Osgood v. Laytin — 5 Abb. Pr. 1

Majority

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OSGOOD against LAYTIN.

Court of Appeals ;

June Term, 1867.

Headnote

Pleading.—Complaint in Action against Trustees of Corporation Making Dividend out of Capital.—Parties.—Action by Receiver.

Where an insurance company, organized under the general law applicable to such companies, being insolvent, distributes its capital among its stockholders, thus placing it beyond the reach of its creditors, it acts in fraud of its creditors, and such 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.

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.

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Appeal from a judgment on demurrer.

This was an action in which Gr. A. Osgood and Cyrus Curtiss, receivers of the Columbian Insurance Company, were plaintiffs (and respondents), and William Laytin, and many others, were defendants (and appellants). The action was brought for the purpose of recovering back dividends which the defendants, as stockholders, had received out of the capital, and of restraining creditors from prosecuting individual actions for the same purpose.

The Columbian Insurance Company was organized as an insurance company by virtue of of the general act authorizing the organization of such companies.

The company was dissolved by the judgment of the supreme court in February, 1863, and the plaintiffs were subsequently appointed receivers, as successors o'f the receivers originally appointed. The plaintiffs duly qualified, and gave the requisite security. In July, 1866, the company, being insolvent, paid a dividend of three and one-half per cent, upon its stock to the defendants, who were stockholders of the company. Some of the defendants, who were creditors of the company, commenced actions individually against several of the stockholders separately, for the purpose of recovering from them the amount of the dividend received by them respectively. Whereupon the plaintiffs commenced this action against all the stockholders of the company who had received dividends, and also against the creditors of the company who had commenced actions against the stockholders, demanding judgment against the stockholders severally for the amount of the dividends respectively received, and a judgment against the creditors, perpetually restraining them against the prosecution of suits against the stockholders of the company for the collection of the dividends received.

'The complaint was in the following form :

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[Title of the cause.]

“The plaintiff's complain and allege :

“I. That the Columbian Insurance Company was a corporation, duly organized under the general laws of the State of Hew York, in or about August, 1857,

“II. That on the 23rd day of January, 18GG [certain other persons, naming them] were duly appoin ted receivers of all the property and effects of the said Columbian Insurance Company, by the supreme court of the State of Hew York, at a special term thereof,' held in the city and county of blew York, upon proceedings duly taken therefor in an action therein pending, between [a third person, naming him] as plaintiff, and the said company as defendant, in which action judgment dissolving the company was duly rendered on the 2nd of February, 1868.

“III. That afterwards, on the 24th day of January, 1836, the said [naming both of the original receivers] duly qualified as such receivers, and filed all the security required of them by the said court, with the clerk of the city and county of Hew York, and were duly vested with all the property and effects of said corporation.

“ IY. That on the 2nd day of March, 1866, the said supreme court duly discharged the said [naming one of the original receivers], at his own request, from his receivership, and ordered that the said [naming the other] should continue as the sole receiver of the said company.

“Y. That on the 11th day of April, 1866, George A. Osgood [one of the plaintiffs] was duly appointed a receiver of all the property and effects of the said Columbian Insurance Company, by the said supreme court, at a special term thereof, held in said city and county of Hew York, to act in conjunction with the said [naming the remaining original receiver],

“YI. That afterwards, on the 13th day of Am il, 186-3, the said Osgood duly qualified as such receiver, and filed all the security required of him by the said court, with the clerk of the city and county of Hew York.

“ YII. That on the 23th day of June, 1866, the said [naming the original receiver remaining] died, and on the

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2nd day of July, 1868, Tby an order of the said supreme court, at a special term thereof, held in said city and county of Mew York, Cyrus Curtiss was duly appointed a receiver of all the property and effects of the said Columbian Insurance Company, to act in conjunction with the said Osgood.

“ Till. That afterwards, and on the said 2nd day of July, 1866, the said Curtiss duly qualified as such receiver, and filed all the security required of him by the said court, with the clerk of the city and county of Mew York, and the plaintiffs are now duly vested with the title to all the property and effects of the said corporation.

