Hyperlawhypertext legal database Bird v. Hayden 24 N.Y. Super. Ct. 383

← Cases

Bird v. Hayden

24 N.Y. Super. Ct. 383 1 Rob. 383 Court N.Y. Super. Ct. Decision date 1863-11-28 English

Contents

Majority

p. 383
Oliver W. Bird, plaintiff vs. Henry H. Hayden, defendant.

Headnote

A personal liability for debts of a corporation, imposed by its charter upon its officers for failing to perform a duty with which they are charged, is quasi penal, and therefore the courts of this state have no jurisdiction to enforce such liability, where the charter creating it was granted by another state. But the personal liability of stockholders, by statute, arises out of their original liability; if they had not been exempted therefrom by such statute. An action against them is therefore upon their contract in a qualified corporate capacity. Where the corporate capacity is not thus qualified, and the members or officers are not liable as original or principal debtors, but by reason of something imposed by the statute, the action can only be to recover the debt by way of a forfeiture or penalty.
(Before Bosworth, Ch. J. and White and Monell, JJ.)
Heard November 12, 1863;
decided November 28, 1863.
Exceptions taken at the trial and directed to be heard in the first instance at the general term.
The defendant was a director of “ The Daggett Manufacturing Company,” a corporation formed under an act of the legislature of the state of Massachusetts, entitled “An act relating to joint stock companies.” One provision of that act required that the officers of the corporation should annually, in the month of January, niake and file a certificate, verified by‘the oaths of the president and a majority of the directors, containing a statement of stock paid in, amount invested in real and personal estate, the amount of existing debts, and other matters. In case of any neglect or refusal to perform such duty, the officers of the corporation were declared by the act to be jointly and severally personally liable for the payment of the debts of the corporation contracted after such neglect, and before such certificate shall be filed.
The action was brought by the plaintiff (Bird) to recover the amount of two promissory notes, made by the company in August, 1860. The company was formed in April, 1857. No such certificate as the act required was ever filed by the company.
p. 384
The cause was .tried on the 13th of Hay, 1863, before Mr. Justice Monell and a jury.
On the closing of the plaintiff’s case, the judge dismissed the complaint, on the ground that the courts of this state had no jurisdiction to try the action, the cause of action being in the nature of a penalty prescribed by the statute of another state. The plaintiff excepted.
The judge directed the exceptions to be heard in the first instance at the general term, and suspended the judgment in the mean time.
John Sessions, for the plaintiff.
I. The contract in question was made (not in Massachusetts, but) in this state; the paper was made (there) to be used here as it was used.
II. The decision in this case was controlled by the case of Derrickson v. Smith, (3 Dutcher, 166.) That case is not authority here, and it must rest now solely upon the accuracy of its reasoning. In that case stress is laid upon the fact that the liability of the officer did not attach until after the debt was created. In this case he was liable at the instant. That liability went with the original delivery, and the person receiving the paper had the right to take it—and did take it solely upon the faith of that liability. In Derrickson v. Smith, it is conceded that when the transaction partakes of the nature of an engagement, the objection to jurisdiction is invalid. If the original recipient had a right to take the paper on the faith of the liability of the officer, it could only be as an engagement. If necessary for his protection,, the officer will be estopped from denying the engagement.
III. That case, when examined, will be found to rest upon the fallacy that this liability is imposed upon the officer, not as a liability on a contract, but as a punishment. Hot for the protection of the few with whom they deal, whether in Boston or Hew York, but of the people of the commonwealth of Massacnusetts, the great body of whom, from the very nature of their avocations, can not be injured. Hot for the
p. 385
protection of the creditors of the corporation, but of the morals of the community.
1. The rule of law from which this fallacy has arisen was, that penalties imposed by the laws of a state for the double purpose of punishment, and of replenishing the public treasury, could not be prosecuted in a foreign state. The principle upon which that rule was founded is obvious—it is impossible, upon familiar principles of law, to carry that rule where the principle on which it rests is found to be utterly wanting.
2. Although not only naturally, but necessarily, a local judicial establishment or creation, is limited in its jurisdiction, to the laws of the same territory as the power that created it, yet jurisdiction is given in such cases because the wants or the conveniences of commerce require it, which creates a distinction.
3. If it be suggested in answer that local laws have no extra territorial power, we reply, if that were so, corporations could not exist out of the state whose laws created them. But they do essentially, when they have their notes in circulation out of their own state.
4. The argument is fully answered by the cases sustaining actions against stockholders brought in another state, and which are cited in Derrickson v. Smith. The authorities of this state cited by the court are relied on, upon the part of the plaintiff here. (See argument of Mr. O’Conor, in Malony v. Dows, 8 Abb. Pr. 316 ; Exparte Van Riper, 20 Wend. 614 ; Corning v. McCullough, 1 Comst. 47.)
IV. The courts of our state entertain jurisdiction of actions to enforce obligations of citizens of even a foreign state, made there, for the benefit of commerce, while here, in a commercial sense, there is no foreign state, but only one state, one people, one commerce and one intercourse. No natural, physical or governmental line can be drawn to obstruct the commercial intercourse of the people of New York and Boston. They are even protected and encouraged in their commercial intercourse by the same general laws and government. Then separate municipal and judicial establishments do not make them
p. 386
foreign nations to each other. Such divisions are, at best, artificial and accidental. A corporation of Massachusetts’ creation, organized by citizens of Eew York, and doing business in Eew York, is a mere fiction there; here it is a reality. To allow them the benefits which may attach to the fiction, divested of the responsibilities which attach to the reality, is to make Massachusetts not only a foreign nation, but a public enemy, since she thereby furnishes to our citizens both the inducement and the means to commit here frauds upon each other, and crime.
Y. It is believed to be fully settled that jurisdiction will be entertained by the courts of our state, arising upon a transaction in any foreign state, when the transaction is purely commercial, or relates solely to property, except when there are obvious objections as in case of real actions, and even as to real estate, in cases of mere contract.
YI. In cases like the present, it is peculiarly nec.essary that jurisdiction should be entertained. It is demanded on account of the recent rapid multiplication of this class of corporations.
P. G. Clark, for the defendant,
Cited Scoville v. Canfield, ( 14 John. 338 ;) The Antelope, ( 10 Wheat. 66 , 123 ;) Story on Confl. of Laws, (§§ 620, 621;) Derrickson v. Smith, (3 Dutcher, 166,) and 5 Gray, 599 .

