Weeks v. Love — 33 N.Y. Super. Ct. 397

Majority

p. 397

JOHN A. WEEKS, Plaintiff and Respondent, v. THOMAS LOVE, Defendant and Appellent.

Headnote

Corporations—Manufacturing—Stockholders, in actions against, for debts of ike company under section 10' of chapter 40 of Laws of 1848— Parties to.

1. Only a judgment creditor of the corporation can bring the action.

3. In any such action brought by a judgment creditor of the corporation it is not necessary to join as parties either the general creditors of the corporation or other judgment creditors thereof, or any of them.

Before Barbour, Ch. J., McCunn and Spencer, JJ.

Decided July 1, 1871.

This action was brought against the defendant, as a

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stockholder of the Peekskill Enamelled Iron Company, by one of its creditors, under the 10th section of the Manufacturing Corporation Act, which is in the following words:

§ 10. “All the stockholders of every company incorporated under this act, shall be severally individually liable to the creditors of the company in which they are stockholders, to an amount equal to the amount of stock held by them respectively for all debts and contracts made by such company, until the whole amount of capital stock fixed and limited by said company shall have been paid in, and a certificate thereof shall have been made and recorded, as prescribed in the following section ; and the capital stock, so fixed and limited, shall all be paid in, one half thereof within one year, and the other half thereof within two years from the incorporation of said company, or such corporation shall be dissolved.”

Upon the trial, all the facts necessary to establish the liability of the defendant, as a stockholder, to the plaintiff, as well as the further fact that when the indebtedness was contracted by the company and accrued, there were several judgment creditors of the company besides the plaintiff. The plaintiff had judgment, and the case came before the general term on the single point presented by the defendant’s counsel, that all of the judgment creditors should have been joined in the action, and that a suit of this character cannot be maintained by one only, of several creditors.

Theodore F. Sanxay, attorney, and of counsel for the respondent.

Marsh & Wallis, attorneys, and Luther R. Marsh, of counsel, for the appellant.

Mr. Marsh urged as follows :

1. The words of the statute are: “ Shall be severally

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liable to the creditors of the company, &c. Not to the creditors severally. Not to each and every of the creditors. Nor are any equivalent words used. The action is to the creditors. But one action. And that action is not to any creditor. Nor to a creditor. But to the creditors. These words necessarily indicate a joint action of the creditors, for it is to them that the action is given. Whenever a 'right of action is conferred or a liability imposed upon a number of persons, the right or liability is always joint unless words of severance are used.

2. The above construction has been recently given to these very words in another similar statute by the court of appeals (Osgood v. Laytin, 5 Abb. Pr. N. S. 1, 9, 10). The section under consideration in that case was in the act to provide for the incorporation of insurance companies (Id., p. 9 ; 4 Edm. Stat. at L. 202, 210, § 20). It is as follows : “No dividend shall ever be made by any company incorporated under this act when its capital stock is impaired, or when the making of such dividend will have the effect of impairing its capital stock ; and any dividend so made*shall subject each of the stockholders receiving the same to an individual liability to. the creditors of said company, to the extent of such dividend received by him.” The court, in construing this section, say (p. 11): “It is clear that no one creditor of the company can maintain an action against an individual stockholder, for the reason that the liability created by the statute is to the creditors generally, and not to individual creditors, thus creating a liability jointly. ” It is impossible to draw a distinction between these two cases. In each the liability is “ to the creditors qf the company ”—the words on this subject being precisely the same in each statute.

3. This construction best subserves the policy of the statute and justice to the whole body of stockholders

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and creditors. The consequences resulting from allowing a single creditor to maintain his action against a stockholder, are such as, never could have been intended by the Legislature. Thus : (a.) If a judgment creditor may sue any stockholder he may choose, he may sue all the stockholders in separate actions, atid may commence as many actions as there are stockholders. The fact of obtaining judgment would not pay his claim, and he might obtain a separate judgment against every stockholder and collect his costs in each suit. This result is strongly put in the case above cited (p. 10). “Again, a creditor, if permitted individually to sue the separate stockholders, might institute actions against each, although his demand amounted to far less than the aggregate liability, and he would continue a creditor until he had obtained satisfaction of his debt, and could obtain judgment in all the actions.” (b.) Among the various creditors of the company similarly situated, no one is entitled to preference over the others. By the terms of the statute, the stockholders are liable to the creditors “to au amount equal to the amount of stock held by them respectively,” and no stockholder can be made to pay more. It cannot be the meaning of the statute that one creditor can absorb,, and by recovering his own debt exhaust this liability of any particular stockholder to the creditors, as would be the result of this individual action. But it is the clear meaning of the statute that all the creditors are entitled to the benefit of this stockholder’s liability in proportion to their respective claims, and that the rights of all the parties are to be settled in an action brought by the parties to whom the right is given, viz : “the creditors.” In the case cited the court of appeals takes this view, saying (p. 10): “Again, in equity, this liability enures to the creditors in proportion to the amount of the debts respectively. The maxim ‘That equality among creditors is equity,’ applies to the case.” Ho

