Leighton v. Leighton Lea Ass'n

the association for $216.75; the action having been begun October 20, 1902. An execution was issued on that judgment, but was returned wholly unsatisfied, and the plaintiff has since become the owner of that judgment by assignment, and he now brings this action upon these two judgments, the deficiency judgment in the mortgage foreclosure action of $26,077.70, and the judgment of $216.75 recovered on the promissory note, made by the association as above stated, and plaintiff’s contention is that as a creditor he has the same right that the association would have to bring the action against all the stockholders who had not paid their stock subscriptions in full, and also that he has a right to bring the action against all the stockholders and members of the association, including those who had paid in full and those who had not, to enforce a statutory liability as against all stockholders of the association to compel them to contribute to the payment of its debts.

Corporations of the character of the Leighton Lea Association, organized under chapter 122 of the Laws of 1851, have certain powers, which are plainly pointed out by statute, and they were incorporated in the articles of association heretofore quoted, and, by the act of 1851, corporations organized under it had authority to accumulate a fund for the purchase of real estate, and to pay off incumbrances thereon. They were given no express power to go out and purchase tracts of land and give long-term mortgages to secure the purchase price, and, so far as the mortgage foreclosure deficiency judgment is concerned, I think the plaintiff cannot recover against any of the defendants.

[1, 2] In the first place, all during the transaction of the giving of the mortgage by the association to Kate B. Leighton as executrix, down until the time it was foreclosed and the deficiency judgment obtained, she and her son, this plaintiff, perfectly understood the plans of the association, and that members were joining it with the understanding that, when lands were deeded to them and they were paid for in full, their deeds would be free and clear of any lien against said lands held by this plaintiff, or Kate B. Leighton, and they acquiesced in that manner of doing business, taking moneys that were paid for the lots and releasing them from the lien of the mortgage, and they are in no position to question the manner of doing business adopted by the association, as particularly stated in its articles of association, of all of which they had full knowledge. The mortgagee and her assigns and this plaintiff derived great benefit from the manner in which this association was transacting its business, and acquiesced in it, and they are clearly estopped from now bringing it into question. Not only is the plaintiff estopped from questioning the validity of the acts of the association in the manner in which it did business, but, when the statute of limitations was pleaded, plaintiff cannot recover for unpaid stock subscriptions and dues, where no payments had been made thereon within six years prior to the commencement of this action. The association could not recover for unpaid stock subscriptions that had been due more than six years when no payments had been made thereon, and, if the association was thus barred by the six-year statute of limitations, the plaintiff as its

creditor certainly would be, as Mr. Justice Sutherland well held on a former trial of this action.

But it seems to me that a greater difficulty than either the principle of estoppel or the six-year statute of limitations confronts the plaintiff.

[3] Section 5 of chapter 122 of the Laws of 1851, under which the Leighton Lea Association was incorporated, reads as follows:

“All corporations formed under this act shall have power to borrow money for temporary purposes not inconsistent with the objects of their organization ; but no loan for such purposes shall have a. longer duration than two years, nor shall such indebtedness exceed at any one time one-fourth of the aggregate amount paid in and received.”

Plaintiff seeks to recover here under section 11 of that act, which provides that:

“All shareholders of any association formed under this act shall be individually liable to the creditors of the association to an amount equal to the amount of stock held by them respectively for all debts contracted by such association.”

And also under section 7 of that act, which provides for the liability of the holder of shares even though they had been redeemed.

But these two sections are not conclusive. The entire act must be considered, and section 5 above quoted distinctly states that the power of the association to borrow money is for temporary purposes, and that no such loan shall have a longer duration than two years. The loan in question, the $60,000 mortgage given by the association to plaintiff’s mother, which mortgage was subsequently foreclosed with the resultant large deficiency judgment, now owned by plaintiff, and which he seeks to collect out of the stockholders of the association, was clearly not a loan for temporary purposes, and it ran for ten years instead of two as provided by statute, so the mortgage loan was one which the Leighton Lea Association had no right to make, and the doctrine of ultra vires must be deemed effectual as against plaintiff’s contention here in so far as his claim under the deficiency judgment is concerned.

This association was the creature of the statute, with its powers clearly defined. There was no power given it by statute to incur any indebtedness, except such as is pointed out in section 5 of the act under which the association was incorporated, and it would not be proper to read into the statute an authority to incur any indebtedness other than that authorized by section 5, and that would be an indebtedness merely for temporary purposes, and that it should not have a duration of more than two years. This mortgage loan ran for ten years, and it was clearly not for temporary purposes. The association had no right to give any such mortgage. It had a right to accumulate a fund as authorized by statute, and invest that fund thus accumulated in real property; but when the association went out and purchased lands when it had no fund accumulated with which to pay for them, but instead gave a large purchase-money mortgage running ten years, as security for the payment, it exceeded its powers, for every act of a corporation of this character which is not authorized by the statute

creating it would be deemed to be prohibited. Morawetz on Corporations, § 648; Leighton v. Knapp (Sup.) 115 N. Y. Supp. 1040 ; Endlich on Building Ass’ns, §§ 175-299.