Actions to recover penalties or forfeiture, created by statutes of the states, being local, are not cognizable by the courts of this state. This is understood to be well settled, (Scoville v. Canfield, 14 John. 338 ; United States v. Lathrop, 17 id. 4; Story on Confl. of Laws, §§ 620, 621,) and was conceded by counsel on the argument.

It is claimed, however, that this is not such an action; but that it is an action to recover upon a contract made by the company, which by force of the statute, the defendant has become individually liable to pay.

There is nothing in the act of incorporation of this company which renders the directors or stockholders liable in the

p. 387
first instance for the debts of the company, as there is in the general banking and other laws of this state. There is no personal liability, if the company fails to pay, and hence there is no right of action against the stockholders .for any debt contracted by the company, nor against the officers, so long as they discharge the duty imposed upon them by law. It is only upon their neglect or refusal to perform such duty, that they render themselves liable.

The personal liability of stockholders, where they are made liable by the charter or act of incorporation, is from the inception of the debt. They become originally liable, and the happening of no event is necessary to charge them. The company is invested with a qualified corporate capacity, but no immunity or exemption from personal liability for the debts of the company is conferred upon the stockholders. In these cases, in judgment of law, the debt is contracted upon the terms and security authorized by the statute, and the creditor having exhausted his efforts to collect from the company, may resort, by a common law action, directly to the stockholders, not to recover a penalty or forfeiture, nor upon a cause of action in the nature of a forfeiture, but to recover a simple contract debt, for which he was liable at the time the debt was contracted.' The action in that case is not upon the statute, and a mere reference to it is all that is necessary to show the connection of the stockholders therewith, and the liability it creates.

But where there is no qualification to the corporate capacity of the company, and where the stockholders are not answerable to the creditors of the company as original and principal debtors, but they or the officers become liable by reason of some act the performance of which is imposed on them by the statute, then the action must be upon the statute, to recover a debt in the nature of a forfeiture, for a failure to perform a a duty. In the one case the absence of any immunity from personal liability renders the shareholder liable when the debt is contracted; in the other the director’s liability is created by his own act or omission to act.

p. 388
It seems to me very clear, therefore, that the personal liability imposed upon the officers of a corporation, who shall have neglected or refused the performance of a duty, with which they are charged by the statute, is in the nature of a penalty, and was designed as a punishment for such neglect. Such is the plain import of the language of the statute. The directors shall file a certificate, and if they refuse or neglect, they shall forfeit to the creditors the amount of their respective debts. The object of requiring a certificate to be filed, was to enable all who thereafter dealt with the. company, to ascertain its pecuniary condition; hence, the penalty goes to such creditors as may have been deprived of this source of information.

A charter or an act of incorporation, is doubtless a contract ; nevertheless, penalties and forfeitures may proceed from it; and when the charter is conferred by public law and the penalty is created by public law, it becomes, to all intents, a penal statute. And if the general manufacturing law of Massachusetts had declared, that if the directors neglected to file a certificate they should forfeit $10,000 to the use of the creditors, the statute would not have been any more penal than the form it now is in. In either case, it would be a penalty or forfeiture, and must be sued for and recovered as such.