“ IX. That on or about the 2nd day of January, 1868, the said Columbian Insurance Company paid a dividend upon the capital stock of the company to each of the stockholders, defendants herein, to the amount set opposite their names respectively, in the schedule hereto annexed, marked ‘A,’ which is made a part hereof.

“X. That all the defendants except [naming certain individuals who were joined because they were sueing as creditors] were, at the time said dividend was paid, holders of stock in the said company, and each of them respectively then owned the number of shares of the par value of one hundred dollars each, stated in the schedule hereto annexed, marked 'A,’ and received the am :unt of dividend upon said stock therein stated, at the time therein stated. That the defendants comprise all the stockholders of said company, except a few who did not receive said dividend.

“XI. That at the time of the payment of the said dividends, the said Columbian Insurance Company was insolvent, and no profits had keen earned upon its capital, but such dividends were paid en irely out of the capital of the company, which was then greatly impaired, so as to be insufficient for the payment of the company’s debts without the return of such dividend: and shortly afterward, the proceedings above mentioned were taken, under which the plaintiffs were appointed receivers of the said company.

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“ XII. That the defendants [naming those who were excepted in paragraph X.] claim to "be creditors of the said company, and as such, have commenced actions against a lavge number of the stockholders thereof, who are among the defendants, to recover the dividends received by them as aforesaid, and threaten to sue in like manner all the stockholders who received snch dividends.

“XIII. That there are many other creditors of the said company who threaten to bring similar actions against its stockholders, and that such proceedings, if carried on, will result in a great multiplicity of suits, probably several hundreds in number.

“Wherefore the plaintiffs demand judgment:

“ I. That each of the defendants named in the schedule hereto annexed, marked ‘A/ pay to the plaintiffs the sum received by him on account of divdends from the Columbian Insurance Company as aforesaid, as set forth in schedule 'A,’ hereunto annexed, together with interest thereon from the day upon which he -received the same as aforesaid.

“ II. That the defendants [naming those mentioned in paragraph XII.], and such other creditors as may hereafter bring actions of a like nature, be restrained by injunction from bringing any actions against any of the other defendants above named, or against any other stockholder of the Columbian Insurance Company, for the recovery of dividends received by them from the said company, and from proceeding in any such action already "brought.

“ III. That each and every one cf the other defendants be restrained by injunction from paying, or securing to be paid, any dividend received by him from the Columbian Insurance Company to any person other than the plaintiffs.”

Several of the defendants demurred to the complaint ; the stockholders upon the ground that the tacts stated constituted no cause of action; the creditors, upon the same ground, and also that the plaintiffs had

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not legal capacity to sue; that there was a defect of parties defendant, and that several causes of action were improperly united.

Judgment was given for the plaintiffs upon the demurrers at special term, which was affirmed on appeal at the general term of the supreme court (see 48 Barb., 463 ); from which the defendants appealed to this court.

D. D. Field, for the plaintiffs, respondents.

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. (1.) A receiver is an officer appointed by the court to administer the assets of a legally incompetent corporation (Smith on Rec.; Hutchinson v. Massarene, 2 Ball & Beatty, 55 ; Davis v. Malborough, 2 Swanst., 118; Curtis v. Leavitt, 15 N. Y., 9 ). (2.) He is a trustee of the common interests of all the claimants, and must administer impartially those assets which he is bound by law to collect (In re Burke, 1 Ball & Beatty, 74). (3.) He alone is empowered by statute to collect assets of the corporation improperly disposed of (Laws of 1858, 506, ch. 314, § 2; 3 Rev. Stat., 5 ed., 226; Talmage v. Pell, 7 N. Y. [3 Seld.], 328 ; Pentz v. Hawley, 1 Barb. Ch., 122 ; Nathan v. Whitlock, 9 Paige, 152). (4.) And the receivers are by them appointment invested with all rights previously possessed by individual claimants (Edw. on Rec., 141-2, and cases there cited; Rankine v. Elliott, 16 N. Y., 377 ; affirming S. C., 14 How. Pr., 339 ). (5.) Hence, if the creditors had no legal right to enforce individual claims against the stockholders, no individual rights became merged by their appointment in the receivers.

