaking not only "that they would discharge their duties with proper care, but that they would exercise the ordinary skill and judgment requisite for the discharge of their delicate trust." (Hun v.Cary,
Perhaps the Legislature may impose such a standard of conduct upon a director. Perhaps the Legislature may give warning to a director that such a rule must be obeyed. I cannot find that the Legislature has done so. It is said that any act which comes within the statutory definition of fraud must constitute participation in the fraud. That is of course true, but it does not at all follow that the definition of fraud is coextensive with what may constitute "participation" in the fraud. Doubtless, where the director acts as the agent of a bank he may be found guilty of participation in the "fraudulent insolvency" of the bank resulting from his failure as agent to conduct the affairs of the bank with the same care and diligence which might reasonably be expected of a paid agent. There we have a well-defined, well-understood *481
standard of conduct of an agent — not too vague to be applied in determining penal responsibility. "The board of directors of a corporation do not stand in the same relation to the corporate body which a private agent holds toward his principal." (Hoyt
v. Thompson's Executors,
In my opinion the Legislature has not attempted to define what acts by a director shall constitute participation in a fraud and it need not do so. The fraud is sufficiently defined. The agent who transacts the business of the moneyed corporation must exercise the care and diligence required of an agent for compensation. If he fails and insolvency follows, the insolvency is fraudulent. If a director participates in that fraud he is criminally responsible, not otherwise. The term "participates" is analogous to "aid" or "abet." (State v. Fox,
So construed the statute does not impose criminal responsibility upon a director merely because he has failed in care and prudence. There must be more before there is "participation" in fraud. There must be an act or omission which logically leads to the inference that a director has had a share in the wrongful acts of corporate agents which rendered its insolvency fraudulent. True, negligence itself may at times sustain an inference of fraud. (Ultramares Corp. v. Touche,
Even under this construction, the indictment here is sufficient. Therefore, I concur in the reversal of the judgment. Perhaps the Legislature should speak in less uncertain terms in warning directors of banks that they must be vigilant in the performance of their duties. In the absence of warning that misplaced reliance by directors in the officers of the bank may result in placing criminal responsibility upon directors, I hesitate to join in any decision which may place the brand of a criminal upon men of good intentions.
Dissenting Opinion
Omitting a clause, concededly unconstitutional in part, the provisions of section 297 of the Penal Law, pertinent to this inquiry, are as follows: "Every director of a moneyed corporation who: 1. In case of the fraudulent insolvency of such corporation, shall have participated in such fraud, * * * is guilty of a misdemeanor, if no other punishment is prescribed therefor by law." Are the words "fraudulent" and "fraud," in the connection in which they are *483 used, sufficient to define the acts sought to be made criminal?
The law has been thus stated: "And a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates the first essential of due process of law." (Connally v. General Construction Co.,
Certainly the word "fraud" or "fraudulent" has not "a technical or other special meaning." Conduct may be fraudulent or otherwise accordingly as we apply the standards of law or morality, of civil or criminal law, of the common law or of equity. Thus, fraud is said to be any "cunning, deception or artifice used to circumvent, cheat or defraud another" (Story, Eq. Juris. [14th ed.] § 267); "all surprise, trick, cunning, dissembling, and other unfair way that is used to cheat any one" (Willard, Eq. Juris. p. 147); "a device by means of which one party has taken an unconscientious advantage of the other." (Jeremy, Eq. Juris. vol. 3, part 2, p. 358.) It has been said that "It is impossible to separate deceit or artifice from fraud; it is of the very essence of the fraud." (People v. Taylor, 4 Park. Crim. Rep. 158, 161.) On the other hand, it has been remarked: "Fraud and dishonesty are synonymous terms;" "an unjust man is a fraudulent one" (Matter of Clark,
Neither the word "fraud" nor the word "fraudulent," as employed in the statute, has "a well settled common-law meaning." "A fraud indictable at common law, *485 must be such as would affect the public, and such as common prudence would not be sufficient to guard against; as the using of false weights and measures, or false tokens, or where there has been a conspiracy to cheat." (People v. Miller, 14 Johns. 371.) In Rex v. Wheatley (2 Burrow, 1125) Lord MANSFIELD said: "The offense that is indictable must be such a one as affects the public. As if a man uses false weights and measures, and sells by them to all or to many of his customers, or uses them in the general course of his dealing: so, if a man defrauds another under false tokens;" and in Rex v. Lara (supra) Lord KENYON said: "What the defendant did was immoral and highly reprehensible: but as he used no false token to accomplish his deceit, the judgment must be arrested." In People v. Taylor (supra) an indictment charged the violation of a statute which made it a crime for any city officer, among other things, "to commit a fraud upon the city." The court dismissed the indictment, for the reason that the statute did not sufficiently describe the crime. "Fraud," under the statute now considered, is not made dependent upon the use of false weights, measures or tokens. Therefore, there can be no pretense that the Legislature intended to use the word in the common-law sense. It thus appears that the statute is not saved from the vagueness which condemns it through the employment of words having "a technical or other special meaning" or "a well settled common-law meaning."
The inquiry remains, whether a clause of the statute, which we have omitted, owing to its partial unconstitutionality, may be employed to make sufficiently definite a statute which would otherwise offend due process. The clause is this: "The insolvency of a moneyed corporation is deemed fraudulent unless its affairs appear upon investigation to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are bound, by law, to *486
observe." It must be conceded that this clause, to the extent that it throws upon a person charged with "fraud" the burden of proving innocence, is unconstitutional. (Manley v. Georgia,
There are many instances where unconstitutional provisions have been exscinded from a statute by interpretation to give it force as an otherwise valid enactment. (Supervisors v. Stanley,
In our case we have a statute which insufficiently provides that in case of a "fraudulent insolvency" of a moneyed corporation every director participating in the "fraud" shall be guilty of a misdemeanor. It then provides that every insolvency is "deemed fraudulent" unless its affairs appear "to have been administered fairly, legally and with the same care and diligence that agents receiving a compensation for their services are *489 bound, by law, to observe." A complete inversion of this unconstitutional provision, which casts the burden of establishing innocence upon an accused, is proposed. The exception from a prohibition is to be employed to determine the thing prohibited. To do this, the statute is to be rewritten, words expressing the reverse of those employed are to be interpolated, new words are to be substituted, and a new enactment to be made. To conclude that we thus have a mere severance, a separation or a permitted deletion is a "turn of ingenuity" which is certainly "extraordinary." That the turn may not be taken, the case of Manley v. Georgia (supra) seems clearly to lay down. In that case the court held that words, setting up a presumption of guilt, almost identical with those employed in our statute, constituted an unconstitutional enactment. The court did not feel justified in using the provision to extract a definition of "fraudulent insolvency" otherwise insufficiently defined. On the contrary, it said: "The statute does not specify the elements of the offense." (p. 6.)
We conclude that the provisions relied upon insufficiently state a crime; that they offend against due process; that the indictment thereunder must, therefore, fail.
The order should be affirmed.
POUND, CRANE and HUBBS, JJ., concur with CARDOZO, Ch. J.; LEHMAN, J., concurs in result in separate opinion; KELLOGG, J., dissents in opinion in which O'BRIEN, J., concurs.
Orders reversed, etc. *490