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Van Cott v. Van Brunt

2 Abb. N. Cas. 283 Court N. Y. Supreme Court, Second Department ; Special Term, Brooklyn, English

Delivered by Gilbebt, J.

Contents

Majority

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VAN COTT v. VAN BRUNT.
N. Y. Supreme Court, Second Department ; Special Term, Brooklyn,
March, 1877.

Headnote

Corporation.— Credit Mobilier.— Contract.— Liability of Directors for transactions in their own interest.—Liability of Stockholders.
Although it may be conceded to be lawful, under the general railroad law, for the company to issue stock and receive in payment therefor, in cash, money’s worth, in material and labor, subserving the lawful objects of the corporation, yet if stock, in whatever way issued, is not actually paid for, its holder is individually liable, through a receiver, to the creditors of the corporation, for the debts and liabilities of the company, to an amount equal to the amount unpaid.
The acceptance and holding of the certificate of stock subjects the holder to the liabilities of a stockholder.[2]
The capital stock is a trust fund for the the payment of the corpo
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rate debts; and the directors will not be permitted to waste it, by receiving, for stock issued without subscription, payment in the form of property, or services, at more than a sum which a faithful trustee, in the honest exercise of his judgment, might deem the just value thereof.
'Directors of a railroad corporation issued stock to one or more of their number under an arrangement by Which it was to be received in payment for building the road, under a contract nominally made with a third person. Held, that upon evidence that the construction was worth far less than the nominal value of the stock, &c., the directors profiting by the transaction were chargeable with the nominal amount of the stock held by them, and were to be credited only with sums actually paid, and the value of the property actually received by the corporation.[2]
A receiver of the corporation represents both it and its creditors, and can maintain an action to recover from the directors in such case. The statute of limitations, though it may have barred creditors from sueing the corporation, does not, after the corporation has suffered judgment without pleading the statute, bar the receiver from forthwith recovering against the directors.
The judgment against the corporation in the action in which the receiver was appointed, is evidence of the corporate indebtedness in the receiver’s action against the directors.
Such an action may be maintained against the stockholders and directors, wrongdoers, without joining the other stockholders.
Trial by the court.
David O. Van Cott, receiver of the Hudson Avenue Railroad Co., brought this action against James A. Van Brunt and Henry L. Slaght, as directors and holders of unpaid stock of the insolvent company. The grounds of relief which plaintiff claimed were established upon the trial were as follows:
The company was organized in 1867 under the
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general railroad act, the capital stock being fixed by the articles of assoóiation at $200,000, in shares of $100 each. The defendants were subscribers to the articles of association, each being a subscriber for two of the original forty-two shares, upon which ten per cent., amounting to $420, was paid in cash.
The defendant Van Brunt was one of the directors and president of the company during its whole corporate existence, and the defendant Slaght was a director from January, 1868.
Shortly after the organization of the company, a contract was made and executed by the president and secretary, in pursuance of a resolution of the board of directors, with one Cowperthwaite, to build and equip about a mile of the proposed road for $50,000 in stock and $75,000 in bonds of the company, and at the same time, or shortly afterwards, Cowperthwaite assigned the contract to the defendant, James A. Van Brunt. It appeared that Cowperthwaite had not the means, and did not expect to build the road, but took the contract with the view of assigning it to Van Brunt. Van Brunt then associated with himself the defendant Slaght and several other persons, and they formed an association which was to furnish the funds necessary to perform the contract and divide amongst themselves the $125,000 in stock and bonds which was the consideration to be paid by the company, as provided for in the contract with Cowperthwaite.
The stock and bonds were accordingly issued, and Van Brunt and his associates constructed about a mile of road at an expense, according to the evidence, probably not exceeding $20,000.
The rest of the proposed road was not constructed, and the company discontinued its business after about a year.
It appeared by the books of the company that over $100,000 of stock of the company and $85,000 of bonds
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of the company were issued, and that no payments therefor were made to the company in cash, except twenty-five per cent, on the first forty-two shares of stock.
Certificates of stock to a larger amount were issued to each of the defendants under the Cowperthwaite contract and otherwise, which still stand in their names.
No subscription book for stock of the company was ever opened.
The plaintiff was appointed a receiver under a decree of sequestration of the company, and brought this action for the benefit of the creditors of the company to compel the defendants, as holders of unpaid stock, to pay up the amount unpaid upon it, and to hold them liable as directors for misappropriating and wasting the stock and bonds and property of the company.
The pleadings were as follows:
The complaint, after stating in the usual form the incorporation of the Hudson Avenue ft. B. Co., with power to construct the track in question, and the appointment of plaintiff as a receiver, and the judgment dissolving the corporation and sequestrating its stock and property, proceeded as follows:
“ That by the articles of association the capital stock of said corporation was fixed at $200,000 ; that is to say, 2000 shares of $100 each.
“ That at the time when the said articles of association were filed, only 42 shares were subscribed for, and as it appears by the affidavits annexed thereto ten per. cent were paid thereon, amounting to $420.
“That it is claimed by defendants and appears by the books that the balance upon said 42 shares was subsequently called for and paid; but whether such is truly the case plaintiff is otherwise uninformed, but charges upon information and belief and so far as he can judge from the books of the corporation, that none of the prescribed capital of $200,000 was ever paid in
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beyond the aforesaid $420, or possibly the aforesaid $4,200.
“ That during the whole existence of the corporation, from 1867 up to 1874 or 1875, the defendant Van Brunt was president and a director and principal manager of said corporation, and the said Slaght director during the year 1868.
“ That the management of the corporation from the commencement has been fraudulent and illegal towards the corporation itself and its creditors.
“ That shortly after the organization of the corporation, 1,000 shares of the company’s stock were issued to said Van Brunt to pay claims against the company prior to its organization, meaning, as plaintiff alleges on information and belief, to pay the persons named as corporators in the original act, of whom the said Van Brunt was one, or other illegal claims.
“ Plaintiff shows further, upon information and belief that the road was built under an illegal and fraudulent arrangement, by which stock and bonds of the company to a large amount ($339,000 or thereabouts) were issued to the contractor or to the said Van Brunt, as and for the contract price for making the road, whilst there was an agreement between the said contractor and the said Van Brunt and others by which it was to be built for a much smaller price, they to furnish the money and the contractor to transfer to them his right to the said bonds and stocks issued for a much larger sum than the real contract price.
“ And plaintiff shows that as nearly as can be ascertained from the books of the company about 700 shares of the capital stock of the company have been issued without any actual bona fide payment thereon or therefor, and that bonds of the company to the amount of $95,000 or thereabouts have been also issued, many of them at fifty cents on a dollar or less, and a considerable amount, as plaintiff alleges on information and be
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lief, upon the fraudulent and illegal contract above mentioned.
“ Plaintiff further shows and charges upon informa- ■ tion and belief, that the said Van Brunt is and has been from the year 1867 to the time of the dissolution of the company, a stockholder of the company, holding stock of said company to a large amount, as nearly as he can ascertain, 387 shares, amounting at par value to $38,700, the whole of which is unpaid.
“ That the said Slaght also holds and has held since May 31, 1867, 139 shares, and since August 13, 1868, 137 shares more, being altogether 376 shares, amounting at the par value, as provided by the articles of association, to $37,600, and plaintiff charges upon information and belief, that the said Slaght never actually, and bona fide paid up any part of the amount of said stock.
“And plaintiff alleges that there are creditors of the said company to a large amount ($100,000 or thereabouts as he is informed and believes), and that so far as he can ascertain there are little available assets, and that the payment of the amount unpaid upon the capital stock of the company will be necessary in order to pay the creditors of the company.
“Plaintiff shows that there may be other solvent stockholders who have not paid up the amount of the stock held by them, but he is not informed sufficiently in relation thereof to make them parties to this action.
“ Plaintiff further shows that during the years 1867 and 1868, and thence up to the time of the disolution of the company, the said Van Brunt was a director as well as president of said company, and that the defendant Slaght was a director during the year 1868, from about January 1, 1868, to January 1, 1869, and that during the time the said Van Brunt and Slaght severally were such directors debts were incurred and owing by the said corporation without any dissent by them or either of them as such directors, to an amount far ex
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ceeding three times the amount of capital stock of said company actually paid in. That plaintiff is unable to state with certainty the amount of paid-up capital or of the debts incurred, but believes that the amount of debts incurred and owing whilst the said defendants were directors as aforesaid exceeded three times the amount of paid-up capital by more than $80,000.
“Wherefore the plaintiff prays that an account may be taken under the order and direction of the court of the assets of said corporation and of the debts and liabilities thereof, and of the stock held by the defendants respectively and the amounts unpaid thereon, and also of the amount of the paid-up capital of the company and of the debts incurred and owing by the company during the time that the said Van Brunt and the said Slaght were directors as aforesaid,
“And that the defendants as stockholders may be adjudged and decreed and compelled to pay up the amount unpaid upon the stock of said corporation held by them, or so much as may be necessary to pay the debts of said company for which said stockholders are liable.
