Torbett v. Godwin

The plaintiff brings this action as the assignee of five employees of a corporation known as The American Opera Company (Limited), to recover from the defendant the claims of these employees against such corporation. It is sought to charge the defendant as a director of the company under section 21 of chapter 611 of the Laws of 1875, pursuant to which act the corporation was organized. The section referred to reads as follows:

“ If any certificate or report made, or public notice gimen, by the officers of any such corporation, shall be false in any material representation, all the officers who shall have signed the same shall be jointly and severally liable for all the debts of the corporation contracted while they are officers thereof.”

The first point presented by the appellant is that this section of the statute does not apply to a liability contracted by the corporation before the report was made. As matter of' fact, the liability matured before the report was filed. The contacts with the plaintiff’s assignors were made on the 1st day of July, 1886. The breach occurred on the 11th of December, 1886, and the report was filed on the 20th of January, 1887.

Now, this statute is highly penal, and the plaintiff must, therefore, show, as was said by Danforth, J., in Van Dyck v. McQuade ( 86 N. Y., 56 ): “ That the words of the statute distinctly enact that, under the circumstances, it (the penalty) has been incurred or that there has been a clear intent to embrace it.” Provisions of this character must be strictly construed, and they cannot be extended by implication. (Potter’s Dwarris, page 245, and cases there cited.) We have said that this section is' “ highly ” penal, and we have used the expression advisedly. (~ít seems to have been taken literally from the manufacturing act of 1848 (chap. 40, § 15), except that the expression “ knowing it to be false,” which, in the latter act, follows the words “ who shall have signed the same,” are omitted. Thus the penalty which formerly attached to downright fraud is now imposed upon mere negligence or inadvertence. A penalty is defined to be “ the punishment inflicted by a law for its violation.” (Bouvier’s Law Dictionary, vol. 2, page 399.) ¡ Certainly, the canons of construction should not be strained to add one iota to the punishment here inflicted or to extend its sphere^

We think that neither the words nor the spirit of this section 21 cover debts of the corporation contracted before the making of the certificate or report. Looked at grammatically, the language used refers to debts contracted in the future, and not to those contracted in the past. The director is not made liable for all the debts of the corporation, but only for all those “ contracted while they are officers thereof.” What does that mean but contracted while they remain officers thereof, that is, contracted during the period of their continuance in office f And why should we construe this sentence so as to make it read “ contracted while they were or a/re officers thereof ? ” That would not be construing the statute, but altering it. (See In re Sneezum, L. R., 3 Ch. Div., 472, and Underhill v.

This interpretation is emphasized by the use of the preceding words, “ who shall home signed the same.” That implies a looking backward (after the debt has been contracted) for the subject of liability. The words “shall have” were, in this connection, quite unnecessary, unless the legislature contemplated debts contracted by the corporation after the making of the report.

What they mean, is this: That, as to debts thereafter contracted, the officers who shall home signed the false report, and who are still in office, shall be liable. Otherwise the legislature might as well have said, in plain words, that all officers “ signing the report shall be liable for all debts of the corporation contracted during their entire term of office.” But this the legislature has not said, certainly not in so many distinct words, and there is no clear intent to embrace such a sweeping liability as would be comprehended within the words which we have paraphrased. The literal meaning is reasonably plain, but even if it were doubtful, the plaintiff must fail under the canons of construction with regard to penal statutes already referred to.

We think, however, that a consideration of the entire act, read in the light of its object and purpose, renders our construction still' clearer. This purpose was defined by Judge Raparlo, in Pier v. Hanmore ( 86 N. Y., 101 ), as follows: “ The purpose for which the annual reports are required to be published is that the public may be correctly informed of the financial condition and resources of these companies, in order that they may judge of the credit to which they are entitled.”