II. The creditors had no legal right to bring separate actions against individual stockholders. (1.) The section of the act under which the individu d suits were brought by the several creditors, provides as follows: “Ho dividend shall ever be made by any company incorporated under this act, when its capital stock is impaired, or when

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the making of sucli 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” (Laws of 1849, ch. 308, § 20 ; as amended by 1 Laws of 1857, ch. 38, § 1; 4 Edm. Stat. at L., 210, § 20). (2.) The object of this section is to provide a remedy for the creditors of a company when solvent, and prevent the improper dividend of assets. (3.) It confers no right on any one creditor to sue'a stockholder. The latter is liable to the whole body of creditors, and hence any proceeding must be made in their collective name. (4.) And the section referred to, inasmuch as it indicts a penalty, is to be construed strictly, by the well known rule as to penal statutes. (5.) And the cases seemingly contra have either been overruled, or else are decisions in cases of corporations organized under other statutes (Hyde v. Lynde, 4 N. Y. [4 Comst.] 387, superseded by Laws of 1858, ch. 314; 3 Rev. Stat., 5 ed. 226; Butterworth v. O’Brien, 39 Barb., 192 ; S. C., 24 How. Pr., 438 , cited and explained, case following).

III. The receivers are not entitled, by virtue of their general powers as trustees, to recover these so-called dividends. (1.) The act under which this company was organized required the payment of the capital as a condition precedent to the transaction of business. (2.) By the terms of the statute, if the profits accruing are insufficient to liquidate the obligations contracted, the creditors have a right of resort to the capital of the company. (8.) Hence, as the stockholders are only entitled by the statute to the net profits, any division which compels a resort to the capital in order to discharge the obligations of the company, is strictly forbidden. (4.) Now the act of 18-49, in such cases, authorizes the creditors (where no receiver is appointed) to recover the dividends so paid (4 Edm. Stat. at L., 210, § 20). (5.) But that section contemplated only legal dividends, and did not create a right of action for pretended dividends appropriated from the capital stock (1 Edm. Stat, at L., 548; 1 Rev. Stat., 590, § 4. See

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1 Rev. Stat., 589, §1, as to what is “a dividend'’). (G.) Therefore, as, according to the eleventh section of the complaint, the dividend was paid out of the capital, it was concedeclly a misappropriation, and should have been sued for as such. (7.) And the specific objection here made is, that the complaint alleges that this so-called dividend was paid out of the capital stock, and yet seeks to recover as a dividend that which by its own showing was not a dividend.

IV. Nor can this complaint be sustained under the provisions of the statute authorizing receivers to recover the proceeds of the trust fund misapplied. (1.) No distinct averment of fraud ajrpears in this complaint in sup- . port of such an action and recovery (Laws of 1858, 506, ch. 314, § 2 ; 3 Rev. Stat., 5 ed., 226). (2.) Nor does it even appear that the directors who misapplied the funds have been proceeded against to no purpose, or are parties to this action. And non constat but they are entirely responsible (Curson v. African Co., Skinner, 184). (3.) So that, though fraud must be alleged and proven, and it cannot be presumed, the complaint contains no allegation that "this property was improperly disposed of,”— which was assumed to be the case in the court below.

—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 capita], and does not therefore come within the meaning of the statute. I am at a loss to discover liow 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. Laws of 1858, 506, § 1, am ng other tilings, 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

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any creditor. From tile 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 ox 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 authorize the plaintiffs to recover, by virtue of the above statute, from the stockholders, the complaint should aver an intent* in making the distiibution, 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 1837 (4 Elm. 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 c.editors 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.

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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 expressed 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 tire 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 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

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in determining the amount each is to pay, upon the trial of the canse ; 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 have instituted such suits, and those who threaten so to do, are proper parties to the action. *

The judgment appealed from should be affirmed.

All the judges concurred.

Judgment affirmed.