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If the certificate filed in 1873, asserting that the whole capital stock of $300,000 had been paid in, is conclusive in favor of the stockholders as against the creditors, the foundation upon which this recovery rests is taken away. One case furnishes a seeming authority for the doctrine, until its occasion and limitations are understood. (Stedman v. Eveleth,
6 Metc. 114.) That decision originated in an existing stockholder's liability so wide and destructive as to induce a conclusion that the certificate was required largely for their protection. The failure to pay in the whole capital stock threw upon the individual stockholder a liability, not measured by his shares, but extending to the whole corporate debt. In that respect the statute of Massachusetts was afterward changed by the substitution of a limited liability like our own; and the question of the effect of the certificate arising again, it was held that it was not conclusive, and the creditors might show non-payment in fact of the full capital, and found upon that the stockholder's liability to the par value of his shares. (BarreNat. B'K v. Hingham M'fg Co., 127 Mass. 563.) Nor is the conclusiveness of the certificate in any manner intimated or sustained by the case of Bonnell v. Griswold (80 N.Y. 128). The question there concerned, not the liability of stockholders derived from the fact of non-payment, but that of the trustees for making a false certificate of the alleged fact; and it does not follow, because a remedy is given against the officers for making no report, under one section, and for making a false report under another, that the liability of the stockholders for non-payment of the full capital is thereby taken away. On the contrary the cases quite plainly indicate that it remains. (Schenck v. Andrews, 46 N.Y. 589; Boynton v. Hatch,
47 id. 225; Boynton v. Andrews, 63 id. 93; Brown v. Smith,
13 Hun, 411; 80 N.Y. 650; Wheeler v. Millar, 90 id. 358.) Under section 10 of the act of 1848 two things are requisite to end the stockholder's liability. The whole amount of capital stock must be paid in, and the certificate of that fact required by section 11 must be made and recorded. A false assertion of compliance does not make compliance with the first condition. The fact must exist, and then it must be certified. While the statute makes some papers presumptive evidence of specific facts, it does not give in terms even that force to the certificate in question. The penal provision (Pier v. Hanmore, 86 N.Y. 95), punishing officers for a false report of capital paid in is entirely consistent with a contract liability of the stockholders until that condition is in truth fulfilled.
Our next inquiry relates to the alleged increase of the capital stock. Originally, and by the articles of incorporation, which were duly filed in 1868, the capital stock of the iron company was fixed at $200,000. In March of the next year the trustees passed a resolution to increase the capital stock by adding thereto $100,000, the same to be divided pro rata among the existing stockholders, whose notes payable in one, two, three, four, five and six months, in equal amounts, were to be taken therefor, and the new stock issued upon their payment. In the succeeding April there was a meeting of stockholders, at which the resolution of the trustees was approved
and ratified, after a recital admitting its legal insufficiency as it stood. But no notice of such meeting of stockholders was given, as required by section 21, chapter 40, of the act of 1848, nor was any certificate of the proceedings of such meeting made, or filed, as required by section 22 of the same act. The attempted increase was, therefore, illegal, but the respondent insists that, nevertheless, as against the creditors of the company, the defendant stockholders by accepting their proportions of the increased stock, by voting for its increase, by taking dividends upon it, and holding it out to those dealing with the company as an actual component of its capital, are estopped from denying the legal validity of the increase and must be held responsible as if it was valid. The authorities for this doctrine are numerous and strong. (Eaton v. Aspinwall,19 N.Y. 119; Chubb v. Upton, 5 Otto, 665; Aspinwall v.Sacchi, 57 N.Y. 331; B. A.R. Co. v. Cary, 26 id. 75;Kent v. Quicksilver M. Co., 78 id. 159; Sheldon H.B. Co. v.Eickemeyer Co., 90 id. 613.) The answer made to them is that an act absolutely and wholly void, because, under the law, incapable of being performed, cannot be made valid by estoppel. This is true where under the law there is an entire lack of power to do the act which is brought in question. The distinction is well illustrated in Scovill v. Thayer (105 U.S. 143). Under the law of Kansas no company like that then before the court could increase its capital to more than double an amount originally authorized. The capital was sought to be increased in excess of that amount. As against creditors it was claimed to be a valid increase by the operation of an estoppel, but the court ruled otherwise, and justly; for the very foundation of an estoppel, the misleading of creditors to their injury, was wanting. The latter knew and were bound to know that no power existed to so increase the capital, and therefore that it was not increased; and hence they were not, and could not be misled. But where, as in the present case, the abstract power did exist, and there was a way in which the increase could lawfully be made, and the creditors could, without fault, believe that the increase had been lawfully
effected and the necessary steps had been taken, there the doctrine of estoppel may apply, and the increased stock be deemed valid as against the creditors who have acted upon the faith of such increase. The referee has found that each and every one of the present defendants have done some act which brings them within the range of the estoppel alleged, or hold shares of the stock which in the hands of the assignors stood charged and burdened with a liability for the company's debts. We must, therefore, treat the increase as lawful, and precisely as if the needed preliminary steps had in truth been taken.