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injustice can result to a creditor from the refusal of any other to unite in such an action as plaintiff, for in that event, under the Code, he may be joined as defendant.

4. This case was disposed of on the trial entirely as a- matter of first impression on the part of the judge, and almost without argument from the cousel, it being the object of all parties to have the decision of the general term on the questions involved.

Mr. Sanxay urged.

As the liability of the defendant is one imposed by statute, the construction above stated, to be maintained, must be derived from the statute itself, either: First. From its ordinary plain signification; or, Second. From its signification' modified by some strong equitable consideration in this place.

I. The plain signification of the statute, (a.) The statute is one which gives a right, and is not descriptive of a remedy, and that part of it which says, “ shall be liable to the creditors,” &c., is merely descriptive of the persons to be benefited, and was not intended to mark out the remedy or the form of action. It provides that stockholders shall, in certain cases, and to a certain extent, be liable substantially as partners, i. e., the same as if the company had not been incorporated. The liability is one on contract, and it has been held, that one who was a stockholder at the time the contract was made with the company, is liable, even though at the time the action was brought he may have no stock, on the very ground that the plaintiff is supposed to have given credit to the company, because the defendant was a stockholder, and thereby liable as a partner in a several and individual capacity (Corning v. McCollough, 1 N. Y. [1 Comst.] 47). (b.) It has been the practice from time immemorial, for one creditor alone to maintain an action on a stockholder’s liability, and what has been done for so long a time without question

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must be presumed to have full judicial sanction, (c.) If all the creditors of the company must be parties plaintiff, it would have to be an action of an equitable nature, and all the stockholders would have to be parties defendant; but the objection that such an action is the only one that can be maintained under the statute, is not now raised by the appellant, neither is it now contended by him, that it is the only appropriate action. The objection noto, simply is that all the creditors have not brought the action against this defendant atone, although the defendant asserts in in his answer (vide. fol. 34) that there are other stockholders, and it would seem to be a great contortion of the statute, to make it mean that all the creditors Jointly must maintain separate actions against a single stockholder, or against all the stockholders singly. Besides, how could there be any judgment, or how could judgment be entered in such an action % (Abbot v. Aspinwall, 36 Barb. 303 ). (d.) There are many cases in the books where it has been held that it is not necessary to join all stockholders as parties defendant in an action by a single creditor, and that if all stockholders are made parties defendant, all creditors would have to be made parties plaintiff, but it'does not appear upon what principle it would be requisite to make all creditors parties plaintiff in a suit against one of the stockholders. The only case where it could be necessary to join all creditors as parties plaintiff, is. where the action is brought in equity against all the stockholders, for the purpose of equitable contribution, or to secure an accounting (Abbott v. Aspinwall, 26 Barb.. 202 ; Bank of Poughkepsie v. Ibbotson, 24 Wend. 472 ). (e.) But many cases entirely overrule the objection raised by the appellant, and it must be considered as decided against him (Garrison v. Howe, 17 N. Y. 458 , 462 ; Burr v. Wilcox, 22 Id. 551 , 557 : 26 Barb. 202 : 24 Wend. 472 ). (/.) The case of Osgood v. Layten,

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reported 5 Abb. Pr. N. S. 1, is not at all applicable to this case. That action arose because of the making of an illegal dividend out of the capital of the company, which was a fraud upon all the creditors alike, and it was not upon a stockholder’s liability in the true sense of that term, although by a necessary coincidence, the defendants were stockholders.