“And that the said Van Brunt and Slaght, as directors, may be adjudged and compelled to pay whatever may be ascertained to have been the excess of debts of the corporation incurred whilst they were directors without their dissent expressed according to law and above three times the amount of capital stock actually paid up.
“ And that plaintiff have judgment therefor and for the costs of this action and for such further or other relief as may be just.”
The answer of Van Brunt, for a first defense, putin issue the judgment of dissolution and receivership, and averred that if such was had it was irregular and void ;
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averred that bonds of the company were issued to the amount of $85,800 ; that the corporate debts were less than $85,000, of which $85,000 was secured by mortgage; that the assets were large; and admitted the other allegations except the amount of stock alleged to beheld by him.
For a second defense, he alleged that Slaght and fourteen other persons named were co-directors with him, stating their residences.
For a third defense, that certain persons named were stockholders, stating the residences of all except those alleged to be dead.
For a fourth defense, that the corporate indebtedness alleged in the complaint was incurred in or about 1867, and did not accrue within six years before the commencement of this action.
The answer of Slaght put in issue the incorporation, the legislative authority to extend the road, the appointment of plaintiff as receiver, the judgment of dissolution and sequestration, the amount of capital stock, the alleged issue of stock to' pay illegal claims, the building of the road under an illegal contract, the amount due to creditors, the incurring of debts at any meeting when he was present without his dissent, and that the debts exceeded paid-up capital. It also alleged that the company was never legally incorporated, that the ten per cent, was never paid, and no true certificate of payment made, and that, by reason thereof, the stock and bonds issued were void. That defendant paid in good faith several thousand dollars for two certificates of stock which he only recently discovered to be thus void. That the stock sold by him was fully paid up. That, if the company was duly incorporated, defendant was a creditor for over $20,000.' That he never attended but one meeting of the board,- and thereafter declined to act, and never since has been
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a director. That such meeting was illegal, and no indebtedness incurred thereat.
The answer also pleaded the statute of limitations,, and alleged th,at the receiver had no power to sue, and had not given the notice required by 2 P. 8 . 469, §§ 70-72.
It also alleged a misjoinder of actions and defects of parties in not joining others named who were stockholders and directors respectively.
The effect of the evidence sufficiently appears in the opinion.
The defendant moved for a nonsuit, which was denied, and the court found for plaintiff.
R. D. Benedict, for defendant
Insisted that no cause of action was shown, because there was no evidence that any amount was unpaid on the stock ofSlaght; that there was misjoinder of parties ; that defendant was entitled to a jury. ■ trial; that the statutory notice was an essential pre-requisite to an action by the receiver ; that the evidence showed' that Slaght had no connection with any fraudulent contract, but took, by transfer, full-paid stock ; that in any other •view the stock was void, and not the foundation of any liability ; that the provision of the Revised Statutes as to the liability of directors when debts exceed three times the capital paid in does not apply to railroad corporations, but was repealed; that there was a defect of parties in not bringing in any other stockholders.
Benjamin G. Hitchings, for plaintiff, in reply,
Cited, on defendants’ common law liability as stockholders : Angell & Ames on Corporations, §§ 599, 600, et seq. ; Slee v. Bloom, 19 Johns. 456 ; 20 Id. 669 ; Briggs v. Penniman, 8 Cow. 387 ; Morgan v. N. Y. & Albany R. R., 10 Paige, 290 ; Bogardus v. Rosendale, &c., Co., 3 Seld. 147 ; Wood v. Dummer, 3 Mason C. C. 308 ; Dayton v. Borst, 31 N. Y. 435 . On statutory
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liability : L. 1854, 614, c. 282, § 10 ; 1 R. S. part 1, c. 18, tit. 3, § 5; 2 R. S. part 3, c. 8, tit. 4, §§ 45-49. On joining in one suit stockholders and directors : Brinkerhoff v. Brown, 6 Johns. Ch. 139 ; Tallmadge v. Fishkill Iron Co., 4 Barb. 383 . On taking of stock, using and voting upon it being equivalent to subscription therefor: Upton v. Tribilcock, 1 Otto, 45. On question whether the stock -was paid-up stock: Tallmadge v. Fishkill Iron Co., supra ; Boynton v. Hatch, 47 N. Y. 225 ; Schenck v. Andrews, 57 Id. 146. On common law liability as directors : Robinson v. Smith, 3 Paige, 222 ; Cunningham v. Pell, 5 Id. 607; Bruff v. Mali, 36 N. Y. 200 -205. On statutory liability as directors: 1 R. S. part 1, c. 18, tit. 4, § 3; 2 R. S. part 3, c. 18, tit. 4, art. 2, § 33. On power of receiver to maintain suit: L. 1852, c. 71; L. 1860, c. 403 ; 2 R. S. part 3, c. 8, tit. 4, § 67. On suing one or more or all directors for misconduct or breach of duty: Cunningham v. Pell, supra; Mayne v. Griswold, 3 Sandf. 463 ; Wilson v. Moore, 1 Mylne & Keen, 127-142. On the objection that all the stockholders who had not paid up should be made parties : Cooper Equity Pleading, 39-40; Wood v. Dummer, supra, and cases cited; Code, § 148; Durand v. Hankerson, 39 N. Y. 291 ; Biscoe v. The Undertakers of the Land Bank, 2 Eq. Cas. Abridged, 166, pl. 7, cited in Good v. Blewitt, 13 Ves. 400; Aspinwall v. Torrance, 1 Lans. 381 ; Bartlett v. Drew, 57 N. Y. 587 .