So it must be held that the doctrine of ultra vires applies, that the Leighton Lea Association had no right or authority to give the mortgage in question, and that the deficiency judgment obtained in the action brought to foreclose it is not an indebtedness for which shareholders of the association are liable. Under the statute they are made liable for certain debts, but only those that the association was authorized to incur. The association had. the right to borrow money for temporary purposes, the loan to have a duration not exceeding two years, and on such an indebtedness of the association the shareholders would undoubtedly be individually liable; but they cannot be held liable on an indebtedness of the association which it had no right to incur, and the stockholders have the right to ask that the doctrine of ultra vires be applied to the end that they may not be made personally liable for an indebtedness incurred by the association represented by the bond and mortgage, which indebtedness the association had no power to incur, and being secured by a bond and mortgage which it had no right to make and execute. Close v. Potter, 155 N. Y. 145 , 49 N. E. 686 ; Leighton v. Leighton Lea Association (Sup.) 130 N. Y. Supp. 935 ; Ward v. Joslin, 186 U. S. 142 , 22 Sup. Ct. 807 , 46 L. Ed. 1093 .

The plaintiff seeks to enforce any claim that the Leighton Lea Association had against any of the defendants at the time the action was commenced, for unpaid stock subscriptions and dues, and have such amounts applied upon his deficiency judgment. I am compelled to disagree with plaintiff in this contention, for the reason that he has no right to collect unpaid subscriptions or dues, if there were any, and apply them on an indebtedness that the association had no right to incur, and, his deficiency judgment having come by way of such an indebtedness, he has no more right to collect unpaid dues on stock subscriptions and apply the moneys received on that indebtedness than he would have in the first instance to compel the various stockholders to contribute to the payment of this unlawful debt The indebtedness being one that the association had no power to contract, and plaintiff’s judgment having come from such an indebtedness, he is not entitled to collect it out of any members or stockholders of the association, either by way of statutory or common-law liability, so I think, as to plaintiff’s first cause of action based upon the deficiency judgment above referred to, he is precluded from recovering, not only because he is estopped from questioning the manner in which the association conducted its business, at all times with his full knowledge and consent, but also because he is seeking to enforce a liability against the shareholders of the association under an indebtedness which it never had a right to incur.

It therefore must be held that as to the first cause of action under the deficiency judgment plaintiff’s complaint must be dismissed as to each and every defendant.

[4] As to plaintiff’s second cause of action, wherein he seeks to have the members of the association contribute to the payment of his claim under the. promissory note judgment, he is in a better position to ask for relief, for that was an indebtedness clearly within the power of the association to contract. The association borrowed money and gave its note therefor payable in 30 days, and that very fact justifies the conclusion that the loan was for temporary purposes.

[5] At the time this note was given, the amendment to the stock corporation law (Laws 1895, c. 672, § 3, subdiv. 2) was in effect. Under the stock corporation law (Laws 1890, c. 563), a stock corporation was defined as a corporation having a capital stock divided into shares, but under the amendment of 1895 (Laws 1895, c. 672) the stock corporation lay/ was amended so that the definition of a stock corporation read as follows:

“A Stock corporation is a corporation having a capital stock divided into shares, and which is authorized by law to distribute to the holders thereof dividends or shares of the surplus profits of the corporation. A corporation is not a stock corporation because of having issued certificates called certificates of stock, but which are in fact merely certificates of membership, and which is not authorized by law to distribute to its members any dividends or share of profits arising from the operations of the corporation.”

That amendment had been passed several years previously to the date of the Adlington note in question and was in effect when that note was given, and I am bound to follow the conclusions of the Appellate Division in this department (Leighton v. Leighton Lea Association et al., 130 N. Y. Supp. 935 ), where in an opinion Mr. Justice Kruse, writing for the court, says:

“I am of the opinion that, as regards the promissory note judgment, the association must be classed as a nonstock corporation.”

That being so, the plaintiff was right in not bringing his action against stockholders until the judgment on the note against the corporation had been recovered and an execution thereon had been returned unsatisfied. He was obliged first to exhaust his remedy against the association, and then proceed against the stockholders. National Bank v. Dillingham, 147 N. Y. 603 , 42 N. E. 338 , 49 Am. St. Rep. 692 .

The statute of limitations, in so far as the promissory note judgment was concerned, did not begin to run until the execution was returned unsatisfied, and that was the l'3th day of August, 1906.

[6] The Leighton Lea Association, as well as all corporations organized under the act of 1851, above referred to, was under the control of the banking department (Laws 1875, c. 564), and must be deemed to have been a moneyed corporation, and the three-year statute of limitations would apply, and as this action was concededly brought within three years after the return of the execution, on the promissory note judgment, the action in that regard must be deemed to have been brought seasonably.

Inasmuch as the promissory note indebtedness was for temporary purposes only and had a duration of less than two years, to wit, 30

days, it was an indebtedness which the association had a right to incur. Laws 1851, c. 122, § 5.

It must be held that all of the defendants who were stockholders in the association at the time that indebtedness was incurred—that is, at the time the note was executed—are individually liable for the judgment recovered on that promissory note, including interest thereon, but that indebtedness should be apportioned ratably among such members in proportion to the number of shares held by each, but not exceeding the par value of the stock, on the basis of $600 per share.

Let judgment be entered accordingly.