II. The statute modified by some strong equity, (a.) Ho case in equity is made out to modify the ordinary remedy at law upon the statute, and the remedy at law is adequate. It does not appear that different actions were commenced simultaneously by each creditor against the defendant, and each other stockholder separately; neither does it appear that an action has been commenced, on behalf of all creditors against said defendant and all the stockholders. It does not even appear from the case that the aggregate liability of the stockholders will not more than cover all debts of the company. Heither does it appear that other creditors are claiming or maintaining their rights against the stockholders. (5.) It does not aiDpear that any harm can come to the defendants by paying the demand of the plaintiff, for it has been held that when he has paid debts of tlie company equal in amount to the stock held by him, he has a. complete defense, both in law and equity, "to any further liability ( 24 Wend. 472 ). • (c.) The construction of the statute sought by the appellant would be most inequitable, and would work its practical nullification. A creditor, before suing, would have to make a search for a judgment against the company. He would have to make a personal inspection of the-judgment rolls in all cases. He would have to satisfy himself by outside inquiry and investigation, that the judgment record is strictly true, as the record would not be conclusive evidence against a person not a ■ party to it. He would have to find out whether the demand upon which the judgments so found were ob

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tained, was upon a credit of more than one year. He would have to find out whether the actions upon which the judgments so found were obtained were commenced within one year from the time the' demands accrued. He would have to find out whether transcripts were docketed in the county where the company carried on its business. He would have to find out whether executions had been issued to the sheriff of the county where the company carried on its business, and whether they were returned unsatisfied. In examining the judgment rolls aforesaid, he might be compelled to go to many widely diverse portions of the State. He would have to determine whether the judgments were upon ordinary demands, or whether to servants or operatives of the company, as the stockholders are liable to the latter upon a different statute. He would have to determine who of the judgment creditors who had complied with all the conditions precedent to the suing of a stockholder, were creditors at the time the proposed defendant, was a stockholder. He would have to determine who of the judgment creditors were stockholders ; for though the latter may sue the company, they cannot sue another stockholder. He would have to determiné whether the suits against the company were properly litigated, for a stockholder may plead non debet of the company. What creditor to a small amount could afford to litigate such an expensive proceeding ?

The generic term “ creditors,” used, as it is in the above section, without qualification, is broad enough to cover and include all of the creditors of a company, without any exception or distinction between judgment and general creditors. But that section, in effect, simply declares what shall be the individual liability of the stockholders if the capital shall not be fully paid in and a

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certificate recorded within the time specified. The remedy, or right of action, .which is given to the creditors, is limited and defined by section 24, which is as follows:

“§24. No stockholder shall be personally liable for the payment of any debt contracted by any company formed under this act, which is not to be paid within one year from the time the debt was contracted, nor unless a suit for the collection of such debt shall be brought against such company within one year after the debt shall become due; and no suit shall be brought against any stockholder who shall cease to be a stockholder in any such company for any debt so contracted, unless the same shall be commenced within two years from the time he shall have ceased to be a stockholder in such company, nor until an execution against the company shall have been returned unsatisfied in whole or in part ” (Id. 738).

Considering these two sections in their connection, it is apparent that, although each stockholder is declared by section 10 to be liable to the company’s creditors generally to the extent of his stock, no right of action is given to them as a class, but only, .by section 24, to such individual creditors as shall choose to avail themselves of section 24, and acquire a right of action against a stockholder by prosecuting their claims to judgment against the company, and exhausting their remedy against it by execution. Nor is a right of action against the stockholders given to all the judgment creditors, but only to such of them as shall have obtained judgments for debts which were payable in one year from the time of contracting, in suits brought within a year after the debts shall have become due. Nor can even one of that limited class of j udgment creditors sustain an action against any stockholder coming within the exceptions mentioned in section 24. It follows, in my opinion, that each judgment

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creditor of the company, who is not excluded by the terms of the last mentioned section, may bring and maintain his action against any stockholder who is not in effect released from personal liability by the further provisions of that section ; and that no suit can properly be brought against a stockholder by the creditors generally, or the judgment creditors, or any number of them, collectively, founded upon several judgments against the company.

The judgment appealed from should be affirmed, with costs.

Cases cited

Abbott v. Aspinwall 26 Barb.. 202 N.Y. Sup. Ct. 1857-12-21 p. 402
Bank of Poughkeepsie v. Ibbotson 24 Wend. 472 N.Y. Sup. Ct. p. 402, p. 403
Garrison v. Howe 17 N. Y. 458 N.Y. at 462 p. 402