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Osgood v. Laytin

3 Abb. Ct. App. 418 Court N.Y. English

Delivered by Grover, J.

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p. 418
OSGOOD v. LAYTIN.
September, 1867.

Headnote

Affirming 48 Barb. 463 .
Where an insurance company, organized under the general law applicble to such companies, being insolvent, distributes its capital among its stockholders, thus placing the fund beyond the reach of its creditors, it acts in fraud of its creditors, and the fund may be recovered back from those who received it, by a proper action commenced by the proper parties. ■
The complaint in such case need not aver that in making such distribution it was done with an intent to defraud the creditors.
The receiver of the company, since he represents the creditors, is the proper person to bring such action. No creditor can individually maintain an action against an individual stockholder, for the share so illegally distributed to him ; the liability is to the creditors generally, and the action should be commenced by some party representing all the creditors.[4]
In such action it is proper for the receiver to join as defendants any creditors who have instituted such suits, and those who threaten to do so, for the purpose of protecting the stockholders from a multiplicity of actions.
G. A. Osgood and Cyrns Curtiss, receivers of the Columbian Insurance Company, brought this action against William Lay-tin and many others, for the purpose of recovering back dividends which certain of the defendants, as stockholders, had received out of the capital, and of restraining other defendants, who were creditors, from prosecuting individual actions for the same purpose.
The Columbian Insurance Company was organized by virue of the general act of 1849, ch. 308; and was dissolved by the judgment of the supreme court, in February, 1866. The plaintiffs were subsequently appointed receivers, as successors of the receivers originally appointed; and they duly qualified.
In July, 1866, the company, being insolvent, had paid a dividend of three and one-half per cent, upon its stock to its
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stockholders. Some of its creditors, individually, commenced actions against several of the stockholders separately, to recover from them the amount of the dividend so received. Whereupon the plaintiffs commenced this action against all the stockholders who had received dividends, and also against the creditors who had commenced such actions, and they demanded judgment against the stockholders severally for the amount of the dividends respectively received, and a judgment against the creditors, perpetually restraining them from the prosecution of suits against the stockholders for the collection of the dividends received.[4]
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The stockholders demurred to the complaint, upon the ground that the facts stated constituted no cause of action; the creditors demurred upon the same ground, and also because the plaintiffs had not legal capacity to sue; there was a defect of parties defendant, and several causes of action were improperly united.
Judgment was given for the plaintiffs upon the demurrers at special term.