I am inclined to think that the liability of directors of railroad corporations by virtue of part 1, c. 18, tit. 4, § 3, of the Revised Statutes (1 R. S. 602), has been taken away by section 16 of chapter 282 of the laws of 1843 (3 Edm. Stat. 645-6).[2] But as I shall put the decision of this case upon other grounds, I shall not stop to discuss that question.

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There is no doubt respecting the liability of the defendants to pay the amount unpaid upon their formal subscriptions to the capital stock. While it is not so clear that a similar liability rests upon them in respect to the stock issued pursuant to the contract with Cowperthwaite, and held by them, yet I think such liability does exist. The general railroad act does not expressly authorize, nor does it prohibit the receiving anything in payment for stock, except money. I suppose it would not be violation of that act to issue stock, and receive, in payment therefor, money’s worth in the form of materials and labor in constructing the railroad, in merchandise or other chattels for its equipment, or in any other form which would subserve the lawful objects of the corporation (Ang. & Ames Corp. 10 Ed. §517, N. B.), But in whatever way the stock is acquired, whether upon an ordinary subscription, payable in money, or upon a contract with the corporation, whereby payment for the stock was to be made in another mode, unless the stock has been actually paid for, the holder of it is individually liable to the creditors of the corporation to an amount equal to the amount unpaid on the stock held by him, for all the debts and liabilities of the company, until the whole amount of the capital stock, so held by him, shall have been paid to the company (Gen. R. R. Act, § 10, as amended by § 16, c. 28, Laws 1854, before cited). The acceptance and holding of a certificate of the stock subjects the holder to the liabilities of a stockholder.

The capital stock of a corporation is a trust fund for the payment of its debts, and the directors of the corporation, who arre the trustees of the fund, will not be permitted to waste it, either directly, by releasing subscribers from the obligations created by their subscriptions, or by receiving payment for stock issued without a subscription in the form of property or services, at more than a sum which a faithful trustee in the

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honest exercise of his judgment might deem the just value thereof (Story Eq. Jur. § 1252; Upton v. Tribilcock, 1 Otto, 45, cases below). It has been held in this State, that where a corporation was expressly-authorized by statute, to issue stock in payment for property purchased, if the purchase of the property and the issue of the stock were fraudulent, and an evasion of the law requiring actual payment of the capital stock in money or its equivalent in value, the personal liability of the original stockholders remained (Boynton v. Hatch, 47 N. Y. 225 ; Schenck v. Andrews, 57 Id. 133).

A fortiori the rule must be applied to directors of a corporation who, without any express authority, make contracts on behalf of the corporation like that made with Cowperthwaite, and then immediately take all the benefits of them to themselves and their associates by assignment. By means of the contract with Cowperthwaite, the defendants and their associates received in stock of the corporation $75,000, and bonds thereof amounting to $50,000; and the corporation received therefor what cost those persons not more than one-fourth of those sums.

There is no principle of law or equity on which such a transaction can be sanctioned. The defendants must be charged with the nominal amount of stock held by them, and credited only with the sums paid upon their subscriptions, and the value of the property so actually received by the corporation on account of the stock issued pursuant to the contract with Cowperthwaite.

The receiver represents the corporation and its creditors, and is, I think entitled to maintain this action.

The statute of limitations did not bar the debt, but only the remedy against the corporation. As the corporation did not plead the statute, but allowed judgment to be received against it, such judgment is con-

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elusive evidence that the original debt still exists. Such original debt was sufficiently proved in this action, it being for horses sold to the corporation.

An interlocutory decree will be entered[2] in accordance with the views expressed, and a clause will be inserted therein, referring it to John Greenwood, Esq., to take and state the account between the parties, and to ascertain and report the debts of the corporation, which have been presented to the receiver, and against which the statute of limitations had not run when the action was commenced. All other questions are reserved until the coming in and confirmation of his report.

* For the practice in respect to interlocutory judgments under the new Code of Civil Procedure, see sections 1333, 1330, 1331.

Footnotes

  1. * Compare Excelsior Petrol. Co. v. Lacey, 63 N. Y. 422 .

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