Marsh v. Kaye

The action was in equity, the complaint asking for equitable relief only. The plaintiff sues on behalf of himself and all other creditors of the Ladies’ Deborah Nursery & Childs’ Protectory, a corporation organized under chapter 319 of the Laws of 1848, providing for the incorporation of benevolent and charitable, scientific, and- missionary societies. The complaint alleges that the plaintiff’s assignor sold and delivered to the said corporation certain goods, wares, and merchandise, for which there remains due and

The liability of the directors of this corporation for the debts thereof is based upon section 11 of the membership corporation law, which provides:

“The directors of every membership corporation * * * shall be jointly and severally liable for any debt of the corporation contracted while they are directors, payable within one year or less from the date it was contracted, if an action for the collection thereof be brought against the corporation within one year after the debt becomes due, and an execution issued therein to the county where its office is, or where a certificate of its incorporation is filed, be returned wholly or partly unsatisfied, and if the action against the directors to recover the amount unsatisfied be commenced within one year after the return of such execution.”

The court below dismissed the complaint upon the ground that “the liability of the several directors is a primary liability, and en

By the act of 1848, under which this corporation was organized, the trustees of the corporation present at any meeting authorizing the contracting of any debt, and acquiescing in the passage of any resolution or order authorizing the same, were made jointly and severally liable for any such debt, provided a suit for the collection of the same were brought within one year after the debt became due and payable. This provision continued until the enactment of the membership corporation law, when the same liability was continued, except that a condition was imposed requiring that an action for the collection of such indebtedness must be brought against the corporation within one year after the debt became due, and an execution issued therein, returned wholly or partly unsatisfied. The liability of the directors of the corporation, however, was the same,—based upon the fact that the directors and trustees of such corporation were liable for its indebtedness contracted while they were in office. The original statute conditioned the liability upon the commencement of an action to recover the amount of the indebtedness within one year after such indebtedness was incurred. The amendment, in addition, conditioned it upon the commencement of an action against the corporation within one year after the indebtedness was incurred, and the return of an execution therein wholly or partly unsatisfied, and the commencement of an action against the directors within one year after the return of such execution unsatisfied. Thus, the principle upon which the liability of the directors existed was not different from that upon which it existed under the act of 1848, and the adjudications as to the nature of that indebtedness would apply to an indebtedness under the provisions of the general membership corporation law in question.

In Corning v. McCullough, 1 N. Y. 53 , the action was brought to recover an indebtedness due from a corporation of which the defendant was a stockholder. The law applicable in that case provided “that the stockholders of the corporation shall be jointly and severally personally liable for the payment of all debts and demands contracted by the corporation,” but that, before any suit should be commenced, judgment must be obtained against the corporation, and an execution issued thereon and returned unsatisfied. In discussing the nature of the individual liability of the stockholders, the court sny:

“If that company had been a voluntary unincorporated association of individuals, using the name of the Kossie Galena Company in its operations, his [the defendant’s] liability for its engagements would have been clear; and his defense, in point of form, to an action against him solely for a debt of the company, would have been the nonjoinder of his associates with him in the action. How has the act of incorporation in this case shielded the stockholders from that responsibility for the debts of the company, which, acting without it, they would have incurred? It is not a general, unqualified incorporation of the company, imparting to the stockholders and members composing it, as a legal consequence, an exemption from personal liability for the debts and engagements of the body corporate. It is a legislative grant of a special, qualified Corporate capacity, with adequate plenary powers for the purposes of its institution, but with the personal liability of the stockholders for the