This doctrine was amplified by Mr. Justice Daniels in Walton v. Godwin ( 58 Hun, 91 ), where this language was used : “ The report has evidently been required as information to the public concerning* the financial condition and responsibility of the corporation. This information is intended as a security to persons dealing with the company. And whatever would materially affect their judgment in their dealings, should be regarded as a material representation in the report itself. But if a report proves to be untruthful in representations which would- have no affect whatever upon the judgment or conduct of persons dealing with the corporation, such representa

The- construction to be given to the section in question should, if possible, be in harmony with its object and purpose as thus defined. That will be accomplished by confining the liability to cases where credit may possibly have been given to the corporation upon the faith of the report. In other words, to debts contracted after it. is filed. '

This gives force also to the word “ representation ” as used in the section. That section does not read, false in any material “ statement ” or material “ fact,” but false in any material “ representation.” Representation implies an object addressed. Representation to-whom, then? Plainly, to any,one who contemplates trusting the company thereafter.

And this view is reinforced by the fact that the false representation which creates liability is not limited by the section to a certificate or report, but may be embodied in anjpublic notice given by the officers of the company.

- Shall it be said, then, that for any negligent or inadvertent publication the officers of the company are to be mulcted, not only for the-possible consequences of such publication, but for debts contracted before it was thought of ?

These views are further strengthened by the non-adherence of the-Court of Appeals, in several cases, to the literal wording of penal provisions contained in the act of 1848, and by a fair construction of such provisions in the interest of reason and good sense, and to-prevent oppression and injustice.

Thus, in Garrison v. Howe ( 11 N. Y., 453 ), it was held that to-charge the trustees with individual liability for a debt of the corporation, by reason of the failure to file the annual report required by law, such debt must have been payable during a default, and that the signing of the contract (under which the company subsequently became liable) during the period of such default was not enough.

So, in Boughton v. Otis ( 21 N. Y., 261 ), it was held that, although the statute said that “ 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,” yet, that such trustees were not so liable for debts contracted after their retirement from office, and that new trustees coming into office after a default are liable only for such debts as are contracted while they are m office. In this case it was said that a literal interpretation would give to the language a broader significance than the legislature intended, and that “ the equity cmd good sense of the statute ” must prevail.

The latter rule.was again applied in Shaler & Hall Quarry Company v. Bliss ( 27 N. Y. 299 ), Selden, J., observing that the “ object of the provision, so far as relates to creditors or jiersons dealing with the corporation, appears to have been to give such notoriety to the pecuniary condition of the company, through the publication of its annual statements, as to deprive it of credit, if it shall be unworthy of it''

There is still another consideration which should be adverted to, for it seems crucial. We find that when the legislature, in the act under consideration, thought proper to include debts contracted in the past, it used unmistakable language. For instance, in section 18, providing a penalty for failure to file a report, the language is, that, “ if any such corporation shall fail so to do, all the directors thereof shall be jointly and severally liable for all the debts of the corporation then existing, and for all that shall be contracted before such report shall be made.”

So in the next section (19), with regard to the declaration of a dividend when the company is insolvent or embarrassed. There it is provided that the directors voting in favor of declaring such dividend shall be jointly and severally liable for all the debts of the

Substitute for tlie latter phraseology that used in the section under consideration, namely, that the directors who shall hme voted for the dividend shall be jointly and severally liable for all the debts of the corporation contracted while they are officers thereof. Could it be successfully contended that the then existing debts (contracted while the same directors were in office), would be covered by this substitute ? And if such contention were made, would not he who made it have to stand, not upon the literal words of the statute, but upon the more reasonable position that existing debts were as much affected by an improper reduction of the company’s assets as debts subsequently contracted, and that for that reason it must have been the intent to embrace such existing debts ?

And is not this latter suggestion a perfect answer to the question, why were the words “ then existing ” and “ thereafter contracted ” used in the one section and not in the other ? Is it not apparent that, in the one case, existing debts would necessarily be affected by the fraudulent act of the directors, and, consequently, they were distinctly specified, while in the other, such existing debts would not be affected by the false report, and, consequently, they were omitted ?

We think it is quite evident, in view of these divergences of phraseology, that the legislature here intended to convey different meanings by the use of different words, and thereby to widen or narrow the sphere of penal action according to the legislative view of what varying circumstances called for.

