Wallace & Sons v. Walsh — 34 N.Y. St. Rep. 426

Majority

p. 426

Wallace & Sons, App’lts, v. Frederick Walsh et al., Resp’ts.^[1]

(Court of Appeals,

Filed December 2, 1890.)

Headnote

1. Manufacturing companies—Annual report—Laws 1848, chap. 40.

The certificate of incorporation of a manufacturing company provided that the number of trustees to manage the concerns of the company for the first year should consist of twelve, but for the year 1885 the stockholders elected but nine, six of whom signed the annual report, which was duly filed. The number had been reduced by a resolution of the board of trustees, who had power under the by-laws to do so, but which was not certified to the county clerk and secretary of state. Held, that no one was injured or aggrieved by what .was done, and such action could not, collaterally, be assailed and tried in an action as for a debt, where the question was only incidentally involved.

2. Same.

When a board of trustees, in fact authorized by the corporation, and

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having possession of its property and franchises, and undisputed control in tire management of its affairs, has filed and published, within the time limited, the report required by the statute, certified by a majority of such board, and verified by its president, it has complied with the letter and spirit of the law. And it is not competent in a proceeding to collect a debt for the creditors to show, with a view of creating a penalty or forfeiture, that some of the acting trustees were not duly elected, or, for some reason, were disqualified from acting as such trustees, or to claim, by reason of a non-performance or an irregularity in the performance of some prior duty enjoined upon stockholders, that an acting board of trustees was not in fact a board authorized to perform the general duties required of them as agents of the corporation.

3. Same.

The words “majority of its trustees” in § 12 of chap. 40, Laws 1848, must be construed literally, it being a penal statute, and do not mean a majority of a constructive board, but a majority of an existing board.

Appeal from judgment of the supreme court, general term, fourth department, reversing judgment entered upon decision of special term.

Cfeo. S. Hastings, for app’lts ; Hdwin Nottingham, for resp’ts.

This action was brought against the defendants, as trustees of the “ Syracuse Stove Company,” to recover an indebtedness owing to the plaintiff by that corporation, upon the ground that such trustees had become personally liable therefor by reason of their neglect to make and publish the annual reports for the years 1887 and 1888 of the financial condition of the corporation as required by statute. Section 12, chap. 40, Laws of 1848. The company was incorporated under the law of 1848 as a manufacturing corporation, and the language of the statute imposing the duty of making reports, so far as it affects this case, reads as follows : “ Every such company shall within twenty days from the ,1st day of January ” in each year, “ make a report which shall be published in some newspaper, etc., * * * which shall state the amount of capital, and of the proportion actually paid in, and of the amount of its existing debts, which report shall be signed by the president and a majority of the' trustees,” and shall be verified, filed, etc., “and if any of said companies shall fail so to do, all the trustees of the company shall be jointly and severally liable for all the debts of the company then existing, and for all that shall be contracted before such report shall be made.”

It is not disputed but that in each of the years named a report was made, filed and published in good faith by the company, which truthfully and accurately stated each of the several facts required to be incorporated in such report, and that such report was signed and verified by the president and a majority of the acting board of trustees of such company. That board, as actually constituted at the time of making these reports, and for several years prior thereto, consisted of nine members, and six of such trustees united in making these reports.

It thus appears that the reports were made and verified exactly in accordance with the requirements of the statute, and the company must be held to have duly executed the duty imposed upon it, unless, for some ulterior reason, it shall be adjudged not to have

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done so. It is claimed by the plaintiff that the requirements of the statute were not complied-with because such reports were not signed by a majority of the trustees whom the company was authorized to elect under its charter, and that the trustees signing did not constitute a majority of such theoretical number. The certificate of incorporation provided that the number of trustees to manage the concerns of the company for the first year should consist of twelve, and it was established on the trial for the year 1885 the stockholders had, in fact, elected but nine trustees. The number signing the reports was six, and because six is not a majority of twelve it is claimed that the trustees became liable for the debts of the corporation, as a penalty for an omission by the company to make reports.