The case of Corning v. McCullough, (1 Comst. 47,) involved the consideration of this question, and received a very careful examination by the court. The 9th section of the act incorporating the Rossie G-alena Company providéd that the stockholders of the company should be jointly and severally personally liable for the payment of all debts contracted by the com-* pany. The question was, whether the statute limitation of three years in bringing an action upon a statute made for a forfeiture or penaltg. given in whole or- in part to any person who would prosecute for the same, applied to that case. The court, in a very elaborate opinion, delivered by the late Chief Justice Jones, held that to. come within the statute, the action must be on the statute for a forfeiture or cause, the benefit and suit whereof is limited wholely or in part to the party

p. 389
aggrieved. The learned judge says: “ I think the intention of the legislature to have been, to apply them, to forfeitures and penalties, and causes of action of the like character, partalcing of the character of penal actions.”

The distinction between the original liability of stockholders, and such as attaches to officers for neglect of duty, is clearly drawn and constantly kept in view in the case referred to, and it is held that in the former case, the stockholders being original debtors, are liable as copartners, and are not exempted by the corporate capacity of the company; and in the latter, that their .liability not being original, they could only be charged by their own act. In the one case, the action was a common law action for the recovery of the debt; in the other it was upon the statute, for the recovery of the penalty. The court say: “The liability of this defendant to these plaintiffs is neither for a penalty inflicted upon him for any offense committed by him, nor for any forfeiture incurred by him, nor does it possess any element or feature of a penal character, assimilating it to either forfeiture or penelty.”

Again: “ It is the policy of the statute to limit the commencement of actions for forfeitures and penalties to shorter periods of time than actions on contracts, and for vested rights, and legislative enactments subjecting the aggressor to a specific measure of damages, or a specific compensation, for the injuries he causes may be in their nature penal.”

Ex parte Van Riper, ( 20 Wend. 614 ,) is fully sustained by Corning v. McCullough. There Van Riper, a director of the bank, was personally liable. The 14th section of the charter provided that the president and directors should jointly and severally be and continue liable, individually to every creditor for the payment of the debts of the' bank; and the court held that the liability was original, and not incurred by any subsequent act. This case is referred to and approved by Mr. Justice Bronson, in his concurring opinion in Corning v. McCullough.

In both these cases the line is distinctly drawn, between the original personal liability of the stockholder or director, ere

p. 390
ated by the charter or act of incorporation, and such liabilities as attach by some subsequent act of the officers.

In Garrison v. Howe, ( 17 N. Y. Rep. 458 ,) the defendant was sought to be charged as' a trustee of a manufacturing company. The act of incorporation required the trustees to make, and file an annual report, &c. and declared' that for any neglect to do so, the trustees should be individually liable for the debts of the company. The trustees neglected to file their report. The question of jurisdiction did not arise, but Dbhio, J. says, “ If the statute was simply a remedial one, it might be said that the plaintiff’s case was.within the equity; for the general object of the law doubtless was, besides enforcing the duty of making reports for the benefit of all concerned, to enable parties proposing to deal with the corporation, to see whether they could safely do so. But the provision is highly penal, and the rules of law do not permit us to extend it by construction to cases not fairly within the language.”

In a recent case in this court, (Merchants’ Bank of New Haven v. Bliss,) a question similar to that in Corning v. McCullough, (supra,) arose. The defendant was sued as a trustee of a manufacturing company organized under the general law of this state, which contains, substantially, the same provisions respecting the duty of the trustees to make and file a report, and their personal liability for not doing so, as are contained in the Massachusetts law, and he was sought to be made liable, by reason of the trustees having failed to make their report. The inquiry was, whether the statute limitation of three years to actions upon a statute, for a penalty or forfeiture, applied. And it was held that it did. The court, in elaborate opinions delivered by two justices, decided that the action was necessarily upon the statute, to recover a penalty or forfeiture,[1]

This question has also been very carefully examined and ■fully considered by the Supreme Court of New Jersey. (Derrickson v. Smith, 3 Dutcher, N.

(a) (a) See post, p. 391.

p. 391
general manufacturing law ; and the defendant was sought to he held liable in that state, the corporation being located and the neglect of the officers having occurred in this state. The court held the action was for a penalty, and could not be maintained in that state. This case is well supported on principle, as well as by the authority of the cases I have above referred to.

.The examination I have been able to give this subject has strengthened and confirmed the views I entertained at the trial, and I see no reason now to change them.

The exceptions should be overruled, and judgment directed for the defendant.

Cases cited