debts the company shall contract, and the liabilities they shall incur. The statute, at the same time that it incorporates the company, and thereby enables them to contract debts in their corporate names, provides that the stockholders who compose the company, and for whose use and benefit purchases are made and debts contracted, in their corporate name shall, notwithstanding their incorporation, be jointly and severally personally liable for the payment of all debts or demands contracted by the company, and that any person having any demand against the corporation may sue any stockholder, director, or directors in any court having cognizance thereof, and recover the same, with costs. * * * If, then, the incorporation of this company does not shield or exempt its corporators and members from individual responsibility for the debts and engagements of the company, but leaves them, under the common-law liability, as partners or joint debtors for those debts and engagements, must it not follow that the defendant, McCullough, he being a stockholder in the Eossie Galena Company at the time the debts of that company to these plaintiffs was-contracted, became, on the consummation of the contract by the delivery of the goods to the company, liable for the payment of the debts contracted thereby? * * * When, therefore, the plaintiffs sold and delivered their merchandise to the company whereof the defendant was a stockholder, they acquired a right —of which nothing could devest them—to the liability of the defendant for the payment of the price of the goods; and the defendant incurred the obligation to answer and pay the debt thus contracted. The creditors were, it is true, required by the tenth section of the act of incorporation first to obtain judgment against the corporation (unless previously dissolved) for their demands, and to cause execution to be issued thereon, which was to be returned unsatisfied, in whole or in part, before they commenced their suit therefor against the individual stockholder on his personal liability. But this provision does not affect the right of the creditor to the personal liability of the stockholder for his debt, nor the obligation of the stockholder to pay the same; nor does it prevent the liability of the stockholder to the creditor from attaching and becoming perfect on the consummation of the contract of the creditor with the corporation. It simply defers the remedy by action upon that responsibility until the remedy at law against the corporation shall be exhausted, or the corporation shall have been dissolved.”

This same question was presented to the general term of the supreme court, and to the court of appeals, in Rogers v. Decker, 62 Hun, 15 , 16 N. Y. Supp. 407 ; Id., 131 N. Y. 490 , 30 N. E. 571 . This case arose under chapter 368 of the Laws of 1865, which contains a provision substantially like the section of the membership corporation law in question. Mr. Justice Barrett, in delivering the opinion of the court at general term, said:

“The trustees are, by the provision to which we have referred, made primarily liable for the debts of the company. * * * The present act of incorporation shields all the members of the company (except those who have accepted the position of trustees) from their common-law liability as joint debtors. The members who become trustees, however, are specially excepted, and, as fhe act does not exempt them from individual responsibility, their liability is original and concurrent with that of the corporation.”

Upon appeal to the court of appeals the order was affirmed, and Judge Finch, in speaking of the opinion of the general term, says:

“It shows that in such case the liability is not so much created by the statute as retained and preserved under the corporate form; that but for the latter the stockholders would have been liable as partners, and the statute continued that primary and original liability until the requisites of a corporate exemption were fully supplied. The opinion further distinguishes * * * between such a cause of action and one founded upon a statutory provision which makes officers liable for failure to file a report, or for its falsity. * * ::: In one case the original and primary liability of the members of the association, which would have existed but for the incorporation, is, as to some of them,

retained and perpetuated, notwithstanding the incorporation; in the other, that primary liability has been lost and destroyed by force of the completed incorporation, but is created anew by the statute, in the form of a penalty for specific acts of disobedience. Under the statute of 1865 no new liability is created; a primary and original obligation is continued and retained."

Thus, when this corporation was organized, the primary obligation of all its members—except those who accepted the position of trustees —for debts of the company, which would have existed but for the fact of the incorporation, was barred; but the members who became trustees, being excepted by the provisions of the statute which incorporated the company, were not exempted from this primary obligation for the debts of the company created while they were trustees. Such individual liability for such debts continued as if they had not become incorporated, and thus was original and concurrent with that of the corporation. By the enactment of the membership corporation law, which repealed the act of 1848, this provision of the act of 1848 was substantially re-enacted, another condition being added to the enforcement of the individual liability against the directors or trustees which had been reserved by the act of 1848. By section 32 of the statutory construction law (Laws 1892, c. 677), it is provided that the provisions of a law repealing a prior law, which are substantially re-enactments of provisions of the prior law, shall be considered as a continuance of such provisions of the prior law, and not as new enactments. Thus, the provision limiting the exemption from liability so that directors or trustees of a corporation should not be exempt from such liability for debts of the corporation has continued in force from the time the corporation was organized down to the time the indebtedness was incurred, and when this indebtedness was incurred the directors or trustees of this corporation became liable with the corporation for such indebtedness. That liability, however, could not be enforced until after a judgment had been obtained against the corporation, and an execution thereon returned unsatisfied in whole or in part. Such being the nature of the obligation of these defendant directors, how could that obligation be enforced? There would seem to be no doubt that each creditor of the corporation had a cause of action, jointly or severally, against the directors who occupied that position at the time the obligation was incurred by the corporation. That cause of action would be the same as a cause of action against the directors if they had been members of a voluntary association who had transacted business in the name of the association, except that the statute provides that they shall be jointly and severally liable, instead of jointly liable, as in such a case. The statute has changed this joint liability to a joint and several one, and that the legislature had such a power was expressly decided in Corning v. McCullough, supra. The relation, therefore, of these directors to a creditor, was simply the relation of joint and several debtors, from whom the creditor was entitled to recover the amount of his demand by action at law. This being so, it would seem to follow that as the plaintiff had an adequate and complete remedy at law to recover the amount of money due him from these directors, who were