The undisputed evidence in the case shows that the Wolfe Stove Manufacturing Company was incorporated on the 3d day of February, 1883, under chap. 40 of the Laws of 1848, and on the 28th day of March, 1885, its corporate name was duly changed, by an order of the supreme court, to the Syracuse Stove Company ; that upon the organization of the original company certain by-laws were adopted, among which was one providing that “ the number of its trustees should be twelve, who shall, respectively, be stockholders in the company,’’ and another authorizing its trustees to alter and amend its by-laws at their discretion, and that on January 28, 1885, the by-laws were duly amended by a resolution of the board of trustees reducing the number of trustees from twelve to nine. But it is claimed that because a certificate of the fact of such reduction was'not filed in the office of the county clerk and secretary of state, as provided by chap. 269 of the Laws of 1860, as amended by chap. 316 of the Laws of 1878, the act of the company in reducing the number of trustees was ineffective for any purpose. That the company had the power, under the statute, to determine absolutely the number of trustees who should constitute its board within-the limits of not less than three or more than thirteen, is not controverted ; or, but that if it had determined, andlegally.manifestedits determination, to have but three trustees, it could have done so without successful opposition by any person whatever. After such reduction was attempted to be made no more than nine trustees were ever elected by the stockholders, and the business of such corporation was thereafter con-, ducted by a board composed of that number, during the years 1885, 1886, 1887 and 1888, and no question was at any time thereafter raised as to their right to exercise the powers of a regular board of trustees. The trustees were empowered by the by-laws of the corporation to appoint to any vacancies which should occur in their board, but the right to elect trustees was vested exclusively in the stockholders. Whether an omission by the stockholders at an annual meeting to elect a full board, under any circumstances, would create a vacancy which might be supplied by the trustees, under the by-laws, is a matter of some doubt, but in a case where the board itself is constituted under a declaration on the part of both stockholders and trustees that a full board should consist of nine members only, and nine are elected, we think it would be a

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■clear case o_ usurpation for a board so constituted to declare the existence of vacancies, and of its own motion appoint additional trustees to fill such, vacancies. It cannot, we think, be doubted, but that the proceedings referred to, concurred in by every one having an interest in the corporation or its affairs, effected a practical reduction of the number of its trustees and constituted the nine thereafter elected a de jure as well as a de facto board, entitled to act for the corporation in transacting its business until some party whose interests were affected should raise the question in a direct proceeding to question the exercise of such authority. People v. N. Y. & M. R. R. Co., 84 N. Y., 566 . Neither the company nor its trustees or stockholders could have been heard to allege, in a collateral proceeding, the invalidity of their action in 'reducing such board; or its want of authority to administer the general affairs of the corporation. Whatever might have been the effect upon the corporation of a direct proceeding by the attorney general, or otherwise, to test the legality of their action in ■reducing such number, or of doing business with an insufficient or defective board, we think such action could not, collaterally, be .assailed and tried in a proceeding wherein the question was only incidentally involved.

So far as the plaintiff and the public were concerned, the whole object and purpose of the statute was accomplished by the reports published, and no one has been injured or aggrieved either by what has heretofore been done or omitted by the corporation. The purpose of the provisions of the statute is to inform the public and those interested in the affairs of the company of its financial standing and condition from time to time, Quarry Co. v. Bliss, 27 N. Y., 297 ; Garrison v. Howe, 17 id., 465, and when súch information has been published in good faith in the manner and form pointed out hy the statute, the trustees have done all that was in their power to comply with the provisions of .the statute and to avoid the incurrence of a penalty for the non-performance of the duty imposed. When a board of trustees, in fact authorized by the corporation and having possession of its property and franchises, and undisputed control in the management of its affairs, has filed and published, within the time limited, the report required by the statute, certified by a majority of such board and verified by its president, it has, we think, complied with the letter and spirit of the law. It is not competent, we think, in such proceedings as this, for the creditors to show, with a view of creating a penalty or forfeiture, that some of the acting trustees- were not duly elected or, for some reason, were disqualified from acting as such trustees, or to claim, by reason of a nonperformance or an irregularity in the performance of some prior duty enjoined upon stockholders, that an acting board of trustees was not in fact a board authorized to perform the general duties ■required of them as agents of the corporation. The immediate •effect of the plaintiffs’ contention is to procure the judgment of the court that since the year 1885 the corporation has not possessed a legal board of trustees, and that the management of its .affairs^for the succeeding period has been conducted in violation

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of the provisions of its charter and without authority of law. The direct effect of such an adjudication would necessarily be not only to declare its existence illegal and subject it to a forfeiture of its franchises, but to expose its contracts and enterprises to the taint, of illegality. Certainly the plaintiffs have no right to ask for such an adjudication in any direct proceeding, and, we think,, they cannot accomplish the same object indirectly.

It was said in Denike et al. v. N. Y. & R. Lime, etc., Co., 84 N. Y. 605 , that “ a corporation owes its life to the sovereign power, and under what circumstances it shall forfeit or be deprived of that: life depends upon the same power. A corporation may be dissolved by forfeiture through abuse or neglect of its franchise, bufe such forfeiture, unless there be special provisions by statute, can: only be enforced by the sovereign in some proceeding instituted in its behalf.” And in Matter of N.Y. El. R. R. Co., 70 N.Y., 338 , it was said that “ a cause of forfeiture cannot be taken advantage of or enforced against a corporation collaterally or incidentally, or in any other mode than by a direct proceeding for that purpose against the corporation, and the government creating the corporation can alone institute the proceeding, and it can waive a forfeiture.” We think this proceeding comes within the spirit and meaning of the rule referred to, and should be governed by the1 principle applying to such cases.