It is not denied that the increased stock of $100,000 was never fully paid in. That brings us to consider the effect of that omission, and puts before us conflicting theories of the meaning and construction of the statute. On the part of the appellants it is argued that the stockholders' liability under section 10 of the act of 1848 is in terms confined to the original capital stock as fixed and limited by the articles of incorporation; that this construction is inevitable in the light of the last clause of the same section, which requires the stock to be paid in, one-half within one year and one-half within two years "from the incorporation of such company," upon penalty of corporate dissolution; that the stockholders' liability is in derogation of the common law, and the statute imposing it must be strictly construed; that section 20, which permits an increase of capital "subject to the provisions and liabilities of" the act, imposes those provisions and liabilities only upon the company and corporation in its organized form, and not at all upon the individual stockholders, save in the case of existing companies previously formed, in which case the significant language is used, "thereupon such company, its officers and stockholders,
shall be subject to all the restrictions, duties and liabilities of this act;" and that even if the stockholders on an increase of capital are made subject to the liabilities imposed, the only one existing by reason of non-payment of capital is for non-payment of capital originally fixed and limited, and nothing more. So far as this construction depends upon
the use of the words "company" and "corporation," as distinguished from the individual holders of shares, the learned counsel for the respondent calls our attention to an analogous case, Wakefield v. Fargo (90 N.Y. 214). No adequate reason can be given why the construction adopted in that case should not prevail in this. It is easy to see that a determination which left the non-payment of increased stock free from a consequent liability of stockholders would furnish an easy mode of evading the statute. The original capital would be fixed at a small amount and all paid in, and then an increase be made without responsibility to any extent required. But this construction does not solve the whole difficulty, and fails to take into account its most serious aspect. That is expressed in the inquiry whether the statute intends to revive a terminated liability, and contains language which necessarily effects that result. The question of construction must meet a case like this: A corporation is organized with a capital of $200,000, all paid in, and the proper certificate in due time made and recorded. That ends the stockholder's liability. A purchaser buys some of the stock after ascertaining that no liability clouds it. Thereafter the stockholders lawfully increase the stock to $300,000, against the vote and protest of such new stockholder. The increased stock not being paid in full, and he, holding none of it, is he at once liable for the debts of the company to the par value of the very unburdened and unclouded stock which he bought because it was such? Does the statute thus revive a liability which the statute itself declares ended? And does justice to the creditor require it? He has all the security as to the original stock which the statute ever contemplated without such added liability. If there had been no increase he would have had for his reliance the full-paid, original capital in the treasury of the corporation. But he has that still, after the increase. It is there just the same, and gives him its security exactly as before. Manifestly the unpaid increase ought not in justice to either party to affect the full-paid original, and the rights and liabilities of its holders. If the statute means that the increased stock by itself, and its
holders by themselves, shall be subject to precisely the same liabilities as was the original stock by itself and its holders by themselves, all the language of the act is satisfied, no injustice is done to the creditors, and a dead liability is not revived. In that event the holders of the increased stock become liable to creditors up to the par value of such increased stock. The fund that is in default is made good; the fund that is not in default is left unharmed. The creditor gets all which the statute contemplates as his due, the security of the original stock fully paid into the treasury, and the liability of the holders of the increased stock in the room of its non-payment. Did the statute mean, in such a case, that creditors might take from stockholders $300,000, instead of $100,000, when $200,000 had been paid in, and that portion of the stock freed by the same law from liability? The learned counsel for the respondent expresses our thought in his brief, though perhaps not consciously. He says the provisions of section 20 "subject the increase of capitalitself to the provisions and liabilities of the act." That is the correct statement. The section deals only with the increased capital as an entity by itself, and with its holders. It has no reference to, and no effect upon the original capital and its holders. It intended to treat the increased capital and its holders precisely as it had already treated the original capital and its holders, but nothing else. It says no word of a revival of the ended liability. It gives no hint of any such purpose, which would be unjust to the original stockholders, and would give creditors a right beyond any thing to which they were ever entitled. Why should we construe the section harshly when the whole force of every word in it may be exhausted by confining it to its real subject, and to the stockholders who are such in respect to that subject? The moment we confine ourselves, as we should, to a literal interpretation of section 20, we find it saying only that it is the increase which is subjected to the liabilities of the act, and as a consequence only the holders of that increase to the par value of that stock who are liable for debts. The innocent holder of full-paid stock, once discharged by law, because his duty was