It does not appear by the record that the plaintiff claimed upon the trial that he was entitled to have this action treated as an action at law to recover his demand against the directors. As no such claim was made on the trial, the court certainly was not bound, of its own-motion, to continue the action for that purpose; and, even conceding that the plaintiff would have been entitled to have the cause continued for that purpose, we would not be justified in reversing the judgment. Nor does this appeal from the order denying the plaintiff’s motion to amend the complaint present any question for review. That motion was not made until after the case had been de

We think the judge below was right in dismissing the complaint, and it follows that the judgment must be affirmed, with costs. All concur, except McLAUG-HLIN", J., dissenting.

(dissenting). The learned justice at special term at the opening of the trial, on motion of the defendants’ counsel, dismissed the complaint on “the ground that the liability of the directors is a primary liability, enforceable in an action at law, and that an action as brought and as stated in the complaint cannot be maintained in a court of equity.” Judgment was entered to this effect, and the plaintiff has appealed. My brethren have reached the conclusion that the question was correctly disposed of at special term, and that the judgment should be affirmed, but in this I cannot concur. The action is an equitable one, brought by one creditor of an insolvent corporation, in behalf of himself and all other creditors similarly situated who may become parties to the action, against the directors of the corporation, to subject them to the personal liability provided by section 11 of the membership corporation law. This provision of the statute provides that:

“The directors of every membership corporation shall be jointly and severally liable for any debt of the corporation contracted while they are directors, payable within one year or less from the date it was contracted, if an action for the collection thereof be brought against the corporation within one year after the debt becomes due, and an execution issued therein, to the county where its office is or where a certificate of its incorporation is filed, be returned wholly or partly unsatisfied; and if the action against the directors to recover the amount unsatisfied be commenced within one year after the return of such execution.”

The complaint contains a statement of the necessary facts to constitute a cause of action against the directors, except as to the recovery of a judgment against the corporation, the issue of an execution thereon, and the return of the same wholly or partly unsatisfied. But, as to such omission, it is alleged that a temporary receiver was appointed—of the corporation—in sequestration proceedings instituted by a majority of the directors, and that the order appointing him enjoined and restrained the plaintiff from commencing or prosecuting any action against the corporation for the recovery of his

The liability of the directors under the statute referred to is, in principle, analogous to the statutory liability of stockholders for the debts of a corporation under the stock corporation law (Laws 1892, c. 688, § 54). That the liability of stockholders can be enforced in this state in an equitable action is so well settled by numerous decisions that the citation of authorities is unnecessary. Equitable jurisdiction to enforce the liability of stockholders is sustained, either because the liability provided for is a fund to which all the creditors have an equal right to resort (Bank v. Dillingham, 147 N. Y. 603 , 42 N. E. 338 ; Marshall v. Sherman, 148 N. Y. 9 , 42 N. E. 419 ; Hirshfeld v. Fitzgerald, 157 N. Y. 166 ; 51 N. E. 997 ), or else to prevent a multiplicity of actions (Pfohl v. Simpson, 74 N. Y. 137 ; Bank v. Goddard, 131 N. Y. 494 , 30 N. E. 566 ; Cochran v. Opera Co., 20 Abb. N. C. 114 ; Bagley & Sewall Co. v. Ehrlicher, 8 App. Div. 583 , 40 N. Y. Supp. 922 ). 27o good reason can be assigned why equitable jurisdiction ought not to be sustained to enforce the liability of the directors in the case at bar, to prevent a multiplicity of actions, as it is in actions against stockholders to enforce their liability. In Bagley & Sewall Co. v. Ehrlicher, supra, the court held that, when many creditors of an insolvent corporation have brought separate actions at law against stockholders who are severally individually liable for its debts, the supreme court has power, at the instance of a creditor suing on behalf of himself and all other creditors similarly situated, to secure an accounting and an adjudication as to the respective liabilities of the respective stockholders, to restrain creditors who have brought individual actions from the further prosecution of their actions, to the end that the rights of all the creditors and the liabilities of all the stockholders may be adjudged in one action. And the reason assigned by the court of appeals for sustaining the exercise of equitable jurisdiction in Pfohl v. Simpson, supra, is just as applicable in this case as it was in that. The court, speaking through Judge Folger, said:

“There is nothing in the provisions of the charter of this corporation, nor in any of the decisions which have been made upon analogous acts, which is inconsistent with the exercise in this ease of the established jurisdiction of equity to forestall a multiplicity of actions by bringing all the litigation into its own grasp in one suit for a general accounting, and a complete adjustment of all the rights. It is in eases where many persons have claims, and are prosecuting or are about to prosecute them at law against one defendant or against a class of defendants or against a fund liable in equal degree to all those persons and to others, and thus there arises the fact or the probability of a mul

tiplicity of actions, that this jurisdiction of equity attaches. It matters not whether the right of action to so many arises from general principles of law, or of particular provisions of the constitution or of statute. If the right exists, and is likely to be used so as to produce the mischief, the jurisdiction of equity arises and attaches. It is recognized in Weeks v. Love, 50 N. Y. 568 , and cases are there cited to the effect that there may be an equitable action against all such stockholders, and that in a proper action the court may provide for the taking an account and enforcing the liability of all of them for the benefit of all the creditors entitled to share in the -fund to be collected from such stockholders. When equitable jurisdiction to that extent is declared, then follows the other jurisdiction of equity to restrain separate and individual actions at law in the same or other courts, and to bring all proceedings into one suit, and all parties to one tribunal.”

See, also, Bank v. Goddard, supra.

The avoidance of a multiplicity of actions is one of the recognized grounds of equity jurisdiction, and upon the facts stated in the complaint, and under the authorities cited, the equitable jurisdiction here sought to be invoked should have been sustained.

I am also of the opinion that the complaint was improperly dismissed for another reason. The debt which the plaintiff is seeking to compel the directors to pay was not contracted by them, and their only liability to pay the same or any part of it originated in, ánd depends upon, the statute. This liability, strictly speaking, is not based upon contract, but is created by statute. It is not primary, in any proper sense in which that term can be used, but is secondary; and its enforcement entirely depends upon the failure of the corporation, in the first instance, to pay and discharge its own obligations. It is not a general liability, but a special, qualified one, conditioned upon the failure of the primary or principal debtor itself to pay. The statute expressly provides that this liability cannot be enforced until the debtor has first procured a judgment against the corporation, issued execution thereon, and the same has been returned wholly or partly unsatisfied. After this has been done, an action may be maintained against the directors to recover, not the amount of the debt, but the amount of the judgment remaining unsatisfied. The directors are, in effect, made to guaranty, not the payment of all the corporate debts, but only such portions of them as may remain after the application of all the property of the corporation to the payment of its debts. Marshall v. Sherman, 148 N. Y. 26 , 42 N. E. 419 . The recovery of a judgment and the issue and return of an execution thereon having been made impossible without fault of the plaintiff, the plaintiff is not .thereby deprived of his remedy against, the directors. • The law never requires an impossibility. But, before he can subject the directors to the liability created by the statute, he must apply towards the payment of the corporate debts all of the corporate assets. This the statute clearly contemplates. A permanent receiver having been appointed, this can only be done by compelling him to account. Until such accounting be had, and an application be made of the proceeds of the assets held by the receiver, it is difficult to see how a recovery can be had against the directors, because until then the extent or amount of their liability cannot be ascertained. The complaint is sufficient to enable the court to di

For these reasons, I am of the opinion that the learned justice at special term erred in dismissing the complaint, and that the judgment appealed from should be reversed, and a new trial granted, with costs to the appellant to abide the event.