We also think the action of the plaintiffs must fail for the reason that their argument requires the court to supply, by construction, language to a statute which does not, by its terms, cover the1 case presented by them. The plaintiffs’ construction of § 12 of the act of 1848 clearly requires that we should hold that a majority of its: trustees must consist of a majority of a constructive board and not a majority of an existing board. This contention requires'language to be supplied to the statute which shall extend its effect, beyond the literal meaning of the terms employed, and is contrary to the well settled rules on the subject. The courts have uniformly refused to extend a penal act beyond the strict letter of the1 statute in order to bring a case within its meaning which was not clearly embraced in its letter. Garrison v. Howe, 17 N. Y., 465 . The contention of the appellants here is founded upon the purest technicality and may in justice be met by an equally technical answer. When a party has been injured by a wrongful or unauthorized exercise of power, either by the constituent elements, or the executive board of a corporation, undoubtedly the law will supply, in some way, redress for the wrong innicted; but it cannot be lawful or just to make one party responsible for the debts of another through a loose construction of a statute imposing a penalty for an omission to perform an act which has, in fact, been performed and its purpose effectually accomplished. Under such circumstances the case is not within the spirit of the act, and,, under well settled rules, must be held to be without its meaning.

The appellants have cited a number of cases arising in England and also in this state in support of their contention, btit we have been unable to find among them any that can be deemed authority upon the question under consideration. The several English

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cases of Rex v. Varlo, 1 Cowp., 248; Rex v. Bellringer, 4 Durn. & East, 810; Rex v. Miller, 6 id., 268; Bailiffs v. Phillips, 4 Adol. & Ellis, 550, were similar to each other in character and determined by the same general considerations. They each involved "the powers of municipal corporations created by grants from the crown or parliament in the exercise of their political jurisdiction and the authority of the municipal administration in appointments to office, the election of members of parliament and the performance of similar duties. The questions arose in direct proceedings by quo tuarranto to test the authority of certain officers to exercise the duties of their offices who claimed to have been appointed by the municipal authorities. The power of appointment in these cases was given to the mayor and a majority of a definite number of burgesses, and the mayor and burgesses were given authority in case of vacancies occurring in the number of burgesses to fill them by election or appointment. It was held that the municipal authorities could not lawfully make such appointments through the concurrence of a less number than a majority of the whole number of burgesses, when by the neglect of the municipal authorities to fill vacancies they had permitted that body to become reduced in number so that a majority of the whole could not be obtained to meet for corporate action.

It is manifest that no analogy exists between the action of a body of men invested with the exercise of political powers under special conditions and the action of the trustees of a private corporation in the conduct of its business .operations. The-one relates to the execution of powers and the other to the performance of duties and the emjoyment of privileges. The one is controlled by the principles governing the relations of principal and agent and the other to the general rules regulating the consequences iollowing a neglect or disobedience of the requirements of statutes affecting private relations. In the one case the question as to what is a good execution of a power is involved and in the other as to what may be considered an adequate performance of a duty. These questions are manifestly controlled by different rules afid that which is required in one is not an authority for the requirements of the other. “ The extent of a power, like the extent of an agency created by written power of attorney must be sought for in the instrument conferring the power and authority not found there does not exist.” Hetzel v. Barber, 69 N. Y., 13 .

The cases cited in this state are, for similar reasons, equally foreign to the questions involved. The People ex rel. Hawes v. Walker, 23 Barb., 304 , was an action by the people to test the right of the defendant to the'office of commissioner of jurors in ¡New York. The power of appointment was given to certain defined officers in the city of ¡New York, and the question was whether such officers had legally executed their power of appointment.

The case of Ex parte Willcocks, 7 Cowen, 402, was a proceeding under a special statute, on behalf of persons claiming the offices, to test the right of certain other persons to hold the office of directors of the Utica Insurance Co.

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Moore v. Rector of St. Thomas', 4 Abb. N. C., 51 , was the foreclosure of a mortgage alleged to have been given by a religious-corporation upon its property, and the corporation set up as a defense that it was not executed by those having authority under the statute to bind the corporation.

The question in'all these cases was as to the proper execution of powers, and it was presented in proceedings instituted for the purpose of testing the validity of the performance of the powers conferred by persons expressly authorized by law to institute the-proceedings.

We have found no authority holding that persons having no-interest in the question litigated can bring suit to review corporate action with a view of determining whether such action has at. all times been in conformity with the rules of law governing such bodies. It is contrary to the general rules of practice for courts' to permit parties to institute actions and drag other parties into litigation upon questions in which the plaintiffs have no interest or concern. It was entirely immaterial toi" the plaintiffs here whether the corporation did business with three or thirteen trustees, or whether they were, each and all, legally elected or not. It-was enough for them to know that the duty which they were interested in having performed had been actually performed by a. board of trustees, duly elected under the by-laws, and having the-actual management and control of the corporation with which the-plaintiffs had contracted.

In accordance with these views the order of the general term-should be affirmed and judgment absolute for the defendants dismissing the complaint be ordered, with costs in all courts.

All concur.