The supreme court, on appeal, at the general term, affirmed the judgment. Reported in 48 Bari. 463. Defendants appealed to this court.
Elbridge T. Gerry, for defendants, stockholders, appellants;
I. The receivers cannot recover, unless upon the ground that as trustees they represent the entire body of creditors. Smith on Bee.; Hutchinson v. Massarene, 2 Ball & Beatty, 55; Davis v. Malborough, 2 Swanst. 118; Curtis v. Leavitt, 15 N. Y. 9 ; In re Burke, 1 Ball & Beatty, 74; L. 1858, p. 506, c. 314, § 2; 3 R. S. 5 ed. 226; Taknage v. Pell, 7 N. Y. (3 Seld.) 328; Pentz v. Hawley, 1 Barb. Ch. 122 ; Nathan v. Whitlock, 9 Paige, 152; Edw. on Rec. 141-2, and cases there
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cited; Rankine v. Elliott, 16 N. Y. 377 ; affirming 14 How. Pr. 339 . II. The creditors had no legal right to bring separate actions against individual stockholders. L. 1849, ch." 308, § 20; as amended by 1 L. 1857 , ch. 38, § 1; 5 Edm. Stat. at L. 210, § 20; Hyde v. Lynde, 4 N. Y. (4 Comst.) 387, superseded by L. 1858, ch. 314; 3 Rev. Stat. 5 ed. 226; Lutterworth v. O’Brien, 39 Bari. 192; S. C., 24 Hew. Pr. 438. III. The receivers are not entitled, by virtue of their general powers as trustees, to recover these so-called dividends. A distribution of capital is not a dividend. Hor can this complaint be sustained under the provisions of the statute authorizing receivers to recover the proceeds of the trust fund misapplied.
C. C. Langdell, for other defendants;
Cited Walker v. Crain, 17 Barb. 119 ; Story v. Furman, 25 N. Y. 214 , 219, 220, 224; L. 1858, c. 314, p. 506; Hyde v. Lynde, 4 N. Y. (4 Comst.) 387, 392-3; Curtis v. Leavitt, 15 N. Y. 9 , 43-5; Porter v. Williams, 9 N. Y. (5 Seld.) 142; L. 1857, c. 38, § 1; 2 R. S. (5 ed.) p. 750; Lutterworth v. O’Brien, 39 Barb. 192 ; S. C., 24 How. Pr. 438 ; Bank of Poughkeepsie v. Ibbotson, 24 Wend. 473 ; 5 Hill, 461 .
David Dudley Field, for plaintiff, respondent;
Cited 1 R. S. 589, §§ 1, 51; 601, § 2; 590, § 4; Gen. Ins. Act, 1847, amended 1857; 4 Edm. Stat. at L. 210, § 20; L. 1858, c. 314 (4 Edm. 483); 2 R. S. 469, §§ 67, 68; 464, §§ 39, 41; 42, § 7; 466, §§ 56, 66; Hathan v. Whitlock, 3 Edw. 220 ; Wood v. Hummer, 3 Mason, 310; Curran v. State of Arkansas, 15 How. U. S. 304; 2 Story Eq. Jur. §§ 1,252; Mumma v. Potomac Co., 8 Pet. 281 ; Wright v. Petrie, 1 S. & M. Ch. 319; Hevitt v. Bank of Port Gibson, 6 Id. 513; Hightower v. Thornton, 8 Georg. 493; Hathan v. Whitlock, 3 Edw. Ch. 215 ; affirmed in 9 Paige, 152; Brouwer v. Harbeck, 9 N. Y. (5 Seld.) 594; Gillett v. Phillips, 13 N. N. (3 Kern.) 114; Brouwer v. Hill, 1 Sandf. 630 ; Talmage v. Pell, 7 N. Y. (3 Seld.) 329; Leavitt v. Palmer, 3 N. Y. (3 Comst.) 19 ; Gillet v. Moody, Id. 479 ; Green v. Bostwick, 1 Sandf. Ch. 185 ; Leavitt v. Be Launay, 4 Id. 281 ;[4] Leavitt v.
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Tylee, 1 Id. 207 ; Walker v. Crain, 17 Barb. 119 ; Bank of Poughkeepsie v. Ibbotson, 24 Wend. 479 ; Geery v. N. Y. & Liverpool St. Co., 12 Abb. Pr. 269 ; Trustees of Huntington v. Hicoll, 3 Johns. 573 ; Story v. Furman, 25 N. Y. 214 ; Wood v. hummer, 3 Mason, 308; Galway v. U. S. S. S. Reig. Co., 13 Abb. Pr. 211 ; S. C., 21 How. Pr. 313 ;[4] Hyde v. Lunde, 4 N. Y. (4 Oomst.) 387; Butterworth v. O’Brien, 39 Barb. 192 ; S. C., 24 How. 438 .