done, goes free, as he should. We ought not to hold him in respect to stock which is sinless, because there is stock which is guilty. The learned counsel for the respondent intimates that section 25 of the act of 1848, which requires the keeping of a stock book, and section 2 of the act of 1869, which permits in the stockholders' action the naming of those as defendants who appear on the stock ledger, recognize no distinction between the original and the increased stock. That is true; but nothing in the scope or purpose of either section required that an existing and recognized distinction should be again drawn. The learned counsel also turns our attention to expressions in the adjudged cases, which mix and treat as one the two sorts of stock. But none of these cases had this question up, or any question which involved the difference between the two. (Johnson v.Underhill, 52 N.Y. 207; Shellington v. Howland, 53 id. 376;Schenck v. Andrews, 46 id. 593; Cuykendall v. Douglas, 19 Hun, 577.) Possibly the question might have been raised in the last case, but it was not. There is, therefore, no authority in the way of the conclusion we have reached. Ordinarily no difficulty will arise in separating the two classes of stock, and assigning to their holders their proper rights and liabilities. If stockholders should so mix and mingle the two as to make such separation absolutely impossible, they might perhaps be left to the consequences of their own act, or that of their officers and agents. In the present case there is no such difficulty. The debts of the corporation proved reach almost $134,000, and the defendants have been required to pay that sum in pro rata
assessments measured by their entire holding of both classes of the stock. As only the holders of the increased stock are liable at all, and they only to the par value of such holding, the creditors have recovered too much. They can only receive in the aggregate the par of the increased stock — that is, $100,000, with interest from the commencement of the action, that sum to be awarded pro rata to the creditor, and assessed against the holders of increased stock in proper proportions. The case must go back for such adjustment, unless we can hold that the
original stock was not paid in in full, or the proper certificate not made and recorded. Those questions remain to be considered.
So far as the stock was issued for property bought of Whitney and French, no question is here raised, but as to Jones it is said the turn made of the debt due to him from the company for work in constructing its furnaces was not a payment of money upon the capital stock within the meaning of section 14 of the act of 1848. If the company had paid the money to Jones in discharge of the debt due him, and then Jones had handed back the same money as a payment upon his stock, no question could have arisen. Precisely that was the substance of the transaction, although the form of passing the money was omitted. We think the payment was sufficient. But the only certificate ever made of payment of capital stock was that of 1873, which called the capital $300,000, and asserted that it was all paid in. That certificate covered both classes of stock, and asserted full payment of both. As to the original stock it was true, and was a sufficient compliance with the statute, unless there be force in the two objections that it was not recorded, and was not made within thirty days after the payment of the last installment. We agree with the learned referee that the thirty days clause in section 11 is directory merely, and that upon the fact found by him that the omission to record was wholly the fault of the clerk who was directed to make the record, the defendants are not to be prejudiced by the omission. Their duty was done.
We have carefully examined the questions raised respecting the claim of Mudgett Tillinghast as representatives of the debts due the Rossie Iron Works and Eastwood; those relating to the amount collected of Lord, and those affecting the estate of McVean, and are satisfied with the referee's conclusions.
All the judgments entered against the defendants must be reversed, and a new trial granted, costs to abide the event. Since there was here but one action and one record, we allow but one bill of costs, and that subject to the event of the action.
EARL, J., concurs. RAPALLO and MILLER, JJ., concur in result, on the ground that none of the defendants are liable for the old stock held by them, but further hold that none of them are liable for the default to pay the increased stock. RUGER, Ch. J., and ANDREWS, J., dissent, holding that said defendants were liable both for the old and new stock. DANFORTH, J., took no part.
Judgments reversed.
Upon motion subsequently made the remittitur was amended so that instead of reversal it ordered a modification of the judgments below so as to conform with the opinion.