Looking, then, at the statute as a whole, we perceive a distinct and reasonable policy with regard to these reports. That policy proceeds upon two lines. First, to require a report and to punish the omission to file it. Second, to require accuracy in the report when filed, and to punish material inaccuracy.

To secure compliance with the first requirement a continuous punishment is inflicted. The directors are made liable for all debts contracted until they obey.- Every day that they fail in their duty is a day of continuous liability. It is thus that the law enforces its mandate. When, however, the .main requirement is complied with,

Such is our conclusion upon both the words and the intent of the statute. Any other conclusion would not only be contrary to thes.e words and to this intent, but it would create a double penalty, where the failure to file the report was followed subsequently by inaccurate compliance. For instance, the directors who fail to file a report, as required by law, are made liable for all debts then existing and for all that shall be contracted before the report is filed. Now, according to the plaintiff’s contention, when the retarded report is filed, if it be inaccurate, the same directors are again made liable to a new penalty for the same previous debts covered by the first penalty. This, surely, could never have been intended, while the construction which we have given to the section under consideration harmonizes the system devised by the legislature and leaves each section to work out wdiat it Avas designed to effect.

In view of the conclusion thus arrived at, it is unnecessary to pass upon the numerous other questions presented. We may say, however, that we might not have felt justified in reversing the judgment on the second point presented, namely, the non-assignability of the penalty. It is true that the question does not seem to have been squarely presented to the Court of Appeals by the record in any of the cases. (Bolen v. Crosby, 49 N. Y., 187 ; Pier v. George, 86 N. Y., 613 ; Stokes v. Stickney, 96 id., 327; Brackett v. Griswold, 103 id., 428.) But the dicta are so numerous and from so many distinguished sources, in favor of the assignee’s right, that we should have hesitated before expressing a contrary opinion. It may be difficult to appreciate the distinction between ownership of the debt

We think the admission of the judgmexxt recovered by the present plaintiff against the company was ex’roi’. It has been expressly held by the Court of Appeals that in actions of this character proof of the recovery of such a judgment is neither conclusive nor prima facie evidence of the debt. (Miller v. White, 50 N. Y., 137 .) This case has since been followed and its doctrine reaffirmed.. (McMahon v. Macy, 51 N. Y., 155 ; Rorke v. Thomas, 56 id., 565.) These cases were distinguished, but in no respect ovenmled or even questioxxed, in Stephens v. Fox ( 83 N. Y., 313 ) and Allen v. Clark (108 id., 269). On the contrax’y, Miller v. White was referred to with approval in both of these later cases. Stephens v. Fox was the case of a stockholder who was ixxdebted to the cox-poration to the anxount unpaid xxpon his stock. The creditor sought to recover that indebtedness ixx satisfaction of his claim against the company. It was held that as the" creditor claimed through the company, and was simply subrogated to its claim agaixxst the stockholder, the judgment was admissible. “ A judgment,” said Rapallo, J., “ against the coi’poration beixxg the highest evidexxce against it, should be as effectual to pass its title to the fund in question (the fund being the company's claim against the stockholder for his unpaid assessment) as a deed or any other form of traxxsfer.”

In Allen v. Clark the judgment was for costs recovered against a manufacturing coxnpany, plaintiff, bjr a defendant in an action brought by it. It was held that this judgment was a debt of the compaxxy which it was under the same obligation to pay as any other

In the present case, the plaintiff introduced evidence tending to support the claims upon which this judgment was recovered. But the learned judge did not submit this evidence to the jury. On the contrary, lie held that the defendant was concluded by the judgment, and instructed the jury that if the plaintiff was entitled to recover, it should be the amount of the judgment, including interest and costs.

The judgment and order appealed from should be reversed and a new trial granted, with costs to the appellant to abide the event.

Yan Brunt, P. J., and Daniels, J., concurred.

Judgment and order reversed and new trial granted, with costs to the appellant to abide event.