By the Court.

The point presented by the stockholders who have demurred is, that the plaintiffs cannot recover from them the sums received as dividends, for the reason that the complaint shows that the same was paid out of capital, and not out of the profits, and is not therefore a dividend within the meaning of the law, but a misappropriation of capital, and does not therefore come within the meaning of the statute. I am at a loss to discover how the argument that money paid by the company to its stockholders, although paid as a dividend, is not such, in a legal sense, if sound, can at all benefit these defendants. The act of 1858, 506, § 1, among other things, provides that the receiver of an insolvent corporation may, for the benefit of creditors, treat as void and resist all acts done, transfers and agreements made in fraud of the rights of any creditor. From the facts stated in the complaint, it is manifest that a distribution of the capital of the company, or any part of it, among the stockholders, was a fraud upon the creditors. It is alleged that the company was at the time insolvent.

It must be presumed that the directors, at the time of declaring the dividend, were cognizant of this fact, as it was the duty of each to examine into the affairs of the company before making a dividend, and, when making it, to know that it was made from net profits belonging to the company. If the company, being insolvent, distributes its capital among stockholders, thus placing it beyond the reach of its creditors, such act is a fraud upon the creditors, and falls directly within the provision of the statute above cited.

It is insisted by the counsel for the stockholders, that to

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authorize the plaintiffs to recover, by virtue of the above statute, from the stockholders, the complaint should aver an intent, in making the distribution, to defraud the creditors.

I do not think this necessary. Ignorance of facts that it was the duty of the managers to know, not to know which was gross negligence, cannot excuse the managers, and impart any virtue or validity to acts otherwise clearly illegal, and which were a palpable fraud upon the creditors.

But I do not think the position sound. Section 20 of the act to provide for the incorporation of insurance companies, as amended in 1857 (4 Edm. Rev. Stat. 210), provides that “ no dividend shall ever be made by any company incorporated under this act, when its capital stock is impaired, or when the making of such dividend will have the effect of impairing its capital stock ; and any dividend so made shall subject each of the stockholders receiving the same to an individual liability to the creditors of said company, to the extent of such dividend received by him.” This shows that the legislature used the term dividend in its proper sense —that is, a sum of money distributed pro rata among the stockholders, without reference to the source from which it was taken or paid.

The fact of its being illegal to make a dividend of anything but net profits does not at all tend to show the meaning of the legislature in the use of the word. The design plainly ex-¡iressed by the language of the section, was to prohibit a dividend of the capital among the stockholders, and to preserve the same intact as a fund for the payment of creditors and security of dealers. It follows that the dividend in the present case was illegal, and that the stockholders receiving the same are liable to the creditors for the amount by them respectively received. The next question is, how is this to be recovered from the stockholders? Their liability is to the creditors of the company.

It is clear that no one creditor of the company can maintain an action against an individual stockholder, for the reason that the liability created by statute is to the. creditors generally, and not to individual creditors, thus creating a liability to the creditors jointly. Again: a creditor, if permitted individually

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to sue the separate stockholders, might institute actions against each, although his demand amounted to far less than the aggregate liability, and he would continue a creditor until he had obtained satisfaction of his debt, and could obtain judgment in all the actions. Again: in equity this liability inures to the creditors in proportion to the amount of their debts respectively.

The maxim “ that equality among creditors is equity,” is applicable to the case. A court of law cannot, in a joint action by all the creditors, work out this equity and do justice between the parties.

This confers jurisdiction in equity, upon the ground that there is no adequate remedy at law.

The plaintiffs, as receivers, are trustees for all the creditors, and the appropriate parties to prosecute in their behalf, thus avoiding the troublesome inquiry as to who are creditors, in the proceeding to collect from the stockholders the several amounts each is liable to pay. All the stockholders who are liable may, and should, be included as defendants in the same action. There is no difficulty in determining the amount each is to pay, upon the trial of the cause; and in case the whole amount of the liability is not required for the payment of the debts of the company, the precise amount each is to pay can be determined in the action. This course of proceeding is also necessary 'to prevent multiplicity of actions, as there are several hundreds of stockholders.

The above views dispose of the case as to the stockholders. The creditors insist that they are not proper parties to the action against the stockholders, and that, upon this ground, they are entitled to judgment upon the demurrer. Equity having the power to enforce payment from the stockholders, and an action having been instituted in the proper mode for that purpose, which, in its result, will place the fund in the possession of the court for distribution among the creditors, it is the duty of the court to protect the stockholders from being harassed by other actions instituted to enforce the same liability. This can only be done by restraining such actions. To enable the court effectually to. do this, those creditors who

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have instituted such suits, and those who threaten to do so, are proper parties to the action.

The judgment appealed from should be affirmed.

All the judges concurred.

Judgment affirmed, with costs.

Cases cited